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191 B.R. 78 (1996)
In re Raymond A. LYALL, Debtor.
MONTICELLO ARCADE LIMITED PARTNERSHIP, Appellant,
v.
Raymond A. LYALL, Appellee.
Action No. 2:95cv1023.
United States District Court, E.D. Virginia, Norfolk Division.
January 23, 1996.
*79 *80 Paul Ernest Eberhardt, Norfolk, VA, for Appellant.
Robert Vincent Roussos, Norfolk, VA, for Appellee.
OPINION
REBECCA BEACH SMITH, District Judge.
This matter is before the Court on appeal, pursuant to 28 U.S.C. § 158(a), from two orders of the United States Bankruptcy Court for the Eastern District of Virginia entered July 11, 1995, and September 19, 1995. Appellant presents three issues in this appeal: (1) whether the bankruptcy court properly exempted Debtor's 1990 Acura Legend under section 34-26(7) of the Virginia Code; (2) whether the bankruptcy court accurately valued Debtor's 100% stock interest in Lyall Design, Inc., a professional corporation, by deducting $12,959.52 from the value of the corporate assets to reflect an unexpired lease commitment; and (3) whether the bankruptcy court erred in apportioning a joint tax refund received by Debtor and his nondebtor wife equally between the two, rather than on the basis of income, or of taxes withheld.
I. FACTUAL AND PROCEDURAL BACKGROUND
On March 6, 1995, Raymond A. Lyall ("Debtor" or "Mr. Lyall") filed a voluntary Chapter 7 petition for bankruptcy in the United States Bankruptcy Court for the Eastern District of Virginia. Debtor listed Monticello Arcade Limited Partnership ("Creditor" or "Monticello") as a creditor holding an unsecured nonpriority claim for back rent in the amount of $20,000.00.
In Schedule B of his petition, Mr. Lyall listed his personal property and assigned a value to each item. In paragraph 12, he listed 100 shares of stock in Lyall Design, Inc., valued at $100.00. In paragraph 17, Mr. Lyall listed his 1994 tax refund, valued at $1.00. Finally, in paragraph 23, Mr. Lyall listed a 1990 Acura Legend, valued at $8,800.00.
In Schedule C, Mr. Lyall listed certain property as exempt from distribution by the trustee in bankruptcy. The first three entries in Schedule C are at issue in this appeal. Mr. Lyall listed his stock interest in Lyall Design, Inc., as exempt under Virginia's general homestead exemption, Va.Code Ann. § 34-4. He listed his 1994 tax refund under that same exemption. Finally, Debtor listed his Acura Legend as exempt under Virginia's "Poor Debtor's Exemption," Va. Code Ann. § 34-26.
Monticello filed a timely objection to these exemptions. It objected to the exemption of Debtor's car as a tool of the trade under section 34-26(7), to the valuation of Debtor's stock interest in Lyall Design, and to the valuation of Debtor's 1994 tax refund. United States Bankruptcy Judge Marvin R. Wooten conducted an evidentiary hearing on Monticello's objections on July 11, 1995.
Judge Wooten first addressed the question of whether Debtor's automobile is exempt under section 34-26(7). Debtor's 1990 Acura Legend has a loan value of $9,900. Debtor *81 is an architect. He uses the car to commute to and from work and also to travel to meetings with clients and to inspect job sites. Monticello first argued that Debtor does not require a car to perform his job. Next, Monticello insisted that even if Debtor does require a car, he does not need a car as valuable as his 1990 Acura in order to perform his job. The bankruptcy court ruled that Mr. Lyall's car is exempt under section 34-26(7) as a tool of his occupation. The court further ruled that it would not inquire into whether Debtor's job requires a car as valuable as the Acura.
The court next addressed the valuation of Debtor's stock interest in Lyall Design, Inc. Mr. Lyall testified at the hearing and produced an analysis, which valued his stock interest at $1,558.41. That figure was arrived at by adding the value of the corporation's assets and subtracting its liabilities, including an unexpired lease obligation for office space currently occupied by the corporation, valued at $12,959.52. The bankruptcy court accepted this methodology and set the value of Debtor's stock at $1,558.41.
Finally, the court considered the value of Debtor's 1994 tax refund. Mr. Lyall filed federal and state joint tax returns with his wife on March 31, 1995. The couple's combined adjusted gross income for 1994 was $39,488. Their tax return showed that $37,927 of this amount was income produced by Debtor; $1,561 was shown as income produced by Debtor's wife. The 1994 federal income tax due from the Lyalls was $2,921. Because $5,508 had been withheld from Debtor's earnings, and $90 had been withheld from Mrs. Lyall's earnings, the couple was entitled to a joint refund of $2,677. The 1994 state income tax due from the Lyalls was $1,196. Because $2,288 had been withheld from Debtor's earnings, the couple was entitled to a joint refund of $1,092. The Lyalls' combined tax refund for 1994, therefore, was $3,769.
The question before the bankruptcy court was how to divide that tax refund between Debtor and his nondebtor wife. Judge Wooten did not incorporate a decision on this issue into his ruling because the parties advised the court that they would attempt to reach an agreement on the proper allocation of the refund. Judge Wooten did, however, indicate that the portion of the tax refund attributable to Debtor and his wife should be proportional to the income of each during the relevant year. The parties failed to reach an agreement on the proper allocation, so the issue was decided by United States Bankruptcy Judge David H. Adams by order entered September 19, 1995. Judge Adams ordered that the tax refund be apportioned between Mr. Lyall and his wife based on Mr. Lyall's ½ interest in the refunds, totalling $1,884.50. Judge Adams indicated in a letter addressed to the parties that he based his decision on Bass v. Hall, 79 B.R. 653 (W.D.Va.1987), where the court held that joint tax refunds should be divided equally between husband and wife.
II. ANALYSIS
A. 1990 Acura Legend
The first issue before the Court is whether Mr. Lyall's Acura is exempt from distribution by the trustee under section 34-26(7) of the Virginia Code. Both parties have presented this issue as a question of law; therefore, the Court will review the bankruptcy court's ruling on this issue de novo. See, e.g., Hager v. Gibson, 188 B.R. 194, 196 (E.D.Va.1995) (conclusions of law in bankruptcy appeals reviewed de novo and factual findings reviewed under a clearly erroneous standard).
The bankruptcy estate includes "all legal or equitable interests of the debtor at the commencement of the case." 11 U.S.C. § 541(a)(1). A debtor may, however, exempt certain property from distribution by the trustee in bankruptcy. 11 U.S.C. § 522. Under the Bankruptcy Code, a state may opt-out of the Code's exemption scheme by enacting its own set of exemptions. 11 U.S.C. § 522(b). Virginia has elected to opt-out of the Federal exemption scheme. Va. Code Ann. § 34-3.1. The Court, therefore, must look to state law to determine whether Debtor may exempt his automobile from distribution. Virginia's "Poor Debtor's Exemption" removes certain items of personal property from distribution by the trustee. Va. *82 Code Ann. § 34-26. The exemption provides, in relevant part, the following:
[E]very householder shall be entitled to hold exempt from creditor process the following enumerated items:
* * * * * *
(7) Tools, books, instruments, implements, equipment, and machines, including motor vehicles, vessels, and aircraft, which are necessary for use in the course of the householder's occupation or trade not exceeding $10,000 in value, except that a perfected security interest on such personal property shall have priority over the claim of exemption under this section. A motor vehicle, vessel or aircraft used to commute to and from a place of occupation or trade and not otherwise necessary for use in the course of such occupation or trade shall not be exempt under this subsection.
Id.
The present version of the "tools-of-the-trade" exemption is the result of a 1990 amendment. Prior to that amendment, the exemption only covered tools and utensils used by a mechanic. Under the prior law, courts uniformly held that automobiles were not exempt. See, e.g., In re Allen, 52 B.R. 206, 212 (Bankr.E.D.Va.1985) (holding that a carpenter's truck used to store tools and to commute to and from job sites was not a tool of the trade under the statute); In re Dummitt, 2 B.R. 136, 138 (Bankr.W.D.Va.1980) (holding that an automobile could never be exempt as a tool of the trade under section 34-26). The 1990 amendment specifically overruled these cases and allowed for exemption of a car as long as it is necessary for use in the debtor's occupation. Since the amendment, no court has interpreted section 34-26(7) as it relates to automobiles.
When interpreting a legislative enactment, a court must read unambiguous statutory language in accordance with its plain meaning. Miller v. Commonwealth, 172 Va. 639, 648, 2 S.E.2d 343 (1939). Under Virginia law, bankruptcy exemptions must be liberally construed in favor of the debtor. See, e.g., In re Perry, 6 B.R. 263, 264 (Bankr. W.D.Va.1980). Here, the statute exempts tools, including motor vehicles, "necessary for use in the course of the householder's occupation or trade." It goes on, however, to preclude exemption of a motor vehicle which is used to commute to and from the work place unless it is "otherwise necessary for use in the course of [the debtor's] occupation or trade." Va.Code Ann. § 34-26(7). The application of the statutory exemption, then, depends upon the meaning of the word "necessary." The word "necessary" is used in ordinary conversation; it is neither a technical term, nor a term of art. It therefore must be interpreted in accordance with its common meaning.
Webster's dictionary defines "necessary" as that which is "absolutely needed" or "required." Webster's Ninth New Collegiate Dictionary 790 (1985). According to Black's Law Dictionary, depending upon the context in which it is used, the term "necessary" can mean "that which is indispensable or an absolute physical necessity" or "that which is only convenient, useful, appropriate, suitable, proper, or conducive to the end sought." Black's Law Dictionary 1029 (6th ed. 1990).
Prior to the 1990 amendment to section 34-26, the statute itself did not require a mechanic's tool to be necessary to the mechanic's trade for it to be exempt. The courts, however, imposed necessity as a required element. See In re Quidley, 39 B.R. 362, 367 (Bankr.E.D.Va.1984). In Quidley, the court established the following test: "`Is the item claimed to be exempt reasonably necessary both in kind and in quality for the workman to perform his chosen craft in an efficient and competent manner?'" Id. (quoting In re Reed, 18 B.R. 1009, 1010 (Bankr.W.D.Ky.1982)). Although the 1990 amendment adopted the courts' necessity requirement, it did not directly codify the requirement as articulated in Quidley. The statute, as it is now written, simply requires that the tool be "necessary"; the statute does not define the term "necessary" or embellish it with modifiers such as "reasonably."
From this background, the Court finds that section 34-26(7) exempts only those tools which the debtor absolutely requires in order to efficiently and competently perform the functions of his occupation or *83 trade. A motor vehicle is only exempt under the statute if it satisfies this standard without regard to its use by the debtor to commute to and from his place of occupation. This interpretation of the statute comports with the common understanding of the term "necessary" as well as the policy behind the tools-of-the-trade exemption. That exemption allows a debtor to continue earning a living after filing for bankruptcy. The reading of the statute which this Court establishes will allow a debtor to retain tools that he absolutely needs to continue working efficiently and competently in his or her chosen field. It does not, however, allow the debtor to keep items which are merely convenient or useful. The Court's interpretation allows debtors to continue their employment, while also protecting creditors from debtors who would shelter items not within the spirit of the exemption.
In this case, it is unclear from the record on appeal whether Mr. Lyall's 1990 Acura may properly be considered "necessary" under the statute. The only evidence before the Court is an admission from Monticello that Mr. Lyall uses the car to commute to and from work and also to visit clients and job sites during the workday. Neither side has presented evidence whether the car is an absolute requirement for Mr. Lyall to efficiently and competently perform his work as an architect. All that is clear from the record is that he uses it in his profession. There is no evidence, however, whether he needs to use it in this manner. After reviewing the transcript of the hearing on July 11, 1995, it is not clear to this Court whether the bankruptcy court considered the issue of necessity. The bankruptcy court seemed to focus on the question of whether a 1990 Acura is a "luxury" car. That was not the proper inquiry.[1] Therefore, this matter is REMANDED to the bankruptcy court to determine whether Mr. Lyall needs to use his car in the course of his occupation as an architect consistent with the standard set forth in this Opinion.
Monticello presents another issue related to the exemption of Debtor's car. It argues that, to be exempt under the statute, a tool must be of a necessary type and also of a necessary quality. In this case, Monticello argues that, although Mr. Lyall may require a car in order to perform the functions of his job, he does not require a "nice" car more specifically, a car as nice as his 1990 Acura. Monticello contends that a luxury car, such as Debtor's, is not necessary to his occupation as an architect.
The Court does not agree with Monticello's interpretation of the statute on this point. First, the statute itself sets an upper limit on the quality of tools which are exempted by restricting the exemption to $10,000. With this restriction, there will not be a case where a debtor is allowed to exploit the statute by exempting a car valued above $10,000.[2] Second, and more importantly, a bankruptcy court should not be placed in a situation where it must make a factual determination of what quality of car is needed for the debtor's occupation. Does a doctor require a more expensive car than a laborer? Does a real estate agent need a better car than a lawyer? These are difficult questions which are better avoided in this context. See Perry, 6 B.R. at 265 (holding that debtor may exempt $2,500 mink coat under Virginia's former exemption for necessary wearing apparel, the court stated that "courts should not indulge in inquiries as to extravagance or bad taste of a debtor's wearing apparel in any consideration relating to its necessity"). Accordingly, the Court finds that once a tool is determined to be necessary under the statute, it is exempt up to $10,000, regardless of whether a less valuable tool would suffice.
B. Stock in Lyall Design, Inc.
Debtor owns a 100% stock interest in Lyall Design, Inc., a professional corporation rendering architectural services. Mr. Lyall listed this stock interest as exempt *84 under Virginia's general homestead exemption. See Va.Code Ann. § 34-4. Monticello objected to the value Debtor assigned to his stock interest in Lyall Design. At the hearing before the bankruptcy court, Mr. Lyall produced a balance sheet showing the assets and liabilities of the corporation. The court subtracted the balance of an unexpired lease obligation, $12,959.52, from the amount of the corporate assets to place a value on Debtor's stock interest at $1,558.41. The valuation of Debtor's stock is important because the property protected under Virginia's homestead exemption may not exceed $5,000 in value. Id. The bankruptcy court's valuation of Debtor's stock interest is a factual determination. The Court, therefore, will review the bankruptcy court's ruling on this issue under a clearly erroneous standard. See Hager, 188 B.R. at 196.
Monticello argues in this appeal that the bankruptcy court erred in subtracting the balance of the unexpired lease obligation from the value of the corporate assets. The lease payments at issue are only due post-petition. Monticello contends that these payments will be made from post-petition accounts and will contribute to post-petition income for Mr. Lyall. Because post-petition income is not included in the bankruptcy estate, Monticello argues that post-petition obligations, like the lease obligation here, should not be subtracted from the value of the corporation's assets when placing a value on Debtor's stock interest.
Mr. Lyall argues that the lease obligation must be subtracted from the corporate assets in order to accurately reflect the value of his stock in the hands of the trustee. The parties agree that if the corporation were liquidated, the lease obligation would be a cost of liquidation. Mr. Lyall argues that this liquidation cost must be figured into the value of his stock because the trustee would have to liquidate the corporation, if he took control of the stock, since Lyall Design is a professional corporation. See Va.Code Ann. § 13.1-549 (stating that only architects and employees of the corporation may own stock in a professional corporation established to offer architectural services). Monticello insists that it is wrong to consider what would happen during a hypothetical liquidation, because the corporation has no plans for liquidation, and it is, in fact, a going concern.
A trustee in a Chapter 7 bankruptcy must "promptly liquidate the nonexempt assets of the estate." In re Latorre, 164 B.R. 692, 695 (Bankr.M.D.Fla.1994). Mr. Lyall offered uncontested testimony at the hearing that there is no ready market for stock in professional corporations rendering architectural services. Therefore, if the trustee were to acquire Debtor's stock in Lyall Design, he would be forced to sell the assets of the corporation in order to obtain any benefit from the stock. Monticello concedes that the lease obligation at issue in this appeal would be a cost of liquidation. The value of Mr. Lyall's stock, therefore, must reflect the corporation's lease obligation which would have to be discharged by the trustee, if he were to acquire the stock and subsequently liquidate the corporation.
Monticello's argument that the lease payments will contribute to post-petition income is misleading. It is true that if Mr. Lyall retains possession of the stock, the corporation will obtain a benefit from its lease, i.e., it will be entitled to occupy its current office space, and that this benefit will contribute to Mr. Lyall's post-petition income. However, the Court must look to the value of the stock in the hands of the trustee, rather than in the hands of the Debtor. The value of the stock in the hands of the trustee is obviously lower because of the corporation's lease obligation. The cost to discharge this obligation, therefore, must be subtracted from the value of the corporate assets to arrive at a true valuation of Debtor's stock. The bankruptcy court's ruling on this point, therefore, is AFFIRMED.
C. 1994 Tax Refund
Mr. and Mrs. Lyall filed state and federal joint tax returns for 1994. They received tax refunds totalling $3,769. At issue in this appeal is what portion of the refunds should be allocated to the debtor, Mr. Lyall, and what portion should be allocated to Mrs. Lyall. It is undisputed that Mr. Lyall's income constituted 96% of the couple's combined income, and that withholdings *85 from Mr. Lyall's paychecks represented 98.9% of the taxes withheld for the couple during 1994. The bankruptcy court ruled that the tax refunds should be allocated equally between Mr. and Mrs. Lyall. Monticello appealed that ruling, contending that the tax refunds should be allocated proportionally in accordance with income produced or taxes withheld.
Courts which have confronted this issue have taken three distinct positions. A majority of courts have held that tax refunds from a joint tax return should be allocated between husband and wife proportionally, in accordance with tax withholdings during the relevant year. See In re McFarland, 170 B.R. 613, 620 (Bankr.S.D.Ohio 1994); In re Honomichl, 82 B.R. 92, 94 (Bankr.S.D.Iowa 1987); In re Alden, 73 B.R. 215, 216 (Bankr. N.D.Fla.1986); In re Ballou, 12 B.R. 611, 612 (Bankr.D.Kan.1981). Other courts have allocated joint tax refunds proportionally, in accordance with income produced. See In re Levine, 50 B.R. 587 (Bankr.S.D.Fla.1985); In re Verill, 17 B.R. 652, 655 (Bankr.D.Md. 1982); In re Kestner, 9 B.R. 334, 336 (Bankr. E.D.Va.1981); In re Colbert, 5 B.R. 646, 648-49 (Bankr.S.D.Ohio 1980). Finally, at least one court has held that joint tax refunds should be allocated equally between husband and wife without regard to tax withholdings or income produced. Bass v. Hall, 79 B.R. 653, 656 (W.D.Va.1987).
In this case, the bankruptcy court relied upon Bass v. Hall, and divided the Lyall's tax refund equally between Mr. and Mrs. Lyall. How to divide a joint tax refund between husband and wife is a question of law; therefore, the Court will review the bankruptcy court's ruling on this issue de novo. See Hager, 188 B.R. at 196. The Court finds the position of the majority on this issue more persuasive than the position articulated in Bass.
If the proper amount for taxes had been withheld from Mr. Lyall's income during 1994, the money now refunded by the government would have been included in his bankruptcy estate as pre-petition income. If Mr. Lyall had given the money to his wife directly, it would have been set aside as a fraudulent conveyance and likewise been included in the bankruptcy estate. See 11 U.S.C. § 548(a)(2). There is no reason for a different result simply because the Debtor, for a short period of time, deposited his money with the government, and later filed a joint return.
It is well-established that filing a joint tax return does not alter property rights between husband and wife. See, e.g., In re Wetteroff, 453 F.2d 544, 547 (8th Cir. 1972). In Wetteroff, the court stated the following:
Congress, in enacting § 6013(a) which allows a husband and wife to file a `single return jointly of income taxes,' intended primarily to equalize the tax burden for married persons in all states, eliminating the disparities which resulted between common law and community property states. In any event, Congress most definitely did not intend § 6013(a) to affect or change the ownership of property rights between taxpayers.
Id. If Mr. Lyall had filed an individual tax return, his entire refund would be included in the bankruptcy estate. See, e.g., Turshen v. Chapman, 823 F.2d 836, 838 (4th Cir.1987) (holding that a debtor's income tax refund is property of the bankruptcy estate). Because the filing of a joint tax return does not affect property rights, the portion of a married couple's joint tax refund which the debtor would have received had he filed individually should likewise be included in the bankruptcy estate.
The question then is how to divide a joint tax refund between husband and wife in a way which approximates what each would have received had the husband and wife each filed individually. Dividing the refund equally between husband and wife, while simple to administer, has the potential of resulting in a distribution which is totally unrelated to the refund each would have received had individual returns been filed. Dividing the refund proportionally in accordance with income produced raises the same concern. For example, a husband and wife may earn the same salary, but one may withhold more than the other, thereby entitling that person to a greater refund.
The most equitable and efficient method of dividing a couple's joint tax refund *86 between husband and wife is to allocate a percentage of the refund to each, in accordance with the percentage each spouse contributed to the couple's total withholdings. This method is easy to administer and results in a fair distribution of the joint tax refund.[3] Moreover, this is the method used by the Internal Revenue Service to distribute refunds between husband and wife when there is a dispute between the two over the amount of the refund to which each is entitled. See Gordon v. United States, 757 F.2d 1157, 1160 (11th Cir.1985); United States v. Mooney, 400 F. Supp. 98, 99 (N.D.Tex.1975).
In this case, the parties are in agreement that Mr. Lyall withheld $5,508 for federal income tax and $2,288 for state income tax, and that Mrs. Lyall withheld $90 for federal income tax. Mr. Lyall made 98.9% of the couple's tax withholdings; therefore, 98.9% of the couple's joint tax refund must be attributed to Mr. Lyall. Their combined state and federal refund was $3,769. Of this amount, $3,727.54 is attributed to Mr. Lyall and included in the bankruptcy estate, and $41.46 is attributed to Mrs. Lyall.
The bankruptcy court's ruling on this issue is REVERSED.
III. CONCLUSION
The judgment of the bankruptcy court on the valuation of Debtor's stock interest in Lyall Design, Inc., is AFFIRMED. The bankruptcy court's ruling on the allocation of the Lyall's joint tax refund is REVERSED. This matter is REMANDED to the bankruptcy court for further proceedings consistent with this Opinion to determine whether Debtor's 1990 Acura is necessary to his occupation as an architect.
It is so ORDERED.
NOTES
[1] See infra at 83.
[2] The value of the car is not at issue here because neither the valuation offered by Debtor, $8,000, nor that offered by Monticello, $9,900, exceeds the $10,000 statutory cap. Even if the value of Debtor's Acura were at issue, this would be a factual determination to be decided in the first instance by the bankruptcy court.
[3] In actuality, the most exact method of determining the refund to which a husband and wife would be entitled had they filed individually is to figure their tax liability as if they had filed individually, divide any benefit from a joint filing equally between the two, and then ascertain the amount of the refund due each. Although this method is accurate, it is also time-consuming and basically unnecessary. This Court finds that dividing a joint tax refund in accordance with withholdings strikes a sensible balance between absolute precision and the need for equity and efficiency. This method comports with that of the majority of courts which have decided this issue.
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63 B.R. 657 (1986)
In the Matter of Barbara Ann GRIESHOP, Debtor.
Bankruptcy No. 85-10252, Civ. No. F 86-149.
United States District Court, N.D. Indiana, Fort Wayne Division.
August 13, 1986.
*658 *659 Robert E. Grant, Baker, Daniels & Shoaff, and Christina McKee, Asst. U.S. Atty., Fort Wayne, Ind., for Federal Land Bank of Louisville and Farmers Home Admin.
Earl Raskosky, Fort Wayne, Ind., for debtor/appellee.
ORDER
WILLIAM C. LEE, District Judge.
This matter is before the court on creditor/appellant Federal Land Bank of Louisville's ("Land Bank") appeal from a final order of the United States Bankruptcy Court for the Northern District of Indiana, entered February 26, 1986. That order denied the motions of the Land Bank and Farmers Home Administration for relief from stay or dismissal. Farmers Home Administration has not joined in this appeal. The debtor has not filed a response to the Land Bank's appeal. Both parties appeared through counsel on July 22, 1986, for oral argument. For the reasons which follow, the order of the bankruptcy court will be reversed.
The debtor herein, Barbara Ann Grieshop ("Grieshop"), filed a petition for relief under Chapter 11 of the United States Bankruptcy Code on April 10, 1985. The Land Bank filed a motion to dismiss or for relief from stay on April 22, 1985, claiming that the debtor's lack of good faith constituted cause, pursuant to 11 U.S.C. §§ 362(d)(1) and 1112(b). Thereafter, the Farmers Home Administration filed a similar motion. Both motions were tried to the bankruptcy court and taken under advisement on October 22, 1985. On February 26, 1986, the bankruptcy court entered its order denying both motions. It is from this order that creditor/appellant Land Bank appeals.
I. FACTS
Grieshop is a debtor under Chapter 11 of the United States Bankruptcy Code. Her husband, Michael Grieshop, is also a bankruptcy debtor. His petition resulted in a confirmed Chapter 13 plan on January 18, 1982.
Mr. Grieshop was continually late in the payment of his obligations to the Land Bank, as they existed under the confirmed plan. Accordingly, on July 19, 1984, the Land Bank sought the dismissal of his proceeding or, in the alternative, relief from the automatic stay, because of his failure to make the payment due March 1 of that year. When this motion was heard on August 9, 1984, the bankruptcy court entered an order relieving the Land Bank of the automatic stay, permitting it to foreclose. *660 Based upon the authority given it by this order, the Land Bank commenced an action to foreclose its mortgage upon the 242½ acres of real estate securing the amounts due it.
Mr. Grieshop, on October 23, 1984, returned to the bankruptcy court and requested that it reimpose the automatic stay in order to stop the pending foreclosure. The bankruptcy court refused to do so on December 14, 1984, and, three days later, the Land Bank obtained a judgment of foreclosure and decree of sale from the Wells Circuit Court against both Mr. and Mrs. Grieshop.
As contemplated by this judgment, the real estate securing the Land Bank's claim was ordered and scheduled to be sold on April 16, 1985. Six days before the scheduled sale, Michael Grieshop's wife, the current debtor, filed this proceeding under Chapter 11 and thereby obtained the benefit of an automatic stay covering the same real estate.
The schedules she filed with the court and her testimony at trial indicate that she has only three creditors, her mother and the two creditors who have mortgages upon the farm, the Land Bank and the Farmers Home Administration. Her employment as a nurse with the Jay County Hospital provides her a monthly income of $680. In order to meet the adequate protection payments of $1,800 per month required by the bankruptcy court, she must rely upon her husband's income from the farming operations, which she considers her own. Mrs. Grieshop admitted in her testimony that she filed this petition in order to stop the sale, which was the culmination of the Land Bank's foreclosure. Her hope in doing so was to enable her husband to make his mortgage payments in order to keep the farm or so that he might sell it at a high enough price to preserve their equity in the land. This farm is the debtor's major asset. The rest of her property consists of only an automobile and miscellaneous household goods and furnishings.
II. ISSUES
In this appeal, the Land Bank argues that the bankruptcy court committed both factual and legal errors. Specifically, the Land Bank challenges the finding that the debtor is not the alter ego of her husband, as well as the bankruptcy court's determination that the debtor does, in fact, intend to reorganize.
The alleged legal errors revolve primarily around the bankruptcy court's treatment of the issue of good faith, both in terms of defining the proper standard and applying it to the facts of this case. Other less substantial legal issues raised by this appeal include whether the bankruptcy court erred in failing to consider the doctrine of collateral estoppel and whether Indiana law regarding tenancy by the entireties has a bearing on this case.
A. Findings of Fact
Turning first to the alleged factual errors, the Rules of Bankruptcy Procedure provide the applicable standard of review. Rule 8013 reads:
On an appeal the district court or bankruptcy appellate panel may affirm, modify, or reverse a bankruptcy court's judgment, order, or decree or remand with instructions for further proceedings. Findings of fact shall not be set aside unless clearly erroneous, and due regard shall be given to the opportunity of the bankruptcy court to judge the credibility of the witnesses.
This high standard of review has been followed by district courts. See, e.g., In re Clarkson, 767 F.2d 417, 419 (8th Cir.1985); In re Tesmetges, 47 B.R. 385, 388 (E.D.N.Y.1984). The "clearly erroneous" language of the rule tracks the language found in Federal Rule of Civil Procedure 52(a), and cases construing the standard under Rule 52(a) are equally applicable to bankruptcy cases. Matter of Louisiana Industrial Coatings, Inc., 53 B.R. 464, 467 (E.D.La.1985). The Supreme Court recently reaffirmed its longstanding definition of this standard: "`[A] finding is "clearly erroneous" when although there is evidence *661 to support it, the reviewing court on the entire evidence is left with the definite and firm conviction that a mistake has been committed.'" Anderson v. City of Bessemer City, N.C., 470 U.S. 564, 573, 105 S. Ct. 1504, 1511, 84 L. Ed. 2d 518 (1985) (quoting United States v. United States Gypsum Co., 333 U.S. 364, 395, 68 S. Ct. 525, 542, 92 L. Ed. 746 (1948)).
The Land Bank argues that the bankruptcy court's findings on two crucial factual issues are clearly erroneous. First, it contends that the court's finding that Grieshop is not acting as the alter ego of her husband is clearly erroneous. Upon a review of the evidence on this point, the court finds the Land Bank's argument to be well taken. The bankruptcy court found the interests of Grieshop and her husband to be sufficiently distinct that no identity of interest existed, reasoning that "Mr. Grieshop consented to a lifting of the automatic stay while Mrs. Grieshop has put herself into bankruptcy to avoid such an outcome." Bankruptcy Order of February 26, 1986 at 4. This distinction becomes transparent when all the surrounding circumstances are considered. While it is true that Mr. Grieshop agreed to the lifting of the automatic stay in his case by stipulation on August 9, 1984, he reappeared less than three months later in an effort to have the stay reimposed. The bankruptcy court held him to his agreement, however, and ordered on December 14, 1985 that the Land Bank be permitted to pursue its foreclosure. Approximately four months later, the debtor herein filed her petition on the eve of the foreclosure sale. Thus, a logical inference can be made that upon the failure of his motion to reconsider, Mr. Grieshop saw the filing of a petition by his wife as the only possible means remaining to forestall the sale of the farm.
Regardless of the context in which Grieshop's petition was filed, however, it remains that the legal interest of Mr. and Mrs. Grieshop in the farm were identical: both held the land as tenants by the entireties. Given this fact, and given the history of the Grieshop's use of the bankruptcy laws to attempt to save their property from creditors, there does not appear to be any evidence that Grieshop was not acting as the alter ego of her husband. The bankruptcy court's finding to the contrary is clearly erroneous.
Second, the Land Bank argues that the bankruptcy court's finding that Grieshop intends to reorganize her business pursuant to the requirements of Chapter 11 is also clearly erroneous. Her testimony indicates that Grieshop's goal in filing her petition was to either enable her husband to generate enough income for them to keep the farm, or to sell the farm at or near its fair market value in order to protect their equity in the property. There is no indication from the record before the court that Grieshop has taken any steps to submit a plan of reorganization, or indeed that she has even formulated one in her own mind. On this issue, the bankruptcy court stated without elaboration that Grieshop "is seeking to establish a plan of reorganization based on the income from the farm and her off-farm income. . . ." No explicit testimony supports this finding, and the court has not been made aware of any such plan having been filed by Grieshop. Thus, the bankruptcy court's conclusion must be supported only inferentially, if at all. The facts regarding Grieshop's income sources do not support such an inference. Schedules filed with the bankruptcy court indicate that her income includes her income as a nurse at the Jay County Hospital of $680 per month and farm income of $1,000 per month. This income is not sufficient even to pay the amount ordered by the bankruptcy court as adequate protection to her secured creditors, without considering the fact that other living expenses must come from these funds. Adequate protection payments have only been possible through supplemental assistance from third parties.
Taken as a whole, this evidence shows neither the intention nor even the ability of Grieshop to reorganize under Chapter 11. The bankruptcy court's finding on this issue is clearly erroneous.
*662 B. Conclusions of Law
Unlike the "clearly erroneous" standard used to review factual findings of the bankruptcy court, legal conclusions are subject to de novo review. In re Global Western Development Corp., 759 F.2d 724, 726 (9th Cir.1985). In addition, "the reviewing court must determine whether the trial court applied the proper legal standard to the facts." In re Stratton, 23 B.R. 284, 287 (D.S.D.1982).
1. Good Faith
The Land Bank's central legal issue concerns the concept of good faith and the degree of bad faith necessary to constitute "cause" for either terminating the automatic stay or dismissing the petition altogether. The Land Bank argues that cause exists under two provisions of the bankruptcy code. In connection with its motion to terminate the automatic stay which Grieshop received upon filing her petition, the Land Bank relies on 11 U.S.C. § 362(d)(1), which reads in part:
(d) On request of a party in interest and after notice and a hearing, the court shall grant relief from the stay provided under subsection (a) of this section, such as by terminating, annulling, modifying, or conditioning such stay
(1) for cause, including the lack of adequate protection of an interest in property of such party in interest. . . .
The second provision cited by the Land Bank is 11 U.S.C. § 1112(b) in support of its motion to dismiss the petition. It reads in part:
(b) Except as provided in subsection (c) of this section, on request of a party in interest, and after notice and a hearing, the court may convert a case under this chapter to a case under chapter 7 of this title or may dismiss a case under this chapter, whichever is in the best interest of creditors and the estate, for cause. . . .
In neither of these sections is the concept of good faith explicitly mentioned. Good faith has long been a prerequisite to a debtor's use of the bankruptcy laws, however, and the lack thereof has consistently been recognized as adequate cause for both terminating the stay afforded by the filing of a petition as well as dismissing the petition outright. See, e.g., In re Thirtieth Place, 30 B.R. 503, 506 (Bankr. 9th Cir. 1983) (finding of good faith clearly erroneous leading to lifting of stay and dismissal of petition); In re Lotus Investments, Inc., 16 B.R. 592, 595 (Bankr.S.D.Fla.1981) (lack of good faith warranted both relief from stay and dismissal of petition).
Despite its recognition as a valid reason to lift a stay or dismiss a petition, the concept of "bad faith" (or lack of good faith) has resisted easy definition. At the root of any definition, however, is a debtor's respect for the underlying goals and policies encouraged by bankruptcy law:
The provisions of the Code dealing with rehabilitation and reorganization must be viewed as direct lineal descendants of a legal philosophy solidly embedded in American Bankruptcy law. Review and analysis . . . disclose a common theme and objective: avoidance of the consequences of economic dismemberment and liquidation, and the preservation of ongoing values in a manner which does equity and is fair to rights and interests of the parties affected. But the perimeters of this potential mark the borderline between fulfillment and perversion. . . . That borderline is patrolled by courts of equity, armed with the doctrine of "good faith": the requirement that those who invoke the reorganization or rehabilitation provisions of the bankruptcy law must do so in a manner consistent with the aims and objectives of bankruptcy philosophy and policy must, in short, do so in "good faith."
Matter of Management Technology Corp., 54 B.R. 5, 7-8 (Bankr.D.N.J.1984) (quoting In re Victory Construction Co., 9 B.R. 549, 558 (Bankr.C.D.Cal.1981)).
In determining whether good faith exists in a given case, the court must consider all underlying facts and circumstances. In re Thirtieth Place, supra, 30 B.R. at 505 (quoting In re Loeb Apartments, Inc., 89 F.2d 461, 463 (7th Cir. *663 1937)). Thus, many cases have developed sets of factors which tend to recur in bankruptcy petitions in which good faith is an issue. As gleaned from the cases, bad faith may exist where:
1. The debtor has few or no unsecured creditors.
2. There has been a previous bankruptcy petition by the debtor or a related entity.
3. The pre-petition conduct of the debtor has been improper.
4. The petition effectively allows the debtor to evade court orders.
5. There are few debts to non-moving creditors.
6. The petition was filed on the eve of foreclosure.
7. The foreclosed property is the sole or major asset of the debtor.
8. The debtor has no ongoing business or employees.
9. There is no possibility of reorganization.
10. The debtor's income is not sufficient to operate.
11. There was no pressure from non-moving creditors.
12. Reorganization essentially involves the resolution of a two-party dispute.
13. A corporate debtor was formed and received title to its major assets immediately before the petition and
14. The debtor filed solely to create the automatic stay.
See, e.g., In re Chesmid Park Corp., 45 B.R. 153 (Bankr.E.D.Va.1984); Matter of Winn, 43 B.R. 25 (Bankr.M.D.Fla.1984); In re Khan, 34 B.R. 574 (Bankr.W.D.Ky. 1983); In re Corp. Deja Vu, 34 B.R. 845 (Bankr.Md.1983); Matter of Hill, 34 B.R. 21 (Bankr.M.D.Fla.1983); In re Wong, 30 B.R. 87 (Bankr.C.D.Cal.1983); In re Thirtieth Place, supra.
The bankruptcy court erred in two respects in its consideration of the issue of good faith in this case. First, the standard it enunciated for measuring good faith is unduly narrow. Second, the court failed to consider all surrounding circumstances.
In its order, the bankruptcy court did not discuss the standard used to measure good faith except to cite Matter of Lipply, 56 B.R. 524 (Bankr.N.D.Ind.1986). Lipply did not explicitly address the concept of good faith. Rather, it discussed conditions beyond the lack of adequate protection which might constitute "cause" for purposes of 11 U.S.C. § 362(d)(1), noting that "[c]reditors have been granted relief where malfeasance by the debtor(s) has constituted an abuse of the bankruptcy process." 56 B.R. at 527.
When applied to the broader concept of good faith, the standard noted in Lipply and relied upon by the bankruptcy court herein, is too limiting. Defining good faith in the bankruptcy context or elsewhere has never been an easy task. It may not be summarily equated with malfeasance and abuse. A debtor may simply be motivated by a desire to use any means at hand to preserve assets that are in jeopardy. Such acts of desperation do not necessarily imply active malfeasance directed at a given creditor. They may, however, illustrate a misuse, as opposed to abuse, of bankruptcy procedure to the extent that the legitimate ends of bankruptcy law are frustrated by the debtor's actions.
Grieshop neither was motivated by ill will directed specifically at her secured creditors nor did she affirmatively attempt to violate the law in filing her petition. Rather, she used the process in such a way that the underlying policy of securing an orderly and fair adjustment of the relationship between debtor and creditors could not be realized. This constitutes a lack of good faith; it does not necessarily rise to the level of malfeasance. As a result, the bankruptcy court erred by expanding the limited discussion of abusive conduct in Lipply to an all-encompassing definition of good faith.
Second, the bankruptcy court did not consider all the relevant facts and circumstances in determining whether Grieshop's *664 actions were in good faith. The overriding circumstance is the fact of Grieshop's filing of her petition on the heels of her husband's unsuccessful Chapter 13 bankruptcy. While his petition is not legally connected with Grieshop's, it is nonetheless appropriate that this court consider the timing and circumstances surrounding both petitions in connection with their effect on the secured creditors of the real estate at issue. The clear effect has been to delay foreclosure on the real estate for reasons which are not likely to further bankruptcy policy. Practically speaking, the only arguable difference in the income information provided in Grieshop's bankruptcy and that of her husband is the additional $680 per month she earns as a nurse, resulting in a combined farm and off-farm income of $1,680. When considered in light of scheduled living expenses totalling $1,065 per month, this amount is not likely to have an appreciable impact on her ability to reorganize the business of the farm since the adequate protection order of the bankruptcy court, which essentially covers only the mortgage interest, is $1,800 per month.
Several of the other factors which the bankruptcy court did not consider in its order suggest that Grieshop has not acted in good faith. For example, she has listed no unsecured creditors who would benefit from the equity in the property. In fact, the real estate upon which the Land Bank seeks to foreclose is the only substantial asset affected by the instant petition. These facts, combined with the timing of Grieshop's petition on the eve of foreclosure, are strong indicia of bad faith filing. In re Chesmid Park Corp., supra, 45 B.R. at 157-58.
In addition, there is a serious doubt as to Grieshop's ability to reorganize the business. The most telling evidence of this inability is her husband's lack of success in rehabilitating the farm operation in his own petition. Even in the unlikely event that Grieshop's off-farm income was not used in this effort, it is not sufficient in itself to create real prospects of the implementation of a viable plan. In re Thirtieth Place, Inc., supra, 30 B.R. at 505. As well as bearing on the debtor's good faith, the inability to effectuate a plan in itself constitutes cause for dismissal. 11 U.S.C. § 1112(b)(2).
The list continues. The facts of this case also point unerringly to a familiar tactic used by those who have otherwise exhausted all possibilities in their efforts to save secured property: the filing of a petition on the eve of foreclosure. Matter of Southern Communities, Inc., 57 B.R. 215, 217 (Bank.M.D.Fla.1986); In re Chesmid, supra, 45 B.R. at 157; In re Corporation Deja Vu, supra, 34 B.R. at 846. Indeed, it appears that every one of the fourteen factors bearing on good faith except one applies in this case. The lone exception is the lack of a recently formed corporate debtor to receive title to the land at issue. In the face of such overwhelming indicia of bad faith in the filing of Grieshop's petition, there is ample reason to grant the Land Bank's motion.
2. Other Legal Issues
The Land Bank raises two other legal issues. It contends first that the bankruptcy court erred by failing to consider the doctrine of collateral estoppel. This argument is premised on a finding that Grieshop was operating as the alter ego of her husband in filing her petition. While this court agrees with the Land Bank that the bankruptcy court's contrary finding on this point was clearly erroneous, the facts of this case are not such that collateral estoppel applies.
Collateral estoppel refers to the doctrine which precludes the relitigation of matters that have once been litigated and decided. In essence, the Land Bank argues that since Grieshop acted as the alter ego of her husband, she is bound by the bankruptcy court's order in her husband's case. The issue thus is whether Grieshop's de facto status as the alter ego of her husband is sufficient to overcome the traditional rule that she not be bound by a judgment in a case in which she was not a named party or otherwise directly involved. Under the facts of this case, the application of collateral estoppel is not warranted.
*665 Cases cited by the Land Bank in support of its argument are distinguishable. For example, In re French Gardens, Ltd., 58 B.R. 959 (Bankr.S.D.Tex.1986), involved multiple filings of closely related business entities in connection with an apartment complex. In an initial Chapter 11 proceeding, the court entered an order which also determined the rights of a junior lienor. On the eve of foreclosure, this lienor filed its own petition, naming the same apartment complex as its only asset. The court dismissed this second petition and imposed sanctions. It held that the first order had the effect of res judicata on the second petition in the circumstances of this case. Id. at 963. The facts of the instant case are sufficiently distinct from French Gardens to make its holding regarding res judicata inapplicable herein. Grieshop was not named or in any way explicitly bound by the order in her husband's case. The only connection of Grieshop to her husband's petition is the more nebulous finding that she acted as his alter ego. This status in itself does not give rise to collateral estoppel.
The second case cited by the Land Bank is In re Kinney, 51 B.R. 840 (Bankr.C.D. Cal.1985). This case involved successive filings by several members of the same family who owned real estate in danger of being foreclosed as tenants in common. The court condemned such abusive conduct, and held that it "is able to bind parties not even before it when such a scheme is demonstrated by strong and clear evidence." Id. at 846. Such "strong and clear" evidence existed in Kinney where ten successive filings occurred within a two-year period. In a case where a wife files a petition on the heels of her husband's unsuccessful bankruptcy, the facts may demonstrate bad faith, but rarely the degree of abuse found in Kinney.
It is significant that the court in Kinney noted that collateral estoppel could be imposed in that case only pursuant to 11 U.S.C. § 105, authorizing the issuance of any "appropriate or necessary" order. Such an order will generally be inappropriate in light of the fact that bankruptcy law explicitly affords either or both spouses the opportunity to file petitions in bankruptcy. The fact that this court has determined that Grieshop acted as the alter ego of her husband in filing her petition does not mandate the further finding that collateral estoppel applies as a bar to her petition. The court also refuses to exercise its discretion pursuant to 11 U.S.C. § 105 to reach this conclusion. The most that can be said of Grieshop's conduct is that she acted in bad faith. Collateral estoppel has no bearing on this case. See In re Wong, 30 B.R. 87 (Bankr.C.D.Cal.1983).
The final argument raised by Land Bank involves the relationship of entireties property to the bankruptcy estate when one or both spouses have filed bankruptcy. There is no indication that this issue was put before the bankruptcy court, and it formed no part of its discussion or order. It is not appropriately raised for the first time on appeal, and therefore will not be considered. In re Glenn, 760 F.2d 1428, 1442 (6th Cir.1985); In re Bugos, 34 B.R. 382, 385 (N.D.Ind.1983).
III. CONCLUSION
For all of the foregoing reasons, the decision of the bankruptcy court is REVERSED.
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816 F. Supp. 2d 793 (2009)
JONATHAN BROWNING, INC., Plaintiff,
v.
VENETIAN CASINO RESORT LLC, et al., Defendants.
No. C 07-03983 JSW.
United States District Court, N.D. California.
October 6, 2009.
Trenton Herbert Norris, Arnold & Porter LLP, San Francisco, CA, Anthony Edward *794 McNamer, McNamer and Company P.C., Portland, OR, for Plaintiff.
Ray L. Wong, Hancock Rothert & Bunshoft LLP, San Francisco, CA, Courtney Lenore Bunt, for Defendants.
Michelle Hon Donovan, Duane Morris LLP, San Diego, CA, for Plaintiff/Defendants.
ORDER GRANTING DEFENDANTS' MOTION FOR SUMMARY JUDGMENT; DENYING PLAINTIFF'S MOTION FOR SUMMARY JUDGMENT; AND FINDING AS MOOT PLAINTIFF'S MOTION TO AMEND
JEFFREY S. WHITE, District Judge.
Now before the Court is the motion for summary judgment filed by Defendants Venetian Casino Resort, LLC, Las Vegas Sands, LLC and Las Vegas Sands Corporation (collectively "Defendants" or "the Venetian") and the motions for summary judgment and for leave to file an second amended complaint filed by Plaintiff Jonathan Browning, Inc. ("Plaintiff"). Having considered the parties' pleadings, the relevant legal authority, and having had the benefit of oral argument, the Court hereby GRANTS Defendants' motion for summary judgment, DENIES Plaintiff's motion for summary judgment, and FINDS AS MOOT Plaintiff's motion to amend the complaint.
BACKGROUND
As alleged in the amended complaint, Jonathan Browning, Inc. is a designer and seller of decorative light fixtures, such as the wall-mounted lighting sconces at issue here. Two of Plaintiff's designs, the Trianon and Ledoux sconces, are at issue in this litigation. Plaintiff alleges that the Defendants purchased 10 sconces from Plaintiff, requested that it bid for 11,368 sconces to be used in the Venetian casino guest room remodel, and, instead of contracting with the design company to produce the lighting fixtures, contacted Plaintiff's manufacturer in China to make copies of the fixtures without Plaintiff's knowledge or permission.
Upon discovering the alleged copying, Plaintiff filed suit seeking damages for copyright infringement and unfair competition based on the production and public display of light fixtures in the casino. Plaintiff alleges that its lighting fixtures are entitled to copyright protection and that the Venetian is liable for direct infringement of its alleged copyrights for making unauthorized derivative works of its hand drawings (Claim One), direct infringement of its alleged copyrights for making unauthorized copies of its light fixtures (Claim Two) and for the unauthorized public display of the same light fixtures (Claim Three). Plaintiff also alleges that the Venetian is liable for inducement of copyright infringement and contributory copyright infringement for allegedly inducing or contributing to the reproduction of unauthorized copies of Plaintiff's light fixtures by the third-party manufacturer in China, Diamond Life (Claims Four and Five). Plaintiff further alleges that Venetian is vicariously liable for direct infringement by Diamond Life, based on the allegation that Defendants allegedly had both the ability and the right to supervise Diamond Life's infringing conduct and to prevent such conduct (Claim Six). Lastly, Plaintiff alleges that Defendants are liable for statutory unfair competition under California Business and Professions Code Section 17200 and common law unfair competition (Claims Seven, Eight and Nine).
Just before filing this lawsuit, Plaintiff filed two applications for copyright registrations for the Trianon and Ledoux lighting sconces, seeking protection for its "design applied to decorative light fixture." (Declaration of Michelle A. Hon, Ex. C.) *795 Plaintiff also requested that the Copyright Office process his application with special handling due to the pending litigation. (Id. at Ex. D.) In his special handling request, Plaintiff acknowledged that the fixtures were useful articles as defined by the Copyright Act, but that they could still be copyrighted "to the extent that their design incorporates pictorial, graphic, or sculptural features that can be identified separately from their utilitarian aspects." (Id.) In letters dated July 18, 2007 and August 1, 2007, the U.S. Copyright Office refused copyright registration for the two disputed lighting fixtures, stating that "Registration for the above works must be refused because they are `useful articles' which do not contain any separable features that are copyrightable." (Id. at Exs. E and F; emphasis in original.) The Copyright Office found that the separable elements of the works submitted by Plaintiff were not copyrightable "because they represent an insufficient amount of original authorship." (Id.) Although Plaintiff had the right to appeal the decisions of the Copyright Office, there is no evidence that any such appeal was made.
Subsequently, Plaintiff filed applications, with special handling, for copyright of the hand shop drawings of the Trianon and Ledoux light fixtures. (Id. at Ex. G.) The Copyright Office issued copyright registrations just for the drawings. (Id. at Ex. H.)
The Court will address additional specific facts as required in the analysis.
ANALYSIS
A. Cross-Motions for Summary Judgment.
1. Legal Standards Applicable to Motions for Summary Judgment.
Summary judgment is proper when the pleadings, discovery, 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." Fed.R.Civ.P. 56(c). The party moving for summary judgment bears the burden of identifying those portions of the pleadings, discovery, and affidavits that demonstrate the absence of a genuine issue of material fact. Celotex Corp. v. Catrett, 477 U.S. 317, 323, 106 S. Ct. 2548, 91 L. Ed. 2d 265 (1986). Once the moving party meets its initial burden, the nonmoving party must go beyond the pleadings and, by its own affidavits or discovery, "set forth specific facts showing that there is a genuine issue for trial." Fed.R.Civ.P. 56(e). On an issue for which the opposing party will have the burden of proof at trial, the moving party need only point out "that there is an absence of evidence to support the nonmoving party's case." Id. Inferences drawn from the facts must be viewed in the light most favorable to the party opposing the motion. Masson v. New Yorker Magazine, 501 U.S. 496, 520, 111 S. Ct. 2419, 115 L. Ed. 2d 447 (1991).
Actions arising under the Copyright Act must adhere to the same summary judgment standard as any other civil action. Shaw v. Lindheim, 919 F.2d 1353, 1358-59 (9th Cir.1990). Accordingly, copyright claims can be resolved on summary judgment where there is no dispute of material fact. Brown Bag Software v. Symantec Corp., 960 F.2d 1465, 1472 (9th Cir.1992). In particular, "[c]opyrightability is often resolved on summary judgment ... because very often no issues of material fact are in dispute and the only task for the court is to analyze the allegedly copyrightable item in light of applicable copyright law." Sem-Torq, Inc. v. K Mart Corp., 936 F.2d 851, 853 (6th Cir.1991) (citations omitted).
2. Extent of Copyright Protection for Utilitarian or Useful Articles and Deference to Copyright Office Determination.
Pictorial, graphic and sculptural works can receive copyright protection. *796 17 U.S.C. § 102(a)(5). However, such copyright does not fully extend to works that are considered "useful articles." 17 U.S.C. § 101. Only sculptural elements that can be identified separately from, and are capable of existing independently of, the utilitarian aspects of the article receive copyright protection. Id. Copyright does not extend to an element of an article if it has any intrinsic utilitarian function. Fabrica, Inc. v. El Dorado Corp., 697 F.2d 890, 893 (9th Cir.1983). "Only the separable ornamental aspects of a work receive copyright protection, and the protection extends only to that aspect (e.g., a carving on the back of a chair may receive a copyright, but the chair does not)." Smith & Hawken, Ltd. v. Gardendance, Inc., 2005 WL 1806369, *2 (N.D.Cal. July 28, 2005) (citing Fabrica, 697 F.2d at 893). A table lamp with a statuette base may receive copyright protection for the statuette, but not for the entire lamp. Mazer v. Stein, 347 U.S. 201, 74 S. Ct. 460, 98 L. Ed. 630 (1954).
If the sole intrinsic function of an article is its utility, the fact that the article is unique and attractively shaped will not qualify it as a work of art. However, if the shape of a utilitarian article incorporates features such as artistic sculpture, carving, or pictorial representation, which can be identified separately and are capable of existing independently as a work of art, such features will be eligible for registration. Esquire v. Ringer, 591 F.2d 796, 800 (D.C.Cir.1978). In Esquire, the Register of Copyrights determined that the particular lighting fixtures at issue in that case were not eligible for copyright as a work of art. The Register interpreted its own regulations "to bar copyright registration of the overall shape or configuration of a utilitarian article, no matter how aesthetically pleasing that shape or configuration may be." Id. The Register's interpretation of the regulations derives from the principle that "industrial designs are not eligible for copyright" and "registration of the overall shape or configuration of utilitarian articles would lead to widespread copyright protection for industrial designs." Id. at 800, 801.
The court in Esquire acknowledged that there were bound to be inconsistencies in the results of the Register's interpretation:
[t]he Register's test requires the application of subjective judgment, and given the large volume of copyright applications that must be processed there may be some results that are difficult to square with the denial of registration here. But this does not mean that the Register has employed different standards in reaching those decision. The available evidence points to a uniform and long-standing interpretation of [the regulations], and accordingly this interpretation is entitled to great weight.
Id. at 802. The Ninth Circuit has also agreed that "courts should generally defer to the Register's interpretation of the copyright statute" and has expressly held that "the Register has the authority to interpret the copyright laws and that its interpretations are entitled to judicial deference if reasonable." Marascalco v. Fantasy, Inc., 953 F.2d 469, 473 (9th Cir.1991).
In this matter, the United States Copyright Office refused the registration for the two light fixtures designed by Plaintiff as useful articles not having any separable features that are copyrightable. Where registration has been rejected, the plaintiff has the burden of establishing that the work is properly the subject of a copyright, and is not entitled to the prima facie presumptions arising from registration. In this particular case, the two sconces at issue were reviewed pursuant to a special handling request as a predicate to litigation. According to Ralph Oman, *797 Defendants' proffered expert, due to Plaintiff's request that his registration applications receive special handling, "at a minimum, the copyright specialist's refusal would have been reviewed and approved by the head of the Visual Arts Division, if not also the Associate Register of Registration and Recordationall of whom are attorneys with specialized knowledge and expertise in U.S. Copyright Law and the registration of useful articles." (Declaration of Ralph Oman in support of Defendants' opposition to Plaintiff's motion for summary judgment, ¶ 12.)[1]
To establish copyright infringement, a plaintiff must be able to prove: (1) ownership of a valid copyright or the right to enforce one; and (2) copying of constituent elements of the work that are original. Feist Publications, Inc. v. Rural Telephone Service Co., 499 U.S. 340, 361, 111 S. Ct. 1282, 113 L. Ed. 2d 358 (1991). The Court must give deference to the determination by the Copyright Office that the sconces at issue here are not subject to registration for copyright due to the lack of separable features that are copyrightable. See Marascalco, 953 F.2d at 473. The fact that the two sconces were given special attention by the Copyright Office counsels further in favor of this Court granting deference to its decision. The Copyright Office, and not the Court, has the expertise and experience to make a determination based on its interpretation of its own guiding regulations as well as its own wealth of experience. This Court owes such a determination deference and also finds that the subject sconces do not contain any separable features that are copyrightable. See Smith & Hawken, 2005 WL 1806369 at *2.[2]
Because Plaintiff cannot establish a valid copyright or the right to enforce one for the subject sconces, Plaintiff has failed to meet his burden to establish the basic elements for copyright infringement and, as a matter of law, Defendants cannot be liable for direct, contributory or vicarious copyright infringement. In addition, because causation for the claim for statutory and common law unfair competition is premised upon the infringement of Plaintiff's alleged copyright, and the claim is preempted by federal copyright laws, the Court finds Plaintiff's claims for unfair competition are without merit. See Kodadek v. MTV Networks, Inc., 152 F.3d 1209, 1212-13 (9th Cir.1998) (holding that a state claim for unfair competition is preempted by copyright where the rights that a plaintiff asserts under state law are equivalent to the those protected by the Copyright Act and the work involved falls within the subject matter of the Copyright Act).[3]
*798 B. Plaintiff's Motion to Amend is Moot.
The Court finds as moot Plaintiff's motion to amend. Because the Defendants' motion for summary judgment is granted, there is no need for the Court to reach the merits of Plaintiff's motion to amend.
CONCLUSION
Based on the foregoing reasons, the Court hereby GRANTS Defendants' motion for summary judgment, DENIES Plaintiff's motion for summary judgment, and FINDS AS MOOT Plaintiff's motion to amend the complaint.
A separate judgment shall issue and the Clerk is instructed to close the file.
IT IS SO ORDERED.
NOTES
[1] Although the Court has rejected Defendants' proffered expert testimony on the ultimate issue of the decision of the Copyright Office in this matter, the Court explicitly permitted the testimony regarding the general process for the registration of useful articles and "the procedures for special handling requests." Jonathan Browning, Inc. v. Venetian Casino Resort LLC, 2009 WL 1764652, *1 (N.D.Cal. June 18, 2009).
[2] To the extent the determination that another sconce in the series, the Calais, which is not at issue in this litigation, was granted registration, the Court can only remark, just as the court did in Esquire, that "given the large volume of copyright applications that must be processed, there may be some results that are difficult to square with the denial of registration here." 591 F.2d at 802.
[3] Also, at oral argument, Plaintiff conceded its claim for unfair competition and Plaintiff has not opposed the motion as to its fraudulent competition claim. The Court notes that based on the current record, Plaintiff possibly could have asserted other, state law claims when originally filing its lawsuit. However, based on the claims as pled, although the Court does not condone Defendants' behavior, it finds that Plaintiff is without a federal remedy.
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64 F. Supp. 953 (1946)
BERNHARD et al.
v.
METCALFE CONST. CO. et al.
Civ. No. 536.
District Court, D. Nebraska, Omaha Division.
January 28, 1946.
Bolus J. Bolus, of Omaha, Neb., for plaintiff.
Joseph T. Votova, U. S. Atty., of Omaha, Neb., for defendants.
DONOHOE, District Judge.
Vernie L. Randall and another no longer concerned brought this action against the defendants seeking to recover a judgment for overtime compensation claimed to be due under the Fair Labor Standards Act of 1938, in connection with work performed by him in the Dominion of Canada.
The defendants have moved to dismiss on the ground that the petition fails to state a claim against any of the defendants upon which relief can be granted, in that the said petition fails to disclose that the plaintiff was at any time mentioned in the petition, *954 engaged in commerce, as defined by the Fair Labor Standards Act of 1938, 52 Stat. 1060, 29 U.S.C.A. §§ 201-219.
The contract, a copy of which is attached to the petition, recites that it was dated and signed at Whitehorse in the Dominion of Canada, and it is agreed by written stipulation of facts filed in the case, that the plaintiff was hired and signed an employment contract in the Dominion of Canada, copy thereof being attached to the petition, and plaintiff's work, under the contract, was all performed wholly within the Dominion of Canada.
The simple question presented to the Court is whether, under the allegations of the petition and the stipulation of facts, the plaintiff is entitled to the benefits of the Fair Labor Standards Act of 1938.
Generally, unless the parties have manifested a contrary intention, the obligations, legal effect and interpretation of a contract which has been entered into and performed in a foreign state or country, are governed by the law of such state or country. 17 C.J.S., Contracts § 12, pp. 338, 339; Soviet American Securities Corporation v. Bolger, D.C.N.J., 1936, 16 F. Supp. 622; Federal Surety Co. v. Minneapolis Steel & Machinery Co., 8 Cir., 1927, 17 F.2d 242; Westbrook v. Elder, 264 Mich. 138, 249 N.W. 617. The contract involved contains no manifestation of intention respecting the law which shall be applied in determining the rights and duties of the parties.
Section 3 of the Fair Labor Standards Act provides, in part:
As used in sections 201-219 of this title * * *
"(b) `Commerce' means trade, commerce, transportation, transmission, or communication among the several States or from any State to any place outside thereof.
"(c) `State' means any State of the United States or the District of Columbia or any Territory or possession of the United States.
"(d) `Employer' includes any person acting directly or indirectly in the interest of an employer in relation to an employee but shall not include the United States or any State or political subdivision of a State, or any labor organization (other than when acting as an employer), or anyone acting in the capacity of officer or agent of such labor organization. * * *
"(j) `Produced' means produced, manufactured, mined, handled, or in other manner worked on in any State; and for the purposes of this chapter an employee shall be deemed to have been engaged in the production of goods if such employee was employed in producing, manufacturing, mining, handling, transporting, or in any other manner working on such goods, or in any process or occupation necessary to the production thereof, in any State."
Citations of authorities are not necessary to support the proposition that the definitions contained in the Act are controlling and must be accepted, and these definitions definitely limit the application of the Act to the territorial limits of the United States, its territories and possessions. American Banana Co. v. United Fruit Co., 213 U.S. 347, 29 S. Ct. 511, 53 L. Ed. 826, 16 Ann.Cas. 1047.
Since the contract was entered into and performed in a foreign state, the Fair Labor Standards Act has no application to such work so performed. The Department of Labor has held on numerous occasions to this effect. W & H Interpretative Bulletin N. 2, Oct. 17, 1938 (2 C.C.H., Labor Law Service, Par. 32,102); 2 C.C.H., Labor Law Service, Par. 23,576.07; 2 C.C.H., Labor Law Service, Par. 23,576; 6 Wage & Hour Reporter, page 203, 204.
While it is true that these rulings of the Department of Labor are not binding on the Courts, still it has been frequently held that administrative interpretations of the Fair Labor Standards Act by the Department of Labor are entitled to great weight. Overnight Motor Co. v. Missel, 316 U.S. 572, 62 S. Ct. 1216, 86 L. Ed. 1682; United States v. American Trucking Associations, 310 U.S. 534, 60 S. Ct. 1059, 84 L. Ed. 1345; Skidmore et al. v. Swift & Co., 323 U.S. 134, 65 S. Ct. 161; Noonan v. Fruco Construction Co., 8 Cir., 140 F.2d 633.
While we have not found a Federal case directly passing on the question none has been cited there are two cases in the State of New York wherein the New York Supreme Court directly held that the Fair Labor Standards Act did not apply to cases such as the case now under consideration. Filardo v. Foley Bros., Inc., 1943, 181 Misc. 136, 45 N.Y.S.2d 262; and Greenstein v. Pac-American Airways, Inc., 185 Misc. 429, 57 N.Y.S.2d 178.
In his petition the plaintiff alleges that the work in which he was engaged was *955 a project of the United States and that he was employed by the United States, and that the defendants acted for the United States and in the employment of the United States under contracts commonly known as war contracts. If we are to accept these allegations, they, in themselves, are sufficient to preclude any recovery, because the Fair Labor Standards Act, 29 U.S.C.A. § 203(d), specifically excludes the United States from the provisions of the Act. Any basis for plaintiff's claim must necessarily rest on the assumptions that the defendants were independent contractors.
The motion of the defendants will be sustained and the clerk is directed to enter a judgment of dismissal accordingly. Costs will be taxed to the plaintiff.
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64 F. Supp. 716 (1946)
DROSTE
v.
NASH-KELVINATOR CORPORATION (INTERNATIONAL UNION, UNITED AUTOMOBILE, AIRCRAFT, AGRICULTURAL IMPLEMENT WORKERS OF AMERICA (UAW-CIO) et al., Intervenors).
No. 5010.
District Court, E. D. Michigan, S. D.
January 30, 1946.
*717 John C. Lehr, U. S. Dist. Atty., and Morris Zwerdling, Asst. U. S. Dist. Atty., both of Detroit, Mich., for plaintiff.
Cook, Smith, Jacobs & Beake, of Detroit, Mich. (Grant L. Cook and Sydney A. Jacobs, both of Detroit, Mich., of counsel), for defendant.
Ernest Goodman, of Detroit, Mich., for the Union.
Boniface R. Maile, of Detroit, Mich., for Veterans of Foreign Wars.
LEDERLE, District Judge.
Findings of Fact
1. This complaint was filed by the United States District Attorney to compel the defendant, Nash-Kelvinator Corporation, to restore a position to plaintiff, George Arnold Droste, a World War II Veteran whose employment with defendant had been interrupted after seven months' employment by a year's period in the armed services, and to compensate him for loss of wages claimed to be due him because of the alleged failure of the defendant to comply with the provisions of Section 8 of the Selective Training and Service Act *718 of 1940, as amended 50 U.S.C.A.Appendix, § 308, herein referred to as the Act. The defendant has acted in good faith in accordance with its conception of the proper interpretation of the Act.
2. Upon motion, and with the consent of both parties, the International Union, United Automobile, Aircraft, Agricultural Implement Workers of America (UAW-CIO) and Local No. 13, International Union, United Automobile Aircraft, Agricultural Implement Workers of America (UAW-CIO), herein referred to as the Union, of which plaintiff is a member, were permitted to intervene early in the pendency of this action. This organization has an employment contract with the defendant, and it likewise contends that the actions taken by defendant were in accordance with the Act.
3. Upon motion made a few days after trial, the Wayne County Council, Veterans of Foreign Wars, with a local membership of 20,000 veterans composed of 25% veterans of former wars and 75% veterans of World War II, was permitted to file a brief amicus curiae, in which it supported the position of plaintiff that World War II veterans were entitled to the so-called "super-seniority" over all other employees of an employer, including veterans of other wars.
4. The material facts involved in this case are not in dispute. Most of them were incorporated in a stipulation of facts, which is hereby adopted as part of these findings.
5. In 1942 the defendant began the operation of a plant in the City of Lansing, Mich., under contract with the United States Government, for the manufacture of aircraft propellers. The plant, machinery and equipment were owned by the Government, and the defendant managed and operated the plant on a cost-plus-a-fixed-fee basis until August 17, 1945, when the contract was terminated and operation in the plant ceased. The plaintiff was employed by defendant in this plant from May 4, 1943, until November 30, 1943, when he was inducted into military service in accordance with the provisions of the Act.
6. The National Labor Relations Board certified the Union as the exclusive bargaining representative for this plant, and Local No. 13 entered into a contract with the defendant. The plaintiff was a member of the Union, and, in accordance with the terms of the contract, was classified as a production employee. The Union contract contained detailed and specific provisions as to the seniority of the various production employees, both as to job classification and as to the entire plant. On November 30, 1943, the plaintiff was working as a camber grinder, classification YD-2, at the rate of pay of $1.39 per hour, with a 5¢ hourly bonus for working on the night shift. His seniority in this classification dated from July 19, 1943, and his plant-wide seniority dated from May 5, 1943, the date of his first employment by defendant.
7. The plaintiff received an honorable discharge from the United States Army on November 2, 1944. On November 29, 1944, he made application to the defendant for restoration to his former position as camber grinder. It is conceded that throughout the period here involved he was qualified to perform the duties of that position. On November 30, 1944, defendant restored plaintiff to his former position as camber grinder. His seniority status in this classification was established by defendant adding to his four months' seniority as camber grinder at the time he entered military service one year's additional seniority computed on the basis of the length of his period of military training and service.
8. Plaintiff continued to work as a camber grinder at the same rate of pay until January 15, 1945. On that date, plaintiff was the forty-ninth employee in line of seniority in the camber grinder classification, in accordance with the provisions of the Union contract. On January 15, 1945, defendant retained other employees, who were not veterans of World War II, in the camber grinder classification, all of whom had worked longer in that classification than the year and four months covered by plaintiff's actual employment in that classification plus his one year's military service. On that date, defendant was ready and willing to employ plaintiff in the job classification to which his plant-wide seniority would entitle him and for which he could qualify, in accordance with the Union contract. At his request, he was granted a leave of absence to obtain employment with another employer, with the understanding that he would retain all of his rights under the Union contract. On January 27, 1945, the plaintiff accepted employment at the defendant's plant in the classification to which his plant-wide seniority entitled him, at a lower rate of pay than he would have received had he continued to work as a camber grinder. He continued *719 to work for defendant in various classifications until May 28, 1945, upon which date he voluntarily quit. During all of the time plaintiff was not employed by the defendant, he was continued on its seniority list. On July 25, 1945, he was recalled by defendant and employed as a camber grinder at $1.39 per hour until August 17, 1945, when the manufacturing operations at the defendant's plant were terminated.
9. During the period of plaintiff's absence from defendant's plant, he was considered as being on furlough or leave of absence and was allowed all of the benefits offered by the employer, pursuant to the established rules and practices relating to employees on furlough or leave of absence, in accordance with the Union contract. Had plaintiff been willing to accept a position to which he would have been entitled under the terms of the Union contract, he would not have lost any time, but would have been compelled to accept pay at a lower rate than he was receiving as a camber grinder, and a position in a lower classification.
10. The plaintiff contends that the Act entitled him to employment as a camber grinder at $1.39 per hour so long as defendant employed any camber grinders in that plant, except other veterans of World War II of greater seniority. In other words, he claims when he was restored to his position, he should have been given a position on the seniority list ahead of all employees who were not veterans of World War II.
11. Plaintiff claims that he is entitled to recover in this action the difference between the wages he received from defendant between January 15, 1945, and July 25, 1945, and the amount he would have earned if he had worked as a camber grinder at the prevailing rate of pay during that entire period. No claim is advanced by plaintiff for the balance of the one-year period following his discharge from the army when the defendant was not operating the Lansing plant, namely, from August 14, 1945, to November, 1945.
Conclusions of Law
1. Jurisdiction of this action is conferred upon this court by Section 8, subsection (e) of the Act, 50 U.S.C.A.Appendix, § 308(e); Hall v. Union Light, etc., Co., D.C., 53 F. Supp. 817.
2. The solution of the problem presented by this case requires a construction of subsections (b) (B) and (c) of Section 8 of the Act, 50 U.S.C.A.Appendix, § 308(b) (B) and (c), which read as follows:
"(b) In the case of any such person who, in order to perform such training and service, has left or leaves a position, other than a temporary position, in the employ of any employer and who (1) receives such certificate, (2) is still qualified to perform the duties of such position, and (3) makes application for reemployment within forty days after he is relieved from such training and service
* * * * * *
"(B) if such position was in the employ of a private employer, such employer shall restore such person to such position or to a position of like seniority, status, and pay unless the employer's circumstances have so changed as to make it impossible or unreasonable to do so;
* * * * * *
"(c) Any person who is restored to a position in accordance with the provisions of paragraph (A) or (B) of subsection (b) shall be considered as having been on furlough or leave of absence during his period of training and service in the land or naval forces, shall be so restored without loss of seniority, shall be entitled to participate in insurance or other benefits offered by the employer pursuant to established rules and practices relating to employees on furlough or leave of absence in effect with the employer at the time such person was inducted into such forces, and shall not be discharged from such position without cause within one year after such restoration."
3. The policy of the Act is stated in Section 1(b), 50 U.S.C.A.Appendix, § 301 (b), to be that, "the obligations and privileges of military training and service should be shared generally in accordance with a fair and just system * * *."
4. General Omar N. Bradley, Administrator of Veterans Affairs, clearly stated the obvious purpose of the Act in an official release of the Public Relations Office of the Veterans Administration, dated September 24, 1945, in the following language: "Jobs cannot be found for veterans if they are not also found for other workers. Any attempt to provide full employment for one group at the expense of another would and should be destined for failure. Were such a solution forced on the nation, the only possible result would be cleavages and group struggles. The men who have borne the burden of war are entitled to advantages and to employment privileges that *720 will assure them equal opportunity with those who stayed at home and bettered themselves in civilian jobs. This is only fair."
5. It is the duty of the court to construe this Act as liberally as possible to carry out its purpose to protect the interests of returned veterans. Kay v. General Cable Corp., 3 Cir., 144 F.2d 653.
6. It is likewise the duty of the court to accept the Act as written. The wisdom of the legislation is for Congress and not for the courts.
7. As stated in Western & Southern Life Ins. Co. v. Huwe, 6 Cir., 116 F.2d 1008, at page 1009, "The first resort in ascertaining legislative intent is to give words used in a statute their natural, ordinary and familiar meaning, and that meaning will be applied unless Congress has definitely indicated the words in the statute should be construed otherwise. The plain, obvious and rational meaning of a statute is always to be preferred to any curious, narrow or strained construction."
8. If the Act is construed exactly as written, it will do more for veterans than plaintiff here claims without disturbing established labor relations of the employees who did not have an opportunity to join the military service in World War II. The Act does more than restore the World War II veteran to the status quo ante. It gives him the full benefit of whatever added rights he might have acquired if he had remained in his position instead of being inducted into the service. If the seniority accumulated during the time he was in the service entitled him a better job classification than he had at the time he entered the service, it is the duty of the employer to give him this better classification. There is nothing in the Act to indicate that Congress intended to cause a fellow employee to make an unequal sacrifice for the benefit of the returned veteran. The obligation to the returned veteran rests equally upon all citizens. In this connection, it must be observed that many patriotic workers were not permitted to enter active military service in World War II for the reason that the Government through its designated agencies decided that their services in the field of production were more important. Deferments were granted upon petition of the employer and after due consideration by the Selective Training and Service Boards, and not because the worker desired it. It seems obvious that Congress did not intend to penalize these essential employees by reducing their seniority status, for it is well known that without the services of the essential employees in production, it would have been impossible to carry the war through to a successful conclusion.
9. The term "restore such person to such position", as used in the Act, means a reinstatement of such person to the same relative place, rank or standing in the employment of his employer as he would have had if he had not been required to leave his employment for World War II training and service in compliance with the Act. It is conceded by plaintiff that defendant did this, but plaintiff contends that the provision "shall not be discharged [for] one year after such restoration" should be interpreted to read "shall not be transferred or laid off from such job classification regardless of his seniority, unless the rights of another veteran of World War II are involved." In order to construe the Act in this manner, it is necessary to add language to the Act which is not there, or to disregard entirely the usual and well settled definition of the word "discharge."
10. "A discharge presumptively means that the employer no longer needs or desires his services; that he is done with him, and all contract relations are at an end." Stitt v. Locomotive Engineers' Mut. Protective Ass'n, 177 Mich. 207, 142 N.W. 1110, 1113.
11. "As a general rule * * * courts have no power to add to, or change, alter or eliminate words which the legislature has incorporated in a statute, not even in order to provide for certain contingencies which the legislature failed to meet, or to avoid hardship flowing from the language used, or to advance the remedy of the statute." Crawford Statutory Construction, pp. 345, 346.
12. The courts may interpolate words in a statute "only when the statutory language is equivocal or where literal interpretation leads to absurdity `so gross as to shock the general moral or common sense.'" Girard Inv. Co. v. Comm., 3 Cir., 122 F.2d 843, 845; Crooks v. Harrelson, 282 U.S. 55, 59, 51 S. Ct. 49, 75 L. Ed. 156.
13. The defendant's rules and practices relating to employees' rights were established by the contract which it had with its employees. The law compelled the defendant *721 to bargain collectively with its employees. Having reached an agreement as to seniority rights of its employees, it was the duty of defendant to include such provisions in the written contract. While this contract was in effect, it was defendant's duty to live up to all of its terms, including the provisions relating to seniority rights of the employees. National Labor Relations Act, 29 U.S.C.A. § 151 et seq.; Heinz Co. v. N. L. R. B., 311 U.S. 514, 61 S. Ct. 320, 85 L. Ed. 309, affirming 6 Cir., 110 F.2d 843.
14. There is no reason to believe that Congress intended to amend or repeal any part of the National Labor Relations Act when it passed the Selective Training and Service Act. No parts of the former Act are specifically repealed by the latter, and repeals by implication are not favored. United States v. Borden Co., 308 U.S. 188, 60 S. Ct. 182, 84 L. Ed. 181.
15. The sections of the Selective Training and Service Act involved herein, like the National Labor Relations Act, are intended to protect the interest of the employees, and there is no positive repugnancy between the provisions of the new law and those of the old, and by a reasonable construction effect can be given to both acts. United States v. Borden Co., 308 U.S. 188, 198, 60 S. Ct. 182, 84 L. Ed. 181; Walling v. Patton-Tulley Co., 6 Cir., 134 F.2d 945, 948.
16. There is nothing in the legislative history of the Act that would justify a court in concluding that Congress intended to upset the established labor relations on the production front by requiring that labor contracts be construed to include provisions for placing returned World War II Veterans in a position at the head of the seniority list. The defendant restored the plaintiff to his position in accordance with section 18 of the Union contract, and that is all the Act requires.
17. The term seniority has a well recognized meaning. In the absence of specific limitation or enlargement, the right of seniority is the right of employees who have served longest to a preference as respects continuous employment. Brand v. Pennsylvania R. Co., D.C., 22 F. Supp. 569, 571. All the here involved provisions of the contract between defendant and its employees relating to seniority used that term in this commonly accepted sense. If Congress intended that established seniority practices covered by labor contracts were not to be considered, there was no occasion to mention seniority in the Act. It is not unusual to provide in labor contracts that certain employees shall head the seniority list. This provision in labor contracts must have been well known to the members of Congress, and the same type of provision for Veterans of World War II could have been specifically inserted in the Act had Congress intended the Act to so provide.
18. The Act imposes upon the employer the duty to restore the World War II veteran, with the option of restoring him either to the position he formerly occupied or to a position of like seniority, status and pay. Like seniority means the same seniority. It does not mean the head of the seniority list.
19. It is also to be noted that the language used in subsection (b)(A), § 8, of the Act, 50 U.S.C.A.Appendix, § 308(b) (A), applicable to United States Government employment of World War II veterans, is substantially the same as the language relating to private employment, and would have to be construed in the same way. If Congress intended to upset all other laws and practices relating to seniority rights of governmental employees, provision for such changes would have been clearly set forth in the Act. No justification exists for distorting the plain wording of the Act to produce such revolutionary results.
In its declaration as to policy relating to employees of states and political subdivisions thereof the same language is used in subsection (b)(C), § 8, 50 U.S.C.A.Appendix, § 308(b)(C).
There is no reason to believe that Congress intended that World War II veterans in private employment should be treated differently than those in public employment, when it used substantially the same language in all three subsections.
20. In this particular case, the plaintiff would gain a slight monetary advantage by adopting his contentions. In some cases, however, the returned veteran would lose if the construction of the Act which plaintiff seeks were adopted. If "lay-off" is construed to mean the same thing as "discharge", the World War II veteran who was inducted into the service while he was temporarily laid off could not be restored to a position, but would have to be rehired. The Act makes no provision for rehiring. *722 It is only by using the usual and accepted interpretation of the term "restore such person to such position" that the rights of all returned veterans can be protected.
21. The defendant fully complied with the Act when it furnished plaintiff with a position of like seniority, status and pay in accordance with the contract it had with him and its other employees. It did not discharge him as alleged in the complaint.
22. The plaintiff did not lose any wages or other benefits because of the failure of the defendant to comply with the Act.
23. It therefore follows that the complaint must be dismissed without costs, and a judgment to that effect is being entered simultaneously herewith. See also: Olin Industries, Inc., v. Barnett, D.C.S.D. Ill., 64 F. Supp. 722; Cf: Fishgold v. Sullivan Dry Dock & Repair Corp., D.C., 62 F. Supp. 25.
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64 F. Supp. 540 (1946)
COEUR D'ALENE COUNTRY CLUB
v.
VILEY, Collector of Internal Revenue for District of Idaho.
No. 1586.
District Court, D. Idaho, N. D.
February 18, 1946.
*541 Robert H. Elder and W. F. McNaughton, both of Coeur d'Alene, Idaho, for plaintiff.
John A. Carver, U. S. Dist. Atty., and E. H. Casterlin and Merrill K. Gee, Asst. U. S. Dist. Attys., all of Boise, Idaho, for the defendant.
CLARK, District Judge.
The plaintiff is a corporation organized under Sections 29-1001 to 29-1005, inclusive, Idaho Codes Annotated. Section 29-1004, Idaho Codes Annotated, reads as follows: "29-1004. Interests of members equalMembership certificates. In such an association the rights and interests of all members shall be equal, and no member can have or acquire a greater interest therein than any other member. Such an association shall not issue any capital stock, but shall issue membership certificates to each member thereof, which certificates can not be assigned so that the transferee thereof can by such transfer become a member of the association, except by resolution of the board of directors and under such regulations as the by-laws may prescribe."
Its articles of incorporation are in regular form and provide that it is not organized for pecuniary profit and has no capital stock, and that its object among other things is to conduct a country club or society for the social enjoyment of the members; to construct, operate and maintain a golf course.
Having organized and incorporated as a non-profit association plaintiff claims that in all of its activities it is operated exclusively for pleasure and recreation.
Section 101, Title 26 U.S.C.A., Internal Revenue Code, provides as follows:
"Exemptions from tax on corporations.
"The following organizations shall be exempt from taxation under this chapter
"* * * (9) Clubs organized and operated exclusively for pleasure, recreation, and other nonprofitable purposes, no part of the net earnings of which inures to the benefit of any private shareholder. * * *"
And under the Statute of the State of Idaho hereinbefore cited and under the Idaho income statute carrying an identical exemption as that provided in Section 101(9), Title 26 U.S.C.A. Int.Rev.Code, hereinbefore cited, the District Court of the Eighth Judicial District of the State of Idaho, in the case of Coeur d'Alene Country Club v. George W. Wedgewood, Tax Commissioner of the State of Idaho, involving income tax of this club for the same years, held that they had complied with the State statute and the Club was exempt from state income taxes. This decision is not binding on this Court, as the Federal Statute is to be construed independent of the State Statute or any construction placed thereon by the State Court. However, this Court takes note of that decision and recognizes that there should not be a conflict between the construction of the State Statute and the Federal Statute where the statutes are identical and the same question raised, if it is possible to harmonize the rulings.
In 1937, without itemizing fully all of the cash receipts of the plaintiff, we find among those receipts as shown by exhibit "1" introduced in evidence in the trial of the cause, an item of $5,485; that was received from leasing cottage sites to members only, with the privilege to build cottages upon them, on an annual basis. Also in 1937, one E. J. Gibson made a payment of $5,000 for a sixty year lease, in reality, a sale of several sites for himself and friends and employees who were members of the Club. These grounds with the improvements upon them comprised about one-tenth of the value of the total property owned by the club. *542 The transaction was beneficial to the club as a means of assuring maintenance of the club and the recreation afforded to its members by the club.
There was an item of $1,250 as a resale of memberships. This amount was the proceeds of the sale of five memberships which, on account of depression years, had been returned to the club by holders or were forfeited and resold at $250 each, the original price.
Another item of income was $2,542.55 which was green fees collected upon a charge of $1 per day to courtesy guests from neighboring clubs desiring to play upon the course.
The evidence shows that the course consists of 18 holes with sprinkler system reaching all the fairways and greens which were grassed and kept in first-class condition, and that the fees charged these courtesy guests were based, in the opinion of the club, in a sum not greater than the cost of up-keep and the same as paid for the privilege by members by way of annual dues and calculated to be and were on actual cost basis.
As to the year 1938, as shown by the exhibits introduced in evidence, the receipts for that year which should be considered here are, first, an item of $4,780.03 reflecting the plaintiff's receipts from clubhouse consisting of receipts for refreshments and entertainment offered only to members and personal guests of members accompanying them, and, second, there is an item of $3,958.50 green fees which were collected upon a charge of $1 per day for the use of the golf course to members having personal guests or courtesy guests of the club desiring to play golf, and this fee was calculated and based upon a sum not greater than actual cost or greater than the amount paid by members in annual dues for their personal use of the golf course.
As to the year 1939, the receipts are shown in detail in Exhibit 3, and the items of gross income as reported on the income tax returns are shown on Exhibit 18. The first item we need consider is the item of $8,253.98 which were receipts from the club-house and were for refreshments and entertainment afforded to members and guests of members on request and strictly confined thereto. The next item of $4,549 green fees collected upon a charge of $1 per day to members bringing guests or to courtesy guests of the club, which fee was calculated on a basis to be not greater than the cost of maintenance of the course, which includes the sprinkler system reaching all fairways and greens, and the keeping of the course in first-class order, and was a sum not greater than paid by the members as dues for that privilege.
It can be said without contradiction that all of the income was for recreational services enjoyed by partaking members, and open to all members, and returned no benefit other than recreational pleasure to any member or shareholder, but the club by offering such pay service, improved and maintained its facilities better than it otherwise might have done, although all of the receipts of the plaintiff for the various years were devoted to the maintenance and improvement of the facilities of the club, all the services for which charges were made were only incidental to the plan and purpose to provide pleasure and recreation to the members, and from the financial statement it appears that they were necessary to fully and successfully carry out the purpose of the club.
The defendant assessed and collected from the plaintiff $988.37 in income taxes for the year 1937, notwithstanding plaintiff's claim of exemption, and assessed and collected from the plaintiff the sum of $194.51 as income tax for the year 1938, notwithstanding its claim of exemption, and assessed and collected from the plaintiff the sum of $799.18 as income tax for the year 1939, notwithstanding plaintiff's claim of exemption, contending (Plaintiff's Exhibit 10): "As approximately twenty-six per cent of the organization's income is derived from nonmembers it is held that the organization is not entitled to exemption under the provisions of section 103(9) of the Revenue Act of 1928". A later contention was raised at the time of the trial by the defendant that there was no equality of treatment between the shareholders and the non-shareholders in that the non-shareholders had no interest or right in the assets of the club and that a percentage of the income for the respective years was invested in capital outlay, no part of which could be distributed to non-shareholders and that the tournament held in 1938, which showed a gross income of $464.30, was not shown to be without profit, and was not shown to not interfere with the usual and ordinary use of the property by its shareholders.
There is no contention, however, on the part of the defendant that the club was not *543 at all times operated exclusively for pleasure and recreation, and this is borne out by the evidence.
It has not sold any of its real property, nor purchased any additional real property. The buildings on the property have been remodeled to some extent and kept in good repair. Two cottages have been replaced by new ones. True, there were guests who participated in the recreational facilities of the club. It is quite doubtful whether this patronage returned any net gain from the guests; if it did, it is immaterial as the amount so collected was probably not in excess of what was paid by regular members.
It is not disputed and it is a fact that all receipts of the club have been devoted to the maintenance and improvement of the club. No dividends have ever been paid, nor has any distribution of receipts, revenues, assets or anything of benefit been made to members. I am unable to find any activity of the club except for the purpose of providing pleasure and recreation and to carry out the sole purpose of the club. It is hard to picture any club so organized that would not have guests.
The Ninth Circuit Court of Appeals in the case of Retailers Credit Ass'n of Alameda County v. Commissioner of Internal Revenue, 90 F.2d 47, at page 50, 111 A.L.R. 152, said: "Reading the statute and the provision of the regulations together, we find that, in determining whether an organization is exempt from tax, three things are to be considered: (1) The kind or type of organization; (2) the purpose of the organization; and (3) the actual operations of the association."
There can be no question here as to the type of the organization, or the actual operation of it. It was operated exclusively for the purposes specified and any business operation was only incidental to the purposes specified in the statute. The Ninth Circuit Court of Appeals in the above-cited case also said: "We believe that the proper interpretation of that rule is that, if the purpose to engage in such a business is only incidental or subordinate to the main or principal purposes required by statute, then exemption cannot be denied on the ground that the purpose is to engage in such a business." In that case also, the Court cites the case of Trinidad v. Sagrada Orden, 263 U.S. 578, 44 S. Ct. 204, 68 L. Ed. 458, wherein the facts are comparable to the facts in the case now before us. The Fifth Circuit Court of Appeals in the case of Scofield v. Corpus Christi Golf & Country Club, 5 Cir., 127 F.2d 452, 454, where the club had revenue of $11,554.46 from an oil lease upon the Club's property, said: "The money that it got from the lease and the operations of its lessee, was merely an incident to the ownership of the land and no more converted the club into a corporation operating for profit, than it would have been converted if it had sold part of the lands outright as the Santee Club did, Santee Club v. White, 1 Cir., 87 F.2d 5, or if it had only gotten a large bonus for an unproductive lease, as in the Koon Kreek Klub case, Koon Kreek Klub v. Thomas, 5 Cir., 108 F.2d 616, and no royalty." The Court further says: "The statute expressly gives the exemption to clubs operated as this one was and as long as the exemption holds, all revenues, of the club without regard to their source, are exempt from tax, because under the statute it is the nature and character of the operations of the club and the use made of the revenues, and not their source, which determines the exemptions." "The purpose for which property and the income therefrom is used is the test to be applied in determining whether such property is exempt from taxation." Sand Springs Home v. State, 168 Okl. 323, 32 P.2d 928, 929.
Taking into consideration the fact that this club has never stepped aside from its corporate purposes, of affording pleasure and recreation; that all of its activities were in furtherance of its exempt purposes; that there is no suggestion that it is being built up in contemplation of liquidation; that all of its earnings accrued from incidental activities and its income is used in accordance with its corporate purposes; that its business has been confined to members and their guests and only a very small percentage, if any, of its revenue is derived from the public and that the State of Idaho, through its District Court in and for the Eighth Judicial District, has adjudged, under an identical statute, that the plaintiff's activities are such that it is exempt from payment of state income tax, which decision has been accepted by the State. This Club is entitled to exemption and refund as prayed for.
Counsel for the plaintiff will prepare the necessary findings of fact, conclusions of law and decree, serve a copy on opposing counsel and submit the original to the Court for approval.
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736 F. Supp. 1156 (1990)
James P. WATKINS, Jr., Plaintiff,
v.
COMMUNICATIONS WORKERS OF AMERICA, LOCAL 2336 and The Chesapeake and Potomac Telephone Company, Defendants.
Civ. A. No. 86-1188.
United States District Court, District of Columbia.
May 7, 1990.
*1157 *1158 James E. Maxfield, Washington, D.C., for plaintiff.
Jonathan Axelrod, Washington, D.C., for Local 2336.
MEMORANDUM ORDER
JOHN GARRETT PENN, District Judge.
This is a hybrid action by an employee against his employer for breach of contract and against his union local for breach of the duty of fair representation under § 301 of the Labor Management Relations Act, 29 U.S.C. § 185. This matter now comes before the Court on motions by the employer and the union for summary judgment. Both defendants assert that plaintiff's suit is untimely under the six month limitations period of § 10(b) of the Act, 29 U.S.C. § 160(b). Furthermore, each defendant contends that it is entitled to judgment on the merits. For the reasons set forth below, the Court concludes that the motions must be denied.
I.
Plaintiff James P. Watkins, Jr. was employed by defendant Chesapeake & Potomac Telephone Company ("C & P") from December, 1969 until his discharge on July 15, 1985 for misuse of company time. On that date, Watkins attended a meeting with two supervisory employees of C & P and a steward from Local 2336 of the Communications Workers of America ("the Union"). After being informed by C & P personnel that he would be terminated, Watkins requested the union steward to file a grievance with C & P in order to have the matter submitted to arbitration. The steward obtained a grievance number from C & P the next day.
The C & P supervisor responsible for hearing the grievance indicates that the Union steward requested no certain date for hearing the grievance and the company was not contacted by the Union until the thirty day limitation in the collective bargaining agreement ("the CBA") between C & P and the Union had expired. Affidavit of James C. Kinser, Jr. at 3, Exhibit to defendant C & P's Motion for Summary Judgment. The Union alleges that its steward, Sidney Tyson, and Watkins supervisor, James C. Kinser, discussed various tentative dates for hearing the grievance, but orally agreed to put off hearing the first step of the grievance for several weeks because "each would be away parts of the next few weeks." Defendant Local 2336's Memorandum in Support of Motion to Dismiss or in the alternative, for Summary Judgment at 8 ("Union Memorandum").
The parties agree that on August 21, 1985, the Treasurer of the Union arranged for a grievance hearing between plaintiff's supervisor and a second union steward to be held on August 26. The C & P supervisor asserts that he realized shortly after agreeing to hear the grievance on August 26 that more than thirty days had elapsed from the July 15 dismissal, and he states that he called the Union treasurer to notify him that the grievance was untimely and the company would not hear it. Kinser Affidavit, 3. The plaintiff contends that he arrived at the agreed site of the grievance hearing on August 26 only to be told that the meeting had been cancelled, and that the managers were in a meeting. Watkins Deposition at 53, filed October 3, 1986. The Union concurs on this point, and it asserts that it informed plaintiff on September 7, 1985 that the company would not hear the grievance.
The Union thereafter filed an unfair labor practice complaint with the National Labor Relations Board ("NLRB"), claiming that C & P had wrongfully refused to process the grievance filed on behalf of Watkins. On October 31, 1985, the NLRB informed the Union that it would not issue a complaint against C & P and that the Union could appeal the decision before November 13, 1985. Plaintiff contends that the Union told him that the NLRB action was designed to "make the company hear *1159 [the] grievance." Plaintiff's Opposition at 12. The Union admits that it did not inform plaintiff of the result of the initial NLRB decision until around November 19, 1985, after the time allowed for appeal had expired. Union Memorandum at 10. Moreover, it also admits that at that time, the Union's local treasurer told plaintiff that it was still considering an appeal of the decision. Id.
II.
Hybrid § 301 suits involve two separate but interdependent actions. In order for the employee to prevail he must (1) establish that the employer breached the collective bargaining agreement and (2) demonstrate that the union breached its duty of fair representation. DelCostello v. International Brotherhood of Teamsters, 462 U.S. 151, 165, 103 S. Ct. 2281, 2291, 76 L. Ed. 2d 476 (1983). It is well established that there is a six month limitation on hybrid actions against an employer for breach of contract and a union for breach of its duty of fair representation. Id. at 172, 103 S.Ct. at 2294. However, the Court in DelCostello was not called upon to determine when the six month period begins to run, and consequently, it did not do so.
Although hybrid suits against both the employer and the union under § 301 of the Act are separate actions, they accrue simultaneously. Proudfoot v. Seafarer's International Union, 779 F.2d 1558, 1559 (11th Cir.1986). Thus, the timeliness of the action is generally measured from the later of (1) when the employee "discovers, or in the reasonable exercise of diligence should have discovered, the acts constituting the alleged [breach]" by the employer, Howard v. Lockheed-Georgia, 742 F.2d 612, 614 (11th Cir.1984), or (2) when the employee knows or should have known of the last action taken by the union which constituted the alleged breach of its duty of fair representation. Galindo v. Stoody, 793 F.2d 1502, 1509 (9th Cir.1986). See also, Proudfoot, 779 F.2d at 1559. Because here, as in Proudfoot, Watkins was discharged before the Union was called upon to process the employee's grievance, the timeliness of the suit turns upon the date when the fair representation claim accrued. The court in Galindo cautioned that the general rule set forth above is not always applied, and that "[a] reasoned analysis of the question when a duty of fair representation claim accrues must focus on the context in which the claim arose." 793 F.2d at 1509.
The Court in Proudfoot defined "final action" as indicating the "point at which the grievance procedure was exhausted or otherwise broke down to the employee's disadvantage." Id. The matter of when a cause of action accrues is normally a question of fact, Samples v. Ryder Truck Lines, Inc., 755 F.2d 881, 887 (11th Cir. 1985), and a dispute as to the timeliness of the suit generally precludes summary judgment, Hill v. Georgia Power Co., 786 F.2d 1071, 1077 (11th Cir.1986); Proudfoot, 779 F.2d at 1559. In some circumstances, as the court in Samples noted, "knowledge of the union's last action can normally be attributed to the employee when his union notifies him of its decision not to pursue his claim any further, or when he should by use of normal diligence have realized that it had made such a decision." 755 F.2d at 887, n. 7.
C & P and the Union argue that the cause of action accrued, if at all, no later than September 7, 1985, when the Union informed plaintiff that C & P was unwilling to hear the grievance. It is undisputed that after meeting with Agnew on September 7, plaintiff knew that C & P refused to hear his grievance because the Union did not arrange for a hearing by August 15. Watkins Deposition at 56, filed October 3, 1986.[1] According to plaintiff, the Union told him at that time that C & P decided not to waive the time limits. Id. Plaintiff, however, asserts that he believed that the Union was still pursuing his grievance by way of the NLRB proceeding. He understood that the purpose of that proceeding was to force C & P to hear the grievance. *1160 Watkins Affidavit at 12, Plaintiff's Opposition Exhibit 1.
In the circumstances presented here, the Court concludes that the time of accrual should be the time when plaintiff knew or reasonably should have known that his grievance was finally resolved against him. Plaintiff has presented sufficient evidence to raise a genuine issue as to whether that time did not occur until he learned that the charge filed with the NLRB had been dismissed. While a charge with the NLRB presents a separate proceeding, the pendency of which would not by itself toll the time for filing a claim against the union, see Adkins v. International Union of Electrical, Radio & Machine Workers, 769 F.2d 330, 335 (6th Cir. 1985), it is not beyond dispute that plaintiff should have known that the grievance process had ended. If plaintiff reasonably thought that the grievance process had not reached a final breakdown, and that his union might be able to force C & P to hear that grievance, his cause of action would not have accrued as of September 7, 1985.[2]
III.
The Union additionally seeks to have the action dismissed on the ground that the local is not a signatory to the CBA, and consequently, there is neither jurisdiction under § 10 of the Labor Management Relations Act, nor a duty on it to provide fair representation to the plaintiff. In this respect, the local clearly misconstrues the applicability of the provisions of the Act. The Supreme Court, in Complete Auto Transit v. Reis, concluded that the Act "provides for collective bargaining agreements to be enforced `against each of the parties thereto'". 451 U.S. 401, 408, 101 S. Ct. 1836, 1841, 68 L. Ed. 2d 248 (1981). In its exposition of the legislative history of the Act, the Court relied upon Representative Case's explanation that the term "parties" was limited to the employer and "the recognized bargaining agent, rather than an individual." Id. at n. 7, quoting 92 Cong.Rec. 765 (1946).
It is undisputed that Article 12 of the General Agreement between C & P and the Communications Workers of America in force during the time period relevant to this action specifically recognizes chartered union locals as the agent for the Communication Workers of America in initially processing grievances. As a chartered and affiliated local of the national union, the local must be considered a "party" to the CBA within the meaning of § 10 of the Act.
IV.
The Union also asserts that plaintiff has alleged nothing more than negligence against the Union, and that mere negligence is insufficient to support a claim for breach of the duty of fair representation. In his complaint, plaintiff alleges that the Union failed to properly prepare, file, and pursue his grievance, and also that this failure was a deliberate attempt to deprive plaintiff of his right to file a grievance. Complaint pars. 12 and 14. After a full opportunity for discovery, plaintiff has submitted no evidence to support his claim that the Union's actions were deliberate or in bad faith. Thus, the question here is whether any facts alleged and supported by plaintiff form the basis for a viable claim based upon arbitrary action by the Union.
Generally, to establish a breach of the duty of fair representation, an employee must show that the union's conduct was arbitrary, discriminatory, or in bad faith. Vaca v. Sipes, 386 U.S. 171, 190, 87 S. Ct. 903, 916, 17 L. Ed. 2d 842 (1967). Many courts have held that mere negligent conduct does not constitute a breach of the duty. See, e.g., Galindo, 793 F.2d at 1514; Hoffman v. Lonza, 658 F.2d 519, 523 (7th Cir.1981); Ruzicka v. General Motors Corp., 649 F.2d 1207, 1211-12 (6th Cir. 1981).
The United States Court of Appeals for the Ninth Circuit has attempted to formulate *1161 some standards for determining when a union's conduct rises to the level of arbitrariness. See Galindo, 793 F.2d at 1514. It has stated that "an act of omission by a union may be so egregious and unfair as to be arbitrary...." Id., quoting Castelli v. Douglas Aircraft Co., 752 F.2d 1480, 1482 (9th Cir.1985); see also NLRB v. Teamsters Local 282, 740 F.2d 141, 147 (2d Cir.1984). The crucial elements for a claim of arbitrariness are that the union's error involved a ministerial rather than judgmental act, that there was no rational or proper basis for the union's conduct, and that the union's conduct prejudiced a strong interest of the employee. Id.
Here, plaintiff asserts that the Union acted arbitrarily in failing to set up a first-step grievance hearing within thirty days of filing the grievance. He argues that if the Union had obtained an extension of time to present the grievance, it wrongfully failed to act within the time allowed. If, on the other hand, the Union had not obtained an extension, plaintiff contends that it is guilty of bad faith in representing that it had. There is no dispute that plaintiff's interests in having his grievance heard were prejudiced because C & P determined that the Union failed to present plaintiff's grievance on time.
Plaintiff has met his initial burden under the standards of Galindo by showing a prejudicial failure by the Union to perform a procedural act.[3] However, the Union contends that its reliance upon C & P's past practice of waiving time limits provides a proper basis for its conduct and entitles it to judgment as a matter of law.
If a union fails to timely pursue a grievance because of its reliance on a prevailing practice of freely granted extensions, it will not be liable for unfair representation. Ruzicka, 649 F.2d at 1211. There is no dispute that "C & P and Local 2336 have orally agreed to waive time limits in numerous cases and have reduced the extension agreement to writing only, if at all, at the end of the extension period." Union's Statement of Facts Not in Dispute, par. 6. However, the Union has failed to submit evidence which shows that Tyson either had such an agreement here, or that he believed he had reached an agreement based upon past practice. Tyson has not been deposed in this case, and the Union has not submitted an affidavit from him. Furthermore, although the Union's answers to plaintiff's interrogatories state that Tyson was one of the people answering them, he did not sign the answers, and they cannot be treated as his sworn statements. Therefore, the Union has failed to meet the requirements of Fed.R.Civ.P. 56, and its motion for summary judgment on liability must be denied.
V.
C & P has also moved for summary judgment on the issue of whether it breached the CBA by discharging plaintiff without just cause. After reviewing the affidavits submitted by James C. Kinser and plaintiff, and drawing all inferences in plaintiff's favor, the Court concludes that there are genuine issues of material fact which preclude the entry of summary judgment on this question. Specifically, if plaintiff's allegations are true, there is a genuine issue as to whether he was led to believe that he could complete his assigned work on July 6, 1985. Although plaintiff's prior unsatisfactory performance was taken into account, it appears that C & P viewed the events of July 5 as the "final straw" when it decided to fire him.
In view of the above, it is hereby
ORDERED that the Chesapeake and Potomac Telephone Company's motion for summary judgment is denied; and it is further
ORDERED that Local 2336's motion to dismiss or for summary judgment is denied.
NOTES
[1] The Union had not set forth the reasons for C & P's refusal in its letter to plaintiff on September 5. See Exhibit 2 to Watkins Deposition, filed October 3, 1986.
[2] The record does not support plaintiff's assertion that the Union misled him regarding their handling of his grievance, and that therefore, the limitations period should be equitably tolled.
[3] The Union appears to contend that any omission consisted of the failure to set up a first-step meeting within seven days of July 16, at which time it presented the grievance. It appears that C & P's position is that the Union did not actually present the grievance on July 16, and that it failed to do so within thirty days of the firing.
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736 F. Supp. 292 (1990)
COMMITTEE OF BLIND VENDORS OF THE DISTRICT OF COLUMBIA, et al., Plaintiffs,
v.
DISTRICT OF COLUMBIA, et al., Defendants.
Civ. A. No. 88-0142-OG.
United States District Court, District of Columbia.
April 17, 1990.
*293 *294 Robert R. Humphreys, Humphreys & Mitchell, Washington, D.C., for plaintiffs and the class.
Domenique Kirchner and Greg Lewis, Asst. Corp. Counsel, Herbert O. Reid, Sr., *295 Corp. Counsel, Martin L. Grossman, Deputy Corp. Counsel, and Cary Pollack, Chief, General Litigation III, Corp. Counsel's Office, on the briefs, for defendants.
MEMORANDUM
GASCH, Senior District Judge.
This is a class action lawsuit brought by blind vendors and their representatives against the District of Columbia Rehabilitation Services Administration and other District of Columbia agencies. Plaintiffs claim that defendants have mismanaged the District's Randolph-Sheppard program to the detriment of plaintiffs and the class. Plaintiffs seek a writ of mandamus to compel defendants to adhere to the Randolph-Sheppard Act, and damages of more than $800,000 for breach of contract.[1]
On October 7, 1988, the Court denied defendants' motion to dismiss or, in the alternative, for summary judgment. The Court rejected defendants' arguments, holding that plaintiffs had standing and were not barred from seeking relief in a judicial forum for failure to exhaust their administrative remedies. Committee of Blind Vendors v. District of Columbia, 695 F. Supp. 1234, 1237-40 (D.D.C.1988). The Court also held that monetary damages were available to aggrieved vendors under the Randolph-Sheppard Act, and rejected defendants' argument that plaintiffs' claims were improper since the named agencies had the sole discretion to allocate agency resources. Id. at 1240-42. Finally, the Court concluded that this action met the requirements of Federal Rule of Civil Procedure 23(b)(3) and that a class action was appropriate. Id. at 1242-44.
Following an allowance of time for discovery and other pretrial matters, the Court held a five-day bench trial from December 18 to December 22, 1989. Approximately 175 exhibits comprising many hundreds of pages were received into evidence. The most significant exhibits consisted of financial audits, program compliance reviews, and correspondence between the blind vendors and the agencies. On February 8, 1990, the parties submitted their proposed findings of fact and conclusions of law. Upon consideration of the testimony of the witnesses at trial, the exhibits filed with the Court, and the entire record herein, the Court has now made its findings of fact and conclusions of law. Before elaborating these findings, however, it is necessary first to outline in broad contours the relevant provisions of the Randolph-Sheppard Act and the nature of plaintiffs' claims.
I. THE STATUTORY FRAMEWORK
The Randolph-Sheppard Vending Stand Act, 20 U.S.C. §§ 107-107f ("the Act"), was first enacted in 1936. Its purpose was to provide employment opportunities on federal property to blind vendors, to afford them self sufficiency, and to further federal rehabilitative efforts on their behalf. 20 U.S.C. § 107(a); H.R.Rep. No. 1094, 74th Cong., 1st Sess. 2 (1936); S.Rep. No. 937, 93d Cong., 2d Sess. 5 (1974). The Act was twice amended, in 1954 and 1974. As several courts have chronicled, Congress intended through these amendments to strengthen the Act in several important respects and to confer on the blind vendors legally enforceable rights. Texas State Comm'n for the Blind v. United States, 796 F.2d 400, 402-03 (Fed.Cir.1986), cert. denied, 479 U.S. 1030, 107 S. Ct. 874, 93 L. Ed. 2d 828 (1987); Delaware Dep't of Health and Social Servs. v. United States Dep't of Educ., 772 F.2d 1123, 1126-31 (3rd Cir.1985).
For the purposes of this lawsuit, several broad aspects of the Randolph-Sheppard program are relevant. First, the Act authorizes blind persons to operate vending facilities on federal property, and requires that blind vendors licensed under the Act be given priority to operate such facilities. 20 U.S.C. § 107(b). In the District of Columbia, vending stands are located on both federal and District government property. *296 Once a vendor becomes licensed to operate a facility, the vendor is assigned a vending stand to operate as a sole proprietor. The vendor is given an initial stock of inventory and a petty cash fund. 20 U.S.C. § 107b(2). Thereafter, the vendor is entitled to profits and responsible for losses. The vendor is also responsible for other operating expenses, including the replacement of inventory and the payment of sales tax. Management services, such as the maintenance and repair of vending equipment, are paid for through an administrative levy assessed on the net proceeds of each vendor. 34 C.F.R. § 395.9 (1988). Should the vendor choose to leave the stand or transfer to another, the vendor is required to return the start-up inventory and petty cash.
Another aspect of the program relevant to this lawsuit concerns the collection and distribution of vending machine income. The Act requires that a percentage of vending machine income obtained from machines located on federal or District property be turned over for the benefit of the blind vendors. 20 U.S.C. 107d-3.[2] This requirement was added to the Act in 1954, following congressional dissatisfaction with the limited expansion of the blind vendor program which stemmed in part from the competition presented by automatic vending machines. See Texas State Comm'n for the Blind v. United States, 6 Cl.Ct. 730, 732-34 (Ct.Cl.1984) (reviewing legislative history of the Act), rev'd on other grounds, 796 F.2d 400 (Fed.Cir.1986). If the vending machine directly competes with a vending facility, the blind licensee who operates that facility is entitled to 100% of the vending machine income. 20 U.S.C. § 107d-3(a). If the vending machine does not directly compete with a vending facility, the vendors are entitled to either 30% or 50% of the income, depending on the nature and use of the property. Id. § 107d-3(b). When no licensee is operating a facility on the property, the vending machine income is deemed "unassigned" and accrues to the blind vendors' pension fund. Id. § 107d-3(c). See also 34 C.F.R. § 395.32.
At the federal level, the Act delegates to the Secretary of Education ("Secretary") the responsibility for interpreting and enforcing its provisions. In turn, the Secretary is authorized to designate state licensing agencies ("SLA's") to operate the program at the state and local levels. The SLA's are designated following an application and approval process through which they agree to adhere to the requirements of federal law. The SLA's are directly responsible for licensing the blind vendors. 20 U.S.C. §§ 107a(a)(5), 107b; 34 C.F.R. §§ 395.5, 395.7. With respect to obtaining a vending stand, the statutory scheme is two-tiered. A prospective vendor must first apply for a license from an SLA; the SLA in turn applies to a federal agency for placement of the licensee on federal property. Randolph-Sheppard Vendors of America v. Weinberger, 795 F.2d 90, 93, 102 (D.C.Cir.1986); see 20 U.S.C. § 107a(a)(5), (c); 34 C.F.R. §§ 395.7, 395.16, 395.35.
Finally, the Secretary is required to ensure, through appropriate regulations, that licensed vendors receive uniform and adequate training, including on-the-job training. The regulations delegate to the SLA's the responsibility to provide uniform and adequate training of the vendors. See 34 C.F.R. § 395.11. The SLA's are further required to provide upward mobility training and follow-up services to ensure that each vendor's "maximum vocational potential is achieved." 20 U.S.C. § 107d-4.
In the District of Columbia, the SLA approved by the Secretary is the District of Columbia Rehabilitation Services Administration ("DCRSA"), a subdivision of the District's Department of Human Services. In this lawsuit, plaintiffs allege that DCRSA has mismanaged the Randolph-Sheppard program in a number of ways. *297 Specifically, plaintiffs allege that DCRSA has been remiss in its duty to identify and satisfactorily account for all sources of vending machine income, thus depriving the blind vendors of substantial revenues; that DCRSA and other District agencies have failed to identify satisfactory sites for vending facilities; that DCRSA violated the Act by contracting for management services with a for-profit entity, the DAC Corporation; that the DAC Corporation failed to provide adequate vendor services and wrongfully expended monies with no resulting benefit to the vendors; that DCRSA violated the Act by failing to distribute the surplus from a levy collected from the blind vendors in 1984; that DCRSA violated the Act by failing to reduce the percentage of the levy by three percent between fiscal years 1986 and 1987; that DCRSA violated the Act by failing to enunciate or implement a training and upward mobility program as required by the Act; and that DCRSA violated the Act by excluding the blind vendors from any meaningful participation in major decisions affecting the vending facility program.
II. FINDINGS OF FACT
The Parties
1. Plaintiff the Committee of Blind Vendors (Blind Vendors Committee, or "BVC") is an organization established by the District of Columbia government in Mayor's Order No. 77-131 (Aug. 8, 1977) pursuant to 20 U.S.C. § 107b-1(3). The BVC is comprised entirely of licensed blind vendors and represents the interests of such vendors under the Randolph-Sheppard Act. Plaintiff Randolph-Sheppard Vendors Association of the District of Columbia, Inc. ("Vendors Association"), is a not-for-profit corporation comprised of licensed blind vendors in the District of Columbia.
2. Plaintiff Gale Conard is a blind vendor licensed in the District of Columbia. He operates a vending facility at 601 D Street, N.W., Washington, D.C., is president of the Vendors Association, and is a member of the BVC. Plaintiff Veronica Holt is a blind vendor licensed in the District of Columbia. She operates a vending facility at the Department of Agriculture, 14th Street and Independence Avenue, N.W., Washington, D.C., is coordinator of the BVC, and is a member of the Vendors Association.
3. On September 28, 1988, the Court granted plaintiffs' motion for certification as a class action. Committee of Blind Vendors, 695 F.Supp. at 1242-44. The class of plaintiffs herein consists of all blind vendors licensed to operate in the District of Columbia. There are approximately 63 blind vendors in the class. Complaint at 14, ¶ 2.
4. Defendant District of Columbia is a municipality and the locus of the seat of national government. Defendant Marion Barry, Jr., is the Mayor of the District of Columbia and is ultimately responsible for the execution of human service programs within the city, including the execution of the Randolph-Sheppard program.
5. Defendant Peter Parham is Director of the Department of Human Services in the District of Columbia. Defendant Katherine A. Williams is Acting Administrator of DCRSA, a position she has held since March 1, 1987. Williams Tr. 66 (day 3). As Acting Administrator, Ms. Williams is currently responsible for overseeing the operations of the Randolph-Sheppard program in the District of Columbia.
6. Defendant Vernon E. Hawkins is currently Deputy Director of the Department of Human Services in the District of Columbia. He was Administrator of DCRSA from 1981 until February 1985, during the period in which many of plaintiffs' claims arose. Hawkins Tr. 6 (day 3). During the months of December 1984 and January 1985, Donald Brooks filled in for Mr. Hawkins in his capacity as Acting Administrator of DCRSA, as Mr. Hawkins was at that time Acting Commissioner of Social Services. Hawkins Tr. 28-29 (day 3); Brooks Tr. 40-41 (day 4).
7. DCRSA is a subdivision of the Department of Human Services in the District of Columbia. DCRSA has been designated by the Secretary of Education, United *298 States Department of Education, as the state licensing agency in the District of Columbia. As such, DCRSA is responsible for implementing the provisions of the Randolph-Sheppard Act in the District of Columbia. 34 C.F.R. § 385.5; P-18; Pacinelli Tr. 54 (day 1).
The Nominee Structure
8. The Act and its implementing regulations permit the SLA to utilize a "nominee agency" to more efficiently deliver services to blind vendors. The SLA is not required to utilize the services of a nominee, and may instead operate the program on its own. The nominee, if utilized, is to "act as [the SLA's] agent in the provision of services to blind licensees under the State's vending facility program...." 34 C.F.R. § 395.1(1). The nominee is responsible for overseeing the day to day operations of each blind vendor. The nominee is also responsible for providing management services and administrative support, including the payment of salaries to employees of a blind vendor's stand, the collection of vending machine income from designated property, the preparation of personal financial statements for each blind vendor, and the maintenance and repair of vendor equipment. P-125 at 4.
9. The services provided by the nominee are paid for by an administrative levy assessed against the net proceeds of each blind vendor. In 1976, the levy was as high as 38% for some categories of services. Effective July 1, 1984, the levy was reduced to a flat rate of 28%. In 1985 it was reduced to 24%, and in 1986 it was further reduced to 21%. Since 1986, the administrative levy has remained at 21%. P-2; P-116; P-125 at 4; Butka Tr. 143-44 (day 1); Williams Tr. 157-58 (day 4).
10. Under an agreement with the District of Columbia Department of Human Resources, District Enterprises for the Blind, Inc. ("DEB"), a nonprofit corporation, was the nominee organization that provided management services to blind vendors in the District of Columbia from December 1, 1976 to December 31, 1984. George Reed, who worked as a blind vendor for nearly 40 years, was the president of DEB from 1971 until its dissolution in 1985. P-2; D-11; D-20; Reed Tr. 149 (day 1).
11. DEB's operations were financed solely through funds collected from the individual vendors, that is, through the administrative levy. In fiscal year 1984, the levy totalled more than $600,000. P-125 at 5. Neither the District of Columbia government nor the federal government contributed supporting funds to assist DEB's management operations. Butka Tr. 125-26 (day 1).
12. On the whole, the blind vendors were satisfied with DEB's performance and regarded DEB's personnel to be experienced and qualified. Although there were some problems, DEB was generally well-managed and tended to improve as the organization matured. Conard Tr. 12 (day 2); Shanahan Tr. 93 (day 2); Zakarian Tr. 166 (day 1).
13. On January 3, 1983, DCRSA commissioned an independent study of DEB in an effort to improve the blind vendor program in the District. The study was performed by Ensight, Incorporated, a non-profit management and business assistance firm. D-14. The Ensight study recommended retaining DEB as the nominee, subject to an internal restructuring of DEB's management activities. D-14 at 30; Hawkins Tr. 17 (day 3).
14. On September 12, 1984, DCRSA gave a 90-day notice of termination to DEB. The terms of the contract between the District of Columbia and DEB allowed for such termination without cause. The termination of DEB's contract was initiated by Vernon Hawkins. Herron Tr. 95 (day 3). DEB's termination as nominee became effective December 31, 1984. D-23 (letter from Donald Brooks to George Reed, Sept. 12, 1984).
15. The blind vendors and the BVC strenuously objected to the termination of DEB. They urged DCRSA to restructure DEB rather than contract out for management services. P-23; P-27; Holt Tr. 66 (day 2). Nonetheless, DCRSA unilaterally decided to terminate DEB and "to establish *299 a new nominee kind of structure." Hawkins Tr. 15 (day 3).
16. DEB was terminated as the nominee notwithstanding its strong financial showing in its final year of operation. Indeed, from January to March 1984, the vending facility program in the District of Columbia experienced one of its best quarters ever. This was attributable to DEB's efforts to cut costs, improve profits, and operate more efficiently. DEB's financial position continued to strengthen through the third quarter of 1984. P-21; P-26; P-29; Butka Tr. 128-30 (day 1).
17. According to official pronouncements, the agreement between the District and DEB was terminated because DCRSA wanted to expand the Randolph-Sheppard program into the operation of large cafeterias, and it was believed that DEB was not capable of managing such large-scale operations. However, the overriding reason that DEB was terminated as the nominee was due to a perception that DEB was functioning beyond the control of DCRSA. Reed Tr. 158-59 (day 1); Conard Tr. 10-11 (day 2); Herron Tr. 96 (day 3).
The DAC Corporation Contract
18. On November 16, 1984, the District of Columbia Department of Human Services issued Request for Proposal ("RFP") No. JA/85887, which was a bid solicitation for a "Comprehensive Professional Food Service Management, Consulting and Support Services Program" to be provided to blind licensees operating vending facilities in the District of Columbia under the Randolph-Sheppard program. The RFP was restricted to certified minority businesses only. P-32.
19. In mid-November 1984, sixty-one blind vendors signed a petition opposing the termination of DEB as the nominee and urging DCRSA to accept Ensight's recommendation to retain DEB as the nominee. P-34. This petition was presented to Vernon Hawkins, who was unpersuaded and rejected DEB's pleas. On December 21, 1984, DCRSA awarded the service contract to the DAC Corporation ("DAC"), a for-profit minority business. The contract took effect January 1, 1985. D-51.
20. DAC replaced DEB in the provision of management services to blind vendors from January 1, 1985 to September 30, 1985. In fact, however, DAC's services were terminated four months earlier, on May 31, 1985. The four month period from June 1 to September 30, 1985 represented the "winding up" of DAC's contractual services to the blind vendors. No services to the blind vendors were provided during this time. P-125 at 4; Conard Aff. (P-175) at 4; Holt Tr. 69 (day 2).
21. Prior to May 31, 1985, DAC provided some accounting services pursuant to its contract. Specifically, DAC provided monthly settlement statements (or profit and loss sheets) to each blind vendor from January through May, 1985. However, these statements were often late and inaccurate, with the result that the vendors were unable to control their finances with accuracy. Holt Aff. (P-176) at 4; Holt Tr. 71-72 (day 2); Conard Tr. 16-17 (day 2); Shanahan Tr. 95 (day 2); Herron Tr. 65-66 (day 5). During this period also DAC collected unassigned vending commissions (those from machines in buildings in which there were no blind vendors), which were placed in the blind vendors' pension fund. Conard Tr. 16-17 (day 2).[3]
22. Viewed overall, DAC provided no appreciable services to the blind vendors during the entire nine months from January 1 to September 30, 1985. Doris Shanahan testified that she received no services while DAC was the contractor. Shanahan Tr. 93-94 (day 2). Lawson Purse testified to the same effect. Purse Tr. 108 (day 2). Gale Conard testified that no DAC employee ever visited his facility, provided management services or technical assistance, or inspected his facility for sanitation and safety. Conard Aff. (P-175) at 3; Conard Tr. 18-19. Veronica Holt also testified that DAC never provided her with assistance or inspected her vending facility *300 for sanitation and safety. Holt Aff. (P-176) at 4-5; Holt Tr. 67-68 (day 2).
23. DAC failed to apply for and procure various business licenses for vending facilities. As a result, some vending facilities were operating illegally for a period of time. The blind vendors also did not receive needed repairs in a timely manner. P-93 at 3; Conard Tr. 29 (day 2); Holt Tr. 72, 83 (day 2).
24. Overall, the blind vendors received inadequate services or no services at all while DAC was the contractor. DAC focused its energies on planning the development of large cafeteria operations, or "emporia," rather than on providing services to the individual vendors. Herron Tr. 67 (day 5); Drake Tr. (day 4).
25. DAC had no experience with the Randolph-Sheppard program, no knowledge of the Act or its regulations, no experience dealing with blind persons and their particular needs, and no knowledge of the particular services the blind vendors would require. Conard Tr. 14 (day 2); Shanahan Tr. 94 (day 2); Hawkins Tr. 22-23 (day 3). As a result, DAC employees were sometimes insensitive in their dealings with individual vendors. For example, Andrew Daniel, a snack bar manager in the Archives building, was pulled from his stand for a period of about six weeks. Although defendants insist that he was pulled from his stand due to poor performance, he was given no advance notice or warning before DAC's actions, and he suffered a loss of inventory and financial injury as a result. Daniel Tr. 103-07 (day 2).
26. A review of the expenditures incurred by DEB and DAC reveals that DAC expended far more in funds for its services than did DEB. For the twelve months ending September 30, 1984, DEB spent approximately $303,000 for management services, or approximately $25,000 per month. In contrast, for the nine months ending September 30, 1985, DAC spent approximately $426,000 for its services, or approximately $47,300 per month. Moreover, in view of the fact that the primary services to the vendors were terminated as of May 31, 1985, and that the last four months of DAC's services were spent "winding up" the contract, a realistic assessment of expenditures reflects that DAC spent approximately $85,000 per month over a five month period, a 250% increase over DEB's monthly average. P-125 at 5-6.
27. In fiscal year 1984, while DEB was nominee, the District appropriated $51,005 to the Randolph-Sheppard program. In fiscal year 1985, while DAC was the contractor, the District appropriated $732,794 to the program. In other words, District appropriated funds were increased by more than 1300% between DEB's tenure and DAC's tenure. P-125 at 5.
28. Although huge sums of money were poured into the Randolph-Sheppard program while DAC was the contractor, the blind vendors did not receive any appreciable benefits as a result. The increased funding from the District to DAC failed to "trickle down" to the vendors. Instead of increasing services to the vendors, DAC spent money for consultants, additional staff, and increased management service expenses. In short, DAC was extremely top heavy in terms of management. P-125 at 5; Troupe Tr. 11-12, 37 (day 2).
29. All funds generated from the Randolph-Sheppard program while DAC was the contractor were funneled into the "Randolph-Sheppard Vending Stand Account802-627," also known as the "627 account." The 627 account was established by the District of Columbia Department of Human Services to monitor the blind vendor program under DAC's management. The account has a zero balance, which means that all funds deposited therein were expended. D-230; D-233; Atlee Tr. 70-72 (day 4); Herron Tr. 60-61 (day 5).
30. The regulations require that the nominee be a "nonprofit agency or organization." 34 C.F.R. § 395.1; Pacinelli Tr. 61-62 (day 1). Vernon Hawkins testified that DAC was not considered to be a "nominee," and that its for-profit status was therefore irrelevant. Hawkins Tr. 25-28 (day 3); Hawkins Tr. 14-16 (day 5). However, that testimony is unpersuasive, for several reasons. First, as described in both the RFP and the DAC contract, the *301 services to be provided by DAC encompassed those typically provided by a nominee. Specifically, DAC was required to locate, repair, and replace vending facility equipment as such needs arose; compile and publish monthly financial reports; identify the locations of all vending machine installations and determine commission proceeds; and provide "individual consultation for Each Operator within the areas of marketing, merchandising, cash control, review of operating statements, procurement, complaints, sanitation and compliance with program policies and procedures." P-32 (Article III) (emphasis in original); P-51 at 3-4. Second, DCRSA represented to the blind vendors that DAC would take over the functions of a nominee. See P-39 (correspondence from Donald Brooks to individual blind vendors, Dec. 14, 1984). Finally, throughout the trial, witnesses for both plaintiffs and defendants referred to DAC as a "nominee" or conceded that DAC performed the functions of a nominee. Herron Tr. 104-05 (day 3); Brooks Tr. 33, 45 (day 4); J. O'Connell Tr. 85 (day 4); B. O'Connell Tr. 132 (day 4).
31. Even before the DAC contract was negotiated, DCRSA administrators were on notice that a service contract with DAC might violate the Randolph-Sheppard Act. On November 30, 1984, Robert Humphreys, counsel for the blind vendors, wrote to Vernon Hawkins and expressed his legal opinion that a contract with DAC for the provision of management services would violate federal law in view of DAC's for-profit status. P-34. Mr. Hawkins took no immediate legal action with respect to this objection. Hawkins Tr. 27-28 (day 3). Blind vendors also directly expressed their concerns that there was no substantive difference between the services provided by DEB and those provided by DAC. P-45 (list of questions submitted to DCRSA in early 1985); Holt Tr. 72-73 (day 2); P-46 at 2 (letter from Veronica Holt to Dr. Pacinelli, Feb. 4, 1985). On March 1, 1985, about a dozen blind vendors walked a picket line in front of DCRSA offices to protest the change in management from DEB to DAC. P-49 (attachment).
32. On March 14, 1985, the federal Rehabilitation Services Administration ("RSA"), a subdivision of the United States Department of Education, informed DCRSA that DAC was functioning as a "nominee" within the meaning of the Randolph-Sheppard Act. Specifically, the RSA found that the range of services DAC contracted to provide "raises the question of whether DAC provides a discrete technical service, or functions as a new nominee organization." The RSA concluded: "The similarity between the DAC contract and a nominee agency agreement causes this Office to believe that DAC functions as a nominee rather than as a contractor providing a management service." P-174 at 1; Pacinelli Tr. 74 (day 1). This conclusion was reached after RSA staff undertook a comparison of the services provided by DEB with those provided by DAC. Pacinelli Tr. 78 (day 1).
33. Following discussions and negotiations with the blind vendors, on March 21, 1985, DCRSA notified the BVC that the contract with DAC would be terminated. P-54. On April 3, 1985, DCRSA informed Carthur Drake, President of DAC, that DAC's contract would be terminated effective May 21, 1985, because it appeared that DAC was "a for profit corporation functioning as a nominee rather than a contractor providing a management service." D-53.
34. DAC's services were paid for in part through District funds and in part through the set-aside levy assessed on the net proceeds of each individual vendor. This levy represents private funds generated by the vendors. Hawkins Tr. 38 (day 4). Because DAC provided no appreciable services to the vendors, the vendors' income was wrongfully diminished in an amount equal to their contribution to the set aside levy during the period of January 1 to September 30, 1985.
Randolph-Sheppard Nominee, Inc.
35. After the contract with DAC was terminated, D.C. Randolph-Sheppard Nominee, Inc. ("Nominee") was established to provide management services to the blind *302 vendors. The Nominee was incorporated on April 28, 1985. Following a transitional period from DAC to the Nominee, the Nominee started its official operations on July 1, 1985. Campbell Tr. 85 (day 4). However, services to the vendors did not emerge until the fall of 1985. Holt Tr. 70 (day 2).
36. During the first two years of the Nominee's existence, the Nominee's provision of direct services to the vendorsincluding technical assistance, business consulting, inspections, and equipment repair and replacementwas perceived by the vendors to be inadequate. The situation remained chaotic and unstable, and the vendors experienced fear and anxiety in dealing with the new Nominee. Conard Tr. 32-37 (day 2). However, it appears that the vendors were not fully cooperating with the Nominee during its first two years of operation. Some vendors were not paying their bills, creating a cash flow problem for the Nominee and making the program difficult to manage. J. O'Connell Tr. 99-100 (day 4); B. O'Connell Tr. 133-35 (day 4); Williams Tr. 155-56 (day 4). There appeared to be resentment among the vendors stemming from the events that transpired in late 1984, when DCRSA decided to terminate DEB and enter into the contract with DAC.
The Surplus Levy
37. A financial audit of DEB completed by Leopold & Linowes for fiscal year 1983-84 revealed a surplus balance of $79,084 in administrative levy. P-63. In the past, surplus amounts in excess of management expenses were customarily returned to the vendors, based on the principle that because the levy is assessed against the vendors' proceeds and represents private earnings, any excess should be refunded. Only once or twice in the past had excess levy funds not been returned to the vendors. This usually occurred when DEB's capital reserves were too low. Reed Tr. 153, 163-64 (day 1).
38. On March 11, 1985, the Board of Directors of DEB wrote to Vernon Hawkins requesting a return of the surplus to the blind vendors. P-50. In a June 14, 1985 letter to Dr. Pacinelli, Vernon Hawkins assured the federal RSA that "whatever amount determined to be `excess' (approximately $79,000) will be distributed to the vendors after a thorough review of program expenditures has been completed." P-60 at 6. Subsequently, in the fall of 1985, Randolph-Sheppard staff recommended that the surplus levy not be returned to the vendors. P-68 (Memorandum from Thomas Herron to Vernon Hawkins, September 24, 1985).
39. There is some evidence that the decision of whether or not to return surplus levy from the preceding fiscal year is a discretionary one residing in the District government. Zakarian Tr. 168, 182 (day 1); P-1 (Notes to Financial Statements of DEB, June 30, 1975, at 2) (stating that the "excess may be further modified by the District of Columbia Government"). Had DEB remained the nominee through 1985, however, the surplus levy from fiscal year 1984 most likely would have been returned to the vendors. Instead, it appears that this surplus amount was transferred to the District when DEB was terminated, deposited into the 627 account, and subsequently expended by DAC. Zakarian Tr. 173-74 (day 1); Atlee Tr. 64-74 (day 4); D-230.
Reduction in Administrative Levy
40. With respect to the amount, or percentage, of set-aside levy to be charged against each vendor's net proceeds, the Act and regulations require that the vendors participate in making this decision. Hawkins Tr. 36-37.
41. When DEB first became the nominee, the administrative levy was set at 33% or 38%, depending on the category of services against which the levy was assessed. P-2; Butka Tr. 143-44. Following discussions between the BVC and administrators of DCRSA, in 1984 the levy was reduced to a flat rate of 28%. Following further discussions, in 1985 the levy was reduced from 28% to 24%. In 1986, the levy was further reduced to 21%, although this time there were no discussions with the BVC. P-36 at 2; Holt Tr. 88-89 (day 2).
42. Correspondence from DCRSA administrators in 1985 indicates a clear intent on the part of the agency to reduce the *303 levy by another 3% in fiscal year 1987. P-36 at 2 (letter from Donald Brooks to Dr. Pacinelli, Jan. 4, 1985); P-43 at 2 (same); P-60 at 8 (letter from Vernon Hawkins to Dr. Pacinelli, June 14, 1985). In one letter, Vernon Hawkins referred to a "commitment" that DCRSA had made to the blind vendors to reduce the levy by another 3%. P-60 at 8. However, this commitment to reduce the levy was implicitly conditioned on the availability of funds. There was no outright commitment or promise to the vendors that the percentage of the levy would be reduced to 18% without regard to the program's financial condition. Brooks Tr. 35 (day 4).
43. In December 1986, Vernon Hawkins informed the blind vendors that as a result of a shortfall in operating revenues totalling approximately $95,000 for 1986, the previous plans for reducing the levy to 18% could not be carried out. P-116. Moreover, given the financial problems that the Nominee experienced in fiscal year 1988, the administrative levy, which now stands at 21%, cannot be further reduced at this time. There are simply no excess funds available for program development, and a reduction of the levy at this time would diminish services. Williams Tr. 157-58 (day 4).
Collection of Vending Machine Income
44. Under the Randolph-Sheppard Act and implementing regulations, vending machine income on Federal and District property accrues to the benefit of the Randolph-Sheppard program. Congress has adopted a three-tiered approach to determine the amount of vending machine income from government property that shall accrue to the blind vendors. Depending upon several factors (such as whether the vending machine is in direct competition with a vending facility operated by a blind vendor, or whether the building is used during other than normal working hours), DCRSA is entitled to receive 100%, 50%, or 30% of all vending machine income on federal property, to accrue to the benefit of blind vendors. 20 U.S.C. § 107d-3; 34 C.F.R. § 395.32(a)-(d).
45. The procedures used in the past for the identification, collection, and accounting of vending machine income on Federal and District property have proven inadequate. No single entity in the District, either local or federal, has taken the lead in identifying and collecting such income for the benefit of the vending facility program. The evidence attests to the difficulty of this task. There are many government buildings in the District, and vending machines are invariably added, relocated, and removed as an agency's changing needs arise. However, the nonexistence of a comprehensive inventory of vending machines and their locations, the lack of coordination between DCRSA and the federal agencies, and the lax monitoring of the collection of vending machine monies have resulted in economic losses to the blind vendors. P-125 at 8-20 (federal property); Castillo Tr. 59 (day 4) (District property).
46. The Randolph-Sheppard program in the District of Columbia has received insufficient vending machine income from certain federal buildings. In some cases, the program has received no income at all. From January 2, 1975, to the date the complaint was filed, no income was received from vending machines located in the House and Senate office buildings. Since 1984, unassigned vending machine income from machines located in the FBI Hoover building of the Department of Justice has been reduced from approximately $55,000 per year to approximately $5,000 per year. Reed Tr. 155-57 (day 1); Herron Tr. 98 (day 3). Vending machine income from machines located in the Bureau of Engraving and Printing has been provided to the program only within the last few years. Herron Tr. 97 (day 3); D-187.
47. The amount of income received from the Hoover building was reduced because the Government Services Administration ("GSA") had awarded a contract to operate the cafeteria in the Hoover building to the Canteen Corporation. This contract encompassed vending machine income and, as a result, the Randolph-Sheppard program receives only a small share of the vending machine income from the Hoover *304 building. Herron Tr. 97-98 (day 3); Hawkins Tr. 47, 50 (day 5); D-187.
48. In June 1984, DEB recommended to DCRSA that it take legal action to recover the amounts lost from the Hoover building. Reed Tr. 154-57, 161-62 (day 1); P-25. The District protested GSA's award of the contract to the Canteen Corporation. Subsequently, Vernon Hawkins, George Reed, and Lawson Purse (a blind vendor), met with the FBI's legal counsel and were informed that the contract was consistent with the Act. DCRSA therefore declined to take the matter to arbitration. Hawkins Tr. 42, 46-48, 51 (day 5).
49. It is difficult to quantify with reasonable accuracy the losses sustained by the blind vendors as a result of the past mismanagement, oversight, and inadequate use of resources by both federal and District agencies in the identification and collection of vending machine income. P-125 at 8-20; Troupe Tr. 21-22 (day 2).
50. During the latter part of DEB's tenure as nominee, specifically from 1982 to 1984, DEB initiated steps to collect vending machine income from federal property. DEB hired an outside consultant who physically inspected federal buildings to inventory the locations of machines and to demand that vending machine income be turned over to the blind vendors. The inventory was never completed because some federal agencies were not fully cooperating. Zakarian Tr. 176-77 (day 1); D. O'Connell Tr. 138 (day 4). Nonetheless, as the result of DEB's efforts, the amount of vending machine income collected from federal property increased substantially. Butka Tr. 133-34 (day 1). DEB never collected vending machine income from District property because DEB was erroneously informed that the Randolph-Sheppard Act did not apply to District property. Id. Tr. 136-37.
51. Under the guidance of Acting Administrator Katherine Williams, DCRSA has recently taken steps toward more accurately identifying vending machine income. DCRSA has requested from GSA a current inventory of all vending machines in federal buildings, but has been informed that GSA does not have the manpower or resources to complete a thorough and updated inventory. DCRSA has therefore obtained bids for the purpose of procuring services that will survey and identify all vending machines on federal property and furnish DCRSA with a comprehensive and updated inventory of vending machines. At the time of trial, DCRSA anticipated that the inventory process would begin in January 1990. Williams Tr. 150-51 (day 4).
Government Vending Management Services, Inc. ("GVMS")
52. On October 4, 1982, the District of Columbia, through the Department of Administrative Services, contracted with Government Vending Management Services, Inc. ("GVMS") for the provision of uniform vending services with respect to vending machines located on District property. The contract was effective for one year, and was renewed for additional one-year terms through September 30, 1986. GVMS was paid $55,000 annually for its services. P-127; P-31.
53. By the terms of the contract GVMS was required, inter alia, to establish and maintain an inventory of all vending machines on District property; to take requests from agencies that either wanted vending machines or wanted them removed; to maintain those machines; to provide a quarterly accounting to the District government of commissions received; and to ensure uniform pricing on the sales of all vending machine products. Castillo Tr. 54-55 (day 4); D-160.
54. To determine how much money would go to the Randolph-Sheppard program under the GVMS contract, the following formula was used. First, GVMS would take 10% of gross commissions on canned sodas and 25% of gross commissions on everything else; this was GVMS's "commission" for collecting the vending machine income, which was taken off the top. DEB would then receive 30% of the remaining balance. Finally, the remainder would go to an "approved agency," that is, one approved by the Director of Administrative Services based on a finding that District employees, tenants, or wards were the primary *305 users of the vending machine, and that the location of the vending machine could reasonably be identified with a specific organization or fund. Mayor's Order No. 84-160, Sept. 13, 1984 (D-171); Castillo Tr. 47-48 (day 4). Vending machine income from public housing units was exempt from collection under the GVMS contract. D-274; D-319.
55. As a general rule, the Randolph-Sheppard program was entitled to receive 50% of the commissions from vending machines on District property which did not directly compete with a vending facility. However, the program was entitled to receive only 30% of such commissions under certain circumstances, to wit, when at least 50% of the total hours worked on the premises occurred during periods other than normal working hours. See 20 U.S.C. § 107d-3(b)(1). Because of the accounting burden involved in determining whether the program was entitled to receive 50% or 30% of the income from any given building, DCRSA worked out an agreement with the Department of General Services to receive 30% of the net receipts of the vending machine income collected, as reflected in the formula recited above. Herron Tr. 69-70 (day 5).
56. A financial and program compliance audit prepared in 1987 found that for the period October 4, 1982 through September 30, 1986, GVMS collected gross commissions from vending machines on District property totalling nearly $510,000. Of that amount, GVMS received nearly $200,000 in management fees, while the Randolph-Sheppard program received approximately $66,000. P-127 at 17-21; Washington Tr. 48-50 (day 2).
57. Otis Troupe, District of Columbia Auditor, concluded in 1987 that elimination of the GVMS contract would result in savings for the District of an estimated $55,000 annually, because the city would no longer be required to pay GVMS the contract price for its services. P-125 at 13. But that estimated saving fails to take into account the contract's replacement cost that is, how much it would cost the District to bring the contract in houseincluding, but not limited to, the cost of finding another entity to conduct inventories and on-site physical inspections of vending machines. Troupe Tr. 44-48 (day 2); Johnson Tr. 66-74 (day 2). Indeed, District officials concluded that the GVMS contract could not be brought in house for lack of resources and manpower, and it was estimated that a minimum of ten people would be required to do the work that GVMS had contracted to do. Washington Tr. 57 (day 2); Campbell Tr. 76-80 (day 4).
Vendor Training
58. Under the Randolph-Sheppard Act, DCRSA is required to provide on-the-job training and upward mobility training for licensed blind vendors. 20 U.S.C. § 107d-4; 34 C.F.R. §§ 395.3(a)(7), 395.11. The regulations further state that "effective programs of vocational and other training services, including personal and vocational adjustment, books, tools, and other training materials, shall be provided to blind individuals" by the state licensing agency. 34 C.F.R. § 395.11.
59. Training was inadequate while DAC was under contract to provide services. Conard Aff. (P-175) at 4-5. Training was also inadequate for a period of time following DAC's termination. From December 1985 to September 1986, there was no training coordinator, despite increased financial resources. This void hampered the entry into the program of seven or eight vendors. P-125 at 7; P-130; Troupe Tr. 33-34 (day 2); Johnson Tr. 58-59 (day 2).
60. The Randolph-Sheppard program in the District currently has one training coordinator, Margaret Davis, who was hired July 31, 1989. Ms. Davis is qualified for the position in light of her academic qualifications and career experience, which includes 24 years of experience in the District's Department of Social Service. She is a licensed social worker and has given lectures to the blind. Before her arrival as training coordinator there was a vacancy in the position for a period of about one year. DCRSA had attempted to fill the position much earlier, in February 1988, but there were no applicants. Williams Tr. 69-72 (day 3); Davis Tr. 7, 12-15, 27 (day 4).
*306 61. The training program for vendors and potential vendors is currently a three-step process. First, trainees receive classroom training at the University of the District of Columbia, taking courses such as business, business mathematics, personnel management, accounting, and retail management. Trainees are also required to take a certification course in sanitation. The training coordinator attends the classes with the trainees and tracks their progress. Davis Tr. 10-11 (day 4); D-196. Second, trainees receive on-the-job training for four to six weeks at Training Facility Number 50, located in the Department of Corrections. Third, trainees enter a mentorship program in which they work with a variety of preapproved vendors to obtain a diverse working experience. Davis Tr. 7-8 (day 4); D-193.
62. Until recently, the training provided to the vendors has been on a very basic level. The books and other training materials have generally been unsophisticated. There has been a lack of detailed training or guidance as to business techniques designed to ensure overall profitability. P-125 at 7-8; Johnson Tr. 58 (day 2); Davis Tr. 27 (day 4).
63. The training program currently used is still in the proposal stage. The program was initially designed by Margaret Davis without the participation of the blind vendors. Davis Tr. 26 (day 4). DCRSA has since submitted the proposed program to the BVC for its comments and revisions. Williams Tr. 152-53 (day 4); D-193.
Vendor Participation
64. Administration of the Randolph-Sheppard program by the SLA requires active participation by the BVC "in major administrative decisions and policy and program development." 20 U.S.C. § 107b(3)(A); 35 C.F.R. § 395.14(b)(1)-(5). The requirement of active participation contemplates an open, honest dialogue between the state agency and the BVC, the exchange of written materials, oral briefings, and open meetings. Pacinelli Tr. 55-58 (day 1); P-18.
65. Active solicitation of the views of the blind vendors is required with respect to the development and implementation of the training program. 20 U.S.C. § 107b-1(3). Active vendor participation is also required when setting out the method of determining the amount of the set-aside levy to be assessed against the net proceeds of the vendors. 34 C.F.R. § 395.9(c); Pacinelli Tr. 57-58 (day 1); Holt Tr. 74 (day 2); P-18.
66. Until recently, DCRSA has generally failed to respond to the requests, recommendations, communications, or demands made by the blind vendors or the BVC. Butka Tr. 129-30 (day 1); Reed Tr. 157 (day 1). The blind vendors have often felt that they were not allowed any meaningful participation in the making of major decisions. These concerns have been frequently expressed to DCRSA and to the Regional Office. E.g., P-27 (memorandum from BVC to Vernon Hawkins, July 17, 1984); P-45 (list of questions submitted by blind vendors to DCRSA in early 1985); P-46 (letter from Veronica Holt to Dr. Pacinelli, Feb. 4, 1985); P-58 (letter from Robert Humphreys to Dr. Pacinelli, May 21, 1985); Shanahan Tr. 97-98 (day 2). Repeatedly, major administrative or policy decisions have been made without the participation of the BVC. Holt Tr. 73-74, 79, 83-84 (day 2); Shanahan Tr. 99-100 (day 2); Purse Tr. 109-10 (day 2).
67. Defendants' consistent failure in the past to allow for the meaningful participation by the BVC in major program and policy decisions was a proximate cause of many elements of plaintiffs' claims.
68. Since Katherine Williams has taken over as Acting Administrator of DCRSA, the BVC has been asked to participate in major administrative and policy decisions to a much greater extent. Holt Tr. 81-82 (day 2); Williams Tr. 75-76, 83-86 (day 3); Williams Tr. 153-54, 159-65 (day 4).
III. CONCLUSIONS OF LAW
1. This action arises under the Randolph-Sheppard Vending Stand Act, as amended, 20 U.S.C. §§ 107-107f ("the Act"). This Court has jurisdiction over the *307 action under Article III, § 2 of the United States Constitution, and 28 U.S.C. § 1331.
2. The Act was created to benefit the blind. Specifically, Congress accorded licensed blind vendors priority to operate vending facilities on federal and District government property "[f]or the purpose of providing blind persons with remunerative employment, enlarging the economic opportunities of the blind, and stimulating the blind in greater efforts in striving to make themselves self-supporting." Pub.L. No. 74-732, § 1, 49 Stat. 1559 (1936) (codified as amended at 20 U.S.C. § 107 (1982)); see also S.Rep. No. 937, 93d Cong., 2d Sess. 3 (1974) (stating that the Act was amended to remove certain obstacles to the growth of the blind vendor program and to further protect the "livelihood, rights, and economic interests of blind vendors"). This Court's conclusions with respect to plaintiffs' rights and defendants' obligations under the Act must be consistent with and in furtherance of this clearly stated congressional policy.
3. The Randolph-Sheppard Act requires that SLA's "provide to any blind licensee dissatisfied with any action arising from the operation or administration of the vending facility program an opportunity for a fair hearing." 20 U.S.C. § 107b(6). Under this authority, a dissatisfied vendor has the right to submit to the SLA a request for a "full evidentiary hearing." Id. § 107d-1(a). Grievances not resolved at the hearing are to be submitted to an arbitration panel convened by the Secretary of Education. Id. The arbitration decision is subject to appeal and review as a "final agency action." Id. § 107d-2(a). The Court of Appeals for this Circuit has held that vendors dissatisfied with the "operation or administration" of the Randolph-Sheppard Act must, as a general rule, exhaust their administrative remedies before being heard in federal court. Randolph-Sheppard Vendors of America v. Weinberger, 795 F.2d 90, 103-04 (D.C.Cir.1986). Other jurisdictions have similarly concluded that resort to arbitration under the Act is mandatory. E.g., Fillinger v. Cleveland Soc'y for the Blind, 587 F.2d 336, 338 (6th Cir.1978); New York v. United States Postal Service, 690 F. Supp. 1346, 1348-51 (S.D.N.Y.1988); Massachusetts Elected Committee of Blind Vendors v. Matava, 482 F. Supp. 1186, 1189 (D.Mass.1980).
4. In its October 7, 1988 opinion, this Court held that plaintiffs were not required to exhaust their administrative remedies before seeking relief in this Court. Specifically, the Court found this to be a "compelling case for invoking the futility exception to the exhaustion doctrine because resort to administrative remedies would be useless." Committee of Blind Vendors, 695 F.Supp. at 1240. The Court today reaffirms that conclusion. Plaintiffs herein were effectively deprived of an administrative tribunal through no fault of their own. The BVC originally requested a hearing from DCRSA on October 23, 1985, making some of the same allegations contained in this complaint. In January 1986, DCRSA requested that the D.C.Office of Fair Hearings conduct an evidentiary hearing. After the completion of certain audits during the months that followed, a hearing was scheduled for September 2, 1987. On August 28, 1987, the BVC requested an indefinite continuance of the hearing in light of an opinion from the D.C.Superior Court holding that an evidentiary hearing on a Randolph-Sheppard complaint would have no legal effect because the District of Columbia had failed to promulgate fair hearing procedures as required by law. See Schlank v. Williams, No. 1164-85 (July 16, 1987) (Wagner, J.). Moreover, on January 19, 1988, the Department of Education clarified that it had "no choice" but to decline to entertain arbitration requests from District of Columbia vendors in light of the absence of procedures to govern fair hearings. Committee of Blind Vendors, 695 F.Supp. at 1240. On January 21, 1988, plaintiffs filed this suit. In sum, the procedural history of this case reflects precisely those "unusual circumstances" and "equitable reason[s]" which exempt a complaint from the exhaustion requirement. Randolph-Sheppard Vendors, 795 F.2d at 102 n. 18.
5. Defendants inform the Court that final regulations for evidentiary hearings *308 have since been promulgated and are now in effect. They suggest that the Court remand this case to DCRSA for resolution by administrative process. The Court declines this belated invitation. Undoubtedly, resolution of the claims presented in this case would have been simplified by the benefit of administrative expertise. In addition, complex cases such as this one tax the resources of the Court. But those reasons do not authorize the Court to decline jurisdiction where it properly exists. Plaintiffs are entitled to a resolution of their grievances, which have been pending in some form since 1985. The Third Circuit's conclusion sheds light on the issue: "The evolution of the Randolph-Sheppard Act from 1936 through 1974 shows increasing concern that the contractual remedies available to [the] vendors be expeditious and completely effective." Delaware Dep't of Health and Social Servs., 772 F.2d at 1139. This Court will not require plaintiffs to further delay resolution of their claims to give effect to recently adopted rules that should have been promulgated some fifteen years ago. See Committee of Blind Vendors, 695 F.Supp. at 1239 n. 3.
6. In its October 7, 1988 opinion, this Court agreed with the analysis in Delaware Dep't of Health and Social Servs., supra, in which the Third Circuit concluded that blind vendors were, in effect, third party beneficiaries of the licensing agreements between the participating states and the federal government. See 772 F.2d at 1127; Committee of Blind Vendors, 695 F.Supp. at 1240-41. The Court today reaffirms its concurrence with that analysis. The Act was intended to benefit blind vendors and confer upon them legally enforceable rights. Plaintiffs' claims in this action are grounded in their contractual relationship with the defendants or their status as beneficiaries of contracts between defendants and the United States. Accordingly, monetary damages are available to aggrieved plaintiffs under the Randolph-Sheppard Act.
7. Defendants request that the Court depart from its earlier opinion and the analysis set forth in Delaware Dep't of Health and instead follow a more recent Eighth Circuit case in which a divided court held that retroactive money damages are not available to blind vendors under the Randolph-Sheppard Act. In McNabb v. United States Dep't of Educ., 862 F.2d 681, 683 (8th Cir.1988), cert. denied, ___ U.S. ___, 110 S. Ct. 55, 107 L. Ed. 2d 23 (1989), two Judges concluded that the eleventh amendment forbids subjecting states to monetary liability for their participation in the Randolph-Sheppard program, because no clear and unambiguous congressional intent to impose such liability is expressed in the Act. Id. at 685-87 (Fagg & Doty, JJ., dissenting and concurring). This Court declines to follow the divided opinion in McNabb. The Court adheres to its earlier opinion, the exhaustive analysis of the Third Circuit in Delaware Dep't of Health, and Chief Judge Lay's dissenting view in McNabb, in which he concluded that Congress, in enacting the Randolph-Sheppard Act, "clearly must have foreseen and approved awards of compensatory relief against states." McNabb, 862 F.2d at 684 (Lay, C.J., concurring and dissenting).
8. Defendants argue that plaintiffs may not challenge defendants' allocation of resources under the Randolph-Sheppard Act. In the final analysis, the Court's monetary award to these plaintiffs is not assessed against District of Columbia appropriated funds. Rather, the source of funds upon which the District's liability rests is the vendors themselves. The award sounds in restitution. Accordingly, the Court is not, as defendants fear, dictating to the agency "how best to allocate its resources." Wisconsin v. Federal Power Comm'n, 373 U.S. 294, 313-14, 83 S. Ct. 1266, 1276-77, 10 L. Ed. 2d 357 (1963).
9. On November 22, 1988, the Court held that the three-year statute of limitations found in D.C.Code § 12-301 applies to plaintiffs' claims. Memorandum (Nov. 22, 1988) at 7. Thus, events occurring prior to January 21, 1985, are generally not actionable. However, the Court further held that the "continuing wrong" doctrine applied in this case, subject to plaintiffs' proof. Under this doctrine, the statute of limitations may be "tolled" so that plaintiffs' *309 claims do not accrue until defendants cease their unlawful conduct. Id. at 12. See Havens Realty Corp. v. Coleman, 455 U.S. 363, 380-81, 102 S. Ct. 1114, 1125-26, 71 L. Ed. 2d 214 (1982). Whether defendants' conduct constituted a continuing wrong will be addressed with respect to each claim.
The DAC Corporation Contract
10. The Randolph-Sheppard regulations define "nominee" to mean "a non-profit agency or organization designated by the State licensing agency through a written agreement to act as its agent in the provision of services to blind licensees under the State's vending facility program." 34 C.F.R. § 395.1(1). The evidence clearly established that in functional terms, DAC Corporation was a nominee within the meaning of these regulations. In contracting with DAC, a for-profit entity, to provide management services to the blind vendors, the District of Columbia violated the Randolph-Sheppard Act.
11. The Act requires participation by the BVC in "major administrative decisions and policy and program development" of the Randolph-Sheppard program. 20 U.S.C. § 107b-1(3). Likewise, the regulations state that the BVC shall "[a]ctively participate with the State licensing agency in major administrative decisions and policy and program development decisions affecting the overall administration of the State's vending facility program." 34 C.F.R. § 395.14(b)(1). The evidence established that DCRSA's decision to terminate DEB and to utilize DAC instead was motivated in part by DCRSA's desire to expand the District's vending facility program into the operation of large "emporia." This was a major administrative decision regarding program development which by law required the active participation of the BVC. Likewise, DCRSA's decision to utilize DAC to carry out this program expansion required the active participation of the vendors.
12. The evidence established that DCRSA acted unilaterally when it issued the RFP to minority businesses, when it terminated DEB, and when it entered into the contract with DAC. In fact, DCRSA not only failed to involve the BVC in these major decisions, but it actively ignored the BVC's vocal protests and legitimate concerns regarding DAC's for-profit status and inexperience with the vending facility program. The failure by DCRSA administrators to allow for the active participation of the BVC when deciding to enter into the management service contract with DAC violated the Randolph-Sheppard Act.
13. Defendants maintain that issues involving the District's contract with DAC are not actionable because the contract was entered into on December 21, 1984, and performance began on January 2, 1985, while the complaint was filed January 21, 1988, more than three years later. This Court has already noted that discrete conduct, such as entering into a contract, generally cannot be classified as a continuing wrong. Memorandum (Nov. 22, 1988) at 12. In two distinct respects, however, the District's contract with DAC constituted a "continuing wrong" with respect to plaintiffs.
First, the contract was solicited without the participation of the BVC, in violation of the Act. Moreover, DCRSA continued to ignore the vendors' protests. DCRSA's chronic failure to involve the BVC in any major decisions regarding DAC's services continued through the first few months of 1985, well within the three-year statutory period. See, e.g., P-46 (letter from Veronica Holt to Dr. Pacinelli, Feb. 4, 1985); P-49 (letter from Robert Humphreys to Dr. Pacinelli, Mar. 7, 1985). Since plaintiffs have challenged DCRSA's "continuing pattern, practice, and policy" of unlawfully refusing to allow the BVC to actively participate in major administrative and program decisions, plaintiffs' complaints with respect to the DAC contract are timely. Havens Realty, 455 U.S. at 381, 102 S.Ct. at 1125.
Second, the DAC contract was financed in part with funds levied from the vendors' net proceeds as authorized by 34 C.F.R. § 395.9. These funds were extracted from the vendors despite the fact that DAC was an illegal nominee that provided no appreciable services. Said another way, these levied *310 funds were wrongfully taken from the vendors, and this wrongful taking continued into mid-1985. The Court concludes that this taking was a continuing wrong for which the statute of limitations did not begin to run until defendants stopped collecting the levy to fund the illegal contract, that is, upon DAC's termination on May 31, 1985. See Almond v. Boyles, 612 F. Supp. 223, 228-29 (E.D.N.C.1985) (holding that state's wrongful deduction from blind vendors was "a continuing wrong for which the statute of limitations did not begin to run until the defendants stopped making the deductions"), aff'd in part and rev'd on other grounds, 792 F.2d 451 (4th Cir. 1986), cert. denied, 479 U.S. 1091, 107 S. Ct. 1302, 94 L. Ed. 2d 157 (1987). Since defendants' conduct constituted a continuing wrong, plaintiffs' claims regarding the DAC contract are not time-barred, and plaintiffs' recovery, set forth below, is not limited to amounts collected after January 21, 1985.
14. During fiscal year 1985, the Randolph-Sheppard program in the District collected $525,423.00 in the form of an administrative levy assessed against the net proceeds of the individual vendors.[4] This levy, or set aside fund, represents private funds generated by the vendors and was intended to defray the costs of management services provided to the vendors during fiscal year 1985 pursuant to DCRSA's licensing agreement with the federal government. See 34 C.F.R. § 395.9(b). The evidence established that the vendors received no appreciable services from January 1 to May 31, 1985, while DAC's contract was in effect, and received no services at all from June 1 to September 30, 1985, while DAC was winding up its operations. Services to the vendors did not resume until the fall of 1985. Since the vendors were deprived of management services for this nine month period, they are entitled to restitution of the amount they paid for services that should have been rendered. An appropriate award is arrived at by returning to plaintiffs ¾ of the levy assessed against their net proceeds in fiscal year 1985, in compensation for the 9/12 of the year they were without services. The Court will therefore award plaintiffs $394,067.25, which represents 75% of the levy assessed in fiscal year 1985, to compensate the blind vendors for the amount their income was wrongfully diminished during the nine months in which DAC was the contractor.[5]
15. In the District of Columbia, the general rule is that interest may be recovered only from the date of judgment. See D.C.Code Ann. § 15-109 (1989). However, prejudgment interest may be awarded where "necessary to fully compensate the plaintiff[s]." Id.; Edmund J. Flynn Co. LaVay, 431 A.2d 543, 550 n. 6 (1981). The Court finds that plaintiffs in this case are entitled to prejudgment interest. By virtue of the District's failure to promulgate timely evidentiary hearing regulations, the blind vendors were deprived of an administrative forum and made to tolerate lengthy delays in resolving this dispute. Cf. Granite-Groves v. Washington Metro. Area Transit Auth., 845 F.2d 330, 342-43 (D.C. Cir.1988) (award of prejudgment interest under § 15-109 justified where processing of plaintiff's claims by contracting officer was subject to unreasonable delay). Plaintiffs' claims arise from contract, not tort, therefore prejudgment interest is allowed. See Reiman & Co. v. Eromanga Invs., N.V., 622 F. Supp. 13, 21 & n. 33 (D.D.C. 1985); compare Schneider v. Lockheed Aircraft Corp., 658 F.2d 835, 855 (D.C.Cir. 1981) (prejudgment interest not allowed in tort actions), cert. denied, 455 U.S. 994, 102 S. Ct. 1622, 71 L. Ed. 2d 855 (1982).
16. The Court further concludes that interest on this claim should be calculated from January, 1985, when the DAC contract first took effect, to the date of this decision. The rate of interest for contract *311 actions is set by statute. In the District of Columbia, that rate is 6% per annum. D.C. Code Ann. § 28-3302(a) (1981 & Supp. 1989). Accordingly, the Court will award plaintiffs $394,067.25, as noted above, plus interest in the amount of $126,022.71, for a total recovery of $520,089.96 in compensation for the amount the vendors' income was wrongfully diminished while DAC was the contractor.[6] This amount shall be distributed to the blind vendors pro rata in amounts equal to, or in proportion to, each vendor's contribution to the set aside fund during the period of January 1 to September 30, 1985.
The Surplus Levy
17. A financial audit of DEB for fiscal year 1984 revealed a surplus in the administrative levy of $79,084. This figure represents an excess in the amount the vendors paid for management services over the amount actually expended by DEB on their behalf. On September 30, 1984, this amount was identified as available for distribution to the vendors, as was customary. The evidence established that in March 1985 the Board of Directors of DEB demanded that the surplus be returned. DCRSA thereafter acknowledged its obligation to refund the excess amount, "after a thorough review of program expenditures has been completed." P-60 at 6. DCRSA never refunded this surplus.
18. A review of program expenditures reveals that this excess amount was transferred to the 627 account[7] and was accordingly used to pay for management services that DAC contracted to provide. The Court has already concluded that the DAC contract was illegal under the Act and that DAC's failure to provide any appreciable services to the vendors entitles them to a partial refund of the levy assessed in fiscal year 1985. For those same reasons, DAC's expenditure of the excess was wrongful. The vendors are therefore entitled to a refund of the surplus identified as available on September 30, 1984.
19. Defendants assert that plaintiffs' claim to this surplus is time barred. They argue that plaintiffs' claim arose on September 30, 1984, when the surplus was first identified in the audit as available for distribution. This argument is unpersuasive. In view of the letter from Vernon Hawkins to Dr. Pacinelli acknowledging DCRSA's obligation to refund the excess, see P-60, plaintiffs clearly had no reason to believe that a refund would not be forthcoming until Randolph-Sheppard staff so decided a year later, in September, 1985. See P-68. Defendants put forth no evidence to show that DCRSA normally would have distributed the surplus on the date it was identified. Moreover, the regulations contemplate that the decision about whether surplus levy is to be refunded is normally a joint one involving both DCRSA and the "active participation" of the BVC. 34 C.F.R. § 395.9(c). Defendants' decision not to refund the surplus was clearly a unilateral one. Under these circumstances, the Court concludes that plaintiffs' legal claim to the surplus did not accrue until it was disputed sometime during the fall of 1985, well within the three-year statutory limit. Accordingly, plaintiffs' claim is not barred by the statute of limitations.[8]
20. Finally, the Court concludes that the vendors are entitled to an award of prejudgment interest on this claim, and that interest should accrue from September 1985 (when defendants unilaterally decided not to refund the surplus) to the date of this decision. Accordingly, the Court will award plaintiffs $79,084, plus interest in *312 the amount of $21,352.68,[9] for a total recovery of $100,436.68 with respect to this claim. This amount shall be distributed to the vendors pro rata in amounts equal to, or in proportion to, each vendor's contribution to the set aside fund during fiscal year 1984.
Reduction of Administrative Levy
21. Plaintiffs claim that DCRSA promised to reduce the administrative levy from 21% to 18% beginning in fiscal year 1987. They claim that DCRSA breached this promise and ask for damages in the amount of $112,000, which represents the amount the vendors would have saved had the levy been reduced by 3% in fiscal years 1987 and 1988. The evidence showed that no outright promise was made, but rather that DCRSA's commitment to reduce the levy was conditioned on the availability of funds. The evidence further showed that the levy, which now stands at 21%, cannot be further reduced without diminishing services to the vendors. Accordingly, the Court concludes that defendants breached no promise to plaintiffs respecting this claim, because the condition precedent to a 3% reduction was not satisfied. Plaintiffs' request for damages with respect to this claim is therefore denied.
Collection of Vending Machine Income
22. Plaintiffs claim that defendants have failed to identify, collect, and distribute to the blind vendors all vending machine income from machines located in federal buildings, in violation of 20 U.S.C. §§ 107b(1), 107d-1(b), 107d-3(a), (b), (c), and 34 C.F.R. §§ 395.8, 395.9, 395.32, 395.37. The evidence clearly supports plaintiffs' assertion that not all vending machine income from federal sources has been identified and accounted for. But as plaintiffs concede, it is very difficult, perhaps impossible, to trace these amounts with any reasonable accuracy.
23. It is undisputed that DCRSA is obligated to distribute to the blind vendors income which has been disbursed to DCRSA by the federal agencies. See 34 C.F.R. § 395.8(a). However, defendants argue that Congress placed the legal responsibility for the collection of, and accounting for, vending machine income from federal property on the managers of that federal property, and not on the SLA's. Specifically, in the same section of the Act in which Congress provided that vending machine income on federal property would accrue to the blind vendors, Congress also stated:
The head of each department, agency, and instrumentality of the United States shall insure compliance with this section with respect to buildings, installations, and facilities under his control, and shall be responsible for collection of, and accounting for, such vending machine income.
20 U.S.C. § 107d-3(b)(2); see also S.Rep. No. 93-937, 93d Cong., 2d Sess 21 (1974) ("Agency heads are responsible for collection of, and accounting for, all vending machine income."). The regulations further support this interpretation of the Act. The regulations state, in relevant part:
The on-site official responsible for the Federal property of each property managing department, agency, or instrumentality of the United States, in accordance with established procedures of such department, shall be responsible for the collection of, and accounting for, vending machine income from vending machines on Federal property under his control and shall otherwise ensure compliance with the provisions of this section.
34 C.F.R. § 395.32(a). When these regulations were promulgated, the Secretary had concluded that the collection of and accounting for income by the federal agencies, for distribution to the blind vendors through the SLA's, would provide "the most effective means for ensuring that vending machine income funds are both properly collected and accounted for." 42 Fed.Reg. 15802, 15805 (Mar. 23, 1977).
24. The Court is unaware of any judicial opinions clarifying the respective duties of the federal and state agencies under 20 *313 U.S.C. § 107d-3. The cases arising under this section of the Act have involved other issues not raised in this case. For example, the Ninth Circuit has considered whether § 107d-3, by requiring newspaper publishers to turn over to blind vendors all of their income from newsracks on federal property, is consistent with the first amendment. See Jacobsen v. United States Postal Service, 812 F.2d 1151 (9th Cir.1987) (reversing the district court's denial of preliminary injunctive relief on behalf of the publishers and remanding for further factual findings). And several courts have construed the scope of § 107d-3(d), which exempts from the vending facility program income from vending machines located on military exchanges. See Texas State Comm'n for the Blind v. United States, 796 F.2d 400 (Fed.Cir.1986), cert. denied, 479 U.S. 1030, 107 S. Ct. 874, 93 L. Ed. 2d 828 (1987); Oklahoma ex rel. Department of Human Servs. v. Weinberger, 582 F. Supp. 293 (W.D.Okla.1982), aff'd, 741 F.2d 290 (10th Cir.1983).
25. No on-site federal officials or federal property managers are defendants in this case. Defendants are the District of Columbia and administrators of DCRSA, a District of Columbia agency. Defendants argue that they are not legally obligated to collect and account for vending machine income from machines located on federal property, because by statute that task belongs solely to the federal government. The Court does not entirely accept that position, for two reasons.
First, there is evidence that GSA has, in the past, delegated to the SLA or the nominee some of the responsibility for identifying and collecting vending machine income on federal property. E.g., Marcus Tr. 110-12 (day 1). This de facto delegation is borne out by the fact that from 1982 to 1984, while DEB was nominee, DEB took upon itself the responsibility for identifying and collecting such income. See Butka Tr. 133-34 (day 1).
Second, in accordance with the statutory scheme, the Secretary of Educationa federal officialhas designated DCRSA as the agency responsible for implementing the Randolph-Sheppard program in the District of Columbia. That designation was made pursuant to the Secretary's finding that DCRSA would administer the program so as to "stimulate and enlarge the economic opportunities for the blind...." 34 C.F.R. § 395.5. DCRSA is further required to "[c]ooperate with the Secretary in applying the requirements of the Act in a uniform manner...." Id. § 395.3(a)(11)(i). It therefore defies the statutory scheme to conclude that DCRSA has no responsibility whatsoever for insuring that the District's vending facilities program is receiving all the income to which it is due. The Randolph-Sheppard program can operate successfully only through the joint efforts of federal and state agencies.
26. For the purposes of this lawsuit, it is not necessary for the Court to precisely demarcate the respective roles of the federal and state agencies in carrying out their statutory obligations to identify, collect, account for, and distribute to the blind vendors vending machine income obtained from federal property. As plaintiffs concede, it is difficult to quantify the losses sustained by the vendors as a result of the past mismanagement, oversight, lax monitoring, and lack of cooperation between the federal and state agencies with respect to this task. Because an award of damages would be merely speculative, the Court denies such relief.
27. With respect to injunctive relief, the evidence shows that since this lawsuit was filed, DCRSA has undertaken steps to compile a complete and accurate inventory of vending machines in federal and District buildings. Those steps are most encouraging. The success of DEB's persistent efforts to identify the locations of vending machines from 1982 to 1984, with the resulting increase in income to the vendors, reflects that cooperative endeavors between DCRSA (and its nominee) and the federal property managers are the most effective means by which to carry out the mandates of the Act. In any case, it is unnecessary for the Court to order DCRSA to complete an inventory of federal buildings, as plaintiffs originally requested, because *314 DCRSA is already undertaking that task. For these reasons, plaintiffs' request for monetary and injunctive relief with respect to this claim is denied.
28. Plaintiffs also argue that the Act was violated whenafter the FBI Hoover building entered into a contract with the Canteen Corporation and reduced the income received from vending machines located thereindefendants failed to file a complaint for arbitration with the Secretary of Education to contest the unilateral reduction of income. The evidence showed that DCRSA declined to take the matter to arbitration because it concluded, after conferring with federal officials, that the FBI's actions did not violate the Act.
The Randolph-Sheppard Act does not specifically require that the SLA file a complaint on the vendors' behalf for any specified grievances. Rather, the Act's language is permissive:
Whenever any State licensing agency determines that any department, agency, or instrumentality of the United States that has control of the maintenance, operation, and protection of Federal property is failing to comply with the provisions of this Act or any regulations issued thereunder ... such licensing agency may file a complaint with the Secretary who shall convene a panel to arbitrate the dispute....
20 U.S.C. § 107d-1(b) (emphasis added); see also 34 C.F.R. § 395.37. It is arguable that the SLA's decision about whether or not to file a complaint with the Secretary is committed to the SLA's discretion. Cf. Heckler v. Chaney, 470 U.S. 821, 105 S. Ct. 1649, 84 L. Ed. 2d 714 (1985) (agency's refusal to pursue enforcement action deemed committed to agency discretion by law and presumptively unreviewable).
29. In Georgia Dep't of Human Resources v. Bell, 528 F. Supp. 17 (N.D.Ga. 1981), the court concluded that the SLA's decision about whether or not to file a complaint with the Secretary is not wholly discretionary. Specifically, the court concluded that the Act imposes upon the SLA the obligation "to pursue a licensed blind vendor's grievance when his rights are arguably being jeopardized by the Federal agency's actions." Id. at 24. To hold otherwise would lead to the anomalous result that the blind vendors would have no recourse against federal agencies. See id. This Court finds that analysis sound and in accordance with the policies guiding the Act.
30. For the purposes of resolving this lawsuit, however, it is unnecessary for the Court to decide upon the preferable rule of law. There was insufficient evidence to support a finding that defendants violated the Act by failing to take this matter to arbitration. The evidence as to the legality of the Canteen Corporation contract is inconclusive. Of course, the Court is bothered by the very sizable reduction in income suffered by the vendors with respect to this property. But the reasons underlying the conclusion of the FBI's legal counsel that the FBI's actions comported with the Act, which reasons were revealed to DCRSA and several blind vendors, are not evident from this record. Therefore, the Court is in no position to hold that defendants violated the Act by failing to take the matter to arbitration. For this reason, plaintiffs' request for relief with respect to this claim is denied.
The GVMS Contract
31. The GVMS contract was entered into for the purpose of providing uniform vending services with respect to vending machines located on District property. The Act authorizes the District to use a contractor, or "commercial vending concern," to provide management services with respect to these machines. See 20 U.S.C. § 107e(8); 34 C.F.R. § 395.1(z). Thus, the District's decision to enter into a contract with GVMS was in accordance with the Act.
32. As the Court already concluded, plaintiffs' contention that the District's elimination of the GVMS contract would have resulted in the District saving an estimated $55,000 annually is not supported by the evidence. Plaintiffs' claim that GVMS was an unnecessary intermediary fails to take into account the many factors relevant to the contract's replacement cost. See *315 supra Fact 57. Accordingly, plaintiffs' request for relief with respect to this claim is denied.
33. The heart of plaintiffs' complaint with respect to the GVMS contract is that GVMS failed to turn over sufficient vending machine income to the Randolph-Sheppard program. Specifically, plaintiffs claim that from October 2, 1982 through October 2, 1986, GVMS collected nearly $510,000 in vending machine income, and they allege that 50% of this amount (or $255,000) should have accrued to the blind vendor program. Instead, the program received only $66,000.
Plaintiffs have not met their burden of showing that the District violated the Act by paying insufficient amounts to the Randolph-Sheppard program. The Act and regulations do not require the straight payment of 50% of vending machine income to the Randolph-Sheppard program, as plaintiffs claim. On several fronts, the statutory scheme is more complicated. First, vending machine companies such as GVMS are authorized to first deduct their management fees before computing the amount of income to be distributed to other concerns. See 20 U.S.C. § 107e(8) (defining "vending machine income" to mean receipts "after cost of goods sold (including reasonable service and maintenance costs)"). Second, where machines are not in direct competition with a blind vending facility, the amount of vending machine income paid to the program depends on whether employees work on the premises during periods other than normal working hours. 20 U.S.C. § 107d-3(b)(1); 34 C.F.R. § 395.32(c), (d). As defendants point out, many District buildings are staffed by employees around the clock. Herron Tr. 69 (day 5). Third, these provisions do not apply to income from vending machines which are not in direct competition with a blind vending facility where the total amount of income from an individual machine does not exceed $3,000 annually. Id. § 107d-3(d); 34 C.F.R. § 395.32(i). Finally, vending machine income from machines located in the District's federally financed public housing projects is generally exempt from the Randolph-Sheppard program. See D-319, D-274 (Low-Rent Housing Accounting Handbook). Plaintiffs' allegation that the amount they received was insufficient fails to take into account these many factors.
34. In view of the complexity of the statutory scheme governing the distribution of vending machine income from government property, the Court concludes that the formula used by the District under its contract with GVMS, see supra Facts 54-55, was reasonable and in accordance with the Act. Plaintiffs put forth insufficient evidence to indicate otherwise. Accordingly, plaintiffs' request for damages arising from the contract between the District of Columbia and GVMS is denied.
Vendor Training
35. Under the Randolph-Sheppard Act, DCRSA is required to ensure that effective training programs, including on-the-job training, upward mobility training, and follow-up services, are provided for blind individuals licensed to operate vending facilities in the District. As the Act states, Congress through this training requirement sought to ensure that the "maximum vocational potential" of each vendor would be achieved. 20 U.S.C. § 107d-4; 34 C.F.R. §§ 395.3(8), 95.11.
36. The evidence showed that the training provided to the vendors was sporadic, inconsistent, and not in compliance with the Act from 1985 until well after the complaint was filed. Since August 1989, however, DCRSA has employed a qualified training coordinator and has developed a training and upward mobility program which has been submitted to the BVC for its comments and revisions. At present, the Court finds no violations of the Act or its regulations.
37. Plaintiffs do not seek damages for defendants' past violations of the Act's training requirements. Rather, they seek a writ of mandamus to compel defendants to adhere to the requirements of the Act. Mandamus is an "extraordinary remedy" to be used only in the most compelling cases, that is, where there is a clearly defined statutory duty that government officials *316 are failing to perform. 13th Regional Corp. v. Department of the Interior, 654 F.2d 758, 760 (D.C.Cir.1980) (citing United States ex rel. McLennan v. Wilbur, 283 U.S. 414, 420, 51 S. Ct. 502, 504, 75 L. Ed. 1148 (1931)). Moreover, a writ of mandamus will traditionally issue only when the imposed duty is "ministerial" in nature, which is a question of statutory interpretation. Id.
38. The Court finds that the evidence presented at trial is legally insufficient to justify the issuance of a writ of mandamus. Although DCRSA's provision of training services in the past was clearly inadequate, defendants are presently complying with the Act. It is perhaps true that plaintiffs' vocal and persistent protests coupled with this lawsuit served to set in motion that compliance. The Court's conclusion might be different if defendants, at the time of trial, still had not hired a training coordinator nor implemented a proposed training program and submitted it for review by the BVC. Under present circumstances, however, such extraordinary relief is not justified. Plaintiffs' request for mandamus is therefore denied.
Vendor Participation
39. Under the Randolph Sheppard Act, DCRSA is required to ensure that the BVC's responsibilities include, in part, active participation with the SLA "in major administrative decisions and policy and program development," active participation "in the development and administration of a transfer and promotion system for blind licensees," and active participation "in developing training and retraining programs." 20 U.S.C. § 107b-1(3); 34 C.F.R. § 395.14(b). This statutory mandate means that the BVC should be more than just informed of decisions already made, but should be actively involved in the decisionmaking process.
40. Until recently, DCRSA's compliance with the participation requirements of the Act was inadequate. The evidence showed that DCRSA generally failed to respond to requests of the BVC. This failure was a proximate cause of many elements of plaintiffs' claims. Specifically, DCRSA's unilateral decision to terminate DEB was made notwithstanding the staunch and vocal opposition of the blind vendors. DCRSA's unilateral decision to contract with DAC was made without any input by the BVC. Finally, DCRSA's unilateral decision not to return the surplus levy identified as available in 1984 was made notwithstanding a demand by DEB on behalf of the blind vendors. There was no semblance of real participation or negotiation with respect to these decisions. These past violations of the Act, which resulted in financial injury to the blind vendors, are discussed above. The Court has already fashioned appropriate relief.
41. The evidence showed that since Katherine Williams has taken over as Acting Administrator of DCRSA, the BVC has been asked to participate in major program decisions to a much greater extent. The Court concludes that at the present time, defendants are complying with the participation requirements of the Act. Plaintiffs have presented no concrete evidence to suggest otherwise.[10] This Court is ill-equipped to issue prospective relief, in the form of mandamus or otherwise, in the absence of such concrete facts. Thus, plaintiffs' plea for relief with respect to this claim, to the extent that it is considered as distinct from plaintiffs' other claims, is denied.
Award of Attorneys Fees
42. Plaintiffs request reasonable attorneys fees and costs as an element of their damages. Complaint at 17, ¶ 4. In *317 Delaware Dep't of Health and Social Servs v. United States Dep't of Educ., 772 F.2d 1123 (3rd Cir.1985), the Third Circuit concluded that, as a matter of federal law, attorneys fees may be awarded in breach of contract actions between blind vendors and a state licensing agency under the Randolph-Sheppard Act. Id. at 1139. Specifically, the Court stated: "We conclude on balance that the undertaking of the states participating in the Randolph-Sheppard program is to make blind vendors whole for state breaches of contract, and that an award of attorneys' fees as contract damages is, in this unique circumstances, an appropriate means to that end." Id. (footnote omitted). This Court agrees with that analysis and holds that plaintiffs are entitled to recover reasonable attorneys fees in this case. See also Almond v. Boyles, 792 F.2d 451, 456-57 (4th Cir.1986) (upholding, without discussion, district court's award of attorneys fees in Randolph-Sheppard challenge, but remanding for recalculation). Plaintiffs shall file with the Court an accounting of their legal fees incurred in prosecuting this action from January 21, 1988 (the date the complaint was filed) to the date of this decision, and defendants shall file their opposition thereto, if any, in accordance with the dates established in the accompanying order.
Remaining Issues Raised in the Complaint
43. On December 13, 1989, several days before trial, plaintiffs filed a praecipe informing the Court that they would not prosecute the following issues: defendants' alleged failure to submit social security payroll taxes for sighted assistants of blind vendors; defendants' alleged wrongful continuation of departmental vending facilities and depletion of the reserve and stabilization fund; defendants' alleged failure to establish valid administrative review and full evidentiary hearing procedures; and defendants' alleged wrongful acts concerning the establishment of the large cafeterias, or "emporia." Since plaintiffs declined to prosecute these claims, they are accordingly dismissed.
44. Plaintiffs allege that defendants violated the Act and regulations by failing to ensure satisfactory sites for vending facilities. Complaint at 6-7, ¶ 10. The Court finds insufficient evidence to sustain this allegation. In addition, with respect to the establishment of sites on federal property, the Act seems to place the primary responsibility for identifying such sites on the federal property managers, who are not defendants in this action. See 20 U.S.C. § 107a(d)(1); 34 C.F.R. § 395.30(a); 42 Fed. Reg. 15802, 15807-08 (Mar. 23, 1977). In any case, since there was insufficient evidence presented at trial with respect to this claim, the Court denies relief.
45. Plaintiffs allege that defendants violated the Act and regulations by failing to implement a transfer and promotions policy. Complaint at 10, ¶ 20. Plaintiffs at trial failed to introduce any evidence to support this allegation. Accordingly, the Court denies relief with respect to this claim.
46. Plaintiffs allege that defendants violated the Act and regulations by requiring the present Nominee to hire unnecessary and unproductive personnel, thereby draining resources from the Nominee to the detriment of the vendors. Complaint at 12, ¶ 29. Except to the extent previously dealt with above, the Court finds insufficient evidence to support this general allegation and denies relief with respect to this claim.
ORDER OF JUDGMENT
The Court having held a bench trial in this matter from December 18 to December 22, 1989, and having set forth its findings of facts and conclusions of law in the accompanying Memorandum, it is by the Court this 17th day of April, 1990,
ORDERED, ADJUDGED, AND DECREED that plaintiffs' request for damages be, and hereby is, granted. Defendants shall pay to plaintiffs damages in the amount of six hundred twenty thousand five hundred twenty six dollars and sixty-four cents ($620,526.64), plus post-judgment interest at the rate of 4 percent per annum, in accordance with D.C.Code § 28-3302(b). This amount shall be paid in *318 lump sum to the Committee of Blind Vendors of the District of Columbia, which shall distribute the funds, in accordance with the accompanying Memorandum, to the individual blind vendors that constitute the plaintiff class; and it is further
ORDERED, ADJUDGED, AND DECREED that in view of present circumstances, and for the reasons set forth in the accompanying Memorandum, plaintiffs' request for mandamus be, and hereby is, denied; and it is further
ORDERED, ADJUDGED, AND DECREED that plaintiffs' request for attorneys' fees be, and hereby is, granted. On or before May 10, 1990, plaintiffs shall file with the Court an accounting of their legal fees incurred in prosecuting this action from January 21, 1988 to the date of this decision. Defendants shall file their opposition papers thereto, if any, on or before May 21, 1990.
NOTES
[1] Plaintiffs originally sought approximately $1,166,000 in damages. Complaint at 16, ¶ 1. Plaintiffs subsequently declined to prosecute several claims for damages. See Praecipe (Dec. 13, 1989).
[2] The Act defines "vending machine income" to mean receipts after the cost of goods sold (including reasonable service and maintenance costs) where the machines are maintained and serviced by a federal agency; or commissions paid by a commercial vending concern where the machines are maintained and serviced by such a commercial concern. 20 U.S.C. § 107e(8).
[3] In the original complaint, plaintiffs charged that DAC failed to place unassigned vending machine income into the blind vendors' pension fund account. Complaint ¶ 18. Plaintiffs subsequently declined to prosecute this charge. See Trial Brief for Plaintiffs (Dec. 13, 1989).
[4] This figure is taken from Form RSA-15 for the period of October 1, 1984 to September 30, 1985. P-81 at 2 ("Accountability of Set-Aside Funds Collected under the Vending Facility Program from All Sources").
[5] $525,423 × 75% = $394,067.25.
[6] $394,067.25 × 6% × 5.33 years = $126,022.71.
[7] The 627 account refers to the "Randolph-Sheppard Vending Stand Account802-627," which was established by the District to monitor the blind vendor program under DAC's management. D-233; see supra Fact 29.
[8] Admittedly, the Court has some difficulty accepting defendants' arguments that plaintiffs' claims are time-barred. Plaintiffs timely requested an evidentiary hearing in October 1985, which ultimately they did not receive through no fault of their own. The statute of limitations was designed to avoid the litigation of "stale" claims. Havens Realty Corp. v. Coleman, 455 U.S. 363, 380, 102 S. Ct. 1114, 1125, 71 L. Ed. 2d 214 (1982). It would be unfair to label plaintiffs' claims "stale" when they should have been litigated in an administrative forum more than two years ago, as plaintiffs originally intended.
[9] $79,084 × 6% × 4.5 years = $21,352.68.
[10] In their post-trial brief, plaintiffs point to several other examples to show that defendants are violating the participation requirements of the Act, including: (1) DCRSA's unilateral decision to develop large "emporia" vending facilities in 1985; (2) DCRSA's refusal to adopt the BVC's recommendations regarding departmental vending stands; and (3) DCRSA's exclusion of the BVC in the development of regulations to govern evidentiary hearings. Plaintiffs' Proposed Findings of Fact and Conclusions of Law, at 13-14. Even assuming that these actions violated the Act, there is no evidence that these violations are continuing. Instead, the evidence reflects that at the present time DCRSA is embracing the views of the BVC and soliciting its active participation, in compliance with the Act.
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152 B.R. 612 (1993)
In re Wademan PETERSON and Janice Kay Peterson, Debtors.
UNITED STATES TRUSTEE, Appellant,
v.
FARM CREDIT BANK OF OMAHA, Appellee.
Civ. 92-4168.
United States District Court, D. South Dakota, S.D.
February 8, 1993.
Charles L. Nail, Jr., Asst. U.S. Trustee, Bruce J. Gering, Atty. Advisor, Sioux Falls, SD, for appellant.
David Nadolski, Sioux Falls, SD, for appellee.
MEMORANDUM OPINION AND ORDER
JOHN B. JONES, Chief Judge.
Introduction
The United States Trustee appeals the bankruptcy court's Memorandum Decision of October 2, 1992, 145 B.R. 631. The United States Trustee contends that there is no authority in the Bankruptcy Code to support the bankruptcy court's award of compensation for services rendered, and reimbursement for expenses incurred, by an attorney for a creditor in a Chapter 12 case. The Court agrees and for the following reasons reverses the judgment of the bankruptcy court.
Jurisdiction
This Court takes jurisdiction over this matter pursuant to 28 U.S.C. § 158(a).
Standard of Review
This Court reviews the bankruptcy court's legal conclusions de novo, while *613 findings of fact are upheld unless clearly erroneous. Wegner v. Grunewaldt, 821 F.2d 1317, 1320 (8th Cir.1987).
Background
On March 30, 1987, Debtors filed a joint petition for relief under Chapter 12 of the Bankruptcy Code. Debtor's Chapter 12 Plan was confirmed on June 7, 1988. On June 25, 1991, Debtors filed a Final Account and Report and Final Exit Report. Appellee, Farm Credit Bank of Omaha ("FCBO"), and the Chapter 12 Trustee filed objections to discharge. No other creditor filed timely objections to the Chapter 12 Discharge. No objections to discharge were filed by the United States Trustee.
Although not requested to do so by the Chapter 12 Trustee, FCBO actively participated in resisting Debtors' discharge. In preparation for the hearing on the objections to discharge, FCBO served debtors with a Subpoena Duces Tecum for the production of certain documents relating to Debtors' farming operation. The hearing on objections to discharge was continued by the bankruptcy court to enable the parties to conduct discovery. A Bankruptcy Rule 2004 examination was conducted and the only parties appearing at this examination were FCBO, Debtors, and the Chapter 12 Trustee.
In an attempt to calculate the actual amount of Debtors' net disposable income during the life of the plan, FCBO reviewed relevant financial data it obtained from the Debtors, which involved considerable time and effort on FCBO's part. The Debtors subsequently filed and served an Amended Final Exit Report. Following negotiations, a court-approved Compromise and Settlement Agreement was entered into by the parties. Under this agreement, Debtors agreed to pay the Chapter 12 Trustee $19,000, which was to be disbursed to administrative claimants and creditors with unsecured claims.
FCBO then filed a fee application as an administrative claim pursuant to 11 U.S.C. § 503 seeking compensation for its efforts. The application requested $13,166.35 as compensation.[1] Over the objections of the United States Trustee and the Farmers Home Administration, the bankruptcy court approved the fee application.
Discussion
This appeal involves an interpretation of 11 U.S.C. § 503(b). That section provides for the allowance of administrative expenses.
"The task of resolving the dispute over the meaning of [the statute] begins where all such inquiries must begin: with the language of the statute itself." United States v. Ron Pair Enters., Inc., 489 U.S. 235, 241, 109 S. Ct. 1026, 1030, 103 L. Ed. 2d 290 (1989). And when the language of the statute is plain, the inquiry also ends with the language of the statute, for in such instances "the sole function of the courts is to enforce [the statute] according to its terms". Id. (quoting Caminetti v. United States, 242 U.S. 470, 485, 37 S. Ct. 192, 194, 61 L. Ed. 442 (1917)).
The plain meaning of a statute is decisive, "except in the rare cases [in which] the literal application of a statute will produce a result demonstrably at odds with the intentions of its drafters." Ron Pair, 489 U.S. at 242, 109 S.Ct. at 1031 (quoting Griffin v. Oceanic Contractors, Inc., 458 U.S. 564, 571, 102 S. Ct. 3245, 3250, 73 L. Ed. 2d 973 (1982)). The Supreme Court, as well as the Eighth Circuit, has consistently applied the plain meaning rule in cases arising under the bankruptcy code. Patterson v. Shumate, ___ U.S. ___, ___, 112 S. Ct. 2242, 2247, 119 L. Ed. 2d 519 (1992); Toibb v. Radloff, ___ U.S. ___, ___ - ___, 111 S. Ct. 2197, 2199-2200, 115 L. Ed. 2d 145 (1991); and In re Juhl Enters., Inc., 921 F.2d 800, 803 (8th Cir.1990).
Section 503(b) provides that the allowance for administrative expenses includes expenses related to specific activities. The Bankruptcy Code's Rules of Construction expressly states that the words "`includes' and `including' are not limiting". 11 U.S.C. § 102(3). Based on this *614 language, the Court agrees that the specified activities listed under § 503(b) are not the only activities which may qualify as compensable administrative expenses.
Section 503(b)(3)(D) states that among the expenses which may be recovered are those incurred by "a creditor, . . . in making a substantial contribution in a case under chapter 9 or 11 of this title". However, there is no provision in § 503 for the recovery of expenses incurred by a creditor in a bankruptcy case under Chapter 7, 12, or 13.
In the absence of § 503(b)(3)(D) the Court might be persuaded that a creditor who performs the activities undertaken by FCBO in this matter would be entitled to compensation for those efforts on the basis that the use of the word "including" in § 503(b) is not limiting. But the presence of subsection (3)(D) to § 503(b) casts an entirely different light on the analysis of the statute.
While Chapter 12 had not yet been drafted or considered by Congress when the original version of § 503(b)(3)(D) was promulgated, Chapters 7 and 13 were in existence at that time and Congress expressly chose not to include those Chapters in § 503(b)(3)(D).[2] Although the parties speculate as to the reasons why Congress did not include the other bankruptcy chapters in § 503(b)(3)(D), the Court is not going to engage in speculation and attempt to divine congressional wisdom. For whatever reason, Congress chose not to include reference to those other chapters in § 503(b)(3)(D).
The ruling of the bankruptcy court in this case has effectively rewritten § 503(b)(3)(D) to include Chapter 12. While this may be an equitable result based on the efforts of FCBO in this case, the Supreme Court has explicitly stated "that whatever equitable powers remain in the bankruptcy courts must and can only be exercised within the confines of the Bankruptcy Code." Norwest Bank Worthington v. Ahlers, 485 U.S. 197, 206, 108 S. Ct. 963, 969, 99 L. Ed. 2d 169 (1988). The authority to address any inequities which may be present in the application of the plain meaning rule to § 503(b) is vested in Congress, not the courts. Taylor v. Freeland & Kronz, ___ U.S. ___, ___, 112 S. Ct. 1644, 1649, 118 L. Ed. 2d 280 (1992).
Moreover, the bankruptcy court's ruling would render subsection (3)(D) of § 503(b) meaningless. As the United States Trustee points out, if a creditor who makes a substantial contribution in a Chapter 12 proceeding is entitled to compensation for its expenses under § 503(b), the phrase "in a case under Chapter 9 or 11 of this title" in subsection (3)(D) would be merely excess verbiage.[3] It is a well established tenet of statutory construction that a statute will not be interpreted so as to render other provisions of the same enactment superfluous. Freytag v. Comm'r, ___ U.S. ___, ___, 111 S. Ct. 2631, 2638, 115 L. Ed. 2d 764 (1991); Conway County Farmers Ass'n v. United States, 588 F.2d 592, 598 (8th Cir. 1978).
Literal application of the statute's language does not "produce a result demonstrably at odds with the intention of its drafters."
Therefore,
Upon the record herein,
IT IS ORDERED:
(1) That for the reasons stated herein, the bankruptcy court's Memorandum Decision of October 2, 1992, awarding FCBO compensation for legal services rendered, is reversed and remanded to the bankruptcy court for further proceedings consistent with 11 U.S.C. § 503 and this Memorandum Opinion and Order.
NOTES
[1] As noted by the bankruptcy court, this amount is approximately 70% of the $19,000 recovered.
[2] When Chapter 12 was enacted, Congress added numerous references to that Chapter throughout the Bankruptcy Code. For a representative sampling see e.g., 11 U.S.C. §§ 103(a), 108, 321(a), 322(a), 326(b), 327(b), 329(b)(1)(B), 330(c), and 346(b)(1).
[3] If the bankruptcy court's ruling were carried to its logical conclusion § 503(b) should provide compensation for creditors in similar situations which may arise in Chapter 7 and 13 proceedings, a result Congress clearly did not intend.
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736 F. Supp. 1236 (1989)
UNITED STATES of America
v.
Lee ALEXANDER, Defendant.
No. 87-CR-137.
United States District Court, N.D. New York.
September 6, 1989.
*1237 Frederick J. Scullin, Jr., U.S. Atty., N.D. N.Y., Syracuse, N.Y. (Paula Ryan Conan, of counsel), for U.S.
Boreanaz, Baker & Human, Buffalo, N.Y., and James R. McGraw, Syracuse, N.Y. (Harold J. Boreanaz, of counsel), for defendant.
MEMORANDUM-DECISION AND ORDER
McAVOY, District Judge.
Following remand from the Second Circuit, reversing this court's order denying the government's motion for specific performance of that portion of defendant's plea agreement relating to surrender of assets and directing the court to hold "whatever proceedings may be necessary to determine what the parties to this agreement intended, whether a breach occurred, whether specific performance is an appropriate remedy here, and if so, what specifically should be required of defendant and his attorneys," United States v. Alexander, 869 F.2d 91, 96 (1989), this court finds that defendant breached the plea agreement and orders that the assets in dispute used by defendant as partial payment for services rendered by his attorneys be surrendered to the government.
Background
Lee Alexander, formerly the mayor of Syracuse, New York, was indicted in 1987 for violating and conspiring to violate the Racketeer Influenced and Corrupt Organization Act (RICO), for violating the Hobbs Act, for conspiring to defraud the United States and for income tax evasion. The forty-count indictment also included a claim for forfeiture of Alexander's assets pursuant to 18 U.S.C. § 1963.
Ultimately, after some two months of serious negotiations, Alexander, represented by counsel (Harold J. Boreanaz and James R. McGraw), reached an agreement with the government on January 4, 1988 and two days later pled guilty to one count of violating RICO, one count of conspiracy to defraud the government and one count of income tax evasion. Specifically, the government agreed (1) that the sentences imposed would be served concurrently, (2) that no sentence would exceed 10 years' imprisonment, (3) that fines would not exceed $100,000 and (4) that the government would move to dismiss thirty-seven counts of the indictment, including the claim for forfeiture. For his part, Alexander agreed (1) to plead guilty to three counts of the indictment and to admit facts sufficient to convict him of those charges, (2) to fully disclose his assets and to submit a financial statement in this regard (Plea Agreement, ¶ 9a), (3) to represent that such disclosure and financial statement is complete and truthful (¶ 9b), (4) to provide satisfactory verification to the government that he has no hidden assets which he has not disclosed (¶ 9c), (5) to surrender to the United States, prior to sentence, "all assets, including cash, municipal bonds, and past due interest coupons" (¶ 9d), and (6) to "surrender and relinquish any and all claims to the *1238 assets identified in the Schedule of Assets which is attached hereto and hereby incorporated by reference," (¶ 9e). The Schedule of Assets (referred to above) provided as follows:
I. Assets in the possession of and under the dominion and control of the defendant Lee Alexander which are to be surrendered to the government ...:
A. All currency, acquired or derived directly or indirectly from the underlying offense, (totalling at least $120,000.00);
B. All municipal bearer bonds, acquired directly or indirectly through the underlying offense, (having a face value of approximately $500,000.00), subject to [certain] exceptions ...; and
C. All matured interest coupons, acquired directly or indirectly through the underlying offense, (approximately $110,000.00).
D. Precious coins, if any.
II. Assets in the possession of and under the dominion and control of the United States recovered during the course of the investigation to which the defendant Lee Alexander relinquishes any and all claims pursuant to this agreement:
A. Municipal bearer bonds having a face value of approximately $425,000.00 recovered from Christ Lemonides, Gregory D. Ferentino, and James T. Spaulding.
III. Assets in the possession and under the dominion and control of the United States recovered during the course of the investigation to which the defendant Lee Alexander relinquishes any and all claims and which will be disposed of by the United States in accordance with paragraph 14(b) of the plea agreement:
A. $20,000.00 in cash recovered from Marine Midland safe deposit box # 1088 on August 20, 1986;
B. Municipal bearer bonds having a face value of approximately $40,000.00 recovered from Flagship Securities, Inc.; and
C. Three gold coins recovered from James T. Spaulding and Michael Elliot.
Concluding the plea agreement, paragraph 16 states that "[i]t is understood by the parties to this Agreement that the terms and conditions specified therein constitute the full and complete understanding between them, and that any modifications, deletions or additions must be in writing."
Even before the agreement was reached, the government had recovered $465,478 of Alexander's assets to which, under the subsequently executed plea agreement, Alexander relinquished all claim. After the plea agreement was reached, but before sentencing, the government recovered an additional $851,697 in bonds and coupons and $125,000 in cash, bringing the total recovered by the government before sentencing to $1,442,175.
On March 24, 1988, the day set for sentencing, the government asserted that Alexander had not fully complied with the plea agreement in that he had not fully disclosed his assets and had failed to surrender all of the assets he had agreed to surrender. The government was aware of coins worth approximately $20,000 to $30,000 and other assets totalling $79,923.42 that had been in Alexander's possession or control but which had not been surrendered. Specifically, these unsurrendered assets included (a) three checks: one for $32,242.84, one for $10,000 and one for $34,980.58, (b) $2,700 in cash and (c) 21 gold coins and 100 silver dollars. Between execution of the plea agreement and the time of sentencing Alexander's attorneys recovered these funds from overseas bank accounts and safe deposit boxes and kept two of the checks, the cash and the coins as payment of attorneys' fees. (The cash was thereafter spent and the $34,980.58 check was sent, at Alexander's direction, to New York State in payment of New York State tax liabilities.)
After enumerating the unsurrendered assets that the government claimed it was entitled to, the United States Attorney moved for an order of specific performance that would require Alexander or his attorneys to turn over the withheld assets. Alexander's attorneys argued that the assets in dispute were no longer in Alexander's possession or control and that those assets that had been paid to the attorneys were exempt from forfeiture as attorneys' fees. *1239 The court reserved decision on the motion but ordered that the two remaining checks and the coins be placed in an escrow account.
Sentencing went forward as all had agreed and thereafter the government renewed its motion for specific performance which this court denied on the ground that specific performance of a plea agreement is not a remedy available to the government upon a defendant's breach. The Second Circuit reversed, holding that when a defendant breaches his plea agreement specific performance is available to the government as a possible remedy. 869 F.2d at 93-94. Recognizing, to a certain extent at least, the applicability of contract law principles to plea agreements, the Second Circuit remanded the matter to this court for further proceedings to determine what the parties to this plea agreement reasonably understood to be the terms of the agreement, United States v. Carbone, 739 F.2d 45, 46 (2d Cir.1984); Paradiso v. United States, 689 F.2d 28, 31 (2d Cir.1982) (per curiam), cert. denied 459 U.S. 1116, 103 S. Ct. 752, 74 L. Ed. 2d 970 (1983), including whether or not the parties intended the agreement to exempt attorneys' fees from those assets that were to be surrendered, whether a breach occurred, whether specific performance, although the only remedy remaining to the government, is appropriate here and, if so, what specifically should be required of defendant and his attorneys. 869 F.2d at 94-96.
This court held a hearing on June 20, 1989 with respect to which pre- and post-hearing submissions were filed: although cognizant of the Second Circuit's opinion, the submissions filed on behalf of Alexander were limited to the argument that, under the circumstances here, specific performance is not an appropriate remedy and should be denied; alternatively, defendant's counsel asked the court to fashion an equitable remedy to adequately compensate counsel for the reasonable value of the legal services rendered. See James R. McGraw's Post-Hearing Memorandum of Law (unpaginated); see also Pre-Hearing Argument and Affidavit of Harold J. Boreanaz. It would seem, on the basis of defendant's pre- and post-hearing submissions, that defendant has implicitly conceded that there was no understanding reached permitting reservation of assets for attorneys' fees and that the reservation of assets here constituted a breach of defendant's obligations under the plea agreement. Nevertheless, given that there has not been an express concession on these issues, under the circumstances, the court will undertake the appropriate analysis as set forth in the Second Circuit's opinion.
Discussion
Following the Supreme Court's decision in Santobello v. New York, 404 U.S. 257, 92 S. Ct. 495, 30 L. Ed. 2d 427 (1971), federal courts have developed a "common law" of plea agreements around the notion that, because the negotiated guilty plea represents a bargained-for quid pro quo, it is contractual in nature and is therefore subject to interpretation under principles of contract law. See United States v. Ataya, 864 F.2d 1324, 1329-1337 (7th Cir.1988); United States v. Partida-Parra, 859 F.2d 629, 633 (9th Cir.1988); United States v. Papaleo, 853 F.2d 16, 19 (1st Cir.1988); United States v. Read, 778 F.2d 1437, 1441 (9th Cir.1985), cert. denied 479 U.S. 835, 107 S. Ct. 131, 93 L. Ed. 2d 75 (1986). Although it is unclear to what extent the specifics of contract law govern disputes relating to plea agreements, at least two general principles can be discerned: (1) that resolution of disputes over the terms of the agreement or allegations regarding breaches thereof necessitates inquiry into what the parties to the plea agreement reasonably understood to be the terms of that agreement and (2) that a court is to apply an objective standard in making its factual determination as to what the parties' reasonable understanding was. See United States v. Alexander, 869 F.2d at 95; United States v. Partida-Parra, 859 F.2d at 633; United States v. Read, 778 F.2d at 1441; Paradiso v. United States, 689 F.2d at 31; United States v. Arnett, 628 F.2d 1162, 1164 (9th Cir.1979). Application of the foregoing principles leads the court to the conclusion that the attorneys for Lee Alexander should have *1240 known that they would not be permitted to reserve from the assets to be surrendered money to pay Alexander's attorneys' fees, i.e., that defendant's counsel should have known, as was reasonably to be expected by the government, that all of Alexander's assets related directly or indirectly to his underlying offenses would have to be surrendered to the government for disposal in accordance with the provisions of the plea agreement without exception for any payment of attorneys' fees.
The starting point for the court are the pertinent provisions of the plea agreement. Specifically, paragraph 9d read in conjunction with part I. of the Schedule of Assets, see United States v. Ataya, 864 F.2d at 1335; United States v. Irvine, 756 F.2d 708, 710 (9th Cir.1985), required Alexander to surrender to the government all currency, municipal bearer bonds and matured interest coupons in his possession or under his dominion and control, subject to certain enumerated exceptions, related directly or indirectly to his underlying offense and also required Alexander to surrender all precious coins in his possession or under his dominion and control. In the court's view, these requirements are unambiguous; moreover, as all concede, no reference is made in paragraph 9, the Schedule of Assets, in the provisions of the plea agreement relating to disposal of assets (¶ 14) or in any other provision of the agreement to reservation of assets for payment of attorneys' fees or to recovery by the government of the proceeds of any sale of assets being made subject to an outstanding attorney's retainer lien, as had been the case with co-defendant Christ Lemonides. See Government's Exhibit 6A and 6B. Nevertheless, although the unambiguous provisions of the plea agreement require, in essence, that all assets related to the underlying offense be surrendered to the government for disposal by it and although no reference is made to the payment of attorneys' fees, or perhaps because of the absence of any such reference, the court must go behind the literal terms of the plea agreement to ascertain what the parties reasonably understood these terms to mean, objectively viewed.
In this regard, the court notes that, during the course of "serious" plea negotiations involving defendant, his two attorneys, United States Attorney Frederick J. Scullin, Jr., AUSA Joseph Pavone and Strike Force attorney Greg West, the issue of exempting certain assets held by Alexander had been broached, with the government ultimately agreeing to exempt from the overall requirement of surrender Alexander's marital residence and personal belongings, such as clothing, jewelry and furniture. This informal understanding, characterized as a "Gentlemen's Agreement" during the June 20 hearing, although referred to in the first draft of the plea agreement, see Government's Exh 5, did not find its way into the final plea agreement. This informal understanding to exempt certain assets was reached notwithstanding the parties' understanding that one of the purposes of the assets surrender provisions of the plea agreement was to leave Alexander with as few assets as possible. Informal agreements were also reached relating to the government's role in prison selection and to Alexander's voluntary commitment to prison; no other informal agreements were reached, however, and, more particularly, defendant's attorneys concede that, in view of the government refusing even to discuss the issue regarding reservation of assets for the payment of attorneys' fees raised by them, perhaps twice, during the final stages of negotiations in and around late December 1987, no agreement of any kind was reached relating to the payment of fees. Nevertheless, defendants' attorneys (through the testimony of Harold Boreanaz) took the government's refusal to discuss the attorneys' fees issue as indicating simply the government's unwillingness to include any reference to the payment of attorneys' fees in the final plea agreement holding open the possibility, in their view, that the payment of attorneys' fees could be subject to further discussions, given that the government had to be aware that they had received some payment already and expected to be paid additional sums for services rendered. Even so, no further discussions *1241 relating to the payment of attorneys' fees from surrendered assets took place and defendants' attorneys failed to explain what if anything the government did to induce the belief that further discussions regarding attorneys' fees would occur. More to the point, defendants' attorneys failed to adduce any proof relating to acts done or statements made by the government that would induce any belief that assets could be withheld to pay attorneys' fees. It follows then that the argument of Harold Boreanaz that he would not have gone, at Alexander's direction, to Nassau and Panama to recover the assets now in dispute if he did not expect that he would be able to reserve some of those assets for attorneys' fees must be rejected. That, as Harold Boreanaz testified, the parties had different perceptions regarding attorneys' fees does not, given the foregoing, mean that the perception of defendant's counsel was reasonable.
Viewed objectively, the parties' reasonable understanding of the terms of the plea agreement was or should have been that the government wanted to leave Alexander with as few assets as possible, that all the assets subject to surrender were to be surrendered to the government for disposal by it and that no exception was to be made for payment of attorneys' fees. Clearly, had the government wanted to accommodate defendant's counsel on the issue of attorneys' fees, it could have done so as it did with co-defendant Christ Lemonides. There is simply no evidence in the record to support the view that the parties reasonably understood reservation of assets for the payment of attorneys' fees to be a term of the plea agreement or to be otherwise permissible. Having so concluded, the court's attention now turns to determining whether defendant breached the terms of the plea agreement.
Whether defendant breached the terms of the plea agreement such that appropriate action is required by the court, which the government bears the burden of proving by a preponderance of the evidence, see United States v. Ataya, 864 F.2d at 1337, rests in part on determining whether the unsurrendered assets, recovered by Harold Boreanaz between the time the plea agreement had been executed and the time for sentencing, are related, directly or indirectly, to the underlying offense. As an initial matter, as noted by the Second Circuit, the government has complied substantially with its part of the bargain; moreover, there is no question, in the court's view, that defendant did not fully and truthfully disclose to the government all of his assets as was required by paragraphs 9a, 9b and 9c of the plea agreement. As for the remaining issue, it is not seriously contested, if at all, by defendant's counsel that the unsurrendered assets were related to the underlying offense: Harold Boreanaz, in travelling at Alexander's direction to Panama and the Bahamas to recover funds remaining there, proceeded under belief, determined by this court to have been unreasonable, that defendant's counsel could withhold from assets subject to surrender to the government a portion for the payment of attorneys' fees. Moreover, on the basis of materials submitted to the court in connection with this hearing (i.e., a stipulation entered into by counsel after the June 20 hearing and that portion of defendant's April 7, 1989 Grand Jury testimony subsequently received into evidence over the objection of defendant's counsel and reviewed by the court in chambers (Government's Exh 2)) relating to the circumstances surrounding the establishment of the Panamanian and Bahamian bank accounts and to Alexander's March 1988 Grand Jury testimony regarding the source of the assets in the original Panamanian account, see Post-Hearing Stipulation, the reasonable inference can be drawn that substantially all, if not all, of the assets kept by defendant in Panama and Nassau were related, directly or indirectly, to the kickback/extortion scheme.
Accordingly, the court concludes that the government has established, by a preponderance of the credible evidence, a substantial breach of the terms of the plea agreement. Remaining for the court's determination is whether specific performance is an appropriate remedy here.
*1242 Specific performance, as an equitable remedy, requires some attention to the relative benefits and burdens that the parties to the breached agreement may enjoy or suffer as compared with an available legal remedy. Texas v. New Mexico, 482 U.S. 124, 107 S. Ct. 2279, 2285, 96 L. Ed. 2d 105 (1987). Specific performance, even thoughas noted by the Second Circuit in the present caseit is the only remaining remedy available to the government, see 869 F.2d at 95, is not demandable as a matter of absolute right; rather, the remedy rests entirely in the court's discretion which is to be exercised according to settled principles of equity with reference to the facts of the particular case. Texas v. New Mexico, 107 S.Ct. at 2285; Haffner v. Dobrinski, 215 U.S. 446, 450, 30 S. Ct. 172, 173, 54 L. Ed. 277 (1910). That is to say, specific performance may not and will not be ordered if under all the circumstances it would be inequitable to do so, Wesley v. Eells, 177 U.S. 370, 376, 20 S. Ct. 661, 664, 44 L. Ed. 810 (1900), as where the effect would be disproportionate in its harm to the breaching party and its assistance to the non-breaching party, see Van Wagner Advertising Corp. v. S & M Enterprises, 67 N.Y.2d 186, 195, 501 N.Y.S.2d 628, 633, 492 N.E.2d 756, 761 (1986).
In the present case, defendant's counsel argue, essentially, that granting the government's motion for specific performance would be unfair to them, given that they did a substantial amount of work identifying and retrieving defendant's assets which provided a great benefit to the government and for which they deserve to be paid. They also note that the fees in question are less than would be allowed to assigned counsel, that the government has already made a substantial recovery under the plea agreement and has recovered more than it initially sought and that granting the government's motion here may have a chilling effect on criminal defendants' rights in the future. For its part, the government argues that its proven "damages" exceed the relief it is seeking here in that the government is not seeking to recover either the amount of the check paid to New York State or the cash that has already been spent and that Alexander is not entirely without assets with which to pay his attorneys (a point not disputed by Mr. Boreanaz or Mr. McGraw), see Government's Post-Hearing Memorandum at 6 n. 5.
Application of the above-stated principals, in view of the parties' arguments, convinces the court that specific performance to the extent sought by the government essentially the payment of money is warranted here. That, as defendant's counsel point out, the government has already recovered a substantial sum of money, perhaps exceeding what it initially hoped to recover, does not warrant the conclusion that the government is seeking specific performance of the plea agreement with "unclean hands" or in bad faith or that recovery of these additional sums of money is somehow inequitable. The court can discern no hardship, let alone any undue hardship, to the defendant or to his counsel if the defendant is ordered to surrender to the government that which should have been surrendered in the first place. Supervening events have not rendered the terms of the plea agreement so one-sided as to make defendant's performance under that agreement unconscionable; nor has the court been made aware of any significant increase in the value of some of the assets to be surrendered (i.e., the precious coins) such that an undeserving benefit would be conferred on the government. To the extent that consideration of the public interest or of public policy is appropriate, see United States v. Johnson, 861 F.2d 510, 512 (8th Cir.1988), the court can discern no adverse impact on the public interest or on public policy arising out of ordering the defendant to comply with the provisions of his plea agreement. More to the point, the concerns expressed regarding the impact specific performance would or may have on future criminal defendants' Sixth Amendment rights have, in the court's view, been rendered meritless in light of the Supreme Court's decisions in United States v. Monsanto, ___ U.S. ___, 109 S. Ct. 2657, 2665-2667, 105 L. Ed. 2d 512 (1989); Caplin & Drysdale, Chartered v. *1243 United States, ___ U.S. ___, 109 S. Ct. 2646, 2651-2657, 105 L. Ed. 2d 528 (1989). Moreover, in view of these two cases it is difficult, if not impossible, for the court to see how ordering surrender of the withheld assets would be unfair to Alexander or to his attorneys. See United States v. Monsanto, 109 S.Ct. at 2665-2667; Caplin & Drysdale, Chartered v. United States, 109 S.Ct. at 2656-2657 and 2656 n. 10 (recognizing that criminal defense lawyers may very well be unable to collect their fees upon conviction or because of the terms of a plea agreement).
In sum, the court concludes, in the exercise of its discretion, that specific performance is an appropriate remedy under the circumstances of this case and orders defendant's counsel to surrender to the government forthwith the two checks (in the amounts of $32,242.84 and $10,000) currently being held in escrow for disposal, along with the 121 precious coins being held by the government, in accordance with the provisions of the plea agreement.
Conclusion
Following remand from the Second Circuit, the court, having conducted necessary proceedings, grants the government's motion for specific performance and orders the surrender of assets for disposal as set out above.
IT IS SO ORDERED.
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736 F. Supp. 737 (1990)
Gary TURPIN, et al., Plaintiffs,
v.
MERRELL DOW PHARMACEUTICALS INC., Defendant.
Civ. A. No. 84-105.
United States District Court, E.D. Kentucky, London Division.
April 25, 1990.
Barry J. Nace and Thomas H. Tate, Paulson, Nace, Norwind & Sellinger, Washington, D.C., for plaintiffs.
Frank C. Woodside, III, Joseph E. Conley, Jr. and Stephen M. Rosenberger, Dinsmore & Shohl, Cincinnati, Ohio, for defendant.
MEMORANDUM
SILER, Chief Judge.
This action is before the Court on the motion of the defendant Merrell Dow Pharmaceuticals Inc. (Merrell Dow) for summary judgment pursuant to Fed.R.Civ.P. 56. After reviewing the voluminous materials submitted by the parties, including affidavits of experts, trial and deposition transcripts, excerpts of transcripts, summaries of published scientific studies, and numerous decisions of other courts regarding the same or similar issues, the Court is convinced that no genuine issues of material *738 fact exist and the case can therefore be decided as a matter of law. Thus, for the reasons stated below, Merrell Dow's motion for summary judgment will be granted.
It appears from the record that the parties do not dispute the facts out of which this action arose. Brandy Turpin, minor-plaintiff, was born on February 27, 1982, to plaintiff-parents, Gary and Betty Turpin. Brandy was born with various deformities to both hands and feet which have required several surgical procedures to partially correct. Betty Turpin ingested the drug Bendectin during her pregnancy with Brandy. Bendectin was a prescription pharmaceutical product manufactured by Merrell Dow, and prescribed for the treatment of nausea and vomiting during pregnancy. Bendectin was the only anti-nauseant approved by the Food and Drug Administration (FDA) to combat "morning sickness" experienced by mothers during pregnancy. Merrell Dow removed the product from the marketplace in 1983 due to the increased costs of litigation surrounding the drug.
The plaintiffs assert that Betty Turpin's Bendectin ingestion caused her daughter's birth defects. Merrell Dow argues that the plaintiffs can submit no evidence that supports the contention that a causal association between Bendectin and birth defects exists. Thus, the primary issue to be decided by the Court is whether the plaintiffs have submitted sufficient evidence that Bendectin is teratogenic (capable of causing birth defects) to survive a grant of summary judgment.
I.
Rule 56(c) of the Federal Rules of Civil Procedure provides that after an adequate opportunity for discovery, see Celotex Corp. v. Catrett, 477 U.S. 317, 322, 106 S. Ct. 2548, 2552, 91 L. Ed. 2d 265 (1986); Anderson v. Liberty Lobby, 477 U.S. 242, 250 n. 5, 106 S. Ct. 2505, 2511 n. 5, 91 L. Ed. 2d 202 n. 5 (1986), the moving party shall be granted summary judgment when it appears that "there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." "[A] party seeking summary judgment always bears the initial responsibility of informing the district court of the basis for its motion, and identifying those portions of `the [record]' which it believes demonstrates the absence of a genuine issue of material fact." Celotex, supra, 477 U.S. at 323, 106 S.Ct. at 2552. However, there is "no express or implied requirement in Rule 56 that the moving party support its motion with affidavits or other similar materials, negating the opponent's claim." Id. (Emphasis in original.)
Once a properly supported motion for summary judgment is made, "the nonmovant must go beyond the pleadings and by affidavits or by `depositions, answers to interrogatories, and admissions on file' designate `specific facts showing that there is a genuine issue for trial.'" Potters Medical Center v. City Hospital Ass'n, 800 F.2d 568, 572 (6th Cir.1986), quoting Fed.R. Civ.P. Rule 56(c), (e). See also Anderson, supra, 477 U.S. at 248-49, 106 S.Ct. at 2510-11.
The standard for granting summary judgment is identical to the standard for a directed verdict under Fed.R.Civ.P. 50(a), "which is that the trial judge must direct a verdict if, under the governing law, there can be but one reasonable conclusion as to the verdict.... If reasonable minds could differ as to the import of the evidence, however, a verdict should not be directed." Anderson, supra, at 250-51, 106 S.Ct. at 2511-12. "The evidence must be viewed in a light most favorable to the party opposing summary judgment and that party must be given the benefit of all reasonable inferences." Potters, supra, at 572. See also Matsushita Electric Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 106 S. Ct. 1348, 89 L. Ed. 2d 538 (1986); Bouldis v. United States Suzuki Motor Corp., 711 F.2d 1319, 1324 (6th Cir.1983).
II.
Merrell Dow contends that human epidemiology studies demonstrate that there is an absence of any evidence connecting Bendectin with birth defects. To support its position, Merrell Dow submitted the summary *739 of over thirty (30) separate human epidemiology studies, none of which demonstrated any connection between birth defects and Bendectin ingestion. The plaintiffs have submitted contrary testimony. The defendant urges the Court to conclude that this expert testimony, tendered by the plaintiffs, is inadmissible under Fed.R.Evid. 703, as their opinions are not based on facts or data "of a type reasonably relied upon by experts in the particular field." Fed.R.Evid. 703. Merrell Dow argues that as the plaintiffs have offered no confirmed, statistically significant, epidemiological data establishing a causal relationship between Bendectin use and birth defects, summary judgment is appropriate.
The plaintiffs attempt to prove Bendectin's teratogenicity through the presentation of expert opinion testimony of seven scientists representing a variety of fields relating to birth defects including pathology, epidemiology, chemistry, developmental biology, pharmacology, toxicology, embryology, teratology, and dysmorphology. These experts include Drs. Johannes Thiersch, Shanna Swan, Stewart Newman, Frederick Crescitelli, Andrian Gross, Jay Glasser, and John Palmer. While testifying to Bendectin's teratogenicity, these experts draw their opinions from four areas of evidence; studies of analogous chemical structures, in vivo and in vitro animal studies, and from the criticism and reanalysis of various of the epidemiological studies submitted by the defendants.
A review of the record reveals the content of each expert's trial testimony. Dr. Johannes Thiersch, a specialist in pathology and pharmacology, would testify that a chemical's composition and its physiological activity is a decisive factor in teratogenic investigations. Dr. Shanna Swan, an epidemiologist and biostatistician, would testify considering all available data, and using the methodology reasonably relied upon by epidemiologists, that with a reasonable degree of medical certainty Bendectin is associated with limb reduction defects. Dr. Stewart Newman, a specialist in developmental, cell, and molecular biology, would testify based on in vitro studies and the pharmacological aspects of Bendectin, that Bendectin is a human teratogen capable of causing birth defects in the developing limbs of human beings. Dr. Adrian Gross, a veterinarian with experience in pathology and toxicology, would testify based on animal studies that Bendectin is teratogenic. Dr. Jay Glasser, a professor of biometry and computer science, with other teaching experience in epidemiology, statistics and biostatistics, would testify based on data reasonably relied upon by biometrists, epidemiologists, and biostatisticians, that Bendectin was epidemiologically statistically associated with limb defects. Dr. Frederick Crescitelli, a biologist with accessory training in physics and chemistry, would testify based on analysis of Bendectin's antihistaminic component, that Bendectin is a teratogen. Dr. John Palmer, a physician and pharmacology professor, would testify based on pharmacological data, animal studies, in vitro studies, epidemiological data and other human data, that Bendectin, specifically its antihistaminic component, has teratogenic properties. Dr. Palmer also examined the medical records pertaining to Brandy Turpin and would testify that within a reasonable degree of medical certainty Bendectin was taken during a period of time that would affect the cells that produce normal limbs in Brandy Turpin and that Bendectin did in fact cause the limb defects from which she suffers. The plaintiffs also submitted materials regarding the credentials and testimony of Dr. Alan Done, Dr. Wayne Snodgrass, and Dr. W.G. McBride, but did not indicate that their testimony would be offered at trial. See Daubert v. Merrell Dow, 727 F. Supp. 570, 574-75 (S.D.Cal.1989) (outlining more fully the proffered testimony of each expert above, with the exception of Dr. Crescitelli).
III.
Fed.R.Evid. 703 requires that the grounds relied upon in the formulation of an expert opinion be of "a type reasonably relied upon by experts in the particular field in forming opinions or inferences upon the subject." Fed.R.Evid. 703. "Whether an expert's opinion has an adequate basis, *740 and whether without it an evidentiary burden has been met, are matters of law for the court to decide." Richardson v. Richardson-Merrell, 857 F.2d 823, 829 (D.C. Cir.1988), cert. denied, ___ U.S. ___, 110 S. Ct. 218, 107 L. Ed. 2d 171 (1989); see United States v. Kozminski, 821 F.2d 1186, 1194 (6th Cir.1987), aff'd, 487 U.S. 931, 108 S. Ct. 2751, 101 L. Ed. 2d 788 (1989). In Kozminski, the Sixth Circuit developed a four-part test that must be satisfied for expert testimony to be admissible. To be admissible the testimony must: (1) be by a qualified expert; (2) be on a proper subject; (3) be in conformity to a generally accepted explanatory theory; (4) and have a probative value which outweighs any prejudicial effect. Kozminski, supra, at 1194. See also Novak v. United States, 865 F.2d 718, 721 (6th Cir.1989) (applying test in a civil action); Sterling v. Velsicol Chemical, 855 F.2d 1188, 1208-09 (6th Cir.1988) (applying Kozminski test). The plaintiffs' experts' testimony, while satisfying three prongs of the test, fails the third prong in that their testimony is not in conformity with a generally accepted explanatory theory in light of the overwhelming epidemiological data governing the non-teratogenicity of Bendectin.
As the Sixth Circuit has made no pronouncement that epidemiological studies form the sole basis upon which experts may reasonably rely when forming an opinion on a drug's teratogenicity, the Court must look to other circuits for guidance. See In re Richardson Merrell, Inc. Bendectin Products Liability Litigation, 624 F. Supp. 1212 (S.D.Ohio 1985), aff'd, 857 F.2d 290 (6th Cir.1988), cert. denied, Hoffman v. Merrell Dow, ___ U.S. ___, 109 S. Ct. 788, 102 L. Ed. 2d 779 (1989) (Although Judge Rubin allowed the presentation of "testimony of eminently qualified and highly credible experts" on both sides, no ruling was made regarding the third prong of the Kozminski test. In fact, defense counsel admits no objection to the admissibility of the plaintiffs' experts was raised, nor was there a motion for directed verdict based upon the insufficiency of evidence in that action.).
Three circuits have rejected similar proof submitted by the plaintiffs in this action, holding that the evidence was insufficient to support a finding of Bendectin's causal connection with birth defects. In Richardson v. Richardson-Merrell, Inc., 857 F.2d 823 (D.C.Cir.1988), cert. denied, ___ U.S. ___, 110 S. Ct. 218, 107 L. Ed. 2d 171 (1989), the D.C. Circuit affirmed the trial judge's holding that the evidence presented at trial was insufficient to support the jury's determination that Bendectin caused the minor-plaintiff's limb reduction defects. In ruling that the plaintiff's relevant evidence of causation was inadmissible under Fed.R.Evid. 703, the court looked behind the expert's ultimate conclusion that Bendectin causes birth defects and analyzed the adequacy of its foundation. Id. at 829. The court examined the probative value of the four types of data relied upon by the plaintiff's expert, Dr. Alan Done, and concluded:
These three types of studies thenchemical, in vitro, and in vivocannot furnish a sufficient foundation for a conclusion that Bendectin caused the birth defects at issue in this case. Studies of this kind, singly or in combination, are not capable of proving causation in human beings in the face of the overwhelming body of contradictory epidemiological evidence. Perhaps mindful of this, the last type of evidence considered by Dr. Done consisted of epidemiological studies. When such studies are available and relevant, and particularly when they are numerous and span a significant period of time, they assume a very important role in determinations of questions of causation.
Id. at 830. Rejecting Dr. Done's epidemiological data, the court wrote:
Dr. Done further admitted that no one who has published work on Bendectin has concluded that there is a statistically significant association between Bendectin and limb reduction defects of the type at issue in this case. Only by recalculating the data was Dr. Done able to obtain what he deems a statistically significant result. Moreover, the studies rejected by Dr. Done had been published in peer-reviewed scientific journals, while Dr. Done *741 has neither published his recalculations nor offered them for peer review. (Footnotes omitted.)
Id. at 831. The court further distinguished its case from Ferebee v. Chevron Chemical, 736 F.2d 1529 (D.C.Cir.), cert. denied, 469 U.S. 1062, 105 S. Ct. 545, 83 L. Ed. 2d 432 (1984), where the defendant's argument that the testimony of plaintiff's experts was inadmissible was rejected. The court stated that in Ferebee the causation issue was novel and "stand[s] at the frontier of current medical and epidemiological inquiry," whereas the wealth of published epidemiological data involving Bendectin was a great distance from the "frontier." Id. at 832. See also Ealy v. Richardson-Merrell, 897 F.2d 1159 (D.C.Cir.1990) (The court followed Richardson and reversed a finding for the plaintiffs on the issue of liability holding that none of the evidence relied upon by the Ealys' experts, either singly or in combination, provided an adequate scientific foundation to render their opinions on human causation admissible. Several of the plaintiffs' experts in this action were the same as in the Ealy trial, including Drs. Gross, Newman, Swan, and Thiersch. In fact, the plaintiffs support their position in this action with several transcript excerpts and affidavits from the Ealy case.). See also Elliott, Toward Incentive-Based Procedure: Three Approaches for Regulating Scientific Evidence, 69 Boston Univ.L.R. 487, 498-99 (1989) (approving the Richardson rule).
The Fifth Circuit reversed a lower court's entry of a judgment on a jury verdict in favor of the plaintiffs, holding that the lack of conclusive epidemiological proof was fatal to the plaintiffs' case. Brock v. Merrell Dow, 874 F.2d 307 mod. 884 F.2d 166 (5th Cir.1989), cert. den., ___ U.S. ____, 110 S. Ct. 1511, 108 L. Ed. 2d 646 (1990). The court rejected the plaintiffs' in vivo and in vitro studies, chemical analysis evidence, and reanalysis of existing epidemiological data, offered by Drs. Glasser, Newman, Thiersch (all present in this action), Snodgrass, Glauser and McBride. The court held:
We find, in this case, the Brocks' failure to present statistically significant epidemiological proof that Bendectin causes limb reduction defects to be fatal to their case. While we do not hold that epidemiologic proof is a necessary element in all toxic tort cases, it is certainly a very important element. This is especially true when the other evidence is in the form of animal studies of questionable applicability to humans.
Id. at 313, mod. 884 F.2d at 167. The court encouraged district judges "faced with medical and epidemiologic proof in subsequent toxic tort cases to be especially vigilant in scrutinizing the basis, reasoning, and statistical significance of studies presented by both sides." Id. at 167.
In Lynch v. Merrell-National Laboratories, 646 F. Supp. 856, 867-68 (D.Mass. 1986), aff'd, 830 F.2d 1190 (1st Cir.1987), the district court granted summary judgment for the defendants. The plaintiffs' evidence, including reanalysis criticizing the methodology of other epidemiological studies, extrapolations from in vivo and in vitro animal studies, and studies of analogous chemical structures, was ruled inadmissible by the court, under Fed.R.Evid. 703:
[A] careful review of the material before this Court indicates that the only relevant, probative, and non-misleading evidence on the issue of Bendectin's role in the causation of birth defects are the controlled observations of human beings, documented in more than 25 published epidemiological studies. The data from these studies do not indicate any statistically significant association between Bendectin and ... birth defect[s].... This Court finds that the evidence submitted by the plaintiffs in support of their expert testimony does not comport with the requirements of the Federal Rules of Evidence. Absent admissible and competent expert testimony grounded on evidence comporting with the requirements of the Federal Rules of Evidence, the plaintiffs cannot raise a genuine issue of material fact concerning Bendectin ... [and] the causation of ... birth defect[s].
Lynch, supra, at 867. The First Circuit affirmed the lower court's decision after carefully analyzing the proffered testimony *742 of Drs. Swan and Done. Lynch, supra, at 1194-96.
In addition to Richardson, Brock and Lynch, other courts have ruled as a matter of law that the evidence supporting Bendectin's teratogenicity was insufficient. See Daubert v. Merrell Dow, 727 F. Supp. 570 (S.D.Cal.1989) (The court granted defendant's motion for summary judgment where evidence from Drs. Gross, Newman, Swan, Glasser, Thiersch and Palmer, was identical to their proffered testimony in this action. Following Brock, Richardson and Lynch, the court held epidemiological studies to be the most reliable evidence of causation and rejected the proffered chemical, in vitro and in vivo studies, and reanalysis of epidemiological studies.); Hull v. Merrell Dow, 700 F. Supp. 28 (S.D.Fla.1988) (Summary judgment was granted as no genuine issue of fact as to causation existed. The motion was unopposed as the plaintiffs were unrepresented by counsel at the motion's filing.); DeLucca v. Merrell Dow, Civ. No. 87-226 (D.N.J. June 12, 1989) (Court granted summary judgment after similar evidence was excluded under Fed.R. Evid. 703.); Monahan v. Merrell Dow, No. 83-3108-WD (D.Mass. December 18, 1987) (Relying on Lynch, the court granted defendant's motion for summary judgment.); DePyper v. Navaro, No. 83-303-467NM (Civ.Ct. Wayne Co., Mich. March 10, 1990) (State court excluded similar evidence, including testimony of Drs. Swan and Glasser in granting defendant's motion for summary judgment.). See also Wilson v. Merrell Dow, 893 F.2d 1149, 1155 (10th Cir.1990) (The lower court's judgment on a jury verdict affirmed for defendant, concluding that the defendant's evidence was "perhaps enough to sustain a directed verdict under Brock, Richardson and Lynch."); In re Paoli R.R. Yard PCB Litigation, 706 F. Supp. 358, 369 (E.D.Pa. 1988) (Although this involved PCB exposure and not Bendectin, the court relied heavily on epidemiological data showing no connection between PCB exposure and the plaintiffs' injuries. The court excluded animal study evidence under Fed.R.Evid. 703 and granted summary judgment for defendants. Ramirez v. Richardson Merrell, 85-1504 (E.D.Pa. September 4, 1986); and Lanzilotti v. Merrell Dow, 82-0183, 1986 WL 7832 (E.D.Pa. July 10, 1986), Bendectin cases in which summary judgment was denied, were cited by the court, although it relied on Richardson and In re "Agent Orange", 611 F. Supp. 1221 (E.D.N.Y.1985), aff'd on other grounds, 818 F.2d 187 (2d Cir.1987), cert. denied, 487 U.S. 1234, 108 S. Ct. 2898, 101 L. Ed. 2d 932 (1988), in evaluating the proffered evidence.).
IV.
The plaintiffs argue that Merrell Dow's proffered recitation of authority is not applicable to this case. However, the affidavits and testimony of the experts in this action were submitted from other cases. Identical testimony was rejected in Lynch (Dr. Swan), Brock (Drs. Newman, Glasser and Thiersch), Ealy (Drs. Gross, Newman, Swan, Thiersch), DePyper (Drs. Swan and Glasser), and Daubert (Drs. Thiersch, Swan, Newman, Gross, Glasser, Palmer). The in vivo, in vitro, chemical and epidemiological data relied on here has been ruled inadequate as a matter of law to support a finding that Bendectin is teratogenic. See Richardson, supra, Brock, supra, Lynch, supra.
While the court was not cited a case referring the testimony of Dr. Frederick Crescitelli, his proffered testimony based on chemical studies, in vivo and in vitro animal studies, adds nothing new and falls far short of "new and statistically significant studies ... which would give a jury a firmer basis on which to determine the issue of causation." Brock, supra, at 167.
All the plaintiffs' experts would testify, in some form or fashion, that the data they relied on to formulate their opinion that Bendectin is teratogenic is of the type that is generally and reasonably relied upon in their particular fields. The Court will not rehash the rationale for rejecting this assertion with regard to the animal studies and chemical studies, as numerous opinions have accurately concluded that they are inadequate and insufficient to support, by a preponderance of the evidence, the conclusion that a causal relationship exists between *743 birth defects and Bendectin. See Brock, supra; Richardson, supra; Lynch, supra.
However, to explain why the defendant's epidemiological data are admissible, where the epidemiological data of the plaintiffs' are not, there are distinct differences between the thirty (30) epidemiological studies, all finding no statistically significant relationship between Bendectin and birth defects, submitted by Merrell Dow and the proffered testimony of Drs. Swan and Glasser. Dr. Swan merely reanalyzes and recalculates existing epidemiological data to support a conclusion of a statistically significant increased risk between exposure to Bendectin and birth defects. Dr. Glasser is not an epidemiologist, medical doctor, or teratologist. He has published no articles on Bendectin, performed no epidemiological studies on Bendectin, and has admitted that no epidemiological study has revealed a statistically significant association between Bendectin and limb reduction defects, yet he concludes that it is more likely than not that a statistically significant association exists. The conclusions of Drs. Swan and Glasser have never been referred or published in peer-reviewed scientific journals. See Lynch, supra, at 1195; Brock, supra, at 312. See also Richardson, supra, at 831 (similar data furnished by Dr. Done rejected). Therefore, the Court, following Brock's mandate to scrutinize the basis, reasoning, and statistical significance of epidemiologic studies, finds the testimony of Drs. Swan and Glasser inadmissible under Fed.R.Evid. 703.
The plaintiffs rely on several cases which give more deference to expert testimony than Brock, Lynch, and Richardson. However, the Court is persuaded that the prevailing school of thought governing expert testimony in Bendectin cases is best exemplified by Brock. See Daubert, supra, at 572. Oxendine v. Merrell-Dow, 506 A.2d 1100 (D.C.1986) (Oxendine I); but cf., Oxendine v. Merrell-Dow, 563 A.2d 330 (D.C.1989) (Oxendine II) (These cases allowed the introduction of expert opinion including Dr. Done's testimony. However, the Richardson opinion specifically rejected Oxendine's reasoning and noted the differences between state and federal rules of evidence regarding admissibility. Richardson, supra, at 825 n. 9.); Ealy v. Richardson Merrell, C.A. 83-3504 (D.D.C.1987) (Jury returned a verdict for $20 million in compensatory damages and $75 million in punitive damages for plaintiff. However, this decision was reversed by Ealy v. Richardson-Merrell, 897 F.2d 1159 (D.C.Cir. 1990)); In re Bendectin Litigation, supra (The issue of admissibility of expert testimony was not squarely before the court.). Although the plaintiffs cite other authority, the Court finds them to be in the minority, and only the state case of Oxendine has been subjected to appellate review and survived.
The plaintiffs assert that these cases provide the basis for denying the defendant's summary judgment motion as they refute the contention that no reasonable jury could find in favor of the plaintiffs. However, the evidence considered by those juries varies sharply from the relevant admissible evidence that survives this Court's ruling that the plaintiffs' in vivo, in vitro animal studies, chemical studies, and human data are inadmissible under Fed.R. Evid. 703. While reasonable jurors can, and did, find for the plaintiffs in other opinions, see Oxendine, supra, no reasonable jury could find that a causal connection exists between Bendectin and birth defects in this action.
The plaintiffs cite In re Bendectin, 732 F. Supp. 744 (E.D.Mich.1990); Wilson v. Merrell Dow, Case No. 82-C-710-E (N.D. Okla. March 1, 1990); Comeau v. Richardson-Merrell, C.A. No. 84-0963N (D.Mass. March 1, 1990); and Barton v. Richardson-Merrell, Case No. C85-0028J (D.Utah March 2, 1990), as support that summary judgment is inappropriate. However, the tendered orders do not mention the evidence the courts considered in reaching their decision. The bare fact that summary judgment was denied without viewing the record, would force this Court to guess the bases for those courts' decision. Therefore, this authority is not persuasive.
*744 CONCLUSION
If Rule 703 is to be of any limit on the ability of expert witnesses to give their opinions, a court must be permitted to examine the bases of the proffered opinions. Otherwise any case in which an expert was willing to use two sets of magic words would always survive motions for summary judgment and directed verdict. As long as the expert was willing to say "to a reasonable degree of scientific certainty" and "the basis of my opinion is X, on which experts in my field reasonably rely," every case requiring expert testimony would get to the jury. If a court is not permitted to examine the basis of an expert's opinion in order to rule on the admissibility of that opinion, then Rule 703 should read: "An expert may cite as the basis of his opinion anything he likes."
In re Paoli R.R. Yard PCB Litigation, supra, at 368. See also Brock, supra, at 167.
In light of over thirty (30) epidemiological studies concluding that no statistically significant association exists between Bendectin and human birth defects, and after closely scrutinizing the bases of the proffered opinions of the plaintiffs' experts, this Court concludes that the testimony is inadmissible under Fed.R.Evid. 703. Furthermore, even if admissible, these opinions only support the conclusion that it is possible that Bendectin is teratogenic, and not more likely or probable than not that a causal relationship exists between Bendectin and human birth defects. Even viewing the record in the light most favorable to the nonmoving party, the plaintiffs have failed to meet their burden. Thus, summary judgment is appropriate.
The Court is not ruling that only epidemiological data is admissible when examining the question of a drug's teratogenicity. Experts may rely on other types of data when framing their opinions. However, something more than the animal studies, analogous chemical studies, and criticisms of the epidemiological data, presented in this action, must be submitted. Until that occurs, or until new and conclusive medical and epidemiological studies emerge which give a jury a firmer basis on which to determine the issue of causation, see Brock, supra, at 315, courts must rely on the current data that no statistically significant association between Bendectin and human birth defects exists.
Accordingly, Merrell Dow's motion for summary judgment will be granted.
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942 F. Supp. 398 (1996)
SWISS BANK CORPORATION, a Swiss Banking Corporation; and O'Connor Investments, an Illinois partnership, Plaintiffs,
v.
DRESSER INDUSTRIES, INC., a Delaware corporation, Defendant.
No. 96 C 2933.
United States District Court, N.D. Illinois, Eastern Division.
October 3, 1996.
*399 Paul E. Dengel, Michael N. Delgass, Schiff, Hardin & Waite, Chicago, IL, for Swiss Bank Corporation, O'Connor Investments.
Philip Scott Beck, Peter Benjamin Bensinger, Jr., Andrew L. Goldman, Bartlit Beck Herman Palenchar & Scott, Chicago, IL, for Dresser Industries, Inc.
MEMORANDUM OPINION AND ORDER
ZAGEL, District Judge.
I. Background
Anyone who has given a deadline to another has learned that it is unwise to use the phrase "prior to x day". Many will regard the deadline to mean "by x day", meaning sometime before the close of business on "x". The fact remains that "prior to x" does not mean the same thing as "by x" and the legal consequences are very different. The plaintiffs here seek to avoid the price paid for reading "prior to" as meaning the same thing as "by". It can do so in two ways. It can show that the use of "prior to x" is so commonly understood to mean "by x" that it is unfair, even deceptive to use "prior to x" as a deadline, a deliberate creation of a trap for the unwary. This showing seems impossible to make and plaintiffs do not try. Instead the plaintiffs argue that in the context of the contract in this case, the use of "prior to x" means "by x" or, alternatively, that "prior to x" is ambiguous here and one must consider parole evidence that the true meaning of the deadline was "by x".
On the basis of this argument, plaintiffs have brought this action for breach of contract regarding a stock warrant agreement that expired "prior to April 5, 1996". This case is now before the court upon Defendant Dresser's Motion to Dismiss the Complaint.
The plaintiffs have alleged that on April 5, 1991, Baroid Corporation ("Baroid") issued a stock warrant ("Baroid Warrant") to Diamant Boart S.A. ("Diamant") granting Diamant the right to purchase up to 1,000,000 shares of Baroid for $7.875 per share.
On January 21, 1994, Defendant Dresser Industries, Inc. ("Dresser") acquired Baroid. Dresser assumed Baroid's obligations under the Baroid Warrant and issued a replacement certificate ("Diamant Warrant") to Diamant. The replacement granted the same benefits under the same terms as contained in the Baroid Warrant. However, the Diamant Warrant granted the right to purchase up to 400,000 shares of Dresser stock for $19.6875 per share to adjust for Dresser's acquisition of Baroid.
On May 19, 1994, plaintiff O'Connor Investments ("O'Connor") purchased the Diamant Warrant from Diamant. On or about June 21, 1994, Dresser issued a replacement certificate ("O'Connor Warrant") to O'Connor. Then, on or about December 29, 1994, plaintiff O'Connor sold the O'Connor Warrant to plaintiff Swiss Bank Corporation ("SBC").
On April 8, 1996, SBC attempted to exercise its rights under the O'Connor Warrant by offering to purchase 400,000 shares of Dresser stock. However, Dresser refused to sell any shares on the grounds that the warrant had already expired. Subsequently, SBC and O'Connor brought this action based on diversity jurisdiction claiming that Dresser's refusal to sell stock to SBC breached the O'Connor Warrant contract. The Defendant moved to dismiss the complaint under Fed. R.Civ.P. 12(b)(6).
*400 II. Standard of Review
"The purpose of a motion to dismiss is to test the sufficiency of the complaint, not to decide the merits." Gibson v. Chicago, 910 F.2d 1510, 1520 (7th Cir.1990) (quoting Triad Assocs., Inc. v. Chicago Hous. Authority, 892 F.2d 583, 586 (7th Cir.1989)). A plaintiff fails to state a claim upon which relief may be granted only if "it appears beyond doubt that plaintiff can prove no set of facts in support of his claim which would entitle him to relief." Leahy v. Board of Trustees of Community College Dist. No. 508, 912 F.2d 917, 921 (7th Cir.1990) (quoting Conley v. Gibson, 355 U.S. 41, 44-45, 78 S. Ct. 99, 102, 2 L. Ed. 2d 80 (1957)).
"[F]or the purposes of determining whether the complaint states a claim, the facts alleged, plus reasonable inferences therefrom, are taken as true, and the question is then whether on those assumptions plaintiff would have a right to legal relief." Bane v. Ferguson, 890 F.2d 11, 13 (7th Cir.1989).
III. Analysis
Did the defendant breach the O'Connor Warrant contract? To answer this, the court must construe the contract to determine whether it was valid at the time that SBC attempted to exercise its rights thereunder. According to the terms of the O'Connor Warrant, Delaware substantive law governs its interpretation and validity.
Under Delaware law, a contract should be construed as a whole to satisfy the reasonable expectations of the parties at the time they entered into the contract. See Northwestern Nat'l Ins. Co. v. Esmark, Inc., 672 A.2d 41, 43 (Del.1996); Demetree v. Commonwealth Trust Co., 1996 WL 494910, at *3 (Del.Ch.).
Delaware follows the plain meaning rule of contract construction which instructs courts to rely solely on the clear, literal meaning of the words if a contract is clear on its face.[1]Demetree, 1996 WL 494910, at *4 (citing Myers v. Myers, 408 A.2d 279, 281 (Del.1979)). An unambiguous integrated written contract should be construed in the way that an objective, reasonable third party would understand it. Demetree, 1996 WL 494910, at *4. There is no room for contract interpretation or construction, Pellaton v. Bank of New York, 592 A.2d 473, 478 (Del. 1991), and courts may not consider parole evidence to interpret the parties' intent. Citadel Holding Corp. v. Roven, 603 A.2d 818, 822 (Del.1992).
However, if a contract is found to be ambiguous or susceptible to various interpretations, courts should consider the context and circumstances to decide the contracting parties' intended meaning. Demetree, 1996 WL 494910, at *4 (citing Klair v. Reese, 531 A.2d 219, 223 (Del.1987)).
Under these commonplace rules, the first inquiry must be whether the O'Connor Warrant is ambiguous. This requires an examination of the contractual language referring to the contested expiration date. Two provisions in the text of the O'Connor Warrant pertain directly to the expiration date. First, a provision on the first page of the contract reads in relevant part, "DRESSER INDUSTRIES, INC. ... hereby grants to O'CONNOR INVESTMENTS ... or its registered assigns ... the right to purchase from the Company up to 400,000 shares (the "Shares") of its Common Stock ... exercisable at any time prior to April 5, 1996." (emphasis added). Complt.Exh. D at 1.
Second, under the heading of "Exercise Period," the contract states in relevant part, "[t]he Registered Holder may exercise ... the rights represented by this Warrant at any time ... during the Exercise Period prior to five years from the Closing Date." (emphasis added). Cmplt.Exh. D at 2.
Both of these provisions in the text of the O'Connor Warrant use the words "prior to" to define the term of the contract. The first provision describes the term as expiring "prior *401 to April 5, 1996". The second provision defines the term as expiring "prior to five years from the Closing Date". The parties agree that the term Closing Date refers to April 5, 1991, and that the words "five years from the Closing Date" refer to April 5, 1996. Cmplt. para. 24; Pl.Resp. at 7; Def.Memo. at 4-5. Thus, I find that "prior to April 5, 1996" has the same meaning as "prior to five years from the Closing Date". The parties in this case do not dispute the significant facts, however they disagree over their legal relevance. Plaintiffs argue that "prior to April 5" means that the Stock Warrant expired prior to the end of the day on April 5, 1996. Pls.Resp. at 6. Defendant, on the other hand, argues that this provision means the warrant expired before April 5, 1996. Def.Memo. at 4-5.
"Although the parties disagree as to the proper interpretation of the contract, their disagreement does not create an ambiguity." Northwestern Nat'l Ins. Co., 672 A.2d at 43. Thus, the mere fact that the parties now dispute the proper interpretation of the O'Connor Warrant does not require finding that the agreement is ambiguous.
There do not appear to be any Delaware cases dealing with the construction of the phrase "prior to" within a contract. However, the United States Supreme Court decided a case wherein a similar issue arose regarding a deadline defined by the words "prior to". In United States v. Locke, 471 U.S. 84, 105 S. Ct. 1785, 85 L. Ed. 2d 64 (1985), the Court found that a provision in the Federal Land Policy and Management Act requiring mining claimants to file with government officials "prior to December 31", meant that filings had to be made "on or before December 30". Locke, 471 U.S. at 96, 105 S.Ct. at 1793-94. Accordingly, the Court found that mining claimants who had filed on December 31 had missed the deadline by filing one day too late. Id. at 87-89, 105 S.Ct. at 1789. The Court's interpretation of "prior to" also accords with the ordinary usage of this phrase. "Prior to" is normally understood to mean "before". See Webster's II, (New Riverside University Dictionary ed., 1984).
The Supreme Court's interpretation of the words "prior to" applies in this case. Just as the Court in Locke found that "prior to December 31" meant "on or before December 30", this court finds that "prior to April 5" in the O'Connor Warrant means "on or before April 4". The literal meaning of the language in the O'Connor Warrant provides a reasonable answer as to the contract's expiration date. The contract was valid on April 4, 1996 and void on April 5, 1996. Thus, I conclude that this contract is not ambiguous.
Still, plaintiffs point to other language in the contract to support their argument that "prior to April 5" means "by the end of April 5". Specifically, plaintiffs refer to a descriptive heading on the first page of the warrant that states, "Void After Five Years From Date of Original Issuance." Pls.Resp. at 5.
I recognize that this descriptive heading read in conjunction with the text discussed above could tend to render the O'Connor Warrant susceptible to multiple interpretations. However, the heading is not legally determinative for several reasons. First, the contract itself provides a mechanism for properly interpreting this inconsistent language. Part 10 of the O'Connor Warrant labeled "Descriptive Headings: Governing Law" states that "[t]he descriptive headings of the several parts and paragraphs of this Warrant are inserted for convenience only and do not constitute a part of this Warrant." Cmplt.Exh. D at 6. Therefore, the descriptive heading, though clumsily drafted, is not part of the contract and its meaning is not controlling.
Second, the decision to disregard the descriptive heading in the O'Connor Warrant is also consistent with accepted methods of contract and statute construction. In United States v. Leslie Salt Co., 350 U.S. 383, 389, 76 S. Ct. 416, 420, 100 L. Ed. 441 (1956), the United States Supreme Court construed a commercial instrument for tax purposes. There, the Court found that the "essential characteristics" of the instruments controlled "regardless of their descriptive caption." Id. In addition, although Delaware appears to lack case law on point, the Delaware Code has addressed the legal weight of descriptive headings in the context of statute interpretation. The Code states that "the descriptive *402 headings ... immediately preceding or within the texts of the individual sections of this Code ... do not constitute part of the law." 1 Del. Code Ann. § 306 (1995).
Third, this construction of the O'Connor Warrant also accords with general rules of contract construction. It is well established that a specific clause should prevail over a more general one in a contract. Mutual Life Ins. Co. of N.Y. v. Hill, 193 U.S. 551, 558, 24 S. Ct. 538, 540-41, 48 L. Ed. 788 (1904); 3 A.L. Corbin, Corbin on Contracts § 547 at 176 (1960 ed.) ("If the apparent inconsistency is between a clause that is general ... and one that is more ... specific in its coverage, the latter should generally be held to operate as a modification and pro tanto nullification of the former."). Applying this rule of construction to the language at issue leads to a finding that the more specific text i.e. "prior to April 5" modifies and nullifies the general language of the descriptive heading i.e. "Void After Five Years From Date of Issuance".
Finally, plaintiffs argue that a prospectus released by Dresser in April 1994 in compliance with federal securities regulations provides additional proof that the contract's expiration date was April 5, 1996. However, in light of my decision that the O'Connor Warrant is not ambiguous, I will not consider parole or extrinsic evidence. Moreover, because the prospectus was published in April 1994, three years after the contract at issue was formed, I find it is irrelevant on the matter of the parties' intent at the time of contract formation.
For the foregoing reasons, the court concludes that this contract is not ambiguous. The O'Connor Warrant had to be exercised on or before April 4, 1996. Even if SBC had been ready, willing, and able to exercise its contractual rights on April 5, 1996, SBC would have acted one day too late. Consequently, Dresser's refusal to sell its stock to SBC on April 8, 1996 did not amount to a breach of contract because the O'Connor Warrant was no longer in effect. Accordingly, Count I of the complaint is dismissed.
IV. Conclusion
For the reasons stated above, defendant's motion to dismiss is GRANTED with respect to Count I of the complaint.
Defendant's request to dismiss the complaint in its entirety is denied because the motion to dismiss failed to address Count II of the complaint regarding reformation of the contract.
NOTES
[1] The plain meaning rule disregards the actual subjective intent of the parties. This approach seems especially appropriate in this case because the parties to this lawsuit acquired their rights through assignments from the original contracting parties. Because the original contracting parties are not involved in this lawsuit, it would be difficult, if not impossible, to understand how the parties' intent at the time of drafting shaped the language of the contract at issue here.
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UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLUMBIA
__________________________________________
)
TRUE THE VOTE, INC., )
)
Plaintiff, )
)
v. ) Civil Action No. 13-734 (RBW)
)
INTERNAL REVENUE SERVICE, et al., )
)
Defendants. )
__________________________________________)
MEMORANDUM OPINION
The plaintiff, True the Vote, Inc., filed this civil action against the Internal Revenue
Service (“IRS”), the United States of America, and several IRS officials in both their official and
individual capacities,1 alleging violations of the First Amendment, the Internal Revenue Code,
26 U.S.C. § 6103 (2012), the Administrative Procedure Act, 5 U.S.C. § 706 (2012), and seeking
declaratory and injunctive relief, as well as monetary damages. See First Amended Complaint
(“Am. Compl.”) ¶¶ 13, 139-214. Currently before the Court are the Defendants’ Motion to
Dismiss Counts I, II, IV[,] and V (“Defs.’ Mot.”) of the Complaint; the Individual Management
Defendants’ Motion to Dismiss [Count III of the Complaint] (“Mgmt. Mot.”); the Motion to
Dismiss [Count III of the Complaint] of Cincinnati Defendants Susan Maloney, Ronald Bell,
Janine L. Estes, and Faye Ng (“Cincinnati Mot.”); and the Plaintiff’s Motion to Stay Agency
1
The individual defendants are: David Fish, Steven Grodnitzky, Lois Lerner, Steven Miller, Holly Paz, Michael
Seto, Douglas Shulman, Cindy Thomas, William Wilkins, Susan Maloney, Ronald Bell, Janine L. Estes, and Faye
Ng. For purposes of resolving the several motions to dismiss, these individual defendants fall into two categories:
the Individual Management defendants (Steven Grodnitzky, Lois Lerner, Steven Miller, Holly Paz, Michael Seto,
Douglas Shulman, Cindy Thomas, and William Wilkins) and the Cincinnati defendants (Susan Maloney, Ronald
Bell, Janine L. Estes, and Faye Ng).
1
Action (“Pl.’s Mot.”).2 For the following reasons, the Court concludes that it must grant all of
the defendants’ motions to dismiss and deny the plaintiff’s motion to stay agency action.3
I. BACKGROUND
The plaintiff asserts that it “is a not-for-profit Texas corporation organized and operated
exclusively or primarily for a charitable purpose.” Am. Compl. ¶ 2. On July 15, 2010, the
plaintiff filed an application with the Internal Revenue Service (“IRS”) for tax-exempt status
pursuant to the Internal Revenue Code, 26 U.S.C. §§ 501(c)(3), 509(a)(1), 170(b)(1)(a)(vi). Id.
¶¶ 3-4; see also id. ¶ 53. After “receiv[ing] no further contact from the IRS [d]efendants during
[the] calendar year 2010,” id. ¶ 54, the plaintiff asked Texas Senator John Cornyn to “inquire[]
of the IRS as to the status of [the plaintiff]’s application for tax-exempt status,” id. ¶ 55. On
February 5, 2011, the plaintiff received a “letter sent from the Cincinnati, Ohio IRS office”
requesting “additional information from [the plaintiff] to complete the IRS’[s] consideration of
[the plaintiff]’s [a]pplication.” Id. ¶ 56.
2
In addition to the submissions already identified, the Court considered the following filings submitted by the
parties in rendering its decision: (1) True the Vote’s Opposition to the Government’s Motion to Dismiss Counts I, II,
IV, and V (“Opp’n to Defs.’ Mot.”); (2) the Reply in Support of Motion to Dismiss Counts I, II, IV[,] and V (“Defs.’
Reply”); (3) the Supplement to [the] Motion to Dismiss Counts I, II, IV[,] and V (“Defs.’ Supplement”); (4) the
Plaintiff’s Notice of Supplemental Authority [Regarding Counts I, II, IV, and V] (“Pl.’s Supp’l Authority I”); (5)
the Federal Defendants’ Response to [the] Plaintiff’s Notice of Supplemental Authority [Regarding Counts I, II, IV,
and V] (“Defs.’ Resp. to Pl.’s Supp’l Authority I”); (6) the Memorandum in Support of [the] Individual
Management Defendants’ Motion to Dismiss (“Mgmt. Mem.”); (7) the Memorandum of Points and Authorities in
Support of the Cincinnati Defendants’ Motion to Dismiss (“Cincinnati Mem.”); (8) True the Vote’s Opposition to
[the] Individual Defendants’ Motion to Dismiss (“Opp’n to Mgmt. and Cincinnati Mots.”); (9) the Reply Brief in
Support of Individual Management Defendants’ Motion to Dismiss (“Mgmt. Reply”); (10) the Reply in Support of
the Cincinnati Defendants’ Motion to Dismiss (“Cincinnati Reply”); (11) the Individual Defendants’ Joint Notice of
Supplemental Authority (“Joint Supp’l Authority”); (12) the Plaintiff’s Notice of Supplemental Authority
[Regarding Count III] (“Pl.’s Supp’l Authority II”); (13) the Federal Defendants’ Response to [the] Plaintiff[’s]
Notice of Supplemental Authority [Regarding Count III] (“Defs.’ Resp. to Pl.’s Supp’l Authority II”); (14) the
Opposition to [the] Plaintiff’s Motion to Stay Agency Action (“Opp’n to Pl.’s Mot.”); (15) the Plaintiff’s Reply to
[the] Federal Defendants’ Opposition to Motion to Stay Agency Action (“Pl.’s Reply”); (16) the Plaintiff’s Notice of
Supplemental Authority (“Pl.’s Supp’l Authority III”); and (17) the Individual Defendants’ Joint Response to [the]
Plaintiff’s Notice of Supplemental Authority (“Mgmt. and Cincinnati Resps. to Pl.’s Supp’l Authority III”).
3
The Court’s opinion should not be interpreted as an assessment of the propriety of the alleged conduct by the
defendants, as resolution of the motions does not require an assessment of the merits of the plaintiff’s claims.
2
On March 7 and March 8, 2011, that information was “furnished to the IRS.” Id. ¶ 57. Then, on
October 12, 2011, the plaintiff “contacted the IRS” to follow up on its application for tax-exempt
status. Id. ¶ 60. The plaintiff was allegedly told that “the Washington, [DC] office had assumed
primary approval responsibility” for the plaintiff’s application. Id. ¶ 60. On November 8, 2011,
the plaintiff “submitted to the IRS additional information” about itself, as well as “legal
precedent . . . that provided the IRS [d]efendants the legal basis” for approving the plaintiff’s
application. Id. ¶ 61.
The following year, on February 8, 2012, the plaintiff received another letter “from the
Cincinnati, Ohio IRS office” stating that “the IRS needed even more information” from the
plaintiff to complete its consideration of the plaintiff’s tax-exempt application. Id. ¶ 63. That
additional information was provided to the IRS on March 20, 2012. Id. ¶ 64. After providing
that information, the plaintiff received a third letter on October 9, 2012, from “the Cincinnati,
Ohio IRS office,” “request[ing] still more information.” Id. ¶ 66. The plaintiff complied with
that information request on November 30, 2012. Id. ¶ 67.
Based on its correspondence with the IRS, the plaintiff alleges that due to its “mission of
promoting election integrity and its perceived association with ‘Tea Party’ organizations, the IRS
[d]efendants systematically targeted [the plaintiff’s] application for unwarranted delay and
heightened review and scrutiny,” thereby subjecting the plaintiff “to numerous unnecessary,
burdensome, and unlawful requests for information about its operations, activities, leadership,
volunteers, associations, and affiliations.” Id. ¶ 5. As support for its position, the plaintiff cites a
May 10, 2013 “meeting of the Exempt Organizations Committee of the Tax Section of the
American Bar Association,” where one of the individual defendants “admitted . . . that the IRS
had selected applications for tax-exempt status for further review and scrutiny ‘simply because
3
the applications’ ‘used names like Tea Party . . .’” Id. ¶ 77 (citing reference). During that
meeting, the plaintiff contends that the IRS admitted it “sent some letters out that were far too
broad, asking questions of these organizations that were[ not] really necessary . . . .” Id. ¶ 78
(internal quotations and citations omitted). As further support of the plaintiff’s allegation
concerning the IRS’s selective targeting, the plaintiff cites “a report entitled ‘Inappropriate
Criteria Were Used to Identify Tax-Exempt Applications for Review’ (the ‘[Report]’)” that was
issued “[o]n or around May 14, 2013,” by “the Treasury Inspector General for Tax
Administration.” Id.¶ 80. The plaintiff summarizes the Treasury Inspector General for Tax
Administration’s conclusion as follows:
The IRS used inappropriate criteria that identified for review Tea Party and other
organizations applying for tax-exempt status based upon their names or policy
positions instead of indications of potential political campaign intervention.
Ineffective management: 1) allowed inappropriate criteria to be developed and
stay in place for more than [eighteen] months, 2) resulted in substantial delays in
processing certain applications, and 3) allowed unnecessary information requests
to be issued.
Id. ¶ 81 (quoting the Report); see generally id. ¶¶ 82-118 (describing certain IRS actions).
Thus, according to the plaintiff, the IRS defendants engaged in an “unlawful scheme”
whereby the plaintiff was “forced to repeatedly furnish the IRS with information, materials, and
documents that were not necessary to determine whether [the plaintiff] was entitled to tax-
exempt status.” Id. ¶ 6. The plaintiff alleges that the “IRS [d]efendants knowingly developed,
implemented, and applied the IRS [t]argeting [s]cheme in violation of the United States
Constitution, the Internal Revenue Code governing tax-exempt organizations, procedures
historically followed by the IRS, and Treasury Regulations.” Id. ¶ 124; see also id. ¶ 135. In
the eyes of the plaintiff, the “mistreatment and mishandling of [the plaintiff]’s application for
tax-exempt status and the refusal of the IRS [d]efendants to issue a determination letter
4
recognizing [the plaintiff]’s tax-exempt status . . . has caused the organization substantial
damages and financial hardship,” id. ¶ 134, and “has substantially and materially interfered with
its ability to engage in free speech, free association, and activities in furtherance of its charitable
purpose,” id. ¶ 137.
The plaintiff filed this action on May 21, 2013, ECF No. 1, and amended its complaint on
July 22, 2013, Am. Compl. at 48. Count one seeks declaratory relief that the plaintiff is entitled
to enjoy tax-exempt status as a charitable organization described in 26 U.S.C. § 501(c)(3) (2012).
See Am. Compl. ¶¶ 140-41. Count two also seeks a declaratory judgment that the “IRS
[t]argeting [s]cheme” violated the plaintiff’s First Amendment rights, and injunctive relief to
prevent additional violations. See id. ¶¶ 150-52, 158. Count three seeks monetary damages
against certain defendants in their individual capacities for their alleged participation in the “IRS
[t]argeting [s]cheme.” See id. ¶¶ 164-65. Count four claims violations of 26 U.S.C. § 6103,
which relates to unauthorized disclosures and inspections of any tax return or tax return
information. See id. And count five asserts violations of the Administrative Procedure Act for
the alleged “IRS [t]argeting [s]cheme.” Id. ¶¶ 189-206.
After the plaintiff instituted this action, “an internal IRS memorandum released by the
IRS” found that “applications for tax-exempt status continued to be subjected to the . . . IRS
[t]argeting [s]cheme until June 20, 2013, when it was allegedly suspended.” Id. ¶ 136 (citing
Daniel Werfel, Charting a Path Forward at the IRS: Initial Assessment and Plan of Action,
Appendix (“App.”) C (June 24, 2013), www.irs.gov/PUP/newsroom/Initial%20Assessment%
20and%20Plan%20of%20Action.pdf (“IRS Action Plan”)). Since the defendants filed their
pending motions to dismiss, the IRS has “grant[ed] the [p]laintiff’s application for tax-exempt
5
status . . . and was in the process of issuing a favorable determination letter.”4 Defs.’
Supplement at 1. The plaintiff opposes all pending motions to dismiss.
II. STANDARDS OF REVIEW
A. Rule 12(b)(1) Motion to Dismiss
Rule 12(b)(1) allows a party to move to dismiss “for lack of subject-matter jurisdiction.”
Fed. R. Civ. P. 12(b)(1). When a defendant moves to dismiss under Rule 12(b)(1), “the
plaintiff[] bear[s] the burden of proving by a preponderance of the evidence that the Court has
subject[-]matter jurisdiction.” Biton v. Palestinian Interim Self-Gov’t Auth., 310 F. Supp. 2d
172, 176 (D.D.C. 2004); see also Lujan v. Defenders of Wildlife, 504 U.S. 555, 561 (1992). A
court considering a Rule 12(b)(1) motion must “assume the truth of all material factual
allegations in the complaint and ‘construe the complaint liberally, granting [a] plaintiff the
benefit of all inferences that can be derived from the facts alleged.’” Am. Nat’l Ins. Co. v. FDIC,
642 F.3d 1137, 1139 (D.C. Cir. 2011) (quoting Thomas v. Principi, 394 F.3d 970, 972 (D.C. Cir.
2005)). But a “court must give [a] plaintiff’s factual allegations closer scrutiny when resolving a
Rule 12(b)(1) motion than would be required for a Rule 12(b)(6) motion for failure to state a
claim.” Byrum v. Winter, 783 F. Supp. 2d 117, 122 (D.D.C. 2011) (citing Macharia v. United
States, 334 F.3d 61, 64, 69 (D.C. Cir. 2003)). And “[a]lthough ‘the District Court may in
appropriate cases dispose of a motion to dismiss for lack of subject[-]matter jurisdiction under
Fed. R. Civ. P. 12(b)(1) on the complaint standing alone,’ ‘where necessary, the court may
consider the complaint supplemented by undisputed facts evidenced in the record, or the
4
The plaintiff has provided the Court with a “true and correct copy of the [d]etermination [l]etter[, which] is a self-
authenticating document . . . .” Opp’n to Defs.’ Mot. at 1 n.1; see also id., Exhibit (“Ex.”) A (September 26, 2013
Determination Letter Granting the Plaintiff’s Application for Tax-Exempt Status (“Determination Letter”)). And in
light of the parties’ representations, the Court takes judicial notice that the plaintiff’s application for tax-exempt
status has been approved by the IRS. Fed. R. Evid. 201(b)(2) (“The court may judicially notice a fact that is not
subject to reasonable dispute because it . . . can be accurately and readily determined from sources whose accuracy
cannot reasonably be questioned.”).
6
complaint supplemented by undisputed facts plus the court’s resolution of disputed facts.’”
Coal. for Underground Expansion v. Mineta, 333 F.3d 193, 198 (D.C. Cir. 2003) (quoting
Herbert v. Nat’l Acad. of Scis., 974 F.2d 192, 197 (D.C. Cir. 1992)). Finally, in determining
whether it has jurisdiction, the Court “may consider materials outside of the pleadings.” Jerome
Stevens Pharm., Inc. v. FDA, 402 F.3d 1249, 1253 (D.C. Cir. 2005).
B. Rule 12(b)(6) Motion to Dismiss
A Rule 12(b)(6) motion tests whether the complaint “state[s] a claim upon which relief
can be granted.” Fed. R. Civ. P. 12(b)(6). “To survive a motion to dismiss [under Rule
12(b)(6)], a complaint must contain sufficient factual matter, accepted as true, to ‘state a claim to
relief that is plausible on its face.’” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Bell
Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007)). In considering a Rule 12(b)(6) motion, the
Court affords the plaintiff the “benefit of all inferences that can be derived from the facts
alleged.” Am. Nat’l Ins. Co. v. FDIC, 642 F.3d 1137, 1139 (D.C. Cir. 2011) (internal quotations
and citation omitted). But raising a “sheer possibility that a defendant has acted unlawfully” fails
to satisfy the facial plausibility requirement. Iqbal, 556 U.S. at 678. Rather, a claim is facially
plausible “when the plaintiff pleads factual content that allows the [C]ourt to draw [a] reasonable
inference that the defendant is liable for the misconduct alleged.” Id. (citing Twombly, 550 U.S.
at 556). While the Court must “assume [the] veracity” of any “well-pleaded factual allegations”
in the complaint, conclusory allegations “are not entitled to the assumption of truth.” Id. at 679.
“In determining whether a complaint states a claim, the [C]ourt may consider the facts alleged in
the complaint, documents attached thereto or incorporated therein, and matters of which it may
take judicial notice.” Abhe & Svoboda, Inc. v. Chao, 508 F.3d 1052, 1059 (D.C. Cir. 2007)
(internal quotations omitted). And among the documents “subject to judicial notice on a motion
7
to dismiss” are “public records,” Kaempe v. Myers, 367 F.3d 958, 965 (D.C. Cir. 2004), which
includes records from other court proceedings, Covad Commc’ns Co. v. Bell Atl. Corp., 407
F.3d 1220, 1222 (D.C. Cir. 2005).
III. ANALYSIS
A. Counts One, Two, and Five of the Plaintiff’s Complaint
The defendants contend that the Court does not have subject-matter jurisdiction over
counts one, two, and five of the plaintiff’s complaint because the IRS ultimately approved the
plaintiff’s application for tax-exempt status, and thus counts one, two, and five—all of which
seek “to correct [the] alleged targeting [of the IRS] and delay during its application process” for
tax-exempt status—are now moot as there is no longer any case or controversy for the Court to
resolve. Defs.’ Reply at 1; see also Defs.’ Mot. at 2-4. The plaintiff, on the other hand, insists
that there are “ongoing, live controversies” because “[t]his case is about declaring the
illegitimacy of the IRS [t]argeting [s]cheme in all its forms [and] enjoining its ongoing
implementation.” Opp’n to Defs.’ Mot. at 9 (emphasis in original). And the plaintiff argues that
without this “additional relief, the IRS can continue to employ its [t]argeting [s]cheme.” Id.
As the outset, the Court notes that the plaintiff does not contest that count one of its
complaint is moot. See id. (“Counts [two] and [five] present, actual ongoing, live controversies”
(emphasis added)). Thus, the Court finds that the plaintiff has conceded the motion to dismiss
count one for lack of subject-matter jurisdiction. See Lewis v. District of Columbia, No. 10-
5275, 2011 WL 321711, at *1 (D.C. Cir. Feb. 2, 2011) (per curiam) (“‘It is well understood in
this Circuit that when a plaintiff files an opposition to a dispositive motion and addresses only
certain arguments raised by the defendant, a court may treat those arguments that the plaintiff
failed to address as conceded.’” (quoting Hopkins v. Women’s Div., Gen. Bd. of Global
8
Ministries, 284 F. Supp. 2d 15, 25 (D.D.C. 2003), aff’d, 98 F. App’x 8 (D.C. Cir. 2004))); Local
Civ. R. 7(b).
Unless an actual, ongoing controversy exists in this case, this Court is without power to
decide it. See Clarke v. United States, 915 F.2d 699, 700-01 (D.C. Cir. 1990). Even where a
case once posed “a live controversy when filed, the [mootness] doctrine requires” the Court “to
refrain from deciding it if ‘events have so transpired that the decision will neither presently affect
the parties’ rights nor have a more-than-speculative chance of affecting them in the future.’” Id.
(quoting Transwestern Pipeline Co. v. FERC, 897 F.2d 570, 575 (D.C. Cir. 1990)). Here, after
the plaintiff initiated this case, its application to the IRS for tax-exempt status was approved by
the IRS. See Opp’n to Defs.’ Mot., Ex. A (Determination Letter) at 1.5 The allegedly
unconstitutional governmental conduct, which delayed the processing of the plaintiff’s tax-
exempt application and brought about this litigation, is no longer impacting the plaintiff. See
NorCal Tea Party Patriots v. IRS, No.1:13-cv-341, 2014 WL 3547369, at *9 n.11 (S.D. Ohio
July 17, 2014) (“The claim for declaratory and injunctive relief cannot be brought by other
Plaintiff Groups who have either had their applications for tax-exempt status ruled upon or have
withdrawn their applications.”). Counts two and five, therefore, are moot.
Notwithstanding the IRS’s favorable resolution of the plaintiff’s tax-exempt application,
the plaintiff wants to forge ahead with these counts of its complaint. The plaintiff attempts to
salvage these counts by invoking the “voluntary cessation” exception to the mootness doctrine.6
See Opp’n to Defs.’ Mot. at 11-15. As the District of Columbia Circuit has explained:
5
This critical fact renders Z St., Inc. v. Koskinen, _ F. Supp. 2d _, 12-cv-0401(KBJ), 2014 WL 2195492 (D.D.C.
May 27, 2014), inapplicable to the Court’s analysis.
6
By invoking an exception to the mootness doctrine, the plaintiff implicitly seems to concede that these claims are
moot.
9
The rationale supporting the defendant’s voluntary cessation as an exception to
mootness is that, while the defendant’s unilateral cessation of the challenged
conduct may grant the plaintiff relief, the defendant is free to return to its old
ways—thereby subjecting the plaintiff to the same harm but, at the same time,
avoiding judicial review. Accordingly, a case can be mooted by virtue of the
defendant’s cessation of its allegedly illegal conduct only if (1) there is no
reasonable expectation that the conduct will recur and (2) interim relief or events
have completely and irrevocably eradicated the effects of the alleged violation.
Qassim v. Bush, 466 F.3d 1073, 1075 (D.C. Cir. 2006) (internal alterations, quotations, and
citations omitted). “The defendant carries the burden of demonstrating ‘that there is no
reasonable expectation that the wrong will be repeated,’ and ‘the burden is a heavy one.’” Am.
Bar Ass’n v. FTC, 636 F.3d 641, 648 (D.C. Cir. 2011) (internal alteration omitted) (quoting
United States v. W.T. Grant Co., 345 U.S. 629, 633 (1953)). But “‘where the defendant is a
government actor—and not a private litigant—there is less concern about the recurrence of
objectionable behavior.’” D.C. Prof’l Taxicab Drivers Ass’n v. District of Columbia, 880 F.
Supp. 2d 67, 75 (D.D.C. 2012) (quoting Citizens for Responsibility & Ethics in Wash. v. SEC,
858 F. Supp. 2d 51, 61 (D.D.C. 2012) (citing Circuit cases)).
The “voluntary cessation” exception does not rescue counts two and five of the plaintiff’s
complaint from dismissal on the ground of mootness. According to the plaintiff, the IRS
publicly “suspended” its “targeting scheme” on June 20, 2013.7 Am. Compl. ¶ 136 (emphasis
added); see also Initiative & Referendum Inst. v. U.S. Postal Serv., 685 F.3d 1066, 1074 (D.C.
Cir. 2012), cert. denied, _ U.S. _, 133 S. Ct. 1802 (2013) (“It is implausible that the [defendant]
would have gone through the cumbersome process of amending its regulation . . . only to
7
Although the complaint states that the IRS “allegedly suspended” the “targeting scheme,” Am. Compl. ¶ 136, the
Court takes judicial notice that the IRS has in fact suspended the alleged scheme and taken remedial steps to address
the alleged conduct, see IRS Action Plan at 7, 14, App. C; IRS Charts a Path Forward [W]ith Immediate Actions,
http://www.irs.gov/uac/Newsroom/IRS-Charts-a-Path-Forward-with-Immediate-Actions (last visited Oct. 23, 2014)
(“IRS Path Forward”), as it has publicly stated so on its website, see, e.g., Seifert v. Winter, 555 F. Supp. 2d 3, 11
n.5 (D.D.C. 2008) (Walton, J.) (citing cases that allow the taking of judicial notice of information published on
government websites).
10
[unconstitutionally] re-amend the regulation after this case is resolved”); Coal. of Airline Pilots
Ass’ns v. FAA, 370 F.3d 1184, 1191 (D.C. Cir. 2004) (mooting case where government
provided “unequivocal assurances” that application of challenged regulation was “effectively
dead”); Citizens for Responsibility, 858 F. Supp. 2d at 62-63 (finding that a submission by the
plaintiff reflecting defendant’s abandonment of challenged policy was enough to provide the
Court with “comfort that the [defendant] [wa]s taking seriously [the] [p]laintiff’s concerns with
the prior policy and [wa]s undertaking efforts to ensure” its “discontinu[ation]”); Mont. Shooting
Sports Ass’ns v. Norton, 355 F. Supp. 2d 19, 21 n.1, 23 (D.D.C. 2004) (mooting case where
government “rescinded” its challenged action), aff’d, No. 04-5434, 2005 WL 2810686 (D.C. Cir.
June 14, 2005); Jean v. Dep’t of Labor, No. 89-cv-0611-OG, 1990 WL 515163, at *4 (D.D.C.
Jan. 9, 1990) (rendering case moot by defendants’ actions and assurances of good faith as to
future behavior). And subsequent to that suspension, the plaintiff’s application for tax-exempt
status was granted. Opp’n to Defs.’ Mot., Ex. A (Determination Letter) (approving plaintiff’s
application on September 26, 2013). Now that the plaintiff has received tax-exempt status,
which has “completely and irrevocably eradicated the effects of the alleged violation[s]” by the
defendants, Qassim, 466 F.3d at 1075, there is no reasonable expectation that the defendants will
“return to [their allegedly] old ways,” i.e., utilizing an allegedly unlawful “targeting scheme” on
certain organizations seeking tax-exempt status during the tax-exempt application process, and
“subjecting the plaintiff to the same harm” again, id. Therefore, the defendants’ grant of tax-
exempt status to the plaintiff, and the defendants’ suspension of the alleged IRS targeting scheme
during the tax-exempt application process, including remedial steps to address the alleged
conduct, coupled with the reduced “concern about the recurrence of objectionable behavior” by
11
government actors, D.C. Prof’l Taxicab Drivers, 880 F. Supp. 2d at 75, convinces the Court that
the “voluntary cessation” exception is not applicable here.8
Endeavoring to prolong the life of counts two and five of the complaint, the plaintiff
hypothetically suggests that the IRS could audit the plaintiff at a later point in time and “be
singled out [again] for reasons unrelated to the provisions of the Internal Revenue Code.” Opp’n
to Defs.’ Mot. at 13. But not only is this prospect of future harm speculative, see Munsell v.
Dep’t of Agric., 509 F.3d 572, 581 (D.C. Cir. 2007) (“[E]ven if [the plaintiff] could establish that
agency officials violated his First Amendment rights . . . [the plaintiff could not] demonstrate[] a
real and immediate threat that [the plaintiff] would be subject to the same conduct in the
future.”); Don’t Tear it Down, Inc., v. Gen. Servs. Admin., 401 F. Supp. 1194 1199 (D.D.C.
1975) (mooting case where challenged governmental conduct “[s]o far as the Court [wa]s aware .
. . ha[d] not been duplicated in any other instance,” and “that it will be duplicated must be
deemed speculative”), it is also a harm that is different than the one identified in the complaint,
which is entirely focused on an alleged IRS “targeting scheme” during the plaintiff’s tax-exempt
application process,9 Qassim, 466 F.3d at 1075 (“voluntary cessation . . . exception” applicable
where plaintiff would be “subject[ed] . . . to the same harm” (emphasis added)). As such, counts
two and five no longer warrant the Court’s attention and further use of its resources.10 Newdow
8
The cases cited by the plaintiff invoking the “voluntary cessation” exception are thus inapposite.
9
This rationale applies equally to the plaintiff’s argument in its motion to stay agency action that the IRS may
potentially disclose the plaintiff’s confidential information at some point in the future pursuant to 26 U.S.C. § 6104.
See Opp’n to Defs.’ Mot. at 10-11.
10
The plaintiff urges the Court to allow it to maintain these counts because “there are indications that the IRS
[t]argeting [s]cheme has not ceased, that it has spread beyond the application process, and that it is likely to
continue.” Opp’n to Defs.’ Mot. at 13. This plea is rejected for several reasons. First, this projected harm is
contrary to what the plaintiff has alleged in its complaint, which is that the IRS targeting scheme is no longer
ongoing. Am. Compl. ¶ 136 (alleging that IRS targeting scheme was “suspended” on June 20, 2013 (emphasis
added)). Second, the Court will not allow the plaintiff to amend the already-amended complaint through an
opposition brief and recast its claims concerning the IRS’s alleged targeting scheme that stalled the approval of its
(continued . . .)
12
v. Roberts, 603 F.3d 1002, 1008 (D.C. Cir. 2010) (holding that while the constitutionality of
certain governmental conduct “may be an important question to [the] plaintiffs, . . . it is not a live
controversy that can avail itself of the judicial powers of the federal courts[, and the question] is
therefore moot”). Accordingly, counts two and five are dismissed for want of subject-matter
jurisdiction pursuant to Fed. R. Civ. P. 12(b)(1).11
B. Count Three of the Plaintiff’s Complaint
The plaintiff seeks “money damages,” also commonly known as a Bivens remedy,12
against the individual IRS defendants in their individual capacities for their alleged constitutional
(. . . continued)
tax-exempt application, e.g., id. ¶ 73 (identifying IRS targeting scheme as limited to a “written and unwritten policy
for identifying and subjecting certain applicants for tax-exempt status to additional and heightened review and
scrutiny” (emphasis added)), as a broader challenge to a potentially unlawful ongoing scheme or policy at the IRS in
carrying out its responsibilities other than reviewing tax-exempt applications. Indeed, “it is a well-established
principle of law in this Circuit that [the plaintiff] may not amend [its] complaint by making new allegations in [the]
opposition brief.” Budik v. Ashley, _ F. Supp. 2d _, _, No. 12-cv-1949(RBW), 2014 WL 1423293, at *8 (D.D.C.
Apr. 14, 2014) (Walton, J.) (citing Larson v. Northrop Corp., 21 F.3d 1164, 1173-74 (D.C. Cir. 1994)). And third,
even assuming that the defendants continue to implement the IRS targeting scheme against other organizations like
the plaintiff in its review of their applications for tax-exempt status—which is contradicted by the plaintiff’s
complaint, Am. Compl. ¶ 136—the plaintiff filed its complaint on the basis of alleged harm to itself during its
application process for tax-exempt status and not on the behalf of others that may have been similarly situated to the
plaintiff, i.e., other organizations subjected to the same alleged conduct during their application processes for tax-
exempt status, see Qassim, 466 F.3d at 1076 (explaining that constitutional challenge to a government policy can
proceed if seeking “relief for individuals similarly situated”).
11
The plaintiff’s reliance on City of Hous. v. Dep’t of Hous. & Urban Dev., 24 F.3d 1421, 1428 (D.C. Cir. 1994), is
misplaced; and in fact, the Court’s conclusion is consistent with the case. The District of Columbia Circuit
enumerated three possible outcomes when a plaintiff’s claim for declaratory relief regarding agency action taken
against the plaintiff pursuant to an unlawful policy is moot: (1) the plaintiff can invoke the “capable of repetition,
yet evading review” or “voluntary cessation” exceptions to continue the litigation and challenge the policy; (2) the
plaintiff “lacks standing to attack future applications of that policy” and “the [C]ourt is unable to award relief”; or
(3) the plaintiff “has standing to challenge the future implementation of that policy” and “declaratory relief may be
granted if the claim is ripe for review.” Id. at 1429-30. Here, the Court has already determined that the “voluntary
cessation” exception is inapplicable. And the plaintiff has not properly pleaded imminent future harm in the
complaint, as the pleaded future harm is not only different than the one spelled out in the complaint, but the
defendants have also suspended the disputed policy, such that the Court could not find standing to challenge future
applications of the policy. See Lujan, 504 U.S. at 560-61 (explaining that there must be an injury-in-fact that is
“concrete and particularized” and “actual or imminent, not conjectural or hypothetical,” to maintain standing in a
suit).
12
In Bivens v. Six Unknown Named Agents of Fed. Bureau of Narcotics, 403 U.S. 388 (1971), the Supreme Court
held that a plaintiff could recover monetary damages against federal officials who violated the constitutional rights
of the plaintiff while acting under the color of federal law.
13
violations alleged in count three of the complaint. Am. Compl. ¶ 164; see also Opp’n to Mgmt.
and Cincinnati Mots. at 24-42. In response, the individual IRS defendants generally argue that
count three should be dismissed because: (1) the Court does not have personal jurisdiction over
several defendants; (2) even if the Court has personal jurisdiction over all defendants, no Bivens
claim can be asserted against the individual IRS defendants; and (3) to the extent any Bivens
claim is allowed, the IRS defendants are entitled to qualified immunity. See, e.g., Mgmt. Mem.
at 1-2, 6-8; Cincinnati Mem. at 1-2. As explained below, because precedent does not permit the
Court to create a Bivens remedy for the plaintiff against the individual IRS defendants, the Court
need not address the personal jurisdiction and qualified immunity issues.
In Kim v. United States, 632 F.3d 713 (D.C. Cir. 2011), the Circuit dealt with aggrieved
taxpayers who alleged IRS wrongdoing, including unconstitutional conduct by individual IRS
employees, and sought Bivens relief as a result of the alleged harm. Id. at 714-15. The Circuit
affirmed the district court’s dismissal of the “Bivens claims against the [d]efendants in their
official capacities” pursuant to Fed. R. Civ. P. 12(b)(1), noting that it is “well established that
Bivens remedies do not exist against officials sued in their official capacities.” Id. at 715. The
Circuit also affirmed the district court’s dismissal of the “Bivens claims against the [d]efendants
in their individual capacities” pursuant to Fed. R. Civ. P. 12(b)(6) because “no Bivens remedy
was available in light of the comprehensive remedial scheme set forth by the Internal Revenue
Code.” Id. at 717.
The plaintiff here attempts to distinguish Kim by characterizing it as “materially
different” and suggesting that Kim’s holdings are limited to cases involving “Bivens claims
[against IRS employees] under [the] Due Process Clause.” Opp’n to Mgmt. and Cincinnati
Mots. at 40. But that suggestion relies on a strained reading of Kim. In affirming the rejection
14
of the Bivens claims against IRS officials in both their official and individual capacities, the
Circuit’s language did not limit the scope of its ruling. See Kim, 632 F.3d at 715, 717. And in
any event, the plaintiff has not distinguished—through the cases it cites or otherwise—any
legally cognizable distinction between Due Process Clause claims and First Amendment Claims
such that a Bivens remedy is appropriate in the former context, but not the latter context.13
The plaintiff attempts to blunt the force of Kim by complaining that the Circuit in Kim
“omit[ted] an entire[] inquiry into whether Congress ha[d] not inadvertently omitted damages
remedies for certain claimants, and ha[d] not plainly expressed an intention that the courts
preserve Bivens remedies.” Opp’n to Mgmt. and Cincinnati Mots. at 41 (certain internal
alterations and quotations omitted). Accordingly, the plaintiff urges the Court to engage in this
inquiry. See id. at 42-44. The alleged omission by the plaintiff, however, is belied by a closer
reading of the district court opinion as well as the Circuit’s opinion.
The district court in Kim undertook the very analysis that the plaintiff asks the Court to
conduct. In declining to extend a Bivens remedy to the plaintiffs against the IRS employees in
their individual capacities for alleged constitutional violations, the district court recognized that
the “existence of a comprehensive remedial scheme” was a “special factor” that counseled
against its extension. Kim v. United States, 618 F. Supp. 2d 31, 38 (D.D.C. 2009), aff’d in part,
rev’d in part and remanded, 632 F.3d 713 (D.C. Cir. 2011). “That is, when ‘Congress has put in
place a comprehensive system to administer public rights, has not inadvertently omitted damages
remedies for certain claimants, and has not plainly expressed an intention that the courts preserve
Bivens remedies,’ courts ‘must withhold their power to fashion damages remedies’ pursuant to
Bivens.” Id. (quoting Spagnola v. Mathis, 859 F.2d 223, 228 (D.C. Cir. 1988) (per curiam) (en
13
“The trend in other Circuits also has been to not recognize Bivens actions against IRS agents.” NorCal, 2014 WL
3547369, at *8 (citing Circuit cases, “follow[ing] the majority position,” and dismissing Bivens actions).
15
banc)). On appeal, the Circuit “agree[d] with the district court’s reasoning” that “no Bivens
remedy was available in light of the comprehensive remedial scheme set forth by the Internal
Revenue Code.” Kim, 632 F.3d at 718; see also NorCal, 2014 WL 3547369, at *5-8; Church By
Mail, Inc. v. United States, No. 87-cv-0754-LFO, 1988 WL 8271, at *3 (D.D.C. Jan. 22, 1988)
(explaining that declaratory relief for applicants seeking tax-exempt status under 26 U.S.C. §
7428 renders Bivens remedy improper for aggrieved applicants). In light of the Circuit’s
unequivocal endorsement of the district court’s Bivens analysis, the Court cannot take a different
approach.
Moreover, a former member of this Court was confronted with a nearly identical case to
the one before the Court and refrained from fashioning a Bivens remedy as well. In Church By
Mail, the plaintiff, a non-profit church seeking tax-exempt status, filed suit against the
defendants, the IRS and various individual IRS agents, for the denial of its tax-exempt status
application. 1988 WL 8271, at *1. The plaintiff claimed, inter alia, that the defendants violated
the Constitution, including the First Amendment, by “favoring traditional churches over more
unusual ones,” id., “demonstrat[ing] dislike and intolerance of [the] plaintiff’s religion,” id. at *2
(internal quotations omitted), and “engag[ing] in invidious discrimination against [the] plaintiff
by singling it out for investigation and attack,” id. According to the plaintiff, in denying its tax-
exempt application, the defendants “exceeded the bounds of the authority given to [the]
defendants under existing law.” Id.
In dismissing the plaintiff’s claims seeking Bivens damages for the constitutional
violations alleged against the defendants, the Court in Church By Mail reasoned that “a court-
created remedy” was unnecessary where “Congress has created a specific remedy for challenges
to rulings on tax exemption.” Id. at *3. Specifically, the Court recognized “that no Bivens-type
16
damages remedy against the individual IRS agents should be created by the Court . . . because
Congress has created a specific, meaningful declaratory judgment remedy under 26 U.S.C. [§]
7428 for cases . . . in which an application for tax[-]exempt status has been denied.” Id. Had it
created a Bivens remedy, the Court opined that it could have “‘wre[acked] havoc . . . [on] the
federal tax system.’” Id. (quoting Baddour, Inc. v. United States, 802 F.2d 801, 807 (5th Cir.
1986)). The Court reasoned that “[i]t would make the collection of taxes chaotic if a taxpayer
could bypass the remedies provided by Congress simply by bringing a damage action against
[IRS] employees.” Id. (internal quotations and alterations omitted). This Court agrees with
Judge Oberdorfer’s assessment, and therefore dismisses count three of the complaint with
prejudice for the failure to state a proper claim for relief under Federal Rule of Civil Procedure
12(b)(6).14
C. Count Four of the Plaintiff’s Complaint
In count four of the complaint, the plaintiff seeks relief from the defendants for their
alleged violations of 26 U.S.C. § 6103 because “[p]ursuant to the IRS [t]argeting [s]cheme, the
IRS [d]efendants knowingly requested information from [the plaintiff] in furtherance of the
IRS’[s] discriminatory and unconstitutional” conduct. Am. Compl. ¶ 175. So according to the
plaintiff, “the IRS [d]efendants knowingly inspected information provided to the IRS . . . [which
was] unnecessary.” Id. ¶ 179 (internal quotations and citations omitted). Because the
information provided by the plaintiff was unnecessary, the plaintiff claims that the defendants’
14
The plaintiff asserts that because the IRS pays for the individual defendants’ legal representation in a Bivens
action, it follows that permitting the plaintiff to proceed on a Bivens claim against the individual defendants is
appropriate. See Opp’n to Mgmt. and Cincinnati Mots. at 26. The Court fails to see how this is remotely relevant,
let alone a basis to rule contrary to this Circuit’s precedent. Moreover, the plaintiff argues that the declaratory relief
provided by 26 U.S.C. § 7428 is not an adequate alternative remedy for constitutional injuries. Opp’n to Mgmt. and
Cincinnati Mots. at 30-37. But the plaintiff’s dissatisfaction with the remedies available to it is not a legally
sufficient reason for the Court to create a Bivens remedy. See Spagnola, 859 F.2d at 227 (“[I]t is the
comprehensiveness of the statutory scheme involved, not the ‘adequacy’ of specific remedies extended thereunder,
that counsels judicial abstention.”).
17
inspection of that information was not “per se for tax administration purposes.” Id. ¶ 178
(internal quotations omitted). Consequently, the plaintiff argues that the defendants are liable
under 26 U.S.C. § 7431, which provides damages for violations of 26 U.S.C. § 6103. Am.
Compl. ¶¶ 170, 207; see also Opp’n to Defs.’ Mot. at 28-42. The defendants contend that the
underlying basis for the plaintiff’s fourth count is the “nature of the [IRS’s] requests for
information,” which is not actionable under 26 U.S.C. § 6103, as this provision only prohibits
“the improper inspection and disclosure” of the information which the plaintiff provided. Defs.’
Mot. at 10-11.
26 U.S.C. § 6103 protects the confidentiality of taxpayers’ tax “[r]eturns and [tax] return
information.” Id. § 6103(a). Tax “return information” is broadly defined to include:
[A] taxpayer’s identity, the nature, source, or amount of his income, payments,
receipts, deductions, exemptions, credits, assets, liabilities, net worth, tax liability,
tax withheld, deficiencies, overassessments, or tax payments, whether the
taxpayer’s return was, is being, or will be examined or subject to other
investigation or processing, or any other data, received by, recorded by, prepared
by, furnished to, or collected by the Secretary with respect to a return or with
respect to the determination of the existence, or possible existence, of liability (or
the amount thereof) of any person under this title for any tax, penalty, interest,
fine, forfeiture, or other imposition, or offense[.]
Id. § 6103(b)(2)(A); see also id. § 6103(b)(2)(B)-(D). Section 6103 contains numerous
exceptions to the general prohibition against disclosure or inspection of tax returns and tax return
information, including that:
Returns and return information shall, without written request, be open to
inspection[15] by or disclosure to officers and employees of the Department of the
Treasury whose official duties require such inspection or disclosure for tax
administration purposes.
Id. § 6103(h)(1). And “[t]he term tax administration”
15
“The terms ‘inspected’ and ‘inspection’ mean any examination of a return or return information.” 26 U.S.C. §
6103(b)(7).
18
(A) means—
(i) the administration, management, conduct, direction, and supervision of the
execution and application of the internal revenue laws or related statutes (or
equivalent laws and statutes of a State) and tax conventions to which the United
States is a party, and
(ii) the development and formulation of Federal tax policy relating to existing or
proposed internal revenue laws, related statutes, and tax conventions, and
(B) includes assessment, collection, enforcement, litigation, publication, and
statistical gathering functions under such laws, statutes, or conventions.
Id. § 6103 (b)(4). In short, Section 6103 addresses “improper disclosure of tax return
information.” Mann v. United States, 204 F.3d 1012, 1020 (10th Cir. 2000); see also Venen v.
United States, 38 F.3d 100, 105 (3d Cir. 1994) (“The history of [S]ection 6103 indicates that
Congress enacted the provision to regulate a discrete sphere of IRS activity—information
handling.”).
Section 6103 does not provide a means for the plaintiff to avoid dismissal of count four
of its complaint. As just noted, Section 6103 concerns the disclosure or inspection, i.e., the
“handling,” of tax return information. Venen, 38 F.3d at 105. To the extent the plaintiff takes
issue with the defendants’ inspection of its tax return information, those allegations are
insufficiently pleaded in its amended complaint. See Iqbal, 556 U.S. at 679 (conclusory
allegations “are not entitled to the assumption of truth”). The insufficiency of the plaintiff’s
allegations is highlighted by the plaintiff’s admission that “[t]he number of unauthorized
inspections of [the plaintiff]’s return information and the identity of those who made the
inspections cannot be completely and accurately ascertained at this time . . . .”16 Am. Compl. ¶
182.
16
As the Court will explain, any alleged inspections of the plaintiff’s tax return information by the defendants
cannot support a claim for a violation of 26 U.S.C. § 6103, as the predicate for these allegedly unauthorized
inspections is the defendants’ requests for information that were allegedly “wholly unnecessary” to its application to
obtain tax-exempt status. Opp’n to Defs.’ Mot. at 35.
19
The plaintiff’s real bone of contention is that the defendants allegedly demanded
“information [that] was not necessary for determining [the plaintiff]’s [tax-]exempt status,” and
then inspected it. Opp’n to Defs.’ Mot. at 31-32. Although the plaintiff is upset about the
defendants’ inspection of its tax return information, it is actually the defendants’ alleged
unconstitutional conduct in acquiring that information that forms the basis of count four of the
complaint. But, unfortunately for the plaintiff, Section 6103 is silent as to how tax return
information can be acquired. Even assuming that the defendants improperly acquired the
plaintiff’s tax return information, that does not compel a finding that such information was
improperly inspected. In the Court’s view, there is a clear dichotomy between the means by
which tax return information is acquired and the disclosure or inspection of that information
thereafter. The plaintiff, however, attempts to have the Court disregard this dichotomy,17 which
conflicts with cases which have found that the propriety of certain conduct separate and apart
from the actual handling of tax return information is irrelevant and cannot be the predicate of a
Section 6103 violation. Cf. Mann, 204 F.3d at 1020 (“Sections 6103 and 7431 address improper
disclosure of tax return information and not improper collection activity. We therefore agree
with the district court that the validity of the means by which the return information was
disclosed is irrelevant to whether the disclosure of the information violated § 6103. We further
agree with the district court and the majority of courts which have considered the issue that there
is nothing in § 6103 which requires that the underlying means of disclosure be valid before [a
disclosure exception] applies.” (emphasis added)); Wilkerson v. United States, 67 F.3d 112, 117
(5th Cir. 1995) (holding that disclosures of tax return information “were not wrongful”
17
Again, the plaintiff attempts to amend its complaint through its opposition brief by contending that its “[S]ection
7431 claim is premised on the improper handling of its information.” Opp’n to Defs.’ Mot. at 32 n.9. The plaintiff
identifies nothing in its amended complaint that supports this position. Nor could it, as this is contrary to the
allegations in its complaint. See Am. Compl. ¶¶ 174-80.
20
notwithstanding “improper levying procedures”); Venen, 38 F.3d at 106 (“Section 6103 and its
attendant damages provision, [S]ection 7431, were meant to regulate only one sphere of
activity—information handling—and were not intended to interfere with collection actions.
Thus, the propriety of the underlying collection action, in this instance the validity of the levy, is
irrelevant to whether disclosure is authorized under [S]ection 6103 and the basis for liability
under [S]ection 7431.” (internal citations, quotations, and ellipses omitted)); Huff v. United
States, 10 F.3d 1440, 1447 (9th Cir. 1993) (finding no liability under Section 6103 “despite the
possible procedural lapses involving the actual levy”).
Further supporting the Court’s maintenance of the dichotomy between the IRS’s
acquisition of tax return information for assessing tax-exempt status and the IRS’s inspection of
that information thereafter,18 is the availability of judicial review and a separate and distinct
remedy for an applicant aggrieved during the tax-exempt application process. Cf. Wilkerson, 67
F.3d at 116 (“Congress enacted separate and distinct provisions concerning collection activities
and information handling.”); Venen, 38 F.3d at 105 (“In a claim such as the present one based on
an improper levy, the concern is not improper information handling but rather improper
collection activity. Collection activity is a separate sphere of IRS activity governed by a separate
body of law.”). Under 26 U.S.C. § 7428, an applicant requesting tax-exempt status under 26
U.S.C. § 501(c)(3) may seek a declaratory judgment that it indeed qualifies for tax-exempt status
if either the application has been denied by the IRS or the IRS has failed to act on the application
18
The plaintiff asserts that the defendants have violated 26 U.S.C. § 6103 because the defendants did not “per se”
inspect the plaintiff’s tax return information for “tax administration purposes.” Opp’n to Defs.’ Mot. at 33; see
also id. at 37; Am. Compl. ¶¶ 177-78. At first blush, this argument has appeal. The plaintiff appears to argue that
the request and inspection of information allegedly unnecessary to determine an applicant’s tax-exempt status is not
the result of “tax administration.” See Opp’n to Defs.’ Mot. at 39-42. However, there does not appear to be a
genuine dispute that “tax administration” encompasses the review of return information submitted in conjunction
with a tax-exempt application. Again, the basis for the plaintiff’s alleged violation of 26 U.S.C. § 6103 is not the
inspection of tax return information; rather, it is the defendants’ request for allegedly unnecessary information
during the tax-exempt application process.
21
in 270 days. 26 U.S.C. §§ 7428(a)-(b). If the application is denied, the applicant may file suit
within ninety days of the mailing of the rejection letter. Id. § 7428(b)(3). Alternatively, if the
IRS fails to act on the application within 270 days, the applicant is “deemed to have exhausted its
administrative remedies,” provided that it, “in a timely manner, [took] all reasonable steps to
secure . . . [a] determination” of its tax-exempt status. Id. § 7428(b)(2). In either case, the
applicant may file suit in the United States Tax Court, the United States Court of Federal Claims,
or the United States District Court for the District of Columbia. Id. §§ 7428(a), (b)(2). In light
of the remedies made available under 26 U.S.C. § 7428 for controversies arising out of the tax-
exempt application process,19 which would encompass plaintiff’s allegations against the
defendants, cf. Church By Mail, 1988 WL 8271, at *3 (holding that “plaintiff clearly has an
adequate remedy under 26 U.S.C. [§] 7428” for constitutional violations during the tax-exempt
application process), it must remain separate and distinct from the remedies available under 26
U.S.C. § 7431 for unauthorized inspections of tax return information that occur after the
application process has either stalled or concluded. Accordingly, count four of the complaint
fails to state a claim for relief and will be dismissed with prejudice pursuant to Fed. R. Civ. P.
12(b)(6).20
19
Other avenues of relief may be better candidates than 26 U.S.C. § 7431. For example, the plaintiff acknowledges
that the defendants’ conduct could potentially be governed by 26 U.S.C. § 7605(b), which generally ensures that
“[n]o taxpayer shall be subjected to unnecessary examination or investigations . . . .” Opp’n to Defs.’ Mot. at 37
n.14. And in NorCal, the Court identified 26 U.S.C. § 7433 as potentially providing adequate relief to aggrieved
applicants for tax-exempt status, as it “creates a damages remedy for the wrongful collection of federal tax.” 2014
WL 3547369, at *6. The Court declines to weigh in, however, on the merits of any potential argument under these
statutory provisions.
20
In light of the Court’s interpretation of the authority cited in this Memorandum Opinion, the Court must
respectfully disagree with that portion of the NorCal opinion, which permitted the plaintiffs to take discovery “to
establish with evidence that IRS officials inspected or disclosed the [plaintiffs]’ return information for improper
purposes,” 2014 WL 3547369, at *13, even though the plaintiffs’ complaint there apparently muddied the
dichotomy identified by the Court in this opinion, and thus did not sufficiently plead allegations concerning a
violation of 26 U.S.C. § 6103. See 2014 WL 3547369, at *13 (citing “PageID 1046” of the plaintiffs’ complaint);
Second Amended Class Action Complaint ¶ 247, NorCal, No.1:13-cv-341 (S.D. Ohio Jan. 23, 2014), ECF No. 71
(continued . . .)
22
IV. CONCLUSION
For the foregoing reasons, the Court grants the defendants’ motions to dismiss as to all
five counts of the plaintiff’s complaint and denies the plaintiff’s motion to stay agency action.21
SO ORDERED this 23rd day of October, 2014.
REGGIE B. WALTON
United States District Judge
(. . . continued)
(“Defendants inspected [p]laintiffs’ information and shared it amongst themselves even though they knew it was
unnecessary for making a decision on [p]laintiffs’ tax-exempt status, and even though they knew it had been sought
based on [p]laintiffs’ political viewpoint. Accordingly, the inspection, review, and disclosure was objectively
unnecessary, and subjectively not undertaken, ‘for tax administration purposes’ under 26 U.S.C. § [6103(h)].”).
Here, the Court will not allow the plaintiff to take discovery where it has not sufficiently pleaded a violation of 26
U.S.C. § 6103. See Am. Compl. ¶ 182 (asserting the need for discovery only because the “number of unauthorized
inspections” and “the identity of those who made the inspections cannot be completely and accurately ascertained at
this time.”).
Further, because the Order accompanying this opinion closes this case, the plaintiff’s motion for a stay of
agency action is moot.
21
An Order consistent with this Memorandum Opinion will be issued contemporaneously.
23
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634 F. Supp. 609 (1986)
John B. GARDNER and Atha L. Gardner, Plaintiffs,
v.
ASBESTOS CORPORATION, LTD.; Bell Asbestos Mines, Ltd.; and Cassiar Mining Corporation, Defendants.
Civ. A. No. C-C-83-0723-P.
United States District Court, W.D. North Carolina, Asheville Division.
March 4, 1986.
Leonard T. Jernigan, Jr., Raleigh, N.C., and Michael Brickman, Blatt and Fales, Barnwell, S.C., for plaintiffs.
J.A. Gardner, III, Hedrick, Feerick, Eatman, Gardner & Kincheloe, Charlotte, N.C., and David G. Traylor, Jr. and William S. Davies, Jr., Nelson, Mullins, Grier and Scarborough, Columbia, S.C., for defendants Asbestos Corp., Ltd. and Bell Asbestos Mines, Ltd.
James F. Blue, III, Asheville, N.C., and David Bears, Shea and Gardner, Washington, D.C., for defendant Cassiar Mining Corp.
MEMORANDUM OF DECISION
SENTELLE, District Judge.
THIS ACTION and several other asbestos disease[1] cases currently pending in this district are before the Court under diversity jurisdiction pursuant to Title 28, U.S.Code, Section 1332. It is undisputed that the law of North Carolina applies to this action as to the other pending cases. All or most of the cases raise the question of the applicability of North Carolina General Statutes (N.C.G.S.) § 1-50(6), the Products Liability "Statute of Repose" enacted in 1979. In this case that question is raised by defendant Cassiar Mining Corporation's (formerly Brinco Mining, Ltd.) Motion for Partial Summary Judgment. The motion is based upon the contention that the statute of repose bars recovery for injuries caused by exposure to asbestos sold by the defendant more than six (6) years before the commencement of the lawsuit. That statute provides:
No action for the recovery of damages for personal injury, death or damage to property based upon or arising out of any alleged defect or any failure in relation to a product shall be brought more than six years after the date of initial purchase for use or consumption.
Unlike a statute of limitations which bars a plaintiff's right to recovery after a period of time subsequent to the injury, the effect of a statute of repose is that unless the injury occurs within a six-year period defined *610 by the sale of the product there is no justicable claim. Lamb v. Wedgewood South Corp., 308 N.C. 419, 302 S.E.2d 868 (1983). Defendants contend that the above language is applicable to asbestos disease cases and that therefore plaintiffs, in order to recover from the manufacturer or seller of asbestos, must act within six years of the time of the last sale, as well as within the three-year statute of limitation commencing with the date of the injury imposed by N.C.G.S. 1-52. Defendant argues that on the facts of this case at least a portion of plaintiffs' claim is time barred by reason of the statute of repose.[2]
Consideration of this argument requires a brief review of the facts before the Court drawn from the materials presented by each side under Rule 56. It seems that certain material facts are not in dispute. Plaintiff John B. Gardner was employed at the "Marshville Plant" from 1948 through 1980 and worked primarily in the "weave room." During the course of his employment he was exposed from time to time to asbestos fibers supplied by the various defendants. Brinco (predecessor in interest to Cassiar Mining) made separate sales of raw asbestos fibers to the owners of the Marshville Plant periodically from 1954 until well after termination of plaintiff's relevant employment.
Therefore, if defendant is correct in its argument as to law, Gardner's claim, together with his wife's derivative claim, will be time barred as to the recovery of any damages resulting from Mr. Gardner's exposure to asbestos fibers sold by Brinco to the Marshville Plant more than six years prior to the commencement of this action in 1983.
In support of its proposition that this is in fact the effect of Section 1-50(6), defendant offers the decision of this Court in Hyer v. Amatex Corp., No. A-C-81-289 (W.D.N.C. Oct. 17, 1983) and the decision of the Eastern District of North Carolina in Silver v. Johns Manville Corporation, No. 81-16-CIV-2 (E.D.N.C. March 16, 1984). In both of those decisions the presiding judges faced the same question before the Court in this case. Simply put, although not simply decided, that question is: What would the North Carolina Supreme Court hold with reference to the applicability of N.C.G.S. 1-50(6) to asbestos disease cases? Therefore, the task of the Court in each of those cases and in this one was not to determine whether that statute of repose should apply but rather to forecast what the North Carolina Supreme Court's decision would be should it be faced with answering the same question. In each of those cases the Court ruled that the statute did apply and that the claims in those cases were barred. This Court would find those cases persuasive authority were there not a basis in North Carolina decisional law bearing upon this forecast today which was not available at the time of the decisions in Hyer and Silver.
Since those decisions, the North Carolina Supreme Court has rendered its decision in the case of Wilder v. Amatex Corp., et al., 314 N.C. 550, 336 S.E.2d 66 (1985). While that case was an asbestos-related disease claim, it arose before the enactment of the statute in the instant case and therefore did not expressly involve its construction. However, in that decision the North Carolina Supreme Court was determining the applicability of a predecessor statuteN.C. G.S. 1-15(b) (Interim Supp.1976) (repealed 1979). That statute in effect at all times material to the Wilder controversy provided:
(b) Except where otherwise provided by statute, a cause of action, other than one for wrongful death or one for malpractice arising out of the performance or failure to perform professional services, having as an essential element bodily injury to the person or a defect or damage not readily apparent to the claimant at the time of its origin, is deemed to have accrued at the time the injury was discovered by the claimant, or ought reasonably to have been discovered by him, *611 whichever event first occurs; provided that in such cases the period shall not exceed ten years from the last act of the defendant giving rise to the claim for relief.
The material facts of Wilder closely parallel those in the case at bar; that is, plaintiff Wilder, like John B. Gardner, was able to demonstrate at the summary judgment stage exposure to asbestos-containing products during the years preceding diagnosis of his asbestos disease. Defendants, like Cassiar, were able to demonstrate sales of the product occurring and/or ceasing prior to the trigger year of the applicable statute of repose. Defendants moved for summary judgment based on the statute of repose and the trial Court allowed the motion. Justice Exum for the North Carolina Supreme Court stated the question before that Court as "Whether entry of summary judgment in favor of defendants ... was proper depends on whether N.C.Gen.Stat. § 1-15(b) ... applies to claims arising out of disease." The Court goes on to determine that the North Carolina Legislature did not intend that statute to apply to claims arising out of a disease. In determining intent of the Legislature the Court looked to the statute's purpose, the state of the law to which the statute was addressed and the changes in that law that the statute was designed to effect. It noted that the statute was not intended to be a limitation governing all negligence claims but that its primary purpose was to change the accrual date for the running of the period of limitations on latent injury claims and the adding of a 10-year statute of repose applying only to latent injury claims.
The Court began with a discussion of Raftery v. Construction Co., 291 N.C. 180, 230 S.E.2d 405 (1976). The Court reviewed the case law prior to the 1971 enactment of Section 1-15(b) and determined that the statute's purpose was to give relief to the harsh results created by former case law. Raftery reviewed several cases which had established the rule that the statute of limitations began to run as soon as the physical injury was inflicted, even though the injured claimant may have been justifiably unaware that he had a cause of action. Jewell v. Price, 264 N.C. 459, 142 S.E.2d 1 (1965); Motor Lines v. General Motors Corp., 258 N.C. 323, 128 S.E.2d 413 (1962); Shearin v. Loyd, 246 N.C. 363, 98 S.E.2d 508 (1957); Lewis v. Shaver, 236 N.C. 510, 736 S.E.2d 320 (1952).
Shearin and Lewis were medical malpractice cases where the Court found that the claims accrued when the injuries to the claimants first occurred (surgery) rather than when the claimants discovered the injuries. Motor Lines and Jewell involved purchases of defective products, and the Court found that claimants were first injured (suffered some loss) at the time of purchase of the defective products whether or not the purchasers knew of the defect. Raftery concluded that the enactment of Section 1-15(b) was to enlarge the time in which an action for damages could be brought. Id., 291 N.C. at 209-10. The Court also found that the Legislature added a balancing featurethe ten-year statute of reposeto protect manufacturers from claims for ancient acts. From the language of the statute, Raftery found that the statute of repose applied only to latent injuries. The Court allowed recovery for injury from a harvester sold 19 years earlier when the claim had been brought within three years of injury.
The Court in Wilder noted that none of the cases toward which the statute was directed involved disease. The Court went on to say that the Legislature, being fully aware of the distinction between disease cases and other injury cases, did not intend the statute of repose to apply to disease cases. Wilder (Slip Op. at 10). While the Court in Wilder was construing Section 1-15(b) and not Section 1-50(6), the reasoning in this decision is of use in construing Section 1-50(6).
In Wilder, the Court held as follows:
A disease presents an intrinsically different kind of claim. Disease such as asbestosis, silicosis, and chronic obstructive lung disease normally develops over long periods of time after multiple exposures *612 to offending substances which are thought to be caustic agents. It is impossible to identify any particular exposure as the "first injury." Indeed, one or even multiple exposures to an offending substance in these kinds of diseases may not constitute an injury. The first identifiable injury occurs when the disease is diagnosed as such, and at that time it is no longer latent. See generally Borel v. Fiberboard Paper Products Corp., 493 F.2d 1076, 1083 (5th Cir. 1973), cert. denied, 419 U.S. 869 [95 S. Ct. 127, 42 L. Ed. 2d 107] (1974) (asbestosis; disease does not generally manifest itself until "ten to twenty-five or more years after exposure"). (Emphasis in original).
Id., At 70.
The Court in Wilder found that the Legislature has almost always equated the disease's manifestation on diagnosis as the injury giving rise to the cause of action. Id., At 71. Since this would be the only point to measure the "first injury," the Court found that disease claims were not latent injury claims and, therefore, the statute of repose had no applicability to them. Wilder At 72. "It is inconceivable that the Legislature enacted G.S. 1-15(b) in 1971 intending that claims for injuries caused by disease accrue before the disease is diagnosed." Wilder At 72.
The Court then went on to support its decision with the fact that the original draft of Senate Bill 572 included specifically the language "disease, damage or injury is diagnosed." The final adopted bill left "disease" out altogether. "[I]t is always presumed that the Legislature acted with care and deliberation and with full knowledge of prior and existing law." State v. Benton, 276 N.C. 641, 174 S.E.2d 793, 804 (1970). This bolstered the Court's opinion that G.S. 1-50(5) as written did not apply to disease cases.
In the case at hand, defendant Cassiar argues that the decision in Wilder has no bearing on the applicability of Section 1-50(6) as Section 1-15(b) in Wilder applied only to latent injury cases while Section 1-50(6) as written applies to all actions for personal injury, death, or property damage arising from a defect or failure in relation to a product. Tetterton v. Long, 67 N.C. App. 628, 313 S.E.2d 250 (1984), modified 314 N.C. 44, 332 S.E.2d 67 (1984); Bernick v. Jurden, 306 N.C. 435, 293 S.E.2d 405, 415. This includes damage "caused by or resulting from the manufacture, construction, design ... warning, instructing, marketing, selling, advertising, packaging or labeling of any product." Tetterton, 332 S.E.2d at 70, quoting N.C.G.S. 99B-1(3).
While it is true as defendants argue that the purpose of Section 1-50(6) is broad in its protection of manufacturers and vendors from the results of long forgotten acts, nothing in the legislative history cited to the Court by defendant gives any indication that the Legislature intended to expand the definition of personal injury beyond that intended in the statute construed in Wilder. It appears to this Court that an accurate forecast of the North Carolina Supreme Court's construction of Section 1-50(6) is most plainly instructed by the Court's construction of the earlier statute of repose. That decision makes it plain in the language quoted above that the State Supreme Court does not consider disease to be included within a statute of repose directed at personal injury claims unless the Legislature expressly expands the language to include it.
For the reason of the enlightenment offered by the Wilder decision, if only for that reason, this Court must disagree with the Hyer and Silver cases decided prior to the enlightenment offered by Wilder and rule that North Carolina's statute of repose does not apply to cases of asbestos disease.
In case any question remains as to the applicability of the general statute of limitations, that question likewise is answered in the Wilder decision. "The first identifiable injury occurs when the disease is diagnosed as such, and at that time it is no longer latent." (Emphasis in the original.) Since in the case at bar it does not appear to be established that the disease was diagnosed as such at a time more than three years before the bringing of the action the general statute of limitations is not a bar.
*613 In opposition to the motion for summary judgment, plaintiffs have also argued that the statute of repose if applied to asbestos disease cases would be unconstitutional in that application is a violation of Article I, Section 18 of the North Carolina State Constitution, commonly called the "Open Courts" provision. Since this Court now holds that the statute does not apply, it is not necessary to reach the constitutional question. Indeed, it is necessary not to reach it since the Supreme Court of North Carolina would not under like circumstances. "[A]ppellate courts will not pass on constitutional questions, even when properly presented, if there be also present some other ground upon which the case may be decided. (Citations omitted)." State v. Jones, 242 N.C. 563, 89 S.E.2d 129 (1955).[3]
For the reasons stated above, defendant's Motion for Partial Summary Judgment is denied. The Court notes that this same reasoning is applicable to a number of other asbestos disease cases now pending before the Court in File No. WDCP-88-1, In Re: Asbestos Related Litigation, and the Clerk of Court is directed to provide copies of this Memorandum to counsel in all those cases.
NOTES
[1] This term is used collectively to refer to asbestosis, mesothelioma and any other disease alleged to be caused by exposure to asbestos.
[2] Plaintiff Atha L. Gardner's claim is for loss of consortium and is derivative to John B. Gardner's claim, so that all discussion of his claim is applicable to both.
[3] This case remains viable law and has been cited with approval as recently as 1985 in State v. Creason, 313 N.C. 122, 326 S.E.2d 24 (1985).
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594 F. Supp. 1452 (1984)
COX CABLE NEW ORLEANS, INC.
v.
CITY OF NEW ORLEANS, et al.
CITY OF NEW ORLEANS, et al.
v.
COX CABLE NEW ORLEANS, INC.
Civ. A. Nos. 84-3743, 84-4264.
United States District Court, E.D. Louisiana.
October 4, 1984.
*1453 *1454 *1455 Salvadore Anzelmo and Thomas W. Milliner, Ashton R. Hardy, Lynne W. Wasserman, Fawer, Brian, Hardy & Zatzkis, New Orleans, La., for the City.
Brent N. Rushforth, Dow, Lohnes & Albertson, Washington, D.C., Walter B. Stuart IV, Gerald F. Slattery, Jr., and William T. D'Zurilla, Gordon, Arata, McCollam Stuart & Duplantis, New Orleans, La., for Cox.
OPINION
WICKER, District Judge.
These consolidated cases were submitted to the Court on a former date. Presently pending are three motions: (1) Cox Cable New Orleans, Inc.'s (Cox's) motion for summary judgment on its amended complaint for a declaratory judgment in Civil Action No. 84-3743, which concerns the issue of federal preemption of local regulation of the "retiering" of basic subscriber cable service (basic service); (2) the Mayor, City Council, and City of New Orleans's (collectively the City's) motion to dismiss this complaint for lack of federal subject matter jurisdiction; and (3) the City's motion to remand No. 84-4264 back to state court for lack of jurisdiction.
After considering the record, the exhibits, the arguments and voluminous briefs of counsel, the briefs of amici curiae, and the applicable law, the Court holds that there is a substantial federal issue raised by Cox's amended complaint in No. 84-3743 and that this Court, therefore, has jurisdiction.
The Court agrees with Cox that there is no material issue of fact presented in its declaratory judgment complaint and that the case is ripe for summary judgment. Given those undisputed facts, however, Cox's substantive position is not supported by the law. Accordingly, the Court denies Cox's motion for summary judgment and holds that federal preemption does not authorize Cox to remove stations and services from its Basic Service tier without City Council approval.
Since the declaratory judgment action resolves the sole federal issue presented, the Court need not determine whether it has jurisdiction over removed action No. 84-4264. Regardless of the technical nuances of federal question jurisdiction over this matter, it is more appropriate for state court adjudication. The Court accordingly will remand No. 84-4264 to state court. Since no federal issues remain in No. 84-3743, the Court similarly will dismiss all remaining claims in that suit without prejudice to renew these matters in state court.
I.
Cox Cable is a cable television company which operates a local cable monopoly in Orleans Parish pursuant to a city franchise. The franchise agreement designates that Cox is to provide cable services to residents of New Orleans. Among these, Cox is to furnish a Basic Service package of 31 stations, including seven "must carry" stations which Federal Communication Commission (FCC or the Commission) rules require the cable operator to carry, for $7.95 per month (Franchise § 8.2; 10.2; Exhibit to Document No. 2).
These suits initially began when Cox filed a complaint and motion for a Temporary Restraining Order at roughly midnight on July 30, 1984 (Document No. 1).[1] Cox intended to raise the rates charged to customers for this 31-channel Basic Service effective August 1 by simultaneously (1) restructuring its Basic Service into two tiers, i.e., one, "Introductory Cable," with eleven channels and the other, "New Orleans Plus," with twenty-two channels;[2] and (2) changing the rate from $7.95 for the original package to $4.95 for Introductory Cable plus $6.00 for Plus service, or a total of $10.95 for the new two-tiered scheme. Cox sought to restrain the Mayor and City Council from filing suit or passing any ordinance which would prevent it from implementing its retiering proposal or which would penalize it for doing so.
*1456 A conference was held in chambers on July 31 at which time the Court scheduled a hearing on the Temporary Restraining Order for August 2 in order to give the City Attorney's Office an opportunity to review the complaint and prepare a response. On August 1, 1984, Cox's rate increase went into effect.
The City then filed a cross-motion for a Temporary Restraining Order seeking to enjoin Cox from altering the rates charged for "must carry" signals (Document No. 6). After hearing counsel's arguments, the Court on August 2 denied Cox's motion and issued a Temporary Restraining Order in favor of the City requiring Cox to roll the rates back to the level charged prior to August 1 and setting a preliminary injunction hearing for August 14, 1984 (Document No. 9). The Court issued an opinion in this regard the following day (Document No. 11).
The parties filed supplemental briefs in support of their motions for preliminary injunctions. The Federal Communications Commission (FCC), the National Cable Association, Inc. (NCTA), and the Community Antennas Association, Inc. (CATA), which believed that this case would have nationwide impact, filed motions for leave to participate as amici curiae, which the Court granted.
On August 14, counsel jointly requested a continuance of the hearing in order to pursue an amicable settlement of the case. The Court issued an order rescheduling the hearing for August 22 with the Temporary Restraining Order to continue in effect (Document No. 26).
On August 22, Cox abandoned its motion for a Temporary Restraining Order. The City expressed that it did not seek to restrain Cox from retiering its Basic Service tier, so long as the basic rate remained the same. Rather, it felt a suit for breach of contract in state court would be the appropriate vehicle for addressing Cox's proposed actions if and when they occurred. The Court, therefore, explained on the record that, given the concessions of the parties and the posture of the suit, a tentative agreement had been reached in the case. The Court granted the City's preliminary injunction preventing Cox from altering its basic rate and dismissed Cox's abandoned motion for preliminary injunction (Document No. 57; 55:24-57:3).
Following this brief impasse, Cox immediately retiered its service. It informed subscribers that effective September 1, it would offer the 11-channel "Introductory Cable" package for $7.95 and the 22-channel "New Orleans Plus" service for $3.00 extra. In this way, it could achieve its rate hike while complying with the City's desire to maintain the same rate for the "basic" tier, whatever it might contain. Much to the public's surprise, the injunction which had appeared to be a victory for the City resulted in higher basic rates than Cox had requested.
Simultaneously, Cox filed a motion for leave to amend its complaint to add a declaratory judgment action. The amended complaint seeks a declaration that "in view of federal law, Cox may delete, without substitution, any or all `non-must carry' signals from its basic tier without the approval of the City" (Document No. 29). Cox then filed a motion for expedited hearing on a motion for summary judgment on this claim which the Court denied (Document No. 31).
The City, seeking to have the entire case heard in state court, filed a suit for breach of contract there on August 28 (Number 84-4264, Document No. 1) and also filed an opposition to the motion to amend (Document No. 34). This opposition admitted that "`an actual controversy' exists on the issue of [Cox's] ability to remove the number of services from the basic tier." It argued, however, that the case was more appropriate in state court where the later-filed suit was already "pending".[3] One hour later, Cox removed the state suit to *1457 federal court (Docket Number 84-4264, Document No. 1).
On August 29, the Court granted Cox's motion to amend (Document No. 37). Not giving up in its forum shopping battle, however, the City filed motions to dismiss or continue Cox's motion for summary judgment (Document No. 39), to dismiss Cox's amended complaint for lack of federal jurisdiction (Document No. 43), and to remand the removed action to state court (Docket Number 84-4264, Document No. 4-b). These three motions, along with Cox's motion for summary judgment, came before the Court on September 12. At that time, the City indicated that it had not been given enough time to brief the complex issues presented by the motion for summary judgment. The Court, therefore, granted the City's motion to continue and continued all other motions until September 26, affording the parties additional time in which to submit any final briefs (Document No. 50; No. 56, 25:1-28:22).
On that date, the Court heard arguments on the three motions which are now before it: Cox's motion for summary judgment on its complaint for declaratory judgment on its complaint for declaratory judgment in Number 84-3743; the City's motion to dismiss this complaint for lack of federal jurisdiction; and the City's motion to remand Number 84-4264. The Court will first address the jurisdictional issues.
II.
The district courts have jurisdiction over all civil actions "arising under" the Constitution, laws or treaties of the United States. 28 U.S.C. § 1331. Federal law must be an essential element of the cause of action. Gully v. First National Bank, 299 U.S. 109, 112, 57 S. Ct. 96, 97-98, 81 L. Ed. 70 (1936); Lowe v. Ingalls Shipbuilding, 723 F.2d 1173, 1178 (5th Cir. 1984). Under the "well-pleaded complaint" rule, it is the nature of the claim asserted, and not the possible defenses to the claim, which determines if federal jurisdiction is present. Id.
The Declaratory Judgment Act, 28 U.S.C. § 2201, is procedural rather than substantive and does not, therefore, expand the reach of federal jurisdiction. Skelly Oil Co. v. Phillips Petroleum Co., 339 U.S. 667, 671, 70 S. Ct. 876, 879, 94 L. Ed. 1194 (1950). It procedurally broadens the class of litigants who may bring causes of action into federal court since "the availability of declaratory relief enables a party to achieve federal question jurisdiction over a suit to declare that a claim arising under federal law which another asserts against him is not valid." Lowe v. Ingalls Shipbuilding, supra, 723 F.2d at 1179. The Act does not, however, enable parties to acquire federal jurisdiction by bringing a declaratory judgment action when the sole federal question would have been by way of defense if the suit were brought in the usual state court proceeding.
In Public Service Commission of Utah v. Wycoff Co., Inc., 344 U.S. 237, 248, 73 S. Ct. 236, 242-43, 97 S. Ct. 291 (1952), the Supreme Court stated that when the declaratory judgment complaint in essence asserts a defense to a threatened state court action, it is the character of the threatened action, and not of the defense, which determines if there is federal jurisdiction. Id. That is, "if, but for the availability of the declaratory judgment procedure, the federal claim would arise only as a defense to a state created action, jurisdiction is lacking." Franchise Tax Board v. Construction Laborers Vacation Trust, 463 U.S. 1, ___, 103 S. Ct. 2841, 2850, 77 L. Ed. 2d 420 (1983), quoting 10A Wright, Miller & Kane, Federal Practice and Procedure § 2767, at 744-45 (2d ed. 1983). It is, therefore, generally the declaratory defendant's and not the declaratory plaintiff's cause of action which is actually litigated and to which the federal court looks in ascertaining if federal jurisdiction is present. The City argues that federal jurisdiction is lacking since Cox's preemption claim arises only by way of defense.
An exception to this general rule applies, and federal jurisdiction is present, however, when the plaintiff seeks declaratory and injunctive relief against threatened state or local governmental action *1458 which would interfere with federal rights. Ray v. Atlantic Richfield Co., 435 U.S. 151, 98 S. Ct. 988, 55 L. Ed. 2d 179 (1978); Jones v. Rath Packing Co., 430 U.S. 519, 97 S. Ct. 1305, 51 L. Ed. 2d 604 (1977); Braniff International, Inc. v. Florida Public Service Commission, 576 F.2d 1100 (5th Cir.1978); see also, Lowe v. Ingalls Shipbuilding, 723 F.2d 1173, 1180-81, n. 7 (5th Cir.1984). Thus, for example, in Ray v. Atlantic Richfield Co., supra, the district court had considered Atlantic Richfield's claim for a declaratory judgment that Washington's Tanker Law had been preempted by the Ports and Waterways Safety Act. In Jones v. Rath Packing Co., supra, the Supreme Court affirmed the district court's declaratory ruling that a county official's regulation of food packaging had been preempted by federal law. And in Capital Cities Cable, Inc. v. Crisp, ___ U.S. ___, 104 S. Ct. 2694, 81 L. Ed. 2d 580 (1984), upon which counsel rely as well, the plaintiff brought an injunctive and declaratory suit claiming that threatened state action had been preempted by FCC regulation.
This exception has been recently reaffirmed by the Supreme Court. In Franchise Tax Board, supra, 463 U.S. 1, 103 S.Ct. at 2852, n. 20, the Court stated that "a person subject to a scheme of federal regulation may sue in federal court to enjoin application to him of conflicting state regulations, and a declaratory judgment action by the same person does not necessarily run afoul of the Skelly Oil doctrine." And in the companion case of Shaw v. Delta Airlines, Inc., ___ U.S. ___, 103 S. Ct. 2890, 2899, n. 14, 77 L. Ed. 2d 490 (1983), the Court stated that federal jurisdiction exists when plaintiffs seek an injunction against enforcement of state laws which they claim are preempted:
The Court's decision today in Franchise Tax Board v. Construction Laborers Vacation Trust, 463 U.S. 1, 103 S. Ct. 2841, [77] L.Ed.2d [420], does not call into question the lower courts' jurisdiction to decide these cases. Franchise Tax Board was an action seeking a declaration that state laws were not preempted by ERISA. Here, in contrast, companies subject to ERISA regulation seek injunctions against enforcement of state laws they claim are preempted by ERISA, as well as declarations that those laws are preempted.
It is beyond dispute that federal courts have jurisdiction over suits to enjoin state officials from interfering with federal rights. See Ex Parte Young, 209 U.S. 123, 160-62, 28 S. Ct. 441, 454-55, 52 L. Ed. 714 (1908). A plaintiff who seeks injunctive relief from state regulation, on the ground that such regulation is preempted by a federal statute which, by virtue of the Supremacy Clause of the Constitution, must prevail, thus presents a federal question which the federal courts have jurisdiction under 28 U.S.C. § 1331 to resolve.
Jurisdiction exists regardless of whether the district court eventually determines that the governmental action is or is not preempted. There must be "an existing dispute between the parties as to present legal rights amounting to a justiciable controversy which [the parties] are entitled to have determined on the merits." Florida Lime and Avocado Growers, Inc. v. Jacobsen, 362 U.S. 73, 85-86, 80 S. Ct. 568, 576, 4 L. Ed. 2d 568 (1960); see also, Shaw v. Delta Airlines, Inc., supra, 103 S.Ct. at 2906 (Disability Benefits Law not preempted); Lake Carriers' Association v. MacMullan, 406 U.S. 498, 508-09, n. 12, 92 S. Ct. 1749, 1756, 32 L. Ed. 2d 257 (1972) (must be a present and concrete controversy). Nor would it be sensible for a district court to have to engage in a full analysis of the merits of a case prior to determining whether the jurisdiction were present to consider the matter it had already resolved.
Plaintiffs, thus, may bring such injunctive actions so long as there is an actual controversy and a colorable claim that the state action has been preempted. Contrarily, suits in which plaintiffs seek declaratory judgments that regulation is not preempted may be brought exclusively in state court.
The federal rights exception applies here. While the City claims that this suit *1459 is essentially one for breach of contract, Cox originally sought injunctive relief in No. 84-3743 to bar the City from enforcing the franchise agreement and from filing suit in state court to enforce this agreement because such actions were preempted by federal law. The declaratory judgment claim likewise seeks to prevent the City from interfering with Cox's purported federal rights under the Supremacy Clause. These are precisely the types of issues which federal courts should determine, regardless of which party may have brought the claim as plaintiff. Federal law is "a pivotal issue in the case, one that is basic to the determination of the conflict between the parties." North American Phillips Corp. v. Emery Air Freight Corp., 579 F.2d 229, 233 (2d Cir.1978). Compare City of Poughkeepsie v. Poughkeepsie Cablevision, 571 F. Supp. 1225 (S.D.N.Y.1983) (no federal jurisdiction over suit by city to declare that cable franchise was not preempted by federal law). The immediacy of the City's threatened action is evidenced by the numerous newspaper articles accompanying the pleadings in which various Councilmen state their intentions, by the City's admission in its opposition to Cox's motion to amend, by the City's fervor in opposing Cox's position, and by the City's subsequent state court suit to block Cox's action. Because Cox sought relief from concrete and immediate governmental action which arguably interfered with its federal rights in No. 84-3743, this Court has jurisdiction over that action.
III.
Cox argues that this Court also has jurisdiction over the state court action which it has removed since it also "arises under" federal law. A case arises under federal law where the vindication of a right under state law necessarily turns on some construction of federal law. Franchise Tax Board, supra, 463 U.S. at ___, 103 S.Ct. at 2846. Under the Skelly Oil doctrine, no federal jurisdiction is present if, but for the availability of the declaratory judgment procedure, a federal claim would arise only by way of defense to a state-created action. Franchise Tax Board expanded the Skelly Oil rule to apply to removal of declaratory judgment actions brought in state court. A state declaratory action may be removed only if a nondeclaratory suit, either civil or injunctive, based on the same facts, would have presented a federal question. Thus, a case may not be removed to federal court on the basis of a federal defense, including the defense of preemption, even if the defense is anticipated in the plaintiff's complaint and even if both parties admit that the defense is the only question truly at issue in the case. Id., 463 U.S. at ___, 103 S.Ct. at 2847. In Franchise Tax Board, therefore, the Supreme Court held that the state declaratory judgment action was not removable where California law had established a set of conditions, without reference to federal law, under which a tax levy could be enforced and federal law became relevant only by way of a defense to the obligation created by state law. Id., 463 U.S. at ___, 103 S.Ct. at 2848.
At the same time, a plaintiff may not defeat federal jurisdiction by using artful pleading to omit necessary federal questions from his complaint. Eitmann v. New Orleans Public Service, Inc., 730 F.2d 359, 365 (5th Cir.1984). Rather, it is the rule of the Fifth Circuit that the removal court must inspect the complaint carefully to determine whether a federal claim necessarily is presented, even if the plaintiff has couched his pleadings exclusively in terms of state law. In Re Carter, 618 F.2d 1093, 1101 (5th Cir.1980), cert. denied, 450 U.S. 949, 101 S. Ct. 1410, 67 L. Ed. 2d 378 (1981). "The reviewing court looks to the substance of the complaint, not the labels used in it." Id.
In this case, the City seeks declaratory and injunctive relief stating that "Section 8 of the Franchise [is] valid and enforceable, and that Cox's removal of services from Tier I of Basic Service and removal of converters from subscribers are violations of the Franchise; and further that ... Cox's announced and intended reduction of the programming services in Tier I of Basic Service from the currently provided thirtyone *1460 (31) services to eleven (11) services without Council approval is in violation of Section 8.2 of the Franchise...."
While the general rule is that federal preemption will not give rise to removal jurisdiction, Illinois v. Kerr-McGee Chemical Corp., 677 F.2d 571, 577-78 (7th Cir.1982), cert. denied, 459 U.S. 1049, 103 S. Ct. 469, 74 L. Ed. 2d 618 (1982); Guinasso v. Pacific First Federal Savings & Loan Association, 656 F.2d 1364, 1366 (9th Cir. 1981), cert. denied, 455 U.S. 1020, 102 S. Ct. 1716, 72 L. Ed. 2d 138 (1982), this is based on the previous principle that federal jurisdiction may not rest on federal issues raised strictly in defense. The issue of when federal preemption of state law does not arise by way of defense, but rather would give rise to removal jurisdiction, is unsettled. Justice White, in his dissent to the denial of certiorari in the Kerr-McGee case in 1982 stated, "the issue whether, or under what circumstances a defendant's federal preemption claim presents a federal question sufficient to support removal of a state plaintiff's complaint which on its face raises only state claims, is a substantial one going to the heart of the power of federal courts to determine claims raised in state court proceedings. The Court should grant this case to resolve the conflict." 459 U.S. at 1050-52, 103 S.Ct. at 470-71. And in Franchise Tax Board, supra, the Supreme Court noted that "a claim of federal preemption does not always arise as a defense...." 463 U.S. ___, 103 S.Ct. at 2848, n. 12.
Other courts have held that federal preemption will give rise to federal jurisdiction on removal under certain circumstances. E.g., Gunter v. Ago International B.V., 533 F. Supp. 86 (N.D.Fla.1981) (Securities Exchange Act of 1934); Palm Beach Co. v. Journeymen's & Production Allied Services of America, 519 F. Supp. 705 (S.D.N. Y.1981) (National Labor Relations Act). See also North American Phillips Corp., supra (original federal jurisdiction due to preemption by Federal Aviation Act of 1958).
The complaint here is drafted exclusively in terms of state law. Still, determination of the breach of contract turns on whether the contract has been preempted by federal law. In fact, the language of the contract itself incorporates the issue of preemption. Section 10.8 states that "only those rates and charges for those services for which rate regulation is not preempted by the FCC shall be subject to regulation" by the City.
This Court, however, need not resolve the difficult issue of whether preemption arises only by way of defense on removal here. Even assuming that this Court has jurisdiction, the sole federal question in No. 84-4264 is the same preemption issue which is raised in No. 84-3743. Since the Court has jurisdiction over the latter suit and resolves this issue in Part IV of this opinion, infra, only pendent claims would remain in No. 84-4264 if the Court were to exercise jurisdiction over it. Whether such claims should be remanded is a question of judicial discretion, not subject matter jurisdiction. In Re Carter, supra. 618 F.2d at 1101. Federal courts should not, however, "make needless decisions of state law ... both as a matter of comity and to promote justice between the parties, by procuring for them a surer-footed reading of applicable law." United Mine Workers of America v. Gibbs, 383 U.S. 715, 726, 86 S. Ct. 1130, 1139, 16 L. Ed. 2d 218 (1966).
The breach of contract issues are more appropriately considered by the courts of Louisiana. Accordingly, this Court determines only the federal issue of preemption. Number 84-4264 is, therefore, remanded to state court. Similarly, the remaining pendent claims in No. 84-3743 are dismissed without prejudice to renew these issues in an appropriate state court proceeding.
IV.
The substantive legal issue raised by these cases is one of first impression: may a cable company, in order to effect a rate increase, "retier" a basic subscriber service package, which contains both the FCC's required "must carry" stations and non- "must carry" stations, without local regulatory *1461 approval, when the contract between the parties provides that the company must deliver specified services[4] and that no increases shall occur without governmental approval?[5] Put another way, has local regulatory authority over basic cable service rates and tiering been preempted by the FCC? Cox argues that it is free to remove program offerings from its Basic Service tier without Council approval regardless of the terms of its contract since those contract provisions which require it to provide a specific number of services, or specific offerings, above and beyond the FCC's required "must carry" stations are void as preempted by federal law. The City contends, however, that the contract is valid and no preemption has occurred.
Under the Supremacy Clause, state regulation may be preempted in a variety of ways, only one of which is relevant here: by the regulatory agency's[6] clear expression of an intent to preempt state law.[7] In Crisp, the Supreme Court set forth the test of whether the FCC has preempted a certain area of local agency cable regulation. The FCC must have (1) resolved to preempt the specific area in question; the determination must (2) represent a "reasonable accommodation of conflicting policies;" and (3) the agency must have the authority to preempt. ___ U.S. at ___, 104 S.Ct. at 2701. In this instance, the Court holds that the FCC did not intend to preempt the local regulation in question, and to the extent, if any, that the Commission or its staff may purport to have done so in the Community II decision,[8] such actions, as accomplished, would be beyond its regulatory authority and, therefore, null and void.[9]
In U.S. v. Southwestern Cable Co., 392 U.S. 157, 177-178, 88 S. Ct. 1994, 2005, 20 L. Ed. 2d 1001 (1968), the Supreme Court held that Congress granted the FCC authority to regulate cable television in the Federal Communications Act of 1934, 47 U.S.C. § 151, et seq. In order "to make available ... to all the people of the United States a rapid, efficient, Nationwide and *1462 worldwide wire and radio communication service," the Commission may issue "such rules and regulations and prescribe such restrictions and conditions, not inconsistent with law," as "public convenience, interest or necessity requires." 47 U.S.C. § 151, § 303(r).
Pursuant to this authority, for over 12 years, the FCC has consistently left to local governmental bodies the exclusive authority to regulate the rates of basic cable service, while rejecting cable companies' arguments that such regulation is overly-burdensome, unnecessary, or not in the public interest. In 1972, the Commission considered "how best to obtain, consistent with the public interest standard of the Communications Act, the full benefits of developing [cable] communications technology for the public...." Cable Television Report and Order, 36 F.C.C.2d 143, 144 (1972). Among the issues considered was the interrelationship of local and federal regulatory bodies. 36 F.C.C.2d at 204-10. Amicus in this case, NCTA, argued at that time that no local rate regulation was necessary and urged the FCC to preempt the field.[10] 36 F.C.C.2d at 205-206.
The FCC rejected the cable industry's views and opted in favor of "creative federalism" wherein local governments would regulate matters with which they had special expertise, such as franchise selection, rates and rate changes, and the handling of service complaints, while the FCC would set minimum standards which would be enforced through the process of issuing Certificates of Compliance. 36 F.C.C.2d at 207. Under this "structured dualism" of combined federal-local regulation, local regulatory bodies were given the authority to regulate the rates for the installation of equipment and for all "regular subscriber services," which were defined as "services regularly furnished to all subscribers." The federal regulations, 47 CFR § 76.31(a)(4), specifically prohibited cable operators from changing the rates charged subscribers "except as authorized by the franchising authority after an appropriate public proceeding affording due process...." 36 F.C.C.2d at 209, 219. The Commission enunciated a policy goal of insuring rates which were fair to both the cable system and the subscribing public. 36 F.C.C.2d at 209.
Completely separate from the FCC's discussion of federal-local relationships, which include rate regulation, was an analysis of so-called "signal carriage" regulation. 36 F.C.C.2d at 147-189. This analysis and the accompanying rules, 47 CFR § 76.51-76.67, concern which television "signals" a particular cable operator in a given geographic market may carry. The rules divided all signals into three categories: signals that a cable system must carry upon request of the broadcast station, signals that a cable system may carry given the size of the particular geographic television market, and signals that same system may carry in addition to those required or permitted in the other two categories. 36 F.C.C.2d at 170-71, 220-33. "Signal carriage" had no bearing on subscriber rates, local regulation of cable operations, packaging of cable program offerings to subscribers, or retiering or recombining of such subscriber packages. Rather, it concerned such issues as "major television markets," § 76.51; boundaries of television markets in terms of laditudinal and longitudinal "reference points," § 76.53; and the "manner of carriage" in terms of quality of broadcast signals, the channel number on which a signal shall be carried, and the abridgement of the content of broadcast programs, § 76.55. The purpose of this preemption was to keep local agencies from requiring operators to receive signals which were not allowed by the FCC. The Commission specifically stated that these carriage provisions did not affect federal-local relationships, such as designation of the proper governmental authority to regulate rates. 36 F.C.C.2d at 165, 207.
*1463 Later in 1972, the Commission reconsidered its order. At that time, it altered the word "changes" in rates in § 76.31(a)(4) to "increases" in rates. Local governments therein retained the right to regulate rate increases for all regular subscriber services. Reconsideration of Cable TV Report and Order, 36 F.C.C.2d 326, 327, 374 (1972).
In 1974, the Commission sought to clarify its cable rules. It stated that it had preempted all regulation of signal carriage and reiterated that signal carriage concerned which transmission signals a cable operator may carry, not regulation of cable service rates or the sales packaging of services the cable carried. Clarification of the Cable Television Rules and Notice of Proposed Rulemaking and Inquiry (Clarification), 46 F.C.C.2d 175, 178, 188-92, 199-200 (1974). The Commission confirmed that regulation of the rates of services supplied to all subscribers remained with local government. It drew a distinction between that regular service which must include at minimum "all broadcast signal carriage and all our required access channels including origination programming,"[11] which was to be regulated at the local level, and "specialized programming" or "pay-television" for which a per-program or per-channel charge is made, which local agencies could not regulate. The FCC preempted regulation of such special pay services, along with "other" non-regular subscriber services such as cable advertising, alarm systems, and two-way systems and decided that there should be no regulation of the rates on either local or federal levels of such new and innovative operations.[12] 46 F.C.C.2d at 199-200.
In 1975, the Commission considered whether there was a need for additional rules to remedy duplicative or excessive over-regulation of cable television since both state and municipal governments had been regulating the industry. The Commission rejected arguments that local regulation, even if it leads to "three-tier" regulation, is necessarily burdensome. Report and Order, Duplicative and Excessive Over-Regulation CATV, Docket No. 20272, 54 F.C.C.2d 855, 858, 863 (1975). The FCC stated that it intentionally had left a considerable amount of regulatory responsibility at the local level and had preempted only specific, narrow aspects of cable regulation. While signal carriage and pay cable, among other subjects, had been preempted, other elements had not been. The Commission concluded that this was "the correct course to follow. While it leads to many difficulties and complications that could be avoided by total preemption, we think that the benefits derived, especially from local determination of the franchisee, to date, here outweighed the liabilities of such an approach." 54 F.C.C. at 863.
In 1976, the Commission continued to hone its rules on local regulation of regular subscriber rates by soliciting views on whether § 76.31(a)(4), which made local rate oversight mandatory, should be modified or deleted. Notice of Proposed Rulemaking, Subscriber Rates-CATV, Docket No. 20681, 57 F.C.C.2d 368, 368-69 (1976). Following the notice, that section was deleted by the Commission. Report and Order, Subscriber Rates-CATV, Docket No. 20681, 60 F.C.C.2d 672 (1976). This action was taken since some local agencies did not have the authority to comply with the Commission's rules and since rate control was not necessary in some geographic areas where regulation would lead to higher, rather than lower rates. 60 F.C.C.2d at 682-83.
*1464 Cox's parent corporation, Cox Cable Communications, and amici NCTA and CATA once again argued that local regulation of basic rates was unnecessary and burdensome and should be preempted as pay-cable rates had been. 60 F.C.C.2d at 676, 677, 681, 684-85. The FCC refused to preempt local regulation, but reaffirmed its 1972 policy of allowing local agencies to regulate regular subscriber rates since these rates "could best be reviewed by the local franchising authority." 60 F.C.C.2d at 673. While determining in this Report and Order that it was counterproductive to the public interest to mandate local regulation where such regulation was impossible or superfluous, the FCC held that it should be up to local governments to decide if they would regulate and what methods they would employ to do so. The Commission confirmed that local regulation of regular subscriber rates had been successful in most instances and concluded that its holding assured that "most, if not all, subscriber rate problems may be effectively settled through local processes."[13] 60 F.C.C.2d at 685.
These rulings represent a clear delegation of authority to regulate regular subscriber services to local government. These services have continually included all services regularly furnished to all subscribers. Cable Television Report and Order, supra, 36 F.C.C.2d at 209. Prior to the deletion of the access channel rules, this service included at minimum, but was not limited to, "all broadcast signal carriage and all our required access channels including origination programming," but did not include pay television. Report and Order, Docket No. 20681, supra, 60 F.C.C.2d at 673, n. 1; Clarification, supra, 46 F.C. C.2d at 199-200. Subsequent to the deletion of these requirements, regular service still includes all service regularly provided to all subscribers, including the entire basic service package.
Cox's confusion stems from its reading that regular subscriber service includes only "must carry" stations. This is too narrow a reading of the FCC's rulings. Rather, the FCC requires these signals to be provided to all subscribers. It has not stated that they exhaust "regular subscriber service," but that they are elements to be included in such service. Cox's Basic Service, since it was received by all Cox customers, was in its entirety an element of regular subscriber service.
In spite of the clear expression of FCC policy encouraging local regulation of regular subscriber rates enunciated in these rulemakings, Cox argues that a recent FCC opinion, and its reconsideration[14] stand for the proposition that the City may not prevent Cox from retiering its Basic Service. In In Re Community Cable, Inc., 54 R.R.2d 1351 (1983) (Community Cable I), the FCC considered whether cable operators could increase the rates charged for receiving a non-basic tier service, that is, something other than regular subscriber service. As the parties and the FCC phrased the issue, does preemption extend not only to pay cable television service for which a per-channel or per-program charge is made, "but also to specialized or auxiliary cable services ... provided in tiers of services offered to subscribers at a single package rate distinct from the rate charged for regular subscriber service?"
The opinion was clear to indicate that it concerned regulation only of Community Cable's "expanded tier," which was distinct from its "basic tier" or regular subscriber service, which in turn included not only "must carry" signals, but other non-mandatory programming. 54 R.R.2d at 1352 and *1465 n. 3. The FCC stated that it had already preempted rate regulation of pay television and other programming not offered as part of the subscriber's basic service package, 54 R.R.2d at 1358, and held that its "preemptive jurisdiction extends to non-basic services whether they are priced individually by channel or by program or as a group in one or more tiers of service," 54 R.R.2d at 1359. Since the "expanded tier" was within the ambit of "services not regularly provided to all subscribers," 54 R.R.2d at 1360, local government was prevented from regulating the rates of this tier.
The Supreme Court cited Community Cable I with approval in Crisp, stating that the Commission has deliberately preempted state regulation of non-basic program offerings. ___ U.S. at ___, 104 S.Ct. at 2703, n. 9. Community Cable I broke no new ground and has no bearing on this case. It concerns rate regulation of a non-basic tier only, where local regulation has been preempted since 1972.
The FCC reconsidered this case and issued a subsequent opinion in July. In Re Community Cable TV Inc., 56 R.R.2d 735 (1984) (Community Cable II). The FCC reiterated that the petition for reconsideration concerned only the preemption of regulation of non-basic service, which was defined as "services, whether offered singly or in tiers, not provided to all subscribers, for which additional fees are charged," and confirmed that basic service which is subject to local regulation extends to "that service regularly provided to all subscribers." 56 R.R.2d at 736, n. 2.
The Commission emphasized that Community Cable I had not changed any prior Commission rules, but had only reasserted that the FCC had preempted regulation of special non-basic pay cable services. 56 R.R.2d at 739. The Commission also recognized that had Community Cable I changed prior Commission policy, a rule-making would have been required under federal law. Id.
There is nothing in Community Cable II which would indicate that "basic service" or "regular subscriber service" should be read in a new fashion so as to consist exclusively of "must carry" signals, as Cox contends. Rather, such services consist of "broadcast signals required to be carried by our rules as well as all required access services associated therewith and installation and reconnection charges, etc." 56 R.R.2d at 740. The word "etc." indicates that local agencies retain the right to regulate the entire basic tier which may contain non-"must carry" signals, just as the Commission had approved in Community Cable I. This reading is supported by Community Cable II's definition of the opposite phrase "non-basic services" as services "not regularly provided to all subscribers," "those services above and beyond the basic service tier, which every subscriber to a system receives." 56 R.R.2d at 739, n. 6.
Community Cable II considered a second issue, not considered in Community Cable I, which arose from a New Jersey company's petition for a declaratory ruling: whether a cable operator could retier a non-basic service tier without local government approval.[15] Both parties cited Footnote 6 of this opinion in support of their positions and seem to feel it is determinative of this case.[16] Cox contends that it *1466 allows operators to remove any offerings from its basic tier so long as "must carry" stations are retained. The City argues that it states that the entire basic tier, regardless of its makeup, is subject to regulation.
Community Cable II must be read in precedential context. It also concerned retiering of a non-basic tier only and its holding must be read in light of this limitation. As the Commission stated, "it has been clear for some time that local and state authorities are preempted from regulatory `rates, terms and conditions' of pay and other video auxiliary services.... Whatever other legitimate actions the [local] Board may take, it may not interfere with Cablevision's clear right to tier its [non-basic] services as it wishes." 56 R.R.2d at 741-42. In fact, the first sentence of Footnote 6 itself limits its reach to non-basic tiers.
Cox seeks to have this Court infer that Community Cable II holds that local governments cannot prevent retiering of basic service as well. Even were this the intended meaning, such a proposition would have been strictly dicta to the Community Cable II case. This court, however, is of the opinion that such a reading would be a misconstrual of the FCC's intent. The FCC was careful to indicate repeatedly that the opinion only applied to the regulation of a non-basic tier. While it recognized that a cable operator may "tier" its service as it wished, it referred to tiering of non-basic services only. In fact, in Community Cable II, the FCC specifically stated with approval that the New Jersey operator had previously applied for and received local authorization to retier basic service. 56 R.R.2d at 738.
Such a reading is consistent with FCC precedent which has always distinguished between regulation of various levels of service, not between types of regulation within a given level. That is, the FCC's holding that a local agency could not regulate retiering of a non-basic level was premised upon the fact that the regulation would have impacted a non-basic tier; it was not grounded on a distinction between rates and tiering. The case emphasized this by declaring that "local and state authorities are preempted from regulating `rates, terms and conditions' of pay and other video auxiliary services." 56 R.R.2d at 741-42. The fact that rates are grouped with terms and conditions of service indicates that the holding was based on the level of service, not on the fact that tiering per se was involved. Because Community Cable II did not change prior FCC precedent, local government franchisors are not preempted from regulating retiering of a basic subscriber service tier, but may hold a cable operator to its contractual duty to provide all promised stations on this tier.
Additional support for this proposition comes from the FCC's consistent express reservation to local government of regulatory power over "rates." The rate charged to subscribers is not a price in a vacuum, but is an amount charged for a unit of a given quantity and quality. A. Kahn, The Economics of Regulation, Vol. I, p. 21. Rates may be increased either by an increase in the price for a given commodity or by a decrease in the quantity or quality of units provided at a given price. By reducing the number of channels which are provided to basic subscribers from 31 to 11 at the same price, $7.95, Cox has increased the rate of basic service. The City has exclusive authority to regulate that rate and may block Cox's retiering scheme in order to enforce its authority.
City Council regulatory power over retiering derives also from its express FCC-granted authority to choose the franchisee. See Crisp, supra, ___ U.S. at ___, 104 S.Ct. at 2702, n. 8. This authority carries with it the capacity to make reasoned, sensible selections to serve the public interest. That determination is largely based on what services will be provided by the potential franchisee and what rates it will charge.[17] If FCC rulings were interpreted to allow local governments the ability to choose franchisees, but not to allow them to contract with them for specific services and rates, agencies' ability to adequately *1467 screen applicants would be severely curtailed.
If Community Cable II's Footnote 6 could be interpreted to imply that cable operators generally could remove services from a basic tier, it would still not forbid cable companies from contracting away this right. Assuming that local agencies' powers were as limited as Cox contends, agencies are not forbidden from contracting with operators to require certain services on a basic tier. Signal carriage rules prevent agencies from requiring operators to receive certain signals which they may not under FCC rules be able to obtain. They do not prevent agencies from requiring operators to place on a basic tier nonpay cable services, which, with FCC approval, they already provide to subscribers. This scenario is explicitly envisioned by Community Cable II which stated, "Of course, if an operator chooses to provide discretionary services as part of basic service, whether this be 12-, 20-, 36- or 54-channel service, or more, the rate for the entire basic tier remains subject to local regulation." 56 R.R.2d at 859, n. 6.
Additionally, if the Community Cable II case were to have held that basic service retiering were preempted, such a holding would represent a change in policy and would be beyond the Commission's authority. Under the Administrative Procedure Act, the Commission cannot change pre-existing rules without a rulemaking proceeding with the requisite notice, hearings, and agency procedures. 5 U.S.C. § 551(4), § 553. 47 CFR § 1.399 et seq. delineates the appropriate steps which the FCC must take to embark on such a proceeding, which were not followed in Community Cable II.
Cox finally contends that the Supreme Court's opinion in Crisp alone permits Cox to retier without Council approval. At issue in Crisp was FCC preemption of an Oklahoma state ban on alcohol advertisements transmitted on cable from out of state. Crisp, unlike this action, was a true signal carriage case since the state agency sought to regulate the content of the transmitted material, that is, the actual signal sent from broadcaster to cable operator. The Oklahoma ban conflicted both with an explicit signal carriage regulation, 47 C.F.R. § 76.55(b), which prohibited local regulators from deleting or altering any portion of signals, and with the completely preempted area of pay cable. ___ U.S. at ___, 104 S.Ct. at 2704.
In this case, Cox seeks to ride the coattails of Crisp by framing the issue as one of signal carriage. However, Cox has never attempted to define or to delimit signal carriage and no signal carriage issues or regulations are involved here. The City does not seek to alter the substance of broadcast signals. It does not desire to tell Cox on what channel it is to transmit its services. Nor does it want to require Cox to carry signals which are not permitted by the FCC's rules. The City merely seeks to regulate the rate of Cox's service by holding the company to its contractual agreement to provide certain services on the Basic Service tier. This has continually been within the proper purview of local regulation and has always been an element of the FCC's discussions of federal/local relationships, not part of its analysis of preemptive signal carriage regulations.
Nor does this case concern pay cable. The services which Cox removed were by contract provided to all customers for the Basic Service price. No additional charge was made either on a per-channel or supplemental tier charge basis. The fact that Cox may want to make these into pay services does not make them so at the relevant time of contracting. Crisp, therefore, has no bearing on this matter.
The City's regulation of Cox's Basic Service retiering is premised on three grounds which have been expressly recognized by the FCC: the right of local agencies to regulate retiering as an element of rate regulation; their authority to choose the cable franchisee; and their general grant of responsibility over basic subscriber services. To date such regulation has not been preempted by federal regulations, the FCC or the Supreme Court. The City Council may properly regulate Cox's Basic Service and prevent the company from either *1468 changing its rate or removing program offerings from this service. The City may also hold Cox to its contractual obligations and, under the express terms of the contract, injunctive remedies are available.[18]
V.
In summary the Court holds:
1. Local governing bodies or regulatory agencies are not preempted from regulating the number or nature of program offerings, whether they are broadcast stations, satellite services, or alphanumeric programming services, which are provided to cable television subscribers on a basic subscriber service tier;
2. Such governing bodies are not preempted from entering into contracts with cable operators, which contracts require the operators to provide specific offerings on the basic subscriber service tier; nor are such contracts or their applicable provisions void as violative of federal law;
3. Cox Cable New Orleans, Inc. (Cox) voluntarily contracted with the City of New Orleans to provide 31 such offerings including Entertainment and Sports Programming Network (ESPN), USA Network, Atlanta Station WTBS, and others on its Basic Service tier, 20 of which services were later removed unilaterally by Cox; and
4. Federal preemption does not authorize Cox to remove stations and services from its basic tier without the City Council's approval; that is, federal preemption of local regulation is not a viable defense to a suit by the City of New Orleans for breach of contract in response to Cox's "retiering" of its Basic Service.
ACCORDINGLY, THE COURT HEREBY DENIES Cox's motion for summary judgment.
THE COURT HEREBY REMANDS Civil Action No. 84-4264 to state court. All remaining state claims in No. 84-3743 ARE HEREBY DISMISSED by the Court without prejudice to renew these matters in state court.
Let judgment be entered in favor of defendants, City of New Orleans, Louisiana; The City Council of New Orleans; Honorable Ernest N. Morial, in his capacity as Mayor of the City of New Orleans; and the Honorables Sidney J. Barthelemy, Joseph I. Giarrusso, Bryan Wagner, James Singleton, Michael Early, Lambert C. Boissiere, Jr. and Wayne M. Babovich, in their official capacities as Councilmen for the City of New Orleans, and against Cox Cable New Orleans, Inc., dismissing plaintiff's suit at its costs.
NOTES
[1] All references are to documents in Civil Action No. 84-3743 unless indicated otherwise.
[2] The two-tier package included two new services for a total of 33 channels.
[3] The Clerks' stamps in fact indicate that the City's state court petition was filed at 4:52 P.M. on August 28, fifteen minutes after the City's 4:37 filing of its opposition to Cox's motion to amend Number 84-3743.
[4] Franchise § 4.24; § 8.2. Section 8.2 states which specific stations Cox must provide in Basic Service. Included are all seven must carry stations, plus a variety of others, including WTBS, ESPN, and the USA Network. Specifically not included are pay television services such as Home Box Office, Showtime and The Movie Channel. § 8.3.
[5] Franchise § 10.2; § 12.1; § 12.2; § 12.3. Section 10.2 provides that Basic Service shall cost $7.95. Section 12.1 grants the City Council the authority to regulate the franchise. Section 12.2 grants the Council the power to regulate rates. Section 12.3 sets limits on rate increases and requires a public hearing prior to the Council's approval of a rate increase.
[6] Usually it is Congress which preempts state law, but federal agency regulations may also do so. "Federal regulations have no less preemptive effect than federal statutes." Capital Cities Cable, Inc. v. Crisp, ___ U.S. ___, 104 S. Ct. 2694, 2700, 81 L. Ed. 2d 580 (1984).
[7] The other means are: when Congress has legislated comprehensively to occupy the field; and when compliance with both state and local law is impossible or the state law "stands as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress." Crisp, supra, ___ U.S. at ___, 104 S.Ct. at 2700. In this case, the FCC has expressly decided not to occupy the field, but to preempt explicitly and narrowly only those areas which it has determined should be within the exclusively federal regulatory domain. See e.g., Clarification of the Cable Television Rules and Notice of Proposed Rulemaking and Inquiry, 46 F.C.C.2d 175, 199-200 (1974). Nor is compliance with both City Council and FCC regulation impossible here where the FCC has expressly left regulation of basic subscriber services to local agencies. See e.g., Report and Order, Duplicative and Excessive Over-Regulation-CATV, Docket No. 20272, 54 F.C.C.2d 855 (1975).
[8] The FCC staff counsel seems to argue in its amicus brief that the FCC has preempted the area of retiering. This is not in keeping with either the FCC's rulemaking or with its opinions. Nor can the staff counsel, without signatures of the Commissioners, speak for the FCC, particularly when counsel purports to make a rulemaking, which even the FCC may not do unless appropriate procedures are followed. See 47 CFR § 1.399 et seq.
[9] It is unquestioned that the FCC has general authority to regulate the cable industry. U.S. v. Southwestern Cable Co., 392 U.S. 157, 172-78, 88 S. Ct. 1994, 2002-05, 20 L. Ed. 2d 1001 (1968). The crucial questions are whether the FCC has exercised that authority and, if so, whether it acted in compliance with its statutory obligations.
[10] In 1969, the Commission had indicated that local regulation of cable television inconsistent with its regulations is preempted. First Report and Order, 20 F.C.C.2d 201, 223 (1969). This authority has been acknowledged by the Supreme Court. Crisp, supra, ___ U.S. at ___, 104 S.Ct. at 2700-01.
[11] The FCC's access channel requirement was struck down by the Supreme Court in 1979. FCC v. Midwest Video Corp., 440 U.S. 689, 708-09, 99 S. Ct. 1435, 1445-46, 59 L. Ed. 2d 692 (1979).
[12] The FCC did not cast pay television irretrievably into the hands of cable operators, however. It indicated that it would step in and regulate these new services if the free market did not prove adequate to protect the public interest. 46 F.C.C.2d at 200. FCC preemption of rate regulation of pay television was affirmed the following year, First Report and Order, Subscription TV Program Rules, Docket No. 19554, 52 F.C.C.2d 1, 67-68 (1975), and has been upheld by the Second Circuit, Brookhaven Cable TV, Inc. v. Kelly, 573 F.2d 765 (2d Cir.1978).
[13] To aid local agencies in regulating regular subscriber rates, the Commission in 1976 sought to create a data bank on local rate regulation. In that notice, the Commission again emphasized that it had no intention of altering the role of local agencies in regulating rates. Notice of Inquiry, Cable Television Subscriber Rates, Docket No. 20767, 58 F.C.C.2d 915, 916 (1976). However, Commissioner Robinson was particularly wary that cable television companies would use the notice as another opportunity to try to convince the Commission to preempt local rate regulation. 58 F.C.C.2d at 918 (Separate Statement of Commissioner Robinson).
[14] The FCC apparently has not deemed either of these opinions significant enough to be published in its official reports to date.
[15] The Community Cable II case was decided after the Supreme Court's ruling in Crisp. The issue of local regulation of retiering arose for the first time in Community Cable II. Thus, Crisp, which cited Community Cable I with approval, does not support the second opinion.
[16] Footnote 6 states:
As we stated in Community Cable TV, Inc., 54 R.R.2d at 1360, nonbasic services are those "not regularly provided to all subscribers...." That is, those services above and beyond the basic service tier, which every subscriber to a system receives. There is no magic number of channels which constitutes basic service, save for the minimal requirement of all mandatory signals. Given our preemption of local signal carriage regulation, the choice at any time of what will constitute basic service above and beyond signals whose carriage is mandated by our rules, remains within the discretion of the system operator. Of course, if an operator chooses to provide discretionary services as part of basic service, whether this be 12-, 20-, 36-, or 54-channel service, or more, the rate for the entire basic tier remains subject to local regulation.
[17] See affidavit of Councilman Singleton, Document No. 49.
[18] Franchise § 12.4(f).
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54 F.Supp. 805 (1943)
SWANSON MFG. CO. et al..
v.
FEINBERG-HENRY MFG. CO., Inc., et al.
District Court, S. D. New York.
July 12, 1943.
*806 *807 Munn, Liddy & Glaccum, of New York City (John H. Glaccum, of New York City, of counsel), for plaintiffs.
George M. Glassgold, of New York City (Irving F. Goodfriend, of New York City, of counsel), for defendant Feinberg-Henry Mfg. Co., Inc.
Jacob B. Goldberg, of New York City, for defendants Columbia Mfg. Co. and E. Behrman & Co.
LEIBELL, District Judge.
On April 25, 1938, plaintiff, Nels H. Swanson of Chicago, Illinois, filed an application for a patent on a coin purse. The following paragraphs of the specifications describe the purposes of the alleged invention:
"The present invention relates to coin purses and more particularly to a `zipper' type of casing having bill, coin, and card pockets provided therein, with one of the pockets provided with an extension to which the lower bevelled end of a coin holder, of a molded plastic product, is secured and formed with suitable coin slots and with inclined top faces to expose coin rest surfaces and guides to facilitate convenient insertion of coins and the easy extraction of the same past suitable detent members provided in the coin slots.
* * * * *
"It is an important object of this invention to provide an improved type of coin case of a middle hinge type provided with a marginal zipper closure mechanism for enlosing a slotted coin holder, the lower end of which is hingedly supported within the casing, with said coin holder being preferably constructed of a molded plastic such as a cellulose acetate product, permitting the partitions separating the coin slots to be suitably bevelled or inclined for the convenient inserting of coins and the removal of coins from the slots which are open both at the front and the back of the coin holder to serve as finger guides for the movement of coins past detents or retaining clips provided near the outer ends of the coin slots to obviate the accidental sliding of coins out of the slots, but permitting the movement of coins past the same when the coins are manually moved."
The patent, as issued January 2, 1940 (No. 2,185,359), contained six claims, of *808 which the 4th, 5th and 6th are involved in this suit. They read as follows:
"4. A coin purse comprising a pair of cover sections having a hinge connection there between, a pocket secured on the inner side of one of the cover sections, a hinge extension integrally formed on the bottom of the pocket, a coin holder having an inclined bottom secured to the hinge extension to permit pivotal swinging of the coin holder with respect to said cover sections, said coin holder having a plurality of coin pockets of different sizes provided therein having inclined bottoms and separated by resilient grooved partitions for receiving therebetween small coins of different denominations and sizes, and stop members in the grooved partitions for governing the insertion and removal of coins from the coin holder.
"5. A purse comprising a pair of cover sections connected together by a hinge section disposed between them, a member secured to one of said cover sections to define a pocket therewith having a closed end adjacent the hinge section and said member extending beyond said closed end to define a hinge member, a coin holder comprising a substantially rigid member having an inclined lower portion attached to said hinge member for swinging movement between said cover sections.
"6. A coin purse comprising a cover section, a combination pocket and hinge member in the purse, and a coin holder secured to the hinge member to permit the coin holder to swing into different positions with respect to the cover section, said coin holder comprising a coin receiving member having an inclined bottom surface secured to the hinge member, said coin receiving member also having a plurality of coin receiving pockets formed with inclined bottoms and with side coin guide grooves having coin stops therein adapted to be flexed by the insertion of coins into the pockets and by the removal of coins from said pockets."
Plaintiff, Swanson Mfg. Co. (of which Nels H. Swanson is president), is the exclusive licensee under said letters patent and since August, 1938, has manufactured a coin purse with a plastic coin rack, which has been a success commercially. The coin rack bears plaintiff's trade-mark "Jiffy".
Defendant, Feinberg-Henry Mfg. Co., is a New York corporation with a place of business in this District. It began manufacturing coin racks of a plastic substance in the Fall of 1939, on which it impressed its trade-mark "Mayflower". The molds for the coin racks were ordered in May, 1939. Feinberg-Henry Co. has sold its "Mayflower" plastic coin racks to the defendants, Columbia Mfg. Co. and E. Behrman & Co., who attach them inside coin purses of a conventional type, which they sell to retailers. Feinberg-Henry also manufactures coin purses and uses its "Mayflower" plastic coin racks as a part thereof. Their cheapest type purse, known as Mon-E-Pak, is sold to chain stores. Others of a better type are sold to retailers generally.
Plaintiffs plead two claims (causes of action) in their amended complaint, one for patent infringement and the other for unfair competition. This court has jurisdiction to determine the issues in each case.
The Patent.
The claim for patent infringement alleges that the plastic coin racks manufactured by Feinberg-Henry and used in the purses of Feinberg-Henry, Columbia and E. Behrman & Co. infringe claims 4, 5 and 6 of the patent in suit. To this the defendants answer that plaintiffs' coin rack lacks invention, that all its essential functional elements are found in the prior art, and that at best it is an unpatentable aggregation of old elements. I have concluded that claims 4, 5 and 6 of plaintiff's patent are invalid, that they lack invention, that their principal elements were disclosed by the prior art. But if said claims of the patent had been valid, the defendants would have infringed through the manufacture and sale of purses containing the "Mayflower" plastic coin rack made by defendant Feinberg-Henry.
Although plaintiff, Nels Swanson, disclosed the appropriateness of using a plastic material (it was light, resilient, and could be molded in one piece) in the specifications of his patent, the patent claims as allowed do not cover the use of a plastic material in the manufacture of the coin racks. Unquestionably the plaintiffs were the first to manufacture plastic coin racks for use in coin purses. The defendants got their idea of a plastic coin rack from the commercial success of plaintiffs' coin rack.
In findings of fact filed herewith I have specified the patents of the prior art which contain elements of plaintiff's patent, either alone or in various combinations. The *809 idea of a coin rack with grooves of various sizes to hold coins of different denominations in their respective grooves, according to size, is old. The use of an inclined base or other device for tilting coins in a groove and holding them in a position where they partially overlap and can be easily removed, is also old. Likewise the use of some restraining force on the sides of the grooves to keep the coins from falling out, and the use of a nub or slight bulge inwardly at the entrance end of the groove, to detain the coin, were known in the prior art and served as a coin stop or coin detent. In fact, plaintiff, Nels Swanson, had for many years (since 1928) manufactured a metal coin rack in which a slight bulge at the upper end of the grooves acted as a coin detent. He applied for a patent on the metal coin rack but never carried the proceeding through to the actual issuance of a patent. Plaintiffs were still making the metal coin rack in 1942.
The principal difference in construction between the plastic coin rack manufactured by plaintiff under the patent in suit and the metal coin rack plaintiff has made for many years, are the light resilient material of the plastic and the inclined bottom for tilting the coins in the groove, so that they overlap in part and are quite readily removed.
The plastic material has properties which make it more adaptable than metal in the manufacture of coin racks for use in leather purses. The plastic coin rack can be poured and molded as one piece: there are a dozen separate pieces in the metal rack. The natural resiliency of the plastic helps hold the coins in place and makes it easier to extract coins from the grooves. The plastic weighs less than the metal. The purse itself is easier to carry and should wear longer, because there is less of a weight strain on the leather hinge and less friction on the lining of the purse.
Plastics in recent years have in many ways supplanted metal, especially the heavier metals, in the manufacture of devices of all kinds. Plaintiff by being the first to use plastic in manufacturing a coin rack could not thereby gain a monopoly which he was not given by the claims of the patent. Further, the use of a plastic material instead of metal could not, in the case of a coin rack, be classed as invention, even if the allowed claims had specifically covered a plastic, which they do not.
In claim 5 reference is made to the manner in which the coin rack is attached to the purse. It provides that some of the purse material (leather) at the bottom of a side pocket, should be extended (as a flap) so as to form a hinge member, to which the coin holder may be attached and swing freely between the cover sections. There was nothing new in having a hinge attachment, at the folding line of a purse, to which a leather receptacle (for identification cards or automobile licenses) could be attached. The prior art disclosed it in many different forms.
When claims 4, 5 and 6 of plaintiff's patent are read, upon the disclosures of the patent, they cover "nothing but the use of the old combined in obvious ways". As Judge Chase wrote in General Time Instruments Corporation v. New Haven Clock Company, 2 Cir., 136 F.2d 49, 50: "Though it is often hard to determine when invention begins, we think it is clear that the present standard for patent claim validity is too high to include this sort of thing. * * * In any event, there is nothing in the patent to bring it up to the plane of inventive thought required by Cuno Engineering Corp. v. Automatic Devices Corp., 314 U.S. 84, 62 S.Ct. 37, 86 L.Ed. 58."
The Unfair Competition.
Plaintiffs' second claim (cause of action) is for unfair competition. Plaintiffs allege that Swanson Mfg. Co. and its predecessor in title have for many years been engaged in the manufacture and sale of coin purses and have established in the public mind a reputation for the quality, durability and value of their purses; that in August, 1928, the corporate plaintiff's predecessor adopted and began to use the trade mark "Jiffy" in order to distinguish its coin purses from those of other manufacturers on the market, and extensively advertised under the trade mark both to the trade and to the purchasing public, at great expense. The above allegations were established in part only.
The amended complaint also alleged that the coin purses manufactured under plaintiffs' letters patent have become so associated with the plaintiff in the public mind as to have acquired such a secondary meaning that any coin purses of the same appearance would be ascribed to the plaintiff *810 as the source of production. This allegation has not been proven either directly or inferentially.
The proof in respect to plaintiff's sales and advertising, in the period between August, 1938, when it first made the "Jiffy" plastic coin rack and October, 1939, when defendant, Feinberg-Henry, put its "Mayflower" plastic coin rack on the market, is not such as to justify the conclusion that a purse with a plastic coin rack had "become so well associated with the plaintiff" (or plaintiffs' trade mark "Jiffy") "as to acquire a secondary meaning" and "cause any [purse] of the same appearance" having a plastic coin rack "to be ascribed to the plaintiff as the source of production." See, Lewis v. Vendome Bags, 2 Cir., 108 F.2d 16, 18. The fact is that plaintiff's predecessor had used the trade mark "Jiffy" on a coin purse with a metal coin rack, which plaintiff had sold as far back as 1928. Plaintiff continued to make metal coin racks until 1942. Plaintiff's advertising undoubtedly informed jobbers, wholesales and retailers in the period between August, 1938, and October, 1939, that plaintiff's "Jiffy" purse with a plastic coin rack was on the market, but neither the sales to the purchasing public nor the advertising so directed were of such volume as to have created a public impression that coin purses with plastic coin racks had only the plaintiff as their source. Plaintiff spent about $2,500 in 1938 in advertising these "Jiffy" plastic coin rack purses, and about $5,800 in 1939. Plaintiff's sales of these "Jiffy" purses for 1938 amounted to about $8,000 and in 1939 to about $67,000. In the latter part of 1939 defendant Feinberg-Henry Mfg. Co. entered the field with its "Mayflower" plastic coin rack, and coin rack purses. In June, 1940, the defendant Columbia Mfg. Co. began manufacturing purses containing "Mayflower" plastic coin racks. There was not enough time nor a broad enough market in the period between August, 1938, and October, 1939, for plaintiff to have built up in the public mind the impression that all plastic coin rack purses had the plaintiff as their source.
It is also alleged in the amended complaint that "each of the defendants has made or sold infringing coin purses of the identical appearance and as precise copies and substantial counterfeits of the said coin purses of the plaintiff, with the intent and the result of profiting by the inevitable public confusion created by defendants' said substantial counterfeits". At an examination of Mr. Swanson before trial on this issue, plaintiff's attorney stipulated (in lieu of a bill of particulars): "* * * that the combination of the following elements produce a design which it is alleged has been so advertised to be recognized by the public as the `Jiffy' purse manufactured by the plaintiff corporation. These include general size and shape of the purse, plurality of pockets arranged to receive bills or other articles, one of which pockets is extended to form a hinge on which is mounted a distinctively shaped coin rack which is made so that it will lie flat within the purse and so that the coins will be positioned in the racks at an angle. And also included among the elements are the closure means used comprising a snap fastener or a zipper arrangement. The color scheme is an additional element, as well as the leather used."
The general size and shape of plaintiff's purse (not uncommon) were determined by two thingsthe functional purposes and the manner in which the purse would be carried. One of the main purposes of the purse was to contain a coin rack for small change. In this country the coin racks in use were designed to carry in separate grooves coins of four denominations, quarters, dimes, nickels and cents. The space necessary for these four grooves would be determined by the size of the coins and the uprights forming the grooves. The size of the coins is fixed by the Government; the width of the above uprights would be determined by the strength required and the resiliency of the material used. The capacity of the coin rack would be governed by the average shopper's need for change. This would not call for a large rack. If the same material (a plastic) is used by the manufacturers of coin racks, and each, for the sake of economy in space and cost, uses a minimum of plastic material, the uprights of the grooves of the coin racks would be about the same size. No one could properly claim a monopoly for a bill fold just large enough to hold government paper currency, or having a pocket therein just the right size for stamps. The use for which a purse is designed determines in a great measure what its size will be.
Plaintiff advertise that its purse fits the hand or hand bag. Such a purse, of course, would be small. A wallet opening like the covers of a book and intended to be carried in the inside pocket of a man's coat or blouse would be made to fit the *811 size of the pocket. A bill fold to be carried in the trouser's pocket would be smaller than a wallet. The thickness of the bill fold purse would depend upon the number of its compartments and whether or not it had a key rack or a coin rack. The number of compartments and gadgets would be governed in part by the price at which the purse would be sold. As a result, purses of many different sizes and shapes are manufactured for the trade. A woman's handbag is usually of such a generous size, that a purse small enough to fit into a man's pocket, could easily be stowed therein. As one of plaintiffs' advertisements put it the coin purses were "designed for men" and "acclaimed by women". They were manufactured "in masculine tones for men" and in "costume colors for women".
Many of defendants' purses were of the same size as plaintiffs' and they all had a plurality of pockets arranged to receive bills or other articles. Purses have been so constructed for many years, as we all know. I do not believe that a purchaser would assume that a purse was plaintiffs' product, because it was of a conventional size or shape or had a plurality of pockets. Whatever good-will there might be in that, is common property. The trade mark did not cover it nor did the patent.
It may be that the size of the purse is as much functional as the pillow-shape was in the "Shredded Wheat" case. Kellogg Co. v. National Biscuit Co., 305 U. S. 111 at page 122, 59 S.Ct. 109, 83 L.Ed. 73. The cost of the purse would be increased if defendants were required to make theirs larger. It could not be made smaller and yet hold the coin rack. Since the coin rack may be manufactured by all (its patent is invalid), plaintiff could not assert exclusive rights in the form "in which the public had become accustomed to see the article". Defendants in turn were free to use that form of coin rack and purse but there rested upon them the duty to identify their product lest it be mistaken for plaintiffs' and to use means which would reasonably distinguish defendant's product from that of plaintiff. Kellogg Co. v. National Biscuit Co., supra.
"In the absence of some recognized right at common law, or under the statutes and the plaintiff claims neither a man's property is limited to the chattels which embody his invention. Others may imitate these at their pleasure. * * * This is confirmed by the doctrine of `nonfunctional' features, under which it is held that to imitate these is to impute to the copy the same authorship as the original. * * * These decisions imply that, except as to these elements, any one may copy the original at will." Cheney Bros. v. Doris Silk Corporation, 2 Cir., 35 F.2d 279, 280. See, also J. C. Penney Co. v. H. D. Lee Mercantile Co., 8 Cir., 120 F.2d 949, for a discussion of the term "functional".
"There is nothing unlawful in copying the unpatented products of another dealer down to the last detail, except in so far as the resulting similarity may become a means of securing his customers through their belief, so induced, that your goods are his." Electric Auto-Lite Co. v. P. & D. Mfg. Co., 2 Cir., 109 F.2d 566, 567.
We have all come to know the bill fold, with a hinged leather framed compartment in which an identification card or license may be carried. To have a coin rack similarly hinged lying flat within the purse, when coin racks became popular, was a natural development in the art. No one, by being the first to do it, could bar others from doing the same thing. And if he closed the purse with a zipper arrangement or a snap fastener, others could also use the same common means of holding the sides of the purse together. A snap fastener for a purse is older than any of the litigants and zippers have been in use for closure purposes on all sorts of leather goods, bags and brief cases for many years. Indeed, defendant Feinberg-Henry advertised in 1938 a purse with a zipper fastener.
Coin rack purses have been made by plaintiff and defendants in many varied colors and in leather of different types. Plaintiff did not limit itself to one or several special colors or types of leather. Plaintiff's purses, marked as exhibits at the trial, were in almost every color and type of leather purchasable on the market and adaptable to the manufacture of purses. Defendants' purses also embraced a similarly wide range. The luggage shops, at different seasons, feature certain leathers and colors. Plaintiffs do not claim that they had any special leather manufactured in a design and color for their coin rack purses.
This brings us to the remaining element which plaintiffs contend served the purpose of producing a design which the public would recognize as the plaintiff's "Jiffy" *812 purse. I refer to what plaintiffs term "a distinctively shaped coin rack which is made so that it will lie flat within the purse and so that the coins will be positioned in the racks at an angle". All this was the subject of the patent claims which I have held invalid for lack of invention. Should plaintiffs nevertheless be given, on a claim of unfair competition, the same monopoly which they sought under the patent statute? Defendants have copied only so much of plaintiff's coin rack as comprise its functional features and assert that they took proper precautions to distinguish their coin rack from the plaintiffs. These identifying measures were the trade mark "Mayflower" impressed on the plastic coin rack; trade names and special designs stamped on the purse itself; advertising matter inserted in the purse.
The amended complaint alleges that the defendant Feinberg-Henry manufactures the "coin purses herein complained of", that Columbia Manufacturing Co. and E. Behrman & Co. act as jobbers and distributors, that the Hoffritz stores distribute and sell the coin purses to the purchasing public and "have advertised, sold and passed off the coin purses herein complained of, as plaintiff's coin purses". It is further alleged that the defendants Columbia and Behrman "have offered for sale and sold, and are offering for sale and selling, the infringing coin purses as and for plaintiff's `Jiffy' coin purses, and have filled orders from retailers specifically calling for the plaintiff's `Jiffy' coin purses with the infringing counterfeit of plaintiff's `Jiffy' coin purses". The defendants are alleged to have been fully aware "of plaintiffs' rights in the premises".
Paragraph 26 of the amended complaint states: "26. All of the aforementioned acts of the defendants are in violation of plaintiffs' rights under United States Letters Patent No. 2,185,359 and constitute acts of unfair competition with corporate plaintiff, which, by deception of the purchasing public, have damaged plaintiffs' business, goodwill and reputation, and which, unless restrained by this Honorable Court, will irreparably damage plaintiff's business and goodwill."
The prayer for relief is as follows: "Wherefore, plaintiffs demand a temporary restraining order and a preliminary and final injunction against further infringement by the defendants, and those controlled by defendants, of said letters patent, and against further unfair competition in respect to coin purses infringing upon said letters patent, and also an accounting for profits and damages, and an assessment of costs against the defendants."
Plaintiffs' plastic racks were put on the market in August, 1938. They were advertised in some magazines, for the purchasing public. Defendant Feinberg-Henry did not complete its blue prints for its plastic molds until May, 1939. It began the manufacture and sale of plastic coin racks in the Fall of 1939. The inference is warranted from the evidence that the plastic coin racks of plaintiff had come to the attention of Feinberg-Henry some time prior thereto and that Feinberg-Henry decided to make plastic coin racks when it learned of plaintiff's product.
The plaintiff did not put any distinguishing mark on the outside of its coin rack purses. It did place its trade mark "Jiffy" on one of the uprights of the coin rack, inside the purse. Otherwise there was no distinguishing mark on the inside or outside of plaintiff's purses. Later plaintiff inserted in the bill pocket of some of its purses a printed slip containing "Directions for using the Jiffy". The directions referred to the "Jiffy" plastic purse and appeared below illustrations of "Jiffy" purses and a "Jiffy" wallet. At the end of the directions there was the notation "Copyrighted 1940 by Swanson Mfg. Co."
There was very little direct proof of confusion in the mind of the purchasing public. In a few instances a defective coin rack, not of plaintiff's manufacture, was returned to plaintiff for credit or repair. In another instance, where entrapment was resorted to, an order sent to the Columbia Manufacturing Co. for "Jiffy" coin purses was filled by the shipment of a dozen Scotch coin purses with Columbia's trade-mark (Wales) on the purses and with Feinberg-Henry's trade-mark (Mayflower) on the coin rack. Some retail stores operated by defendant Hoffritz sold a customer defendants' purses when she asked for "Jiffy" purses. Hoffritz displayed both kinds in their show window and in a counter case placed near a card advertising "Jiffy" purses. A defendant manufacturer is "not responsible for substitutions made by unscrupulous" retailers, if defendant "does nothing to further their practices." Electric Auto-Lite Co. v. P. & D. Mfg. Co., 2 Cir., 109 F.2d 566.
*813 The defendant, Feinberg-Henry Mfg. Co., Inc., is a New York corporation with a place of business in New York County. The defendant, Columbia Manufacturing Co., is a co-partnership having a place of business in New York County. The acts of these defendants which constituted unfair competition with plaintiff, Swanson Mfg. Co., were at least initiated in this State and in some instances were completely performed here. Whether or not their conduct was tortious is a question of state law, under Erie R. Co. v. Tompkins, 304 U.S. 64, 58 S.Ct. 817, 82 L. Ed. 1188, 114 A.L.R. 1487. See, Fashion Originators Guild v. Trade Commission, 312 U.S. 457, at page 468, 668, 61 S.Ct. 703, 85 L.Ed. 949.
The applicable legal principles under New York law are summed up and clearly stated in an excellent opinion by Mr. Justice Davis, Supreme Court, Madison County, N. Y., in Oneida, Ltd. v. National Silver Co., 25 N.Y.S.2d 271, pages 275, 276 from which I quote the following:
"The question of whether equitable relief will be granted or withheld, depends upon the facts developed in the particular case, which accounts for the variances in results in adjudicated cases. The courts will inquire beyond the adroitness used in simulation, and disregard minor differences, for the test of offensive simulation is in general resemblance, not incidental differentiation. Unfair competition is a species of fraud, where fraudulent intent is a necessary ingredient. The test is whether the simulation or other acts result in the deception, or the likelihood thereof, practiced on the inexperienced public, the casual or ordinary purchaser of goods, or of confusion in the public mind concerning the source of the competing product. In certain cases the court will take the ensemble which the competing party has made up for the public display of their goods, and compare it with that of the original vendor. The essence of unfair competition is to be found in cases where the simulated article is `palmed off' or `passed off' as the goods of another, involving, of course, the intent to deceive. This consists not only in the sale of the original vendor to dealers or retailers, but also the acts of these latter persons in actual or attempted substitution. The rule is that he who induces another to commit a fraud and furnishes the means, is equally guilty with the one who perpetrates the fraud. The fact that dealers who have become familiar with both articles and can readily distinguish the difference is not important. Courts will not tolerate a deception devised to delude the consuming purchaser by simulating some well-known product. It is not necessary * * * that any particular person has been actually deceived; it is the opportunity afforded for deception and the likelihood of confusion or deception which the courts take into consideration. The controlling question in all cases where the equity power of the courts is invoked is whether the acts are fair or unfair, according to principles recognized in equity, and not by `The morals of the market place.'"
Feinberg-Henry Mfg. Co., Inc.
The sale of the accused coin purses to the trade by the manufacturing defendants did not constitute unfair competition in so far as they used proper means to identify their product "lest it be mistaken for that of the plaintiff." Kellogg Co. v. National Biscuit Co., supra [305 U.S. 111, 59 S.Ct. 114, 83 L.Ed. 73]. In most instances that was done. The coin racks manufactured by defendant Feinberg-Henry and sold by the other defendants all had the trade mark "Mayflower" molded on the front of the rack, with as much prominence as plaintiffs' racks bore the trade mark "Jiffy". Both trade marks appear on the central upright of the coin rack. They are necessarily limited in size and position by the size and functions of the rack itself. The trade mark "Mayflower" was registered by defendant Feinberg-Henry in August, 1939. It does not resemble plaintiff's trade mark. Its spelling and sound are different. There was no proof of any use of the trade mark "Jiffy" by any of the manufacturing defendants. Plaintiff's trade mark "Jiffy" has not been infringed. However "a state of facts may be sufficient to show unfair competition even though insufficient to support a claim of technical trade-mark infringement." Grocers Baking Co. v. Sigler, 6 Cir., 132 F.2d 498, 500, citing cases.
For a time the defendant Feinberg-Henry copied certain advertising material of plaintiff's and used it in the sale of a Feinberg-Henry purse which it termed a "Mon-E-Pak". As to this unfair practice I have made the following findings of fact:
"31. The defendant, Feinberg-Henry Mfg. Co., Inc., deliberately copied plaintiff's illustrations and also certain reading material, including one of plaintiff's ad *814 vertising slogans `New Smart Way to Carry Money', with knowledge of the plaintiff's prior use.
"32. The coin rack illustration and the advertising slogan appearing on the card on which the defendant, Feinberg-Henry Mfg. Co., Inc., mounted and sold its Mon-E-Pak purses were substantially copies of the illustration on the back of plaintiff, Swanson Mfg. Co.'s card, on which its purses were mounted and introduced to the market in April 1939, and of the slogan on the front of said card. The `Mayflower' Mon-E-Pak card, exemplified by Exhibit 26 contained instructions on the reverse side thereof, the wording of which was a substantial copy of the directions on the reverse side of plaintiff's `Koin Kaddy' card, Exhibit 27."
While defendant Feinberg-Henry marked all its coin racks with its own trade mark "Mayflower" and on some types of purses had the word "Mayflower" stamped on the leather, yet in the display card to which one of its cheaper purses was attached, it copied the size of the card, the manner of attaching the purse to the card, some of the advertising matter such as plaintiff's slogan, the "New Smart Way to Carry Money" "for men women and children", and the instructions for use on the back of plaintiff's card. Feinberg-Henry's display card had attached to it defendant's Mon-E-Pak purse so that the purchaser received both the card and the purse. The card was in effect a "container". So was plaintiff's card which Feinberg-Henry copied in part.
Such practices should be enjoined and as to the sales thereby effected I am of the opinion that plaintiff is entitled to an opportunity to prove plaintiff's resulting damage and to an accounting of Feinberg-Henry's profits therefrom.
Columbia Manufacturing Co.
There were somewhat similar practices on the part of defendant, Columbia Manufacturing Co., in certain instances which are described in findings of fact Nos. 54, 55 and 58, as follows:
"54. Defendant Columbia Manufacturing Co. took one of plaintiff's display cards and copied it in all details, except for the use of the word `Scotch' in place of the trade mark `Jiffy', and enclosed said card in its shipment to dealers, at least to the extent of 5,000 cards."
"55. Defendant Columbia Manufacturing Co. likewise used on its boxes and in its advertising the slogan `A New Way To Carry Money', originated and featured by the plaintiff in its advertising."
"58. Defendant, Columbia Manufacturing Co., filled one order for twelve "Jiffy" purses with purses of its own manufacture, with the trade mark `Wales' clearly embossed in a suitable place thereon, and billed these twelve purses as Scotch purses on its Company invoice."
These practices will also be enjoined and as to the sales effected by these means plaintiffs are entitled to an accounting and damages.
Defendant Columbia copied in every detail (except one word) a counter display card of plaintiff Swanson Mfg. Co. The only difference was the substitution of Columbia's name "Scotch" in place of plaintiffs' name "Jiffy", in the bottom display line of the card. The defendant's card (Ex. 53) can be superimposed line for line upon plaintiff's card, Exhibit 52. Plaintiff's display cut and advertising slogan "New Way To Carry Money" appear on each. Even the tobacco-brown printer's ink was copied, although not quite the same shade. That all this was deliberately done was admitted by Columbia's president. It must have been done for purposes of deception and together with the similar appearance of the closed coin purse it may be inferred that in many cases deception resulted. This was hardly fulfilling Columbia's obligation that it distinguish its product from plaintiff's. Just the opposite was intended.
On the sides of the large flat box, in which the dozen purses were sent to Roline by Columbia (the entrapment order), there was printed plaintiffs' advertising slogan "A New Way to Carry Money". A label on one side contained the words "Scotch Coin Purses". A display paper sign enclosed in the box also carried plaintiff's advertising slogan and the words "Scotch purses". The invoice bore the Columbia bill head with references to its trade mark names "Wales" and "Scotch" and the goods were described as "Scotch Purses". A small cardboard holder, for the display of a purse, had printed thereon the words "The Wales Scotch Purse. A New Way To Carry Money". Each of the dozen purses in this sale to Roline was packed in a small plain box. The coin purses were of different colors and bore no trade mark on the outside only the words "alligator calf". Each purse was closed with a zipper. When opened, the purse showed a plastic coin rack with the word *815 "Mayflower" on the central groove finger. In each groove was a round piece of card board, printed like a coin with the names "Wales" thereon. On the lining of the purse there were stamped in gold print the words "Wales Deluxe Scotch Purse". In one of the purse pockets was some stage money bearing a dollar sign and the statement "The Wales' Scotch-Fold. A new way to carry money. Made in all leathers. Guaranteed & Manufactured by Columbia Manufacturing Co., New York City."
Columbia Manufacturing Company has been in business for about twenty-five years, making leather goods, wallets, bill folds, key cases and the like and has registered and used the trade name and mark, "Wales", to identify its products for about nineteen years. It has also used the trade name "Scotch" in the sale of its leather goods and has packaged some of its goods in boxes bearing the name "Scotch Wales Purse", "Wales Scotch Fold", "Scotch Purse" and "Scotch Fold". Its products have been advertised among retailers, who have also been furnished with "mats" for local newspaper advertising.
E. H. Behrman & Co.
E. H. Behrman & Co. have purchased "Mayflower" coin racks from defendant Feinberg-Henry. The purses made by Behrman Co. included these racks, which bore the "Mayflower" trade mark. There do not appear to have been any other distinguishing marks on the Behrman purses, which resembled plaintiff's purses in size. Behrman Co. did no advertising. No charge of any deliberate attempt to palm off its purses as plaintiffs' is made against Behrman Co. That company no longer manufactures coin rack purses. The evidence connecting them with any invasion of plaintiff's rights by unfair methods of competition is scattered and rather weak. I have directed that the complaint as against Behrman Co. be dismissed, but without costs.
An injunction may properly issue against a defendant who in the sale of a competing product appropriates and uses plaintiff's advertising slogans. The court may also enjoin the use by defendant of plaintiff's printed directions and information for the use of its product. NuEnamel Corp. v. Nate Enamel Co. Inc., 243 App. Div. 292, 276 N.Y.S. 930, affirmed 268 N. Y. 574, 198 N.E. 411.
It is the possibility of passing off defendant's product for that of the plaintiff, rather than the fact itself, that is important. Martin, J.'s dissent in Smith Co. v. American Pharmaceutical Co., 244 App. Div. 702, 278 N.Y.S. 834, reversed 270 N. Y. 184, 200 N.E. 779.
Where a defendant is shown to have pushed the sale of its product at the expense of the plaintiff through unfair practices, which had as their objective to confuse the public mind so that the public would purchase defendant's product thinking it was plaintiffs', we may infer that defendants accomplished the result they intended. When a competitor copies another's carton or advertising matter and both sell the same article, it is reasonable to assume that he intended thereby to acquire some of the other's good will and business. Socony-Vacuum Oil Co. v. Rosen, 6 Cir., 108 F.2d 632, at page 636; J. C. Penney Co. v. H. D. Lee Mercantile Co., 8 Cir., 120 F.2d 949, at page 955; O. & W. Thum Co. v. Dickinson, 6 Cir., 245 F. 609.
If the carton or sales display card are sufficiently alike to mislead the public, it matters not that on the article itself the defendant places some "distinguishing marks by which it could be identified by a careful and discriminating purchaser" because "it is the casual or ordinary purchaser who must be protected, and as to him the test is general appearance." Chesebrough Mfg. Co. v. Old Gold Chemical Co., 6 Cir., 70 F.2d 383, 385.
At the end of the trial I thought that a limited form of injunction would afford plaintiffs adequate relief. But as I have studied the record in Chambers I have come to the conclusion that an injunction would serve only to protect plaintiff Swanson Mfg. Co. from future violations and would not compensate plaintiff for any damages it sustained as a result of defendants' unfair practices. Further, unless accompanied by a decree requiring defendants, Feinberg-Henry Mfg. Co. and Columbia Manufacturing Co., to account for any profits they realized from sales which were accompanied by the unfair practices, those defendants would be permitted to retain the fruits thereof. Socony-Vacuum Oil Co. v. Rosen, 6 Cir., 108 F.2d 632, at page 636.
The following quotations from Michel Cosmetics, Inc. v. Tsirkas, 282 N.Y. 195, 26 N.E.2d 16, 17, are applicable:
"The defendants have wronged the plaintiff. They must pay to the plaintiff the damages they have caused the plaintiff *816 by that wrong. * * * The wrong inflicted upon the plaintiff is analogous to the wrong suffered by an owner through the infringement of his patent or trademark, and the rule of damages is similar. An infringer must compensate the owner of a trade-mark, a patent, a process or a formula for the profits which the owner would have acquired in his business except for such infringement. * * *
"A wrongdoer who has imitated the containers of the plaintiff and has used the secret formulas and processes belonging to the plaintiff might be compelled `to yield up his gains to the true owner, upon a principle analogous to that which charges a trustee with the profits acquired by wrongful use of the property of the cestui que trust.' Hamilton-Brown Shoe Co. v. Wolf Bros. & Co., 240 U.S. 251, 259, 36 S.Ct. 269, 270, 60 L.Ed. 629."
See, also, Westcott Chuck Co. v. Oneida Nat. Chuck Co., 199 N.Y. 247, 92 N.E. 639, 139 Am.St.Rep. 907, 20 Ann.Cas. 858.
If only an injunction were granted, with no provision for an accounting by defendants Feinberg-Henry and Columbia, or the ascertainment of plaintiffs' damage, plaintiffs would not be given their day in court. That point was before the New York Court of Appeals in Warren, Inc. v. Turner's Gowns, Ltd., 285 N.Y. 62, 32 N.E.2d 793. The trial court had granted an injunction and directed that plaintiff have judgment for the damages it sustained as well as an accounting of the profits which defendants had made by their wrongful acts of unfair competition. The Appellate Division modified the judgment of the trial court so as to limit plaintiffs' recovery to the injunctive relief granted. On appeal to the New York Court of Appeals the judgment of the Appellate Division was modified so as to reinstate the decision and judgment of the trial court. Judge Conway of the Court of Appeals wrote (pages 67 and 68 of 285 N.Y., page 795 of 32 N.E. 2d):
"The result of the modification is that plaintiffs have had no opportunity to establish their damages and defendants' profits either before the trial justice or the referee later appointed. Plaintiffs are clearly entitled to their day in court on those matters. The rule in such a case is well stated in Merriam Co. v. Saalfield, 6 Cir., 198 F. 369, 371: `* * * the usual practice contemplates an accounting and that such practice should be followed, and an accounting ordered, unless it is made clearly and certainly to appear that neither upon the existing record, nor upon any record which complainant can make before the master, could there be any substantial recovery. If there remains any fair probability that the complainant can produce the necessary proof, or that, upon final hearing, and as aided by all such proof, the trial court or the reviewing court may think that complainant is entitled to a recovery of damages or profits (beyond the amount of any which may be tendered, if a tender is made), then the complainant should have the opportunity to make and present his case.' See, also, Michel Cosmetics, Inc. v. Tsirkas, 282 N. Y. 195, 203, 26 N.E.2d 16; Underhill v. Schenck, 238 N.Y. 7, 17, 18, 143 N.E. 773, 33 A.L.R. 303. * * *
"Inability to prove damages would not preclude plaintiffs from recovering, on an accounting, profits realized from sales unlawfully made, together with interest thereon from the time of the commencement of the action. Cutter v. Gudebrod Brothers Co., 190 N.Y. 252, 83 N.E. 16. Cf. Michel Cosmetics, Inc. v. Tsirkas, 282 N.Y. 195, 199, 26 N.E.2d 16, where there were no profits made by defendant and so only damages were recoverable."
I am filing herewith findings of fact and conclusions of law as required by Federal Rules of Civil Practice, rule 52(a), 28 U. S.C.A. following section 723c. Settle decree on two days' notice.
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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/2745535/
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UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLUMBIA
JAMES OWENS, et al.,
Plaintiffs,
v. Civil Action No. 01-2244 (JDB)
REPUBLIC OF SUDAN, et al.,
Defendants.
AMENDED MEMORANDUM OPINION
Over sixteen years ago, simultaneous suicide bombings in Nairobi, Kenya, and Dar es
Salaam, Tanzania, devastated two United States embassies, killed hundreds of people, and
injured over a thousand more. This Court has entered final judgment on liability under the
Foreign Sovereign Immunities Act (“FSIA”) and District of Columbia law in this and other civil
actions—brought by victims of the bombings and their families—against the Republic of Sudan,
the Ministry of the Interior of the Republic of Sudan, the Islamic Republic of Iran, and the
Iranian Ministry of Information and Security for their roles in these unconscionable acts. And
with the help of special masters, the Court has assessed and awarded damages to most of the
individual plaintiffs in these cases. See, e.g., Mar. 28, 2014 Mem. Op. [ECF No. 300] at 3. But
a few plaintiffs remain. Currently before the Court are a special master’s award
recommendations for these remaining plaintiffs.
Plaintiffs—the so-called “Aliganga plaintiffs,” who take their name from Jesse Nathanael
Aliganga, a United States Marine Corps sergeant who died in the 1998 attack—are twelve
United States citizens injured or killed in the Nairobi bombing and their immediate family
members. See Am. Compl. in Intervention [ECF No. 262] (“Am. Compl.”) at 9; Apr. 11, 2014
1
Mem. Op. at 1. Although these plaintiffs did not participate in the opening stages of the original
Owens lawsuit, this Court allowed them to intervene in this case. July 23, 2012 Order [ECF No.
233] at 1. By that time, other plaintiffs had already served process on each defendant,
defendants had failed to respond, and the Court had entered a default against defendants.
Moreover, this Court had already held that it has jurisdiction over defendants and that the United
States national plaintiffs have a federal cause of action under 28 U.S.C. § 1605A(c), while the
foreign-national family members of the bombing victims may pursue their claims under the laws
of the District of Columbia. 1 See Owens v. Rep. of Sudan, 826 F. Supp. 2d 128, 148–51, 153–57
(D.D.C. 2011). Finally (and perhaps most importantly), this Court had already found that
defendants were responsible for supporting, funding, or otherwise carrying out the Nairobi
bombing, and it therefore entered final judgment on liability against them pursuant to the FSIA.
See id. at 135–47, 157.
The Court then referred the Aliganga plaintiffs’ claims to a special master, Paul G.
Griffin, to prepare proposed findings of fact and damages recommendations for each plaintiff.
Sept. 18, 2012 Order [ECF No. 253] at 1. The special master has now filed his reports, which
rely on sworn testimony, expert reports, medical records, and other evidence. See Reports of
Special Master [ECF Nos. 332–39, 341–42]; see also Filing of Special Master [ECF No. 344]
(“Wolf Expert Report”). The reports describe the facts relevant to each plaintiff and carefully
analyze each plaintiff’s claim for damages under the framework established in other mass-tort-
terrorism cases from this District. The Court thanks Special Master Griffin for his work.
The Court hereby adopts all facts found by the special master relating to plaintiffs in this
case. Where the special master has received evidence sufficient to find that a plaintiff is a United
1
Amongst the Aliganga plaintiffs, only one—Egambi Fred Kibuhiru Dalizu—is not a United States
national. See Am. Compl. at 44; see also infra at 5.
2
States national and is thus entitled to maintain a federal cause of action, the Court adopts that
finding. In addition, the Court adopts the special master’s finding that each plaintiff has
established the familial relationship necessary to support standing under the FSIA. See 28
U.S.C. § 1605A(a)(2)(A)(ii); see also Owens, 826 F. Supp. 2d at 149. The Court also adopts all
damages recommendations in the reports—with the exception of the few adjustments described
below. See Valore v. Islamic Rep. of Iran, 700 F. Supp. 2d 52, 82–83 (D.D.C. 2010) (“Where
recommendations deviate from the Court’s damages framework, those amounts shall be altered
so as to conform with . . . the framework.” (internal quotation marks omitted)). As a result, the
Court will award the Aliganga plaintiffs a total judgment of over $622 million.
This opinion and judgment brings to a close this Court’s role in assessing the
responsibility for, and the damages recoverable as a result of, the 1998 embassy bombings. But
the story is hardly over for the victims of these attacks, who not only must continue the effort to
actually recover their awarded damages, but, more importantly, must also continue to live with
the devastating consequences of these callous acts. That, after all, is the design of such terrorist
activity—to inflict present and future fear and pain on individuals and governments. The Court
commends the dedicated, creative, and courageous resolve of all plaintiffs—and their
conscientious attorneys—in the cases brought against the terrorists responsible for the embassy
bombings and their supporters. They have helped to ensure that terrorism, and its support by
defendants, will not ultimately succeed in achieving its long-term goals.
CONCLUSIONS OF LAW
Defendants’ liability in this case under both the FSIA and District of Columbia law was
decided long ago. 2 See Owens, 826 F. Supp. 2d at 157. But two questions remain. First, what
2
It bears repeating from previous opinions in this case that “for plaintiffs’ federal claims under § 1605A(c),
the Court [was] presented with the difficulty of evaluating the[] claims under the FSIA . . . which does not spell out
3
kinds of damages may plaintiffs recover from the (now liable) defendants? And second, what
damages awards are appropriate for each plaintiff?
I. PLAINTIFFS MAY RECOVER DAMAGES UNDER EITHER 28 U.S.C. § 1605A OR DISTRICT
OF COLUMBIA LAW
Both the FSIA and District of Columbia law provide a basis for damages awards here.
Start with the FSIA. That statute allows United States national plaintiffs to recover various types
of damages, including “economic damages, solatium, pain and suffering, and punitive damages.”
28 U.S.C. § 1605A(c). But “[t]o obtain damages in an FSIA action, the plaintiff must prove that
the consequences of the defendants’ conduct were reasonably certain (i.e., more likely than not)
to occur, and must prove the amount of the damages by a reasonable estimate consistent with this
Circuit’s application of the American rule on damages.” Valore, 700 F. Supp. 2d at 83 (internal
quotation marks and alterations omitted).
The Aliganga plaintiffs satisfy these requirements. As discussed in this Court’s previous
opinions, plaintiffs have proven that the consequences of defendants’ conduct were reasonably
certain to—and indeed intended to—cause plaintiffs’ injuries. See Owens, 826 F. Supp. 2d at
135–47. According to the FSIA’s remedial scheme, then: “[T]hose who survived the attack may
recover damages for their pain and suffering, as well as any other economic losses caused by
their injuries; estates of those who did not survive can recover economic losses stemming from
wrongful death of the decedent; [and] family members [so long as they are United States
the [applicable] elements of these claims . . . . Hence, the Court [was] forced to apply general principles of tort law.”
Owens, 826 F. Supp. 2d at 157 n.3 (internal quotation marks, citations, and alterations omitted); see also Mar. 28,
2014 Mem. Op. at 4–5 (concluding that plaintiffs are entitled to damages under the FSIA). Plaintiffs, here, proffered
various theories of recovery under the FSIA that typically sound in tort, including wrongful death and intentional
infliction of emotional distress. See, e.g., Am. Compl. at 29–31. In this Court’s judgment, plaintiffs met their
burden regarding these claims. As other terrorism cases explain, “there is no but-for causation requirement under
the FSIA; proximate cause is sufficient.” Valore, 700 F. Supp. 2d at 75. And there is no doubt—based on this
Court’s earlier factual findings—that defendants proximately caused the wrongful, “premature death” of several
plaintiffs. Id. at 78 (internal quotation marks omitted); see also Owens, 826 F. Supp. 2d at 135–47. The family
members of the injured or killed plaintiffs also satisfied the traditional intentional-infliction-of-emotional-distress
test, because acts of terrorism “by their very definition” amount to extreme and outrageous conduct. Valore, 700 F.
Supp. 2d at 77 (internal quotation marks omitted).
4
nationals] can recover solatium for their emotional injury.” Oveissi v. Islamic Rep. of Iran, 879
F. Supp. 2d 44, 55 (D.D.C. 2012); see also Amduso v. Rep. of Sudan, --- F. Supp. 2d ---, 2014
WL 3687126, at *2 (D.D.C. July 25, 2014) (limiting solatium-damages awards under the FSIA
to United States national family members). The Court will therefore award plaintiffs
“reasonable” economic, pain-and-suffering, and solatium damages, as appropriate.
This conclusion covers all but one of the Aliganga plaintiffs. And District of Columbia
law suffices to cover the damages claim of the sole remaining plaintiff: Egambi Fred Kibuhiru
Dalizu, who is a national of the Republic of Kenya, and who was the husband of Jean Rose
Dalizu, a United States citizen and embassy employee killed in the Nairobi attack. Am. Compl.
at 44. Dalizu hopes to recover solatium damages under District of Columbia law, because, he
alleges, defendants’ actions amounted to intentional infliction of emotional distress. As this
Court has previously held, District of Columbia law applies to Dalizu’s claim. Owens, 826 F.
Supp. 2d at 153–57. A prima facie claim for intentional infliction of emotional distress under
that jurisdiction’s law requires Dalizu to show: (1) extreme and outrageous conduct on the part
of defendants which, (2) either intentionally or recklessly, (3) causes him severe emotional
distress. Larijani v. Georgetown Univ., 791 A.2d 41, 44 (D.C. 2002).
Dalizu meets every element of this tort. Here, just as in the FSIA context, acts of
terrorism “by their very definition” amount to extreme and outrageous conduct, Valore, 700 F.
Supp. 2d at 77 (internal quotation marks omitted), and the facts in this case prove that defendants
acted intentionally and recklessly, causing Dalizu severe and lasting emotional trauma, see
Report of Special Master [ECF No. 339] (“Dalizu Report”) at 3–6, 25; see also Owens, 826 F.
Supp. 2d at 135–46; Murphy v. Islamic Rep. of Iran, 740 F. Supp. 2d 51, 74–75 (D.D.C. 2010)
(describing an immediate family member’s intentional-infliction-of-emotional-distress claim in
5
the state-sponsored-terrorism context). Because Dalizu presented evidence sufficient to prove
his intentional-infliction-of-emotional-distress claim under District of Columbia law, and
because that law allows spouses to recover solatium damages, see D.C. Code § 16-2701, the
Court concludes that he is entitled to recover such damages here.
II. DAMAGES
Having established that plaintiffs are entitled to damages, the Court will now assess the
type and amount of damages to award each plaintiff. This issue requires the Court to consider
the recommendations of the special master and to weigh the severity and extent of plaintiffs’
injuries against those alleged by other plaintiffs in other terrorism cases. See, e.g., Mwila v.
Islamic Rep. of Iran, --- F. Supp. 2d ---, 2014 WL 1284978, at *3–7 (D.D.C. Mar. 28, 2014).
The Court will accept most (but will reject or adjust some) of the special master’s recommended
awards. A complete list of the damages awarded each plaintiff can be found in the table attached
to the Order separately issued on this date.
a. Compensatory Damages
1. Economic damages
Under the FSIA, injured victims and the estates of deceased victims may recover
economic damages, which typically include lost wages, benefits and retirement pay, and other
out-of-pocket expenses. See 28 U.S.C. § 1605A(c). The special master recommended that the
Court award economic damages to the estates of eleven deceased plaintiffs. 3 See Wolf Expert
Report at 6. To determine the economic losses resulting from each plaintiff’s death, the special
master relied on a report submitted by Steven A. Wolf, an accounting and financial forensics
expert. See, e.g., Dalizu Report at 3, 22; Wolf Expert Report at 18. Wolf’s report, in turn, relied
3
They are: Jesse Nathanael Aliganga, Julian Leotis Bartley, Sr., Julian Leotis Bartley, Jr., Jean Rose
Dalizu, Molly Huckaby Hardy, Kenneth Ray Hobson II, Prabhi Guptara Kavaler, Arlene Bradley Kirk, Mary Louise
Martin, Ann Michelle O’Connor, and Sherry Lynn Olds. See Am. Compl. at 9.
6
on such factors as each plaintiff’s annual income, expected future income, and work-life
expectancy. Wolf Expert Report at 6–11 (explaining methodology used to calculate the
economic losses for each plaintiff). The Court will adopt the findings and recommendations of
the special master and award economic damages to the estates of these eleven victims in the
amounts calculated and recommended.
2. Pain and suffering awards
Courts determine pain-and-suffering awards for injured and killed victims based on
factors including “the severity of the pain immediately following the injury, the length of
hospitalization, and the extent of the impairment that will remain with the victim for the rest of
his or her life.” O’Brien v. Islamic Rep. of Iran, 853 F. Supp. 2d 44, 46 (D.D.C. 2012) (internal
quotation marks omitted); see also Haim v. Islamic Rep. of Iran, 425 F. Supp. 2d 56, 71 (D.D.C.
2006). But when calculating damages awards, “the Court must take pains to ensure that
individuals with similar injuries receive similar awards.” Peterson v. Islamic Rep. of Iran, 515 F.
Supp. 2d 25, 54 (D.D.C. 2007), abrogation on other grounds recognized in Mohammadi v.
Islamic Rep. of Iran, 947 F. Supp. 2d 48, 65 (D.D.C. 2013). Courts in this District have
therefore developed a general framework for assessing pain-and-suffering awards for victims of
terrorist attacks. Plaintiffs who suffer serious physical injuries tend to receive a $5 million
award; plaintiffs who suffer relatively more serious or numerous injuries may receive $7 million
(or more); and plaintiffs whose injuries are relatively less serious or who only suffer emotional
injuries may receive something closer to $1.5 million. See Valore, 700 F. Supp. 2d at 84–85;
O’Brien, 853 F. Supp. 2d at 47.
The special master has recommended that the Court award pain-and-suffering damages to
three Aliganga plaintiffs. One recommended award—advising the Court to award $1.5 million
to Howard Charles Kavaler, who worked in the Nairobi embassy at the time of the attack, and
7
who continues to suffer severe post-traumatic stress syndrome as a result of the bombing, see
Report of Special Master [ECF No. 338] (“Kavaler Report”) at 3–4, 11—complies with this
District’s general damages framework. The Court will therefore adopt the special master’s
recommendation regarding Kavaler.
Two recommended awards, however, depart from this District’s framework and require
significant adjustment. The first relates to Jesse Nathanael Aliganga, the Marine killed in the
Nairobi attack. The special master recommended that the Court award Aliganga $12 million in
pain-and-suffering damages, because he “suffered severe physical injuries prior to his death.”
Report of Special Master [ECF No. 333] (“Aliganga Report”) at 10. But while there is no doubt
that Aliganga’s injuries were severe, this recommendation ignores that the touchstone of any
pain-and-suffering award is whether the victim suffered “conscious pain” for some period of
time. Peterson, 515 F. Supp. 2d at 53; see also Oldham v. Korean Air Lines Co., 127 F.3d 43, 56
(D.C. Cir. 1997) (“[T]he key factual dispute [in pre-death pain-and-suffering cases] turns on
whether the [victim was] immediately rendered unconscious.” (internal quotation marks
omitted)). In other words, if the victim was conscious after suffering injury, then a pain-and-
suffering award might be appropriate; if not, then not. Here, all the available evidence suggests
that Aliganga’s injuries put him on the inappropriate side of the divide. As the special master
recognized, Aliganga’s “head was crushed in the bombing and his brain avulsed [i.e., separated]
from his skull.” Aliganga Report at 3. And though the Marines initially told Aliganga’s family
that he was “alive but injured,” no one testified that Aliganga was conscious at any point before
dying from his wounds. See id. at 4–5. The Court therefore cannot award Aliganga’s estate any
pain-and-suffering damages.
8
The second problematic award presents a similar issue. The special master recommended
that the Court award $12 million to the estate of Julian Leotis Bartley, Jr., because he “endured
bodily pain and suffering after the attack and prior to his death.” Report of Special Master [ECF
No. 342] at 11–12. There is some basis for awarding pain-and-suffering damages in Bartley’s
case. After all, he “suffered horrific injuries and terrible pain when both his legs were . . .
amputated in the explosive blast.” Id. at 12. But the special master admitted that “it is unclear
how long [Bartley] suffered before succumbing to his injuries,” and he could only conclude that
Bartley did not die “immediately,” but instead died some time later “due to a severe loss of
blood.” Id. Though Bartley’s injuries were undeniably terrible, in cases like this—“[w]hen the
victim endured extreme pain and suffering for a period of several hours or less”—the courts will
“rather uniformly award[] $1 million” in damages. Haim, 425 F. Supp. 2d at 71 (emphasis
added). Indeed, courts will sometimes settle on smaller awards, if the evidence suggests that the
victim suffered for only a very brief period. See, e.g., Peterson, 515 F. Supp. 2d at 53. Here,
Bartley almost certainly survived for less than several hours. The Court will therefore adopt the
usual award for such cases: $1 million.
3. Solatium
“In determining the appropriate amount of compensatory damages, the Court may look to
prior decisions awarding damages for . . . solatium.” Acosta v. Islamic Rep. of Iran, 574 F.
Supp. 2d 15, 29 (D.D.C. 2008). Only immediate family members—parents, siblings, spouses,
and children—are entitled to solatium awards. See Valore 700 F. Supp. 2d at 79; see also D.C.
Code § 16-2701 (allowing recovery by “the spouse or domestic partner and the next of kin of the
deceased person”). The commonly accepted framework for solatium damages in this District’s
FSIA terrorism cases is that used in Peterson, where spouses of deceased victims receive $8
million, parents of deceased victims receive $5 million, and siblings of deceased victims receive
9
$2.5 million. 515 F. Supp. 2d at 52. And where the victim does not die, but instead only suffers
injury, the solatium awards are halved: Spouses receive $4 million, parents receive $2.5 million,
and siblings receive $1.25 million. Id. Moreover, this Court has previously held that children of
deceased and injured victims should receive awards akin to those given to parents (i.e., $5
million where the victim died, and $2.5 million where the victim suffered injury). See, e.g.,
Mwila, 2014 WL 1284978, at *5 (“[C]hildren who lose parents are likely to suffer as much as
parents who lose children.”). Although these amounts are guidelines, not rules, see Valore, 700
F. Supp. 2d at 85–86, the Court finds the distinctions made in Peterson and other cases to be
reasonable, and thus will adopt this framework for determining solatium damages here.
For most plaintiffs, the special master properly applied the preceding framework in
making his damages calculations, and the Court will therefore accept the bulk of his
recommendations. But there are a few exceptions. One is straightforward. The special master
recommended a $5 million solatium award to the estate of Frederick Arthur Bradley, the father
of a deceased victim of the Nairobi attack. See Report of Special Master [ECF No. 334] at 20.
But there is a significant problem with this award: Frederick Arthur Bradley is no longer a
plaintiff in this case, as he voluntarily dismissed his claim in 2012. See Notice of Vol. Dismissal
[ECF No. 258] at 1. The Court therefore declines to award Bradley any damages.
Four other solatium awards also require adjustment. Other courts in this District have
held that it is inappropriate for the solatium award of a family member to exceed the pain-and-
suffering award of the surviving victim. See, e.g., Davis v Islamic Rep. of Iran, 882 F. Supp. 2d
7, 15–16 (D.D.C. 2012). This Court has followed that approach in previous embassy-bombing
cases, see, e.g., Mwila, 2014 WL 1284978, at *6, and it will do the same here. Therefore, the
solatium awards for several family members of Howard Charles Kavaler—who suffered severe
10
emotional injury after the bombing, and who the Court has awarded $1.5 million in pain-and-
suffering damages—must be modified. The special master recommended awarding $2.5 million
each to Tara and Maya Kavaler (Howard’s daughters) and to the estates of Pearl and Leon
Kavaler (Howard’s parents). See Kavaler Report at 13–14. But $2.5 million is obviously greater
than $1.5 million, and so the Court will reduce these family members’ awards to match
Howard’s pain-and-suffering compensation. 4
b. Pre-Judgment Interest
Plaintiffs are not only entitled to damages in this case. They are also owed pre-judgment
interest at the prime rate on most of those damages. See Oldham, 127 F.3d at 54; Forman v.
Korean Air Lines Co., 84 F.3d 446, 450–51 (D.C. Cir. 1996). The special master already
adjusted the recommended economic loss figures for each plaintiff to reflect the present
discounted value of those awards, see, e.g., Aliganga Report at 9; see also District of Columbia
v. Barriteau, 399 A.2d 563 (D.C. 1979), but he did not adjust the recommended awards for pain
and suffering and solatium. These awards therefore do not account for the time that has elapsed
since the 1998 attacks, meaning plaintiffs have lost the use of this money which should have
been theirs immediately after the bombings. Moreover, denying pre-judgment interest on these
damages would allow defendants to profit from their use of these funds over the intervening
sixteen years. The Court will therefore award pre-judgment interest on plaintiffs’ pain-and-
suffering and solatium awards—which should suffice to place plaintiffs in the same position they
would have been in had they received (and invested) their damages awards in 1998. See, e.g.,
4
The special master actually recommended that each of Howard’s daughters receive $7.5 million in
solatium damages, because their mother (Prabhi Guptara Kavaler) died in the bombing, which entitles them to an
additional $5 million under this District’s solatium-damages framework. This $5 million award is entirely
appropriate, and the Court’s reduction of their award only applies to the solatium damages stemming from their
father’s injury. The Court therefore awards each daughter $6.5 million in solatium damages: $5 million based on
their mother’s death and $1.5 million based on their father’s injury. See, e.g., Valore, 700 F. Supp. 2d at 86
(awarding solatium damages for each lost relationship).
11
Doe v. Islamic Rep. of Iran, 943 F. Supp. 2d 180, 184–85 (D.D.C. 2013); Reed v. Islamic Rep.
of Iran, 845 F. Supp. 2d 204, 214–15 (D.D.C. 2012). But see Oveissi, 768 F. Supp. 2d at 30 n.12
(declining to award pre-judgment interest on solatium damages). 5
The Court will calculate the applicable interest using the prime rate for each year. The
D.C. Circuit has explained that the prime rate—the rate banks charge for short-term, unsecured
loans to creditworthy customers—is the most appropriate measure of pre-judgment interest. See
Forman, 84 F.3d at 450–51. Although the prime rate, applied over a period of several years, can
be measured in different ways, this Circuit has approved an award of pre-judgment interest “at
the prime rate for each year between the accident and the entry of judgment.” Id. at 450. Using
the prime rate for each year is more precise than, for example, using the average rate over the
entire period. See Doe, 943 F. Supp. 2d at 185 (noting that this method is a “substantially more
accurate market-based estimate” of the time value of money (internal quotation marks omitted)).
Moreover, calculating interest based on the prime rate for each year is a simple matter. 6 Using
the prime rate for each year results in a multiplier of 2.26185 for damages incurred in 1998, 7 and
the Court will use this multiplier to calculate the total award for each plaintiff in this case. 8
5
In Oveissi, the court awarded damages in amounts above and beyond the usual solatium framework (i.e.,
the framework called for a $5 million award for plaintiff, but the court awarded $7.5 million). 768 F. Supp. 2d at
30. And the court in that case denied plaintiff’s request for pre-judgment interest, because its “upward adjustments”
from the usual framework sufficed “to fully compensate [plaintiff] for the enormous loss he sustained.” Id. at n.12
(internal quotation marks omitted). Unlike Oveissi, this Court has not made any “upward adjustments” from the
usual framework, and the Court therefore finds that pre-judgment interest on plaintiffs’ solatium awards is required
if plaintiffs are to be “fully compensate[d].”
6
To calculate the multiplier, the Court multiplied $1.00 by the prime rate in 1999 (8%) and added that
amount to $1.00, yielding $1.08. Then, the Court took that amount and multiplied it by the prime rate in 2000
(9.23%) and added that amount to $1.08, yielding $1.17968. Continuing this iterative process through 2014 yields a
multiplier of 2.26185.
7
The Court calculated the multiplier using the Federal Reserve’s data for the average annual prime rate in
each year between 1998 and 2014. See Bd. of Governors of the Fed. Reserve Sys. Historical Data, available at
http://www.federalreserve.gov/releases/h15/data.htm (last visited October 14, 2014). As of the date of this opinion,
the Federal Reserve has not posted the annual prime rate for 2014, so the Court will conservatively estimate that rate
to be 3.25%, the rate for the previous five years.
8
The product of the multiplier and the base damages amount includes both the pre-judgment interest and
the base damages amount. In other words, applying the multiplier calculates not the pre-judgment interest but the
base damages amount plus the pre-judgment interest—or the total damages award.
12
CONCLUSION
The August 7, 1998, embassy bombings shattered the lives of thousands—including
the seventy-one plaintiffs in this case. Reading plaintiffs’ personal stories reveals that, even after
some sixteen years, they each still feel the horrific effects of that awful day. Damages awards
cannot fully compensate these innocent people, who have suffered so much. But they can offer a
helping hand. That is the very least that plaintiffs are owed—and that is what this Court seeks to
accomplish.
A separate Order consistent with this Memorandum Opinion has issued on this date.
/s/
JOHN D. BATES
United States District Judge
Dated: October 24, 2014
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586 F. Supp. 936 (1984)
Jonathan FIELDMAN, a Minor, By and Through his Mother and Next Friend, Susan S. FIELDMAN, Plaintiff,
v.
ROPER CORPORATION and Sears, Roebuck and Company, Defendants.
Civ. A. No. J82-538(R).
United States District Court, S.D. Mississippi, Jackson Division.
June 22, 1984.
*937 William Larry Latham, Jackson, Miss., for plaintiff.
Thomas W. Tardy, III, Barry S. Zirulnik, Jackson, Miss., for defendants.
MEMORANDUM OPINION
DAN M. RUSSELL, District Judge.
This cause is presently before the Court on the defendants' motion to dismiss. The plaintiff (Fieldman), currently a minor resident of California, was injured on July 4, 1972, in Wichita, Kansas, by a lawn mower manufactured by Roper Corporation and distributed by Sears, Roebuck and Company. Roper Corporation is a Delaware corporation qualified to do business in Mississippi. The Mississippi statute of limitations permits suit within 6 years from the date of injury; therefore, if the Mississippi statute of limitations controls, plaintiff's action is timely brought.
The defendants object to the applicability of the Mississippi 6 year statute and argue that the Kansas tolling statute for legally disabled persons is a statute of substantive law and thereby controls. Should the Kansas prescription statute be held applicable, the action must be dismissed. The sole question before this Court is whether the Kansas tolling statute for persons under "legal disability", Kan.Stat.Ann. § 60-515(a) (1983),[1] is a statute of substantive rather than procedural law thereby time barring the present action.
The issue presents itself as one of first impression to be decided by this Court. No decisions of the Kansas Supreme Court bearing directly upon this issue has been found by this Court nor cited by counsel. Such being the situation, this Court must exercise its best judgment as to how the Kansas Supreme Court would determine this proposition.
Mississippi treats statutes of limitations as procedural and enforces the Mississippi limitation periods and not those of foreign jurisdictions. Cummings v. Cowan, 390 F. Supp. 1251, 1254 (N.D.Miss.1975). *938 This is in accordance with the general rule with respect to limitation of actions in that the law of the forum governs. Schrieber v. Allis Chalmers Corp., 611 F.2d 790 (10th Cir.1979), Leonard v. Kleitz, 155 Kan. 626, 127 P.2d 421 (1942). "If the statute of limitations of a foreign state is held by the courts of that state to be procedural, Mississippi courts, to date have applied the law of the forum." Steele v. G.D. Searle and Co., 428 F. Supp. 646, 650 (S.D. Miss.1977).
The exception to the above traditional rule occurs when a statute creates a right of action and simultaneously provides for a time within which a suit must be brought. Bethlehem Steel Co. v. Payne, 183 So. 2d 912 (Miss.1966). This rule has undergone a broader transition as to hold a Mississippi Court bound by a foreign prescription statute "whenever the prescription statute conditions the existence of the right of action, rather than merely the pursuit of the remedy, in such a way as to extinguish the right of action after the specified period has elapsed, regardless of whether the prescription is `"built in"' to a statute creating the right of action." Ramsay v. Boeing Company, 432 F.2d 592, 597 (5th Cir. 1970).
The abstract semmantical difference between barring a "right of action" or barring merely a "remedy" can be best understood by turning attention to the United States Supreme Court case of Davis v. Miller, 194 U.S. 451, 24 S. Ct. 692, 48 L. Ed. 2d 1067 (1904) on which Ramsay v. Boeing Co., supra, was based. In Davis, pp. 453-454, 24 S.Ct. p. 694, the Court stated that a limitation statute may be substantive and may even be in a different statute, "provided it was directed to the newly created liability so specifically as to warrant saying it qualified the right." In other words, there must be a statutorily created right as well as a condition as to time in which a cause of action under that right may be brought.
The Kansas tolling statute, Kan.Stat. Ann. § 60-515(a) (1983), fails to meet this standard. No newly created liability is either specifically provided for or directed to. Rather, § 60-515(a) operates "merely to toll the statute of limitations under stated circumstances." Lewis v. Shuck, 5 Kan. App. 2d 649, 623 P.2d 520, 523 (1983). As a "mere tolling statute" to Kansas' general statute of limitations, Kan.Stat.Ann. § 60-513 (1983)[2], all questions of interpretation should be considered in pari materia for comparison and construction.
The rule of in pari materia is a logical extension of the general principle that whenever a legislative body passes a new statute, it does so aware of all previous statutes on the same subject. Erlenbaugh v. United States, 409 U.S. 239, 244, 93 S. Ct. 477, 480, 34 L. Ed. 2d 446 (1972), Clark v. Murray 141 Kan. 533, 41 P.2d 1042 (1935). Any new enactment of a fragmentary nature on the same subject should be construed as "intended to fit into the existing system and to be carried into effect conformably to it, except as a different purpose is plainly shown." United States v. Jefferson Electric Manufacturing Co., 291 U.S. 386, 396, 54 S. Ct. 443, 447, 78 L. Ed. 859 (1933).
At no time has Kansas' general statute of limitation been held to be substantive. Kansas state courts, as well as Federal courts within our own circuit, have repeatedly held the Kansas prescription statute to be procedural in nature. Schreiber v. Allis Chalmers Corp., 611 F.2d 790, 794 (5th Cir.1979), Steele v. G.D. Searle and Co., 428 F. Supp. 646, 649 (S.D.Miss.1977), Steele v. G.D. Searle and Co., 422 F. Supp. 560, 563 (S.D.Miss.1976), Valentine v. Cunningham, 198 Kan. 313, 424 P.2d 528 (1967), Murray v. Modoc State Bank, 181 Kan. 642, 313 P.2d 304 (1957). To recognize the general statute of limitations as procedural and yet hold that the tolling statute to the general statute is substantive would circumvent apparent legislative *939 intent and logical progression since the two statutes must conform for effective application.
Had the Kansas legislature intended to create two different classes of individuals, one of non-disabled adults to be governed by the lex fori, and the other of infants, incapacitated, and incarcerated to be governed by substantive state law, the specific statutory standards and language would have been provided.
In the absence of statutory language and precedent to the contrary, this Court finds that § 60-515(a) merely serves to toll the Kansas general statute of limitations necessitating a similar interpretation concerning its procedural effect. Since this Court finds Kan.Stat.Ann. § 60-515(a) (1983) to be procedural, the action is not time barred and the motion to dismiss will be denied.
An order in accordance with the opinion of this Court shall be provided as set forth in the Local Rules.
NOTES
[1] 60-515. Persons under legal disability.
(a) Effect. If any person entitled to bring an action, other than for the recovery of real property or a penalty or a forfeiture, at the time the cause of action accrued, or at any time during the period the statute of limitations is running, be within the age of eighteen (18) years, or an incapacitated person, or imprisoned for a term less than his or her natural life, such person shall be entitled to bring such action within one (1) year after such disability shall be removed, but no such action shall be commenced by or on behalf of any person under the disabilities specified after more than eight (8) years beyond the time of the act giving rise to the cause of action.
[2] 60-513. Actions limited to two years.
(a) The following actions shall be brought within the two (2) years: ...
(4) An action for injury to the rights of another, not arising on contract, and not herein enumerated....
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586 F. Supp. 2d 1336 (2008)
Thomas E. BERG, Jr., Plaintiff,
v.
MERCHANTS ASSOCIATION COLLECTION DIVISION, INC., d/b/a MAF Collection Services, Defendant.
Case No. 08-60660-CIV.
United States District Court, S.D. Florida.
October 31, 2008.
*1338 Donald A. Yarbrough, Fort Lauderdale, FL, for Plaintiff.
Joan Carlos Wizel, Onier Llopiz, Lydecker Diaz Lee Behar Berga & De Zayas, Miami, FL, for Defendant.
ORDER DENYING DEFENDANT'S MOTION TO DISMISS THE COMPLAINT WITH PREJUDICE
WILLIAM P. DIMITROULEAS, District Judge.
THIS CAUSE is before the Court upon the Defendant Merchant Association Collection Division, Inc.'s Motion to Dismiss the Complaint with Prejudice [DE 11] filed on June 24, 2008. The Court has carefully considered the Motion, the Plaintiff Thomas E. Berg, Jr.'s Opposition to Defendant's Motion to Dismiss [DE 18] filed on August 5, 2008, the Defendant's Reply Memorandum in Support of its Motion to Dismiss with Prejudice [DE 19] filed on August 15, 2008, and is otherwise fully advised in the premises.
I. BACKGROUND
Plaintiff alleges that the Defendant Merchant Association Collection Division, Inc. d/b/a MAF Collection Services ("MAF") left pre-recorded messages on Plaintiffs voice mail at his residence in seeking to collect on an alleged debt. (Complaint, ¶¶ 7-8.) At least 11 times within a year, the Defendant allegedly left the following message:
*1339 Hello. This message is for Thomas Berg. If you are not the person requested, disconnect this recording now. By continuing to listen to this recording you acknowledge you are the person requested. This is MAF Collection Services. We are expecting your call at 1-800-749-7710. This is an attempt to collect a debt. Any information obtained will be used for that purpose. 1-800-749-7710.
(Complaint, ¶ 8).
Plaintiff alleges that his father (Thomas E. Berg, Sr.), step-mother, stepmother's ex-spouse, girlfriend, and neighbor all heard the message in the Plaintiff's home on one or more occasions. (Complaint, ¶ 11). Also, Plaintiff alleges that the Defendant knew or had reason to know that other persons besides the Plaintiff might hear the messages, and that Defendants never had authority to communicate with third parties regarding the debt. Plaintiff claims that these messages are in violation of the federal Fair Debt Collection Practices Act (FDCPA), 15 U.S.C. § 1692c(b), and the Florida Consumer Collection Practices Act (FCCPA), Fla. Stat. § 559.55. Plaintiff seeks damages and attorney's fees for violation of the FDCPA (Count I), damages and attorney's fees for violation of the FCCPA (Count II), and a permanent injunction to prevent the Defendant from further communications that violate the FDCPA and FCCPA (Count III).
II. DISCUSSION
In its Motion to Dismiss, the Defendant argues that the messages described in the Complaint do not fall within the statutory restrictions on debt collectors' communications with third parties when left at the debtor's home voice mail. Defendant also argues that to interpret the statutory provisions as prohibiting such communications would render the statute unconstitutional under the First Amendment. Finally, Defendant contends that the Count III must be dismissed because the FDCPA does not make equitable relief available to private litigants.
Plaintiff counters that a plaintiff need only claim that third parties heard the messages in order to state a claim. Plaintiff also claims that the risk that third parties may hear voice mail messages at a debtor's home required the Defendant to use another method to communicate with the Plaintiff about the debt. Plaintiff asserts that the Defendant's arguments are actually a fact-based "bona fide error defense" inappropriate for this stage of litigation.
A. Motion to Dismiss Standard
When a defendant files a motion to dismiss for failure to state a claim under Federal Rule of Civil Procedure 12(b)(6), the Court must determine if the Plaintiff in the complaint has alleged "enough facts to state a claim to relief that is plausible on its face." Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 127 S. Ct. 1955, 1974, 167 L. Ed. 2d 929 (2007) (abrogating Conley v. Gibson, 355 U.S. 41, 78 S. Ct. 99, 2 L. Ed. 2d 80 (1957)). Plaintiffs must "raise a right to relief above the speculative level" and "nudge[] their claims across the line from conceivable to plausible." Twombly, 127 S.Ct. at 1965, 1974. The allegations of the claim must be taken as true and must be read to include any theory on which the plaintiff may recover. See Linder v. Portocarrero, 963 F.2d 332, 336 (11th Cir.1992) (citing Robertson v. Johnston, 376 F.2d 43 (5th Cir.1967)).
B. Plaintiff Has Stated a Claim under the FCCPA
Defendant stated that it limited its analysis to the FDCPA because Fla. Stat. § 559.77(5) states that "[i]n construing this section, due consideration and great weight shall be given to the interpretations of the Federal Trade Commission and the federal courts relating to the federal Fair *1340 Debt Collection Practices Act." However, that provision related only to the section on civil remedies, § 559.77. Section 559.552 gives the relationship between the FCCPA and FDCPA, where it states that the FCCPA gives additional consumer protections without limiting the FDCPA. Fla. Stat. § 559.552. Thus, we interpret the FCCPA third-party communications provision separately from the FDCPA provision.
In order to bring a claim under Fla. Stat. § 559.77(5), a Plaintiff must assert "(1) that there was a disclosure of information to a person other than a member of the debtor's family, (2) that such person does not have a legitimate business need for the information, and (3) that such information has affected the debtor's reputation." Heard v. Mathis, 344 So. 2d 651, 655 (Fla. 1st DCA 1977).
The Plaintiff here has alleged specifically that there was a disclosure of information to his neighbor and girlfriend among others, that those third persons did not have a legitimate business need for the information, and that the information affected the Plaintiff's reputation. (Complaint, ¶¶ 8, 11, 12, 14, 15, 21). Therefore, Plaintiff has sufficiently alleged a claim under the FCCPA in Count II of his Complaint.
C. Plaintiff Has Stated a Claim under the FDCPA
Defendant does not dispute that the messages are communications under the FDCPA, but asserts that the plain language of § 1692c(b) does not prohibit debt collectors from leaving voice mail messages in a debtor's home. The Defendant maintains as well that it was not the intent of Congress for the FDCPA to prohibit the voice mail messages of the type at issue here. The Defendant also contends that the previous rulings of other courts have suggested that these voice mail messages would not run afoul of the FDCPA.
1. Plain Language of the FDCPA
A court's starting point in statutory interpretation is the statute's language. Cmty. for Creative Non-Violence v. Reid, 490 U.S. 730, 739, 109 S. Ct. 2166, 104 L. Ed. 2d 811 (1989); Ford v. Moore, 296 F.3d 1035, 1038 (11th Cir.2002). Where the text is unambiguous, the interpretation ends. Am. Bankers Ins. Group v. United States, 408 F.3d 1328, 1332 (11th Cir.2005). Unless defined otherwise, "words are given their ordinary, plain meaning." Id. Only in the rare case where the plain meaning of the text gives an absurd result is there a narrow exception to following the plain, unambiguous meaning of a statute. United States v. Nix, 438 F.3d 1284, 1286 (11th Cir.2006).
Section 1692c(b) requires that debt collectors communicating with third parties may not reveal that the consumer owes a debt:
Communications with third parties. Except as provided in section 804 [15 U.S.C. 1692b], without the prior consent of the consumer given directly to the debt collector, or the express permission of a court of competent jurisdiction, or as reasonably necessary to effectuate a postjudgment judicial remedy, a debt collector may not communicate, in connection with the collection of any debt, with any person other than the consumer, his attorney, a consumer reporting agency if otherwise permitted by law, the creditor, the attorney of the creditor, or the attorney of the debt collector.
15 U.S.C. § 1692c(b). The definition of communications in the FDCPA is "the conveying of information regarding a debt directly or indirectly to any person through any medium." § 1692a(2). Courts generally consider pre-recorded messages *1341 and voice mail messages from debt collectors to be "communications," even if the messages do not state what the calls are regarding. See e.g., Belin v. Litton Loan Servicing, LP, 2006 WL 1992410 *4, 2006 U.S. Dist. LEXIS 47953 *12 (M.D.Fla. July 14, 2006) (holding that messages left on the debtor's answering machine were "communications" under the FDCPA); Foti v. NCO Fin. Sys., 424 F. Supp. 2d 643, 655-56 (S.D.N.Y.2006) (holding that a voice mail message is a "communication" under the FDCPA); Hosseinzadeh v. M.R.S. Assocs., Inc., 387 F. Supp. 2d 1104, 1115-16 (C.D.Cal.2005) (same); but see Biggs v. Credit Collections, Inc., 2007 WL 4034997 *4, 2007 U.S. Dist. LEXIS 84793 *12-13 (W.D.Okla. Nov. 15, 2007) (ruling that a voice mail message by a debt collector was not a communication because it contained no information regarding a debt). Contact of the consumer's family members by debt collectors falls within the scope of § 1692c(b), with the exception of the consumer's wife, or parent if the consumer is a minor. § 1692c(d); West v. Costen, 558 F. Supp. 564, 576 (W.D.Va.1983) (granting summary judgment when the debt collector spoke to consumer's grandparents, parents, daughter, and uncle regarding the consumer's debt). Although debt collectors are to refrain from mentioning the debt when communicating with third parties, they must indicate to the consumer their identity, that the debt collector is attempting to collect a debt, and that any information obtained would be used for that purpose. §§ 1692d(6), 1692e(11). This warning is sometimes referred to as the "mini-Miranda." E.g., Barrows v. Chase Manhattan Mortgage Corp., 465 F. Supp. 2d 347, 359-60 (D.N.J.2006).
Defendants argue that the statute, by its plain language, does not include voice mail messages left at the debtor's home as "communicat[ing] in connection with any debt with any person other than the consumer." § 1692c(b). The Defendant emphasizes the forewarning it included in the message, directing anyone other than the Plaintiff to disconnect. However, it is not clear that this forewarning necessarily removes the messages from the statutory restrictions on communicating with third parties. The FDCPA definition of "communication" includes "conveying information regarding a debt directly or indirectly to any person through any medium." § 1692a(2). Furthermore, the statute states that "prior consent of the consumer" must be "given directly to the debt collector" before the debt collector may communicate with third parties. § 1692c(b). With this fairly broad definition of communication and the need for direct prior consent for communications with third parties, the Court cannot hold that the plain language of the statute excludes the Defendant's communications.
2. Legislative History and FTC Interpretations
Defendants also maintain that the legislative history of the FDCPA and the FTC interpretation show that the restrictions of § 1692c(b) do not apply to voice mail messages left at the debtor's residence.
The purpose of the FDCPA is to "eliminate abusive practices, not disadvantage ethical debt collectors, and promote consistent state action." S.Rep. No. 95-382 at 7 (1977) as reprinted in 1977 U.S.C.C.A.N. 1695, 1701. Among the needs the Senate listed for the legislation is collection abuse in the form of "disclosing a consumer's personal affairs to friends, neighbors, or an employer." Id. The Senate noted that the "legislation strongly protects the consumer's right to privacy by prohibiting a debt collector from communicating the consumer's personal affairs to third persons," while recognizing the "legitimate need to seek the whereabouts of missing debtors." Id. at 4, *1342 1977 U.S.C.C.A.N. p. 1698. About § 1692c in particular, the Senate wrote that "[t]here is general prohibition on contacting any third parties (other than to obtain location information)," with some exceptions not relevant here. Id. at 7, 1977 U.S.C.C.A.N. p. 1701.
Congress did not appear to address directly the situation here. The statute itself uses language that is significantly broader, by defining communications to include indirect conveying of information. § 1692c. The legislative history offers little guidance on a situation as this one where the third party receives the information, in the home of the consumer, after receiving a warning that the information is intended only for the consumer.
Congress charged the Federal Trade Commission (FTC) with the authority to enforce the FDCPA, but did not give the FTC the authority to promulgate rules and regulations. § 1692l. Therefore, FTC interpretations on the FDCPA "should be accorded considerable weight," but are not binding on courts. Hawthorne v. Mac Adjustment, 140 F.3d 1367, 1372 n. 2 (11th Cir.1998). The Defendant notes an FTC Staff Opinion Letter stating that the purpose of § 1692c(b) was to "prevent unscrupulous debt collectors from embarrassing consumers and invading their privacy be revealing the existence of their debt to friends, neighbors or other third parties." FTC Staff Opinion Letter Borowski Nov. 6, 1992, available at http://www.ftc.gov/os/ statutes/fdcpa/letters/borowski.htm. This letter suggests that § 1692c(b) was intended to prevent debt collectors from purposely shaming debtors in front of others, rather than generally protecting a consumer's right to privacy. However, the FTC gave this opinion in the context of a debt collector communicating with one holder of a joint account concerning bad checks from the joint account written by the other joint account holder.[1]Id. We find more relevant the FTC Staff Commentary, where the FTC stated that "[a] debt collector does not violate this provision when an eavesdropper overhears a conversation with the consumer, unless the debt collector has reason to anticipate the conversation will be overheard." Federal Trade Commission Staff Commentary on the Fair Debt Collection Practices Act, 53 Fed.Reg. 50104 (Dec. 13, 1988). The example given here by the FTC suggests that the FDCPA is violated by debt collectors who leave messages for consumers while aware that the message may be heard by others.
Only one case to this Court's knowledge has specifically ruled on whether leaving messages on the debtor's home answering machines, heard by third parties, was a violation of § 1692c(b). F.T.C. v. Check Enforcement, 2005 WL 1677480 *8 (D.N.J. 2005). The court in Check Enforcement found it to be a violation without discussion. Id. Courts have found violations of the FDCPA when debt collectors have left messages for debtors without leaving the "mini-Miranda". E.g., Hosseinzadeh v. M.R.S. Associates, Inc., 387 F. Supp. 2d 1104, 1112 (C.D.Cal.2005); see also Belin v. Litton Loan Servicing, LP, 2006 WL 1992410 *4-5 (M.D.Fla.2006) (finding that the plaintiff had stated a claim under the FDCPA when the debt collector left a message on a third person's answering machine asking the debtor to call back, but not revealing that the call was in regards to a debt).
*1343 Other courts, while not facing the same issue before us, have given conflicting opinions on the closely related issue of automated messages. For example, the court in Joseph v. J.J. Mac Intyre Cos. addressed automated calls to the debtor's home, where there would be a risk of someone other than the debtor answering and hearing the message (a risk similar to the situation here). 281 F. Supp. 2d 1156, 1164 (N.D.Cal.2003). Joseph stated that while the "disclosure during an automated call could compromise the debtor's privacy if another party such [sic] a neighbor or relative inside the home picks up the debtor's phone and hears the automated call, the possible compromise of privacy is less likely and more remote than where e.g., the [debt collector] indicates the nature of the collection notice on the outside of an envelope sent by mail for the world to see." Id. (internal citations omitted) (comparing § 1692c(b) to § 1692f(7)-(8), which restrict what information debt collectors may put on the outside of mailing envelopes). Joseph went on to state that Congress's concern was "deliberate disclosure of the debtor's status to third parties." Id. The court in Foti v. NCO Fin. Sys. Inc., without reaching the question, acknowledged that Joseph established some authority that it may be possible for automated messages at a debtor's home to comply with both §§ 1692d(6) and 1692e(11) requirements of disclosure and § 1692c(b) restrictions on communications with third parties. 424 F. Supp. 2d 643, 660 n. 26 (S.D.N.Y.2006). But Foti found that debt collectors who use automated messages do so at the peril of violating the FDCPA, either by not leaving enough information for the debtor in violation of §§ 1692d(6) and 1692e(11), or by leaving too much information for a possible third party in violation of § 1692c(b). See id. at 658-59. Debt collectors have no entitlement to use automated messages to reach debtors, and courts have no obligation to harmonize different provisions of the FDCPA so that debt collectors may use an inherently risky method of communication. See id. at 659-60 (citing Russell v. Equifax A.R.S., 74 F.3d 30, 35 (2nd Cir.1996)).
Voice mail messages left at the debtor's home pose similar risks as automated messages.[2] In this case, the Defendant left messages at the Plaintiff's home with a warning to the listener to disconnect if the listener was not the Plaintiff, and that continuing to listen to the message indicates that the listener was Plaintiff Thomas Berg. This warning would perhaps persuade other persons from continuing to listen to the message. However, nothing in the message would alert the Plaintiff to disconnect if he were to listen to the message in the presence of others. Even if by leaving the warning, the Defendant had taken reasonable precautions to prevent third persons from continuing to play the messages themselves, the Plaintiff could claim that the Defendant could still reasonably anticipate that third persons would overhear the message while the Plaintiff played it. Also, the FDCPA specifically requires that prior consent for third party communication be given directly to the debt collector by the consumer. § 1692c(b). A third party, or the debtor in the presence of a third party, continuing to listen to the message in spite of the warning does not qualify as prior consent directly to the debt collector. Therefore, the Court cannot say that the Plaintiff has failed to state a claim upon which relief can be granted when the Defendant left *1344 messages on the Plaintiff's voice mail that third persons heard.
The Court is aware that this ruling will make it difficult, though perhaps not impossible, for debt collectors to comply with all of §§ 1692c(b), 1692d(6), and 1692e(11) at once in a message left on the consumer's voice mail. However, we follow reasoning similar to Foti to find no reason that a debt collector has an entitlement to use this particular method of communication. Debt collectors have other methods to reach debtors including postal mail, inperson contact, and speaking directly by telephone.
D. Interpretation of This Claim as a Violation of § 1692c(b) Does Not Render the FDCPA Unconstitutional
Defendant argues that the FDCPA must be found unconstitutional if it is to be interpreted to prohibit the communications described in the Plaintiffs complaint, because such a ruling would effectively make it impossible for debt collectors to leave messages on debtors' answering machine while conforming to the FDCPA. According to the Defendant, the restrictions on debt collector's speech to debtors on their answering machines violate the First Amendment regardless of whether the restrictions are considered content-based, content-neutral, or commercial speech. The Court declines to rule that its decision today is a complete prohibition of messages regarding debt collection left on debtors' voice mail, but will nonetheless address the Defendant's First Amendment concerns.
Laws are content-based if they "by their terms distinguish favored speech from disfavored speech on the basis of the ideas or views expressed." KH Outdoor, LLC v. City of Trussville, 458 F.3d 1261, 1269 (11th Cir.2006) (quoting Turner Broad. Sys., Inc. v. FCC, 512 U.S. 622, 643, 114 S. Ct. 2445, 129 L. Ed. 2d 497 (1994)). A content-based restriction is "subject to strict scrutiny, meaning that it is constitutional only if it constitutes the least restrictive means of advancing a compelling government interest." Solantic, LLC v. City of Neptune Beach, 410 F.3d 1250, 1258 (11th Cir.2005). Content-neutral restrictions are subject to intermediate scrutiny, so they must be "narrowly tailored to serve a significant governmental interest," and they must "leave open ample alternative channels of communications." DA Mortg., Inc. v. City of Miami Beach, 486 F.3d 1254, 1256 (11th Cir.2007) (citing Ward v. Rock Against Racism, 491 U.S. 781, 791, 109 S. Ct. 2746, 105 L. Ed. 2d 661 (1989)).
The Court disagrees with the proposition that the communications restrictions of the FDCPA amount to restrictions based on the ideas or views expressed, and therefore deserve the highest scrutiny under the First Amendment. Such a finding would lead to strict scrutiny analysis of any legislation requiring discretion in information disclosure by debt collectors, financial institutions, medical personnel, or others dealing with sensitive personal information. As the Supreme Court stated, "speech on matters of purely private concern is of less First Amendment concern." Dun & Bradstreet v. Greenmoss Builders, 472 U.S. 749, 759, 105 S. Ct. 2939, 86 L. Ed. 2d 593 (comparing issues of public concern, which receive special First Amendment protection, with the issuance of credit reports, which did not). Like the credit reports of Dun & Bradstreet, the information here is solely of interest to the speaker and its specific audience and is not a matter of public concern. See also Trans Union Corp. v. FTC, 245 F.3d 809, 818 (D.C.Cir.2001) (finding that lists of names and addresses of compiled and sold by a consumer reporting agency were akin to the credit reports of Dun & Bradstreet and did not *1345 merit strict scrutiny protection). The FDCPA restrictions at issue here, then, do not fall under strict scrutiny analysis.
Under intermediate scrutiny, the restrictions would be constitutional if they are "narrowly tailored to serve a significant governmental interest." DA Mortg., Inc. v. City of Miami Beach, 486 F.3d 1254, 1256 (11th Cir.2007). Abusive debt collection practices and invasion of privacy are concerns Congress intended to address by enactment of FDCPA. § 1692(a); S. Rep 95-382 at 7 (1977) as reprinted in 1977 U.S.C.C.A.N. 1695, 1701. Both are significant governmental interests. The Defendant argues it is "nonsensical" to rule that the total prohibition on debt collectors from leaving messages on debtors' voice mail is narrowly tailored to address harassing or abusive collection practices. The invasion of privacy, however, was also a stated goal of Congress. § 1692(a); S. Rep 95-382 at 7, 1977 U.S.C.C.A.N. p. 1701. Section 1692c(b) is intended to prevent debt collectors from revealing information about a consumer's debt to third persons. Leaving a message at the debtor's home, where another third person may retrieve or overhear it, is a substantial risk of communication to third parties that § 1692c(b) the FDCPA was intended to prevent. Prohibiting voice mail messages is narrowly tailored to prevent that risk, though it may not be, nor does it need to be, the "least restrictive" means as would be required under strict scrutiny analysis. Debt collectors have several alternative channels of communication available to them, including live conversation via telephone, in person communication, and postal mail.
In the messages particular to this case, ruling that Plaintiffs have stated a claim under the FDCPA does not offend the First Amendment. As discussed above, the inclusion of the warning by the Defendant would not alert the Plaintiff that he should disconnect the message before private and potentially embarrassing information would be revealed to others in hearing range. Thus, a prohibition of these particular messages is narrowly tailored to serve the significant governmental interest of protecting consumers' privacy. Again, Defendant has alternative channels of communication available.
E. Whether Any Violation by the Defendant Was Intentional is an Issue of Fact
Defendant argues that under § 1692k(c), which establishes the "bona fide error" defense, the messages should be held not to be violations as a matter of law. Section 1692k(c) states that a "debt collector may not be held liable . . . if the debt collector shows by a preponderance of evidence that the violation was not intentional and resulted from a bona fide error notwithstanding the maintenance of procedures reasonably adapted to avoid any such error." The "preponderance of evidence" language in § 1692k(c) contemplates a factual inquiry. The content of the messages at issue may suggest that a violation was unintentional. However, Plaintiff has alleged that the Defendant either knew or had reason to know that third parties might hear the message. Thus, there is a factual dispute as to the Defendant's intent, and the Court will not rule on this factual issue based only on the pleadings.
F. Plaintiff May Seek Injunctive Relief under the FCCPA
Defendant argues that Count III of the Plaintiffs Complaint seeking injunctive relief should be dismissed because the FDCPA does not provide such relief to private litigants. Plaintiff did not respond to this portion of Defendant's argument in his Response.
*1346 Count III of the Plaintiffs Complaint seeks injunctive relief under both the FCCPA and the FDCPA. Defendant is correct that the FDCPA does not authorize injunctive relief to private litigants. Sibley v. Fulton DeKalb Collection Service, 677 F.2d 830, 834 (11th Cir.1982). However, the FCCPA states that a "court may, in its discretion, award punitive damages and may provide such equitable relief as it deems necessary or proper, including enjoining the defendant from further violations of this part." Fla. Stat. § 559.77(2). Florida has granted specific statutory authority for a plaintiff to seek injunctive relief under the FCCPA. Thus, the Plaintiff has stated a claim upon which relief may be granted in Count III.
III. CONCLUSION
Accordingly, it is ORDERED AND ADJUDGED that the Defendant's Motion to Dismiss the Complaint with Prejudice [DE 11] is hereby DENIED.
NOTES
[1] The FTC wrote a similar statement in the context of answering a question of whether a debt collector may give information to a debtor's survivors when the survivors already know of the debt and are contacting the debt collectors for the amount in order to resolve it. FTC Staff Opinion Letter Fisher Aug. 6, 1992, available at http://www.ftc.gov/os/ statutes/fdcpa/letters/fisher.htm.
[2] The messages at issue here automated. The risk of another person listening to or overhearing the message would, of course, be identical whether the message left was automated or left by a live caller.
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586 F. Supp. 2d 148 (2008)
In re BRISTOL MYERS SQUIBB CO. SECURITIES LITIGATION.
No. 07 Civ. 5867(PAC).
United States District Court, S.D. New York.
August 20, 2008.
*151 Katherine McCracken Sinderson, Jai Kamal Chandrasekhar, Bernstein Litowitz Berger & Grossmann LLP, Salvatore Jo Graziano, Milberg Weiss Bershad & Schulman LLP, New York, NY, for Ontario Teachers' Pension Plan Board.
Frederic Scott Fox, Sr., Jeffrey Philip Campisi, Joel B. Strauss, Kaplan Fox & Kilsheimer LLP, New York, NY, Karen H. Riebel, Richard Lockridge, Lockridge, Grindal Nauen, P.L.L.P., Minneapolis, MN, for Minneapolis Firefighters Relief Association and others.
Lorin L. Reisner, Debevoise & Plimpton, LLP, Robert Francis Carangelo, Weil, Gotshal & Manges LLP, Elkan Abramowitz, Claudio Godinez Roumainochoa, Jerrold L. Steigman, John Josepg Tigue, Jr., Morvillo, Abramowitz, Grand, Iason, Anello & Bohrer, P.C., New York, NY, for Defendants
OPINION & ORDER
PAUL A. CROTTY, District Judge.
Lead Plaintiff Ontario Teachers Pension Plan Board and Plaintiff Minneapolis Firefighters' Relief Association (collectively, "Plaintiffs") bring this class action securities fraud suit challenging the adequacy of Bristol Myers Squibb Co.'s ("Bristol-Myers" or "the Company") public disclosures concerning its attempts to settle patent litigation with generic pharmaceutical drug company Apotex, Inc. ("Apotex") over its patented and highly profitable blood-thinning medication, Plavix. The gravamen of Plaintiffs' Amended Complaint is that Bristol-Myers failed to disclose that the Company had agreed to relinquish certain material legal rights under its settlement agreements with Apotex and failed to disclose that it had entered into "secret" oral side agreements related to the Apotex litigation. Plaintiffs claim that the failure to disclose these critical facts rendered Bristol-Myers's public statements that it would "vigorously pursue" the Apotex litigation, and that Apotex would be "at risk" if it were to launch its generic product, materially false, incomplete, and misleading. Plaintiffs also complain that the existence of the unlawful oral side agreements greatly increased the risk of regulatory rejection of the settlement agreement, and that the Company failed to report the initial regulatory rejection of the settlement in a timely manner. According to the allegations of the Amended Complaint, when the omissions complained of and the true facts surrounding the settlement negotiations were eventually disclosed, securities analysts noted their significance, and the price of Bristol-Myers's stock declined. Plaintiffs seek relief pursuant to sections 10(b) and 20(a) of the Securities Exchange Act of 1934. The class includes all individuals who purchased or acquired Bristol-Myers common stock from after the close of the market on March 21, 2006 through August 8, 2006 (the "Class Period").
Bristol-Myers and individual Defendants Peter Dolan and Andrew Bodnar move to dismiss the Amended Complaint ("Am.Compl") on the grounds that: (1) the disclosures made by Bristol-Myers regarding the settlement attempts were adequate; (2) Plaintiffs fail to adequately plead loss causation; and (3) Plaintiffs fail to adequately plead scienter. Individual *152 Defendants Bodnar and Dolan also move to dismiss on the basis that Plaintiffs have inadequately pleaded their individual 10(b) claims, and that Plaintiffs inadequately pleaded control person liability pursuant to section 20(a). For the reasons set forth below, Defendants' motions to dismiss are denied.
SUMMARY OF ALLEGED FACTS
Bristol-Myers, one of the world's largest pharmaceutical companies, is engaged in the research, discovery, development, licensing, manufacturing, marketing, distribution, and sale of pharmaceutical drugs and related health care products worldwide. (Am.Compl. ¶ 15.) During the Class Period, Defendant Peter Dolan served as the Company's Chief Executive Officer, Director, and Chairman of its Executive Committee, (Am.Compl. ¶ 16), and Defendant Andrew Bodnar, a medical doctor and attorney, was Bristol-Myers's Senior Vice President for Strategy and Medical and External Affairs, and also a member of the Company's Executive Committee. (Am.Compl. ¶ 18.) According to the Amended Complaint, Dr. Bodnar was the lead Bristol-Myers representative involved in the settlement negotiations at issue in this lawsuit.
Bristol-Myers and Sanofi-Aventis ("Sanofi"), a French pharmaceutical company, jointly manufacture and sell the prescription drug Plavix, a very successful and highly prescribed blood-thinning medication which treats or prevents a myriad of cardiac conditions, including heart attack, stroke, arterial disease, acute coronary syndrome, and other heart conditions. (Am.Compl. ¶ 30.) Bristol-Myers sells the drug in the United States, and Sanofi sells it in most other countries. Originally approved by the Food and Drug Administration ("FDA") in 1997, Plavix sales in the United States totaled more than $3.8 billion in 2005. (Am.Compl. ¶ 30.) It is Bristol-Myers's largest selling drug, and the second largest-selling drug in the entire world. (Am. Compl. ¶ 30.) The primary patent covering the pharmaceutical compounds contained in Plavix is scheduled to expire on November 11, 2011. (Am. Compl. ¶ 30.)
In November 2001, Canadian generic pharmaceutical company Apotex filed an Abbreviated New Drug Application ("ANDA") with the FDA seeking permission to introduce a generic form of Plavix in the United States prior to the expiration of the Plavix patent. (Am.Compl. ¶ 31.) As part of that application, Apotex argued that the Plavix patent was invalid and unenforceable, and therefore would not be infringed by the proposed generic product.[1] (Am.Compl. ¶ 31.) If granted, the ANDA would guarantee Apotex 180 days of marketing exclusivity over other generic Plavix drugs; that is, for the first six months after ANDA approval, the Apotex generic would be the sole Plavix alternative marketed to consumers. (Am.Compl. ¶ 31.) Given the tremendous popularity of Plavix, and the enormous potential market for a generic form of the drug, it was apparent that an Apotex generic launch would not only likely be successful, but could pose a significant threat to a key element of Bristol-Myers's core business and profitability.
In response to this application, in March 2002 Bristol-Myers (and Sanofi) sued Apotex for patent infringement in the Southern District of New York, and a statutory *153 stay of the ANDA application was invoked. (Am.Compl. ¶ 32.) The stay expired in May 2005 and Apotex immediately began manufacturing and preparing for the sale of generic Plavix. (Am.Compl. ¶ 32.) At that point, Bristol-Myers sought to negotiate a settlement with Apotex by which Bristol-Myers would agree to certain limitations on its patent rights in exchange for a promise by Apotex to delay its generic product launch until shortly before the official patent expiration in November 2011. (Am.Compl. ¶ 32.)
Bristol-Myers and Apotex did, in fact, successfully negotiate a settlement of the patent litigation in March 2006, but due to a consent decree involving prior similar conduct, Bristol-Myers could not finalize the settlement on its own.[2] (Am.Compl. ¶ 34.) Rather, Bristol-Myers had to submit all of its settlement agreements to two separate groups: (1) the Federal Trade Commission ("FTC"), and (2) the state attorneys general of all fifty states, for their review and approval. (Am.Compl. ¶ 34.)
In the initial settlement agreement negotiated with Apotex, Bristol-Myers bargained away certain statutory rights with respect to the damages it was entitled to seek, and the injunctive relief it could pursue, if the settlement did not gain regulatory approval and Apotex was able to continue its generic launch. If Apotex launched a generic drug following regulatory disapproval of the settlement agreement but before resolution of the patent litigation, Bristol-Myers agreed, inter alia, to the following terms with respect to the patent litigation:
1) Bristol-Myers would seek only 70% of Apotex's profits in damages from net sales of its generic if Bristol-Myers had not launched its own generic; it would seek 60% if it had launched its own;
2) Bristol-Myers would not seek treble damages from Apotex as entitled by statute;
3) Bristol-Myers would not seek a trial date earlier than two and one-half months from the date of request to the court;
4) Bristol-Myers agreed to a five-day waiting period after the Apotex generic drug launch before seeking a temporary restraining order so that Apotex could flood the market with its generic.
(Am.Compl. ¶ 37.)
In light of the agreement, Bristol-Myers publicly announced on March 21, 2006 that it had settled the patent litigation with Apotex, but it did not disclose the precise terms of the settlement in its public statements. Instead, it issued a press release which stated that under the terms of the proposed settlement, Apotex would receive a royalty-bearing license to manufacture and sell a generic form of Plavix over a specific period of time. (Am.Compl. ¶ 58.) The press release also stated that the settlement agreement "includes other provisions." (Am.Compl. ¶ 58.) Beyond the disclosure of a promise of payment from Bristol-Myers to Apotex, however, the statement failed to further explain what *154 those "other provisions" were, and did not disclose that Bristol-Myers had agreed to limitations on damages, nor that the Company had acceded to delays in seeking trial and a restraining order. (See Am. Compl. ¶ 58.) With respect to finalization and approval, Bristol-Myers disclosed the following:
The proposed settlement is subject to certain conditions, including antitrust review and clearance by the Federal Trade Commission and state attorneys general. There is a significant risk that required antitrust clearance will not be obtained. In such event, the proposed settlement would be terminated, and the litigation would be reinstated ....
If the litigation were reinstated, [Bristol-Myers] intend[s] to vigorously pursue enforcement of [its] patent rights in Plavix. It is not possible at this time reasonably to assess the outcome of this lawsuit or the timing of potential generic competition for Plavix.... Apotex could launch a general [Plavix] product at risk
....
[L]oss of market exclusivity of Plavix and the subsequent development of generic competition would be material to [Bristol-Myers's] sales of Plavix and results of operations and cash flows, and could be material to ... [Bristol-Myers's] financial condition and liquidity.
(Am. Compl. ¶ 58, Press Release of March 21, 2006 (emphasis added).) According to the Amended Complaint, these same (or similar) disclosures (that the Company would "vigorously pursue" its rights, and that an Apotex launch would be "at risk") were repeated in other securities filings, public statements, and press releases without further detail or context about the precise status of the settlement negotiationsfrom March 14, 2006 through at least May 31, 2006. (See Am. Compl. ¶¶ 58-76.)[3]
In addition to the March 21, 2006 press release, Bristol-Myers also filed a Form 8-K on that same day which stated that if antitrust clearance were not obtained, then Bristol-Myers "intend[ed] to vigorously pursue patent enforcement of [its] patent rights in Plavix" and "if the litigation were reinstated, Apotex could launch a generic [Plavix product] at risk." (Reisner Decl. Ex. E (emphasis added); Am. Compl. ¶ 63.) The Company also posted similar statements on its website. ("Questions and Answers" posted March 21, 2006 (Exhibit 99.2 to Form 8-K, Reisner Decl. Ex. E); Am. Compl. ¶ 65.) Plaintiffs allege that these assertionsthat Bristol-Myers would "vigorously pursue" patent enforcement, and that any Apotex generic launch would be "at risk" to Apotexwere issued repeatedly by the Company throughout the class period, despite the fact that they were materially false and misleading statements of Bristol-Myers's true position due to the fact that they did not reflect the concessions already made in the settlement agreement.
*155 In trading on March 22, 2006, presumably on the basis of the previous day's settlement announcement, Bristol-Myers stock increased in value by 11%. (Am. Compl. ¶ 59.) The positive sentiment surrounding the announcement was premature. Although the settlement had been negotiated, it was not finalized. As the press release made clear, the agreement required the approval of the state attorneys general and the FTC in order to become final. (Press Release of March 21, 2006, Exhibit 99.1 to Form 8-K, Reisner Decl. Ex. E; also excerpted at Am. Compl. ¶ 58.)
Approximately six weeks later, on May 5, 2006, Bristol-Myers received word that the state attorneys general had rejected the initial settlement agreement, (Am. Compl. ¶ 38), but Bristol-Myers did not disclose this fact at that time. Instead, on May 8, 2006, Bristol-Myers filed a Form 10-Q making no mention of the attorneys general non-approval, even though it stated with respect to the settlement that "[t]he proposed settlement is subject to certain conditions, including antitrust review and clearance by the Federal Trade Commission and state attorneys general. There is a significant risk that the required antitrust clearance will not be obtained." (Am.Compl. ¶ 73.) In fact, the "significant risk" mentioned in the 10-Q had already occurred with respect to the first negotiated settlement agreement.
Thereafter, in lieu of disclosing the attorneys general rejection of the initial settlement agreement, Bristol-Myers and Apotex sought to quietly renegotiate the terms of the agreement in order to gain regulatory approval. (Am.Compl. ¶ 39.) According to the Amended Complaint, on May 12 and 24, 2006, at the direction of and/or with the knowledge of Defendant Peter Dolan, Defendant Andrew Bodnar of Bristol-Myers and a representative of Apotex attended "secret" meetings to renegotiate the settlement terms. (Am. Compl. ¶ 39.) These meetings were conducted without lawyers present, and, on May 26, 2006, Bristol-Myers and Apotex entered into an amended settlement agreement. (Am.Compl. ¶ 39). A written agreement which purportedly memorialized the amended settlement terms was produced and resubmitted to the FTC and the state attorneys general for approval. (Am.Compl. ¶ 39.)
According to Plaintiffs' allegations, however, the formal written agreement that was submitted for regulatory approval did not contain all of the terms of the amended settlement agreement. (Am.Compl. ¶ 39.) Instead, unbeknownst to regulators and the general public, the amended settlement actually included both the written terms and terms which were agreed to as part of "secret oral side agreements." (Am.Compl. ¶ 39.) Among other things, the oral side agreements allegedly included promises that Bristol-Myers would pay a large cash sum to Apotex, a term specifically noted by regulators as a concern in the initial settlement. (Am.Compl. ¶ 42.)
On May 31, 2006, Defendant and CEO Dolan made public comments about the settlement at a securities analysts' conference, stating that:
[The] [k]ey to revenue growth, obviously, is maintaining Plavix exclusivity. You have read that we have a settlement proposal that is being vetted and evaluated. There's a significant risk that it doesn't get approved. I don't have much more to offer today about Plavix, but it clearly is critical to our future growth.
(Am.Compl. ¶ 76.) Despite the fact that this statement directly addressed the ongoing settlement proceedings, it failed to report the initial non-approval of the settlement by the state attorneys general, *156 and did not discuss Bristol-Myers's attempts to renegotiate the settlement. In addition to the failure to publicly report on these matters, Plaintiffs also allege that Dolan and Bodnar informed neither the Bristol-Myers Board of Directors nor their federal monitor about the nature of the renewed settlement negotiations and the secret side agreements, notwithstanding the fact that Plavix exclusivity was admittedly a critical component of the Company's business. (Am.Compl. ¶ 123.)
On June 5, 2006, counsel for Apotex sent a letter to the Department of Justice disclosing that the terms contained in the parties' written agreement were incomplete, and that further terms were hidden from regulators in an effort to surreptitiously gain regulatory approval. (Am. Compl. ¶ 4, 42, 43.) Presumably in response to this letter, on June 8, 2006, the FTC requested written certification from the settling parties that there were no side agreements to the amended settlement, and that the Company had not made any representation or commitment that was not explicitly set forth in the written settlement agreement. (Am.Compl. ¶ 50.) On or about June 12, 2006, Bristol-Myers filed the requested certification guaranteeing the absence of oral agreements, which, according to the Plaintiffs, it "knew to be materially false" at the time it was filed. (Am.Compl. ¶ 50.)
On June 25, 2006, Bristol-Myers publicly announced that it had renegotiated the Apotex settlement agreement (Am.Compl. ¶ 79), but still did not disclose the initial non-approval by the state attorneys general. Instead, Bristol-Myers asserted that the renegotiation was conducted in response to regulators' "concerns," and revealed only that "[a]mong other revisions," Apotex had negotiated an earlier licensing date. (Am.Compl. ¶ 79.) No other terms were revealed. (Press Release, June 25, 2006, attached to Reisner Decl. as Ex. H.)
About one month later, on Wednesday, July 26, 2006, the Federal Bureau of Investigation ("FBI") searched Bristol-Myers headquarters in New York, and sought information surrounding the settlement negotiations and agreements. (See Am. Compl. ¶¶ 6, 51.) The next day, Thursday, July 27, 2006, Bristol-Myers confirmed that a criminal investigation had begun. (See Form 8-K filed July 27, 2006 (Reisner Decl. Ex. I) ("[Bristol-Myers] learned yesterday that the Antitrust Division of the United States Department of Justice is conducting a criminal investigation regarding the proposed settlement of the Apotex litigation described above."); Am. Compl. ¶ 82.) Bristol-Myers stock price declined 7.5%. (Am.Compl. ¶ 85.) One day later, Friday, July 28, 2006, the stock rallied briefly as securities analysts commented that an "at-risk" launch for Apotex was unlikely because it "would be a `bet-the company' endeavor .... [and Bristol-Myers] might be able to collect treble damages." (J.P. Morgan Securities Inc. Report, July 28, 2006, excerpted at Am. Compl. ¶ 89). On that same day (after the close of the market), Bristol-Myers reported that the amended settlement agreement did not win regulatory approval. (Am.Compl. ¶ 87.) On the next trading day, Monday, July 31, 2006, Bristol-Myers shares declined another 2%. (Am. Compl. ¶ 94.) Even then, however, Plaintiffs contend that the full impact of Bristol-Myers's settlement concessions was not apparent to the market, which still believed that the entire spectrum of statutory relief was available in the event of an Apotex generic launch. (See Reuters report, July 31, 2006, excerpted at Am. Compl. ¶ 90 ("Industry analysts cautioned on Monday [July 31, 2006] that Apotex Inc. has the right to immediately launch its copycat form of [Plavix], although it is *157 unlikely to do so because of huge financial risks to the generic drug maker.").)
In fact, it was not until the filing of another Form 10-Q on August 8, 2006 that the exact terms of the amended settlement agreement were revealed. (Am. Compl.¶ 95.) The terms were similar to those of the initial (rejected) settlement, although the amended agreement contained even more concessions from Bristol-Myers with respect to available damages and injunctive relief. The amended settlement agreed, inter alia, that:
(1) Bristol-Myers would seek no more than 50% of Apotex's profits in damages from net sales of its generic if Bristol-Myers had not launched its own generic; it would seek only 40% if Bristol-Myers had launched its own;[4]
(2) Bristol-Myers would not seek treble damages;
(3) Bristol-Myers would not seek a trial date earlier than two and one-half months from the date of request to the court;
(4) Bristol-Myers would wait five days after Apotex's generic launch to seek a temporary restraining order or preliminary injunction so that Apotex could flood the market with its generic.
(Am.Compl. ¶ 41.) The stock declined another 7% following revelation of these terms. (Am.Compl. ¶ 96.)
On September 12, 2006, Bristol-Myers fired its CEO, Defendant Dolan, and on May 10, 2007, Bristol-Myers agreed to plead guilty to two counts of making false statements to the government in connection with the amended Apotex settlement. (Am.Compl. ¶¶ 105, 107.) On June 11, 2007, a hearing was conducted and Bristol-Myers did, in fact, plead guilty to two felony counts of fraud in violation of 18 U.S.C. § 1001. (See Press Release of June 11, 2007 (Reisner Deck Ex. P); Am. Compl. ¶ 108.)
DISCUSSION
I. Motion to Dismiss Standard
On a motion to dismiss, the court "must accept as true all of the factual allegations contained in the complaint," and construe the complaint in the light most favorable to the plaintiff. Bell Atl. Corp. v. Twombly, 550 U.S. 544, 127 S. Ct. 1955, 1975, 167 L. Ed. 2d 929 (2007) (citation omitted). But mere "formulaic recitation of the elements of a cause of action" will not suffice; instead, "[f]actual allegations must be enough to raise a right to relief above the speculative level." Id. at 1965. To survive a motion to dismiss, courts require "enough facts to state a claim to relief that is plausible on its face." Id. at 1974; see also Iqbal v. Hasty, 490 F.3d 143, 157-58 (2d Cir.2007) (a plaintiff must "amplify a claim with some factual allegations in those contexts where such amplification is needed to render the claim plausible."). Simply put, plausibility is the touchstone of the pleading standard; Plaintiffs must therefore allege "plausible grounds to infer" that their claims rise "above the speculative level." Twombly, 127 S.Ct. at 1965.
When deciding a motion to dismiss pursuant to Rule 12(b)(6), the Court may consider "any written instrument attached to the complaint, statements or documents incorporated into the complaint by reference, legally required public disclosure documents filed with the SEC, and documents possessed by or known to the plaintiff and upon which it relied in bringing the suit." ATSI Commc'ns, Inc. v. Shaar Fund, Ltd., 493 F.3d 87, 98 (2d Cir.2007) *158 (citing Rothman v. Gregor, 220 F.3d 81, 88 (2d Cir.2000)).
A. Pleading, Rule 9(b) and the PSLRA
In addition to the threshold pleading requirements of Federal Rule of Civil Procedure 8(a) and the Twombly "plausibility" standard, securities fraud claims under section 10(b) and Rule 10b-5 must also meet the heightened pleading standards set forth in Federal Rule of Civil Procedure 9(b) and the Private Securities Litigation Reform Act of 1995 ("PSLRA"), codified at 15 U.S.C. § 78u-4(b). Rule 9(b) requires that the circumstances of any claim for fraud or mistake be stated with particularity. Fed.R.Civ.P. 9(b). This requirement to plead with particularity applies in full force to claims of securities fraud arising under section 10(b) because it "serves to provide a defendant [in a securities fraud case] with fair notice of a plaintiffs claim, safeguard his reputation from improvident charges of wrongdoing, and protect him against strike suits." ATSI, 493 F.3d at 99 (citing Rombach v. Chang, 355 F.3d 164, 171 (2d Cir.2004)).
A plaintiff in a securities fraud suit must also comply with the exacting pleading requirements of the PSLRA, which was enacted by Congress in 1995 "[i]n order to curtail the filing of meritless lawsuits." Novak v. Kasaks, 216 F.3d 300, 306 (2d Cir.2000) (quotations and citations omitted). In addition to other requirements, the PSLRA requires "plaintiffs to state with particularity both the facts constituting the alleged [securities fraud] violation" and the other elements of the 10(b) cause of action. Tellabs, Inc., v. Makor Issues & Rights, Ltd., 551 U.S. 308, 127 S. Ct. 2499, 2504, 168 L. Ed. 2d 179 (2007).[5] In order to effectuate Congress's intent to eliminate baseless lawsuits through the application of rigorous pleading standards, the PSLRA mandates that a plaintiff alleging a section 101(b) action must: (1) specify each statement alleged to have been misleading and the reason or reasons why the statement is misleading, and (2) state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind. 15 U.S.C. § 78u-4(b)(1) and (2).
B. Section 10(b) & Rule 10b-5
Section 10(b) of the Securities Exchange Act of 1934 makes it unlawful "for any person, directly or indirectly ... [t]o use or employ, in connection with the purchase or sale of any security ... any manipulative or deceptive device or contrivance" in violation of the rules set forth by the Securities and Exchange Commission for the protection of investors. 15 U.S.C. § 78j. Rule 10b-5, promulgated thereunder, makes it unlawful for "any person, directly or indirectly, ... [t]o make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading." 17 C.F.R. § 240.10b-5.
In order to state a claim for relief under section 10(b) and Rule 10b-5, plaintiffs must allege that "in connection with the purchase or sale of securities, the defendants], acting with scienter, made a false material representation or omitted to disclose material information and that the plaintiff[s'] reliance on defendant's action caused [the plaintiff] injury." Edison *159 Fund v. Cogent Inv. Strategies Fund, Ltd., 551 F. Supp. 2d 210, 220 (S.D.N.Y.2008) (quotations and citations omitted); see also Lentell v. Merrill Lynch & Co., Inc., 396 F.3d 161, 172 (2d Cir.2005), cert. denied, 546 U.S. 935, 126 S. Ct. 421, 163 L. Ed. 2d 321 (2005) (plaintiffs must allege that the defendants "`(1) made misstatements or omissions of material fact; (2) with scienter; (3) in connection with the purchase or sale of securities; (4) upon which plaintiffs relied; and (5) that plaintiffs' reliance was the proximate cause of their injury.'" (quoting In re IBM Sec. Litig., 163 F.3d 102,106 (2d Cir.1998))).
ANALYSIS
Plaintiffs Amended Complaint alleges that Bristol-Myers: (1) negotiated a settlement agreement which bargained away critical statutory relief, yet continued to insist it would "vigorously pursue" its patent rights despite the limited relief available to it; (2) stated that in the event of regulatory disapproval, any generic launch by Apotex would be "at risk", without disclosing that it had bargained away some of the statutory deterrence mechanisms to such a launch; (3) submitted the agreementwithout disclosing its terms to the publicfor regulatory review as required by the consent decree under which it was operating; (4) did not disclose that the initial settlement agreement was rejected by the state attorneys general and claimed only that there was a "significant risk" of disapproval; (5) secretly sought to renegotiate the settlement's terms after regulatory rejection; (6) eventually assented to a revised settlement agreement which (unbeknownst to both regulators and the general public) retained some of the objectionable terms of the initial (and rejected) agreement, but only in the form of "secret oral side agreements" which supplemented a revised written agreement; (7) resubmitted the revised written settlement agreement for regulatory approval, without disclosing the secret oral terms; (8) when questioned by regulators as to whether the written agreement embodied all of the terms agreed upon by the parties, submitted a false statement indicating that the agreement completely represented all of the parties' terms; and (9) pleaded guilty to making false statements to the government. With these allegations in mind, the Court turns to Defendants' arguments that the Amended Complaint is deficient.
I. Bristol-Myers's Motion
Defendants argue that the case must be dismissed because the Amended Complaint is deficient in three respects: (1) Plaintiffs cannot challenge the adequacy of Bristol-Myers's disclosures because they were adequate as a matter of law; (2) Plaintiffs have failed to adequately pleadand cannot pleadloss causation; and (3) Plaintiffs have failed to adequately plead scienter. (Memorandum of Law of Bristol-Myers Squibb Company in Support of Motion to Dismiss ("Bristol-Myers Mem.") at 9-16, 17-20 & 20-24, respectively.) The Court shall address each argument in turn.
(1) The Adequacy of the Disclosures
Defendants first argue that Bristol-Myers's public disclosures were appropriate and adequate as a matter of law, and there was no duty to disclose any additional information regarding the details of the Plavix/Apotex settlement. This argument is not persuasive. It is undisputed that where "an allegation of fraud is based upon nondisclosure, there can be no fraud absent a duty to speak." Chiarella v. U.S., 445 U.S. 222, 235, 100 S. Ct. 1108, 63 L. Ed. 2d 348 (1980) (discussing disclosure requirements in the context of insider trading and finding that silence is only fraudulent if there exists a duty to disclose). Once a corporation has elected to *160 speak, however, Rule 10b-5 mandates that its speech must be truthful, accurate, and complete. See Caiola v. Citibank, N.A, 295 F.3d 312, 331 (2d Cir.2002) ("Upon choosing to speak, one must speak truthfully about material issues. Once [a company] chose to discuss its hedging strategy, it had a duty to be both accurate and complete." (citations omitted)). The requirement to be complete and accurate, however, does not mean that "by revealing one fact ... one must reveal all others that, too, would be interesting ... but means only such others, if any, that are needed so that what was revealed would not be so incomplete as to mislead." Backman v. Polaroid Corp., 910 F.2d 10, 16 (1st Cir.1990) (quotations and citation omitted). Specifically, section 10(b) and Rule 10b-5 "impose[ ] ... a duty to disclose only when silence would make other statements misleading or false." Glazer v. Formica Corp., 964 F.2d 149, 157 (2d Cir. 1992) (quotations and citations omitted). Therefore, even an entirely truthful statement may provide a basis for liability if material omissions related to the content of the statement make itor other statements madematerially misleading. Indeed, under the plain language of Rule 10b-5, it is impermissible "to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading." 17 C.F.R. § 240.10b-5.
Materiality is another matter. It is undisputed that liability for a misstatement or omission can only be found if the non-disclosure is a material one, or materially affects another disclosure made. Information is considered material if there is "a substantial likelihood that the disclosure of the omitted [information] would have been viewed by the reasonable investor as having significantly altered the `total mix' of information made available." Basic Inc. v. Levinson, 485 U.S. 224, 231-32, 108 S. Ct. 978, 99 L. Ed. 2d 194 (1988) (quotations and citations omitted); see also Halperin v. eBanker US Acorn, Inc., 295 F.3d 352, 357 (2d Cir.2002) ("Recognizing that the materiality of an omission is a mixed question of law and fact, courts often will not dismiss a securities fraud complaint at the pleading stage of the proceedings, unless reasonable minds could not differ on the importance of the omission.").
With respect to the adequacy of the disclosures here, Defendants contend that it was sufficient for Bristol-Myers to disclose the fact that there was a "significant risk" that regulatory approval would not be obtained, that Apotex might launch a generic version of Plavix in the absence of a settlement agreement, and that while Bristol-Myers would "vigorously pursue" its patent rights, it might suffer serious adverse consequences from a generic launch. (Bristol-Myers Mem. at 1.) This argument, however, fails to address Plaintiffs' chief complaint: that Bristol-Myers failed to disclose in its public statements that, in the event of regulatory disapproval of the settlement and subsequent litigation, Bristol-Myers had relinquished certain legal rights that would otherwise have been available in the patent litigation. Plaintiffs contend that this omission led the market to believe that in the event of regulatory disapproval of the settlement, Apotex would be deterred from launching a generic Plavix product by operation of the statutory deterrence mechanisms, and, in the event of a launch, that the impact on Bristol-Myers could be mitigated through the award of statutory relief. In fact, Plaintiffs contend that much of that relief (including immediate injunctive relief and statutory damages) had already been bargained away in the settlement negotiations. *161 Thus, while the market believed that Bristol-Myers maintained its full arsenal of statutory weapons, in reality, it had secretly agreed to an arms limitation.
It is undisputed that Bristol-Myers did not disclose the information sought by Plaintiffs, including the terms of the initial and revised settlement agreements, and the initial regulatory disapproval by the state attorneys general. What remains is a determination as to whether those omissions were material and rendered the statements actually made by Bristol-Myers false or misleading. In the Court's view, Plaintiffs have plausibly pleaded that Bristol-Myers's statements were rendered misleading by the failure to include relevant information about the nature of the settlement negotiations and the terms of the settlement agreement. That is, Plaintiffs have adequately alleged that a reasonable investor would have considered the undisclosed information material in making investment decisions. See Lapin v. Goldman Sachs Group, Inc., 506 F. Supp. 2d 221, 238 (S.D.N.Y.2006).
Bristol-Myers issued a series of statements, press releases, regulatory filings, and website postings throughout the relevant period claiming that it would "vigorously pursue" its patent rights and that any generic Apotex launch would be "at risk."[6] Plaintiffs also provide a host of references to analysts' reports and other industry commentary concerning the settlement agreements. (See Am. Compl. ¶¶ 86-104.) Those reports indicate that securities analysts were aware of the statutory implications of a generic Apotex launch and considered these implications relevant in assessing the value of the Bristol-Myers stock. (See Am. Compl. ¶¶ 89-90.) More importantly, perhaps, the reports indicate that the analysts were unaware of the impact the settlement agreement's terms had on the availability of the typical statutory remedies.[7] On July 28, 2006, a J.P. Morgan Securities,' Inc. report stated that "[l]aunching at risk would be a `bet-the-company' endeavor for Apotex.... Bristol ... might be able to collect treble damages from Apotex ...." (J.P. Morgan Securities, Inc. Report, July 28, 2006, excerpted at Am. Compl. ¶ 89.) On July 31, 2006, Reuters stated, "Apotex Inc. has the right to immediately launch its copycat form of [Bristol-Myers] blockbuster anti-clotting drug, although it is unlikely to do so because of huge financial risks to the generic drug maker." (Reuters, July 31, 2006, excerpted at Am. Compl. ¶ 90.) On August 5, 2006, a newspaper reported that:
[a] decision by Apotex to begin marketing the drug while the [Bristol-Myers] patent is still in force would be a move known in the industry as an "at-risk launch." It means Apotex could be responsible for repaying [Bristol-Myers] three times their sale losses if they end up successfully defending their patent in court.
(Am.Compl. ¶ 93.) Assuming, as the Court must, that the allegations of the Amended Complaint are true, and that the phrase "at risk launch" is a loaded term with a specific and well-understood industry meaning, then it is plausible that Bristol-Myers's disclosures that Apotex's launch would be "at risk" and that it would "vigorously pursue" the patent litigation *162 without accompanying statements or disclosures that it had bargained away certain statutory remedieswere materially misleading. As to the adequacy of the disclosures, the Court must merely decide whether Plaintiffs have pleaded their claims with sufficient particularity and whether it is plausible that the use of such terms in Bristol-Myers's public disclosures, without more detailed information about the settlement negotiations, led (or misled) the securities market to believe that all available statutory remedies were at Bristol-Myers's disposal in the event of a generic Plavix product launch, and that such a belief (or misbelief) affected the price of Bristol-Myers securities in the market. The Court finds that such an allegation is plausible in light of the Plaintiffs' allegations.
In accordance with the requirements of Rule 9(b) and the PSLRA, the Plaintiffs have identified the purportedly misleading statements and/or omissions ("vigorously pursue" and "at risk"), identified the relevant speaker (Dolan and/or Bristol-Myers), provided the dates the statements were made (various), and stated why the statements were fraudulent (because they materially misled the market with respect to the Plavix negotiations) with sufficient particularity. (See Am. Compl. ¶¶ 58-81.) These allegations informing the Court what was said, by whom, on what date, and why it was significant are more than adequate to satisfy 9(b). "To satisfy Rule 9(b), ... a plaintiff need not plead dates, times and places with absolute precision, so long as the complaint gives fair and reasonable notice to defendants of the claim and the grounds upon which it is based." In re Revlon, Inc. Sec. Litig., No. 99 Civ. 10192(SHS), 2001 WL 293820, at *8 (S.D.N.Y. Mar. 27, 2001) (quotations and citations omitted); see also U.S. Commodity Futures Trading Comm'n v. Amaranth Advisors, LLC, 554 F. Supp. 2d 523, 536 (S.D.N.Y.2008) (finding that fraud allegations were sufficiently pleaded under 9(b) when they specified the fraudulent statement, identified the speaker, and made clear when the statements were made, where they were made, and why they were fraudulent); Manavazian v. Atec Group, Inc., 160 F. Supp. 2d 468, 483 (E.D.N.Y.2001) (same).
Viewing the Amended Complaint in the light most favorable to the Plaintiffs, and drawing all reasonable inferences in their favor, the Court finds that the Plaintiffs have pleaded their claims with sufficient particularity to survive the threshold pleading standard of a motion to dismiss, and that Plaintiffs have plausibly alleged that Bristol-Myers's silence with regard to the details of the Apotex settlement made its public statements misleading or false. Accordingly, the Court denies Defendants' motion to dismiss on the grounds that the disclosures were adequate.
(2) Loss Causation
Defendants next argue that Plaintiffs have failed to plead (and cannot plead) loss causation as a matter of law. (Bristol-Myers Mem. at 17.) It is clear that "[p]rivate securities fraud actions are available 'not to provide investors with broad insurance against market losses, but to protect them against those economic losses that misrepresentations actually cause.'" City of Sterling Heights Police and Fire Retirement System v. Abbey Nat, 423 F. Supp. 2d 348, 357 (S.D.N.Y.2006) (quoting Dura Pharms. Inc. v. Broudo, 544 U.S. 336, 345, 125 S. Ct. 1627, 161 L. Ed. 2d 577 (2005) (emphasis added)). Accordingly, as the Second Circuit has stated, "[i]t is long settled that a securities-fraud plaintiff 'must prove both transaction and loss causation.'" Lentell, 396 F.3d at 172 (quotations and citations omitted).
*163 To successfully plead loss causation, Plaintiffs must link the defendant's purported material misstatements or omissions with the harm ultimately suffered. Id.; see also Emergent Capital Inv. Mgmt., LLC v. Stonepath Group, Inc., 343 F.3d 189, 198 (2d Cir.2003) (finding that loss causation is satisfied where plaintiffs "specifically asserted a causal connection between the concealed information ... and the ultimate failure of the venture"); Citibank, N.A. v. K-H Corp., 968 F.2d 1489, 1495 (2d Cir.1992) ("To establish loss causation a plaintiff must show, that the economic harm that it suffered occurred as a result of the alleged misrepresentations"). Loss causation is adequately pleaded "if the risk that caused the loss was within the zone of risk concealed by the misrepresentations and omissions alleged by a disappointed investor." Lentell, 396 F.3d at 173. That is,
loss causation has to do with the relationship between the plaintiffs investment loss and the information misstated or concealed by the defendant. If that relationship is sufficiently direct, loss causation is established, but if the connection is attenuated, or if the plaintiff fails to demonstrate a causal connection between the content of the alleged misstatements or omissions and the harm actually suffered, a fraud claim will not lie.
Id. at 174 (quotations and citations omitted). An allegation that the value of a stock declined following the public announcement of "bad news" does not, by itself, demonstrate loss causation. See Leykin v. AT & T Corp., 423 F. Supp. 2d 229, 245 (S.D.N.Y.2006) (finding that the revelation of bad news which is unrelated to the underlying fraud is insufficient to demonstrate loss causation); In re Tellium, Inc. Sec. Litig., No. 02 Civ. 5878(FLW), 2005 WL 2090254, at *4 (D.N.J. Aug. 26, 2005) ("Dura itself makes clear that loss causation is not pled upon allegations of drops in stock price following an announcement of bad news that does not disclose the fraud."). Such a decline might be the result of a market-wide downturn, an industry-specific phenomenon, or other intervening events unrelated to the disclosure defect at issue. Lentell, 396 F.3d at 174. Instead, to survive a 12(b)(6) motion challenging the adequacy of pleadings with respect to loss causation, "the complaint[ ] must allege facts that support an inference that [the defendants'] misstatements and omissions concealed the circumstances that bear upon the loss suffered such that plaintiffs would have been spared all or an ascertainable portion of that loss absent the fraud." Id. at 175. Allegations of loss causation, however, are not subject to the heightened pleading requirements of Rule 9(b) and the PSLRA. Rather, courts in this district have made it clear that if the complaint connects the Defendants' fraud with Plaintiffs' purported loss within the "short and plain statement" standard of Rule 8(a), then "[t]hat is all that is necessary at this stage of the litigation." CompuDyne Corp. v. Shane, 453 F. Supp. 2d 807, 828 (S.D.N.Y.2006).
It is undisputed that the claims in the Amended Complaint are based on stockprice declines which occurred on three separate days: July 27, 2006 (the date of the announcement of the Antitrust Division investigation); July 31, 2006 (the first day of trading after the announcement of regulatory disapproval); and August 8, 2006 (the date of the announcement of the Apotex generic launch). (Am.Compl. ¶¶ 111(a)-(c); Bristol-Myers Mem. at 17.) Defendants claim that Plaintiffs have not, and cannot, plead loss causation as a matter of law because any losses suffered by Plaintiffs as a result of stock price declines on these three days were linked to risks that were fully disclosed, or that the declines themselves *164 did not result from the non-disclosures complained of. (Bristol-Myers Mem. at 17-18.) Specifically, Defendants argue that they fully and adequately disclosed the risk of both regulatory nonapproval and a generic product launch. Plaintiffs, in contrast, contend that Defendants mischaracterize their loss causation allegations by recasting the risks which later materialized as risks that were identical to those disclosed. (Plaintiffs' Memorandum of Law in Opposition to Defendants' Motions to Dismiss ("Pl. Mem.") at 33-34.) In fact, Plaintiffs argue that the losses suffered were caused by risks which were not disclosed, namely, the risk that the terms of the settlement agreement would either fail to deter Apotex from launching in the event of regulatory nonapproval (or worse, that the terms would actually aid Apotex by allowing it to flood the market with its generic product) and the risk that the "secret oral side agreements" would either result in regulatory denial of the settlement agreements or otherwise expose Bristol-Myers to adverse consequences. (Pl.Mem. 32-42).
(a) July 27, 2006 Loss: Corrective Disclosure
On July 27, 2006, Bristol-Myers's stock price declined 7.5% or $1.95 per share (from $25.99 per share at the close of business on July 26 to $24.04 per share at closing on July 27). (Am.Compl. ¶ 111(a).) Defendants characterize this loss as a direct result of the announcement that the Justice Department had commenced a criminal investigation, but Plaintiffs plausibly suggest that it was in fact a partial "corrective disclosure." A corrective disclosure can be a revelation of a prior statement's falsity or of a material omission, such that the price of a stock declines as the market absorbs the newly revealed information. See In re Take-Two Interactive Sec. Litig., 551 *F.Supp.2d 247, 282 (S.D.N.Y.2008) (citations omitted). A plaintiff may "successfully allege loss causation by ... alleging that the market reacted negatively to a `corrective disclosure,' which revealed an alleged misstatement's falsity or disclosed that allegedly material information had been omitted." In re Merrill Lynch & Co. Research Reports and Sec. Litig., No. 02 Civ. 9690(JFK), 2008 WL 2324111, at *5 (S.D.N.Y. June 4, 2008). Plaintiffs contend that the July 27 disclosure of the Justice Department investigation was "corrective" because it revealed generally that Defendants had not complied with their obligation to present accurate information to regulators regarding the Apotex settlement, and that the revelation of this failure to comply is what caused the criminal investigation.
While it may be that mere "allegations of drops in stock price following an announcement of bad news that does not disclose the fraud" are insufficient to plead loss causation, what we have here is much different. Tellium, 2005 WL 2090254, at *4 (citations omitted). The "bad news" was the revelation that a criminal investigation had commenced, but Plaintiffs also allege why the investigation commenced (the Apotex settlement negotiations). The Company's own press release confirms the basis for the investigation. (Bristol-Myers Press Release, July 27, 2006, excerpted at Am. Compl. ¶ 82 ("[Bristol-Myers] learned yesterday that the Antitrust Division of the United States Department of Justice is conducting a criminal investigation regarding the proposed settlement of the Apotex litigation ...")). The Amended Complaint links the announcement of the investigation to the purportedly fraudulent misconduct: entering into and then failing to disclose the secret oral side agreements in the settlement negotiations. This is not "bad news" followed by a stock price decline. *165 The revelation is, in fact, more akin to a corrective disclosure, and there is no requirement "that [a corrective] disclosure take a particular form or be of a particular quality.... It is the exposure of the fraudulent representation that is the critical component of loss causation." Lapin, 506 F.Supp.2d at 243 (quotations and citations omitted). It is also clear that a corrective disclosure need not take the form of a single announcement, but rather, can occur through a series of disclosing events. In re Vivendi Universal S.A., No. 02 Civ. 557KRJH), 2004 WL 876050, at *7 (S.D.N.Y. Apr.22, 2004) (finding loss causation adequately pleaded when a complaint alleged that a series of corrective disclosures was followed by a material price decline, and the price decline was attributable to the series of corrective disclosures); see also In re Bradley Pharms., Inc. Sec. Litig., 421 F. Supp. 2d 822, 828-29 (D.N.J. 2006) ("Guided by a pragmatic understanding of Dura, the Court concludes that Plaintiffs have adequately pled loss causation. The revelation of the `truth' about the [alleged fraud] did not take the form of a single, unitary disclosure, but occurred through a series of disclosing events."). Drawing all reasonable inferences in Plaintiffs' favor, it is plausible that the announcement of a criminal investigation into Bristol-Myers's efforts to settle the Apotex litigation marked the first in a series of corrective disclosures which would reveal to the market that the Company had engaged in misconduct with respect to the settlement negotiations. In essence, the announcement of the investigation was not an isolated event in itself, it was instead the "tip of the iceberg"the first in a series of revelations which would ultimately expose the Company's entire fraudulent scheme to protect Plavix exclusivity.
(b) July 31, 2006 Loss
On July 31, 2006, the stock price fell 2% or $0.50 per share (from a closing price of $24.47 on July 28 (the prior trading day) to $23.97 at the close of the market Monday, July 31) on the announcement that federal regulators had rejected the amended Apotex settlement agreement. (Am.Compl. ¶ 111(b).) Defendants contend that this loss was the result of a risk which was fully and regularly disclosed: the risk of regulatory rejection of the agreement. (See, e.g., Press Release of March 21, 2006, excerpted at Am. Compl. ¶ 58 ("There is a significant risk that required antitrust clearance will not be obtained.").) Plaintiffs argue that while the price drop was the result of the disclosure that regulators had officially rejected the amended Apotex settlement agreement, the rejection itself was the result of Defendants' fraudulent misconduct with respect to the settlement negotiations. (Am.Compl. ¶ 111(b).) Therefore, according to Plaintiffs, the price drop was actually the result of Defendants' fraudulent conduct which virtually assured that regulators would reject the agreement, and not merely the announcement of the rejection itself.
While the Court need not reach the merits of their argument, Plaintiffs' viewthat the losses suffered on July 31 were caused by Defendants' misconduct which resulted in regulatory rejectionis plausible. Accordingly, the allegation survives this motion to dismiss.
(c) August 8, 2006 Loss: Multiple Causation
On August 8, 2006, the stock price fell 7%, or $1.56 per share, from a close of $22.77 on August 7 to $21.21 on August 8. (Am.Compl. ¶ 111(c).) Defendants attribute this drop to the announcement on that day that Apotex had launched its generic producta risk that had been disclosed in Defendants' various public statements *166 (Bristol-Myers Mem. at 18-19) (See, e.g., Press Release of March 21, 2006, excerpted at Am. Compl. ¶ 58 (stating that in the event of regulatory rejection, the settlement would be terminated, and the litigation would be reinstated, and "if the litigation were reinstated, Apotex could launch a generic [Plavix] product at risk.").) In contrast, Plaintiffs contend that the drop resulted from the long-delayed disclosure of the precise terms of the Apotex settlement agreement, including the fact that Bristol-Myers had agreed not to seek injunctive relief until five business days after the Apotex launch, and had agreed to waive its statutory right to seek treble damages. (Am.Compl. ¶ 111(c).) In support of their position, Plaintiffs cite to various news reports explaining the significance of the terms of the settlement agreement to market commentators. For example, on August 9, 2006, Dow Jones reported that Bristol-Myers had entered into "a rather disadvantageous patent settlement with Apotex," specifically citing the five-day waiting period on injunctive relief. (Am.Compl. ¶ 99.) On August 10, 2006, the Financial Times reported that the five-day waiting period provision was "likely to have lasting effects on the market for Plavix" (Am.Compl. ¶ 104), and an analyst from A.G. Edwards & Sons, Inc. called the damages limitation "a big strategic mistake" (Am.Compl. ¶ 101).
At this stage in the proceedings, the Court finds it is plausible that the price drop on August 8, 2006 was the resultat least in partof the disclosure of the amended settlement agreement's terms. Any further requirement to ascribe the actual amount of loss to one cause or another does not arise on a motion to dismiss. The Plaintiffs need only plead that Defendants' fraudulent behavior concealed facts or circumstances which, when revealed, contributed to the loss. See In re Parmalat Sec. Litig., 376 F. Supp. 2d 472, 510 (S.D.N.Y.2005) (stating that "the loss causation requirement will be satisfied if [Defendants' deceptive or manipulative] conduct had the effect of concealing the circumstances that bore on the ultimate loss."). The Court need not make a final determination as to what losses occurred and what actually caused them, but it is clear from a pleading and plausibility standard that the Amended Complaint is sufficient.
(3) Scienter
In order to establish liability under section 10(b) and Rule 10b-5, a plaintiff must also prove that the defendant acted with scienter, "a mental state embracing intent to deceive, manipulate, or defraud." Ernst & Ernst v. Hochfelder, 425 U.S. 185, 193 n. 12, 96 S. Ct. 1375, 47 L. Ed. 2d 668 (1976). As with the other elements of a 10(b) claim, allegations regarding scienter must be stated with particularity, and, pursuant to the PSLRA, the plaintiff must put forth "facts giving rise to a strong inference that the defendant acted with the required state of mind." 15 U.S.C. § 78u-4(b)(2). Indeed, it is not enough "that a reasonable factfinder plausibly could infer from the complaint's allegations the requisite state of mind." Tellabs, 127 S.Ct. at 2504. Instead, "an inference of scienter must be more than merely plausible or reasonableit must be cogent and at least as compelling as any opposing inference of nonfraudulent intent" in order to survive a motion to dismiss. Id. at 2504-05.
In order to determine whether a complaint has adequately pleaded scienter, a court should examine all of the facts alleged collectively or "holistically" (without parsing individual allegations), and take into account any inference concerning scientersupporting or opposingwhich *167 can be drawn from the complaint. See id. at 2509. Once it has considered the complaint in this light, it should find that scienter has been adequately pleaded only if a "cogent and compelling" inference regarding the requisite state of mind can be drawn. Id. at 2509-10. In essence, a complaint must "allege facts that give rise to a strong inference of intent to deceive, manipulate or defraud. That intent can be established either by: (1) alleging facts showing Defendants had both motive and opportunity to commit fraud; or (2) alleging facts that constitute strong circumstantial evidence of conscious misbehavior or recklessness." Lapin, 506 F.Supp.2d at 241 (quotations and citations omitted); see also Novak, 216 F.3d at 307-08. According to the Supreme Court, the critical inquiry is: "[w]hen the allegations are accepted as true and taken collectively, would a reasonable person deem the inference of scienter at least as strong as any opposing inference?" Tellabs, 127 S.Ct. at 2511. If the Court answers in the affirmative, then scienter has been adequately pleaded. If not, the case may be dismissed.
Here the Amended Complaint specifically alleges with respect to scienter that Dolan authorized Bodnar to negotiate secret oral side agreements on behalf of the Company in order to protect its most profitable drug, that Bodnar in fact negotiated those agreements and committed the Company to their illegal terms, that Dolan was informed and fully aware of the undisclosed terms of those secret agreements, that Dolan approved the Company's materially incomplete and misleading public disclosures, and that he personally made materially incomplete and misleading public statements in an effort to gain approval for the settlement and protect Plavix exclusivity. (Am.Compl. ¶ 122.) The Amended Complaint also contends that Dolan and Bodnar kept the Board of Directors and the federal monitor in the dark about the true nature of the settlement negotiations and the secret oral side agreements. (Am. Compl. ¶ 123.)
In addition to these specific claims, the Court adds its own list of allegations relevant to the "holistic" view of the purported facts as they relate to scienter. Tellabs, 127 S.Ct. at 2509.
▄ Plavix was a highly profitable medication, critical to the Company's success and continuing profitability. (Am.Compl. ¶ 76.)
▄ Dolan himself made statements about the importance of the drug, stating that the "[k]ey to revenue growth, obviously, is maintaining Plavix exclusivity," reiterating that Plavix "clearly is critical to our future growth" and adding for good measure that "Plavix is, obviously, critical to our future." (Dolan's comments at the Sanford C. Bernstein & Co. Strategic Decisions Conference, May 31, 2006 (excerpted at Am. Compl. ¶ 76).)
▄ Apotex applied to the FDA to launch a generic form of Plavix, thereby threatening the exclusivity of the drug and perfecting Bristol-Myers's motive. (Am.Compl. ¶ 31.)
▄ Bristol-Myers responded to the threat by initiating a patent infringement suit and then attempting to enter into a settlement agreement with Apotex. (Am.Compl. ¶¶ 32-33.)
▄ As part of the settlement agreement, Bristol-Myers made significant concessions limiting the relief it would seek in the event of regulatory disapproval, but failed to disclose those concessions. (Am.Compl.¶ 37.)
▄ Regulators rejected the initial terms of the settlement agreement, citing *168 antitrust concerns. (Am.Compl. ¶ 38.)
▄ Instead of announcing the rejection, Bristol-Myers sought to quietly renegotiate the settlement, agreeing to more onerous demands, and keeping some of the objectionable terms in the form of "secret" oral side agreements (Am.Compl. ¶¶ 38-39) and then failed to disclose the renegotiations and the secret oral side agreements to regulators and/or the general public (Am.Compl. ¶¶ 39, 42).
▄ When asked for written certification that the disclosed termsthose memorialized in the written settlement agreementwere the only terms, Bristol-Myers provided a false certification knowing that other undisclosed terms existed. (Am.Compl. ¶ 50.)
▄ The Department of Justice launched an investigation into the Apotex settlement negotiations. (Am.Compl. ¶¶ 51-52.)
▄ Bristol-Myers pleaded guilty to two felony charges of making false statements to a government agency under 18 U.S.C. § 1001. (Am.Compl. ¶ 56.)
Defendants argue that these allegations fail to give rise to the requisite cogent and compelling inference of scienter because there was no clear duty to disclose more detailed information regarding the Plavix settlement. (Bristol-Myers Mem. at 21.) Absent such a duty, Defendants contend that there can be no "strong evidence of conscious misbehavior or recklessness." (Bristol-Myers Mem. at 21) (quoting Kalnit v. Eichler, 264 F.3d 131, 144 (2d Cir. 2001).) In the alternative, Defendants suggest two opposing inferences: that no disclosure was made for fear of competitors using the information to Bristol-Myers's disadvantage, or because the individuals responsible for the disclosures (e.g. Dolan) were not aware of the secret side agreements. These arguments are disingenuous.
The critical inquiry is whether a reasonable person would deem the inference of scienter at least as strong as any opposing inference. Based on the Plaintiffs' allegations, in toto, a reasonable person is compelled to infer that Defendants acted with scienter. Indeed, the inference is easily drawn. Defendants' own statements show how critical maintaining Plavix exclusivity was to the Company's profitability. Once the exclusivity was threatened by Apotex's application to launch a generic Plavix competitor, Bristol-Myers acted to protect its wonder drug, even if it meant engaging in fraud. Motive quickly turned to opportunity. When the initial settlement agreement was rejected by the regulatory entities, Bristol-Myers did not disclose the rejection, but instead tried to renegotiate. The renegotiated agreement contained secret oral concessions which Bristol-Myers lied about, eventually pleading guilty to two counts of making false statements (providing strong circumstantial evidence of conscious misbehavior or recklessness). On these allegations and facts, it is easy to infer that Defendants acted with scienter, and that conclusion is at least as cogent and compelling as any opposing inferences that can be drawn from the allegations here.
II. Section 10(b) Claims Against the Individual Defendants
Defendants Peter Dolan and Andrew Bodnar join, adopt, and incorporate by reference[8] Bristol-Myers' motion to dismiss; *169 but also move on separate grounds for dismissal of Plaintiffs' individual section 10(b) and 20(a) claims.
A. Section 10(b) Claims Against Dolan
Dolan alleges that Plaintiffs' "generalized allegations" fail to adequately plead scienter against him. (Dolan Mem. at 4-11.) He contends that absent particularized allegations that he engaged in insider trading, realized specific profits, or demonstrated any other indicia of personal gain, the allegations against him are inadequate. (Dolan Mem. at 6.) While it is insufficient for Plaintiffs merely to allege that Dolan held a senior position and wished to keep it, (see Kalnit, 264 F.3d at 139), the Second Circuit has found scienter sufficiently alleged where there was a strong motive not to disclose fraud, In re Time Warner Sec. Litig., 9 F.3d 259, 270 (2d Cir.1993).
In this case, Dolan is not sued merely because he held a senior position and wished to keep it. Plaintiffs allege that Dolan was highly motivated to protect Plavix exclusivity, that he concocted a scheme to quietly renegotiate the Apotex settlement after the initial rejection, that he ordered Bodnar to do his bidding in this regard, that he continually made false or misleading statements in order to prevent the market from discovering his fraudulent conduct, and that he was ultimately involuntarily dismissed due to "issues relating to the Plavix patent litigation with Apotex." (Am. Compl. ¶ 124, see generally Am. Compl. ¶¶ 122-27.) These allegations provide much more than a blanket assertion that Dolan wanted to keep his job and maintain a high level of compensation. Instead, the Amended Complaint alleges that Dolan was at the very heart of the fraudulent scheme which surrounded him, and was well aware that he and the Company were misrepresenting material facts with respect to the Apotex settlement. Such allegations are more than sufficient to survive the threshold pleading requirements of scienter on a motion to dismiss. See Borochoff v. GlaxoSmithKline PLC, No. 07 Civ. 5574(LLS), 2008 WL 2073421, at *8 (S.D.N.Y. May 9, 2008).
B. Section 10(b) Claims Against Bodnar
Bodnar first argues that Plaintiffs' individual 10(b) claims against him suffer from a "failure of pleading" because the Amended Complaint fails to allege that Bodnar actually made any statements to the public as required by Central Bank of Denver, N.A. v. First Interstate Bank of Denver, N.A., 511 U.S. 164, 177, 114 S. Ct. 1439, 128 L. Ed. 2d 119 (1994). Bodnar also claims that Plaintiffs have not adequately pleaded: (i) reliance on Bodnar's conduct, (ii) that their loss was caused by his conduct, (iii) that his conduct was "in connection with" Plaintiffs' purchase of Bristol-Myers's stock, (iv) that he acted with scienter, or (v) that his conduct was "deceptive" within the meaning of section 10(b). (Bodnar Mem. at 2.) These arguments, too, are not compelling.
With respect to Central Bank, the Supreme Court's full holding regarding 10(b) liability stated that "we again conclude that the statute prohibits only the making of a material misstatement (or omission) or the commission of a manipulative act." Central Bank, 511 U.S. at 177, 114 S. Ct. 1439 (emphasis added). This view comports with the plain language of 10(b) and rule 10b-5, prohibiting deceptive devices, contrivances, and acts. See 15 U.S.C. *170 § 78j; 17 C.F.R. § 240.10b-5. The allegations that Bodnar: (1) secretly negotiated a settlement with illegal oral side agreements; (2) knowingly withheld information about the negotiations, the terms of the settlement, and the oral side agreements from shareholders, the Board of Directors, and the federal monitor; and (3) failed to correct Dolan and the Company's material misstatements despite his duties as a senior executive are, within the Court's view, "the commission of manipulative acts" sufficient to satisfy the Supreme Court's 10(b) pleading standards. (Am.Compl. ¶¶ 120-127.)
Bodnar tries to escape liability based on Stoneridge Inv. Partners, LLC v. Scientific-Atlanta, Inc., ___ U.S. ___, 128 S. Ct. 761, 169 L. Ed. 2d 627 (2008). In Stoneridge, the Court found that allegations regarding complicit participation by outside suppliers in a cable company's fraudulent scheme were too remote from the investing public to satisfy the reliance element of the 10(b) standard, and therefore insufficient to allege scheme liability under 10(b). Id. at 770. Here, however, Bodnar's behavior is at the heart of Bristol-Myers's false and misleading conduct. It is neither implausible, nor too remote to find that the investing public relied on the announcement of the Apotex litigation settlement in deciding whether or not to invest in Bristol-Myers stock, and Bodnar was directly responsible for the settlement agreements. Bodnar made no public statements himself, but investors relied on his good faith in negotiating the Apotex settlement agreement and committing the Company to its terms. Furthermore, unlike in Stoneridge where the defendants' "deceptive acts were not communicated to the public," Bodnar's misconduct and deceptive acts were communicated to the public here through the disclosure of the regulatory rejection of the settlement, the disclosure of the amended settlement's terms, and the revelation of the secret oral side agreements. Id. at 769. Bodnar's actions are directly tied to the Apotex settlement, the Justice Department investigation, and the alleged misstatements and omissions. These allegations are more than adequate to satisfy 10(b) and the requirements of the Stoneridge decision.
C. Section 20(a): "Control Person" Liability
Section 20(a) of the Exchange Act provides that "[e]very person who, directly or indirectly, controls any person liable under any provision of this chapter ... shall also be liable jointly and severally with and to the same extent as such controlled person" unless the purported control person can demonstrate that he "acted in good faith and did not directly or indirectly induce the act or acts constituting the violation or cause of action." 15 U.S.C. § 78t.
Courts in this district have found that "[i]n order to plead a prima facie case of control person liability under section 20(a), a plaintiff must allege (1) a primary violation by the controlled [entity], (2) control of the primary violator by the defendant, and (3) that the defendant was, in some meaningful sense, a culpable participant in the controlled person's fraud." In re Scottish Re Group Sec. Litig., 524 F. Supp. 2d 370, 386 (S.D.N.Y.2007) (quotations and citations omitted). It is not sufficient for a plaintiff to allege that an individual defendant has control person status; instead, the plaintiff must assert that the defendant exercised actual control over the matters at issue. Id. Control person liability need not be pleaded with particularity and is generally analyzed under the "short and plain" statement analysis of Rule 8(a). See Sedona Corp. v. Ladenburg Thalmann & Co., Inc., No. 03 *171 Civ. 3120(LTS)(THK), 2005 WL 1902780, at *16 (S.D.N.Y. Aug. 9, 2005) (holding that a plaintiffs pleading with respect to the elements of control person liability need only meet the requirements of 8(a) since "neither the PSLRA (because scienter is not an essential element), nor Rule 9(b) (because fraud is not an essential element), apply to a Section 20(a) claim."). Some courts, however, analyze the culpable participation prong under the heightened pleading standard of the PSLRA. In re Global Crossing, Ltd. Sec. Litig., No. 02 Civ. 910(GEL), 2005 WL 1907005, at *5 (S.D.N.Y. Aug. 8, 2005) ("since culpable participation is an element [of 20(a) claims], the PSLRA's heightened pleading requirements apply ...."); Burstyn v. Worldwide Xceed Group, Inc., No. 01 Civ. 1125(GEL), 2002 WL 31191741, at *8 (S.D.N.Y. Sept. 30, 2002) (same). The distinction is immaterial for our purposes since under either pleading standard the Plaintiffs have met their burden to adequately plead control person liability with respect to individual Defendants Dolan and Bodnar.
First, the control person claims against Dolan and Bodnar are premised on Bristol-Myers's underlying primary violations of 10(b) and 10b-5. The Court has already found that those claims survive this motion to dismiss; therefore, the requisite primary violation has a sufficient foundation in the pleadings.
Second, Plaintiffs have adequately alleged that both Dolan and Bodnar actually exercised control of the primary defendant, Bristol-Myers. Dolan, as CEO and Chairman of the Company, and signor and speaker of many of the public statements, was clearly in a position to exercise control over the Company. See In re Alstom SA Sec. Litig., 406 F. Supp. 2d 433, 494 (S.D.N.Y.2005) ("Although status as officer or committee member is generally not enough to constitute control, and thus a mere recitation of [a defendant's] title as CEO along with the committees upon which [a defendant] sat is not sufficient," the power to sign SEC filings implies that the person had some measure of control over those who write them.). Bodnar, meanwhile, held very high-level executive positions and is also alleged to have been the one to actually negotiate and enter into the disputed settlement agreements on behalf of Bristol-Myers. Given this allegationthat he actually exercised control over the entity by entering into major agreements involving the Company's most profitable drug on its behalfit is not implausible that he had control over the primary violator. Indeed, Plaintiffs allege that he was, in fact, the key actor of the controlled entity and that he influenced the critical transaction in question, the Apotex settlement (in all of its various forms, both public and private). See Alstom, 406 F.Supp.2d at 487. These allegations clearly survive a motion to dismiss.
Third, with respect to "culpable participation," the allegations of the Amended Complaint with respect to Dolan and Bodnar are also more than adequate to survive this motion. Dolan is alleged to have actually made materially misleading statements knowing they were false, (see, e.g., Am.Compl. ¶¶ 70, 76, 83), and Bodnar is alleged to have knowingly entered into the secret, unlawful, oral side agreements. Of course, neither Dolan nor Bodnar hesitates to point his finger at the other. Dolan argues that Bodnar, not he, acted as Bristol-Myers's principal negotiator in the Apotex settlements, that he did not participate in the settlement discussions in any way, and that he had no "knowledge" of these agreements. (Dolan Mem. at 3-4.)[9]*172 Bodnar contends that he did not in any way "control" Bristol-Myers, nor did he culpably participate in the fraud. (Bodnar Mem. 10-11). Instead, Bodnar helpfully points out that it was Dolan, not he, who made the misleading public statements. (Bodnar Mem. at 1.)
The culpable participation requirement can be satisfied by a showing of recklessness, for example, where there has been an "extreme departure from the standards of ordinary care," Rothman, 220 F.3d at 90, or when defendants are "aware[ ] of facts or [have] access to information contradicting their public statements" Alstom, 406 F.Supp.2d at 491 (citing Novak, 216 F.3d at 308). Suffice it to say that viewing the allegations of the Amended Complaint in the light most favorable to Plaintiffs, both Dolan and Bodnar are adequately alleged to be culpable participants, and their finger-pointing confirms their culpability. Crediting their mutual accusations confirms that both engaged in deceptive and risky conduct involving Bristol-Myers's most profitable drug and the key to its core business, and both were aware of information which contradicted the Company's public statements that it would "vigorously pursue" the Apotex litigation and that a generic launch was "at risk." These allegationsamong the countless others made throughout the Amended Complaintmore than satisfy the requirement that the control person was a culpable participant in the fraud in some meaningful sense.
CONCLUSION
For the reasons stated above, Defendants' motions to dismiss are DENIED. The parties should confer and contact the Court no later than Friday, August 29, 2008, to schedule a pre-trial conference. The Clerk of Court is directed to terminate all pending motions.
SO ORDERED.
NOTES
[1] These claims were based on the assertion that Bristol-Myers's patent on the drug covered only some, and not all, of the medicinal compounds contained in Plavix; specifically, Apotex sought to introduce a generic version of the compound clopidogrel bisulfate. (Am. Compl. ¶¶ 58, 63.)
[2] According to the allegations of the Amended Complaint, in 2003 the Federal Trade Commission alleged that Bristol-Myers violated antitrust laws in connection with another agreement involving a generic drug company, and the settlement of patent litigation involving the cancer drug Taxol. (Am.Compl. ¶ 34.) As a result of these allegations of anticompetitive conduct, Bristol-Myers entered into a consent decree and, in June 2005, a deferred prosecution agreement, requiring, among other things, regulatory approval of settlement agreements involving generic drug-makers. Pursuant to the terms of the consent decree, the Company also appointed a corporate monitor, former United States District Judge Frederick Lacey, to provide oversight and ensure compliance with the agreement. (Am. Compl. ¶ 34-35.)
[3] See, e.g., Form 10-K filed March 14, 2006, attached to Declaration of Lorin L. Reisner in Support of Motion to Dismiss ("Reisner Decl.") Exhibit ("Ex.") D, Form 8-K filed March 21, 2006 (Reisner Decl. Ex. E), Press Release of March 21, 2006 (Exhibit 99.1 to Form 8-K, Reisner Decl. Ex. E; also excerpted at Am. Compl. ¶ 58), "Questions and Answers" website posting, March 21, 2006 (Exhibit 99.2 to Form 8-K, Reisner Decl. Ex. E; also excerpted at Am. Compl. ¶ 65), First Quarter 2006 Press Release of April 27, 2006 (filed on Form 8-K, Reisner Decl. Ex. F), Statements by Dolan at Annual Meeting of Stockholders on May 2, 2006 (excerpted at Am. Compl. ¶ 71), Form: 10-Q filed May 8, 2006 (Reisner Decl. Ex. G), Dolan's comment at Sanford C. Bernstein & Co. Conference on May 31, 2006 (excerpted at Am. Compl. ¶ 76).
[4] An amount reduced from 70% and 60%, respectively, in the original Apotex settlement. (Am.Compl. ¶ 41.) For additional discussion, see supra page 153.
[5] The PSLRA also adopted reforms with respect to: selection of the lead plaintiff, limitations on fees, a statutory safe harbor for forward-looking statements, sanctions for frivolous litigation, and a discovery stay pending resolution of a motion to dismiss. Tellabs, 127 S.Ct. at 2508.
[6] See supra note 3, at 154.
[7] The Court notes that the analysts' reports are not cited for their truth, but only "to show whether and when information was provided to the market" such that the reports contributed to the total mix of information available to investors. Patel v. Parries, No. 07 Civ. 5364(MMM), 2008 WL 2803076, at *16 (C.D.Cal. May 19, 2008) (quotations and citations omitted).
[8] See Memorandum of Law in Support of Peter R. Dolan's Motion to Dismiss the Amended Complaint ("Dolan Mem.") at 1-2; Memorandum of Law in Support ol Andrew G. Bodnar's Motion to Dismiss ("Bodnar Mem.") at 1.
[9] Dolan also attacks the Sherman Affidavit as "self-interested" and containing "inadmissible hearsay statements." (Dolan Mem. at 3-4.) These arguments, of course, are inappropriate on a motion to dismiss where the Court is concerned about the allegations of the complaint, must accept its allegations as true, and draws all reasonable inferences in plaintiff's favor.
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586 F. Supp. 22 (1984)
COMPUTERLAND CORPORATION, Plaintiff,
v.
MICROLAND COMPUTER CORPORATION, Defendant.
No. C-83-3076 SW.
United States District Court, N.D. California.
March 30, 1984.
Dismissed With Prejudice September 6, 1984.
*23 Hilary E. Pearson, Arnold, White & Durkee, Palo Alto, Cal., Rodney K. Caldwell, J. Paul Williamson, Arnold, White & Durkee, P.C., Houston, Tex., Jonathan Greenfield, Ian N. Feinberg, Ware, Fletcher & Freidenrich, A Professional Corporation, Palo Alto, Cal., for plaintiff Computerland Corporation.
D. Peter Harvey, Horning, Janin & Harvey, San Francisco, Cal., Michael A. Ladra, Peter J. Courture, Wilson, Sonsini, Goodrich & Rosati, Palo Alto, Cal., Milton W. Schlemmer, Debra Dahl, Flehr, Hohbach, Test, Albritton & Herbert, San Francisco, Cal., for defendant Microland Computer Corp.
MEMORANDUM AND ORDER GRANTING DEFENDANT'S MOTION FOR PARTIAL SUMMARY JUDGMENT
SPENCER WILLIAMS, District Judge.
ORDER AND MEMORANDUM OF LAW
Upon consideration of written memoranda in support and opposition to defendant's motion for partial summary judgment, and oral argument entertained on February 1, 1984, IT IS HEREBY ORDERED that DEFENDANT'S MOTION FOR PARTIAL SUMMARY JUDGMENT on plaintiff's claims 1 and 2 is hereby GRANTED. A brief explanation of this Court's order is provided below.
FACTS:
In 1976, plaintiff was incorporated in Oakland, California, as a franchisor of retail microcomputer outlets. Originally planning to operate as "Computer Shack", plaintiff dropped its plans when contacted by Radio Shack (a Tandy subsidiary), which voiced objection to this use. Plaintiff has grown to over 600 franchises throughout the U.S., although mainly concentrated in West and Southwest, and the rest of the world. It has sold over $1.5 billion in retail computer goods since 1977, making it the fourth largest retailer of major electronic appliances in the U.S. a vivid example of a business benefiting from, and fueling, the spectacular growth of demand for computers in modern society.
In November 1982, defendant operating a single store selling computer goods changed its name from "The Computer Post of Newark" to "Microland". In January 1983, plaintiff learned that defendant was operating in direct competition with its franchisees, and attempted to dissuade its continued use. Those efforts failed, and this suit was filed in June 1983.
Simultaneously, five other "computer related" retailers: Businessland; Techland; DECland; Softwareland and Serviceland have been pressured to drop their use of these names which Computerland finds offensive. Thousands of other computer, and noncomputer related companies currently use the "land" suffix to denote the availability of goods suggested by the prefix appended. Examples include: Flowerland, Carpetland, Adventureland, Plantland, Musicland, and countless others. Other instances of similar suffixes include: "mart", "center" and "shop".
Although plaintiff's substantive opposition to this motion was late, and not entirely within the purview of the leave granted upon its Fed.R.Civ.P. 56(f) affidavit to permit plaintiff to complete outstanding discovery, we note for the record that all relevant and admissible materials submitted *24 in opposition to defendant's motion were considered on their merits.
LAW:
This is an instance where plaintiff's meteoric, and virtually overnight, success under its name cannot overcome that name's inherent weakness through its linguistic tradition and the common parlance of the marketplace. To do so would have required both plaintiff's exclusive and well-publicized use over a lengthier period, and a substantial evolution in consumer awareness and identification of name and entity.
Defendant took the offensive in plaintiff's suit for federal Lanham Act and state law claims, because invalidity or unprotectability of a registered trademark is effectively an affirmative defense to claims of infringement, unfair source designation and other allegations of unfair competition. Although defendant bore the burden of production and proof on each prong of the analysis, the burden shifted to plaintiff in two important respects: first, plaintiff was required to come forward with sufficient showing that facts material to the relevant issues were in genuine dispute, sufficient to forestall consideration as a matter of law; and, second, that its name, although found to be "descriptive", is nonetheless protectable because it has acquired "secondary meaning". Plaintiff failed to discharge either burden.
Registration of trade or service marks with the U.S. Copyright Office affords presumptive protection in the use of that mark. Such registration, as plaintiff did in late 1976 or early 1977, does not insulate the mark from the sort of legal challenge defendant mounts here. See, e.g., Dollcraft Co. v. Nancy Ann Storybook Dolls, Inc., 94 F. Supp. 1 (N.D.Cal. 1950), aff'd 197 F.2d 293 (9th Cir.) cert. denied, 344 U.S. 877, 73 S. Ct. 172, 97 L. Ed. 679 (1952). The U.S. Copyright Office merely performs the mechanical function of scriviner: one sends in the fee and mark; the Office verifies that that particular mark has not yet been recorded if not, it records it. Registration of the mark includes no review of the legal status of the mark; determination of whether the mark is protected against an instance of alleged encroachment is left solely within the judgment of the courts. Id.
There are two components of determining whether "Computerland" is a protectable mark. First, we must decide what type of a mark it is: "generic", "descriptive", "suggestive" or "fanciful"; and, second, if found to be, at best, descriptive, whether, as a matter of fact, it has acquired sufficient "secondary meaning" to exempt it from the usual rule that descriptive marks are not protected, regardless of registration.
(1) Is "Computerland" protectable as a matter of law?
Although the Ninth Circuit appears to construe "genericness" very broadly (see, e.g., Anti-Monopoly, Inc. v. General Mills Fun Group, 611 F.2d 296 (9th Cir. 1979)), it has also recognized that the lines between these classifications are not clear. HMH Publishing Co. v. Brincat, 504 F.2d 713, 716 (9th Cir.1974).
These classifications, from least protected to most protected from appropriation, are (1) "generic"
one that refers, or has come to be understood as referring, to the genus of which the particular product or service is a species. It cannot become a trademark under any circumstances...;
(2) "descriptive" "specifically describ(ing) a characteristic or ingredient of an article or service. It can, by acquiring a secondary meaning, i.e., becoming `distinctive of the applicant's goods', become a valid trademark" (emphasis added); (3) "suggestive" "suggests rather than describes an ingredient, quality or characteristic of the goods and requires imagination, thought, and perception to determine the nature of the goods", and is afforded protection from registration without proof of secondary meaning; and, (4) "arbitrary or fanciful" "applied to words invented solely for their use as trademarks and enjoys all the rights ...". Surgicenters of America, Inc. v. Med. Dental Surgeries, Co., *25 601 F.2d 1011 (9th Cir.1979), quoting Abercrombie & Fitch Co. v. Hunting World, Inc., 537 F.2d 4, 9-11 (2d Cir.1976).
We agree with defendant: at best, plaintiff's mark is descriptive. "Computerland" used as a name to denote a place to buy computers is "descriptive", although perilously close to the "generic" line. In a deposition taken in the Computerland v. Businessland, C 83-2008 WAI (SJ), plaintiff's Vice-President of marketing testified that the use of "land" as a suffix to "computer" meant to him "Retail stores where people can access knowledge of and products relating to microcomputers ... `land' indicating a place to buy computers". Plaintiff understandably attempts to qualify this articulation of the inherent weakness of its name, but we merely cite this testimony as illustrative of the virtual reflection of name to service.
The plaintiff concedes that "computer" and "land" are independently generic terms, which acquire a more protected status when combined. However, this is not the law. The Ninth Circuit has clearly held that the mere combination of two common, and presumably generic, terms like "Surgi" (a common abbreviation for surgical) and "center" (as a location) cannot together constitute more than a generic term. Surgicenter of America, Inc., supra, at 1015. Accord, National Conf. of Bar Examiners v. Multistate Legal Studies, Inc., 692 F.2d 478 (7th Cir.1982) (use of "Multistate Bar Examination" unprotected, as components are common descriptives); S.S. Kresge Co. v. United Factory Outlet, Inc., 598 F.2d 694 (1st Cir.1979) (the "Mart" and "K-Mart"; "Mart" held generic); Abercrombie & Fitch, supra ("Safariland" as the name of a store which sells "Safari" clothes held unprotectible as generic).
However, since the line between generic and descriptive is less than absolutely certain, and appellate review of this determination de novo, we proceed with our analysis assuming, arguendo, that Computerland is descriptive. Since there may be some dispute as to whether the plaintiff's use of "land" invokes a denotative or sufficiently primary definition, or merely an inferential, slang or symbolic meaning, we err, if at all, by affording plaintiff the benefit of any doubt.
This benefit does not extend so far as accepting plaintiff's half-hearted contention that its use is "suggestive". We believe this appropriately rejected; "Computerland" was selected by plaintiff for the same reason that it cannot today be afforded much regard: it literally communicates the goods and services offered by the plaintiff.
(2) Has Computerland become protectible by having acquired a sufficient "secondary meaning", notwithstanding its legally deficient status?
As the advertising/market survey offered by plaintiff illustrates, consumer awareness of "Computerland" as a proper noun is low or, at best, is in the process of being developed. It is understandable that, as an early entrant in a nascent industry, plaintiff would select a "common descriptive" which is not a sufficient deviation from a natural usage or unusual unitary combination to permit registration. Id. at 1018.
However, as the Ninth Circuit held, in reversing this Court's solicitude for General Mills' claim to "Monopoly,"
When a trademark primarily denotes a product, not the product's producer, the trademark is lost ... (because) one competitor will not be permitted to impoverish the language of commerce by preventing his fellows from fairly describing their own goods.
. . . . .
Even if only one producer Parker Brothers has ever made the Monopoly game, so that the public necessarily associates the product with that particular producer, the trademark is invalid unless source identification is its primary significance.
Id. at 301-302.
CONCLUSION:
Here, both plaintiff's and defendant's businesses can be described by the name *26 "computerland", or some variant of the word "computer" attached to "land". In Telemed Corp. v. Tel-Med, Inc., 588 F.2d 213 (7th Cir.1978), the Seventh Circuit, in rejecting the plaintiff's efforts to protect its use of "Telemed" against defendant's use of "Tele-Med", adopted the Eighth Circuit's rule that combination of two descriptive words: "Tel" (for telephone) and "Med" (for medicine or medical) to form one new, arguably arbitrary or fanciful, did not automatically elevate what was essentially a descriptive mark to the status of "suggestive" or "fanciful". Id. Cf. Hamm v. Knocke, 374 F. Supp. 1183, 1187 (E.D.Cal.1973) (term "descriptive" because "it requires little imagination or thought to interprete this term"); Vision Center v. Opticks, 596 F.2d 111, 116-117 (5th Cir. 1979), cert. denied, 444 U.S. 1016, 100 S. Ct. 668, 62 L. Ed. 2d 646 (1980) (four-part test to drawing distinction between descriptive and suggestive).
Thus, we conclude that the mark "Computerland" is either generic or descriptive, at most. As the Seventh Circuit explains, the result of such a conclusion is to rebut the "statutory presumption of validity ... accorded ... marks registered under the Lanham Act ... § 1115(a). Surigicenters, supra, at 1118. registration. Upon the evidence presented to this Court upon the defendant's motion for summary judgment, we have also concluded that plaintiff's mark has not yet acquired the level of consumer awareness required to establish a "secondary meaning" such as to render a legally unprotected mark factually protected. See Kellogg v. National Biscuit Co., 305 U.S. 111, 118, 59 S. Ct. 109, 113, 83 L. Ed. 73 (1938); Anti-Monopoly Inc. v. General Mills Fun Group, 611 F.2d at 302; Hamm v. Knocke, 374 F.Supp. at 1187.
Therefore, summary judgment on defendant's motion that "Computerland" is legally unprotectible is appropriate, and as such plaintiff's claim for tradename infringement upon the Lanham Act is unsupportable as a matter of law.
As for the plaintiff's second federal claim for unfair source designation, this claim falls with our resolution of the mark's vulnerability, so summary judgment is properly entered for defendant on Claim 2 as well. We dismiss the plaintiff's pendent state law claims 3 through 6, in order for the plaintiff to proceed in state court, if the plaintiff so desires.
IT IS SO ORDERED.
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182 F. Supp. 608 (1960)
HIGHWAY TRUCK DRIVERS AND HELPERS LOCAL 107, of the International Brotherhood of Teamsters, Chauffeurs, Warehousemen and Helpers of America, an unincorporated association, by Thomas Graham, Carmen Grasso, Anthony Hnizdo, Jr., Karl M. Jensen, John C. Jones, Edward P. McCormick, John Regan, William D. Stasen and Robert D. Thomas, Trustees ad litem
v.
Raymond COHEN, Joseph E. Grace, Edward Battisfore, Edward Walker and Benjamin Lapensohn.
Civ. A. No. 27053.
United States District Court E. D. Pennsylvania.
March 24, 1960.
*609 *610 Edward B. Bergman, Philadelphia, Pa., for plaintiffs.
Samuel Dash, Philadelphia, Pa., for defendants, Raymond Cohen, Joseph E. Grace, Edward Battisfore and Edward Walker.
Morton Witkin, Philadelphia, Pa., for defendant, Benjamin Lapensohn.
Richard H. Markowitz, Philadelphia, Pa., for Union.
CLARY, District Judge.
This is a private suit brought under the recently enacted Labor Management Reporting and Disclosure Act of 1959, Public Law 86-257 (hereinafter referred to as the "Act"), 29 U.S.C.A. § 401 et seq. That Act establishes a fiduciary responsibility on the part of officers of a labor organization [§ 501(a)], and further provided for a suit in a Federal district court to enforce these responsibilities [§ 501(b)]. The present suit has been brought under § 501(b) to enforce certain of these duties.
The moving parties are nine rank-and-file members of Highway Truck Drivers and Helpers, Local 107, of the International Brotherhood of Teamsters, Chauffeurs, Warehousemen and Helpers of America (hereinafter referred to as "Local 107"), who were given leave by this Court on November 12, 1959 to file a complaint against the defendants, the governing officers of Local 107.[1] The complaint charged the defendants with a continuing mass conspiracy to cheat and defraud the union of large sums of money the conspiracy alleged to have begun in 1954 and continued to the present time.
The defendants have yet to answer these very serious charges. Having been unsuccessful in first opposing the plaintiffs' petition for leave of this Court to sue,[2] defendants now move to have the complaint dismissed. They are supported in this motion by counsel for Local 107, which has been allowed to intervene as a party defendant. This motion to dismiss is presently before the Court along with the plaintiffs' prayer for a preliminary injunction to prohibit the defendants from using union funds to defray the legal costs and other expenses being incurred by the defendants (and several other members of Local 107) in the defense of civil and criminal actions brought against them in the Courts of Pennsylvania and also the present suit in our own Court. The charges in these cases, in essence, grow out of the alleged activities of the defendants complained of here. The question of the preliminary injunction will be taken up after we resolve the motion to dismiss the complaint.
Motion To Dismiss
Section 501(a) of the new Act establishes a federal duty on the part of labor union officials to abide by the ordinary rules of fiduciary responsibility. Section 501(a) states:
"The officers, agents, shop stewards, and other representatives of a labor organization occupy positions of trust in relation to such organization and its members as a group. It is, therefore, the duty of each such person, taking into account the special problems and functions of a labor organization, to hold its money and property solely for the benefit *611 of the organization and its members and to manage, invest, and expend the same in accordance with its constitution and bylaws and any resolutions of the governing bodies adopted thereunder, to refrain from dealing with such organization as an adverse party or in behalf of an adverse party in any matter connected with his duties and from holding or acquiring any pecuniary or personal interest which conflicts with the interests of such organization, and to account to the organization for any profit received by him in whatever capacity in connection with transactions conducted by him or under his direction on behalf of the organization. A general exculpatory provision in the constitution and bylaws of such a labor organization or a general exculpatory resolution of a governing body purporting to relieve any such person of liability for breach of the duties declared by this section shall be void as against public policy."
Its complement, § 501(b) authorizes suit in a federal court to enforce the duties imposed by subsection (a). Section 501(b) states:
"When any officer, agent, shop steward, or representative of any labor organization is alleged to have violated the duties declared in subsection (a) and the labor organization or its governing board or officers refuse or fail to sue or recover damages or secure an accounting or other appropriate relief within a reasonable time after being requested to do so by any member of the labor organization, such member may sue such officer, agent, shop steward, or representative in any district court of the United States or in any State court of competent jurisdiction to recover damages or secure an accounting or other appropriate relief for the benefit of the labor organization. No such proceeding shall be brought except upon leave of the court obtained upon verified application and for good cause shown, which application may be made ex parte. The trial judge may allot a reasonable part of the recovery in any action under this subsection to pay the fees of counsel prosecuting the suit at the instance of the member of the labor organization and to compensate such member for any expenses necessarily paid or incurred by him in connection with the litigation."
On September 30, 1959 the plaintiffs filed an application for leave to sue under § 501(b) and annexed the complaint which has since been filed by Order of this Court. Aside from the alleged continued expenditure of union funds to defend the criminal and civil suits brought against the defendants and others mentioned above, the only specific acts of misconduct alleged in this complaint relate to events occurring between June 1, 1954 (the date the defendants took office) and September 1957. The remainder of the complaint contains several general claims of fraud and breach of duty and alleges that such acts are continuing to the present time, and that these can only be discovered by an accounting. In light of this fact, the defendants vigorously assert that we must dismiss the complaint, since § 501(a) and (b) apply prospectively only and can not be applied to acts occurring prior to September 14, 1959, the effective date of § 501.
The defendants' contention that those alleged wrongs which occurred prior to the enactment of § 501 can not alone constitute a basis for recovery under that section, must be accepted. Aside from the fact that the plaintiffs have not attempted to meet this contention, the principle that a statute which creates a new substantive right or duty will not, in the absence of clear legislative intent to the contrary, be construed to apply retrospectively, is too well established to admit of argument. Brewster v. Gage, 1930, 280 U.S. 327, 50 S. Ct. 115, 74 L. Ed. 457; Miller v. United States, 1935, 294 U.S. 435, 55 S. Ct. 440, *612 79 L. Ed. 977; Home Indemnity Co. v. State of Missouri, 8 Cir., 1935, 78 F.2d 391; Peony Park, Inc. v. O'Malley, 8 Cir., 1955, 223 F.2d 668.
Moreover the question of retrospective application of the Act has only recently been passed on by Judge Mathes in the Southern District of California, Flaherty v. McDonald, 1960, 183 F. Supp. 300. Although that case dealt with Title III of the Act, rather than Title V, we believe that that court's reasoning is applicable here. Like the trusteeship provisions of Title III, Title V creates new substantive rights and duties not formerly cognizable under federal law. They will not be applied retrospectively.
Perhaps, the assertion that the basic and fundamental requirements of justice and fair play called for by § 501(a) of the Actrequirements which are indeed developed but one step beyond the Seventh Commandment itselfare "newly created duties", seems startling even in our present day and age. In defense of this admitted paradox we may only point out that although the duties alleged to have been breached here have long been encompassed within the moral law, and presumably within the common law of the various states (although we would be hard pressed to substantiate this with case law in the labor field), these duties are new to federal law, on which the jurisdiction (and thus the sole power) of this Court to act is based. Therefore, we feel bound by the principle of statutory interpretation previously enunciated.
To avoid the effect of this conclusion plaintiffs' attorney has astutely advanced the somewhat novel contention that §§ 157 and 158(a) (3) of Title 29 U.S.C.A. (popularly referred to as the Taft-Hartley Act) create an independent basis for recovery in this action. Since the Taft-Hartley Act became law on June 23, 1947 it would, of course, if applicable here, dispel any problem of retrospective application. However, we are convinced that it is not applicable and that the plaintiffs' argument must fail.
Generally speaking the sections of the Taft-Hartley Act relied upon by the plaintiffs recognize under federal law the right of employees to organize unions and further makes it an unfair labor practice for an employer to discriminate in regard to the hiring or tenure of employment except that they may discriminate against an employee for nonpayment of union dues, (i. e., § 158(a) (3) recognizes the right of a union and an employer to enter a union shop agreement whereby a new employee must within 30 days join the union or lose his job.)
From this, plaintiffs argue that the employee under a collective bargaining agreement containing this union shop clause (which clause is contained in a great majority of Local 107's contracts) must pay dues to the union in order to retain his job as a result of the specific command of federal law. Having reached this point, they maintain that it necessarily follows that the union and its officers must use the dues money they thus receive by virtue of federal law to further proper union objectives and not for purely private gain. This they argue is a federally created duty concomitant with the federally created right to exact dues. To strengthen this argument plaintiffs' counsel points to a series of Supreme Court cases beginning with Steele v. Louisville & Nashville Railroad Co., 1944, 323 U.S. 192, 65 S. Ct. 226, 89 L. Ed. 173, and Tunstall v. Brotherhood of Locomotive Firemen & Enginemen, 1944, 323 U.S. 210, 65 S. Ct. 235, 89 L. Ed. 187, which they maintain bear out this conclusion.
In the Steele case, supra, the Brotherhood of Firemen and Enginemen was a labor organization recognized under the Railway Labor Act, 45 U.S.C.A. § 151 et seq. as exclusive bargaining agent for all firemen on the Louisville & Nashville Railroad. The Brotherhood had entered into a collective bargaining agreement with the railroad, which contract obviously discriminated against Negro firemen. The Negro firemen brought suit. The Supreme Court reversed the state *613 court and held that the Railway Labor Act requires the union "in collective bargaining and in making contracts with the carrier, to represent non-union or minority union members of the craft without hostile discrimination, fairly, impartially, and in good faith." 323 U.S. at page 204, 65 S.Ct. at page 233. The Tunstall case, supra, decided the same day, added the proposition that the breach of this federally created duty justified resort to a federal court for relief. See also Syres v. Oil Workers International Union, 1955, 350 U.S. 892, 76 S. Ct. 152, 100 L. Ed. 785 (his case appears to overrule Williams v. Yellow Cab Co., 3 Cir., 1952, 200 F.2d 302, which had refused to extend the reasoning of the Steele case to cases involving the Taft-Hartley Act); Conley v. Gibson, 1957, 355 U.S. 41, 78 S. Ct. 99, 2 L. Ed. 2d 80; Ford Motor Co. v. Huffman, 1953, 345 U.S. 330, 73 S. Ct. 681, 97 L. Ed. 1048; Brotherhood of Railroad Trainmen v. Howard, 1952, 343 U.S. 768, 72 S. Ct. 1022, 96 L. Ed. 1283; Cunningham v. Erie Railroad Co., 2 Cir., 1959, 266 F.2d 411; McMullans v. Kansas, Oklahoma & Gulf Ry. Co., 10 Cir., 1956, 229 F.2d 50.
In answer to this argument based upon the fundamental proposition that where a government confers rights upon a group (which necessarily impede to a lesser or greater degree upon the rights of other members of society) it must necessarily impose a corresponding duty upon that group to properly exercise the rights conferred, the defendants argue that (1) the very reason why Congress enacted the new Labor Management Reporting and Disclosure Act was to provide redress for the type wrongs complained of here, which wrongs were presumably not prohibited by prior federal law; (2) nothing in the Taft-Hartley Act provides for jurisdiction in this type of action, and there is not the slightest intimation in either the legislative history of that Act or in its subsequent enforcement in the courts, which would indicate that it was intended to regulate the collection or spending of union dues; (3) rather than confer the right of unions to make security agreements with an employer which would compel a worker to join a union, the act restricted the union in such matters and in this respect differs from the Railway Labor Act; and (4) at any rate, the Taft-Hartley Act sets up a structure for the solution of federal disputes within the exclusive jurisdiction of the National Labor Relations Board, rather than with the federal courts.
We are not convinced that these arguments are a sufficient answer to the plaintiffs' contention, although we are not in complete disagreement with the defendants on any one of them. The fact that Congress may not have believed that prior federal law prohibited the type activity here complained of, is far from conclusive on the question of whether the Taft-Hartley Act does in fact afford such protection. That question is for a court of law. Nor does the fact that no one since the enactment of the Taft-Hartley Act has advanced the theory now pressed so ably and sincerely by counsel for the plaintiffs, convince us that their argument must fail. We have not yet completely abandoned the concept of a "legal pioneer" or what at first glance might be labeled a "wild theory".
Defendants third argument (i. e., that the Taft-Hartley Act did not confer any right to collect dues, since the unions had this right and indeed exercised it more zealously in many instances, prior to that law's enactment) we find more persuasive. Nevertheless, we will not rest our rejection of plaintiffs' argument solely upon this ground or upon defendants' argument concerning the N.L.R.B.'s exclusive jurisdiction.
Leaving aside for a moment the case of Railway Employes' Dept. Am. Federation of Labor, International Ass'n of Machinists v. Hanson, 1956, 351 U.S. 225, 76 S. Ct. 714, 100 L. Ed. 1112, and the case of International Association of Machinists v. Street, 1959, 215 Ga. 27, 108 S.E.2d 796 probable jurisdiction noted, 1959, 361 U.S. 807, 80 S. Ct. 84, 4 L. Ed. 2d 54, cited in the last section of plaintiffs' *614 brief, the Steele case and all of those following it which the plaintiffs have cited, deal with problems arising directly out of the union's activity in the process of collective bargaining, (i. e., most of them involved actions to declare discriminatory collective bargaining agreements void). The Steele case, which is the prototype of this line of cases, was decided by the Supreme Court upon an interpretation of the specific language of the Railway Labor Act. They interpreted the word "represent", used in the Act, to mean "represent fairly" and that the Act thus prohibited discrimination in collective bargaining activity the very subject which both the Railway Labor Act and the Taft-Hartley Act purport to regulate. Nowhere in their complaint do the plaintiffs allege that Local 107 has in any way discriminated against them in its collective bargaining activity. On the other hand, the Taft-Hartley Act nowhere attempts to regulate the use of union funds. Because of this important distinction, we feel that the holding in this line of cases is not applicable here.
Indeed, in the Steele case itself, the facts recited by the Supreme Court would appear to bear out this distinction. Thus, although it was careful to point up the numerous rights which the Railway Labor Act bestowed upon the union (including the right to act as exclusive bargaining representative), the Court found no violation of any federal duty in the union expressly excluding negroes from its membership. By inference, the Court appeared to concede the fact that so long as the union represents these men fairly in collective bargaining, there could be no complaint based upon federal law. If the plaintiffs' broad thesis of rights attended by commensurate duties were applied there, such discrimination would seem to violate the federal act which conferred exclusive bargaining rights upon that union.
In pointing up this distinction we do not mean to infer that this line of cases has no bearing at all here. In certain instances their language does add weight to the plaintiffs' argument. Thus the Supreme Court in the Steele case, by way of dictum, stated that if the Railway Labor Act were construed to confer these numerous powers upon a bargaining representative of a craft without imposing any commensurate statutory duty toward its members, "constitutional questions arise". 323 U.S. at page 198, 65 S.Ct. at page 230, 89 L. Ed. 173. This is the reasoning which plaintiffs would have us apply in our case. But even assuming that the Supreme Court had held in the Steel case that the duty to represent all members of a craft fairly in collective bargaining was a duty which the due process clause of the Constitution itself required,[3] this is not to say that the Taft-Hartley Act would violate due process if it were not found to impose a specific duty upon a union to spend its money solely for collective bargaining purposes.
This brings us to the Hanson case. The plaintiffs in that case attacked the 1951 "union shop" amendment to the Railway Labor Act, requiring an employee to become a member of the union which was the certified representative for his craft, within 60 days after a collective bargaining agreement containing a "union shop" clause went into effect. If an employee refused to join, he would lose his job. The plaintiffs argued that to require an employee to pay dues to a union in order to keep his job is to force him to contribute financially to ideas he did not necessarily believe in, and therefore violated his rights under the First Amendment. The argument was rejected by the Court and thus cannot be directly relied upon by the plaintiffs. Nevertheless, plaintiffs maintain that the language used by Justice Douglas in reserving the question of whether a union member could object to the expenditure of union funds for ideological purposes to which they were strongly opposed, clearly indicated *615 that dues money taken by a union under a union shop contract must be used for purposes germane to collective bargaining, and for no other purpose. The specific question of whether such money can be used for political purposes is presently before the Supreme Court, see International Association of Machinists v. Street, supra.
Before passing upon the plaintiffs' reliance upon the dictum in the Hanson case, it is important to understand the reach of their argument. If accepted, it would create federal jurisdiction in every suit wherein a single union member alleged that a particular union expenditure was made for a purpose not germane to collective bargaining. It is submitted that such a sweeping expansion of federal jurisdiction is not justified by a proper interpretation of the Taft-Hartley Act or the Railway Labor Act. To say that by enacting these laws Congress intended to open the federal courts to such a vast area of litigation does not appear to us well-founded and, as defendants point out, no such jurisdiction has been recognized in the many years that these Acts have been in existence. It would appear that so long as a union performs its purpose of representing the employee in a fair and reasonable way in its collective bargaining capacity, the fact that they may incidentally spend union moneys for a noncollective bargaining purpose affords no right of action under §§ 157 or 158(a) (3) of the Taft-Hartley Act. If such expenditures should reach the point where they actually interfere with such fair and reasonable representation in collective bargaining, a different question might arise.
As to plaintiffs' "due process" argument which is somewhat analogous to the First Amendment argument left open in the Hanson case, the denial of the right which the plaintiffs assert here (i. e., the right of a union member to come into a federal court and force a union to limit its expenditures solely to collective bargaining purposes) does not in our opinion violate that concept as we interpret it. So long as that federal law which strengthens the union's bargaining power, in turn sees to it that that power is used fairly in reaching collective bargaining agreements, it would not appear to violate basic motions of justice and fair play. Plaintiffs are not without a remedy in this type situation. The state courts have recognized a duty on the part of a union to act only in accordance with its constitution and bylaws. See citations and discussion infra, at page 618 of 182 F.Supp. Moreover, the new Labor Management Reporting and Disclosure Act of 1959 offers further protection in such matters. There appears to be no reason for us now to attempt to stretch the provisions of the Taft-Hartley Act to cover such a situation. As we have pointed out already, we neither feel that the Constitution requires us to do so nor that a fair interpretation of the Taft-Hartley Act permits us to do so.
Happily we need not base our opinion solely upon constitutional grounds. There is a more obvious reason why the plaintiffs' theory is of no avail here. The rights which § 158(a) (3) of the Taft-Hartley Act confer, as well as the corresponding duties imposed by it (whatever we might hold them to be) are rights and duties conferred upon the collective bargaining unit, i. e., the union. They are not conferred upon the individual officers of that union. Therefore, the plaintiffs really must argue that a federal law which confers numerous rights upon a union, must necessarily impose strict duty upon its individual officers not to spend the union's money for noncollective bargaining purposes. This does not follow. The language in the opinions relied upon by the plaintiffs speak in terms of the "duty of the union". Yet the whole tenor of the plaintiffs' complaint makes it evident that this suit is against the individual officers of Local 107 and not against the union. In their brief in opposition to Local 107's motion to intervene, the plaintiffs specifically state that "The Union itself * * * has no standing as a party litigant" since the plaintiffs appear as trustees ad litem for the union.
*616 Nor do we view this as a mere technicality which has been corrected by the Court's Order allowing the union to intervene as a party defendant. It is evident that the plaintiffs' claim here is not against the union. The acts complained of were not acts of the union done on its behalf by an acting officer. If anything, they are acts done in flagrant breach of duty. If they were in fact done, they were done for the defendants own personal gain at the expense of the union. In such a suit against private individuals, the Taft-Hartley Act clearly does not confer federal jurisdiction.
From what has been said above, the Court holds that the statute may not be applied retroactively and that the complaint has not stated a cause of action under the provisions of the Taft-Hartley Act. Putting aside temporarily the question of injunctive relief as to expenditure of union funds for legal fees in suits now pending against the defendants, it would appear that the remainder of the action should be dismissed unless the complaint states a cause of action arising out of events subsequent to the effective date of the Act. Since one of the defendants, Benjamin Lapensohn, has had no connection with the union since 1957 and the injunction in no way involves him, it follows that the action as to him must be dismissed. As to the remaining defendants, officers and/or trustees of the local, while the complaint in general language alleges continuing misdeeds, it fails to set forth any specific act of commission or omission which occurred subsequent to the effective date of the Act.
If the only matter before the Court were the motion to dismiss discussed above, the Court might be disposed to grant the motion. However, there is another facet to the case which prevents the dismissal of the action. That facet relates to the motion for a preliminary injunction to prohibit the defendants from using union funds to defray the expense of legal fees in civil and criminal actions which have been brought against them in the Courts of Pennsylvania as well as to defray legal costs of the present action. The charges in those cases, in essence, grow out of alleged misappropriation of funds by the officers,[4] and the plaintiffs maintain that such expenditures are in violation of the fiduciary duties imposed upon officers of a labor union by Section 501(a) of the Act, supra, and that unless such expenditures are enjoined the union will suffer irreparable harm thereby.
Motion For Injunction
Shortly after the effective date of the Act and the institution of suits, criminal and civil, in the local Courts against the defendants, the union at a regular monthly meeting, with few dissenting votes, adopted a resolution authorizing the union to bear "Legal costs of such actions [against the officers] which are in reality not directed at our officers but are directed at us, the members of Local 107, our good contracts, our good wages and our good working conditions."
The question, therefore, which faces us is: Does the expenditure of union funds to pay for legal fees in the defense of both criminal and civil actions brought against the various defendant officers for an alleged conspiracy to cheat and defraud their union of large sums of money constitute a breach of that fiduciary duty imposed upon them by Section 501(a), supra, notwithstanding the purported authorization of such expenditures by a resolution of the union membership passed at a regular union meeting?
At the hearing on the preliminary injunction, it was brought out that within the limit of some four or five weeks after the adoption of the resolution the union, pursuant to the resolution, paid upwards of $25,000 to the attorneys representing the defendants. It is also clear that counsel for the union has advised the officers that such expenditures are proper. We are, therefore, with the payment of those large sums of money already accomplished *617 and threatened further payments about to occur, in a position factually to pass upon the merits of the plaintiffs' contention.[5]
At the outset of our discussion of this question it is necessary to make several general observations as to the construction to be given this new and far-reaching Act of Congress. We do so with caution, aware of the importance of this new legislation in the labor field and of the far-reaching effect which initial judicial interpretation of this Act must necessarily have upon its future.
The purpose of this Act is no secret. It was enacted "to eliminate or prevent improper practices on the part of labor organizations, employers, labor relations consultants, and their officers and representatives which distort and defeat the policies of the Labor Management Relations Act, 1947." § 2(c). It came on the wake of Congressional findings of crime and corruption in the labor and management field § 2(b).
Section 501, with which we are particularly concerned, is entitled "Fiduciary responsibility of officers of labor organizations." This section, quoted earlier, attempts to define in the broadest terms possible the duty which the new federal law imposes upon a union official. Congress made no attempt to "codify" the law in this area. It appears evident to us that they intended the federal courts to fashion a new federal labor law in this area, in much the same way that the federal courts have fashioned a new substantive law of collective bargaining contracts under § 301(a) of the Taft-Hartley Act, 29 U.S.C.A. § 185(a). See Textile Workers Union of America v. Lincoln Mills, 1957, 353 U.S. 448, 77 S. Ct. 923, 1 L. Ed. 2d 972. In undertaking this task the federal courts will necessarily rely heavily upon the common law of the various states. Where that law is lacking or where it in any way conflicts with the policy expressed in our national labor laws, the latter will of course be our guide.
We turn then to Section 501, not expecting to find a detailed command or prohibition as to the particular act complained of, but rather to find a general guide which, properly developed, will lead us to an answer. We feel that that answer here must be in plaintiffs' favor.
In determining whether or not the expenditures now sought to be enjoined violate the fiduciary responsibility of an officer of a labor organization we must necessarily determine the legal effect of the September 20th Resolution. This goes to the heart of the present problem and appears to be the main ground on which the defendants seek to avoid the injunction.
The plaintiffs assert that the Resolution authorizing such expenditures is encompassed within the express prohibition of § 501(a) against any "general exculpatory resolution". Although not expressly purporting to absolve the defendants of guilt, plaintiffs argue that the Resolution in effect does just this. Unfortunately the Act does not define the phrase "general exculpatory resolution".
The defendants take issue with the plaintiffs' interpretation. They maintain that the Resolution should be taken at face value, i. e., as a pledge of the union's faith in their officers and a pledge of financial aid to defend suits which are in reality directed at the union movement. They point to several remarks made in Congress which make it clear that this provision was not intended to restrict in any way the right of the membership to give a grant of authoritywhich they allege is all that the September 20th Resolution does.
A plain reading of the last sentence in § 501(a) leads me to agree with *618 the defendants, at least in their conclusion. On the other hand, it is not necessary for a resolution to read "The officers are hereby absolved of all responsibility created by the Act" before a court will strike it down as "exculpatory" under § 501(a). Nor must a court accept at face value the stated purpose of a resolution when reason and common sense clearly dictate a different purpose. Nevertheless in my interpretation of § 501 (a), the Resolution under discussion is not one "purporting to relieve any [officer] of liability for breach of the duties declared by this section * * *."
We must distinguish between a resolution which purports to authorize action which is beyond the power of the union to do and for that reason in violation of § 501(a) when done by an officer (such as the present Resolution) and a resolution which purports to relieve an officer of liability for breach of the duties declared in § 501(a). At times this distinction may be a fine one. Very often the result will be the same. Nevertheless we feel that such a distinction should be made here unless the "exculpatory" provision is to be read as a mere "catchall" phrase.[6]
We turn then to the question of whether the September 20th Resolution is valid, i. e., conforms with the law of Pennsylvania and the Federal Labor laws. See International Union of Operating Engineers, A.F.L.-C.I.O. v. Pierce, Tex.Civ. App., 1959, 321 S.W.2d 914, at page 917-918. If it is inconsistent with either, we think it follows that the present expenditures by the defendants violate that provision in § 501(a) which imposes upon them a strict duty to "expend [union funds] in accordance with its constitution and bylaws and any resolutions of the governing bodies adopted thereunder * * *."since we read this sentence to authorize only those expenditures made pursuant to a lawful bylaw or resolution.
Unfortunately there is a dearth of Pennsylvania case law on the question of limitations on union expenditures or the corresponding rights of a dissenting union minority. Unlike the analogous doctrine of ultra vires acts in the corporate field, the courts have been reluctant to interfere in the internal affairs of a union. Underwood v. Maloney, D.C.E.D.Pa. 1957, 152 F. Supp. 648. Nevertheless the principle of majority rule is not absolute in an unincorporated association such as a union. West Virginia Pulp & Paper Co. v. Lewis, 1958, 17 Misc. 2d 94, 191 N.Y.S.2d 303, 8 A.D.2d 899, 187 N.Y.S.2d 1002. This follows from the fact that each member has a property interest in the assets of the union, and in addition has a contractual right (viewing the constitution, bylaws and resolutions as creating a contractual relationship between the organization and the membership, Williams v. Masters, Mates and Pilots of America, 1956, 384 Pa. 413, 120 A.2d 896), to have the assets of the union used only for the purposes for which the union was organized. Maloney v. United Mine Workers of America, 1932, 308 Pa. 251, 162 A. 225; Leatherman v. Wolf, 1913, 240 Pa. 557, 88 A. 17; Beasley v. Allyn, 12 W.N.C. 90; Bacon v. Paradise, 1945, 318 Mass. 649, 63 N.E.2d 571, 167 A.L.R. 1227; Guy Le R. Stevich, Unincorporated Associations, (1889) pp. 56, 57; 21 Pennsylvania Law Encyclopedia, Labor § 236.
The defendants argue that this Court is precluded from passing upon the merit or propriety of the Resolution in question. With this we agree. But there is a distinction between the merit of a resolution and its legality. The latter question is peculiarly within the competence of a court to pass upon and can not be abandoned finally to the organization. Maloney v. United Mine Workers of America, supra; Gordon v. Tomei, 1941, 144 Pa.Super. 449, 19 A.2d 588. *619 When a serious question arises as to whether a particular act is within the legitimate aims and purposes of a labor union as expressed by its constitution and bylaws, the Court must ultimately resolve the matter so as to preserve on the one hand the rights of the union and on the other those of the individual members of that union. Maloney v. United Mine Workers of America, supra.
In answering this question of whether an act is ultra vires, we look first to the Constitution of Local 107.[7] Article I, Section 2, sets forth the "objectives" of the organization in broad terms. These objectives might be summed up as an effort to organize workmen, to educate them, to improve their condition and to improve the industry in which they work. The defendants pointed to no more specific provision in the constitution (nor can we find any) which would authorize the type of expenditure dealt with here.
It is true that from the general objectives and purposes of a particular trade union, certain ancillary powers reasonably necessary for their attainment may be implied. In determining whether a particular act falls within this admittedly broad latitude of action, the Court must take into consideration all of the factors surrounding it, i. e., the stated purpose of the action, its immediate effect, its possible future benefit to the union, etc. This is necessary in order to determine whether the union, in light of the authority derived from its constitution, has a sufficient interest in the action to empower it to so act. If it has, a court of law will not interfere regardless of the wisdom or propriety of the act. If it has not, a court of law must intervene at the behest of a single union member. Maloney v. United Mine Workers of America, supra; Weiss v. Musical Mutual Protective Union, 1899, 189 Pa. 446, 42 A. 118; Leatherman v. Wolf, supra; West Virginia Pulp & Paper Co. v. Lewis, supra; Bacon v. Paradise, supra.
In passing upon the question of whether a union has sufficient interest in criminal and civil suits brought against various officers for the theft of union funds, to spend large sums of its money on legal fees for those officers, the Court is admittedly without a Pennsylvania case directly on point. There are, however, two interesting English cases which passed upon a similar question and which held that such expenditures were beyond the power of a union to make. Alfin v. Hewlett, 18 T.L.R. 664 ( ); Orman v. Hutt, 1 Ch. 98 (1914) (c. a.). These cases are persuasive.
Furthermore we feel that those cases involving the use of corporate funds to pay for the defense of officers charged with misconduct in office are helpful. Although this question again has not been passed upon in Pennsylvania, several other jurisdictions when faced with the problem have concluded that such expenditures are improper.[8]
In the case of Jesse v. Four-Wheel Drive Auto Co., 1922, 177 Wis. 627, 189 N.W. 276, the Supreme Court of Wisconsin held that such expenditures could only be authorized by a unanimous vote of the membership. See also In re E. C. Warner Co., 1950, 232 Minn. 207, 45 N.W.2d 388; Solimine v. Hollander, 1941, 129 N.J.Eq. 264, 19 A.2d 344; New York Dock Co., Inc. v. McCollom, 1939, 173 Misc. 106, 16 N.Y.S.2d 844; Corporate Responsibility for Litigation Expenses of Management, 40 Cal.L.Rev. 104 (1952); Washington, Litigation Expenses of Corporate Directors in Stockholder's Suits, 40 Col.L.Rev. 431 (1940).
*620 The only interest which Local 107 (as an organization dedicated to the objectives stated in its Constitution) would appear to have in the civil and criminal actions against these officers is an interest (1) in not losing the services of their officers (whom we must presume are competent) simply because someone wrongfully accuses them of misconduct, or (2) in not having men closely associated with their union (whose conduct somewhat reflects upon the union) convicted of serious wrongs when they are not in fact guilty of these wrongs, or (3) not having officers in their union accused of serious wrongs by antiunion people, simply because they are officers of a union.
Assume for a moment that one of these officers was accused of evasion of personal income taxes, would not Local 107 have exactly these same interests in the outcome of such a suit? If in such a situation, a majority of the union were to pass a resolution affirming their confidence in that officer and asserting herein that the action by the United States was in reality an attempt "to break up and destroy our union" [and therefore] be it resolved that Local 107 go on record to help our [officer] in every way possible in [this] court [matter] by having Local 107 bear the legal costs of such actions which [is] in reality not directed at our [officer], but [is] directed at us, the members of Local 107, our good contracts, our good wages, and our good working conditions", a proper court of law upon an objection by a union member would independently pass upon the power of Local 107 to so spend its money, and even presuming the good faith of the membership in passing such a resolution, would properly enjoin the expenditure as outside the legitimate aims and purposes of Local 107 as expressed in its Constitution.
In light of the foregoing and upon consideration of the situation surrounding the present expenditures, in particular the nature and seriousness of the charges brought against the defendants by the State of Pennsylvania as well as by individual members of their union, the Court feels that such expenditures to pay for the legal expenses incurred by the defendant officers in the criminal and civil suits brought against them individually are expenses to be borne by the officers themselves and are beyond the power of Local 107 to make. Being beyond the powers of the union as derived from its Constitution, it follows that a mere majority vote at a regular union meeting can not authorize such expenditures. West Virginia Pulp & Paper Co. v. Lewis, supra.
There are undoubtedly situations in which a suit against a union officer would have a direct and injurious effect upon the union itself or would in reality be directed at the union. In such a situation the union would have the power to lend its financial support to such officer. When the question of whether the union has a sufficient interest to spend large sums of money to defend such a suit arises, it must ultimately be resolved by the court. Although a court will allow wide latitude to those in control of the union, it can not, by allowing unlimited latitude, abandon the right of a minority to see that the union spends its monies in accordance with its lawful aims and purposes as expressed in its Constitution and bylaws. Particularly is this true today, when the voice of the individual employee in fixing his own wages, hours and working conditions has necessarily been surrendered to the voice of the collective bargaining unit.
There is a further reason why the present Resolution is no defense here. Aside from its validity under Pennsylvania law, it is inconsistent with the aims and purposes of the Labor Management Reporting and Disclosure Act and violates the spirit of that Act. A stated purpose of the Act is "to eliminate * * improper practices on the part of labor organizations * * * and their officers". (Emphasis added). To allow a union officer to use the power and wealth of the very union which he is accused of pilfering, to defend himself against such charges, is totally inconsistent with Congress' *621 effort to eliminate the undesirable element which has been uncovered in the labor-management field. To allow even a majority of members in that union to authorize such action, when, if the charges made against these defendants are true, it is these very members whom the officers have deceived, would be equally inconsistent with the Act. If some of those members have not been deceived by the defendants, but because of the immediate gains in their income and working conditions which Local 107 has won for them, they are content to accept as officers anyone who produces immediate results, regardless of what other wrongs those officers may commit in so doing, this Court would still not feel constrained to bow to their will in the light of its duty both to those members of Local 107 who place honesty above material gain as well as to the millions of others in the labor movement whose cause would be seriously injured by such an attitude.
Although we have not attempted to treat defendants' arguments individually, since we feel they are satisfactorily answered in this opinion, something should be said concerning their argument that the plaintiffs are here asking us to do that which Congress specifically refused to do when it failed to adopt Subsection 107(b) of the original Senate version of the Labor Bill (The Kennedy-Ives Bill), which specifically prohibited "both unions and employers from directly or indirectly paying or advancing the costs of defense, of any of their officers * * who [are] indicted for * * * any violation of any provision of the Bill." S.Rep. No. 187, 86th Cong., First Session, 1959, U.S.Code Cong. and Adm. News 1959, p. 2318.
We are familiar with this argument in statutory construction. Although the value of such reasoning to discover the "intent" of Congress is often questionable, we can not of course ignore it, particularly in light of several Supreme Court rulings referred to by the defendants. Manhattan Properties, Inc. v. Irving Trust Co., 1934, 291 U.S. 320, 54 S. Ct. 385, 78 L.Ed 824; Duplex Printing Press Co. v. Deering, 1921, 254 U.S. 443, 41 S. Ct. 172, 65 L.Ed 349; Pennsylvania Railroad Co. v. International Coal Min. Co., 1913, 230 U.S. 184, 33 S. Ct. 893, 57 L.Ed 1446. Nevertheless there are reasons why we are not persuaded by their argument here.
First, the language contained in the Kennedy-Ives Bill is much broader than our holding in the present case. It is essential to an understanding of our position in this case that this point be made clear. That section quoted above would foreclose financial aid by the union to an officer in suits under the Act, under any circumstances. In our case we have expressly limited our holding to the facts before us. In the light of all of these facts we do not feel that the several actions brought against the defendants involve any question of sufficient interest to Local 107 to warrant their expending large sums of union money to pay the legal costs of the defendants in these suits. That Congress refused to foreclose the right of a union under any circumstances to lend financial aid to an officer when sued under any section of the Kennedy-Ives Bill is not, we feel, a strong argument for the conclusion that under no circumstances could a union be prohibited from lending financial aid to an accused officer.
Second, in none of the cases cited by the defendants to support their argument as to the conclusion to be drawn from the omission of Section 107(b) were there two distinct bills involved. Here the Act finally passed by Congress (with modification) was the Landrum-Griffin House Bill and not the Kennedy-Ives Senate Bill. Strictly speaking, the Conference Committee did not amend the final Bill as to the provision in question, since it was never contained in it to begin with. Had the Kennedy-Ives Bill ultimately been adopted with Section 107(b) deleted, the defendants' argument would be more convincing.
Finally, even assuming that Congress intended to leave a union free to use its funds for the purpose of paying its officers *622 legal expenses in actions brought against them under the new Act, if under the law of Pennsylvania, the state in which the union membership contractual relationship arose, such expenditures are illegal, a union officer could not consistent with his duty to the union (which duties ultimately flow from its Constitution) expend union funds for this purpose. This would follow unless we interpret the omission of this prohibition as creating an affirmative federal right in a union to so spend its funds, which right is intended to supersede any state law to the contrary. We flatly reject such an interpretation of the new Act.
Conclusion
At the time that permission was granted to the plaintiffs to file their complaint pursuant to § 501(b) of the Act (see our Order of November 12, 1959), we specifically refused to pass upon the validity of any of the legal arguments raised by the defendants. Since the reasonable time requirements of § 501(b) were clearly met as to at least one phase of the complaint,[9] and there appearing to have been "good cause" shown by the plaintiffs for filing suit, the Court permitted the complaint to be filed.[10]
However, since that time we have had the benefit of extensive legal arguments on the merits of the action and as a result have reached the conclusions above set forth with regard to the retrospective application of the Act. In view of these conclusions, which in effect result in stripping plaintiffs' complaint of all but those few paragraphs which state in general terms that the defendants' unlawful activities are continuing to the present time, we are compelled to order the plaintiffs to amend their complaint to state specific acts of misconduct in violation of § 501 which have occurred subsequent to September 14, 1959 and which the union upon request has failed within a reasonable time to answer or otherwise correct. In the event that the plaintiffs fail to so amend within a time to be set in our order, their complaint will be dismissed with prejudice, excepting from such dismissal, of course, that part of their complaint which deals with the injunction discussed above.
A formal order will be entered enjoining the defendants from expending union funds for the defense of the cases presently pending against the defendants in either the Courts of the Commonwealth of Pennsylvania or in this Court. This ruling in no way attempts to pass upon the question of whether or not Local 107 may with propriety, by appropriate resolution, reimburse its officers for their legal expenses in the event they are exonerated from any wrongdoing in connection with the handling of union funds involved in the actions presently pending.[11]
NOTES
[1] Benjamin Lapensohn, a named defendant, is not an officer of Local 107 and for reasons hereinafter stated the action will be dismissed as to him.
[2] § 501(b) specifically provides that "No such proceeding shall be brought except upon leave of the court obtained upon verified application and for good cause shown * * *".
[3] That the Court did not decide the Steele case upon such a constitutional ground appears evident from a reading of Mr. Justice Murphy's concurring opinion.
[4] See Stipulation of counsel and in particular Exhibit G of the stipulation for the various complaints which have been lodged against the defendants.
[5] There has been no showing on the part of the defendants, nor was it argued in defendants' brief, that defendants are responsible persons who would be able to reimburse the union for funds expended in their behalf. The sums involved are neither nominal nor minimal and in the circumstances the Court holds that a showing of irreparable harm (assuming the illegality of the payments) has been established.
[6] We might point out in this regard that the original Senate version of the Act (i. e., The Kennedy-Ives Bill, S.Rep. No. 187, 86th Cong., First Session, 1959) contained a somewhat similar prohibition against any exculpatory resolution and also contained a clause prohibiting unions from paying the legal fees or fines of any person indicted or convicted of a violation of the Bill.
[7] The only constitution under which Local 107 operates is that of the International Union. Moreover they have no bylaws.
[8] In this regard, it is interesting to note that very recently the Pennsylvania Legislature passed a bill empowering a corporation to indemnify directors, officers and others against expenses in suits brought against them "by reason of being or having been directors or officers * * * of the corporation" except where he is adjudged liable for negligence or misconduct in performance of his duty. Act of April 18, 1945, P.L. 253, as amended October 13, 1959, 12 P.S. § 1324.
[9] The union has from the outset taken the position that expenditures for counsel fees are proper in light of the Resolution. Therefore, no purpose would be served by further delay in this matter and the "reasonable time" requirement in § 501(b) was met.
[10] Although the Act does not specify what is meant by "good cause" in § 501(b), it would appear that such a preliminary requirement is intended as a safeguard to the union against harassing and vexatious litigation brought without merit or good faith. The fact that permission to file the complaint can be granted after an ex parte hearing would seem to support this view. The Court believed that the present suit satisfied this basic requirement.
[11] See footnote (8), supra.
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586 F. Supp. 92 (1984)
Bruce GOLDBERG, et al.
v.
UNITED STATES of America, et al.
Civ. No. Y-84-1138.
United States District Court, D. Maryland.
May 31, 1984.
*93 Bruce Goldberg, pro se.
Max H. Lauten, Asst. U.S. Atty., Baltimore, Md. and Mark Gellar, Tax Div., U.S. Dept. of Justice, Washington, D.C., for plaintiff United States.
MEMORANDUM
JOSEPH H. YOUNG, District Judge.
On March 6, 1984, the Internal Revenue Service served four summonses upon the *94 First National Bank of Maryland, two summonses on Legg, Mason, Wood, Walker, Inc. and two summonses on Merrill, Lynch, Pierce, Fenner & Smith, Inc. to produce certain records relating to Bruce Goldberg, Dr. Bruce Goldberg, Inc. and Universal Life Church. On March 22, 1984, Bruce Goldberg, pro se petitioner herein, instituted this action to quash the Internal Revenue Service ("IRS") summonses pursuant to § 7609(b)(2). The government has filed an answer to the petition to quash as well as a motion for summary denial of the petition and for summary enforcement of the summonses. Jurisdiction over this matter is conferred by 26 U.S.C. § 7609(h)(1).
Goldberg seeks to have the summonses quashed primarily on the grounds that the summonses are overbroad and violative of the Universal Life Church's First Amendment rights, and that the government has failed to make a prima facie showing that enforcement is proper. The United States contends that the petition to quash should be denied and the summonses enforced since it has made its prima facie showing and since petitioner has come forward with no facts demonstrating abuse of process. In support of its motion it has submitted the affidavit of Revenue Agent Darlene Grace which states that Grace, an agent in the Examination Division of the IRS, is assigned to investigate the tax liabilities of Bruce Goldberg for the years 1981 through 1983. See Grace affidavit at ¶ 2. The purpose of her investigation is to determine the taxpayer's correct income liabilities for the years under investigation. Id. at ¶ 3. Grace issued the summonses because the summoned parties transacted business with Goldberg and are in possession of records and other information relating to the investigation. The material demanded by the summonses is not already in the possession of the IRS and is relevant because it may shed light on the correct income tax liabilities of Goldberg for the years in question. Id. at ¶¶ 7, 8. The records pertaining to the Universal Life Church are limited to those over which Goldberg had signatory authority and may shed light on his financial dealings. Id. at ¶ 8. No recommendation has been made to the Justice Department for criminal prosecution of the taxpayer, nor has the Justice Department made any request for disclosure of any returns under 26 U.S.C. § 6103(h)(3)(B). Id. at ¶ 4.
Under the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA), P.L. 97-248, 96 Stat. 601 et seq., the taxpayer bears the burden of instituting an action to quash an IRS summons directed to a third-party recordkeeper. 26 U.S.C. § 7609(b)(2). Despite this shift in the burden of commencing litigation, the substantive law concerning summons enforcement is largely unchanged by TEFRA. See S.Rep. 494, 97th Cong., 2d Sess. 281, reprinted in 1982 U.S. Code Cong. & Ad.News, 781, 1027. The standards for enforcement of an IRS summons are well established. As the court in Godwin v. United States, 564 F. Supp. 1209, 1212 (D.Del.1983) recently explained,
To make a prima facie case for enforcement, the government need only show: (1) that the investigation will be conducted for a legitimate purpose, (2) that the data sought is relevant to that purpose, (3) that the data being sought is not already in the IRS's possession, and (4) that the administrative steps required by the Internal Revenue Code with respect to a summons have been followed. United States v. Powell, 379 U.S. 48, 57-58, 85 S. Ct. 248, 254-255, 13 L. Ed. 2d 112 (1964); see United States v. LaSalle Nat'l Bank, 437 U.S. 298, 313-14, 98 S. Ct. 2357, 2365-2366, 57 L. Ed. 2d 221 (1978). "The requisite showing is generally made by the affidavit of the agent who issued the summons and who is seeking enforcement." United States v. Garden State Nat'l Bank, 607 F.2d 61, 68 (3d Cir.1979) (citing United States v. McCarthy, 514 F.2d 368, 372 (3d Cir. 1975); accord United States v. Will, 671 F.2d 963, 966 (6th Cir.1982). Indeed, "no more than [an affidavit] is necessary to make the prima facie case." United States v. Kis, 658 F.2d 526, 536 (7th Cir.1981), cert. denied sub nom. Salkin *95 v. United States, 455 U.S. 1018, 102 S. Ct. 1712, 72 L. Ed. 2d 135 (1982).
This Court concludes that the IRS has made out its prima facie case.[*] Revenue Agent Grace's affidavit satisfies all the requisite elements: a valid purpose was established, namely to investigate Goldberg's tax liability; the records sought were limited to the taxpayer, his corporation, or those "on which [the taxpayer] had signature privileges" for the applicable years; Goldberg had not claimed that the IRS is in possession of the specific information sought; and notice of the summonses was provided to Goldberg pursuant to the statute.
Once a prima facie case is shown, the burden "falls upon petitioner[] to disprove the existence of a valid purpose or to show that enforcement of the summonses would be an abuse of the Court's process or otherwise would be improper." Godwin v. United States, 564 F.Supp. at 1213. In this case, petitioner argues that the summonses are overbroad and violative of the church's First Amendment freedoms of association and religion. United States v. Trader's State Bank, 695 F.2d 1132 (9th Cir.1983). Petitioner claims that because the summonses require disclosure of records in the name of Universal Life Church, the constitutional rights of individuals who have made donations or who have become church members have been infringed.
In a case strikingly similar to this one, the Fifth Circuit found that no substantial showing of abusive use of the summons had been made. United States v. Grayson County State Bank, 656 F.2d 1070 (5th Cir.1981). In that case, the IRS had summoned certain specified records "on (or on behalf of) the First Pentecostal Church ... for the years 1973, 1974, 1975 and 1976 and on which the [minister-taxpayer] has signature privileges and/or trustee assignment." The church filed a motion to quash on First Amendment grounds. After reviewing the relevant authorities, the Court concluded that the district court had erroneously concluded that "First Amendment rights of the church or its members were implicated by the issuance of the summons." 656 F.2d at 1075. The court noted that the summons "was issued to secure access to records in the possession of a bank, in *96 connection with a taxpayer investigation, to examine those records of the bank pertaining to the church that were relevantly connected with the taxpayer's financial activity for the tax years of the investigation." Id. at 1075. The court concluded that under such facts the church had not made a showing of abusive use of the summons because its issuance did not constitute any significant burden on the free exercise of religious activity by the church or its members. Id. This Court reaches the same conclusion with regard to the summonses in this case: petitioner has simply failed to produce any evidence that enforcement of the summonses would restrict the religious activity of church members. See also United States v. Manufacturers Bank, 518 F. Supp. 495 (E.D.Mich.1981). United States v. First National Bank, 691 F.2d 386 (8th Cir.1982); United States v. Freedom Church, 613 F.2d 316, 320 (1st Cir. 1979); and McTaggart v. United States, 570 F. Supp. 547 (E.D.Mich.1983). Indeed, the case relied upon petitioner to support his argument concerning a First Amendment infringement is simply inapposite. In United States v. Trader's State Bank, 695 F.2d 1132 (9th Cir.1983), the IRS sought to enforce a summons for all records relating to the Life Science Church while investigating the tax liability of Mr. and Mrs. Kerr, the founders and trustees of the church. The court found the summonses overbroad: they required disclosure of all church banking records, not only those related to the Kerrs. 695 F.2d at 1133. In this case, in contrast, the summonses directed to Universal Life Church records are specifically limited to those over which Goldberg has "signatory authority." Therefore, the factors motivating the Ninth Circuit's decision in the Trader's State Bank case are clearly not present here.
Petitioner also argues that the IRS is attempting to conduct multiple audits in violation of § 7605(b). The very simple answer to that allegation is that § 7605(b) does not apply to third-party records. United States v. Lask, 703 F.2d 293 (8th Cir.1983).
Petitioner finally argues that he is entitled to discovery and an evidentiary hearing. Although petitioner has sworn to his petition to quash, he has not come forward with any specific facts to support his conculsory allegations, nor has he submitted affidavits. Under these circumstances, the Court finds an evidentiary hearing and discovery unnecessary. United States v. Garden State National Bank, 607 F.2d 61, 71 (3rd Cir.1979); United States v. First National Bank, 691 F.2d 386, 387 n. 3 (8th Cir.1982); Moutevelis v. United States, 561 F. Supp. 1211 (M.D.Pa. 1983); McTaggart v. United States, 570 F. Supp. 547 (E.D.Mich.1983).
NOTES
[*] The petitioner challenges the prima facie case in several respects, but the Court finds no merit in petitioner's contentions. First, petitioner argues that none of the provisions of § 7602 apply to him and that the IRS has exceeded its authority under that section in seeking to enforce the summons. Contrary to petitioner's assertions, Revenue Agent Grace's actions appear to have been in complete compliance with that section "which authorizes the Secretary of the Treasury to summon and `examine any books, papers, records, or other data which may be relevant or material' to a particular tax inquiry." United States v. Arthur Young & Co., ___ U.S. ___, ___, 104 S. Ct. 1495, 1500-1501, 79 L. Ed. 2d 826 (1984). Moreover, the summonses in question were not violative of petitioner's Fourth and Fifth Amendment rights. United States v. Blackwood, 582 F.2d 1244 (10th Cir.1978). Second, petitioner argues that the materials are irrelevant since no criminal allegations have been made. This claim is simply contrary to the law that a summons cannot be issued if there has been a Justice Department referral. See § 7602(c)(1). Third, petitioner claims that only the year 1981 was assigned to Revenue Agent Grace since the handwritten notation "81 12" appeared after the phrase "tax year(s)" on petitioner's notice from the IRS that his tax records would be examined. In light of Grace's affidavit to the contrary, this Court does not find that the handwritten numbers demonstrate that the summonses cover years which were not under investigation. Fourth, petitioner claims that the IRS has no jurisdiction for summoning the material since Goldberg's reported income has already been substantiated by other records. However, the fact that plaintiff has substantiated his income with his own records does not mean that the IRS cannot seek additional records when it has stated that it does not already have possession of such records. Cf. United States v. Groos National Bank, 661 F.2d 36 (5th Cir.1981). Fifth, petitioner asserts that the IRS did not give any reason for the issuance of the summons. He cites the district court opinion United States v. Grayson County State Bank in support of his position. Yet, he neglects to mention that that decision was reversed. 656 F.2d 1070 (5th Cir.1981), cert. denied, 455 U.S. 920, 102 S. Ct. 1276, 71 L. Ed. 2d 460 (1982) (summons for records of bank account of church over which taxpayer had signatory authority). In short, despite petitioner's creative efforts, this Court finds no basis for finding that the government has not met its burden of establishing a prima facie case for enforcement.
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586 F. Supp. 643 (1984)
OIL, CHEMICAL AND ATOMIC WORKER'S INTERNATIONAL UNION LOCAL NO. 4-23 and Leo Max Hildabridle, Jr.
v.
AMERICAN PETROFINA COMPANY OF TEXAS.
Civ. A. No. B-83-195-CA.
United States District Court, E.D. Texas, Beaumont Division.
May 8, 1984.
*644 *645 M. Diane Dwight, Thomas Swearingen, Provost, Umphrey, McPherson & Swearingen, Port Arthur, Tex., for plaintiff.
Durwood D. Crawford, Goins, Underkofler, Crawford & Langdon, Stephen Kardell, Dallas, Tex., for defendant.
MEMORANDUM OPINION
JOE J. FISHER, District Judge.
This labor dispute arises from an event which occurred during the eleven-month-long Oil, Chemical and Atomic Worker's Union strike of the Port Arthur American Petrofina Company Plant in 1982. During that strike, Max Hildabridle, an O.C.A.W. member, was involved in some picket-line violence which resulted in his being terminated by the Fina Company. This termination occurred when no union contract was in effect and no arbitration procedures were in place. The Union seeks an Order from the Court directing Fina to arbitrate the issue of Leo Hildabridle's discharge; and defendant Fina has responded that since the strike occurred after a contract had expired, Hildabridle was not protected by the contract, and the company was free to deal with Hildabridle without arbitration.
This Court has jurisdiction of this case under Sec. 301(a) of the National Labor Relations Act, as amended, 29 U.S.C. Sec. 185 (1978). This case was tried to the Court on March 9, 1984, and post-trial briefs were submitted by both parties. After a careful review of the evidence and the briefs in what appears to be a case of first impression in this Circuit, this Court finds that in this context, Hildabridle was unprotected by any continuing or retroactive contract rights. Therefore, no order to arbitrate will issue and judgment will be entered for defendant.
I. THE BACKGROUND
The facts in this case are undisputed. In late 1981, the war clouds were gathering at the Fina Refinery in Port Arthur, Texas. A collective bargaining agreement between the Company and Local 4-23 of the O.C. A.W. provided that the agreement would stay in effect through midnight January 7, 1982 unless either party served notice to the other "not less than sixty days prior to the desired termination date." On November 1, 1981, the Union served the required notice on Fina that it would terminate the said agreement at 12:01 a.m. on January 8, 1982. Negotiation occurred in an attempt to avert the walkout, but to no avail. On January 8, 1982, the Union struck Fina.
Picket lines were set up, which Union employees refused to cross. The Plant, however, continued to operate with its management personnel. The situation was undeniably tense and ugly. On February 20, 1982, an incident occurred on the picket line involving Hildabridle and several company guards. The guards alleged that in the middle of an argument Hildabridle had pulled a knife and threatened them. The police were called and the matter was investigated. Charges were filed against Hildabridle, though no conviction resulted.[1]
The company investigated the incident and concluded that it was serious enough to warrant disciplinary action against Hildabridle. The company wrote O.C.A.W. officials and Hildabridle to inform them of the investigation and attempted to schedule an informal hearing with Hildabridle to hear his side of the events. The only answer the company received *646 was a letter from Hildabridle's attorneys protesting the investigation and complaining that Hildabridle would not attend any hearing unless his attorneys could be present. The attorneys also made a statement in their letter that has returned to haunt them. Referring to the company's proposal for a hearing, the attorneys stated "as we all are aware, the labor contract expired at 12:01 a.m. on January 8, 1982. Upon its expiration, the grievance and arbitration procedure also expired" (emphasis added).[2]
After some further futile correspondence between the parties, the Company acted on its own. After reviewing the evidence, the Company concluded that Hildabridle should be discharged. This decision was made after a meeting of Company officials and was basically the decision of the Company's Vice-President of Employee Relations. Thereafter, by a May 27, 1982 letter, the Company informed Hildabridle that he was terminated as of that date.
The Union then took steps to reinstate Hildabridle. Unfair Labor Practice charges were filed against the Company with the National Labor Relations Board, contending that Hildabridle's discharge was the result of his union activity. The N.L.R.B. refused to act on this charge at both the regional and national level, and eventually the charge was dismissed.
Meanwhile, negotiations to end the strike began. In the final discussions that accompanied the strike's settlement, the Company and the Union discussed Hildabridle's discharge. The Union wanted the plaintiff reinstated; or, if the Company would not agree to this, to have the matter arbitrated. The Company refused both requests. Instead, the Company and the Union agreed to disagree. Within the "Return to work understanding" executed by the O.C.A.W. and Fina in settlement of the strike, a specific clause outlined the parties' conflicting positions on the Hildabridle discharge, leaving the matter to future resolution.
On December 20, 1982, the Union went back to work. That same day, the Union filed a grievance under the new contract claiming Hildabridle had been terminated without just cause. Once again, the Company refused to arbitrate the matter. Thus, the Union and Hildabridle brought suit in this Court.
II. THE LAW
It is well-settled that Federal labor policy favors the settling of labor disputes by arbitration. United Steelworkers of America v. American Manufacturing Co., 363 U.S. 564, 80 S. Ct. 1343, 4 L. Ed. 2d 1403 (1960); United Steelworkers of America v. Warrior & Gulf Navigation Co., 363 U.S. 574, 80 S. Ct. 1347, 4 L. Ed. 2d 1409 (1960); United Steelworkers of America v. Enterprise Wheel & Car Corp., 363 U.S. 593, 80 S. Ct. 1358, 4 L. Ed. 2d 1424 (1960) (The Steelworker's Trilogy). Yet, it is also well-settled that the obligation to arbitrate a dispute is totally a creature of contract between the parties. No one can be forced to arbitrate a dispute without his express agreement to do so. Gateway Coal Co. v. United Mine Workers of America, Et Al., 414 U.S. 368, 94 S. Ct. 629, 38 L. Ed. 2d 583 (1974). Since there was no contract in effect between the O.C.A.W. and Fina at the time of the May 27 letter terminating Hildabridle, the plaintiffs can compel arbitration in this case only by arguing that the discharge was covered by the residual effects of the old contract or by the retroactive effects of the new contract.
This is, in effect, what the plaintiffs have attempted to do here. Their claim is based on two arguments. First, they claim that the language of the expired contract mandated *647 that its provisions carry over into a situation presented by the instant case, thus compelling arbitration. Second, and alternatively, the plaintiffs argue that Hildabridle's termination could not have occurred on May 27, 1982 as a matter of law, and thus, his termination could only have occurred when the new contract took effect. This being so, the new contract directed that a grievance be filed, and that the matter go into arbitration. For the reasons outlined below, this Court finds neither argument persuasive.
A. THE ISSUE OF POST-CONTRACT ARBITRABILITY: NOLDE AND ITS PROGENY.
At first blush, it would seem that no clause or requirement of a contract could survive the expiration of a contract. Yet, the plaintiffs' argument in this case, though not applicable in these circumstances, is based on good authority. In Nolde Brothers, Inc. v. Local No. 358, Bakery & Confectionery Workers Union, AFL-CIO, 430 U.S. 243, 97 S. Ct. 1067, 51 L. Ed. 2d 300 (1977), the Supreme Court addressed the general issue. A contract had terminated, and a company has closed a plant. A dispute arose over whether severance pay would be paid as a fringe benefit in the circumstances. The court held the dispute was arbitrable. The court indicated as a ground for its decision that there were strong reasons to believe that the parties did not intend their arbitration duties to terminate automatically with the contract. Otherwise, the employer would be allowed to cut off all arbitration of severance pay claims by simply terminating the contract and then closing the plant an illogical and unjust result. See Nolde, 430 U.S. at 253, 97 S. Ct. at 1073. It is important to note that in Nolde, the severance pay was a benefit that was in place prior to the contract's termination.
Since Nolde, several cases have addressed the issue of post-contract arbitrability. From these cases, an important pattern has emerged. It appears that courts will compel arbitration after a contract has expired in two circumstances. When a case involves the accrued rights of employees, such as pension benefits or disability payments, courts will not allow contract termination to extinguish those rights without arbitration of the issue. See e.g. United Steelworkers of America v. Fort Pitt Steel Casting Division Conval-Penn, Inc., 635 F.2d 1071 (3rd Cir.1980); Federated Metals Corporation v. United Steelworkers of America, Et Al., 648 F.2d 856 (3rd Cir.1981). Furthermore, arbitration will be ordered in situations where the dispute centers around an event that took place either totally or in part during the term of the contract. See e.g. Diamond Glass Corp., v. Glass Warehouse Workers & Paint Handlers Local Union 206, 682 F.2d 301 (2d Cir.1982). An event can be construed as occurring within a contract when the contract terms are deemed to continue past the contract's formal expiration date.
Several cases have dealt with the issue of a discharged employee. Some of these cases have required arbitration of a discharge even after a contract has terminated. Each of these cases fits into one of the above two exceptions. Arbitration was ordered in Glover Bottled Gas Corp. v. Local Union No. 282, 711 F.2d 479 (2nd Cir.1983), even though a contract had expired. In that case, however, employees had been fired because they refused to take a polygraph test concerning a recent theft. The termination occurred after the contract's expiration; but all other significant events the theft and the refusal to take the test occurred during the contract term. In Ottley v. Sheepshead Nursing Home, 688 F.2d 883 (2nd Cir.1983), a company had signed a contract while a member of an employer's association. The company later withdrew its membership from the association, and a short time thereafter discharged an employee. When the employee sought arbitration, a district court ordered it, but also ordered that the issue of withdrawal from the association be arbitrated first. Thus, the real issue was whether the contract was still in effect. The circuit court affirmed. Other cases ordering arbitration *648 of a discharge in this context seemed to be based on a finding that the contract itself had continued, and thus, the arbitrable event occurred under its terms.
The plaintiffs claim that Hildabridle can fit within one of the exceptions. With regard to the line of cases that accept an accrued right as a reason to compel arbitration, Hildabridle alleges that he had a right to job security and a right not to be discharged except for just cause. The Court agrees that these rights are important. Yet, these rights are of a much broader nature than those accrued rights recognized by Nolde and subsequent cases. Being of a broader and much different nature, these rights are protected by different means such as the right to collectively bargain, the right to belong to a union, and so on. It is not something protected by compelling arbitration in this context, and the plaintiffs have not cited a case that would so hold.
Likewise, the plaintiffs try to fit themselves within the second "continuing contract" exception. Their argument fails here, as well. The plaintiffs note that the Company and Union had agreed to arbitration in another matter, though the arbitration was scheduled long after the contract had expired. Yet, the grievance giving rise to this arbitration clearly arose during the regular contract term. Also introduced into evidence was a list of pre-existing disputes carried over for arbitration under the new contract. Once again, every grievance on the list was filed before the expiration of the old contract. The conduct of the parties in this matter does not indicate a continuing intent to arbitrate events which occurred while no contract was in force; instead, it reflects a willingness of the Company to take care of grievances arising under the earlier contract. These grievances would fit in neatly with the exceptions outlined above. The grievance in the instant case does not. The fact that they can be so easily distinguished points up the fallacy of the plaintiffs' argument.[3]
By the above arguments, Hildabridle asks this Court to adopt new facts as fitting within the Nolde exceptions. Alternatively, the plaintiffs ask the Court to accept a new rule of law: That the "duty to arbitrate survives independent of contract expiration unless (1) there is language clearly to the contrary in the collective bargaining agreement; or, (2) there is conduct of the parties that is so clear that a contrary intent is established." Plaintiffs' Brief at 10. This rule would be founded neither on sound law nor good policy. Plaintiffs' authority for his rule comes from a standard laid out in Fort Pitt, supra, 635 F.2d at 1075. Yet, Fort Pitt in turn relied on Nolde; and it is apparent that its standard is simply an overbroad misinterpretation. Other decisions have limited Nolde to apply only to accrued rights and benefits; and this Court believes this is the proper view. Otherwise, almost every clause and term of a collective bargaining agreement would stay in effect after the agreement was terminated. This certainly would not reflect the intention of *649 the parties; but it would certainly lead to a raft of litigation.
B. THE RETROACTIVE EFFECT OF THE 1982 CONTRACT.
Hildabridle has yet another argument, unrelated to the continuing duty to arbitrate claim. This argument places Hildabridle in the position of an economic striker, who, according to accepted Federal labor policy [See N.L.R.B. v. International Van Lines, 409 U.S. 48, 93 S. Ct. 74, 34 L. Ed. 2d 201 (1972)], cannot be terminated without being permanently replaced. Since, the plaintiffs argue, Hildabridle was never permanently replaced, he could not have been terminated during the strike period; instead, Hildabridle's termination only became effective on December 20, 1982, the date of the new contract. As such, plaintiffs contend, Hildabridle's termination was arbitrable under the new contract.
This argument must also fail. It is well-settled in this Circuit that a dispute over events that occurred prior to the execution of a collective bargaining agreement is not arbitrable where it is clear the parties did not agree to arbitrate it. Local 787 IUE v. Collins Radio Co., 317 F.2d 214 (5th Cir. 1963). Contrary to plaintiffs' argument, there is nothing in the record to indicate that the company ever intended to arbitrate Hildabridle's discharge. In the "Return to Work Understanding" that presaged the end of the strike, it was specifically stated "As to disciplinary action previously taken during the strike both the company and union preserve their positions as to the application of the grievance procedure." From the evidence presented, it is apparent that disciplinary action had been taken during the strike regarding only one employee: Hildabridle. Thus, this clause in the "Return to Work Understanding" has to refer to him. Thus, the "Understanding" specifically preserved the company's position concerning Hildabridle. The plaintiffs have not buttressed their argument concerning the applicability of the new contract with either good facts or case law; and therefore, there is nothing to dissuade the Court from saying the rule of Collins Radio should apply. Clearly, the Company never intended to arbitrate Hildabridle's dismissal, which occurred on the earlier date.
III. CONCLUSION
In sum, there is nothing in the present action that would cause the Court to compel arbitration. There was no contract in effect providing for arbitration. No reason has been shown for ruling that the contract's arbitration clause survived the contract's expiration. Finally, no intent to arbitrate has been proven. It is therefore,
ORDERED, ADJUDGED and DECREED that Judgment be entered for Defendant American Petrofina Company and against Plaintiffs Oil, Chemical, and Atomic Worker's International Union Local No. 4-23 and Leo Max Hildabridle, Jr., in that no order compelling arbitration will issue.
NOTES
[1] This Court does not reach the merits of Hildabridle's case. In fairness, however, the Court will note that a state court jury acquitted Hildabridle of a misdemeanor charge of a terroristic threat on November 8, 1983. All other charges were later dismissed.
[2] The plaintiffs have strenuously objected to the admission of this letter into evidence. They claim the letter is unfairly prejudicial and has been improperly characterized as an admission against interest. The Court is convinced, however, that the letter is not unfairly prejudicial, and that it is admissible under Fed.Rule Evid. 803(24), the residual exception to the hearsay rule, in that the letter has circumstantial guarantees of trustworthiness. It is used to illustrate the negotiations that occurred during the strike period.
[3] The plaintiffs have cited two decisions at the District Court level ordering arbitration of a discharge. Neither are applicable, nor persuasive. In Newspaper Guild v. Central States Publishing Co., 451 F. Supp. 1112 (D.C.Pa.1978), the court found that at the expiration of a labor contract, the company and the union had agreed to negotiate, and had further agreed to abide by the terms of the old agreement while negotiations continued. Id. at 1115. Furthermore, when a new contract was signed, the parties expressly agreed that its terms would apply retroactively to the expiration date of the old agreement Id. The event causing the discharge can be viewed as occurring while contract terms were in effect. Arbitration was also ordered in Washington-Baltimore Newspaper Guild v. The Washington Post Co., 442 F. Supp. 1060 (D.D.C.1977). There, however, an agreement between the company and a union provided that the terms of the old agreement would govern while negotiations continued. Negotiations ended when a rivalry developed between two unions over which was the proper NLRB representative. The court would not allow the company to escape arbitration in these circumstances. But it was a unique circumstance; and the court specifically stated that it was "not necessary to confront the question of the propriety of directing arbitration after the termination of a collective bargaining agreement" Id. at 1063. Clearly, neither case fits the instant cause.
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70 B.R. 196 (1986)
In re SOUTHERN INDUSTRIAL BANKING CORPORATION, Debtor.
Hugh G. ANDERSON and Hazel Anderson, et al., Defendants/Appellants,
v.
Thomas E. DUVOISIN, Liquidating Trustee, Plaintiff/Appellee.
Civ. No. 3-86-800, Adv. No. 3-83-00372.
United States District Court, E.D. Tennessee, N.D.
December 17, 1986.
*197 John A. Lucas, Jeffrey Norwood, Knoxville, Tenn., for plaintiff-appellee.
W.C. Myers, Jr. (Lead), Knoxville, Tenn., for defendants-appellants.
MEMORANDUM
EDGAR, District Judge.
This matter is presently before the Court on an interlocutory appeal from the United States Bankruptcy Court for the Eastern District of Tennessee. The defendants in this action appeal the decision of the bankruptcy court denying a jury trial in this matter. 66 B.R. 370 (1986). The liquidating trustee, the plaintiff, has also filed a number of motions seeking to have several of the defendants' notices of appeal dismissed. For the following reasons, the defendants' motions will be DENIED and the plaintiff's motions will be GRANTED. This Court's jurisdiction is proper under 28 U.S.C. § 158(a) and § 1334(b).
*198 I.
The proceedings in the bankruptcy court were initiated by the liquidating trustee beginning in early 1984 to recover alleged preferential transfers, pursuant to 11 U.S.C. § 547. The debtor, Southern Industrial Banking Corporation ("SIBC"), an industrial loan and thrift company under T.C.A. §§ 45-5-101-612, filed a voluntary petition in bankruptcy court under Chapter 11 of the Bankruptcy Code on March 10, 1983. The approximately 800 defendants in this consolidated adversary proceeding were "investors" in SIBC who withdrew part or all of their "deposits" during the 90-day period preceding SIBC's Chapter 11 petition filing.
This matter first came before this Court over a year ago to decide whether SIBC was an eligible debtor under 11 U.S.C. § 109(b)(2). By an order dated January 16, 1986, this Court held that SIBC was eligible to be a debtor based on the Court's analysis of SIBC under both the law of the state of incorporation and the Bankruptcy Code. See 2 L. King, Collyer on Bankruptcy ¶ 109.02 (1985). See also Cash Currency Exchange, Inc. v. Shine (In re Cash Currency Exchange, Inc.), 762 F.2d 542 (7th Cir.), cert. denied sub nom. Fryzel v. Cash Currency Exchange, Inc., ___ U.S. ___, 106 S. Ct. 233, 88 L. Ed. 2d 232 (1985); First American Bank & Trust Co. v. George, 540 F.2d 343 (8th Cir.), cert. denied, 429 U.S. 1011, 97 S. Ct. 634, 50 L. Ed. 2d 620 (1976). Subsequent to this order, a group of defendants asked this Court to amend its January 16, 1986 order to include its certification for interlocutory appeal to the court of appeals as required under 28 U.S.C. § 1292(b). By an order dated February 21, 1986, the Court denied these defendants' certification based on its determination that there was not a "substantial ground for difference of opinion." Cardwell v. Chesapeake & Ohio Rwy. Co., 504 F.2d 444, 446 (6th Cir.1974). The Court also concluded that certification was not justified in the case as it was doubtful whether an immediate appeal would materially advance the ultimate termination of the litigation. The Court found that an interlocutory appeal of the admittedly complicated issues involved, rather than an appeal at the conclusion of the bankruptcy court proceedings, would not expedite the delivery of justice.
Since the February order of this Court, the liquidating trustee has been proceeding with the actions to recover alleged preferences. In their answers to the liquidating trustee's complaints, many of the defendants requested a jury trial in this matter. On September 3, 1985, the bankruptcy court ordered the parties to submit briefs discussing the right to a jury trial in preference actions and discussing whether the bankruptcy court was authorized to conduct a jury trial in such a proceeding. On September 26, 1986, the bankruptcy court denied the defendants' request for a jury trial. The bankruptcy judge ruled that the defendants to this preference action in which the only relief sought was a monetary judgment did not have the right to a jury trial. The court did not reach the second issue as to whether a bankruptcy court has the authority to conduct a jury trial in a core proceeding such as an action to recover a preference.
The bankruptcy court noted in its memorandum that there is no constitutional right to a jury trial in bankruptcy proceedings, given the equitable nature of these proceedings. Beery v. Turner (In re Beery), 680 F.2d 705, 710 (10th Cir.) ("[T]he right to a jury trial in bankruptcy proceedings is purely statutory."), cert. denied, 459 U.S. 1037, 103 S. Ct. 449, 74 L. Ed. 2d 604 (1982). The bankruptcy court then analyzed the possible statutory sources for the right, including the Constitution as a source. The bankruptcy court first addressed 28 U.S.C. § 1411 which appears to allow jury trials under Title 11 for personal injury or wrongful death tort claims and may possibly permit jury trials in cases involving other types of claims. The court found that this section only applies to cases, unlike the present case, which were filed after the 1984 effective date of the section. Next, the bankruptcy court examined 28 U.S.C. § 1480 but, as this section was implicitly *199 repealed, the court ruled that this section also did not provide the defendants with a right to a trial by jury. Jacobs v. O'Bannon, 49 B.R. 763, 766-68 (Bankr.M. D.La.1985). The bankruptcy court concluded, therefore, that any right to a jury trial in this action would have to be founded on the seventh amendment to the Constitution. The court noted that the seventh amendment preserves the right to trial by jury only for certain "suits at common law." The bankruptcy court then proceeded to determine whether a preference action as involved in the present case was such a cause of action. After a lengthy historical discussion, the bankruptcy court concluded that no right to trial by jury attaches in preference actions. Katchen v. Landy, 382 U.S. 323, 86 S. Ct. 467, 15 L. Ed. 2d 391 (1966). The court also found that 28 U.S.C. § 157(b) reflects an implicit congressional intent that preference actions be tried without a jury. Morgan v. Lefton (In re Hendon Pools of Michigan, Inc.), 57 B.R. 801, 803 (E.D.Mich.1986); Baldwin-United Corp. v. Thompson (In re Baldwin-United Corp.), 48 B.R. 49, 56 (Bankr.S.D.Ohio 1985); Pennels v. Barnes (In re Best Pack Seafood, Inc.), 45 B.R. 194 (Bankr.D.Me. 1984).
II.
Before discussing the merits of the defendants' interlocutory appeal, this Court must first address a jurisdictional issue. Appeals from interlocutory orders in bankruptcy cases are governed by 28 U.S.C. §§ 158(a) and 1334(b) and Bankruptcy Rules 8001(b), 8002, and 8003. Bankruptcy Rule 8002(a) provides in relevant part:
The notice of appeal shall be filed with the clerk of the bankruptcy court within ten days of the date of the entry of the judgment, order, or decree appealed from. If a timely notice of appeal is filed by a party, any other party may file a notice of appeal within ten days of the date on which the first notice of appeal was filed, or within the time otherwise prescribed by this rule, whichever period last expires.
The first notice of appeal in this matter was filed on October 6, 1986, allowing all other parties through October 16, 1986 to file their notice with the bankruptcy court.[1] The time limits contained in the Rules are to be strictly enforced and, accordingly, this Court is without jurisdiction to rule on the motions filed after October 16, 1986. Bankr. Rule 8001(a)-(b). In re Universal Minerals, Inc., 755 F.2d 309, 311 (3d Cir. 1985); Walker v. Bank of Cadiz (In re LBL Sports Center, Inc.), 684 F.2d 410, 412 (6th Cir.1982). Thus, an appropriate order will enter dismissing these late appeals.
III.
28 U.S.C. § 158(a) provides: "The district courts of the United States shall have jurisdiction to hear appeals from final judgments, orders, and decrees, and, with leave of the court, from interlocutory orders and decrees, of bankruptcy judges entered in cases and proceedings [under Chapter 11]." A final order is an order which ends litigation on merits leaving only the execution of the judgment remaining. Catlin v. United States, 324 U.S. 229, 233, 65 S. Ct. 631, 633, 89 L. Ed. 911 (1945). See also Sun Valley Foods Co. v. Detroit Marine Terminals, Inc. (In re Sun Valley Foods Co.), 801 F.2d 186, 189 (6th Cir. 1986). Denial of a jury trial may not be characterized as a final order. The Court is aware that "final" has assumed a slightly different meaning for the purpose of bankruptcy matters than in other federal cases. In re Fox, 762 F.2d 54 (7th Cir. 1985). However, the denial of a jury trial in this matter did not conclusively determine any controversy, and the defendants have not shown that they will be caused any serious harm by delaying the appeal. In re Sun Valley Foods, at 189; Teleport Oil Co. v. Security Pacific Nat'l Bank (In *200 re Teleport Oil Co.), 759 F.2d 1376 (9th Cir.1985). By contrast, the granting or denying relief from automatic stays by bankruptcy courts which have been held to be "final" orders reviewable by district courts, see, e.g., In re Sun Valley Foods, involve actions which could not easily be corrected, if needed, on appeal.
As a denial of trial by jury is not a "final" order, the decision whether to grant the defendants' leave to appeal under § 158(a) is left to the discretion of the Court. It has been suggested that such applications for leave to appeal should be liberally granted where review will expedite the case's resolution. Robinson v. Johns-Manville Corp. (In re Johns-Manville Corp.), 45 B.R. 833, 835 (S.D.N.Y. 1984). Considerations of judicial economy and the interest of saving the parties' time and money should also be given weight in this decision. In re Pleasant View Utility Dist. of Cheatham County, 27 B.R. 552, 553 (M.D.Tenn.1982). In view of these policy concerns, the Court finds that review of the bankruptcy court's interlocutory order is not justified. The Court is particularly influenced by the date of the upcoming trial before the bankruptcy judge. Trial is scheduled within the month. Appeal to this Court would necessarily result in a delay of several months.
For additional support for its denial of defendants' request for leave to appeal, the Court also notes the policy favoring the sparing application of § 1292(b) to grant interlocutory appeals. In re April 1977 Grand Jury Subpoenas, 584 F.2d 1366, 1369 (6th Cir.1978), cert. denied sub nom. General Motors Corp. v. United States, 440 U.S. 934, 99 S. Ct. 1277, 59 L. Ed. 2d 492 (1979); Cardwell, 504 F.2d at 446. Leave to appeal should be granted "only in exceptional cases where an intermediate appeal may avoid protracted and expensive litigation." Cardwell, 504 F.2d at 446 (quoting Milbert v. Bison Laboratories, 260 F.2d 431, 433 (3d Cir.1958)). The statute's use was intended to be reserved for the "extraordinary type of case contemplated by § 1292(b)." Cardwell, 504 F.2d at 446, (quoting Kraus v. Bd. of County Rd. Comm'rs, 364 F.2d at 922). Rather than permit piecemeal appeal of each bankruptcy court ruling, the Court finds that the interests of justice will be much better served by reserving review of the bankruptcy court proceedings in their entirety at their conclusion.
In addition to these broad concerns, district courts deciding matters under § 158(a) have applied the standards developed in the courts of appeals in deciding whether to allow appeals from interlocutory orders of district courts under 28 U.S.C. § 1292(b). Id.; D'Avella v. MacRae (In re Bertoli), 58 B.R. 992, 995 (D.N.J.1986). 28 U.S.C. § 1292 provides:
When a district judge, in making in a civil action an order not otherwise appealable under this section, shall be of the opinion that such order involves a controlling question of law as to which there is substantial ground for difference of opinion and that an immediate appeal from the order may materially advance the ultimate termination of the litigation, he shall so state in writing in such order. The court of appeals may thereupon, in its discretion permit an appeal to be taken from such order, if application is made to it within ten days after the entry of the order: provided, however, That application for an appeal hereunder shall not stay proceedings in the district court unless the district judge or the Court of Appeals or a judge thereof shall so order.
12 U.S.C. § 1292(b) (Emphasis provided). While the bankruptcy judge does not certify the matter for appeal under § 158(a), as a district judge must under § 1292(b), the similarity of appeals from the bankruptcy court to the district court and from the district court to the appeals court make the standards under § 1292 reasonable for use in the present action.
In order to appeal an interlocutory order which is not otherwise appealable of right under 28 U.S.C. § 1292, the Sixth Circuit has required the existence of the following four elements:
*201 (1) The question involved must be one of "law";
(2) It must be "controlling";
(3) There must be substantial ground for "difference of opinion" about it; and
(4) An immediate appeal must materially advance the ultimate termination of the litigation.
Cardwell v. Chesapeake & Ohio Ry. Co., 504 F.2d at 446. While the plaintiff contends that the defendants' application for leave flounders on almost all points, there is little doubt that the question of the right to a trial by jury in preference actions is a legal one. It is also clear that the question is "controlling" in that its incorrect disposition amounts to reversible error on appeal. Katz v. Carte Blanche Corp., 496 F.2d 747, 755 (3d Cir.), cert. denied, 419 U.S. 885, 95 S. Ct. 152, 42 L. Ed. 2d 125 (1974); 16 C. Wright, A. Miller, E. Cooper & E. Gressman Federal Practice and Procedure § 3930 at 159 (1977). While this Court is aware of the historical differences of opinion surrounding the right to trial by jury in preference actions, see McLouth Steel Corp. v. Marblehead Lime Co. (In re McLouth Steel Corp.), 55 B.R. 357, 360 (E.D.Mich.1985), the Court does not find a substantial ground for dispute such as to require an appeal from the bankruptcy court's interlocutory order. As discussed below, the Court does not find that the defendants involved here would be likely to succeed on appeal of the denial of trial by jury. Finally, the Court does not find that an immediate appeal would materially advance the ultimate termination of this litigation. In point of fact, the Court finds that an interlocutory appeal would not only fail to advance termination of this matter, but it would also contribute to further delay in this already lengthy case.[2] As stated above, the case is presently scheduled to come up for trial before the bankruptcy judge in the Northern Division of the Eastern District of Tennessee in less than one month. Given the very crowded docket of this district court, scheduling of an interlocutory appeal would necessarily delay the resolution of this case for months. See Kraus v. Bd. of County Rd. Comm'rs., 364 F.2d 919, 922 (6th Cir.1966) (denying interlocutory appeal on grounds of avoiding delay and that trial on the merits could be had in a few days). As the Court finds that all four elements of the Cardwell test have not been met and in view of the policy concerns outlined above, this Court rules that this matter is not appropriate for an interlocutory appeal under 28 U.S.C. § 158. Defendants' request for leave to appeal their denial of a jury trial is DENIED. An appropriate order will enter.
IV.
As stated above, as part of the denial of defendants' request for leave to appeal, this Court does not find that the defendants involved in this action will be likely to succeed in proving that they are entitled to a jury trial of this core proceeding. The Court adopts the reasoning of the bankruptcy court with the following amplifications.
The jurisdiction of the bankruptcy courts was specifically addressed by the Bankruptcy Amendments and Federal Judgeship Act of 1984 ("BAFJA"), enacted on July 10, 1984. Under 28 U.S.C. § 157, bankruptcy judges are explicitly permitted to hear and finally determine "core proceedings." 28 U.S.C. § 157(b) provides that:
(1) Bankruptcy judges may hear and determine all cases under title 11 and all core proceedings arising under title 11, . . . and may enter appropriate orders and judgments, subject to review under section 158 of this title.
(2) Core proceedings include, but are not limited to
. . . . .
(F) proceedings to determine, avoid, or recover preferences.
As a core proceeding, an action to recover a preference is properly considered equitable in nature. In re McLouth Steel Corp., 55 *202 B.R. at 362. As equitable proceedings, preference actions such as those presented here are within the jurisdiction of the bankruptcy judge to decide. Consistent with the holding of the Supreme Court in Katchen v. Landy, 382 U.S. at 336, 86 S. Ct. at 476, no right to a trial by jury attaches in equitable actions. Jefferson Nat'l Bank v. I.A. Durbin, Inc. (In re I.A. Durbin, Inc.), 62 B.R. 139 (S.D.Fla.1986); King, Jurisdiction and Procedure Under the Bankruptcy Amendments of 1984, 38 Vand.L.Rev. 675, 704 (1985) ("[T]here is no right to a jury trial in core proceedings."). The fact that some of the several hundred preference actions may have been filed before the BAFJA was enacted does not change this Court's holding. The recovery of preferences is a matter traditionally considered within the equitable powers of the bankruptcy court to which no right to trial by jury attaches. Katchen, 382 U.S. at 336-39, 86 S. Ct. at 476-78; Curtis v. Loether, 415 U.S. 189, 195, 94 S. Ct. 1005, 1008, 39 L. Ed. 2d 260 (1974) ("[T]he [Katchen] Court recognized that a bankruptcy court has been traditionally viewed as a court of equity, and that jury trials would `dismember' the statutory scheme of the Bankruptcy Act." (citing Katchen, 382 U.S. at 339, 86 S. Ct. at 478)). In re Hendon Pools of Mich., Inc., 57 B.R. at 803; Reda, Inc. v. Harris Trust & Savings Bank, (In re Reda, Inc.), 60 B.R. 178, 180-81 (Bankr.N. D.Ill.1986).
V.
As a final matter, this Court will address defendants' motion for a stay of trial proceedings in bankruptcy court pending appeal of defendants' right to a jury trial, filed December 4, 1986. Bankruptcy Rule 8005, governing the procedures for a motion for stay pending appeal of a bankruptcy court order, states in relevant part:
A motion for a stay of the judgment, order, or decree of a bankruptcy court . . . or for other relief pending appeal must ordinarily be made in the first instance in the bankruptcy court..... A motion for such relief, or for modification or termination of relief granted by the bankruptcy court may be made to the district court . . ., but the motion shall show why the relief, modification, or termination was not obtained from the bankruptcy court.
Defendants maintain that they made an oral motion at a November 18, 1986 pretrial conference for a stay of the trial proceedings. This request was summarily denied, according to the defendants, and a January 1987 trial date was set. The plaintiff maintains that no defendants' attorney moved the bankruptcy court for an order staying the trial court's order setting the case for trial. The defendants now contend that the alleged denial of their motion for a stay was an abuse of discretion or an error.
As the Court has now either ordered the dismissal or denial of the defendants' requests for leave to appeal the denial of a trial by jury in this matter, the defendants' motion for a stay of trial proceedings in bankruptcy court pending the resolution of their appeal to this Court is now MOOT. In view of this Court's holding that there is no appeal in this matter, there is no reason presently before this Court requiring the delay of the bankruptcy court trial. Accordingly, defendants' motion for a stay will be DENIED. An appropriate order will enter.
NOTES
[1] As Bankruptcy Rule 8002 is an adoption of Rule 4(a) of the Federal Rules of Appellate Procedure, this Court computed the applicable time period under Rule 26 of the Federal Rules of Appellate Procedure. Bankr.Rule 8002 advisory committee note.
[2] This request for appeal from an interlocutory order is the third in this case.
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Action to quiet and determine title to certain real estate in New Madrid county. The petition is in usual form under Section 1520, Revised Statutes 1929 (Mo. Stat. Ann., sec. 1520, p. 1682). It alleged that plaintiffs were the owners in fee simple of the lands described; that defendants were in possession and claimed some right, title and interest therein, adverse and prejudicial to plaintiffs. Plaintiffs prayed judgment for title and possession; that defendants be enjoined and estopped from hereafter setting up any claim, right, title or interest. The petition closed with a prayer for general relief. Defendants by answer admitted that they were in possession and claimed title, and denied that plaintiffs were the owners or entitled to possession. The answer than averred that defendant Alvin T. Earls was the owner in fee simple of the lands described; alleged that plaintiffs had attempted to purchase at an execution sale under a judgment for drainage taxes; and then stated that "these defendants hereby offer and tender to plaintiffs all sums paid by plaintiffs or those under whom they claim at such pretended tax sale and these defendants hereby offer to do equity as the court may herein direct." Defendants then prayed the court decree title in defendants. A jury was waived, the cause tried to the court and a decree entered adjudging title and possession to plaintiffs. Motion for new trial was overruled and defendants appealed.
There is little dispute as to the facts. The Himmelberger-Harrison Land and Investment Company (hereinafter referred to as the Investment Company) is the common source of title. Plaintiffs claim title as follows: (1) On August 15, 1927, the Investment Company conveyed by warranty deed to Samuel J. Ault. (2) On the same date Ault executed a deed of trust to Edward J. Bauerle as trustee for the Investment Company. This deed of trust secured the payment of a note for $5330 due ten years after date. The warranty deed was recorded September 28, 1927, and the deed of trust September 16, 1927. (3) On May 22, 1933, the sheriff of New Madrid County executed a drainage tax deed to R.P. Smith. The basis of this deed was a judgment establishing the lien of drainage taxes against the lands in question and rendered in favor of the Little River Drainage District against Samuel J. Ault, Edward J. Bauerle, trustee, and the Investment Company for delinquent drainage taxes for 1928, 1929, and 1930. The defendants in the tax suit were the record owners at the time the suit was instituted and at the time of the sale. All of said defendants were duly served with process; defendant Samuel J. Ault by publication, Edward J. Bauerle, trustee by personal service, and the Investment Company by service upon its secretary, one Clarence Hutson. No objection was raised to the form of the judgment or proceeding upon which it was based. (4) On January 21, 1935, R.P. Smith, the purchaser at the tax sale, and his wife executed a quitclaim deed to the Little River Drainage *Page 266
District. This deed and the tax deed to Smith, were filed for record December 3, 1935. (5) On May 22, 1936, the Little River Drainage District executed a quitclaim deed to plaintiffs L.A. Richards and Francis A. Steele. This deed was recorded June 2, 1936. Each and every one of said deeds is in due form, regular on its face, described the lands in question, and was duly recorded in the land records of New Madrid County, Missouri.
Defendants' claim arises as follows: On September 16, 1927, the said $5330 Ault note, secured by the deed of trust as hereinbefore referred to, was endorsed and delivered by the Investment Company to the Himmelberger-Harrison Lumber Company (hereinafter referred to as Lumber Company). The Lumber Company retained ownership until March 5, 1936. On March 5, 1936, and before the maturity of the note, the Lumber Company transferred the said note to defendant Edwards. Edwards, acted for himself and defendant Earls. They were "jointly interested." Edwards thereafter caused the deed of trust securing the said note to be foreclosed, and on September 12, 1936, S.J. Harris, sheriff, as substitute trustee, under the said Ault deed of trust, executed and delivered a substitute trustee's deed to said lands to defendant Alvin T. Earls. This deed was recorded September 12, 1936.
Other facts appearing in evidence are as follows: At the time process in said suit for delinquent drainage taxes was served upon Mr. Hutson, as secretary of the Investment Company, Mr. Hutson was also secretary of the Lumber Company. The Lumber Company was then the owner and holder of said note by assignment from the Investment Company. On December 31, 1931, prior thereto, the Lumber Company had charged said note off to profit and loss. The Lumber Company, after knowledge of the institution on October 6, 1932, of said suit for delinquent drainage taxes, decided not to protect the said land.
The said drainage tax suit was instituted and prosecuted to judgment by R.P. Smith as tax attorney for the Little River Drainage District (hereinafter referred to as the district). At the sale under said drainage tax judgment he purchased the said real estate for the drainage district and at the personal direction of the secretary of the district. The records of the district, however, showed no authority given by the board of supervisors or any action taken by them with reference to said purchase, but it was the regular practice of the tax attorney to bid in all lands for drainage taxes, where there were no other bids. The tax deed, as executed by the sheriff, was made directly to Smith. The price of $25 paid for this 160 acres of land at the tax sale was not unusual or out of line for tax sales in 1933. Except for 10-12 acres, "it was wild land." There was evidence, however, that the land should have been worth around $4 or $5 per acre and was very productive. Mr. Smith did not pay the consideration. *Page 267
It was paid by the district and Smith held title for the district. At the time the tax suit was instituted against the record owners of the land, the district and its officers and its tax attorney had no knowledge or information concerning the transfer of the note in question to the Lumber Company. No record of the assignment of this note appeared in the land records.
Defendant Edwards paid the Lumber Company $100 for the $5330 Ault note on March 5, 1936. At that time the note showed total credits of $39.48, being amounts paid on interest during 1929. Before Edwards purchased the Ault note, he was entirely familiar with all transactions appearing of record with reference to this land, including the said tax proceedings. He had previously communicated with the secretary of the drainage district and had been advised that the district claimed to own this land. After the note was purchased an additional expense of $26.36 was incurred in foreclosing the deed of trust. There was evidence that the plaintiffs knew that Earls had purchased the Ault note from the Lumber Company before they obtained their deed from the drainage district.
On November 13, 1935, and after R.P. Smith ceased to be attorney for the Little River Drainage District, and after the execution of his deed to the district, but before it was recorded, the said district, by R.B. Oliver III, as tax attorney, instituted a second suit for delinquent drainage taxes on this land, and for the 1930, 1932 and 1934 taxes. The suit was instituted against the same parties named as defendants in the first suit. They still appeared as the record owners of the land. After defendant Edwards acquired the Ault note, as hereinbefore referred to, Earls went into possession of the land. On March 16, 1936, Earls paid off the delinquent drainage taxes covered by this second tax suit, and said suit was dismissed. The purchase of the Ault note from the Lumber Company, and the payment of the taxes covered by the second suit, was subsequent, however, to the recording of the said tax deed to Smith and of Smith's deed to the drainage district, both being recorded December 3, 1935.
[1] Appellants in their brief refer to this proceeding as one in equity. Certain amici curiae have also briefed this cause on the theory that this action is essentially one by defendants (appellants) as inferior lien holders to redeem this real estate from the grantees of purchasers at a tax sale or foreclosure of a superior lien, when they (appellants' assignors) were not parties to the foreclosure proceeding of the superior lien and that they are not bound thereby. It becomes important therefore to determine whether this action is at law or in equity. Whether the action is one at law or in equity must be determined according to the issues tendered by the pleadings. [Rains v. Moulder,338 Mo. 275, 90 S.W.2d 81, 84; Jacobs v. Waldron, 317 Mo. 1133, 1137,298 S.W. 773, 774, citing cases. Ebbs v. Nebb, 325 Mo. 1182, 1191, 30 S.W.2d 616, 620.] A determination *Page 268
of whether the cause is legal or equitable is essential to determine (1) whether the cause was triable before a jury in the court below and, (2) as to what method of review must be employed here. If the pleadings present issues of equitable cognizance, then the cause is in equity. The action is one at law since both the plaintiffs and the defendants seek the establishment of purely legal rights, to-wit, a judgment for fee simple title and possession. [Williams v. Walker, 333 Mo. 322, 62 S.W.2d 840, 842, citing cases. Becht v. Johnson, 333 Mo. 420,62 S.W.2d 847, 849.] The petition states no grounds for affirmative equitable relief. The answer states no facts calling for equitable relief and there is no prayer for affirmative equitable relief. The sole issue made by the pleadings is one at law as to the legal title in fee simple and the right to possession. The prayer for injunction and general relief at the close of plaintiffs' petition, standing alone, is insufficient to convert the case to one in equity, because the petition fails to state a cause of action in equity. The demand for relief is no part of the cause of action. [Rains v. Moulder, supra; Koehler v. Rowland, 275 Mo. 573, 581-582, 205 S.W. 217, 218, 9 A.L.R. 107; Jacobs v. Waldron, supra; Peterson v. Larson, 285 Mo. 119, 125,225 S.W. 704, 705.] The answer does not state a cause of action in equity. The mere statement in the answer that plaintiffs had purchased at a "pretended tax sale," and that "defendants hereby offer to do equity as the court may herein direct," did not make the cause of action or defense one in equity, and constituted no basis for affirmative equitable relief based upon an equitable defense. Even the statement in the answer of an equitable defense or evidence in support thereof would not convert a proceeding at law into one in equity. [Turner v. Hine, 297 Mo. 153, 160,248 S.W. 933, 935; Electric Ry. Co. v. Curtis, 154 Mo. 10, 20, 55 S.W. 222.] The action was therefore one at law. The record shows that a jury was waived and the cause submitted to the court. No declarations of law were requested or given. Absent errors in the trial, therefore, the finding of the court if based on substantial evidence is conclusive on us.
[2] Appellants assign error in the admission in evidence of (1) the tax deed of R.P. Smith, (2) the deed from Smith to the drainage district, and (3) the deed of the drainage district to respondents (plaintiffs below). The first deed was objected to on the following grounds: (1) that the proceedings in the tax suit were such that it failed to convey the interest under the deed of trust; (2) that the purchase at the tax sale was by the drainage district and that title was illegally and falsely taken in the name of R.P. Smith for the benefit of the district; (3) that the consideration for the tax deed was so negligible as to shock the conscience of the court. The other two deeds were objected to on the theory that the grantors therein had no title and conveyed no title and that the district had no power to *Page 269
acquire the land; that the land was not acquired for the purposes of the district; and that buying and selling land was entirely beyond the powers of the Little River Drainage District.
The several instruments were properly admitted in evidence. Under the issues made by the pleadings they constituted evidence of plaintiffs' chain of title. Each deed was regular on its face and therefore prima facie admissible, as against the objections made by appellants. [Sec. 10765, R.S. 1929 (Mo. Stat. Ann., sec. 10765, p. 3493); Sec. 1715, R.S. 1929 (Mo. Stat. Ann., sec. 1715, p. 3990); Travelers' Insurance Co. v. Beagles, 333 Mo. 568,62 S.W.2d 800.] The matters complained of by appellants did not appear from the face of the instruments. They were affirmative defensive matters not pleaded and requiring independent affirmative proof. The assignment is overruled.
[3] Appellants next assign error in the admission of testimony as to the actual knowledge of the Lumber Company as to the pendency of the first tax suit. The record shows that this information first appeared as follows: "Q. Mr. Hutson, was the Himmelberger-Harrison Land and Investment Company served a summons in tax suit No. 9245, entitled Little River Drainage District v. Sam J. Ault?
"MR. BAYNES: That is objected to, the return is the best evidence.
"The COURT: That is true however, I will let him answer.
"MR. BAYNES: Exception.
"A. Yes sir; The Himmelberger-Harrison Lumber Company had actual knowledge of the fact that a tax suit had been filed on this property; it is a part of my duties as secretary of the Himmelberger-Harrison Lumber Company to make a record of the tax sales in which the company is interested."
It is apparent that the information given in the answer was not called for by the question objected to and was merely additional information voluntarily given by the witness. No motion was made to strike out the voluntary statement of the witness. No objection or exception was saved to the answer of the witness as made. The assignment is overruled. [Cazzell v. Schofield,319 Mo. 1169, 8 S.W.2d 580, 589; State ex rel. Friedman v. Purcell,131 Mo. 312, 319, 33 S.W. 13.]
[4] Appellants further assign error in the admission of the testimony of witness Hutson as to acts, conversation, and private transactions within the Lumber Company, concerning protection or abandonment of the lands in controversy. This assignment was abandoned by appellants. The particular testimony is not pointed out. The grounds of objection are not specified. No effort was made to show how appellant was prejudiced by the admission of the testimony. The matter is not mentioned under points and authorities or in argument, and no authorities are submitted in support of the assignment. *Page 270
The assignment is overruled. [Span v. Jackson-Walker Coal
Mining Co., 322 Mo. 158, 16 S.W.2d 190, 202.]
[5] The final assignments of error are that the court erred (1) in finding respondents were the owners of the land, and (2) in finding that appellants were not the owners of the land in question.
Under these assignments of error appellants in their brief urge (1) estoppel, (2) invalidity of the tax deed, and (3) that appellants' rights were not foreclosed by the tax proceeding.
Appellants contend that respondents are estopped by the acts of the drainage district to assert the validity of the tax title (1) because the district subsequent to said tax sale sued the former owners for delinquent drainage taxes and alleged in said suit that said former owners still owned said lands, and (2) because in reliance on said suit appellants bought the note from the Lumber Company and paid the taxes covered by the second suit.
Estoppel was not an issue in this cause. The issues in a lawsuit are made up by the pleadings. [Kleinlein v. Foskin,321 Mo. 887, 13 S.W.2d 648, 654; Moore v. Dawson,220 Mo. App. 791, 277 S.W. 58, 61; Frank v. Myers (Mo. App.),109 S.W.2d 54, 57.]
Estoppel is an affirmative defense to be pleaded and proven, unless such facts appear from plaintiffs' case. [State ex rel. School District v. Haid, 328 Mo. 729, 41 S.W.2d 806, 809; Ambruster v. Ambruster, 326 Mo. 51, 31 S.W.2d 28, 35, 38; Grafeman Dairy Co. v. Bank, 315 Mo. 849, 870, 288 S.W. 359, 363, 368; Missouri Cattle Loan Co. v. Insurance Co., 330 Mo. 988,52 S.W.2d 1, 11.]
Appellants contend that evidence sufficient to create an estoppel came in without objection. We think the evidence was insufficient for that purpose. The evidence in this case discloses that at the time the delinquent taxes covered by the second tax suit were paid on March 16, 1936, the tax deed to Smith, and the quitclaim deed from Smith to the district, had been of record since December 3, 1935. Before Edwards bought the note, or Earls paid the taxes, Edwards had contacted the secretary of the drainage district and had been advised that the district owned the real estate and would sell it. Edwards was present when Earls paid off the taxes covered by this second tax suit. Edwards admitted that he did not know of the filing of the second tax suit (filed November 13, 1935) at the time he purchased the note on March 5, 1936, but he did know of the tax sale and the deeds thereunder. It is therefore apparent that appellants did not rely on the statements in the second tax suit when they paid the taxes. We are of the opinion that the pleadings are not sufficient to raise an issue of estoppel and the evidence fails to establish the necessary elements of estoppel. [Blodgett v. Perry, 97 Mo. 263, 10 S.W. 891; 892; Rosencranz v. Swofford Bros. Dry Goods Co., 175 Mo. 518, 75 S.W. 445; Waugh v. Williams, 342 Mo. 903, 119 *Page 271 271 S.W.2d 223, 226; Rhoads v. Rhoads, 342 Mo. 934, 119 S.W. 247, 252; Burke v. Adams, 80 Mo. 504, 50 Am. Rep. 510; State ex rel. Richards v. Fidelity Casualty Co. (Mo. App.), 82 S.W.2d 123, 128.]
[6] Appellants next urge that the execution sale under the tax judgment and the deed thereunder was invalid and the district acquired no title because the statute which alone gave the district power to buy at tax sales was not strictly complied with. Appellants contend that the deed was void and not merely voidable, and the several conveyances passed no title.
Section 10766, Revised Statutes 1929 (Mo. Stat. Ann., sec. 10766, p. 3494) among other things provides: "To protect said lien of said drainage taxes . . . in any case where delinquent lands are offered for sale . . . the board of supervisors shall have authority to bid or cause to be bid, not to exceed the whole amount due thereon, as aforesaid, in the name of the district, and in case such bid is the highest bid, the sheriff shall sell and convey such lands to such drainage district . . ."
Section 11020, Revised Statutes 1929 (Mo. Stat. Ann., sec. 11020, p. 3659) among other things provides: "Drainage or levee districts . . . incorporated under any of the drainage or levee laws of this state where lands are offered for sale for their own taxes or assessments due thereon, shall be and are hereby authorized to buy such lands. . . . If such bid is the highest bid, the sheriff shall convey such lands to such drainage district. . . ."
Section 10768, Revised Statutes 1929 (Mo. Stat. Ann., sec. 10768, p. 3496) among other things provides: "In order to effect the drainage, protection and reclamation . . . the board of supervisors is authorized . . . to hold, control and acquire by donation or purchase, and if need be, condemn any land . . . for any of the purposes herein provided, or for material to be used. . . ."
All terms and provisions of the drainage act are to be broadly and liberally construed. [Sec. 10808, R.S. 1929 (Mo. Stat. Ann., sec. 10808, p. 3530); Walker v. Sundermeyer, 271 Mo. 579, 585, 197 S.W. 102, 103; In re Drainage District v. Rolwing,269 Mo. 161, 169, 190 S.W. 261, 263.] Appellants contend that no title passed by the tax deed since, according to their evidence, the district bought at the tax sale but the deed was made to R.P. Smith. Mr. Smith, one of the attorneys for appellants, and a witness on their behalf testified: "I bid in the land as tax attorney for the Little River Drainage District, at the personal direction of B.F. Burns, Secretary of the District. . . . I asked Mr. Burns how he wanted the deed made and he told me in my name. . . . I gave a check for all those bids in my name. . . . The consideration was paid by the Little River and I held it solely for them." However, the interest of the district in the matter did not appear on the records of the district or in the *Page 272
deeds. Prima facie Smith had the right to take legal title. At least he had the legal capacity prima facie to be a grantee in the deed. If he purchased for or at the direction of the district, and if the district furnished the consideration, then the district was the equitable owner, and if Smith subsequently conveyed to the district by proper deed, the equitable and legal title merged in the district. If the district purchased at the tax sale it ultimately received the legal title and had the legal title before appellants purchased the Ault note, paid the drainage taxes under the second tax suit, or foreclosed the Ault deed of trust. There was no testimony as to the express purpose for which the lands were acquired, except as might be inferred from the testimony of Mr. Smith that it was, "the policy of the Drainage District that Mr. Burns and myself would see to it that the land wouldn't go without bids; if there were no other bids the land was marked off to me." As far as the issues of this suit are concerned we think that the conveyances in evidence were sufficient for the district to acquire and pass the legal title to the lands in question to respondents. The district had authority to acquire and convey real estate for certain purposes and appellants may not collaterally question the right of the district to take and transfer title in this case. Only the state could complain. [Hafner v. St. Louis, 161 Mo. 34, 43-45, 61 S.W. 632; Land v. Coffman, 50 Mo. 243, 254.] In the absence of specific pleading and proof that the real estate was unlawfully acquired by the district we must presume that it was lawfully acquired for lawful purposes of the district.
[7] Appellants finally contend that the first tax suit failed to foreclose the rights of the Lumber Company since the Lumber Company, as assignees and owners of the Ault note secured by the said deed of trust, was not a party defendant in said tax sale proceeding; and that appellants, as subsequent assignees of the note, and as purchasers under the foreclosure of the deed of trust, are not affected by the sale for taxes. Appellants insist that the sale transferred only the rights of the parties named as defendants in the tax suit.
However, if a lien holder is not made a party to a proceeding to foreclose a superior tax lien and not otherwise bound by the foreclosing proceeding, his remedy is by a proceeding in equity to redeem. No such issue is raised by the pleadings.
We have seen that this action is one at law and that the answer of appellants did not state facts showing any equitable rights in appellants. Appellants did not claim an equitable right of redemption in the property, but the legal title thereto. There was no prayer for redemption or for affirmative equitable relief. No direct assault was made upon any deed or proceeding. The sole issue presented by the pleadings was as to which party had the better legal title. The motion for a new trial alleges no error in not allowing appellants to redeem. It states that the court erred in deciding this cause in favor *Page 273
of respondents, when his decision should have been in favor of appellants. The same assignments of error are made here to-wit: That the court erred in holding that respondents are the owners of the land and in not holding that appellants are the owners. Under points and authorities and in argument appellants point out that respondents hold under the tax title, and contend that since at the time the tax suit was instituted the Lumber Company owned the note and "was not made a party to the tax suit nor served with process makes it impossible for them to be affected." Again, appellants say: "The tax suit was invalid because the actual owner of the deed of trust under which appellants now hold, was not made a party to that suit." This does not suggest a claim of a right of appellants in equity as the holders of an alleged inferior lien to redeem property sold under the foreclosure of a superior lien and to which foreclosure proceedings of the superior lien the appellants and their grantors were not parties. Rather it suggests that the tax proceeding was wholly void and may be disregarded. [Spore v. Land Co., 186 Mo. 656, 85 S.W. 556.] If it be conceded that the Lumber Company was not a party to the proceeding for the foreclosure of the drainage tax lien, or not otherwise bound by said proceeding (which we do not hold), still, since the tax lien was superior to the lien of the deed of trust, and the legal title of Ault was foreclosed and sold, one could not say that the sale was invalid and the rights of the Lumber Company and its assigns would not be affected, because in that case their right would be one of redemption. In case of foreclosure of the inferior lien the purchaser thereunder would hold subject to the rights of purchasers under foreclosure of the superior lien. [City of Springfield v. Ransdell, 305 Mo. 43,264 S.W. 771, 773.] The cause was tried below and is presented here upon the sole proposition as to whether appellants or respondents have the better legal title to the real estate in question. We may not go outside the evidence and the pleadings and make findings and grant relief not responsive to any issue in the case. [Rains v. Moulder, supra, citing cases.]
[8] The question, therefore, is: Did respondents, who hold under the purchaser at the tax sale, acquire a better legal title than appellants who purchased at the foreclosure of the deed of trust? By Section 10764, Revised Statutes 1929 (Mo. Stat. Ann., sec. 10764, p. 3491), the lien of drainage taxes is a paramount lien, subject only to the lien of the State for general State, county, school and road taxes. There is no claim that the lien of drainage taxes was not superior to the lien of the deed of trust or that the District did not proceed properly to foreclose its tax lien against the land as to Ault and the Investment Company, or that the proceeding is not regular on its face. [Sec. 10765, R.S. 1929 (Mo. Stat. Ann., sec. 10765, p. 3493); Sec. 9953, R.S. 1929 (Mo. Stat. Ann., sec. 9953, p. 7995).] Appellants contend that an action to enforce a tax lien, prosecuted "against the *Page 274
owner of the property, if known, and if not known, then against the last owner of record as shown by the county or city records at the time the suit was brought" does not affect unknown assignees of notes secured by deeds of trust of record. [See Sec. 10765, R.S. 1929 (Mo. Stat. Ann., sec. 10765, p. 3493, and Sec. 9953, R.S. 1929 (Mo. Stat. Ann., sec. 9953, p. 7995); Morgan v. Willman, 318 Mo. 151, 168, 1 S.W.2d 193, 200.] However, the sale under the judgment for drainage taxes conveyed the legal title in the lands in question to respondents subject to appellants' rights. [Little River Drainage District v. Sheppard,320 Mo. 341, 7 S.W.2d 1013, 1014.] In the case of Stafford v. Fizer, 82 Mo. 393, 397, the court in dealing with the rights of a purchaser under a proceeding for the foreclosure of a tax lien as against a purchaser under a deed of trust said: "It will be observed that we are dealing with two liens, one created by law in favor of the State which necessarily takes precedence of other prior, as well as subsequent liens, on account of its peculiar character; . . . the other in favor of creditors, created by the act of the debtor. These two liens have been foreclosed and the purchasers stand opposed to each other with deeds under the proceedings respectively employed for enforcing them. The lien of the State is the superior one, although subsequent in time. . . ." The court then held that the purchaser at the sale under foreclosure of the superior lien had the superior title at law. [See also Gitchell v. Kreidler, 84 Mo. 472; Myers v. Bassett,84 Mo. 479; Cowell v. Gray, 85 Mo. 169; Allen v. McCabe, 93 Mo. 138, 6 S.W. 62.]
It is therefore immaterial to any issues in this case whether a subsequent and "unknown assignee" and owner of a note is bound by a tax judgment against the payee of the note named in the deed of trust where suit is instituted subsequent to the transfer of the note, since no issue as to the right of the assignee to redeem is presented. Respondents have the better legal title. Finding no error in the record the judgment is affirmed. Hyde andBradley, CC., concur.
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793 F. Supp. 293 (1992)
Ariska SAVIOUR, Plaintiff,
v.
CITY OF KANSAS CITY, KANSAS, et al., Defendants.
Civ. A. No. 90-2430-L.
United States District Court, D. Kansas.
June 4, 1992.
On Motion to Reconsider June 22, 1992.
*294 Rosie M. Quinn, Rosie M. Quinn & Associates, Kansas City, Kan., for plaintiff.
Maurice J. Ryan, Kansas City, Kan., for defendants.
MEMORANDUM AND ORDER
LUNGSTRUM, District Judge.
This matter is currently before the court on the Motion to Dismiss/Summary Judgment on Behalf of Tom Dailey (Doc. # 117). This case involves a complaint for damages filed by plaintiff against defendants City of Kansas City, Kansas (the "City"), police officers Richard Hartzfeld, James Porterfield and Patrick Ohler, individually, and Thomas Dailey, individually and in his capacity as chief of police, for various civil rights violations pursuant to 42 U.S.C. §§ 1981, 1983 and 1985 and pendent state law claims. In an Order dated May 15, 1992, this court ruled on the motion for summary judgment filed by defendants City, Hartzfeld, Porterfield and Ohler. At the time the court ruled on the other defendants' motion for summary judgment, Dailey's motion to dismiss and for summary judgment was not ripe for adjudication by the court due to the fact that the time *295 period for Dailey's reply had not yet elapsed. Dailey's reply was received by the court on May 22, 1992, making the Dailey motion fully at issue before the court.
After consideration of the arguments and authorities presented by both parties in their briefs, and after a careful examination of the procedural record in this case, the court is prepared to rule on Dailey's motion. The court finds that plaintiff's third amended complaint, which added Dailey as a defendant in his individual capacity, does not relate back under the requirements of Fed.R.Civ.P. 15(c) as it existed at the time this action was filed. Therefore, plaintiff's claims against Dailey in his individual capacity shall be dismissed.
Dailey became chief of police of Kansas City, Kansas, in May of 1989. On November 10, 1989, the incident which is the subject of this lawsuit occurred. Plaintiff alleges that three officers of the Kansas City, Kansas Police Department used excessive force in effecting an arrest of plaintiff. Plaintiff also alleges that the City's policy of indifference in the supervision and discipline of officers proximately caused his injuries.
Plaintiff initially filed his action on December 6, 1990. On December 10, 1990, plaintiff filed his first amended complaint. The first amended complaint named Dailey as a defendant in the body of the pleading but not in the caption. There is no mention of Dailey in the first amended complaint other than the one paragraph in which Dailey is identified as a defendant. The first amended complaint contains no allegations of any actions taken by Dailey that contributed to plaintiff's alleged injuries. Plaintiff did not serve Dailey with notice of the complaint.
Plaintiff filed his second amended complaint on May 24, 1991. The purpose of the second amended complaint was to add Patrick Ohler as an individual defendant. Regarding Dailey, the second amended complaint was identical to the first amended complaint. Dailey was not listed as a defendant in the caption and there were no allegations of any actions taken by Dailey that contributed to plaintiff's alleged injuries. Once again, plaintiff failed to serve Dailey with notice of the complaint.
On October 25, 1991, plaintiff moved to amend his complaint for a third time. Plaintiff sought to add Dailey as a defendant in the caption both in his individual capacity and in his official capacity as chief of police. However, even this proposed amended complaint failed to specify any actions taken by Dailey that contributed to plaintiff's alleged injuries. The magistrate denied plaintiff's motion to amend due to plaintiff's failure to comply with D.Kan. Rule 206(e), which requires that a motion to amend include a precise statement of the amendment sought to be allowed.
On November 15, 1991, plaintiff filed a motion to reconsider the magistrate's order denying plaintiff's motion to amend. In the motion to reconsider, plaintiff stated that he proposed to amend his complaint to add Dailey as a defendant in his individual capacity. Even at this late date, plaintiff proposed only to add Dailey as a defendant in the caption of the complaint, and continued to completely fail to allege in the body of the complaint any specific actions taken by Dailey that contributed to his alleged injuries.
On April 2, 1992, the magistrate granted plaintiff's motion to amend the complaint but made no specific finding that the amended complaint related back to the filing of the original complaint for statute of limitations purposes. Additionally, the magistrate specifically reserved consideration of defendant's arguments as to the merits of the claims against Dailey to this court.
On April 9, 1992, plaintiff filed his third amended complaint. The complaint included Dailey as a defendant in his individual and official capacities. Additionally, for the first time, the body of plaintiff's complaint contained references to Dailey. Dailey was added to those allegations of the complaint originally brought only against the City relating to the policy of indifference in the supervision and discipline of police officers. Plaintiff finally served a *296 copy of the third amended complaint on Dailey.
The federal civil rights statutes do not provide a specific statute of limitations. In Garcia v. Wilson, 731 F.2d 640 (10th Cir.1984), aff'd 471 U.S. 261, 105 S. Ct. 1938, 85 L. Ed. 2d 254 (1985), the Tenth Circuit held that civil rights actions, such as those asserted by plaintiff in this case, should be characterized as violations of personal rights and the district courts should apply the similar state statute of limitations. In Kansas, K.S.A. 60-513(a)(4) provides for a two-year statute of limitations for an "injury to the rights of another." Therefore, the civil rights claims asserted by plaintiff are subject to a two-year statute of limitations period.
The question of whether the third amended complaint relates back to the original filing of the action for purposes of the action against Dailey individually is governed by Fed.R.Civ.P. 15(c) as it existed at the time the case was filed. The Rule states:
Whenever the claim or defense asserted in the amended pleading arose out of the conduct, transaction, or occurrence set forth or attempted to be set forth in the original pleading, the amendment relates back to the date of the original pleading. An amendment changing the party against whom a claim is asserted relates back if the foregoing provision is satisfied and, within the period provided by law for commencing the action against the party to be brought in by amendment that party (1) has received such notice of the institution of the action that the party will not be prejudiced in maintaining his defense on the merits, and (2) knew or should have known that, but for a mistake concerning the identity of the proper party, the action would have been brought against the party.
Under Rule 15(c) an amended complaint naming new parties will only relate back if each of the following three conditions are met: (1) the claims asserted in the amended pleading arise out of the conduct, transaction or occurrence set forth in the original pleading: (2) within the period provided by law for commencing the action against them, parties to be brought in have received such notice of the institution of the action that they will not be prejudiced in maintaining their defense on the merits; and (3) the new parties knew or should have known that, but for the mistake concerning the identity of the proper parties, the action would have been brought against them.
There is no question that the amended complaint relates to the same occurrence set forth in the previous complaints. Thus the primary focus is whether the second and third elements of Rule 15(c) have been complied with. After an examination of the facts of this case, the court finds that neither the second nor the third elements of Rule 15(c) have been complied with.
Plaintiff's theory of the case is that the City's policy of indifference in the supervision and discipline of officers proximately caused his injuries. Plaintiff additionally alleges that the police department conducted cursory reviews of excessive force complaints and that the City's policy of destroying records of excessive force complaints has fostered an atmosphere which results in an increased likelihood that excessive force will be used by officers.
It is apparent when reading the third amended complaint in conjunction with the plaintiff's response to Dailey's motion that plaintiff seeks to hold Dailey individually liable on plaintiff's civil rights claims on the theory that Dailey, in his supervisory position as chief of police, was responsible for and acquiesced in the City's policy of indifference in the supervision and discipline of officers, and that this policy proximately caused plaintiff's injuries. This theory may have been sufficient to bring a claim against Dailey individually if plaintiff had timely plead such a claim. See Hinshaw v. Doffer, 785 F.2d 1260 (5th Cir. 1986). However, plaintiff failed to properly join Dailey as a defendant until the filing of plaintiff's third amended complaint, which occurred after the limitations period had expired, and the Court finds that plaintiff's previous complaints do not meet the notice requirements of Rule 15(c) to cause *297 the third amended complaint to relate back. Therefore, plaintiff's complaint was not timely filed against Dailey in his individual capacity.
The Court finds that plaintiff's bringing an action against the City for a policy of indifference in the supervision and discipline of officers did not create sufficient notice to Dailey that plaintiff was also bringing an action against him in his individual capacity. The case against Dailey in his individual capacity differs from the case against the City. As proof of the City's policy of indifference, plaintiff's first and second amended complaints allege a series of incidents involving alleged use of excessive force by City police officers that extends from 1985 to the present. Dailey did not become chief of police until May of 1989. Plaintiff's alleged injury occurred in November of 1989. Therefore, the period from May to November 1989 is the only relevant time period to analyze Dailey's possible liability in an individual capacity for actions taken by Dailey which may have violated plaintiff's constitutional rights. Dailey was not chief of police during the majority of the period that plaintiff relies on to establish his policy of indifference in the supervision and discipline of officers against the City. The court finds that plaintiff's claim against the City as stated in plaintiff's first and second amended complaints did not give Dailey notice that Dailey would be held liable in his individual capacity when the majority of plaintiff's case against the City relies on incidents that occurred before Dailey became chief of police.
As to possible prejudice to defendants maintaining a defense on the merits, plaintiff's own inexcusable neglect is a proper consideration. Bruce v. Smith, 581 F. Supp. 902 (W.D.Va.1984). Throughout this case, plaintiff has followed a pattern of continually modifying his theories of liability and the identity of the named defendants. If plaintiff intended to bring an action against Dailey in his individual capacity, plaintiff should have made such claim in a timely fashion in his first or second amended complaints, including specific allegations of conduct by Dailey that caused injury to the plaintiff. Plaintiff failed to do this until the filing of his third amended complaint on April 9, 1992, which occurred only two months before the scheduled trial date on this matter and well after the statute of limitations period for bringing an action against Dailey had run. The court believes that even if Dailey had constructive notice of the action filed by plaintiff before the expiration of the limitations period, plaintiff's first and second amended complaints, which failed to allege any actions taken by Dailey in his individual capacity that contributed to plaintiff's alleged injuries, did not give Dailey sufficient notice of the action against him as required by Fed.R.Civ.P. 15(c). Therefore, the action against Dailey in his individual capacity is barred by the statute of limitations and Dailey is dismissed from this lawsuit in his individual capacity.
Although plaintiff is barred from bringing his claims against Dailey in his individual capacity, the court will allow plaintiff's civil rights claims against Dailey in his official capacity. A suit against a municipality and a suit against a municipal official acting in his or her official capacity are the same. Watson v. City of Kansas City, Kansas, 857 F.2d 690, 695 (10th Cir. 1988). Therefore, plaintiff's claims against the City and against Dailey in his official capacity are treated as one claim. This court has already determined in its Order dated May 15, 1992, that plaintiff's civil rights claims against the City will be allowed to proceed.
IT IS, THEREFORE, BY THE COURT ORDERED that the Motion to Dismiss/Summary Judgment on Behalf of Tom Dailey (Doc. # 117) will be granted in part and denied in part. All claims against Dailey in his individual capacity are dismissed. The civil rights claims against Dailey in his official capacity will proceed to trial.
IT IS SO ORDERED.
ON MOTION TO RECONSIDER
On June 15, 1992, the court held a hearing on the Motion to Reconsider (Doc. *298 # 148) filed by defendants City of Kansas City, Kansas, et al. For the reasons set forth in the record, the court granted the motion concerning the state law claims against defendants Porterfield and Ohler and denied the motion in all other respects.
On the same date, the court also held a hearing on the motions in limine filed by the parties. The court's rulings were set forth in full on the record and the court finds that as of the date of this order, those motions (Docs. # 139, 141, 142, 151, 152, 157, 162, 166 and 167) were all decided or are now moot.
IT IS SO ORDERED.
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Memorandum Opinion Withdrawn; Reinstated; and Order filed August 15,
2013.
In The
Fourteenth Court of Appeals
____________
NO. 14-12-01117-CV
____________
MORLOCK, L.L.C., Appellant
V.
NATIONSTAR MORTGAGE, LLC, Appellee
On Appeal from the 157th District Court
Harris County, Texas
Trial Court Cause No. 2012-13507
ORDER
On July 23, 2013, this court dismissed this appeal for want of prosecution
because no appellant’s brief had been filed. See Tex. R. App. P. 42.3(b). On
August 13, 2013, appellant filed its brief and advised this court that it had
attempted to file its brief in response to this court’s order on June 25, 2013, but its
e-filing was rejected.
On the court’s own motion, we order our opinion of July 23, 2013,
WITHDRAWN, and our judgment of the same date VACATED, and the appeal
REINSTATED. Appellee’s brief shall be due on or before September 16, 2013,
subject to any extensions of time that may be granted.
PER CURIAM
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188 F. Supp. 554 (1960)
ARMCO STEEL CORPORATION, Plaintiff,
v.
Robert C. WATSON, Commissioner of Patents, Defendant.
Civ. A. No. 104-59.
United States District Court District of Columbia.
November 14, 1960.
*555 Felix M. de Rosa, Washington, D. C., John W. Melville, Cincinnati, Ohio, and John C. Griffin, Middletown, Ohio, for plaintiff.
George C. Roeming, Washington, D. C., for defendant.
HOLTZOFF, District Judge.
This is an action against the Commissioner of Patents to direct that he issue to the plaintiff two trade-mark registrations. The applications in question are Numbers 16087, filed on September 21, 1956; and 16088, filed on the same day. The plaintiff is a manufacturer of stainless steel, among other things. The two trade-marks which it seeks to register are 17-4 PH, and 17-7 PH, and are intended to designate the particular brands of stainless steel products it manufactures and sells. The applications were denied by the Patent Office on the ground, in effect, that these marks are descriptive, because the letters PH mean "precipitation hardening", and the figures are claimed to signify the proportions of the constituents of the alloys. Further it was held by the Patent Office that, in effect, these marks identify the grade of the product rather than denote the particular goods of the plaintiff.
In applying the law to the facts of this case it is first necessary to recapitulate the applicable principles. A trade-mark is an arbitrary symbol, word, or phrase that is devised and used by a manufacturer or a dealer to designate his goods, and that is understood by the consuming public as denoting these particular *556 products and as distinguishing them from other commodities of a similar kind. A person may not, however, adopt for this purpose some word that has been previously known and that has a definite significance of its own. The manner in which this doctrine is sometimes phrased is that no one may appropriate a descriptive or a geographical term as a trademark. One may concoct and employ only an arbitrary conglomeration of letters, newly coined and previously nonexistent and unknown. The reason for this principle is that it would be intolerable to permit anyone to monopolize and exclude others from using existing words having well understood meanings and connotations. Words listed in the dictionary are in the public domain. Everyone is entitled to use them. If as a result of continuous use, the trade-mark in the course of time becomes associated in the mind of the consuming public with the owner's goods, he acquires a property right in it in connection and only in connection with his business.
The rule that descriptive or geographical terms may not be used as trade-marks is, however, subject to a limitation. If the mark by which the applicant for registration denotes his product has been used for such a long period of time and so comprehensively and exclusively that it has come to mean his product in the eyes of the public, so that whenever the words are used they call up in the minds of the consuming public the applicant's goods, the words, though originally descriptive, may still be employed as a trade-mark. At times it is said, perhaps inaccurately, that under these circumstances the term acquires a secondary meaning.
A leading case on this point is a decision of the Sixth Circuit, G. & C. Merriam Co. v. Saalfield, 198 F. 369, 373. In that case, Judge Denison, who in his day was known for his decisions in the patent and trade-mark field, summarizes these principles in a manner that makes it worthwhile to quote at some length from his opinion. He said:
"Primarily, it would seem that one might appropriate to himself for his goods any word or phrase that he chose; but this is not so, because the broader public right prevails, and one may not appropriate to his own exclusive use a word which already belongs to the public and so may be used by any one of the public. Hence comes the rule, first formulated in trade-mark cases, that there can be no exclusive appropriation of geographical words or words of quality. This is because such words are, or may be, aptly descriptive, and one may properly use for his own product any descriptive words, because such words are of public or common right. It soon developed that this latter rule, literally applied in all cases, would encourage commercial fraud, and that such universal application could not be tolerated by courts of equity; hence came the `secondary meaning' theory. There is nothing abstruse or complicated about this theory, however difficult its application may sometimes be. It contemplates that a word or phrase originally, and in that sense primarily, incapable of exclusive appropriation with reference to an article on the market, because geographically or otherwise descriptive, might nevertheless have been used so long and so exclusively by one producer with reference to his article that, in that trade and to that branch of the purchasing public, the word or phrase had come to mean that the article was his product; in other words, had come to be, to them, his trade-mark. So it was said that the word had come to have a secondary meaning, although this phrase, `secondary meaning' seems not happily chosen, because, in the limited field, this new meaning is primary rather than secondary; that is to say, it is, in that field, the natural meaning."
Applying these principles to the case at bar, we are confronted with the question of fact whether these marks *557 have acquired a secondary meaning. The evidence may be briefly summarized. It appears that these trade-marks have been used by the plaintiff since about 1949. They are stamped on sheet products and they are used in the form of a tag attached to bundles of bar products. All of the catalogs, brochures and other pamphlets and there are many of them issued by the plaintiff use the trademarks to designate these goods. All of its advertising matter does likewise. Over $500,000 has been spent by the plaintiff during the past ten years to advertise these products under these trade-marks. The sales of the company amounted to about $5,000,000 last year.
To show that the consuming public recognizes these trade-marks as such, a number of representatives of purchasers were called as witnesses, each of whom testified that these marks are known in the trade as denoting the plaintiff's goods, and are so associated in the minds of the consuming public. Specifications prepared by purchasers use these trademarks to signify the plaintiff's products. The plaintiff produced a series of orders received from customers, all of which referred to these trade-marks. The plaintiff has licensed a number of foundries to make castings from ingots purchased from the plaintiff, under the plaintiff's patents and under his trademarks. Editors of two principal trade journals in this field were called as witnesses, both of whom testified that these trade-marks are known in the trade as denoting the plaintiff's goods and are not associated in the minds of the public with any other product; and further that whenever anyone in the trade sees these trade-marks, he automatically assumes that they refer to the plaintiff's products. The Court finds as a fact that the plaintiff's trade-marks have acquired a secondary meaning and, therefore, are entitled to recognition and registration.
In arriving at a conclusion contrary to that reached by the Patent Office, the Court is not in fact overruling the decision of the Patent Office. The Patent Office did not have the benefit of the evidence introduced at this trial, and it may well be that it might have reached a different conclusion if this evidence had been available to it. In this respect review by this Court of decisions of the Patent Office is somewhat anomalous. In respect to actions of some other administrative agencies, this Court and the Court of Appeals are empowered to remit the case to the agency for consideration of the new evidence. This may not be done in cases relating to patents and trademarks. The Court wishes that the statute permitted it to do so.
Accordingly, the Court will render judgment in favor of the plaintiff as to both trade-marks. A transcript of this oral decision may be considered as the findings of fact and conclusions of law. The Court wishes to thank counsel for both sides for their very helpful and able presentation of this matter. You may submit a formal judgment.
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01-03-2023
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10-30-2013
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533 F.3d 11 (2008)
UNITED STATES of America, Appellee,
v.
Juan BORRERO-ACEVEDO, Defendant, Appellant.
No. 06-2655.
United States Court of Appeals, First Circuit.
Heard May 6, 2008.
Decided July 10, 2008.
*13 Johnny Rivera González for appellant.
Thomas F. Klumper, Assistant United States Attorney, with whom Rosa Emilia Rodríguez-Vélez, United States Attorney, and Nelson Pérez-Sosa, Assistant United States Attorney, were on brief for appellee.
Before LYNCH, Chief Judge, O'CONNOR,[*] Associate Justice, and TORRUELLA, Circuit Judge.
*12 LYNCH, Chief Judge.
We apply, for the first time, the Supreme Court's recent plain error decisions to a defendant's unpreserved claim of Rule 11(b)(1)(N) error as to a waiver of appeal clause at the change-of-plea hearing. See United States v. Dominguez Benitez, 542 U.S. 74, 124 S.Ct. 2333, 159 L.Ed.2d 157 (2004); United States v. Vonn, 535 U.S. 55, 122 S.Ct. 1043, 152 L.Ed.2d 90 (2002); cf. United States v. Teeter, 257 F.3d 14 (1st Cir.2001).
In doing so, we join the other circuits to have considered the question and hold that the plain error standard applies to unpreserved claims of violations of Fed.R.Crim.P. 11(b)(1)(N), albeit our understanding of the plain error rule seems to differ from some. See, e.g., United States v. Murdock, 398 F.3d 491, 496 (6th Cir.2005); United States v. Arellano-Gallegos, 387 F.3d 794, 797 (9th Cir.2004). The defendant must show, as part of his *14 demonstration that his substantial rights were affected, a reasonable probability that he would not have entered the plea had the error not been made.
We conclude that defendant has not met his burden, and the waiver of appeal clause at issue here is to be enforced. As a result, we do not reach defendant's underlying arguments that the plea is invalid for other reasons.
I.
On July 20, 2005, in a one-count indictment covering him and eleven co-defendants, Juan Borrero-Acevedo was charged with conspiracy to possess with intent to distribute five kilograms or more of cocaine and one kilogram or more of a mixture or substance containing a detectable amount of heroin, in violation of 21 U.S.C. §§ 841(a)(1), 841(b)(1)(A), 846. The indictment identified Borrero as one of the suppliers for the conspiracy's drug points. After initially pleading not guilty, Borrero filed a motion to change his plea, which was referred to a magistrate judge.
The change-of-plea hearing was conducted on June 9, 2006, by a magistrate judge. Borrero entered a guilty plea pursuant to Fed.R.Crim.P. 11(c)(1)(A) and (B) and an agreement with the government. The plea agreement stated, and the government testified at the hearing, that at trial the government would have presented evidence establishing that, from 1999 to the date of the indictment, the defendant participated in the distribution of cocaine and heroin in the La Via sector at Aguadilla, Puerto Rico. During this time, defendant was considered a supply source for heroin in La Via and was involved in at least one drug transaction there. He conspired to sell between 700 grams and one kilogram of heroin in furtherance of the conspiracy.
Borrero benefitted from the plea agreement he had reached with the government. Based on the charges in the indictment, Borrero was subject to a minimum ten-year sentence. Pursuant to the plea agreement, the government recommended an eighty-seven month prison term, which was the sentence the court imposed. The plea agreement contained a simple and easily understood waiver of appeal. This waiver stated: "The defendant hereby agrees that if this Honorable Court accepts this agreement and sentences him according to its terms and conditions, defendant waives and surrenders his right to appeal the judgment and sentence in this case."
In 1999, Congress added to Rule 11 what would become section (b)(1)(N), which requires the court both to inform the defendant of and to determine that the defendant understands "the terms of any plea-agreement provision waiving the right to appeal or to collaterally attack the sentence."[1] Fed.R.Crim.P. 11(b)(1)(N). The purpose of the amendment was to ensure that waivers of appellate rights are knowing and voluntary. See id. 11 advisory committee's note ("1999 Amendments"). When Rule 11(b)(1)(N) was added, it became subject to the terms of Fed. R.Crim.P. 11(h) that "[a] variance from the requirements of this rule is harmless error if it does not affect substantial rights." This language is similar to the harmless error rule in Fed.R.Crim.P. 52(a).
*15 It is undisputed here that the magistrate judge failed to comply with the requirements of Rule 11(b)(1)(N) during the colloquy with the defendant at the change-of-plea hearing. The prosecutor also failed to point out the waiver during the colloquy.[2]
Borrero could have attempted, based on this omission, to withdraw his guilty plea in the trial court before sentencing. See id. 11(d)(2)(B). Had he done so, he would have had to show only a "fair and just reason for withdrawal." Id.; see also, e.g., United States v. Newbert, 504 F.3d 180, 183-84 (1st Cir.2007) (affirming decision of trial court not to enforce waiver of rights where defendant had been permitted to withdraw his plea under Rule 11(d)(2)(B)). Having raised the omission for the first time on appeal, Borrero faces a much tougher standard.
Borrero argues that the magistrate judge's failure to ask him specifically about the waiver of appeal means that he is not bound by this waiver. Not so.[3] Borrero's primary argument is that it would be unjust to hold him to the waiver of appeal because this would block him from making his argument on the merits, which is that insufficient attention was paid to whether his plea was voluntary given that it was part of a package deal and he might have been coerced into pleading guilty by a co-defendant.
II.
Vonn resolved a circuit split[4] on the standard for evaluating Rule 11 errors. It held that a defendant who has not preserved his claim of Rule 11 error and wishes to be relieved of his guilty plea on appeal must satisfy the plain error standard of Fed.R.Crim.P. 52(b). Vonn, 535 U.S. at 58-59, 122 S.Ct. 1043.
In order to show plain error, a defendant must demonstrate that there is "(1) `error,' (2) that is `plain,' and (3) that `affect[s] substantial rights.' If all three conditions are met, an appellate court may then exercise its discretion to notice a forfeited error, but only if (4) the error `seriously affect[s] the fairness, integrity, or public reputation of judicial proceedings.'" Johnson v. United States, 520 U.S. 461, 467, 117 S.Ct. 1544, 137 L.Ed.2d 718 (1997) (quoting United States v. Olano, 507 U.S. 725, 732, 113 S.Ct. 1770, 123 L.Ed.2d 508 (1993)) (alterations in original).
As we noted in United States v. Mescual-Cruz, 387 F.3d 1 (1st Cir.2004), the decision in Vonn also clarified two areas as to application of the plain error rule to Rule 11 errors. First, the burden is on the defendant to make the required showings. Id. at 7. As Vonn noted, this placement of burdens is necessary to give *16 the defendant an incentive to bring an obvious Rule 11 error to the court's attention when it occurs. Vonn, 535 U.S. at 73, 122 S.Ct. 1043. Second, an appellate court may consider the whole record when considering the effect of the Rule 11 error on defendant's substantial rights, and not simply the record of the plea colloquy. Mescual-Cruz, 387 F.3d at 7.
Vonn, by its terms, is not restricted to particular types of Rule 11 errors. This court has applied Vonn's plain error rule to claimed Rule 11 errors regarding defendant's understanding of his possible sentencing exposure, United States v. Jimenez, 512 F.3d 1, 3 (1st Cir.2007); defendant's understanding of the charges and the factual basis for the plea, United States v. Smith, 511 F.3d 77, 85 (1st Cir. 2007); defendant's understanding of a package plea agreement, Mescual-Cruz, 387 F.3d at 7; and a lack of explanation of the interstate commerce elements of the crime to which defendant was pleading guilty, United States v. Cruz-Rivera, 357 F.3d 10, 12-13 (1st Cir.2004). As we read Vonn, it provides no basis for applying a standard other than plain error to a court's failure to address a waiver of appeal (or a waiver of the right to collaterally attack a sentence) as required by Rule 11(b)(1)(N). Indeed, other circuits have applied the plain error test articulated in Vonn to claims involving violations of Rule 11(b)(1)(N). See, e.g., United States v. Sura, 511 F.3d 654, 658 (7th Cir.2007); Murdock, 398 F.3d at 496; Arellano-Gallegos, 387 F.3d at 796; United States v. Edgar, 348 F.3d 867, 871 (10th Cir. 2003).
In Dominguez Benitez, the Supreme Court set the standards that a defendant complaining of an unpreserved Rule 11 error must meet on the third prong of the plain error test. In Dominguez Benitez, the judge had failed to warn the defendant, as required by Fed. R.Crim.P. 11(c)(3)(B), that he could not withdraw his plea if the court did not accept the government's sentencing recommendation, an obvious error. Dominguez Benitez, 542 U.S. at 78, 124 S.Ct. 2333. The question on which the Court granted review was the showing that must be made by a defendant alleging a violation of Rule 11 under the plain error standard. The Court held that a defendant is "obliged to show a reasonable probability that, but for the [Rule 11] error, he would not have entered the plea." Id. at 76, 124 S.Ct. 2333; see also Hill v. Lockhart, 474 U.S. 52, 59, 106 S.Ct. 366, 88 L.Ed.2d 203 (1985) (to demonstrate prejudice in an ineffective assistance of counsel claim, defendant must "show that there is a reasonable probability that, but for counsel's errors, he would not have pleaded guilty and would have insisted on going to trial"). It is not enough to ask whether the defendant understood the rights at issue when he entered his guilty plea; courts must consider the effect of an omitted warning on the defendant's decision to plead guilty. Dominguez Benitez, 542 U.S. at 84, 124 S.Ct. 2333. The Court also stated that the defendant's showing of prejudice should be causally tied to the precise Rule 11 error alleged. Id. at 85, 124 S.Ct. 2333. The Court did not suggest it would vary the rule depending on the type of Rule 11 violation alleged.
The "reasonable probability" standard for showing prejudice on plain error review of Rule 11 violations is less onerous than a requirement that a defendant prove by a preponderance of the evidence that but for the error, things would have been different. See id. at 83 n. 9, 124 S.Ct. 2333. One rationale for using the "reasonable probability" standard for Rule 11 plain error review, instead of a more burdensome standard, may be the recognition *17 that a defendant will "rarely, if ever be able to obtain relief for Rule 11 violations under [28 U.S.C.] § 2255." Id.; see also Vonn, 535 U.S. at 63-64, 122 S.Ct. 1043; United States v. Timmreck, 441 U.S. 780, 783-84, 99 S.Ct. 2085, 60 L.Ed.2d 634 (1979).
We have enforced the Dominguez Benitez rule before in considering unpreserved claims that the district court committed Rule 11 error in accepting a plea. See, e.g., United States v. Caraballo-Rodriguez, 480 F.3d 62, 76 (1st Cir.2007); United States v. Matos-Quiñones, 456 F.3d 14, 23 (1st Cir.2006); United States v. Delgado-Hernandez, 420 F.3d 16, 28 (1st Cir.2005).
III.
The question here is not whether the waiver of appeal clause in the plea agreement was initially valid, but whether defendant, who could have but did not raise the issue in the district court, where it could easily have been remedied, has met the plain error standard.
Applying Vonn, it is clear that the defendant has established the first two prongs of the plain error rule. The magistrate judge committed error in his failure to comply with the clear terms of Rule 11(b)(1)(N), and that error was both obvious and plain. Murdock, 398 F.3d at 497; Edgar, 348 F.3d at 871-72; accord Teeter, 257 F.3d at 24.
The third prong of the test asks whether defendant has shown that his substantial rights were affected. We start the analysis of the third prong with the plea agreement and the plea colloquy. Relevant considerations include, inter alia, the clarity of the plea agreement itself, defendant's signature on the agreement and his attestations, defendant's statements at the change-of-plea hearing, statements by counsel for both the defendant and the government at the hearing, and the nature of the questioning done by the judge at the hearing.
The waiver of appeal clause was clear and self-evident on its face. Borrero initialed every page of the plea agreement and signed his name at the bottom to indicate that he had "read the Plea Agreement and carefully reviewed every part of it with my attorney," and that he fully understood and was voluntarily agreeing to it.
At the plea colloquy, Borrero stated that he was thirty-eight years old, had an eleventh grade education, was mentally competent, and was suffering from no disability. Borrero also stated affirmatively that (a) he had the opportunity to review and discuss the plea agreement with his attorney; (b) he did not need additional time to discuss the agreement with his attorney; (c) he understood all the terms of the plea agreement and no one had made any promises to him that were not contained in the agreement; (d) he understood that the court could accept or reject the agreement, that sentencing was within the court's discretion, and what the statutory minimum and maximum penalties were; and (e) he had discussed with his attorney and understood that he was waiving various constitutional rights. Additionally, his attorney stated that Borrero was fully competent; that he had met with Borrero on multiple occasions to discuss the case and his defense; and that he had provided a sentence-by-sentence translation of the plea agreement into Spanish for Borrero.
As to Borrero's burden to show prejudice, we look to the "entire record, not to the plea proceedings alone." Dominguez Benitez, 542 U.S. at 80, 124 S.Ct. 2333; see also Caraballo-Rodriguez, 480 F.3d at 76. Here the government had a strong case and Borrero had compelling *18 reasons to make a deal and reduce his sentencing exposure. Borrero received the exact sentence recommended by the plea agreement. Borrero, with good reason, does not even attempt an argument that he would not have entered the plea had he been aware he was waiving his appellate rights. Indeed, it is hard to see how the omission of the appellate waiver warning from the bench had any effect on his decision to plead guilty. See Dominguez Benitez, 542 U.S. at 85, 124 S.Ct. 2333; Caraballo-Rodriguez, 480 F.3d at 76. Whether or not Borrero's decision to plead guilty was foolish (and it does not seem to be), the "point ... is not to second-guess a defendant's actual decision." Dominguez Benitez, 542 U.S. at 85, 124 S.Ct. 2333.
Some courts have held that where there is no discussion of an appellate waiver clause at the plea hearing and there is an absence of "any indication on the record that the defendant understood that he had a right to appeal and he was giving up that right," that will suffice to satisfy the third prong of the plain error test. Murdock, 398 F.3d at 497; see also Arellano-Gallegos, 387 F.3d at 797 (same). This view is, we think, inconsistent with both Vonn and Dominguez Benitez. It is defendant's burden to show that the waiver of appellate rights was deficient and that he would otherwise not have pled guilty. If the record contains no evidence in defendant's favor, his claim fails. See Dominguez Benitez, 542 U.S. at 82, 124 S.Ct. 2333; Vonn, 535 U.S. at 62-63, 122 S.Ct. 1043; cf. Edgar, 348 F.3d at 872-73.
There may well be cases where a defendant can show he did not understand that he was waiving his appellate rights, and that had he understood the appellate waiver clause, he would not have pled guilty. A panel in the Seventh Circuit, over a dissent, found that to be the situation in United States v. Sura, which also involved a Rule 11(b)(1)(N) error. But there were other indicia in that case not present here: the seventy-one-year-old defendant, who was undergoing mental health treatment, gave confused responses to the district court, and the appellate court said it doubted, on the record, whether he would have entered the plea "had he realized that he was losing his chance to challenge the district court's sentencing decision, which was based primarily on crimes unrelated to the crime of conviction and gave little weight to Sura's individual circumstances." Sura, 511 F.3d at 662. Nothing of the sort exists here. Borrero has not shown that he did not know or understand that he had waived his appellate rights or that he would not have pled guilty had he realized he was waiving his appellate rights.
We do not reach Borrero's underlying merits argument about this being a package plea. "[A]n inquiry into the merits is exactly what a waiver of appeal blocks." Id. at 668 (Easterbrook, J., dissenting). As the Supreme Court said in Dominguez Benitez, relief from a guilty plea "will be difficult to get, as it should be." Dominguez Benitez, 542 U.S. at 83 n. 9, 124 S.Ct. 2333.
There is one final point. In light of Vonn and Dominguez Benitez, one might question what is left of this circuit's former rule on enforceabililty of waiver of appeal clauses, announced in United States v. Teeter. In Teeter, we held that pre-sentence waivers of appellate rights were valid in theory, but given the attendant dangers, we would require such waivers to meet stringent conditions:
Our basic premise, therefore, is that if denying a right of appeal would work a miscarriage of justice, the appellate court, in its sound discretion, may refuse to honor the waiver. As a subset of this premise, we *19 think that the same flexibility ought to pertain when the district court plainly errs in sentencing.
Teeter, 257 F.3d at 25 (footnote omitted); see also Newbert, 504 F.3d at 189 (Boudin, J., concurring) (defendant may be relieved of a waiver of the right to appeal by district judge where enforcing the waiver would effect a miscarriage of justice).
More precisely, the question after Vonn and Dominguez Benitez is whether there is any discretionary power left in this court to decline to enforce a waiver of appeal clause where we conclude that enforcing the waiver would be a miscarriage of justice. The question may well be a hypothetical one; it is not clear such situations would exist where a defendant could not also meet all four prongs of the plain error rule.
In Timmreck, the Supreme Court left room for a defendant on collateral review to show that the Rule 11 proceeding either constituted a "complete miscarriage of justice" or was "inconsistent with the rudimentary demands of fair procedure." Timmreck, 441 U.S. at 783, 99 S.Ct. 2085 (quoting Hill v. United States, 368 U.S. 424, 427, 82 S.Ct. 468, 7 L.Ed.2d 417 (1962)) (internal quotation marks omitted). This suggests such exceptions might also be available on direct review. The Supreme Court has not directly addressed this question in the context of Rule 11 errors regarding appellate waiver clauses, and we do not address it here. If such a case exists in fact, and not in hypothetical, we will address the issue then.
We enforce the waiver of appeal and dismiss the appeal.
NOTES
[*] The Hon. Sandra Day O'Connor, Associate Justice (Ret.) of the Supreme Court of the United States, sitting by designation.
[1] The provision states:
Before the court accepts a plea of guilty or nolo contendere, the defendant may be placed under oath, and the court must address the defendant personally in open court. During this address, the court must inform the defendant of, and determine that the defendant understands, ... the terms of any plea-agreement provision waiving the right to appeal or to collaterally attack the sentence.
Fed.R.Crim.P. 11(b)(1)(N).
[2] As a matter of efficiency and securing finality, prosecutors would be well-advised to call such omissions to the attention of the court at change-of-plea hearings.
[3] In its initial brief, the United States took the position that because there had been no mention of the appellate waiver at the plea colloquy, the waiver could not be enforced. This court is not bound by a party's concessions. See United States v. Mescual-Cruz, 387 F.3d 1, 8 n. 2 (1st Cir.2004). The court directed the parties to file supplemental briefs on the waiver issue, calling their attention to the case law on point. Thereafter, the United States filed a supplemental brief reversing its position and arguing that defendant was bound by his appellate waiver because he had not met the third prong of the plain error test.
[4] Before Vonn, this court had held that unpreserved claims of Rule 11 error were subject to plain error review under Rule 52(b), and not harmless error review. See United States v. Gandia-Maysonet, 227 F.3d 1, 5 (1st Cir. 2000). Vonn agreed with the position. Vonn, 535 U.S. at 61, 62 n. 4, 122 S.Ct. 1043.
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643 F.Supp. 510 (1986)
Margaret MARGRAVE, Plaintiff,
v.
BRITISH AIRWAYS, Defendant.
No. 85 CIV. 4070 (PKL).
United States District Court, S.D. New York.
September 10, 1986.
Palmeri & Gaven (John J. Palmeri, of counsel), New York City, for plaintiff.
Condon & Forsyth (Stephen J. Fearon, of counsel), New York City, for defendant.
OPINION
LEISURE, District Judge:
Plaintiff Margaret Margrave ("Margrave") claims that she suffered a back injury as the result of an accident aboard a plane owned by defendant British Airways, and that the airline is therefore liable for her ensuing damages under the Warsaw Convention.[1] British Airways now moves to dismiss Margrave's claim for failure to state a cause of action, pursuant to Fed.R. Civ.P. 12(b)(6) or, in the alternative, for summary judgment under Fed.R.Civ.P. 56. Since matters outside the pleadings have been presented to and been considered by the court, defendant's motion will be treated as one for summary judgment. See Fed.R.Civ.P. 12(b).
STATEMENT OF FACTS
The facts in this case are largely undisputed. On August 29, 1984, plaintiff Margrave, *511 then seventy-five years old, was a passenger on British Airways Flight 176, scheduled to depart from Kennedy International Airport in New York and to arrive in Heathrow Airport in London. Plaintiff boarded the aircraft, a Boeing 747, at 8:30 P.M. The plane left the terminal gate at the scheduled time of departure, 9:00 P.M. At about that time, the British Airways Control Center in London received a telephone threat that a bomb was on board British Airways Flight 174, another London-bound flight which had left New York approximately two hours earlier. Flight 174 was diverted to Boston; passengers aboard Flight 176 were not notified of the bomb threat.
Subsequently, it was determined that eleven pieces of baggage from the endangered Flight 174 had been placed on Flight 176. As a result, Flight 176 returned to the terminal gate, and the baggage in question was removed. In total, the bomb threat and ensuing safety measures caused a delay of approximately two hours. At 11:04 P.M., while preparing for takeoff, a mechanical problem forced Flight 176 to return once again to the terminal. An additional three hours passed during the investigation of this mechanical problem and the transfer of passengers to a new plane. Flight 176 finally departed at 2:21 A.M. on August 30, 1984, five hours and twenty-one minutes after its scheduled departure time.
During most of the delay, plaintiff remained seated in a "very cramped position" aboard defendant's airplane, see Deposition of Margaret Margrave ("Margrave Dep.") at 50, with her seat belt fastened. Id. at 20. Although plaintiff acknowledges that she left the plane and was able to "move about" in the airport terminal during the period in which a substitute aircraft was being prepared for use, see id. at 17, she maintains that passengers were generally "not able to get up" during the delay and that "no one could even enjoy stretching." Id. at 20. Plaintiff alleges that she suffered back pain throughout this ordeal, id., although she admits that she never informed any British Airways personnel of her discomfort during the delay. Id. at 21. Moreover, plaintiff concedes that, at least while she was waiting in the terminal, nothing prevented her from leaving the airport, other than her understandable reluctance to avoid missing her trip. See id. at 42-43; see also Deposition of British Airways employee Jorgen Pedersen ("Pedersen Dep.") at 28 (any passenger on the flight who wanted to discontinue while the airplane was at the gate would be free to leave).
After Flight 176 had left Kennedy Airport, Margrave told a British Airways stewardess that her back was hurting her very much. See Margrave Dep. at 21. In response to this complaint, the stewardess assured plaintiff that "[w]e will be there soon." Id. Upon her arrival in England, plaintiff continued to suffer back pain and sought medical treatment. The physicians who treated Margrave in England took no X-rays or other preventative measures, although they did prescribe painkillers. Plaintiff's activities abroad entailed visiting three different cities in England and staying in university dormitories.
When plaintiff returned to New York on September 24, 1984, her doctors discovered compression fractures at the T-11, L-1, and L-2 levels of her spine. Because of these fractures, plaintiff was admitted to the New York Hospital for treatment on October 3, 1984, where she remained for over three weeks. Plaintiff alleges that she experienced severe back pain during the delay of Flight 176, and now claims that the delay itself was the cause of her injuries.
DISCUSSION OF LAW
A. Whether There Was an "Accident"
Article 17 of the Warsaw Convention makes air carriers absolutely liable for injuries sustained by a passenger "if the accident which caused the damage so sustained took place on board the aircraft or in the course of any of the operations of embarking or disembarking." 49 Stat. 3000; see Air France v. Saks, 470 U.S. 392, 105 S.Ct. 1338, 1339-40, 84 L.Ed.2d 289 (1985). In moving for summary judgment, *512 defendant argues that the plaintiff's injuries were not caused by an "accident" within the meaning of Article 17 of the Warsaw Convention.
In support of this argument, defendant cites plaintiff's own sworn statement that her back injury was attributable solely to the fact that she sat in a "very cramped position" for an extended period while on board defendant's plane. See Margrave Dep. at 50-51. As defendant points out, however, the mere act of sitting aboard an aircraft is a normal aspect of commercial flying. Scherer v. Pan Am, 54 A.D.2d 636, 636, 387 N.Y.S.2d 580, 581 (1st Dep't 1976). Moreover, courts have consistently held that normal travel procedures which produce an injury due to a passenger's peculiar internal condition are not "accidents" within the meaning of Article 17. See Air France v. Saks, 105 S.Ct. at 1340 (citing cases).
Thus, extended sitting in an airplane, even in an uncomfortable position, cannot properly be characterized as the sort of "accident" that triggers an airline's liability under the Warsaw Convention. Plaintiff's counsel argues, however, that even though extended sitting was the immediate cause of plaintiff's injury, the "accident" that set off the chain of events which eventually led to that injury was, in fact, the bomb threat to British Airways Flight 174.
Arguably, such a definition of the "accident" at issue distorts the factual record in this case beyond recognition for the transparent purpose of forcing plaintiff's injuries into the category of those compensable under the Warsaw Convention. Nonetheless, on a motion for summary judgment, the court is required to resolve all questionable inferences in favor of the party opposing the motion. See United States v. Matheson, 532 F.2d 809, 813 (2d Cir.), cert. denied, 429 U.S. 823, 97 S.Ct. 75, 50 L.Ed.2d 85 (1976). Accordingly, this Court accepts, for purposes of deciding defendant's motion, plaintiff's contention that the accident at issue in this case was the bomb threat to Flight 174.
In Air France v. Saks, the Supreme Court held that "liability under Article 17 of the Warsaw Convention arises only if a passenger's injury is caused by an unexpected or unusual event or happening external to the passenger." 105 S.Ct. at 1345. There is little doubt that a bomb threat constitutes "an unexpected or unusual event" under the Supreme Court's analysis in Saks. See Salerno v. Pan Am, 606 F.Supp. 656, 657 (S.D.N.Y.1985) (a bomb threat was held to be an accident).[2] Thus, plaintiff has satisfied her burden of showing that an "accident" occurred within the meaning of Article 17.
B. Whether the Accident "Caused" Plaintiff's Injury
The mere occurrence of an accident, however, does not lead to liability under the Warsaw Convention. Rather, the accident must have "caused the damage ... sustained." 49 Stat. 3000. In Saks, the Supreme Court stated that, "[a]ny injury is the product of a chain of causes, and we require only that the passenger be able to prove that some link in the chain was an unusual or unexpected event external to the passenger," 105 S.Ct. at 1346. The Supreme Court also noted that Article 17 "cannot be stretched to impose carrier liability for injuries that are not caused by accidents." Id.
Traditionally, courts have applied proximate cause analysis in determining an air carrier's liability under the Warsaw Convention. See, e.g., DeMarines v. KLM Royal Dutch Airlines, 580 F.2d 1193, 1196 (3d Cir.1978). Following the Supreme Court's decision in Saks, courts have continued to apply the test of proximate cause to questions of causation under the Warsaw Convention. See Fischer v. Northwest Airlines, 623 F.Supp. 1064, 1065 (N.D.Ill. *513 1985); Salce v. Aer Lingus, 84 Civ. 3444, slip op. at 8 (S.D.N.Y. May 1, 1985) (Stewart, J.) [Available on WESTLAW, DCTU database]; cf. Perera v. Varig, 775 F.2d 21, 23 (2d Cir.1985) (carrier's action did not proximately cause cargo loss).
In the instant case, plaintiff's claim for damages depends upon an attenuated chain of causation. Cf. Palsgraf v. Long Island R.R. Co., 248 N.Y. 339, 162 N.E. 99 (1929). According to plaintiff's scenario, the bomb threat to Flight 174 caused a delay in the departure of plaintiff's flight, since British Airways was forced, as a precautionary measure, to unload some suitcases from Flight 176. An independent cause, a mechanical difficulty, led to a further delay. Because of the resulting unloading of baggage and transfer of passengers to another airplane, plaintiff remained seated for a number of additional hours, during which period she suffered continual back pain. See Margrave Dep. at 20. Several weeks later, plaintiff's doctors discovered that Margrave was suffering from vertebral fractures which may or may not have been caused by her prolonged sitting aboard Flight 176. See discussion, infra, at 10-12.[3]
Questions of proximate cause are ordinarily treated as questions of fact. See, e.g., Fustok v. Conticommodity Services, 618 F.Supp. 1082, 1087 (S.D.N.Y.1985). Nonetheless, the question of proximate cause may be one for the court where there are active and efficient intervening causes, or where reasonable jurors could reach only one conclusion regarding the issue of proximate cause. See Kroon v. Beech Aircraft Corp., 628 F.2d 891, 893 (5th Cir. 1980).
When a party has moved for summary judgment, "[t]he judgment sought shall be rendered forthwith 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 a judgment as a matter of law." Fed.R.Civ.P. 56(c). Although proximate cause is clearly a material fact in this case, British Airways is entitled to summary judgment as a matter of law unless the non-moving party (Margrave) has made a "sufficient showing" that there is a "genuine issue" as to proximate cause. See Celotex Corp. v. Catrett, ___ U.S. ___ 106 S.Ct. 2548, 2553, 91 L.Ed.2d 265 (1986). A genuine issue of material fact exists only when reasonable jurors could disagree. See W. Schwarzer, Summary Judgment Under the Federal Rules: Defining Genuine Issues of Material Fact, 99 F.R.D. 465, 481 (1984). When reasonable persons could reach only one conclusion, no triable issue exists. Id.
Although courts are generally disposed to deny applications for summary judgment whenever a dispute concerning proximate cause has been identified, see, e.g., Canipe v. National Loss Control, 736 F.2d 1055, 1062 (5th Cir.1984), cert. denied, 469 U.S. 1191, 105 S.Ct. 965, 83 L.Ed.2d 969 (1985), the Second Circuit has recognized that questions of proximate cause are subject to summary judgment in appropriate cases. See Goldberg v. Mallinckrodt, 792 F.2d 305, 310 (2d Cir.1986) (affirming summary judgment on grounds that alleged fraud was not the proximate cause of plaintiff's injuries); see also Argus Inc. v. Eastman Kodak Co., 801 F.2d 38 (2d Cir.1986) (granting summary judgment based on plaintiffs' inability to prove a causal nexus between plaintiffs' economic injury and defendant's antitrust violation).
In this case, reasonable persons could conclude only that the purported "accident," the bomb threat to Flight 174, was in no sense the proximate cause of plaintiff's injuries. The record presented to the court sets forth an allegation of proximate cause that cannot withstand even cursory scrutiny. For example, although plaintiff *514 claims that the bomb threat was the proximate cause of her injuries because it caused her flight to be delayed more than five hours, it is undisputed that a subsequent, unrelated mechanical problem with the aircraft's engine was the direct cause of more than three hours of the delay. See Pedersen Dep. at 18-21.
Even more troubling is the possibility that plaintiff's injury was caused by a preexisting medical condition rather than by prolonged sitting aboard Flight 176. Ordinarily, on a motion for summary judgment, a trial court would not hesitate to resolve a conflict in medical evidence regarding the significance of a pre-existing condition in the non-movant's favor. In this case, however, plaintiff's own medical evidence casts significant doubt on the proposition that the five-hour delay of Flight 176 proximately caused plaintiff's injury.[4]
For example, the pre-litigation report prepared by plaintiff's own doctor takes note of Margrave's "history of verbal compression fractures." Report of Howard D. Balensweig, M.D. ("Balensweig Report") at 10; see also Report of Robert M. Richman, M.D. ("Richman Report") at 3 (patient's X-rays show multiple compression fractures as early as 1982). The same physician also acknowledges that "[i]t is not usual for a patient to develop compression fractures as a result of prolonged sitting." Balensweig Report at 13; see also Richman Report at 3 (stating opinion that "prolonged sitting in an aircraft is [not] a competent producing cause of vertebral fracture" even in an osteporotic patient such as Margrave).
Plaintiff arguably finds solace in her doctor's conclusion that her prolonged sitting "did play a part in the development of the compression injuries." Balensweig Report at 13. The doctor's support for this bare conclusion, however, is that the injuries and the sitting "occurred during [the same] period of time." Id. This statement utterly ignores the possibility that Margrave's injury might have been caused by some trauma she suffered during the weeks she stayed in England before returning home for full medical treatment.[5] In addition, Dr. Balensweig calls his own opinion into serious doubt by citing recent medical literature which clearly indicates that a woman plaintiff's age is more likely than not to suffer from abnormal vertebrae compression, and would quite possibly be suffering from compression fractures of "spontaneous origin." See id. at 14.[6]
To establish proximate cause, plaintiff must demonstrate a close relationship between cause and effect. This requirement is not satisfied by the mere assertion of a chain of causation without evidentiary support. In this case, plaintiff has not "come forward with admissible evidence showing any genuine issue to be tried." Barnett v. Howaldt, 757 F.2d 23, 26 (2d Cir.1985); see also Air France v. Saks, 105 S.Ct. at 1345 (trier of fact should decide *515 whether an accident caused the passenger's injury only when there is "contradictory evidence"). Accordingly, defendant is entitled to judgment as a matter of law.
Considerations of public policy and the history of the Warsaw Convention further support summary judgment disposition of this case. The Warsaw Convention, as amended by the Montreal Interim Agreement, 31 Fed.Reg. 7302, imposes a form of absolute liability on international air carriers for accidents which cause passenger injuries. Since liability under the Convention is nearly absolute, courts should be wary of reckless invocation of the Convention by eager but undeserving litigants. Cf. Saks v. Air France, 724 F.2d 1383, 1389-90 (9th Cir.1984) (Wallace, J., dissenting), rev'd, 470 U.S. 392, 105 S.Ct. 1338, 84 L.Ed.2d 289 (1985) (intent of the Warsaw Convention was not to make carriers insurers of their passengers' well-being, but to create incentives for safe and economical air travel). In this regard, the plaintiff's burden of proving that an accident proximately caused his or her injury provides a significant limit on the scope of a carrier's liability under the Convention. Air France v. Saks, 105 S.Ct. at 1346. When a plaintiff fails utterly to satisfy that burden of proof, there is no sound justification for submitting the case to a jury.
CONCLUSION
For the reasons stated herein, summary judgment is granted in favor of defendant British Airways, and plaintiff's claim is dismissed.
SO ORDERED.
NOTES
[1] Convention for the Unification of Certain Rules Relating to International Transportation by Air, Oct. 12, 1929, 49 Stat. 3000, T.S. No. 876 (1934), note following 49 U.S.C.App. § 1502. It is undisputed that the Warsaw Convention governs plaintiff's cause of action, whih was originally brought in state court, and then removed to this Court pursuant to 28 U.S.C. § 1441(d).
[2] In addition, since baggage from Flight 174 had been placed aboard plaintiff's Flight 176, the bomb threat was arguably an accident "on board the aircraft," as required by Article 17. See 49 Stat. 3000.
[3] The fragile chain of causation upon which plaintiff's theory of liability relies becomes stretched to the breaking point when one considers that plaintiff might have abated her discomfort at any time during the five-hour delay simply by leaving the plane or, at a minimum, complaining to British Airways personnel. See discussion, supra, at 4.
[4] Plaintiff has attempted to satisfy her obligation "to go beyond the pleadings," see Celotex, 106 S.Ct. at 2553, by submitting three documents relating to her medical condition: a copy of a 1984 hospital report; a copy of a report prepared for plaintiff's counsel by Howard D. Balensweig, M.D.; and a copy of a report prepared for defendant's counsel by Robert M. Richman, M.D. None of these documents have been sworn to or certified in lieu of oath, thus raising a significant question as to whether this Court should even be considering such "evidence" on a motion for summary judgment. See Fed.R.Civ.P. 56(c); 56(e).
[5] It is undisputed that upon plaintiff's arrival in England, she was treated by physicians who dispensed painkillers, but failed to take X-Rays or detect plaintiff's compression fractures. See Margrave Dep. at 24, 30. In the absence of proper medical treatment, plaintiff's activities during the trip may have aggravated or caused her injuries. See id. at 26 (plaintiff's testimony that she "just suffered" during her trip in England).
[6] Even assuming that plaintiff's doctor's opinion as to causation is correct, all he is saying is that Margrave suffered a minor trauma on board Flight 176 which, in combination with plaintiff's "underlying osteoporosis," caused her present injuries. See id. at 13. That set of facts simply does not give rise to liability under the Warsaw Convention. See Scherer, 387 N.Y.S.2d at 581 (sitting in an airline seat during normal flight which aggravated passenger's thrombophlebitis was not an "accident" within the meaning of Article 17).
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643 F.Supp. 779 (1986)
Theodore TEVELSON
v.
LIFE AND HEALTH INSURANCE COMPANY OF AMERICA.
Civ. A. No. 83-11.
United States District Court, E.D. Pennsylvania.
August 20, 1986.
*780 Kenneth L. Oliver, Deborah C. Applebaum, Obermayer, Rebmann, Maxwell & Hippel, Philadelphia, Pa., for plaintiff.
Alan B. Epstein, Kirschner, Walters & Willig, Philadelphia, Pa., for defendant.
MEMORANDUM AND ORDER
VanARTSDALEN, Senior District Judge.
Plaintiff Theodore Tevelson brought this action against Life and Health Insurance Company of America (Life and Health) pursuant to the Age Discrimination in Employment Act (ADEA), 29 U.S.C. §§ 621-634. The action was tried before a jury in January 1986, and the jury found through special interrogatories that defendant willfully discriminated on the basis of age in discharging plaintiff. The jury awarded back pay amounting to $23,513 and front pay amounting to $177.00. On the basis of the finding of willfulness, the court entered a verdict in favor of the plaintiff in the amount of $47,203.00, representing front pay plus double back pay.
*781 Defendant filed timely motions for judgment notwithstanding the verdict, for a new trial and to amend the verdict. After a long delay caused by defendant's failure to file a timely brief in support of its motions upon receipt of the transcript, briefing is now complete on defendant's post trial motions. Plaintiff has filed a motion to strike or dismiss defendant's post trial motions on the basis of defendant's failure to file a timely brief in support of those motions.
I. Plaintiff's Motion to Strike
The pattern of dilatoriness in this action dating from its inception has been appalling. Defendant failed to provide timely responses to discovery, failed to file its pretrial memorandum on time and failed to file an answer to the plaintiff's complaint for almost two years. See Memorandum and Order, May 3, 1985 (Docket Entry No. 24). On May 3, 1985 the court ordered counsel for defendant to pay plaintiff $500 sanctions in connection with the failure to file an answer to the complaint.
Despite the astounding pattern of dilatoriness, striking defendant's post trial motions is not the appropriate sanction for defendant's failure to timely file its brief. The Third Circuit Court of Appeals has repeatedly stated that sanctions denying the opportunity for cases to be resolved on their merits are to be avoided where possible. See, e.g., Poulis v. State Farm Fire & Casualty Co., 747 F.2d 863, 867 (3d Cir. 1984). The "preferable sanction for [a] pattern of attorney delay ... [is] to impose the excess costs caused by such conduct directly upon the attorney, with an order that such costs are not to be passed on to the client, directly or indirectly." Id. at 869.
Defendant retained new counsel for trial of this matter after the court awarded sanctions in connection with the failure to file an answer. Current counsel cannot be charged with responsibility for past abuses in this case, but given his knowledge of the history of this case, he should have been particularly careful to avoid the situation that has arisen.
The trial transcripts were completed and filed on March 18, 1986. The court ordered defendant to file its brief on the post trial motions by April 25, 1986. The court signed and approved a stipulation extending the date for filing of defendant's brief to May 2, 1986. No further extensions have been granted.
On May 28, 1986, plaintiff's counsel sent defense counsel a letter noting that the time to file had passed and demanding payment on the judgment. Defense counsel responded to that letter on June 2, 1986 by letter stating in part:
Last week I sustained rather severe burn injuries as a result of a fire and explosion at my home. Quite to my surprise, when I returned to my office today, I found your letter of May 28, 1986 stating you had not received the supporting Memorandum to my earlier filed Motion for New Trial and Judgment Notwithstanding the Verdict. This document, which had been prepared and forwarded to you and the Court approximately one month ago, evidently has not reached either you, the Clerk or the Judge, and accordingly, I am taking immediate steps to have the Memorandum copied, collated and forwarded to you immediately.
The memorandum was not received by plaintiff's counsel or by the court immediately following this letter. Over one month later, on July 15, 1986, plaintiff filed his motion to strike or dismiss defendant's post trial motions. On July 25, 1986, defendant filed a response to plaintiff's motion to strike along with the brief on its post trial motions. Defense counsel explained the delay as follows: "The inadvertent actions of defendant's counsel in not submitting the previously completed brief were engendered by counsel for defendant's absence from his office on a full-time basis due to serious injuries received in an accident, including second and third degree burns of his face and arms."
The court sympathizes with defendant's counsel and regrets the serious misfortune *782 that has befallen him. Nevertheless, defendant's counsel is not without fault in the delay. If defendant's counsel was in a position to write the June 2, 1986 letter explaining his problems and refusing to pay the judgment, then he was also in a position to either make sure personally that the documents that were misplaced were filed immediately or delegate that responsibility to another responsible professional in his office. As a direct result of defense counsel's failure to timely file his brief, the proceeding has been delayed and plaintiff has incurred the extra expense of filing his motion to strike and his memorandum in further support of that motion.
In accordance with the dictates of Poulis, it is inappropriate to strike defendant's post trial motions in this situation, but defendant's counsel should bear the excess costs caused by his conduct. Defendant's post trial motions will be considered on their merits.
II. Defendant's Post Trial Motions
Defendant has moved for judgment notwithstanding the verdict (n.o.v.), Fed.R. Civ.P. 50(b), and for a new trial, Fed.R. Civ.P. 59. In ruling on a motion for a judgment notwithstanding the verdict the court must test the body of the evidence for its overwhelming effect, and the court may only grant such a motion if the evidence permits no finding other than one mandating judgment in favor of the moving party. See Massarsky v. General Motors Corp., 706 F.2d 111, 119 (3d Cir.1983). If there is sufficient evidence to support a contrary finding, then the motion must be denied. Id.; see also Thomas v. E.J. Korvette, Inc., 476 F.2d 471, 474 (3d Cir.1973). A motion for a new trial may be granted at the discretion of the court if the verdict is against the weight of the evidence, damages assessed are excessive or inadequate, there are substantial errors of law in admission or rejection of evidence or instructions to the jury, or if a new trial is required for some other reason to prevent injustice. See Montgomery Ward & Co. v. Duncan, 311 U.S. 243, 251, 61 S.Ct. 189, 194, 85 L.Ed. 147 (1940); E.J. Stewart, Inc. v. Aitken Products, Inc., 607 F.Supp. 883, 893 (E.D.Pa.1985); 11 C. Wright & A. Miller, Federal Practice & Procedure § 2805. The Third Circuit recently reaffirmed the following description of the trial judge's role in ruling on motions for judgment n.o.v. and for a new trial:
The one motion [judgment n.o.v.] requires a judge to determine whether the evidence and justifiable inference most favorable to the prevailing party afford any rational basis for the verdict. The other [new trial] requires that the trial judge evaluate all significant evidence, deciding in the exercise of his own best judgment whether the jury has so disregarded the clear weight of the credible evidence that a new trial is necessary to prevent injustice.
Berndt v. Kaiser Aluminum & Chemical Sales, Inc., 789 F.2d 253, 258 (3d Cir.1986) (quoting Zegan v. Central Railroad, 266 F.2d 101 (3d Cir.1959)).
In support of both its motion for judgment notwithstanding the verdict and its motion for a new trial defendant contends that: (1) plaintiff was not an "employee" covered by ADEA, but rather was an independent contractor; (2) plaintiff did not prove that age was a determinative factor in his discharge; (3) the evidence does not support a finding of willfulness; and (4) the evidence establishes conclusively that plaintiff failed to exercise reasonable diligence to mitigate his damages. Specifically in support of its motion for a new trial, defendant contends that the verdict was against the weight of the evidence and that the court erred in its evidentiary rulings and/or jury instructions with respect to the employment status of the plaintiff, with respect to the mitigation requirement and with respect to willfulness of an ADEA violation.
In 1968 Theodore Tevelson began working as a debit insurance salesman for Life and Health. Fourteen years later, in July 1982, Tevelson's employment was terminated by Life and Health. Tevelson was 65 years old when he was discharged, and he *783 was replaced by someone who was 47 years old.
The debit insurance sold by Tevelson for Life and Health was life and home fire insurance, the premiums for which were collected by Tevelson on a weekly, bi-weekly or monthly basis. The two major aspects of Tevelson's duties were to collect the premiums due on existing policies and to solicit sales of new policies in his assigned neighborhood. His performance of his duties was satisfactory to Life and Health at least up to some point in 1981. Tevelson received Life and Health's award as outstanding salesman for the year of 1979.
In 1979, Joseph Kull was promoted from his position as a debit insurance sales agent to manager of all Life and Health debit agents. Kull became Tevelson's supervisor. Kull testified at trial that he was disappointed with Tevelson's performance in 1981 and 1982 because Tevelson failed to collect premiums at the 95% collection rate desired by the company, because he sold a significant number of new policies over one period and then failed to sell sufficient new policies and allowed a number of policies to lapse over another period, and because he refused to cooperate with Kull and Kull's assistant, Raymond Herman, in their efforts to have Herman assist Tevelson's selling new policies.
There is no doubt that plaintiff presented at trial a sufficient prima facie case of age discrimination. He was in the protected age group; there was evidence that he was qualified for the position; he was discharged from the position; and a younger person assumed his duties. Cf. Smithers v. Bailar, 629 F.2d 892, 894-95 (3d Cir.1980); Madreperla v. Willard Co., 606 F.Supp. 874, 876 (E.D.Pa.1985). Moreover, defendant clearly presented evidence to suggest legitimate, nondiscriminatory reasons for the termination. The issue faced by the jury and the issue the court must consider in ruling on these post trial motions is the ultimate issue whether age was a determinative factor in Life and Health's decision to terminate Tevelson's employment. Cf. Berndt, 789 F.2d at 257 ("once the district court denied [defendant's] motion for directed verdict and ordered that the case proceed, the focus of inquiry shifted to deciding the ultimate discrimination issue").
A review of all of the evidence presented confirms that there was ample evidence to support the jury's findings of discrimination and willful violation of the ADEA and that the jury's verdict was not against the clear weight of the credible evidence. Defendant has not established that it is entitled to judgment notwithstanding the verdict or to a new trial.
Plaintiff's troubles with his supervisors began in 1981, the year in which he turned 65. Plaintiff testified that Kull, on one occasion in April 1982, called him into his office, asked him how old he was, and then told him to sign up for Social Security because he was through at Life and Health. There was evidence that the company was concerned about the high rates being paid for health benefits for older workers.
There was evidence impeaching defendant's proffered reasons for discharging plaintiff. An analysis of defendant's records effectively refuted at least some of defendant's characterizations of plaintiff's poor performance. A comparison of plaintiff's performance statistics with those of other agents revealed that plaintiff's performance ranked relatively high among the agents even for the 1981-1982 period. There was also evidence of poor performers who were younger than Tevelson and were not discharged.
There was evidence that Life and Health made employment decisions on the basis of an employee's "potential," and that this basis for retention or discharge inherently discriminated on the basis of age. There was evidence that Life and Health's policy of demanding or expecting consistent growth in the number of policies and the amount in premiums handled by each agent was discriminatory because it was more difficult for older workers who had accumulated *784 a large amount of business preventing the lapsing of policies while also soliciting new business.
Kull testified that, prior to the commencement of this lawsuit, he had no knowledge of the ADEA. This testimony would support several conflicting inferences. One who has no knowledge of the ADEA might be more likely to discriminate on the basis of age because he or she does not know that such discrimination is against the law. One who has no knowledge of the ADEA might be less likely to commit a willful violation of the Act on the basis that he or she knew that his or her conduct was prohibited by the Act, but more likely to commit a willful violation on the basis that he or she showed reckless disregard for the matter whether his or her conduct was prohibited by the Act. Finally, a jury could believe that a person professing no knowledge of the Act is simply lying, and such testimony could support an inference of willful violation.
In sum, weighing all of the evidence, including that discussed above, there is ample evidence to support the jury's verdict finding age discrimination and a willful violation of the ADEA. To the extent defendant seeks a new trial or judgment notwithstanding the verdict on the basis that discrimination was not proved and that there was insufficient evidence of willfulness, defendant's motions must be denied. This was a classic example of a case with evidence adequate to support a verdict for either plaintiff or defendant. The jury weighed the evidence and reached its verdict, and there is no basis for overturning its decision.
Defendant contends that plaintiff cannot recover for a violation the ADEA because he was not an "employee" protected by the Act. Defendant admitted in its answer to the complaint, in deposition testimony read into the record at trial and in its pretrial memorandum read into the record at trial that plaintiff was employed by defendant. These admissions preclude defendant from asserting now that plaintiff was an independent contractor and not an employee.
Defendant also contends that the court should have held that defendant could not recover damages for any period after his last contact with another insurance company about employment because defendant failed to mitigate damages after that point. The issue of mitigation was appropriately submitted to the jury. Certainly plaintiff's efforts to mitigate damages go beyond his contact with other insurance companies. He increased his hours on his second job at the Philadelphia Inquirer, and did so to such a successful degree that the jury awarded only $177 in front pay. The jury appropriately determined the amount of damages taking into account plaintiff's duty to mitigate and his obtaining alternate employment.
Finally, the defendant contends that the court erred in its instructions to the jury regarding willfulness of an ADEA violation. The instruction to the jury followed the precise language approved by the Supreme Court in Trans World Airlines, Inc. v. Thurston, 469 U.S. 111, 105 S.Ct. 613, 83 L.Ed.2d 523 (1985). The defendant did not object to that instruction. Defendant's objection at this point is barred under Federal Rule of Civil Procedure 51. Regardless of that procedural bar, it is clear there was no error.
For the reasons stated above, all of defendant's post trial motions will be denied. In addition, defendant's counsel will be required to pay plaintiff's expenses incurred with respect to his motion to strike or dismiss defendant's post trial motions.
ORDER
Upon consideration of defendant's motions for judgment notwithstanding the verdict, for a new trial and/or to amend the verdict and plaintiff's motion to strike or dismiss defendant's post trial motions and all supporting and opposing memoranda of law, for the reasons stated in the accompanying memorandum,
It is Ordered that:
*785 (1) defendant's motion for judgment notwithstanding the verdict is denied;
(2) defendant's motion for a new trial is denied;
(3) defendant's motion to amend the verdict is denied; and
(4) defendant's counsel shall pay plaintiff three hundred and fifty dollars ($350) in expenses incurred with respect to plaintiff's motion to strike or dismiss defendant's post trial motions, provided that either party may, within five (5) days of the date of this order, file a request for a hearing to determine the amount of reasonable expenses in the event that it believes the figure of $350 is inappropriate.
It is further Ordered that if no request for a hearing is filed, the $350 shall be paid within twenty (20) days of the date of this order. It is further Ordered that defendant's counsel shall not directly or indirectly pass the cost of this sanction on to his client.
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490 F.Supp. 517 (1980)
Leonard COHEN, Individually and d/b/a Riegel Textile Co., a single proprietorship, Plaintiff,
v.
Marilyn HARTMAN; Harry Hartman; Balart, Inc., N.V., Defendants.
No. 80-6135-CIV-JAG.
United States District Court, S. D. Florida, N. D.
May 13, 1980.
Joseph S. Paglino, Miami, Fla., for plaintiff.
Jerry B. Schreiber, Miami, Fla., for defendants.
ORDER OF DISMISSAL
GONZALEZ, District Judge.
THIS CAUSE is before the Court sua sponte upon plaintiff's filing of an Amended Complaint.[1] In his Amended Complaint plaintiff, a Canadian citizen residing in Florida, alleges that his employee, defendant, Harry Hartman, a Canadian citizen also residing in Florida, "did embezzle monies from plaintiff in excess of $450,000.00." The funds were allegedly used inter alia to purchase and improve Florida realty. This property was subsequently conveyed to the co-defendant, Balart, Inc., N.V., a Netherlands' Antilles corporation. The co-defendant, Marilyn Hartman, is likewise a Canadian citizen residing in Florida.
*518 In sum none of the parties to this action is a citizen of the United States.
Plaintiff asserts Federal jurisdiction under 28 U.S.C. § 1350 which provides:
The district courts shall have original jurisdiction of any civil action by an alien for a tort only, committed in violation of the law of nations or a treaty of the United States.
The issue before the court is whether such jurisdiction indeed exists here.
In his Amended Complaint plaintiff does not refer to nor does he rely on any treaty of the United States which may have been violated by the defendants' allegedly tortious conduct. Instead plaintiff alleges that the defendants' conduct constitutes a tort committed in violation of the "law of nations".
Although § 1350 finds its origin in Section 9 of the Judiciary Act of 1789, 1 Stat. 73, 77 (1789) it has rarely been relied on, and it has been termed "a kind of legal Lohengrin . . . no one seems to know whence it came." ITT v. Vencap, Ltd., 519 F.2d 1001, 1015 (2d Cir. 1975).
There has been little judicial interpretation of what constitutes the "law of nations" nor is there a universally accepted characterization. Dreyfus v. Von Finck, 534 F.2d 24, 30 (2d Cir.), cert. denied, 429 U.S. 835, 97 S.Ct. 102, 50 L.Ed.2d 101 (1976); Khedivial Line, S.A.E. v. Seafarers' International Union, 278 F.2d 49, 52 (2d Cir. 1960) (per curiam); Valanga v. Metropolitan Life Ins. Co., 259 F.Supp. 324, 327 (E.D. Pa.1963). Of paramount importance in any discussion of § 1350 is that the phrase "law of nations" be narrowly construed to comport with the parameters of Article III. ITT v. Vencap, Ltd., 519 F.2d at 1015.
In Lopes v. Reederei Richard Schroder, 225 F.Supp. 292 (E.D.Pa.1963) the court provided one of the most comprehensive discussions of the "law of nations."
What the law of nations is `may be ascertained by consulting the works of jurists, writing professedly on public laws; or by the general usage and practice of nations; or by judicial decisions recognizing and enforcing that law.' The court's examination . . . must consider the words used as part of an `organic growth.' Id. at 295-96, citations omitted.
In his Commentaries, Kent defined the "law of nations" as, "that code of public instruction which defines the rights and prescribes the duties of nations in their intercourse with each other." 1 Kent Commentaries, 1 (1st ed. 1826). von Redlich wrote that "[i]t is termed the Law of Nationsor International Lawbecause it is relative to States or Political Societies and not necessarily to individuals, although citizens or subjects of the earth are greatly affected by it." von Redlich, The Law of Nations 5 (2d ed. 1937). See also Brierly, The Law of Nations 1 (6th ed. 1963).
What has evolved is the understanding that a violation of the "law of nations" arises only when there has been "a violation by one or more individuals of those standards, rules or customs (a) affecting the relationship between states or between an individual and a foreign state, and (b) used by those states for their common good and/or in dealings inter se." Lopes, 225 F.Supp. at 297.
It appears that the only reported decision sustaining the court's jurisdiction under § 1350 for a violation of the "law of nations" is Abdul-Rhaman Omar Adra v. Clift, 195 F.Supp. 857 (D.Md.1961).[2] There a father *519 sought to regain custody of his minor daughter from his former wife. Husband was a national of Lebanon, wife was a national of Iraq, and their child was at all times a national of Lebanon. Husband had previously been granted custody of the child by a Lebanese court. After refusing to deliver the child to the father, the mother concealed the child's name and true nationality, and secured admission into the United States under an Iraqi passport. The court held these actions wrongful not only against the United States, 8 U.S.C. § 1182, 18 U.S.C. § 1546, but also against the Lebanese Republic which was entitled to control the issuance of passports to its nationals. Id. at 864-65, citations omitted.
Since the wife's acts were tortious, Prosser on Torts, 2d ed., sec. 103, pp. 692-693; Restatement, Torts, sec. 700., and a violation caused a direct and special injury to the husband, the court held it had jurisdiction to entertain the husband's complaint. 195 F.Supp. at 865. (The case was eventually dismissed on other grounds.)
Later cases attempting to meet the jurisdictional prerequisite of a violation of the "law of nations" have been unsuccessful. For example, the "law of nations" is not violated where: the claim is based on the doctrine of unseaworthiness, Lopes v. Reederei Richard Schroder, 225 F.Supp. 292 (E.D.Pa.1963); a negligence claim is brought under the Jones Act, 46 U.S.C. § 688, Damaskinos v. Societa Navigacion Interamericana S.A., Pan., 255 F.Supp. 919 (S.D.N.Y.1966); or a Russian beneficiary seeks to recover proceeds under a life insurance policy, Valanga v. Metropolitan Life Insurance Co., 259 F.Supp. 324 (E.D.Pa. 1966).
Likewise, an action for wrongful death and for baggage loss against an international air carrier is not an action alleging a violation of the "law of nations." Benjamins v. British European Airways, 572 F.2d 913 (2d Cir. 1978), cert. denied, 439 U.S. 1114 (1979); nor is the "law of nations" violated where a Swiss citizen brings an action against a West German citizen for alleged wrongful confiscation of property in Nazi Germany in 1938. Dreyfus v. Von Finck, 534 F.2d 24 (2d Cir. 1976). In ITT v. Vencap, Ltd., 519 F.2d at 1001, the court held that § 1350 does not provide jurisdiction in an action for fraud, conversion, and corporate waste; and Abiodun v. Martin Oil Service, Inc., 475 F.2d 142 (7th Cir.), cert. denied, 414 U.S. 866 (1973) held that allegations of a fraudulent breach of contract do not provide a basis for claiming a violation of the law of nations.
In the instant case plaintiff alleges that defendant, Harry Hartman, converted or embezzled funds and breached his fiduciary duty. Plaintiff attempts to allege jurisdiction pursuant to § 1350 based upon the recognition of both the United States and Canada of the torts of conversion and breach of fiduciary duty. Such allegations fail to meet the jurisdictional prerequisite of "a tort . . . [committed in] violation of the law of nations" since the acts alleged are not so flagrant as to violate "the rules of conduct which govern the affairs of this nation, acting in its national capacity, in its relationships with any other nation." Valanga, 259 F.Supp. at 328.
Judge Friendly's pronouncement in Vencap is dispositive of the issue herein.
[This court] cannot subscribe to plaintiffs' view that the Eighth Commandment `Thou shalt not steal' is part of the law of nations. While every civilized nation doubtless has this as part of its legal system, a violation of the law of nations arises only when there has been `a violation by one or more individuals of those standards, rules or customs (a) affecting the relationship between states or between *520 an individual and a foreign state, and (b) used by those states for their common good and/or in dealings inter se.' 519 F.2d at 1015, quoting Lopes, 225 F.Supp. at 297.
It is accordingly,
ORDERED AND ADJUDGED as follows:
1. That Plaintiff's Amended Complaint be and the same is hereby DISMISSED without prejudice for lack of subject matter jurisdiction under 28 U.S.C. § 1350.
2. That the Lis Pendens filed in this cause be and the same is hereby dissolved, cancelled, set aside, and held for naught by virtue of the dismissal of the Amended Complaint.
NOTES
[1] The original complaint alleged that defendants, Marilyn Hartman and Harry Hartman were residents of Florida. Inasmuch as the basis for jurisdiction was diversity of citizenship, 28 U.S.C. § 1332, the complaint was dismissed with leave to amend. See Wright, Miller & Cooper, Federal Practice and Procedure § 3611 (1975).
[2] Jurisdiction under a predecessor to § 1350 was sustained in Bolchos v. Darrell, 3 Fed.Cas. No. 1,607, p. 810 (D.S.C.1795) where a treaty was violated.
It has also been suggested that under the predecessor statute, as well as a statute providing for jurisdiction over civil actions involving controversies between the United States and foreign nations, Mexican citizens could seek redress for damages incurred when an American irrigation company altered the channel of the Rio Grande River. 26 Op.Atty.Gen. 250 (1907).
It has also been implied that § 1350 would provide the jurisdictional basis for the unjustified seizure of an alien's property in a foreign country by an officer of the United States, Khedivial Line, S.A.E. v. Seafarers' International Union, 278 F.2d 49, 52 (2d Cir. 1960) (per curiam), citing O'Reilly De Camara v. Brooke, 209 U.S. 45, 28 S.Ct. 439, 52 L.Ed. 676 (1908); and for the failure to accord comity to the ships of a foreign nation. See Khedivial Line, 278 F.2d at 52.
More recently, in Nguyen Da Yen v. Kissinger, 528 F.2d 1194, 1201 n. 13 (9th Cir. 1975) the court said that § 1350 may be applicable to an action alleging the illegal seizure and removal of an alien from a foreign country against his will.
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784 F.Supp. 23 (1992)
UNITED STATES of America,
v.
Michael BLOOME, a/k/a "Smurf," Joseph DeFigueroa, a/k/a "Mayo," Philip DeAngelo, Salvatore Fusco, a/k/a "Sally," Thomas Roberto, Richard Santiago, Frank Smith, a/k/a "Frankie," Angel Soto, Peter Spoto, Anthony Vega, Anthony Zappola, George Zappola, a/k/a "Little George," and Vincent Zappola, a/k/a "Vinnie," Defendants.
No. CR-90-0504.
United States District Court, E.D. New York.
February 7, 1992.
*24 *25 Jack Wenik, Asst. U.S. Atty., Brooklyn, N.Y., for U.S.
Christopher Nalley, Staten Island, N.Y., for Michael Bloome.
Martin Adelman, New York City, for Salvatore Fusco.
Paul A. Lemole, Staten Island, N.Y., for Vincent Zappola.
MEMORANDUM AND ORDER
GLASSER, District Judge:
Defendants Michael Bloome, Salvatore Fusco, and Vincent Zappola were convicted at trial on the first thirteen counts of a fourteen-count superseding indictment. After the jury verdict, each of these three defendants waived his right to trial by jury on the fourteenth count (for forfeiture under 18 U.S.C. § 1963(a)(3) of the proceeds of the racketeering activity of which the defendants were convicted in counts one and two). This court then found that the government had established beyond a reasonable doubt that the defendants were jointly and severally liable for $1,740,000.00 to be forfeited to the United States under count fourteen. United States v. Bloome, 777 F.Supp. 208 (E.D.N.Y.1991). These three defendants have now moved under Federal Rule of Criminal Procedure 29(c) that the court set aside the jury verdict on every count of the superseding indictment; the government opposes the defendants' motion. For the reasons set forth below, that motion is denied in its entirety.
DISCUSSION
Federal Rule of Criminal Procedure 29(c) provides that a court, on the motion of a defendant after a guilty verdict, may "set aside the verdict and enter judgment of acquittal." The standards for review of a jury verdict (or for entering judgment of acquittal at the end of the government's case) are straightforward:
When a defendant moves for a judgment of acquittal, the Court "must determine whether upon the evidence, giving full play to the right of the jury to determine credibility, weigh the evidence, and draw justifiable inferences of fact, a reasonable mind might fairly conclude guilt beyond a reasonable doubt. If [it] concludes that upon the evidence there must be such a doubt in a reasonable mind, [it] must grant the motion; or, to state it another way, if there is no evidence upon which a reasonable mind might fairly conclude guilt beyond a reasonable doubt, the motion must be granted. If [it] concludes that either of the two results, a reasonable doubt or no reasonable doubt, is fairly possible, [it] must let the jury decide the matter."
United States v. Mariani, 725 F.2d 862, 865 (2d Cir.1984) (quoting United States v. Taylor, 464 F.2d 240, 243 (2d Cir.1972) (quoting Curley v. United States, 160 F.2d 229, 232-33 (D.C.Cir.), cert. denied, 331 U.S. 837, 67 S.Ct. 1511, 91 L.Ed. 1850 (1947))). The defendants here attack the verdicts on the first thirteen counts of the superseding indictment (and, derivatively, the decision of this court as to the fourteenth count). Each argument is considered in turn.
1. Counts One, Two, and Fourteen: The RICO Counts
Counts one and two of the superseding indictment charged the defendants with violation of the Racketeer Influenced and Corrupt Organization Act ("RICO"), 18 U.S.C. §§ 1961 et seq., and with conspiracy to violate RICO. Count fourteen is a count under 18 U.S.C. § 1963(a)(3) for the forfeiture of the proceeds of the racketeering activity of counts one and two. The defendants argue that the verdicts on these counts must be set aside because the government "failed to prove that the Racketeering Acts were related to each other and to the same enterprise." Memorandum of Defendants at 9. The defendants reason that one predicate-act burglary "was committed by a group of people (enterprise) that was unknown to and totally different from the group that committed" a second predicate-act burglary. Id. In other words, the defendants argue, because *26 the actual participants of the charged predicate acts may have differed from act to act, the government has failed to prove either the existence of an "enterprise" or any "relatedness" among the discrete instances of racketeering activity.
The defendants are entirely incorrect to suggest that, under RICO, different groups of persons committing different predicate acts necessarily constitute different enterprises. One enterprise may, as did the enterprise in this case, have different members at different moments in its existence. United States v. Coonan, 938 F.2d 1553, 1560 (2d Cir.1991) (affirming RICO conviction when, inter alia, membership of enterprise changed over time).
As a matter of establishing the "pattern" requirement of RICO, the government must demonstrate that the charged predicate racketeering acts are "related." H.J. Inc. v. Northwestern Bell Telephone Co., 492 U.S. 229, 239, 109 S.Ct. 2893, 2900, 106 L.Ed.2d 195 (1989). As the Second Circuit has made clear, such "relatedness" or "[a]n interrelationship between [predicate] acts""may be established in a number of ways." United States v. Indelicato, 865 F.2d 1370, 1382 (2d Cir.), cert. denied, 493 U.S. 811, 110 S.Ct. 56, 107 L.Ed.2d 24 (1989). Among these avenues of proof are:
proof of ... temporal proximity, or common goals, or similarity of methods, or repetitions. [Furthermore,] [t]he degree to which these factors establish a pattern may depend on the degree of proximity, or any similarities in goals or methodology, or the number of repetitions.
Id. In this case, "relatedness" is readily demonstrated by the "temporal proximity, ... common goals, [and] similarity of methods" of the predicate acts: Within a period of three years, the defendants committed numerous sophisticated burglaries of commercial establishments. In all these burglaries, the members of this RICO enterprise employed similar modi operandi. As the indictment chargedand as the government demonstrated at trial:
Typically, members of the [enterprise] would sever the telephone lines leading to the burglarized premises. Members would then make a hole in the roof of the establishment using a pick axe and once inside smash any alarm boxes. Other members of the [enterprise] would remain outside the premises, conducting surveillance for police while maintaining radio communications with those members ... inside the burglarized premises. Finally, members of the [enterprise] would seek out any safes in the burglarized premises and open them using a unique drilling method....
In short, the nature of the predicate acts as well as the way in which they were committed and the time period within which they were committedestablished the "relatedness" requirement of the "pattern" element of the RICO statute under Indelicato. Thus, the defendants' challenge to their guilty verdicts on the first and second counts of the superseding indictment necessarily fails; by extension, their challenge to count fourteen is also without merit.
2. Counts Three and Six: 18 U.S.C. § 659
Count three of the superseding indictment charged that the defendant Fusco violated 18 U.S.C. § 659 by possessing goods (with a value over $100.00) that he knew to be stolen and that had been a part of an interstate shipment. This count refers to Fusco's possession of certain jewelry stolen from the Jewelers of Bond Street in Nassau County, New York. Count six of the indictment charged that the defendants Bloome and Zappola violated 18 U.S.C. § 659 by stealing goods (with a value over $100.00) that were a part of an interstate shipment. This count refers to their theft of Bulova watches during a burglary of the Bulova Watch Company facility in Queens, New York. As to both these counts, the defendants contend that the jury verdicts should be set aside because the government failed to prove that the goods in question were a "part of an interstate shipment."
As a threshold matter, certain general observations about Section 659 are in order. First, there is a division of authorities on the question whether the "interstate *27 shipment" component of Section 659 is an element of the crime itself or is simply a jurisdictional prerequisite for trial in a federal court. Compare United States v. Bizanowicz, 745 F.2d 120, 122 (1st Cir.1984) ("interstate shipment" component an "essential element of the crime") with United States v. Hankish, 502 F.2d 71, 76 (4th Cir.1974) ("interstate shipment" component "simply a jurisdictional peg ... not ... an element of the criminal offense"). Regardless of the answer to this question, the defendants are correct in their argument that, if the government failed to demonstrate that the goods in counts three and six were "part of an interstate shipment", their convictions in this federal court must be set aside.
The leading case on Section 659 in this circuit, United States v. Astolas, 487 F.2d 275 (2d Cir.1973), cert. denied, 416 U.S. 955, 94 S.Ct. 1968, 40 L.Ed.2d 305 (1974), instructs that "Section 659 is designed by the Congress to promote the flow of goods in interstate commerce" and that "the carrying out of this purpose is not to be hampered by technical legal conceptions." Id. at 279. See also United States v. Bryser, 954 F.2d 79, 85 (2d Cir. 1992) ("This court has long interpreted § 659 as evincing Congress' intention to protect the integrity of interstate commerce and to prevent interference with the flow of that commerce."). Among the "technical legal conceptions" which are to be avoided in construing the scope of Section 659 is any notion that the goods in question must be actually moving in interstate commerce at the time they are stolen. Astolas, 487 F.2d at 279; see also Bizanowicz, 745 F.2d at 122 ("It is not necessary for the goods ... to be actually moving in interstate commerce at the time for an offense to lie under 18 U.S.C. § 659."). Rather, "the determination that a shipment is interstate is essentially a practical one based on common sense and administered on an ad hoc basis." Astolas, 487 F.2d at 279. Thus:
[This determination] depends on such indicia of interstate commerce as the relationship of consignee, consignor, and carrier, if they are separate entities ... the physical location of the goods when stolen ... whether the goods have been delivered to a carrier at the time of the theft ... where there is no carrier, what steps the owner has taken to carry out an interstate shipment ... and the certainty with which interstate shipment is contemplated, as evidenced by shipping documents.
Id. at 279-80. The court in Bizanowicz considered similar factors to be germane to the determination of whether particular goods constituted an interstate shipment. Bizanowicz, 745 F.2d at 122 (listing as factors: physical location of goods when stolen; whether goods had been delivered to carrier; whether owner had taken any measures to effect interstate shipment; and whether shipping documents indicated that shipment would occur). With these touchstones clearly in mind, the arguments of the defendants are readily adjudicated.
As to count three, Fusco argues that the jewelry stolen from the Jewelers of Bonds Street did not constitute part of an interstate shipment because: "there was no ... proof that the goods stolen were mailed to that store; quite the contrary, the goods were dropped off at the store to be mailed to the customer when the goods were repaired...." Memorandum of Defendants at 4. However, the president of the Jewelers of Bond Street, Gary Sanford, testified at trial that his company conducted a substantial portion of its business with customers located outside New York. He testified that the Jewelers of Bond Street would, about twice a week, ship jewelry (always of value exceeding $100.00) to customers outside the state; he testified that these shipments were made through the United States Postal Service. Sanford also stated that, often, jewelry that had been packaged and labeled for shipment would remain in his store overnight; such jewelry would be mailed the following day. He specifically testified that, as to the burglary of the Jewelers of Bond Street in July of 1985, some of the jewelry stolen had already been packaged and labeled for out-of-state shipment.
*28 On the evidence adduced at trial, it is clear that the jewelry taken from the Jewelers of Bond Street constituted "part of an interstate shipment." Among the pieces taken, certain items had been packaged and had been labeled for interstate shipment; the packages were to have been taken to the post office the morning after the burglary. To hold that these itemsfor which all preshipment preparation had been completed did not constitute part of an "interstate shipment" because they had been left at the jewelry store for the night would defeat the mandate of Astolas and of Bizanowicz that goods need not be "actually moving" in interstate commerce to constitute an interstate shipment. Such a holding would, in fact, frustrate the legislative intent to protect the integrity of interstate commerce by adherence to a rigid, formalistic understanding of "interstate shipment." For this reason, this court cannot set aside the verdict on count three of the superseding indictment.
On count six, the defendants again argue that the government failed to establish that the watches stolen from the Bulova Watch Company facility in Queens were part of an interstate shipment. They concede that the government demonstrated that the facility conducted all domestic operations of the Bulova Watch Company (such as inventory, storing, marketing, packaging, and shipping). Memorandum of Defendants at 2. Although the stolen watches were among approximately 68,000 watches that the Bulova Watch Company intended to ship to a customer in New Jersey within a few days of the burglary, the defendants maintain that the stolen watches "had not yet taken on the characteristics ... of an interstate shipment." Id. at 1-2. Specifically, the stolen watches had not yet been transferred from the general inventory records of the company to the "to-be-shipped" inventory records; the watches had not yet been packaged for shipment; they had not been labeled for shipment to New Jersey; and many of the watches were still in preshipment tote boxes. On the other hand, testimony from employees of the Bulova Watch Company established that between 80 and 85 percent of the sales orders handled by the burglarized Bulova facility were regularly shipped to destinations outside New York, that the sales order placed by the New Jersey customer had been memorialized in a contract, that some of the stolen watches were to have been used to fill the New Jersey shipment order, and that, accordingly, some of the stolen watches had already been physically separated from the general Bulova inventory of watches.
The defendants submit that United States v. Hardaway, 455 F.Supp. 226 (N.D.Ill.1978), aff'd, 593 F.2d 285 (7th Cir.), cert. denied, 441 U.S. 964, 99 S.Ct. 2413, 60 L.Ed.2d 1070 (1979), should control this case. There, the court found that, among other indicia of interstate commerce, the relevant goods had been stolen from a large mail-order establishment after the company had lost "its ability to cancel or intercept an outbound customer order." Id. at 233. The court determined that to hold that those goods did not constitute an interstate shipment simply because they had not yet been consigned to a carrier would be to frustrate the legislative purpose of Section 659 on the basis of a "technical legal concept." Id. It appears that the defendants here would have this court read Hardaway to stand for the proposition that the question of whether particular goods constitute an "interstate shipment" turns on whether or not the owner of those goods has "irretrievably placed [them] into [the] stream" of interstate commerce. Memorandum of Defendants at 3.
Although this court does not doubt the integrity of the Hardaway decision, it declines the invitation of the defendants to construe that opinion as providing the algorithm for every application of Section 659. Rather, this court follows the mandate of the Second Circuit that the Section 659 judgment is "essentially a practical one based on common sense and administered on an ad hoc basis." Astolas, 487 F.2d at 279. In this regard, it is significant that the New Jersey order was a "firm" order that had been reduced to a contract. Furthermore, the employees of the Bulova Watch Company had already begun to separate *29 the watches destined for New Jersey from the other watches at the facility. In other words, the watches stolen in the Bulova burglary had already been effectively designated as inevitably bound for shipment to New Jersey.
Far closer to the factual configuration of this case than Hardaway is the opinion of the First Circuit in Bizanowicz. There, the defendant stole candy from a manufacturer which transported its goods from its factory in Cambridge, Massachusetts to its warehouse in Chelsea, Massachusetts. From Chelsea, the candy would have been sent to destinations "throughout the United States." Bizanowicz, 745 F.2d at 121. In fact, over 90 percent of the candy manufactured in Cambridge was regularly sold and shipped to out-of-state locations. Moreover, bills of lading had already been prepared for the stolen candy at the Chelsea warehouse, and some of the candies were "special order" items made for out-of-state customers. The defendant argued, however, that because he stole the candy during the intrastate transportation of the candy from Cambridge to Chelsea, it had not yet "acquired an interstate flavor." Id. at 122. The court disagreed with the defendant: It held that the candy was part of an "interstate shipment" within the meaning of Section 659 because bills of lading had already been prepared for the candy, because some of the candy had been specially made for out-of-state customers, and because there was nothing to suggest that "at least 90% ... of the stolen goods were not destined for out of state delivery in accordance with normal practices." Id. (emphasis added).
Similarly, the watches in this case were clearly "destined" for "out of state delivery" pursuant both to "normal practices" and to the firm sales order placed by the New Jersey customer. Also, many of the watches to be shipped were of unique design and they had been specifically requested by the New Jersey customer. That bills of lading had not yet been prepared for the watches in this case as they had been for the candy in Bizanowicz does not furnish an adequate basis for distinction; indeed, such a distinction would constitute precisely the type of "technical legal concept" about which Astolas cautions. In this case, the written contract between Bulova and its New Jersey customer for the sale and shipment of the watches stolen by the defendants is as clear an index of interstate commerce as were the bills of lading in Bizanowicz. Furthermore, in both this case and in Bizanowicz, the high percentage of out-of-state business conducted by the commercial establishments from which the goods were stolen virtually compels the conclusion that a theft of finished goods from those businesses is a theft of goods that are "destined for out of state delivery." Protection of the integrity of the business done by just such firms is precisely the legislative objective that informs Section 659. On these factors, the "interstate shipment" character of these stolen watches could not be more plain.
3. Count Four: 18 U.S.C. § 2312
Count four charged that the defendants Bloome and Zappola violated 18 U.S.C. § 2312 by transporting in interstate commerce a motor vehicle that they knew to be stolen. The "motor vehicle" to which count four refers was a truck stolen from the Bulova Watch facility as a part of the defendants' burglary of that facility. The defendants contend that "there was insufficient evidence [at trial] to prove that each or [either] of these defendants transported or substantially assisted in the transportation of the stolen ... truck across a state line...." Memorandum of Defendants at 7.
However, by their own contention ("there was insufficient evidence to prove that ... these defendants ... substantially assisted ..."), the defendants concede that there was evidence that they did in fact participate in the transportation of the stolen truck across state lines. Furthermore, at trial, Angel Soto, a coconspirator in the Bulova Watch Company burglary, testified that both Bloome and Zappola participated in that burglary and in the theft of the truck. The defendants do not dispute that this truckwhich they helped to stealwas later transported from New *30 York into New Jersey. On this basis, there was clearly adequate evidence for a jury to infer that Bloome and Zappola had violated Section 2312 either as principals or as aiders and abettors. Because there was sufficient evidence for this verdict, then, this court will not set it aside.
4. Counts Five, Eight, Nine, and Twelve: 18 U.S.C. § 2314
Count five of the superseding indictment charged that the defendants Bloome and Zappola violated 18 U.S.C. § 2314 by transporting in interstate commerce stolen goods with a value of $5,000.00 or more: Specifically, they were charged with having transported from New York to Pennsylvania certain Bulova watches stolen from the Bulova Watch Company facility. Counts eight and nine charged that the defendants Bloome, Fusco, and Zappola violated Section 2314 by transporting in interstate commerce stolen cash in the amount of $5,000.00 or more: Specifically they were charged with having transported approximately $85,000.00 in cash stolen from a Bradlees department store in New Jersey into New York and with having transported the same stolen funds from New York to Florida. Finally, count twelve charged that Bloome, Fusco, and Zappola conspired to violate Section 2314: Specifically, they were charged with conspiracy to transport in excess of $5,000.00 in interstate commerce after the burglary of a K-Mart department store in New Jersey. The defendants attack the sufficiency of the evidence adduced to prove these counts.
As to count five, there was clearly evidence from which the jury could infer that the defendants had participated in the transportation of the stolen Bulova watches to Pennsylvania. As a threshold matter, they do not attack the adequacy of the evidence on which the jury found that they had participated in the burglary of the Bulova Watch Company facility and in the theft of Bulova watches from that facility. Furthermore, accomplices of the defendants testified that the burglary participants had discussed sending the watches to Pennsylvania. In fact, such watches including watches of unique design were found in Pennsylvania shortly after the Bulova Watch facility burglary; some of the recovered watches were still in tote boxes such as those used at the Bulova facility. From this evidence, a jury could have reasonably inferred that the watches found in Pennsylvania were indeed those taken by the defendants from the factory in New York; on this basis, the jury could also have concluded that the defendants had participated in the interstate transportation of those stolen goods.
As to count eight of the superseding indictment, Dominick Costa testified that he had participated in the burglary of the Bradlees department store with the defendants and that, together, they transported cash well in excess of $5,000.00 from the site of the burglary in New Jersey to New York. As to count nine, Costa testified that he and the defendants went to Florida after this burglary and that he took with him $10,000.00 of the stolen money. Similarly, the principal evidence on count twelve was the testimony of Dominick Costa. The defendants contend that the "uncorroborated" testimony of Costa constituted an inadequate basis on which to predicate a verdict of guilt on these counts.
However, even if this testimony from Costa were entirely uncorroborated (it was in fact corroborated on several points), it would nonetheless be adequate evidence on which to base a conviction. As stated by the court in United States v. Parker, 903 F.2d 91, 97 (2d Cir.), cert. denied, ____ U.S. ____, 111 S.Ct. 196, 112 L.Ed.2d 158 (1990):
The fact that a conviction may be supported only by the uncorroborated testimony of a single accomplice is not a basis for reversal if that testimony is not incredible on its face and is capable of establishing guilt beyond a reasonable doubt.
Accord: United States v. Mejia, 909 F.2d 242, 245 (7th Cir.1990) (Testimony of accomplice is sufficient evidence for conviction unless it is "inherently unbelievable" or "contradict[s] the laws of nature or other indisputably true evidence."); United States v. Drews, 877 F.2d 10, 12 (8th Cir. *31 1989) ("Accomplice testimony is sufficient to support a conviction when it is not incredible or insubstantial on its face."); United States v. Elusma, 849 F.2d 76, 79 (2d Cir.1988), cert. denied, 489 U.S. 1097, 109 S.Ct. 1570, 103 L.Ed.2d 936 (1989) ("An accomplice's testimony ... need not be corroborated to establish guilt."); United States v. Vaccaro, 816 F.2d 443, 455 (9th Cir.), cert. denied, 484 U.S. 914, 928, 108 S.Ct. 262, 295, 98 L.Ed.2d 220, 255 (1987) ("[T]he testimony of an accomplice, if believed, is sufficient to sustain a conviction."). The credibility of Costa's testimony was a question solely for the consideration of the jury. Mejia, 909 F.2d at 245 ("Credibility is for the jury, not this court, to determine."); Parker, 903 F.2d at 97 (The court "must defer to the jury's assessments of both the weight of the evidence and the credibility of the witnesses...."); Vaccaro, 816 F.2d at 455 ("Witness credibility ... is a question for the jury that is not reviewable.").
Because Dominick Costa, an accomplice of the defendants, testified as to the defendants' violations of Section 2314, and because his testimony was not "incredible on its face," the defendants' argument that the guilty verdict on counts eight, nine, and twelve should be set aside is entirely without merit.
5. Counts Seven, Ten, and Eleven: 18 U.S.C. § 2113(a)
Count seven of the superseding indictment charged that the defendant Fusco violated 18 U.S.C. § 2113(a) by entering the Atlantic Liberty Savings Bank ("ALSB") with intent to commit a felony affecting the bank (that is, with intent to steal property or money worth over $100.00 from the bank). Count ten charges that the defendants Bloome, Fusco, and Zappola violated 18 U.S.C. § 2113(a) by entering the European American Bank with intent to commit a felony affecting the bank (that is, with intent to steal property or money worth over $100.00 from the bank). Count eleven charges that the defendant Fusco conspired to violate 18 U.S.C. § 2113(a) by entering the First Nationwide Savings Bank ("FNSB") with intent to commit a felony affecting the bank (that is, with intent to steal property or money worth over $100.00 from the bank). As to all these counts, the defendants contend that "the evidence ... consisted solely of Dominick Costa's testimony and was therefore insufficient to sustain the jury's verdict." Memorandum of Defendants at 8.
As demonstrated above, even the uncorroborated testimony of an accomplice in a crime is sufficient to support a verdict of guilt if that testimony is not "incredible on its face." Parker, 903 F.2d at 97. But the defendants have not endeavored to suggest to this court how Costa's testimony is "incredible" or why it is otherwise "insufficient." This court heard Dominick Costa testify, and the court concluded at that time that he had testified "in a coherent and forthright manner." United States v. Bloome, 773 F.Supp. 545, 547 (E.D.N.Y. 1991). This court knows of no reasonnor do the defendants suggest anywhy the jury should not have been entitled to weigh Costa's testimony, to determine for itself the credibility of his account, and to reach a verdict that either embraced or rejected his evidence.
As to count eleven, the defendant Fusco also argues that the evidence at trial did not establish a conspiracy to commit a burglary of the FNSB. He argues that the government failed to show any agreement "express or implied" by Fusco and Costa to burglarize the bank; rather, he contends: "[T]he evidence showed a unilateral act by the defendant Fusco with no agreement or even tacit acknowledgment by Costa to do anything. Costa was simply a witness to the acts of Fusco at the bank." Memorandum of Defendants at 8.
Once again, the defendant advances a meritless position. Costa testified that he and Fusco entered the bank together. While there, Fusco procured the use of a safe deposit box (under an assumed name); but the purpose of the visit to the bank, Costa testified, was for Costa to reconnoiter the general security at the bank and for Fusco to survey the safe deposit boxes. From this, the jury was more than reasonable *32 to infer that there was an agreement, either explicit or implicit, between Costa and Fusco to burglarize the bank. See, e.g., Mariani, 725 F.2d at 865-66 ("Conspiracy can be proven circumstantially; direct evidence is not crucial.... Seemingly innocent acts taken individually may indicate complicity when viewed collectively and with reference to the circumstances in general.") (citations omitted). On this basis, this court cannot set aside the verdict of the jury.
Finally, as to count seven, Zappola argues that, because he was previously acquitted of charges that he participated in the burglary of the ALSB (he was convicted on charges of conspiracy to commit that burglary), the government was barred under the Double Jeopardy Clause of the federal Constitution from offering against him evidence of his participation in that crime. His argument is grounded in Grady v. Corbin, 495 U.S. 508, 110 S.Ct. 2084, 109 L.Ed.2d 548 (1990). There, the Supreme Court specifically held that:
[T]he 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.
Id. 110 S.Ct. at 2087. Although, Zappola is not named in count seven of the superseding indictment, and although evidence about his involvement in the ALSB burglary was not offered against him for purposes of establishing his guilt on a Section 2113(a) count in this trial, the evidence of his role in the burglary was offered to show the existence of the RICO enterprise of which Zappola was alleged to be a member. In other words, Zappola argues that certain conduct by him (that is, his conduct in the ALSB burglary) that constituted an offense for which he had already been prosecuted (as a substantive Section 2113(a) violation) was proven at this subsequent trial for the purpose of showing an essential element (the RICO enterprise) of the offense charged in counts one and two of the superseding indictment. Thus, he reasons, the sweeping language of Grady should have precluded the use of that evidence against him on the RICO counts.
However, Grady has been read by the courts of appeals less expansively than its own broad language might suggest. At least three circuits have held that Grady applies only to "single event" crimes; as such, they have determined that Grady is inapposite to double jeopardy analysis in RICO prosecutions. Those circuits have continued to apply Garrett v. United States, 471 U.S. 773, 105 S.Ct. 2407, 85 L.Ed.2d 764 (1985), to double jeopardy claims in RICO cases; thus, they have held that double jeopardy does not bar a RICO prosecution that alleges as a predicate act a crime for which the defendant was previously prosecuted. See United States v. Arnoldt, 947 F.2d 1120, 1126 (4th Cir.1991) ("We believe the principles enunciated in Grady govern the paradigmatic `single course of conduct' case, but that prosecutions under statutes such as RICO ... statutes targeted at `multilayered' instances of criminal conduct invariably occurring at different places and timescall for a calculus reflecting the concerns expressed in Garrett."); United States v. LeQuire, 943 F.2d 1554, 1559 (11th Cir.1991) ("[T]he rationale of Garrett is more appropriate than Grady in RICO situations.... Grady ... is more applicable in single offense situations...."); United States v. Pungitore, 910 F.2d 1084, 1110 (3d Cir.1990), cert. denied, ___ U.S. ___, 111 S.Ct. 2009-11, 114 L.Ed.2d 98 (1991) ("The double jeopardy analysis in ... Grady ... cannot easily be transposed to the RICO context.... Instead, we consider the double jeopardy problem posed by the successive prosecutions [in a RICO case] to be more closely analogous to that in [Garrett]....").
However, this practiceby which the courts of appeals have analyzed double jeopardy claims for "single event" cases under Grady and double jeopardy claims for RICO cases under Garretthas not been expressly adopted by the Second Circuit. Indeed, in the dicta of one case that did not involve a RICO count, the court stated that Grady applied, by its own terms, to "all double jeopardy claims arising *33 in the context of successive prosecutions." United States v. Calderone, 917 F.2d 717, 721 (2d Cir.1990). It is not clear, however, what force this passage from Calderone has in the context of a RICO prosecution: Not only did Calderone involve crimes other than RICO, but the panel in that case did not even mention Garrett the case that the other circuits have determined to be better suited to double jeopardy claims in RICO cases and a case that the Supreme Court specifically cited (without questioning or overruling) in Grady. Hence, unlike the decisions from other courts of appeals that have evaluated Grady in an attempt to coordinate it with Garrett, Calderone leaves entirely unclear what continued application Garrett is to have in double jeopardy analysis. Compare: United States v. Scarpa, 913 F.2d 993, 1013-14 n. 8 (2d Cir.1990) (recognizing continued vitality of Garrett after Grady).
Furthermore, Second Circuit cases subsequent to Calderone have cast some doubt on the significance of its construction of Gradyparticularly as it relates to Garrett. See, e.g., United States v. Giovanelli, 945 F.2d 479, 492 (2d Cir.1991) (recognizing that "single event" crimes and "multi-layered conduct" crimes merit separate double jeopardy analyses); United States v. Coonan, 938 F.2d 1553, 1563 (2d Cir. 1990) (citing pre-Grady cases from Second Circuit); United States v. Gambino, 920 F.2d 1108, 1113 (2d Cir.1990), cert. denied, ___ U.S. ___, 112 S.Ct. 54, 116 L.Ed.2d 31 (1991) (recognizing continued vitality of Garrett after Grady and citing Pungitore). Along those same lines, no other double jeopardy case in this circuit has referred to the split decision of Calderone for the proposition that Grady controls all double jeopardy claims. Thus, despite the broad language of Calderone language even broader than that of Grady itself the Second Circuit has explicitly confirmed that Garrett survives Grady, and the court has implicitly recognized that Garrett may be a better tool than Grady for double jeopardy analysis in RICO cases.
This court is satisfied that, under a Garrett analysis, the introduction at this RICO trial of evidence concerning Zappola's role in the ALSB burglary in order to demonstrate the "enterprise" element of the RICO counts did not violate double jeopardy. The circuit courts have consistently read Garrett for the proposition that double jeopardy does not bar successive prosecutions for an act that constitutes both an independent substantive offense and a predicate act offense under RICO. See, e.g., Arnoldt, 947 F.2d at 1126-27. Indeed, those courts have applied Garrett in this manner even whenas in this casethe racketeering activity in question did not continue beyond the date of the first prosecution. See id. at 1126 n. 7. If the successive prosecutions of particular events both as substantive offenses and as predicate acts under RICO do not offend double jeopardy, a fortiori the introduction of testimony about an already prosecuted substantive offense as mere evidence of the enterprise element of RICO likewise does not ran afoul of that constitutional bar. See, e.g., Dowling v. United States, 493 U.S. 342, 110 S.Ct. 668, 107 L.Ed.2d 708 (1990) (introduction of testimony about previously prosecuted burglary as evidence of identity of burglar in bank robbery prosecution was not barred by double jeopardy).
Furthermore, even if Grady does control the analysis of this case, the introduction of this evidence against Zappola still withstands double jeopardy scrutiny. First, it is important to note that, on at least one possible construction of Grady, the conduct involved in a violation of Section 2113(a) and the conduct involved in a violation of RICO are not necessarily congruent. In the first case, the relevant "conduct" of Zappola was his endeavor to commit a felony affecting the ALSB; in the second case, the relevant "conduct" of Zappola was his participation in an enterprise that engaged in a pattern of racketeering activity. See, e.g., United States v. Gonzalez, 921 F.2d 1530, 1538 (11th Cir.), cert. denied, ___ U.S. ___ and ___, 112 S.Ct. 96 and 178, 116 L.Ed.2d 68 and 140 (1991) (distinguishing conduct involved in importation and distribution of contraband from conduct involved in RICO conspiracy for purposes of Grady v. Corbin). Indeed, Grady specifically rejected *34 both a "same evidence" and a "same transaction" testeither of which would more closely circumscribe the standards for determining the relevant "conduct." See Grady, 110 S.Ct. at 2093 and at 2094 n. 15. Thus, it is not altogether clear that Grady operates to foreclose the introduction of this evidence for the purpose of demonstrating Zappola's participation in the RICO enterprise.
Secondly, it appears also that the circumstances of this casethe offering of this evidence against Zappola to support the "enterprise" element of RICOmay well fall outside the intended scope of Grady. A carefully reasoned concurring opinion by Judge Newman in Calderone attempts to delineate more clearly the "element" component of the Grady test. Judge Newman points out that, as Justice Scalia had remarked in dissent in Grady: "All evidence pertaining to guilt seeks `to establish an essential element of [the] offense,' and should be excluded if it does not have that tendency." Grady, 110 S.Ct. at 2103. Thus, Judge Newman observes, a broad reading of the "element" component of Grady would threaten any meaningful boundary to the Grady test. Rather:
I think we are obliged to apply Grady in a way that gives the "element" component significance. That means barring the second prosecution only when the conduct previously prosecuted is to be used to "establish" the element of the second crime, which I think must mean "constitute the entirety of" the element. If Grady is read more broadly, that is, if the second prosecution is barred whenever the previously prosecuted conduct is to be used only as evidence of an element of the second offense, then we would almost be applying a "same evidence" test. Instead, I think it more likely that the Supreme Court expected Grady to apply only when the conduct prosecuted at the first trial is or may constitute the entirety of an element of the offense at the second trial.
Calderone, 917 F.2d at 724. Not only does this reading render the "element" segment of Grady more meaningful, it also, as Judge Newman argues, reconciles Grady with Dowlinga task thought to be problematic by the Grady dissenters.
This court is persuaded by Judge Newman that the words "to establish an element" in Grady signify "constitute the entirety of an element." Thus, if indeed Grady applies to the double jeopardy analysis in a RICO case such as this one, the analysis must be as follows: Although Zappola's conduct in the ALSB burglary was introduced at this trial "as evidence of" his participation in the charged enterprise and although "enterprise" is an element of a RICO offense, Zappola's conduct was not introduced "to establish" the enterprise element because that conduct did notand could not"constitute the entirety of [the enterprise] element." Indeed, at trial the government introduced substantial additional evidence of the existence of the charged enterprise and of Zappola's participation in that enterprise; as such, the matters concerning his role in the bank burglary were not by any means dispositive of the enterprise element of the RICO counts. Hence, either under Garrett or under Grady, the double jeopardy claim of the defendant Zappola proves to be meritless.
6. Count Thirteen: 18 U.S.C. § 1512
Count thirteen of the superseding indictment charged that the defendants Bloome and Fusco, in violation of 18 U.S.C. § 1512, attempted to kill Dominick Costa with the intent to prevent him from communicating to a federal law enforcement officer information about the commission of federal crimes. The defendants tersely contend that: "[T]he evidence ... on this [c]ount ... was insufficient to sustain the jury's verdict. The evidence was insufficient, contradictory and incredible as a matter of law." Memorandum of Defendants at 9.
Although one might have hoped for a fuller account of the defendants' position, the conclusory statements advanced in lieu of an argument are adequate to reveal the lack of merit on this point. At trial, the government adduced on count thirteen the testimony of Dominick Costa as well as the testimony of Dorothy Lazar (a corroborating *35 eyewitness). This court attended carefully to the testimony of those witnesses and did not find it at all to be "insufficient, contradictory [or] incredible as a matter of law." The defendants' motion to set aside the verdict on count thirteen is therefore denied.
CONCLUSION
For the reasons indicated above, the motion of the defendants to set aside the guilty verdicts on all counts and to enter a judgment of acquittal is denied in all respects.
SO ORDERED.
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333 B.R. 666 (2005)
Michael Q. CAREY d/b/a Carey & Associates, Appellant,
v.
Rudolf J.O. ERNST and Angelika L. Ernst, Debtors.
No. 05-CIV-03958 (RPP), 05-CIV-03332 (RPP), 05-CIV-03959 (RPP).
United States District Court, S.D. New York.
November 8, 2005.
*668 Michael Q. Carey, Natasha P. Conception, Carey & Associates LLC, New York City, for Appellant.
Joseph L. Fox, Koerner Silberberg & Weiner, LLP, New York City, for Appellees Rudolf J. Ernst and Angelika L. Ernst.
Christopher Campbell, Thomas R. Califan Vincent J. Roldan, New York VIty, Richard M. Kremen, Jodie E. Buchman, Baltimore, MD, DLA Piper Rudnick Gray Cary U.S. LLP, for Appelless Franklin Community Bank, NA and Larry A. Heaton.
OPINION AND ORDER
PATTERSON, District Judge.
Appellant Michael Q. Carey d/b/a Carey & Associates ("Carey" or "Appellant") appeals fromtwo separate rulings of Judge Cornelius Blackshear, United States Bankruptcy Judge, Southern District of New York ("Bankruptcy Court"). On March 3, and March 7, 2005 Carey filed a notice of appeal and an amended notice of appeal from the February 22, 2005 ruling of Judge Blackshear, "Opinion on the Fee Application of Michael Q. Carey and Carey & Associates and the Related Debtors' Objection to Claim No. 9 Filed by Michael Q. Carey and Carey & Associates" ("Fee Opinion") and his March 7, 2005 Order entered thereon. For the reasons set forth below, the Bankruptcy Court's Fee Opinion denying Carey's application for fees is remanded, and the denial of Carey's post-petition interest, and reduction of Carey pre-petition pre-judgment interest from 12% to 9% is upheld. On March 23, 2005, Carey filed an appeal from a March 17, 2005 ruling of Judge Blackshear, "Sua Sponte Order Denying Motion for Leave to Commence an Adversary Proceeding" ("Adversary Order"). That Order is affirmed.
BACKGROUND
This case arises out of an attorney's fee litigation initiated in New York Supreme Court, New York County, in August 1998, which resulted in an opinion dated March 26, 2004, by Justice DeGrasse awarding Carey his outstanding fees on his claim of breach of contract and account stated and severing Carey's claim for fees incurred in attempting to collect his outstanding fees. (State Court Op.)[1]
Ten days later, on April 5, 2004, Debtors filed for bankruptcy in a voluntary petition under chapter 13 of Title 11 of the United States Code, 11 U.S.C. § 101 et seq. (the "Bankruptcy Code"). (Fee Op. at 4.) On July 27, 2004, Carey filed a Proof of Claim with the Bankruptcy Court in the amount of $335,319.20. This included: (1) the *669 judgment of $72,274.14; (2) prejudgment interest on the $72,274.14, at Retainer Agreement rate of 12% per annum, totaling $48,900.88 for the period of July 31, 1998 through March 19, 2004; (3) postjudgment interest on the $72,274.14, at the statutory rate of 9% per annum, totaling $2,298.91 for the period of March 20, 2004 through July 27, 2004(4) attorneys' fees from the collection efforts totaling $195,893.50; and (5) disbursements during the collection action totaling $15,951.77. (Id.)
Pursuant to an order of the Bankruptcy Court, dated December 9, 2004, Carey filed a Fee Application, totaling $205,707.78, plus 12% interest, with the Bankruptcy Court on December 17, 2004, relating solely to his claim for fees and disbursements incurred in pursuing the Collection Case and defending against the Debtors' counterclaims of fraud, malpractice, and breach of fiduciary duty. (Carey Fee App., Appellant's App. Ex. F). Debtors filed their Objections to Carey's Fee Application on January 7, 2005. (Fee Op. at 4.)
On January 20, 2005, the Bankruptcy Court scheduled an evidentiary hearing for February 22, 2005. (Jan. 20, 2005 Tr.) It also directed each party mark its exhibits, confer on whether or not there would be any objections to the exhibits, and prepare an exhibit list and provide the exhibits, pre-marked, to the Bankruptcy Court and each other before the hearing. (Id.)[2] At the January 20, 2005 conference, Debtor's counsel objected to the format of Carey's fee application, suggesting that it did not conform to the Guidelines for Fees and Disbursements for Professionals in Southern District of New York Bankruptcy Cases ("Guidelines"). (Id.) The Bankruptcy Court agreed that Carey's fee application did not conform, but stated that the issue would be heard at the evidentiary hearing scheduled for February 22, 2005. (Id.)
DISCUSSION
A. Standard of Review
Pursuant to Rule 8013 of the Federal Rules of Bankruptcy Procedure ("FRBP" or "Bankruptcy Rules") and the case law thereunder, a bankruptcy court's conclusions of law are subject to de novo review. See In re Miner, 229 B.R. 561, 564-565 (2d Cir. BAP 1999); In re Macrose Industries, Corp., 186 B.R. 789, 797 (E.D.N.Y.1995). "A de novo review allows [the court] to decide the issue as if no decision had previously been rendered." In re Miner, 229 B.R. at 565.
In contrast, a bankruptcy court's findings of fact are subject to a clearly erroneous standard. See Fed.R.Civ.P. 52(a); Bankruptcy Rule 8013. A finding of fact is clearly erroneous within the meaning of Bankruptcy Rule 8013 when
although there is evidence to support it, the reviewing court on the entire record is left with the definite and firm conviction that a mistake has been committed. While the trial court's findings of fact are not conclusive on appeal, the party that seeks to overturn them bears a heavy burden. If two views of evidence are possible, the trial judge's choice between them cannot be clearly erroneous. To be clearly erroneous, a decision must strike us as more than just maybe or probably wrong; it must strike us as wrong with the force of a five-week-old unrefrigerated dead fish.
*670 In re Miner, 229 B.R. at 565 (internal quotation marks and citations omitted).
B. Fee Application
On February 22, 2005, the date scheduled for the evidentiary hearing, the Bankruptcy Court did not hold an evidentiary hearing. Instead the Court issued an opinion which: (1) gave full faith and credit to the State Court judgment on Carey's breach of contract and account stated claims for $72,274.14, the unpaid balance when Carey terminated his representation of Ernst in the extradition proceeding; (2) allowed the pre-petition interest on the $72,274.14 balance for the period of July 31, 1998 to April 4, 2004, but reduced it from 12% to the statutory rate of 9%; (3) denied Carey post-petition interest on the Supreme Court judgment; (4) allowed Carey "costs and disbursements related to the $72,274.14 Supreme Court judgment... for the period beginning May 1, 1998 through and including July 31, 1998"; and (5) disallowed in its entirety Carey's application for attorney's fees and collection costs incurred after July 31, 1998. (Fee Op. at 6-11.)[3]
At the outset of its opinion, the Bankruptcy Court stated, "the creditors fee application is governed by the Guidelines for Fees and Disbursements for Professionals in Southern District of New York Bankruptcy Cases. The Debtors' objection to claims is governed by 11 U.S.C. § 502(b)(1) and § 502(b)(4)." (Id. at 4.) The Bankruptcy Court denied Carey attorney's fees and purported costs incurred in the collection action ($205, 707.78) on two grounds: 1) Such a claim must meet the "reasonable" test under § 502(b)(4) (See In re United Merchants & Mfrs., Inc., 674 F.2d 134, 139 (2d Cir.1982)); and 2) the claim must be "substantiated" by "proper documentation." (Fee Op. at 9-10.) The Court found that based on Carey's inconsistent time records, unverified disbursement requests, and a three year gap in activity on the state docket, Carey's collection efforts were overstated. (Id. at 9.) The court held that "Carey has not met his burden of showing that the collection costs are valid and fall within the ambit of legal costs necessarily incurred in a collection action of this nature." (Id. at 10.) Without citing authority, the court found that the "creditor's entitlement to such fees is subject to forfeiture if the creditor fails to support his claim with proper documentation," and found Carey's collection efforts unsubstantiated and not reasonable under the Bankruptcy Code. (Id.)
Sections 502(b)(1) and 502(b)(4) of Title 11 of the United States Code read as follows:
(b) Except as provided in subsections (e)(2), (f), (g), (h) and (i) of this section, if such objection to a claim is made, the court, after notice and a hearing, shall determine the amount of such claim in lawful currency of the United States as of the date of the filing of the petition, and shall allow such claim in such amount, except to the extent that
(1) such claim is unenforceable against the debtor and property of the debtor, under any agreement or applicable law for a reason other than because such claim is contingent or unmatured;
....
(4) if such claim is for services of an insider or attorney of the debtor, such claim exceeds the reasonable value of such services;
Technically, the fees involved here are not related to the services of an insider or attorney of the debtor, but the Bankruptcy Court apparently elected to utilize this section *671 pursuant to its equitable power.[4] Bankruptcy Rule 3007 provides that once an objection is filed, a "copy of the objection with notice of the hearing thereon shall be mailed or otherwise delivered to the claimant, the debtor or debtor in possession and the trustee at least 30 days prior to the hearing." Although these sections suggest that a hearing is required when an objection has been asserted, reading 11 U.S.C. § 502(b) in conjunction with 11 U.S.C. § 102(1),[5] "makes it clear that a hearing is not statutorily required, but only that parties are given an opportunity for a hearing and may have a hearing if it is so requested." In re D.A. Elia Construction Corp., No. 99 Civ. 0546, 2000 WL 1375739, at * 4 (W.D.N.Y. Sept. 22, 2000) (quotation marks omitted).
Although neither the Bankruptcy Code nor the Federal Rules of Bankruptcy Procedure requires a full evidentiary hearing (See In re Manhattan Woods Golf Club, Inc., 192 B.R. 80, 84-85 (S.D.N.Y. 1996)), on November 4, 2004, November 18, 2004, and January 20, 2005, Judge Blackshear gave the parties repeated notice that an evidentiary hearing would be held. On January 20, 2005, he scheduled the hearing for February 22, 2005. (Nov. 4, 2004; Nov. 18, 2004; and Jan. 20, 2005 Trs.) At the January 20, 2005 conference, disputes arose between the attorneys over the comprehensiveness and intelligibility of Carey's fee application, and its compliance with the Guidelines, to which Judge Blackshear responded, "We will get into that at the hearing date." (Jan. 20, 2005 Tr. at 58.) He also suggested that Carey would "have to explain" his time sheets to Mr. Fox, Debtor's counsel, at the hearing as well. (Id. at 59-60.) After some confused inquiries between the parties over the clarity of Carey's time sheets, Judge Blackshear stated, "You know what? I have heard enough," and ended the conference, again repeating that the scheduled evidentiary hearing date would be held, "February 22 at 10:00 a.m." (Id. at 60-61.)
Because Judge Blackshear repeatedly stated on January 20, 2005, that the parties would have an opportunity to address their dispute and make their further arguments at an evidentiary hearing, he should have allowed Carey an opportunity to present his evidence and to argue in support *672 of his claim before the court reached a decision.
In similar circumstances, Bankruptcy judges have been reversed when a party has not received the opportunity to present evidence. In Morton v. Morton (In re Morton), the Bankruptcy Appellate Panel for the Sixth Circuit held that the Bankruptcy Court erred in determining that the debtor had "failed to meet her initial burden of establishing a colorable challenge to the proofs of claim" because the court ruled on the objection "without giving the parties the opportunity to present evidence." 298 B.R. 301, 307-308 (6th Cir. BAP 2003). In Morton, as in this case, the parties believed an evidentiary hearing on the matter would be held at a later date, but the Bankruptcy Court instead decided to issue its opinion without providing the hearing. (Id.) The Bankruptcy Appellate Panel found that "[t]he evidence that the bankruptcy court may have needed to determine that Debtor had met her initial burden might have been the evidence that Debtor intended to offer at an evidentiary hearing. Debtor understood that she would have the opportunity to present such evidence...." The Bankruptcy Appellate Panel reversed the Bankruptcy Court and remanded with instructions "to provide Debtor with an opportunity to present evidence." (Id. at 309.) Moreover in In re Rene Press, Inc., the Bankruptcy Appellate Panel for the First Circuit vacated and remanded a decision of the Bankruptcy Court on similar grounds. 29 B.R. 446 (1st Cir. BAP 1983). In Rene Press, the Bankruptcy Court had "made several statements during the initial hearing that would lead a reasonable attorney to believe that further opportunity for argument, whether by written response or additional hearing, would be provided" and then "without allowing further opportunity to argue this issue, the court entered its order denying recovery based on this very ground." (Id. at 447-448.) The Bankruptcy Appellate Panel held that, "[b]y the court's own statements, appellant was led to believe that an opportunity for further argument would be given. Under these circumstances, it was unfair to deny [appellant's] request without an additional hearing." (Id. at 448.)
Here, the Bankruptcy Court denied Carey's fee application in its entirety, stating that "a creditor's entitlement to such fees is subject to forfeiture if the creditor fails to support his claim with proper documentation." (Fee Op. at 10.) His only finding of lack of documentation however was for the improper disbursement entries for legal research. He made no finding that Carey did not meet his burden of making a prima facie claim for any collection costs. (Id. at 10.)
Nor did Judge Blackshear find that Carey had not properly executed and filed a proof of claim. "A properly executed and filed proof of claim constitutes prima facie evidence of the validity of the claim. To overcome this prima facie evidence, the objecting party must come forth with evidence which, if believed, would refute at least one of the allegations essential to the claim." In re Reilly, 245 B.R. 768, 773 (2d Cir. BAP 2000)(citing Fed. R. Bankr.P. 3001(f).)
Although Judge Blackshear concluded with the statement, "This Court finds the collection efforts were not substantiated," this Court's review of the record in Bankruptcy Court showed that Carey had filed handwritten daynotes broken down to less than a tenth of an hour for services rendered in drafting the complaint, redrafting the complaint, arranging effective service on the defendants, review of answer, preparation for deposition of the Debtors, as well as other services. All daynotes reflected the provider, the provider's time *673 expended, and some description of the nature of the legal services.[6] The daynotes also suggest however that a number of services were not directed to recovery of a judgment but were typical of post-judgment discovery efforts or attempts to obtain judgment against the Debtors' son.
In any event the disallowance in its entirety of Carey's application for his attorney's fees and costs in pursuing the collection action is not supported by the record in the Bankruptcy Court. Accordingly the decision is reversed and the claim is remanded for a determination of what fees and disbursements if any should be allowed, as contemplated by 11 U.S.C. § 502(b).
Reduction of Interest from 12% to 9%
The Bankruptcy Court disallowed Carey's post-petition interest on his claims in its entirety, and reduced his pre-petition, pre-judgment interest from 12% to the statutory rate of 9%. Carey contends that the Bankruptcy Court erred as a matter of law by not awarding Carey the contractual interest rate of 12%.[7]
Judge Blackshear acknowledged the state court judgment, but cited his own opinion in In re United States Lines, Inc., 199 B.R. 476 (Bankr.S.D.N.Y.1996), for the proposition that the Bankruptcy Court had "jurisdiction to determine whether pre-and post-judgment interest is allowable under the Bankruptcy Code." (Fee Op. at 6.) Judge Blackshear also noted that the purpose of his "review is to determine `to what extent the judgment is enforceable against the Debtor's estates pursuant to the Bankruptcy Code,' not to decide the validity of the state court judgment," and that "the doctrines of full faith and credit, res judicata, and collateral estoppel did not prevent a debtor or representative of the debtor's estate from challenging the interest portion of a state court judgment." (Id. at 6-7; quoting In re United States Lines, Inc., 199 B.R. at 480.) Judge Blackshear reduced Carey's pre-judgment interest rate to 9% on the ground that Carey had billed "needless hours on unrelated matters for the sole purpose of racking up interest on a legitimate account stated."[8] He denied post-judgment interest, stating the judgment was allowed as a general unsecured debt. (Order of March 7. 2005.)[9]
Judge Blackshear correctly relied on the Bankruptcy Court's equitable powers to determine the allowance of claims before it. (Fee Op. at 6-7.) Just as the Bankruptcy Court has power to determine how much of the state court judgment should be allowed based on a "reasonableness" test, it may also determine what rate of interest to allow. See Kohn, 157 B.R. 523; Pepper v. Litton, 308 U.S. 295, 60 S.Ct. 238, 84 L.Ed. 281; supra note 4 and accompanying text. The *674 Bankruptcy Court was therefore free to determine the rate of pre-judgment interest. Based on his finding that Carey had needlessly extended the date of judgment to rack up interest (see supra note 8 and accompanying text), Judge Blackshear did not err as a matter of law in reducing the rate of interest, and not only is his finding not clearly erroneous, it is supported by the handwritten daynotes. Judge Blackshear's decision to reduce the interest rate on Carey's pre-judgment claims from 12% to 9% based on his finding is therefore upheld.
C. Adversary Order
On March 17, 2005, the Bankruptcy Court issued a sua sponte order in this Chapter 13 Bankruptcy proceeding, denying Carey leave to commence an adversary proceeding. It issued this order after the Section 341 meeting of creditors and after Carey had filed an adversary complaint in the Bankruptcy Court on July 27, 2004, and amended that complaint on August 18, 2004, alleging several fraudulent transfers and naming as defendants the Debtors, their son Rudi Ernst, Jr., EFF Ernst Fine Foods LLC, Franklin Community Bank, N.A., and Larry Heaton, as trustee, Susan Burdzy, Kevin Burdzy, John Doe # 1-10, Jane Doe # 1-10, XYZ Associates # 1-10. (Appellees' Appendix, Ex. E.) On February 2, 2005, Judge Blackshear had granted the motion of Franklin Community Bank and Larry Heaton to dismiss without prejudice Carey's amended adversary complaint because Carey lacked standing to file an adversary proceeding because he had done so without leave of the court. (Appellant's Supp.App., Exhibit A.)
On March 7, 2005, without giving notice to Franklin Community Bank and Heaton, Carey moved for leave to commence an adversary proceeding and submitted a memorandum of law in support of the motion dated March 7, 2005 ("Carey Mem.") (Appellees' App., Ex. B) supported by a declaration by Carey ("Carey Decl.") with Exhibits A-W. (Appellant's Supp.App.)
As recited in his motion for leave to file an amended complaint, Carey was a creditor in this Chapter 13 case, based on his claims for unpaid fees and interest. Carey argued that he had standing to bring the adversary proceeding which the Bankruptcy Court had previously dismissed without prejudice on February 2, 2005, because (1) the trustee had expressly consented to this suit by letter dated February 8, 2005, six days after the Bankruptcy Court dismissed Carey's original adversary proceeding without prejudice [10] and (2) the suit is (a) in the best interests of the bankruptcy estate and (b) necessary and beneficial to the fair and efficient resolution of the bankruptcy proceeding. (Carey Mem. at 4.) As authority Carey relied on Commodore International, Ltd. v. Gould (In re Commodore International, Ltd.), 262 F.3d 96, 100 (2d Cir.2001) and Glinka v. Federal Plastics Mfg. (In re Housecraft Indus. USA, Inc.), 310 F.3d 64, 70 (2d Cir.2002). (Carey Mem. at 4.) Acknowledging that the bankruptcy estate lacked resources to bring this action on its own, Carey consented to bear the costs of the litigation, subject to a later application for an award of attorneys' fees and costs. (Id.)
Carey advised the court that the adversary proceeding would seek to avoid two preferential payments made within the 90 day period preceding the bankruptcy filing, pursuant to 11 U.S.C. § 547 (preferential transfers): 1) a payment to creditor *675 North Pork Bank in the amount of $68,320.00. (Carey Decl, Ex. E; Ernst Chapter 13 Bankruptcy Petition, Statement of Financial Affairs, Item # 3), and 2) a payment to creditor Bank One in the amount of $4,275.00 (Id., Item # 3; Carey Mem. at 5-6.)[11] Carey also explained that the adversary proceeding would seek to avoid as alleged fraudulent transfers pursuant to 11 U.S.C. § 548:(a) the 1998 transfer of the Union Hall property by Debtors to their son Rudy on the grounds that the sale was for less than full consideration because Debtors subsequently made some mortgage payments and paid some maintenance expenses for the property (Carey Mem. at 9-10);[12] (b) the transfer of the Union Hall property to Rudy on the grounds that the transfer was made to secure him as a lender and was therefore not a bona fide sale (id. at 9); (c) the lien on the Union Hall property held by Franklin Community Bank in the amount of $245,000 on the grounds that Franklin Community Bank was not a bona fide purchaser in good faith and did not act in good faith (id. at 14); (d) the possibility that Defendants may be repaying the line of credit from Franklin Bank and "intentionally misled the Court" regarding earlier payments (id. at 15-16); (e) the sale on April 10, 2003, of lakefront property in Virginia assessed at $5,000 to Kevin and Susan Burdzy for $10 (id. at 16); (f) the sale on November 28, 2003 of real property in Roxbury, New York, to Laura Kramer for less than fair value (id.); and (g) the transfers in 2003 of unspecified real and personal property valued at $26,600 for less than fair value (id. at 17). (Carey Decl., Ex. E, Bankruptcy Petition, Statement of Financial Affairs, Item # 2; Carey Mem. at 7-17.)
The Debtors' Objection to Motion For Leave to Commence Adversary Proceeding ("Objection," Appellant's App., Ex. D), urged the Bankruptcy Court to take note of Carey's legal fee claim of over $200,000 to collect a $72,000 judgment and the attendant burden of that litigation on the Debtors and their families and friends, and objected to his appointment to represent the estate. (Id, at 2.) The objection suggested Carey's motion selectively read transactional documents, e.g., that the Burdzy's had paid "ten dollars and other valuable considerations" for real property in Virginia when Carey had been provided with evidentiary proof in the dismissed adversary proceeding that they paid *676 $5,000, its fully assessed value. (Id.) (See Appellees' App., Ex. F, H, Affidavit of Kevin Burdzy, dated January 18, 2005, with attached assessment.) The sale of the Roxbury, New York, property to Laura Kramer-Carini was for $8,000. (Id. at 13.) The Objection argued that the legal expense of pursuing such claims far outweighed any positive benefits and would only harass the Debtors and other parties, and delay confirmation in this case.
After pressing procedural points, the Debtors requested that the Court apply the test in STN Enterprises, 779 F.2d 901 (2d Cir.1985), to "determine the probabilities of legal success and financial recovery in the event of success, as well as the terms relative to attorneys' fees, and therefore, whether pursuit of the claim will benefit the estate and to justify the anticipated delay and expenses in the bankruptcy case." (Objection at 5-6; citing STN, 779 F.2d at 905-906).
The Debtors pointed out that Franklin Bank had maintained that none of the transfers were fraudulent, that Carey does not "state any law upon which the relief he alleges can be granted," and that, in any event, Carey's fees will far outweigh any benefit to the estate. (Objection at 6.)
The Debtors concluded, "after seeing Carey operate, it must be clear to the Court that he is certainly not the appropriate party to pursue a claim on behalf of the trustees. It is likely that Carey will continue to prolong this case with inappropriate and unnecessary legal proceedings."
The Objection supported by affidavits from the Debtors in Carey's dismissed adversary proceeding argued that:
(1) the preference claim against Bank One for $4,250 was required by North Fork as a condition of closing; that Bank One is entitled under Chapter 13 to a 20% distribution, and that any lawsuit would have to be brought in the state of Bank One's principal place of business (28 U.S.C. § 1409), causing the cost of recovery to exceed the amount recovered;
(2) the preference claim against North Fork Bank for $68,320.59 was made to pay off an existing security interest in the cooperative unit as part of the refinancing and that, inasmuch as it was a security interest, North Fork did not receive any more than it would have recovered in a liquidation (11 U.S.C. § 547).
(3) that the fraudulent transfer claim against Franklin Community Bank is based on a refinancing in 2003 over five years after the original transfer and Carey has made no showing that the Bank was not a bona fide lender paying full consideration to the Debtors' son;
(4) that the Burdzy and Kramer transactions were bona fide sales at the assessed value of each of the properties.
The objection was supported by the affidavits of Debtors and Burdzy (Appellees' App., Ex. F). The Debtors also argued that the text of the statute itself supports their position, as the language of Sections 547 and 548 give express authority to pursue avoidance actions solely to the trustee.
Although Judge Blackshear's opinion is not a model of clarity, it is clear that the Court, after review of the adversary complaint and the motion papers, made certain determinations. First, Judge Blackshear found that there was not sufficient preliminary evidence suggesting that the Debtors intentionally misled the Court or the Chapter 13 trustee during the Section 341 meeting of creditors such that an adversary proceeding against the Debtors would be warranted. (Adv. Order at 1-2.) Second, *677 he found that the statutory period for bringing a fraudulent transfer action for the 1998 transaction with the Debtor's son had now run, both under the state statute and under the Bankruptcy Code. (Id. at 2.) Lastly, Judge Blackshear held that Carey, as a Chapter 13 creditor, lacked standing to pursue an adversary proceeding, and that Carey offered no evidence or rationale to support an exception to this rule. (Id.)
The question of standing is dispositive in this case. Judge Blackshear examined In re STN Enterprises, 779 F.2d 901, 904 (2d Cir.1985), a Chapter 11 proceeding, for authority to determine whether an individual creditor had standing to commence an adversary proceeding in a Chapter 13 proceeding. (Adv. Order at 2). He noted that the Second Circuit in STN "found an implied, but qualified, right for creditors' committees to initiate [adversary] proceedings in the name of the debtor in possession" in Chapter 11 proceedings and that "other courts have allowed creditors committees to initiate proceedings only when the trustee or debtor in possession unjustifiably failed to bring a suit or abused its discretion in not suing to avoid a preferential transfer." (Id.); quoting In re STN Enterprises, 779 F.2d at 904. He concluded that the creditor's entitlement to bring avoidance actions is a qualified right, adding that it is "at times predicated on the standard of extraordinary circumstances." (Adv. Order at 2.)
Judge Blackshear then turned his attention to whether a Chapter 13 creditor such as Carey should be granted standing to bring an avoidance action and concluded "even if the Court could `judicially craft' an exception to the standing rule," it would require "a showing of `extraordinary circumstances'...." (Id.)[13] Judge Blackshear found that "the movant has failed to show the requisite `extraordinary circumstances' " in this ease. (Id.) Noting that "derivative standing cases are usually granted in complex chapter 11 cases," he stated that "chapter 13 trustees are ordinarily reticent about pursuing avoidance actions in a chapter 13 case because of the nominal amount of recovery for creditors." Judge Blackshear also found that the trustee had not shown the court that he had conducted a "cost-benefit analysis to determine whether the contemplated litigation is in the best interest of all creditors." (Id. at 2-3)(no emphasis added). He then denied the application. (Id. at 3.)
Carey argues that Judge Blackshear erred in relying on STN Enterprises, because STN has been superceded by Commodore (2d Cir.2001) and Housecraft (2d Cir.2002). In STN, the Court held that to give a creditor's committee standing to sue in a Chapter 11 proceeding, the Court *678 must undertake a cost-benefit analysis before allowing the adversary suit by the creditors' committee to be filed. 779 F.2d at 905. Commodore extended STN to allow a creditors' committee to "acquire standing to pursue the debtor's claims if (1) the committee has the consent of the debtor in possession or trustee, and (2) the court finds that suit by the committee is (a) in the best interest of the bankruptcy estate, and (b) is `necessary and beneficial' to the fair and efficient resolution of the bankruptcy proceedings." 262 F.3d 96, 100 (2d Cir.2001). Housecraft broadened Commodore slightly, to allow standing to an individual creditor, acting on behalf of the trustee if the action "is in the best interest of the estate." Housecraft, 310 F.3d 64, 71 n. 7 (2d Cir.2002). Thus cases held, as in STN, that prior to granting approval the Court must make a costbenefit analysis. Judge Blackshear found that the trustee had not shown that "the contemplated litigation is in the best interest of all creditors." (Adv. Order at 2-3.) Such a determination requires a court to make a cost-benefit analysis, thus essentially complying with the standard set forth in STN, Housecraft, and Commodore.
In Chapter 11 cases, the Second Circuit has granted standing to creditors' committees and to individual creditors to pursue adversary proceedings. Commodore, 262 F.3d 96; Housecraft, 310 F.3d 64. Nevertheless, the parties cite no parallel exception for creditors in Chapter 13 proceedings against individual debtors. The Second Circuit has never extended its standing exception to Section 548 to a Chapter 13 creditor, and such an exception cannot necessarily be inferred from the Chapter 11 cases because Chapter 11 and Chapter 13 are distinctly different proceedings. Individual debtors in Chapter 13 proceedings do not have the financial resources or personnel to divert time and funds to the demands of litigation that are available to corporations in Chapter 11 proceedings. The claims contemplated by Carey in his proposed adversary proceeding would have required the Debtors to devote time and legal expenses to the litigation. This Court has been unable to find any authority in other circuits or bankruptcy court opinions authorizing an exception to allow a creditors' committee or individual creditor standing to bring an adversary proceeding in a Chapter 13 case.
Shortly after the new Bankruptcy statute was enacted in 1980, Judge Schwartzberg, a highly respected judge on the Bankruptcy Court for the Southern District of New York, explained in In re Ciavarella, 28 B.R. 823, 825 (Bankr.S.D.N.Y. 1983), "the unique nature of Chapter 13 proceedings, where the debtor is given broad authority and status to effect a rehabilitation." In distinguishing Chapter 13 proceedings from Chapter 11 or Chapter 7 proceedings, Judge Schwartzberg pointed to the "entirely voluntary" nature of Chapter 13 proceedings, the limited powers of the trustee who "serves an administrative function," the rehabilitative purpose of Chapter 13, the broader benefits to the debtor, and the immateriality of "debtor's past conduct" due to Chapter 13's focus on "future earnings or other future income of the debtor." (Id. at 825-826.) With respect to standing, Judge Schwartzberg pointed out that:
a Chapter 13 creditor is not authorized to exercise the avoiding powers prescribed in Code § 547(b) or Code § 549(a). If creditors in a Chapter 13 case who received preferential or avoidable transfers were answerable to the other creditors in the case, so that Chapter 13 creditors might shoot it out against each other while the Chapter 13 debtor stood by passively without having *679 a choice in the matter, the net result could be the demise of the Chapter 13 case.
(Id. at 825).[14]
Other courts have followed Judge Schwartzberg's reasoning, holding that, unlike a Chapter 11 debtor, "a Chapter 13 debtor does not have standing to independently assert the trustee avoidance powers." Ryker v. Current (In re Ryker), 315 B.R. 664, 667 (Bankr.D.N.J.2004); see also In re Binghi, 299 B.R. 300, 306 (Bankr. S.D.N.Y.2003) ("The plain and unambiguous statutory language of Sections 1303 and 544(a), the Supreme Court decision in Hartford Underwriters and overwhelming case law compel the conclusion that Chapter 13 debtors do not have standing to assert trustee's avoidance powers.") See also, In re Milam, 37 B.R. 865 (Bankr.N.D.Ga.1984)(denying standing to a Chapter 13 creditor who sought to set aside debtor's conveyance of property to his wife as fraudulent, because this power resides solely with the trustee.)
Judge Blackshear did not find, as Carey argues, that a creditor could not have standing to bring an adversary action in a Chapter 13 proceeding. He held that a Bankruptcy Court, using its equitable Section 105 powers, might grant such an exception to the standing provisions in the Code upon a showing of "extraordinary circumstances." He found that Carey presented no evidence that such circumstances existed here, and that the trustee had not made "a cost-benefit analysis to determine whether the contemplated litigation is in the best interest of all the creditors." (Adv. Op. at 2-3.)[15] On appeal, Carey has not shown that Judge Blackshear's finding of fact is clearly erroneous. Carey's fraudulent transfer claimsagainst the Burdzy's and Kramer-Carinisuggest a minimal, if any, likelihood of recovery in these actions, Carey pointed to no indicia of any fraudulent transfer, and any possible recovery would be negligible when compared with the cost of pursuing either one. Similarly, Carey pointed to no evidence that the Franklin Bank, the holder of the Union Hall mortgage, was not a bona fide lender for value. Carey's claims regarding fraud in the 1998 transfer of the Union Hall property to Debtors' son and subsequent mortgage and maintenance payments by Debtors are not so clearly maintainable that this Court could find that Judge Blackshear's finding was an abuse of discretion. Carey's argument that the Debtors' son was a lender to the Debtors and not a purchaser of the Union Hall property had no evidentiary support. Carey's preference claims against North Fork Bank and Bank One evolved into a claim, not against either of those creditors, but into a claim of "concealed funds" from the March 2004 apartment refinancing based entirely on unsubstantiated speculation over how the balance of $38,000 was disposed of pre-petition, any portion of which, even if it can be considered a preference and can be recovered for the bankruptcy estate, was unlikely to exceed the litigation costs in pursuing the unidentified beneficiaries. It was not unreasonable for Judge Blackshear to coney *680 clude that, under these circumstances, authorizing an adversary action containing these diverse claims was unlikely to provide additional assets to the Bankruptcy estate and would be offset by the costs of recovery. Furthermore, allowing the adversary proceeding would embroil the Debtors in a number of litigations and adversely affect their ability to pay off the creditors in this Chapter 13 proceeding out of "future earnings or other future income" of the Debtors. On balance it is clear that Judge Blackshear's finding that Carey had not shown that the contemplated litigation was in the best interests of all creditors, had support in the record before him.
Since the Second Circuit has not crafted an exception to the standing rule for Chapter 13 creditors, and since Judge Blackshear found both that there were no extraordinary circumstances sufficient to merit such an exception, and since neither Carey nor the trustee had shown that the benefits of such an action would outweigh the costs, the decision of the Bankruptcy Court denying standing to Carey to commence an adversary hearing was not clearly erroneous and is upheld.
CONCLUSION
For the foregoing reasons, the decision of the Bankruptcy Court is upheld with respect to its denial of Carey's post-petition interest, reduction of Carey pre-petition, pre-judgment interest from 12% to 9%, and its denial of Carey's motion for leave to commence an adversary proceeding. With respect to the Bankruptcy Court's denial of Carey's fee application in its entirety, this appeal is remanded to the Bankruptcy Court for further findings consistent with this opinion.
IT IS SO ORDERED.
NOTES
[1] Carey's complaint included a claim against Rudi Ernst Jr., the Debtors' son, based upin an alleged oral promise to pay Dr. Ernst's legal fees. The court found this claim not viable because a "special promise to answer for the debt of another is unenforceable unless in writing.'' (State Court Op. at 3.) The Appellate Division, First Department vacated that decision and reinstated the claim against Rudi Ernst, Jr. (State Court II Op.) Rudi Ernst, Jr. seeks reconsideration. (Letter of October 21, 2005, from Debtors' counsel.)
[2] During oral argument before this Court, the parties stated that they had exchanged exhibits before the February 22, 2005 hearing (Aug. 12, 2005 Trans, at 42), though the Bankruptcy Court docket sheet does not reflect such a submission of exhibits between January 20, 2005 and February 22, 2005.
[3] Judge Blackshear implemented this opinion with his March 7, 2005 Order.
[4] Though the case before this Court involves a prior state judgment award of legal fees, such claims are also subject to § 502(b). Kohn v. Leavitt-Bemer Tanning Corp., 157 B.R. 523, 527 (N.D.N.Y.1993)("Section 502(b) requires the bankruptcy court to undertake a two-part analysis. First the court must `determine the amount of [a creditor's] claim as of the date of the filing of the petition....' In a case such as the one at bar, this means accepting as non-reviewable the amount of the claim as determined by the state court. This figure then forms the basis for the second part of the analysis, wherein the court determines how much of the claim should be allowed. Applying the principles of equity inherent in the code, the court looks behind the judgment to ascertain the relationship between the parties"); See also Pepper v. Litton, 308 U.S. 295, 307, 60 S.Ct. 238, 84 L.Ed. 281 (1939)("The bankruptcy court in passing on allowance of claims sits as a court of equity").
[5] Section 102 reads in pertinent part:
(1) "after notice and a hearing", or similar phrase
(A) means after such notice as is appropriate in the particular circumstances, and such opportunity for a hearing as is appropriate in the particular circumstances, and such opportunity for a hearing as is appropriate in the particular circumstances; but
(B) authorizes an act without an actual hearing if such notice is given properly and if
(i) such a hearing is not requested timely by a party in interest; or
(ii) there is insufficient time for a hearing to be commenced before such act must be done, and the court authorizes such act[.]
[6] Confusingly, Carey also submitted computerized daynotes, evidently generated at a later date from the handwritten daynotes. The computer-generated daynotes generally omitted data necessary to determine that the services were necessary to obtaining a judgment against Debtors.
[7] The state court decision did award Carey pre-judgment "interest from July 31, 1998," but did not state the rate of interest. (State Court Op. at 4.)
[8] Review of Carey's daynotes supports the Bankruptcy Court's conclusion that Carey's claim for account stated was allowed to linger for years while he explored the defendants' assets and his claim against the Debtors' son. (Carey Fee App. and attached exhibits.)
[9] Unsecured creditors are not entitled to postpetition interest. 11 U.S.C. § 502. The petition was filed ten days after the state court opinion. (Fee Op. at 4.) The record does not reveal when judgment was entered on the state court opinion.
[10] The trustee's consent consisted of an endorsement to Carey's letter to him stating, "no object." (Appellant's App., Ex. C.)
[11] Carey acknowledged that discovery in the dismissed adversary proceeding had shown that the Debtors had refinanced their New York apartment on March 1, 2004 in the amount of $120,000, and that the Debtors had disclosed that the $68,320.00 payment to North Fork Bank was made to pay off a prior secured loan and that the $4,275 payment of Bank One was a requirement of the refinancing. Carey stated that the adversary proceeding would seek to recover from recipients an unexplained balance of $38,000. (Carey Mem. at 6-7.)
[12] In connection with the Union Hall purchase, Rudi made a down payment of $34,000 to Debtors and obtained a mortgage loan from First Virginia Mortgage Company ("First Virginia") in the amount of $136,000, $135,181.84 of which was remitted to Debtors as the balance of the purchase price of $170,000. (Carey Mem. at 8.) He executed a deed of trust secured by the Union Hall property on September 10, 1998. (Id.) First Virginia assigned the Deed of Trust to Countrywide Home Loans, Inc. ("Country Wide"). (Id.; Affidavit of Linda Adams, Appellant's App. Ex. J, 17.) Some mortgage payments were made by Debtors when Rudi lost his job at ABC television. (Affidavit of Rudi Ernst, Jr., Appellant's App., Ex. N, f 13.) On March 26, 2003, Rudi entered into Home Equity Line/Credit Agreement with Franklin Community Bank in the amount of $165,000 and thereafter increased the terms of credit as the property value increased. The outstanding loan is now $243,642.20, plus interest. (Franklin Brief at 4-6.)
[13] The "extraordinary circumstances" test was used by the district court in Surf' N Sun Apts., Inc. v. Dempsey, to answer whether a Chapter 7 creditor could pursue a fraudulent transfer action, 253 B.R. 490 (M.D.Fla.1999); citing In re V. Savino Oil & Heating Co., 91 B.R. 655, 657 (Bankr.E.D.N.Y.1988)("such authority might be granted upon showings of particularly extraordinary circumstances"). The Surf N Sun Court noted that this exception to the language of Section 548 of the Bankruptcy Code, which grants such power to bring an avoidance action only to the trustee, was conceived in the context of Chapter 11 cases and that at least two district courts had applied it in Chapter 7 cases. 253 B.R. at 493. The Court noted that the Bankruptcy Court's equity powers granted to it under Section 105, justify this exception to Section 548. Id. "The court may issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of this title." 11 U.S.C. § 105(a). The court held, however, that in light of the Section 548 language, no such exception could be made. Surf N Sun, 253 B.R. at 494. In In re V. Savino Oil, which post-dates STN, the Court held that in a Chapter 11 case such authority could be granted in "particularly extraordinary circumstances." 91 B.R. at 657.
[14] Though Ciavarella only dealt with §§ 547(b) and 549(a), the reasoning asserted in that case would apply equally to § 548.
[15] Indeed the evidence before Judge Blackshear consisted of a letter from Carey to the trustee, which did not enclose his proposed complaint or describe the various actions Carwas actually contemplating, beyond saying that he sought "to set aside fraudulent conveyances and to avoid preferences." The trustee in turn offered no indication of his thought processes, simply endorsing the letter, "no object." (February 7, 2005 Letter to Jeffrey Sapir, Appellant's App., Ex. C.)
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283 F.Supp. 734 (1968)
Robert HUGHES
v.
Leonard CHITTY, d/b/a Tideland Towing Company et al.
No. 7689.
United States District Court E. D. Louisiana, New Orleans Division.
April 9, 1968.
*735 Owen J. Bradley, Plotkin, Sapir, Bradley & Krasnoff, New Orleans, La., for plaintiff.
Monte J. Ducote, Schoemann, Gomes & Ducote, New Orleans, La., for defendants.
COMISKEY, District Judge.
MEMORANDUM OF DECISION
This is a motion by the defendants, Ernest L. Canulette,[1] Charles W. Wall, Sr.,[2] and Employers Mutual Liability Insurance Company of Wisconsin[3] to dismiss and/or for summary judgment under the provisions of Rule 12(b) of the Federal Rules of Civil Procedure. The motion is directed against the supplemental libel of plaintiff, Robert Hughes.
The plaintiff, Hughes, was employed as a carpenter for M & W Marine Ways, Inc., which was engaged in the business of repairing various types of watercraft. M & W had been engaged to perform general overhaul and repair work to the tugboat "TIDELAND" which was owned by Leonard Chitty.
The "TIDELAND" was swamped and capsized in the Mississippi River on *736 August 18, 1964 near New Orleans. It sunk to the bottom of the river where it remained until October 1964, when it was raised and taken to M & W repair facilities to commence the overhaul work. On October 14, 1964, the plaintiff, Hughes, went aboard the "TIDELAND" to engage in the work of his employer, when an explosion occurred causing his injuries for which he seeks damages. The tug, at the time of the explosion, was docked on the Mississippi River.
At this point in time, all defendants have been dismissed from this action except for Canulette, Wall and Employers Mutual Liability Insurance Company of Wisconsin. In a summary judgment granted in favor of Leonard Chitty, d/b/a Tideland Towing Company on February 4, 1966 made final on May 11, 1966, Judge Ainsworth concluded that the vessel was out of navigation, hence no unseaworthiness claim could lie. He also concluded that the shipowner was not negligent, thus defeating all other causes of action that plaintiff might have had against the shipowner.
It is clear that the injury suffered by the plaintiff was the result of a maritime contract and occurred over navigable waters of the Mississippi. It is well settled that a contract to repair a vessel is maritime. North Pacific Steamship Co. v. Hall Brothers Marine Railway & Shipbuilding Co., 249 U.S. 119, 39 S.Ct. 221, 63 L.Ed. 510 (1910). Hence, admiralty jurisdiction attaches, and the only question raised by the plaintiff in this regard is whether the Longshoremen's and Harbor Workers' Act has concurrent jurisdiction with Louisiana Workmen's Compensation Act[4] so that the plaintiff has an election. Or put another way, is this accident in the "twilight zone" defined in Davis v. Department of Labor, 317 U.S. 249, 63 S.Ct. 225, 87 L.Ed. 246 (1939) by Mr. Justice Black but limited by Calbeck v. Travelers Insurance Co., 370 U.S. 114, 82 S.Ct. 1196, 8 L.Ed.2d 368 (1962). The limitation imposed by Calbeck was after a complete historical analysis of the Longshoremen's Act. The Court speaking through Mr. Justice Brennan in Calbeck said, "Our conclusion is that Congress invoked its constitutional power so as to provide compensation for all injuries sustained by employees on navigable waters whether or not a particular injury might also have been within the constitutional reach of a state workmen's compensation law." Furthermore, he said "* * * the Acts adoption of Jensen line between admiralty and state jurisdiction as the limit of federal coverage included no exception for matters of `local concern'". The Calbeck decision has been subject to wide discussion both in the case law and the legal journals.[5] The Fifth Circuit immediately after Calbeck in Holland v. Harrison Bros. Dry Dock and Repair Yard, Inc., 306 F.2d 369 held that where it is clearly an admiralty jurisdictional injury the federal remedy is mandatory.[6]
*737 It is our conclusion that where injury occurred on a vessel in navigable waters while engaged in a maritime contract of repairing a vessel out of navigation, then admiralty jurisdiction attaches and the injured employee's mandatory remedy is under the Longshoremen's and Harbor Workers' Compensation Act.
The plaintiff, Hughes, is attempting to hold defendant Wall, Canulette and their liability insurer for the damages sustained. Under the provision of 33 U.S.C.A. § 905[7] the exclusive liability of the employer shall be compensation under this act. Also under 33 U.S.C.A. § 933(i),[8] as amended 1959, fellow workers including officers are immune under the act from suit by injured employees, however they may still have a right of action against third parties. This is made crystal clear by looking to the Congressional intent under the amended provisions:[9]
"The other major provision of the bill relates to immunization of fellow employees against damage suits. The rationale of this change in the law is that when an employee goes to work in a hazardous industry he encounters two risks. First, the risks inherent in the hazardous work and second, the risk that he might negligently hurt someone else and thereby incur a large common-law damage liability. While it is true that this provision limits an employee's rights, it would at the same time expand them by immunizing him against suits where he negligently injures a fellow worker. It simply means that rights and liabilities arising within the `employee family' will be settled within the framework of the Longshoremen's and Harbor Workers' Compensation Act."
Therefore, if we accept admiralty jurisdiction and the injured parties remedy as the Longshoremen's Act, it becomes manifest that the exclusive remedy provisions of the Act would exclude this action against defendant Wall, an officer of the employer, M & W, and defendant, Canulette, the operations officer of the employer. So with regard to these two defendants the motion to dismiss should be granted.
But the plaintiff maintains that this action against the insured under the Direct Action Statute of Louisiana[10]*738 creates a separate and distinct right of action in favor of an injured party[11] and that the immunity granted by the Longshoremen's Act is in the nature of a personal defense unavailable to insurer. A search of the jurisprudence has revealed no case on point to support this proposition and the plaintiff admits this is res novo with regard to the Longshoremen's Act.
The insurance policy is a "Comprehensive General Liability Policy" which includes as named insured "any executive officer, director or stockholder thereof while acting within the scope of his duties as such" and under its exclusions is included "any obligation for which the insured or any carrier as his insurer may be held liable under any workmen's compensation, unemployment compensation or disability benefits law, or under any similar law;" because Workmen's Compensation is provided under a separate policy, it is maintained that this action would not come under this provision.
In support of plaintiff's position, In re Independent Towing Co., 242 F.Supp. 950 (E.D.La.1965) is cited, referred to here as ITCO. In ITCO the question before the court was whether the statutory provision limiting liability of a vessel owner to the amount of the vessel was a personal defense unavailable to an insurer who received a premium under a contract of insurance for liability coverage. The court concluded that it was a personal defense available only to the shipowner and the apparent benefits cannot be urged or asserted by the liability insurer. At page 954 the ITCO court said:
"Since equity traditionally has been concerned with those mitigating circumstances more or less personal in nature which involve one individual's relations vis-a-vis another, it then follows that limitation, as `the administration of equity in admiralty" is a proceeding in personam which evokes defenses personal in nature. Therefore, as a defensive action, in personam a petition for exoneration from or limitation of liability is the assertion of a personal defense."
In ITCO the Louisiana Direct Action Statute was the vehicle used to hold the insurer as in the case at bar, and the court concluded that it has been consistently held to deprive insurers or underwriters of the insured's personal defenses. Personal defenses held not to be *739 available to insurers as a defense are such as lunacy, minority, bankruptcy, governmental immunity, charitable immunity, interspousal immunity and family immunity.
However, if we conclude that this defense is unavailable to the insurer defendant, we would in substance be creating a new remedy for injured employees in actions not only against fellow workers, but also against employers. Such a position would clearly contravene the exclusiveness provided by the Longshoremen's and Harbor Workers' Compensation Act and therefore permit a state statute with regard to insurance to be in derogation of the statutory grant of general maritime jurisdiction. It would also be in violation of Congressional intent as quoted supra and manifested by the amended provision of 33 U.S.C.A. § 933 (i). Where Congress has clearly enacted a statute granting limited remedies to injured parties on navigable waters involved in maritime contracts, it is Congress, not the courts, who should make any changes giving additional remedies.[12]
Consequently, we find that the exclusiveness of remedy available to the plaintiff, Hughes, under the Longshoremen's and Harbor Workers' Compensation Act bars this suit against the defendant insurance carrier and therefore the defendant Employers Mutual Liability Insurance Company of Wisconsin can avail itself of this defense.
Hence for the reasons stated above, we grant to the defendants, Wall, Canulette and Employers Mutual Liability Insurance Company of Wisconsin, the motion to dismiss.
NOTES
[1] Ernest L. Canulette was sued as an officer of M & W Marine Ways Inc. He was employed at the time of the accident as Operations Manager.
[2] Charles W. Wall, Sr. was sued as an executive officer and stockholder of M & W Marine Ways Inc.
[3] Employers Mutual Liability Insurance Company of Wisconsin was sued as the insurer under a general liability policy which covered the executive officers and stockholders of M & W Marine Ways Inc.
[4] See generally La.R.S. 23:1 et seq.
[5] See Gainsburgh and Fallon "Calbeck v. Travelers Insurance Co. `The Twilight's Last Gleaming?'" 37 Tul.L.R. 79 (1962); also Bue, Admiralty Law in the Fifth Circuit A Compendium for Practitioners, 4 Houston L.Rev. 347, 378-384 (1966); also Gisevius and Leppert, Maritime Injury Problems: Admiralty versus State Jurisdiction, 12 Loyola L.Rev. 57 (1965-66).
[6] 306 F.2d 369 at page 372, Judge Wisdom says "[the] (twilight zone) doctrine does not give every injured water front worker freedom to choose the more generous compensation statute. Where admiralty jurisdiction is clearly present the federal remedy is mandatory. And where there is a total absence of admiralty jurisdiction the worker must of course seek relief under the state law. But when the case is on the borderline the worker is entitled to seek relief under either his state law or the federal law * * *"; Also see where the N.J. Supreme Court held that even though injured employee received benefits under the Longshoremen's Act where there was apparent clear admiralty jurisdiction, the injured employee could also receive benefits under the State Act based on the outmoded "local concern" doctrine. See Hansen v. Perth Amboy Dry Dock Co., 48 N.J. 389, 226 A.2d 4 (1967); Szumski v. Dale Boat Yards, Inc., 48 N.J. 401, 226 A.2d 11 (1967).
[7] 33 U.S.C.A. § 905 reads as follows:
"The liability of an employer prescribed in section 904 of this title shall be exclusive and in place of all other liability of such employer to the employee, his legal representative, husband or wife, parents, dependents, next of kin, and anyone otherwise entitled to recover damages from such employer at law or in admiralty on account of such injury or death except that if an employer fails to secure payment of compensation as required by this chapter, an injured employee, or his legal representative in case death results from the injury, may elect to claim compensation under this chapter, or to maintain an action at law or in admiralty for damages on account of such injury or death. In such action the defendant may not plead as a defense that the injury was caused by the negligence of a fellow servant, nor that the employee assumed the risk of his employment, nor that the injury was due to the contributory negligence of the employee. Mar. 4, 1927, c. 509, § 5, 44 Stat. 1426."
[8] 33 U.S.C.A. § 933(i) reads as follows:
"The right to compensation or benefits under this chapter shall be the exclusive remedy to an employee when he is injured, or to his eligible survivors or legal representatives if he is killed, by the negligence or wrong of any other person or persons in the same employ: Provided, That this provision shall not affect the liability of a person other than an officer or employee of the employer. As amended Aug. 18, 1959, Pub.L. 86-171, 73 Stat. 391.
[9] U.S.Code Congressional and Administrative News 86th Congress, First Session 1959 Volume 2, pages 2135-2136.
[10] La.R.S. 22:655 reads in full: "No policy or contract of liability insurance shall be issued or delivered in this state, unless it contains provisions to the effect that the insolvency or bankruptcy of the insured shall not release the insurer from the payment of damages for injuries sustained or loss occasioned during the existence of the policy, and any judgment which may be rendered against the insured for which the insurer is liable which shall have become executory shall be deemed prima facie evidence of the insolvency of the insured, and an action may thereafter be maintained within the terms and limits of the policy by the injured person, or his or her survivors mentioned in Revised Civil Code Article 2315, or heirs against the insurer. The injured person or his or her survivors or heirs hereinabove referred to, at their option, shall have a right of direct action against the insurer within the terms and limits of the policy; and such action may be brought against the insurer alone, or against both the insured and insurer jointly and in solido, in the parish in which the accident or injury occurred or in the parish in which an action could be brought against either the insured or the insurer under the general rules of venue prescribed by Art. 42, Code of Civil Procedure. This right of direct action shall exist whether the policy of insurance sued upon was written or delivered in the State of Louisiana or not and whether or not such policy contains a provision forbidding such direct action, provided the accident or injury occurred within the State of Louisiana. Nothing contained in this Section shall be construed to affect the provisions of the policy or contract if the same are not in violation of the laws of this State. It is the intent of this Section that any action brought hereunder shall be subject to all of the lawful conditions of the policy or contract and the defenses which could be urged by the insurer to a direct action brought by the insured, provided the terms and conditions of such policy or contract are not in violation of the laws of this State."
[11] See Lumbermen's Mutual Casualty Co. v. Elbert, 348 U.S. 48, 75 S.Ct. 151, 99 L.Ed. 59 (1956).
[12] Compare Dandridge v. Fidelity & Casualty Co., 192 So. 887 (La.App. 2nd Cir. 1939) where a suit was brought against the insurer of the statutory employer for damages in tort under the public liability insurance contract where the court held "* * * [the] plaintiff's claim against the United Gas Company is not well founded in law, for the reason the law provides that her sole and exclusive right is to claim compensation. There is no relative incapacity of the plaintiff to sue the insured, United Gas Company, and there is no relative immunity of the insured against being sued by plaintiff. The law only defines the kind of suit she may bring against the insured, the same as it defines the kind of action that can be brought under any other given state of facts. * * *
* * * the insurer and the insured are referred to as being liable in solido if the insured becomes liable for a claim for damages. But in such case the insurer is like the principle debtor, and if the claim against the insured is not well founded in law, the insurer is not liable. We are convinced the casualty company has the legal right to urge the same defense urged here by the insured, * * *" (Emphasis added)
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113 F.Supp. 881 (1953)
ALDERMAN
v.
BALTIMORE & OHIO R. CO.
No. 1392.
United States District Court S. D. West Virginia, Charleston Division.
July 31, 1953.
*882 William L. Jacobs and William Bruce Hoff, Parkersburg, W. Va., for plaintiff.
Steptoe & Johnson, Charleston, W. Va. (Stanley C. Morris, W. F. Wunschel and E. Lloyd Leckie, Charleston, W. Va.), for defendant.
MOORE, Chief Judge.
Plaintiff, a citizen of West Virginia, brings this action against defendant, a Maryland corporation, to recover for personal injuries sustained by her as a result of the derailment of one of defendant's trains near Adrian, West Virginia, on February 14, 1952.
Plaintiff was not a fare-paying passenger. She was traveling on a trip pass, which afforded her free transportation from Flatwoods, West Virginia, to Morgantown, West Virginia, and return. The following conditions were printed on the pass: "In consideration of the issuance of this free pass, I hereby assume all risk of personal injury and loss of or of damage to property from whatever causes arising, and release the company from liability therefor, and I hereby declare that I am not prohibited by law from receiving free transportation and that this pass will be lawfully used."
Plaintiff in her original complaint charged defendant with negligence in the maintenance of its tracks and the operation of its train. After a pre-trial conference, at which the legal effect of the release from liability contained in the pass was discussed, plaintiff filed an amended complaint charging defendant with wilful or wanton conduct.
On the basis of the amended pleadings and supporting affidavits filed by defendant, defendant moved for summary judgment under Rule 56 of the Federal Rules of Civil Procedure, 28 U.S.C.A., on the ground that there was no genuine issue as to any material fact, and that plaintiff failed to state a case of wilful or wanton conduct.
It is undisputed that the derailment was caused by a break in one of the rails as the train was passing over the track. It is also shown by defendant's affidavits, and not denied, that the break in the rail was due to a transverse fissure inside the cap of the rail, which broke vertically under the weight of the train; that such a fissure is not visible upon inspection; that such defects occur in both new and old rails; and that a visual inspection was in fact made of this particular rail the day preceding the accident and the defect not discovered.
Since plaintiff was an intrastate passenger, and since the accident occurred in West Virginia, the law of West Virginia governs both the effect to be given to the release and the degree of care which defendant owed plaintiff. New York Central Railroad Co. v. Mohney, 252 U.S. 152, 40 S.Ct. 287, 64 L.Ed. 502.
In West Virginia it is firmly established that a common carrier for hire owes its passengers the highest degree of care compatible with practical operation of the vehicle, and that it may incur liability for the slightest negligence. Laphew v. Consolidated Bus Lines, 133 W.Va. 291, 55 S. E.2d 881; Isabella v. West Virginia Transportation Co., 132 W.Va. 85, 51 S.E.2d 318; Adkins v. Raleigh Transit Company, Inc., 127 W.Va. 131, 31 S.E.2d 775.
However, counsel have been unable to direct the Court's attention to, and the Court has not found, any West Virginia decision *883 which has determined the effect which a release from liability contained in a pass has upon the carrier's duty to the holder of such a pass. In the cases of Harris v. City & Elm Grove Railroad Co., 69 W.Va. 65, 70 S.E. 859, 50 L.R.A.,N.S., 706, and Bailey v. Bartlett, 112 W.Va. 27, 163 S.E. 615, 616, the court indicates that such a release would be valid, at least to a limited extent. In the Bartlett case the Court said: "The law seems to be well established that the same degree of care that is owed to a passenger for hire is owed to one who is carried gratuitously, in the absence of any condition or stipulation on the part of the latter as to assumption of risk." (Emphasis supplied.)
Since the Federal statute and the West Virginia statute authorizing the issuance of free passes are similar, 49 U.S. C.A. § 1(7), and W.Va.Code, Ch. 24, Art. 3, § 4, it is pertinent to examine the United States Supreme Court decisions construing the Federal statute. The Supreme Court has held that a carrier may contract against liability for negligent injury to one who accepts a free pass, Francis v. Southern Pacific Co., 333 U.S. 445, 68 S.Ct. 611, 92 L. Ed. 798; Charleston & Western Carolina Railway Co. v. Thompson, 234 U.S. 576, 34 S.Ct. 964, 58 L.Ed. 1476; Northern Pacific Railway Co. v. Adams, 192 U.S. 440, 24 S. Ct. 408, 48 L.Ed. 513; but that for reasons of public policy it cannot relieve itself of liability for wilful or wanton acts. New York Central Railroad Co. v. Mohney, supra.
I am therefore of opinion that the sole duty imposed upon defendant under the facts of this case was to refrain from wilfully or wantonly injuring plaintiff.
In Kelly v. Checker White Cab, Inc., 131 W.Va. 816 at page 822; 50 S.E.2d 888 at page 892, the West Virginia court, quoting from 29 Cyc. 510 said: "`"In order that one may be held guilty of wilful or wanton conduct, it must be shown that he was conscious of his conduct, and conscious, from his knowledge of existing conditions, that injury would likely or probably result from his conduct, and that with reckless indifference to consequences he consciously and intentionally did some wrongful act or omitted some known duty which produced the injurious result."'" See also Stone v. Rudolph, 127 W.Va. 335, 32 S.E. 2d 742.
The substance of plaintiff's contention that defendant wilfully injured her is that defendant used old and obsolescent rails in its tracks, knowing that the use of these rails made derailments reasonably probable. It is charged that defendant used old rails because the cost of derailments was less than the cost of replacing the old rails, and that for this reason defendant was willing to take the risk of derailments.
I am of opinion that the complaint fails to state sufficient facts to substantiate a charge of wilfulness, as that term is defined by the West Virginia court. It is clear that plaintiff has stated a charge of negligence; but that is not the test in this case. To establish wilfulness it would be necessary to charge that defendant knew of this particular defect in the rail; that the defect would probably result in a break in the rail if the train were run over it, causing a derailment of the train; and that defendant, with this knowledge of existing conditions, and the likelihood or probability of an injury resulting from its conduct, intentionally drove its train over the defective rail with an indifference to the consequences. The undenied affidavits of defendant show clearly that plaintiff cannot establish these facts.
At the hearing of this motion, counsel for plaintiff moved for a continuance of the hearing to enable him to substantiate a newspaper report to the effect that defendant was using old and obsolescent rails in its tracks because the cost of derailments was cheaper than the cost of replacing the rails. The motion was denied since this contention, even if it were true, merely has a bearing on an issue of negligence, and not upon the question of wilful conduct. Plaintiff does not contend that she can establish that defendant knew of the particular defect in the rail that caused the derailment.
For the reasons stated above, defendant's motion for summary judgment will be sustained. An appropriate order may be entered.
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61 B.R. 292 (1986)
In re SHOP-N-GO OF MAINE, INC. d/b/a Stop-N-Go of Maine, Inc., Debtor.
UNITED STATES of America Small Business Administration, Plaintiffs,
v.
SHOP-N-GO OF MAINE, INC. d/b/a Stop-N-Go of Maine, Inc. and Harvey J. Putterbaugh, Trustee, Defendants.
Civ. No. 86-0095 P.
United States District Court, D. Maine.
June 5, 1986.
Harlan J. Choate, Sp. Asst. U.S. Atty., Augusta, Me., for plaintiffs.
George J. Marcus, Anne M. Pare, Pierce, Atwood, Scribner, Portland, Me., for defendants.
MEMORANDUM OF DECISION AND ORDER AFFIRMING THE DECISION OF THE BANKRUPTCY COURT
GENE CARTER, District Judge.
This case is before the Court on appeal from a final order of the Bankruptcy Court awarding the Small Business Administration ("SBA") (1) the compounded interest earned on the investment of the net proceeds of the sale of its collateral from the date of investment until disbursement of the proceeds; and (2) the compounded interest earned on the investment of administrative expenses relating to the sale of Debtors' Pine Street property. The Trustee has appealed, asserting that both awards of interest and the method allowed for computing such interest were in error.
The stipulation of facts and legal issues on which the judgment below is based shows that Debtor filed its petition for reorganization under Chapter 11 on June 24, 1981. The case was converted to a Chapter 7 proceeding in November 1981, at which time the present Trustee was appointed. The SBA filed a complaint for relief from stay on December 4, 1981, and by agreement of all parties in interest, the Trustee sold the debtor's properties free and clear of liens held by the SBA. The SBA liens, which were for $93,240.66 on a note assigned by Depositors' Trust Co., and $80,820.18 on a note assigned to SBA by Northeast Bank, attached to the proceeds of the sales of the collateral. After making appropriate deductions, the Trustee realized total net proceeds of $31,620.88 on sale of the collateral for the Depositors' *293 note and $30,934.78 on the sale of collateral for the Northeast note.
Shortly after the sales in May 1982, the Trustee invested the proceeds in interest-bearing repurchase agreements at the variable rates of interest set forth in the parties' stipulation. On November 23, 1982, the Trustee contested the extent of the SBA liens on Debtor's property. After adjudication in the Bankruptcy Court and appeal to this Court, it was determined on April 2, 1984, that the SBA liens did not extend to all of Debtor's properties but were limited to five properties in Portland, Skowhegan and Lewiston, Maine.[1] On April 12, 1984, counsel for the SBA wrote a letter to the Trustee setting the amounts he thought were due the SBA under its assigned notes. On June 28, 1985, the SBA filed an application for an order requiring the Trustee to account and disburse, which resulted in the order which is the subject of this appeal.[2]
The Trustee first asserts that the SBA is not entitled to receive interest on the net proceeds of sale because the SBA is undersecured and interest is not payable by the Trustee with respect to undersecured claims. For this proposition, he relies on a negative inference drawn from 11 U.S.C. § 506(b)[3] and earlier decisional law providing that interest on claims against a debtor's funds ceases to accrue when the petition is filed. Vanston Bondholders Protective Committee v. Green, 329 U.S. 156, 163-64, 67 S.Ct. 237, 240, 91 L.Ed. 162 (1946).
The Court agrees with the Bankruptcy Court that the interest sought by the SBA here is not interest on its claim. There is no record indication that prior to liquidation the SBA ever sought more than the amounts due it on the notes plus interest that had accrued on the notes prior to the filing of the petition. The SBA's application for an order to account and disburse clearly seeks "all proceeds of sales of debtor's property subject to plaintiff's perfected security interest together with all interest earned on said proceeds from date of receipt by said trustee to date of disbursement to this plaintiff." Record, Vol. I-3 (emphasis added). In the context of a liquidation proceeding, this application cannot be construed to seek interest on the creditor's claim, which in turn increases the claim on an undifferentiated estate.
As has been oft stated, section 506 of Title 11 "merely codifies pre-Code law that an oversecured creditor can assert, as part of its secured claim, its right to interest and costs arising under its credit agreement." United Merchants & Manufacturers, Inc. v. Equitable Life Assurance Society, 674 F.2d 134, 138 (2d Cir.1982) (emphasis in original; bold emphasis added). As the Trustee concedes, Appellant's Brief at 11, the interest sought does not arise under the credit agreement. It is not covered, therefore, by section 506(b) or the pre-Code rule there codified.
This is further demonstrated by the fact that many of the reasons for not allowing interest on secured claims to accrue after the filing of the petition do not apply with equal force when the interest sought is on proceeds, all of which are subject to a perfected security interest. For example, exaction of interest in this situation is not like the penalty for law-imposed delay prohibited by Vanston and its predecessors. See Vanston, 329 U.S. at 163, 67 S.Ct. at 240. The interest sought will not come from the general funds of the Debtor or its other assets, but from money generated from funds earmarked for the SBA.
*294 Another reason expressed in Vanston for prohibiting accrual of interest concerned the administrative inconvenience of recomputation of claims because of continuous recomputation of interest. Id. at 164, 67 S.Ct. at 240. Such is obviously not the case here. The claim was a fixed one and did not fluctuate, causing uncertainty in the administration of the estate. The only administrative burden, once the collateral was liquidated, was payout of a sum readily determinable.
In deciding that the SBA is entitled to interest earned on the proceeds of its collateral, the bankruptcy judge relied on a nonbankruptcy case in which the Court of Appeals for the First Circuit allowed interest under a Massachusetts statute on money which had been attached. As here, the interest was "not `disputed contractual damages,' but simply interest on an `undisputed fixed sum' held in escrow." Afcodian (International) Ltd. v. Brompton Air Services Division of African-American Trade Corp., 753 F.2d 176 (1st Cir.1985).
In an even more recent decision, the Court of Appeals has applied the same principle in a bankruptcy case in which a law firm sought to be compensated for delay in receiving its fees and expenses. In Boston and Maine Corp. v. Moore, 776 F.2d 2, 12 (1st Cir.1985), the Court affirmed the denial of compensation for delay in payment of legal fees during a corporate reorganization,[4] but allowed the law firm to collect is proportional share of interest that had accrued on a fund that had been set aside specifically to pay claims, including the law firm's claims for fees, that had not been paid prior to the consummation date of the reorganization. The Court stated:
[W]e see no reason why the amount of interest earned by the portion of the fund that is to be awarded to Shea should not be paid to petitioner. See In re Penn Central Transportation Co., 23 B.R. 499, 513 ([Bankr.]E.D.Pa.1982); cf. Webb's Fabulous Pharmacies, Inc. v. Beckwith, 449 U.S. 155, 162, 101 S.Ct. 446, 451, 66 L.Ed.2d 358 (1980) ("The usual and general rule is that any interest on an interpleaded and deposited fund follows the principal and is to be allocated to those who are ultimately to be the owners of that principal."). It is true, of course, that Shea has no right to the money until its fee petitions are granted. Nonetheless, if some of the money was earmarked for payment to B & M's counsel, and Shea is now entitled to payment from that fund, it seems appropriate for petitioner to receive its proportionate share of the interest that has accrued in the interim. For parties other than for whose benefit the fund was established to receive the interest that has accrued, simply because the fees had not been paid earlier to Shea, strikes us as an undeserved windfall to them.
Id. at 13.
This Court realizes that the situation here is not identical to that set forth in Moore, where the fund was established after the reorganization was fully accomplished. It is analogous, however. Under 11 U.S.C. § 363, liquidated cash collateral, like the proceeds subject to SBA's liens here, must be segregated and accounted for. Because the segregated cash collateral may not be used by the Trustee without a court order, it is like a fund earmarked for the secured creditor. Moreover, the record does not indicate that any other creditor had an interest in the collateral which was liquidated, and the fact that the Trustee has paid to the SBA the entire proceeds from the collateral initially liened by it indicates that the SBA alone, and not other lienors, was entitled to the fund. This being so, the "circumstances and equities *295 permit[ted]," id., the Bankruptcy Court's award to the SBA of the interest that had accrued on the proceeds from the sale of its collateral.
The Trustee also challenges the Bankruptcy Court's order "that the SBA is entitled to receive the interest earned on the investment of administrative expenses relating to the sale of debtor's 64 Pine Street property from the date of investment until disbursement of such amount to the SBA." The Trustee argues that the $4209.19 in administrative expenses erroneously charged to the SBA was not money retained and invested by the Trustee, but was instead paid out for rent and taxes. Although the Trustee cites Exhibit A to the Stipulation of Facts as substantiation of these points, that exhibit does not appear in the Court's file and cannot form a basis for the challenge to the bankruptcy court's ruling.
Even if the Court assumes the representations of counsel to be true, however, there appears no basis for overturning the Bankruptcy Court's decision awarding interest on the administrative expenses. The Bankruptcy Court did not make specific findings concerning the $4209.17 in administrative expenses. This Court can infer from the Court's ruling, however, that a sum equivalent to that sum, which the Trustee sought to charge to the SBA, was invested by the Trustee. See In re Brown, 21 B.R. 701 (1st Cir.Bankr.App.1984). The Bankruptcy Court's July 25, 1983 ruling made clear that although the Trustee had not regarded it so, the $4209.17 was indeed part of the fund earmarked for the SBA. Implicit in the Court's decision to award the interest on that acknowledged part of the fund is the finding that it is equitable to do so. Although it did not make its findings explicit, this Court assumes that the Bankruptcy Court exercised its discretion to award the interest only after it had made the appropriate equitable determinations. These would have included findings (1) that the fund contained sufficient sums to make the interest payments; (2) that the amount of the award was proper; and (3) that there were not serious adverse effects on other outstanding claims. See Boston and Maine Corp. v. Moore, 776 F.2d at 13. There is no suggestion in the record that these findings, which necessarily underlie the Bankruptcy Court's decision, are clearly erroneous. Permitting the Trustee to retain, for distribution to other creditors, the interest earned on money which should have been in the secured creditor's fund would provide the undeserved windfall which the Court of Appeals sought to avoid in Moore.
The Trustee's final challenge regards the Bankruptcy Court's direction that "the SBA is entitled to receive such interest compounded, as "compounded" is defined in the parties' stipulation." The Trustee argues that "compounded" is not defined in the parties' stipulation and that simple interest is the only interest which has been quantified in the stipulation and can, therefore, be awarded.
Although the record is sparse and the bankruptcy judge does not detail what is meant by "compounded," he obviously found that more than simple interest was earned on the invested proceeds. It seems clear that under Moore, neither the Trustee nor other creditors should reap a windfall from the investment of SBA's liened proceeds. The SBA is entitled to all of the money earned with its money, whether initial interest or interest on reinvested interest. Having examined the briefs submitted to the Bankruptcy Court, this Court infers, once again, see In re Brown, 21 B.R. at 701, that the Bankruptcy Court's reference to the stipulation, as regards compounding, implies that the investments there described were actually reinvestments of both principal and interest. Thus, the Court's award of compounded interest describes that sum to which the SBA is equitably entitled.
Accordingly, it is ORDERED that the decision of the Bankruptcy Court is hereby affirmed.
So ORDERED.
NOTES
[1] The figures given above for proceeds on SBA's assigned notes represent the sums received from sales of these five properties, the liens upon which were never contested.
[2] The briefs note that the Trustee disbursed the net proceeds of the sales of the collateral securing both assigned notes on October 15, 1985.
[3] Section 506(b) provides:
To the extent that an allowed secured claim is secured by property the value of which, after any recovery under subsection (c) of this section, is greater than the amount of such claim, there shall be allowed to the holder of such claim, interest on such claim, and any reasonable fees, costs or charges provided under the agreement under which such claim arose.
[4] The SBA urges this Court to affirm the bankruptcy court's decision on a similar ground, granting it compensation for delay in enforcing its rights against the collateral under the concept of "adequate protection" set forth in 11 U.S.C. §§ 361-364. The bankruptcy court was presented with this argument but did not address it in its opinion or use it in any way as the basis for its decision. The record on appeal is inadequate for the Court properly to evaluate the adequate protection argument, which it appears is most often applied to interest in the reorganization rather than liquidation context.
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215 B.R. 132 (1997)
COUNTY OF OAKLAND, Appellant-Defendant,
v.
Richard FRALICK and Sandra Fralick, Appellees-Plaintiffs.
Bankruptcy No. 1:97-CV-626, Adversary No. 96-8277.
United States District Court, W.D. Michigan, Southern Division.
October 3, 1997.
John J. Lynch, III, Vandeveer, Garzia, P.C., Birmingham, MI, for County of Oakland.
Craig W. Elhart, Elhart & Power, Traverse City, MI, for Richard J. Fralick.
OPINION
RICHARD A. ENSLEN, Chief Judge.
This matter is before the Court pursuant to Bankruptcy Rules 8001 and 8013 in order to resolve the appeal of the County of Oakland of the Bankruptcy Court's Order of June 11, 1997 determining that the plaintiffs' *133 judgment debt to the County of Oakland was dischargeable pursuant to 11 U.S.C. § 523. For the reasons which follow, the determination of the Bankruptcy Court is affirmed.
I.
This matter involves Charlotte O'Leary, the minor child of Sandra Fralick and her former husband, Daniel O'Leary. Charlotte O'Leary was removed from the care of her parents because of abuse and neglect by Order of the Oakland County Juvenile Court of January 3, 1996. In April of 1996, the child was returned to the care of her mother. On June 10, 1996, the Juvenile Court ordered that the natural parents reimburse the County of Oakland for costs of the child's care ($5,043.80) and attorney fees ($330) pursuant to state statute requiring parents to reimburse counties for the costs of foster care placement and attorney fees Mich.Comp. Laws § 712A.18. Since then, Sandra Fralick has re-married and with her new husband has filed bankruptcy and sought a determination that these court-ordered expenses are dischargeable under the Bankruptcy Code.
This matter was fully briefed and argued before the Bankruptcy Court for the Western District of Michigan, the Honorable James D. Gregg presiding. Therein, Judge Gregg determined by Order of June 11, 1997 that the debt was dischargeable because the debt for child-support was not owed directly to the child, a spouse or former spouse and it was not owed to a governmental entity entitled to the support because of a valid assignment of support. This appeal then followed.[1]
II.
This matter is before the Court for the sole reason of testing the Bankruptcy Court's statutory interpretation of 11 U.S.C. § 523(a)(5). Under Bankruptcy Rule 8013, and the general law governing appeals, this Court must review the statutory interpretation of the Bankruptcy Court de novo. United States v. Hans, 921 F.2d 81, 82 (6th Cir.1990); In re Acequia Inc., 787 F.2d 1352, 1357 (9th Cir.1986); In re Chang, 210 B.R. 578, 580 (9th Cir. BAP 1997)
In making this interpretation, the Court must construe the statute as a whole giving effect to each word of the statute. United States v. Nordic Village, Inc., 503 U.S. 30, 35, 112 S. Ct. 1011, 1015, 117 L. Ed. 2d 181 (1992); United States v. Caldwell, 49 F.3d 251 (6th Cir.1995). In doing so, the Court must also attempt to preserve the legislative purposes of the statute passed by Congress. United States v. Noland, 517 U.S. 535, 116 S. Ct. 1524, 134 L. Ed. 2d 748 (1996). The Court does so first by looking to the language of the statute itself and then, if it unclear, by looking at the legislative history of the statute Toibb v. Radloff, 501 U.S. 157, 161, 111 S. Ct. 2197, 2199-2200, 115 L. Ed. 2d 145 (1991).
III.
Title 11 United States Code Section 523(a)(5) provides as follows:
Section 523. Exceptions to Discharge
(a) a discharge under section 727, 1141, 1228(a), and 1228(b) 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 other order of a court of record, or other determination made in accordance with State or territorial law by a governmental unit 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 (other than a debt assigned pursuant to section 402(a)(26) of the Social Security Act [42 U.S.C. § 602(a)(26)], or any such debt which has been assigned to the Federal Government or to a State or any political subdivision of such State); or
(B) such debt includes a liability designated as alimony, maintenance or support, *134 unless such liability is actually in the nature of alimony, maintenance or support;
11 U.S.C.A. § 523(a)(5) (West 1993).[2]
This statute partakes of the bankruptcy system which Congress has enacted pursuant to its express constitutional authority to do so. Its subject is the technical, but crucial, one of discharge the fresh start that debtors are customarily granted in Title 11 proceedings. See Grogan v. Garner, 498 U.S. 279, 111 S. Ct. 654, 112 L. Ed. 2d 755 (1991). Because discharge is so crucial to the bankruptcy process, the Supreme Court and the lower courts have traditionally interpreted exceptions to discharge narrowly in favor of the debtor. Gleason v. Thaw, 236 U.S. 558, 562, 35 S. Ct. 287, 289, 59 L. Ed. 717 (1915); In re Omegas Group, Inc., 16 F.3d 1443, 1452 (6th Cir.1994); In re Ward, 857 F.2d 1082, 1083 (6th Cir.1988). While there is a tension between this presumption and the purpose of this particular exception to discharge namely, to except from discharge court-ordered monies for the support of children which are owed directly to either the children or to a spouse or former spouse for the children's support the Court must remember to interpret exceptions to discharge, including this one, narrowly. In re Chang, 210 B.R. at 581.
It is evident from the language of this statute that it intends to except child support obligations from discharge, but only to the extent they are owed directly to the child or to a spouse or former spouse that is supporting the child. In re Erfourth, 126 B.R. 736, 740-41 (Bankr.W.D.Mich.1991); In re Crouch, 199 B.R. 690 (9th Cir. BAP 1996) (discussing statutory language and statutory history); In re Spencer, 182 B.R. 263 (Bankr. E.D.Cal.1995). Appellant, the County of Oakland, seeks to distinguish the cited case law on the ground that the above cases concerned situations in which the children and not the parents caused the need for foster placement. This distinction, however, has no basis in the statutory language here interpreted and the cause of placement is not a basis for the statutory interpretations adopted in the above cases. Furthermore, other cases in which the cause of placement is not discussed at all have determined that the parents' debt of reimbursement of foster care expenses under state statute is dischargeable because the debt for support is owed to an entity other than a child, spouse or ex-spouse and was not owed because of an assignment of support to a governmental entity. In re Saafir, 192 B.R. 964, 969 (Bankr. D.Neb.1996).
Both the Saafir and the Erfourth decisions mentioned above rely upon the language of Section 523(a)(5)(A) which explicitly excludes from the exception to discharge voluntary or statutory assignments to entities other than children, spouses and ex-spouses. This limitation to the exception to discharge is itself limited by language which makes clear that an assignment of a debt pursuant to 402(a)(26) of the Social Security Act which refers to a voluntary assignment of support as part of the Aid to Families with Dependent Children ("AFDC") program and other similar assignment of debts to governmental entities are treated like support owed to a child, spouse or ex-spouse. See, e.g., In re Jones, 94 B.R. 99 (Bankr.N.D.Ohio 1988) (holding that child support debt that had been assigned as part of AFDC program was non-dischargeable). In this case, though, the County of Oakland has not been assigned an interest in the debtor's right to child support as part of a state or federal program like AFDC. Rather, as in Saafir and Erfourth, the County is simply trying to enforce its rights against the parents under a state statute for reimbursement for costs of foster care placement. Such rights do not constitute an assignment of child support and therefore the obligation contained in the Juvenile Court's Order of Reimbursement is dischargeable under Section 523. Erfourth, 126 B.R. at 740-41; Saafir, 192 B.R. at 969.
*135 IV.
Therefore, it is the conclusion of this Court that the Order of the Bankruptcy Court should be affirmed.
NOTES
[1] The Court resolves this appeal without oral argument because it concludes pursuant to Bankruptcy Rule 8012 that the decisional process would not be significantly aided by oral argument.
[2] The Court notes that there have been subsequent technical amendments to the statute which do not affect its general interpretation. The 1993 version of the statute is used instead of the current version because this debt was incurred before the effective date of the 1996 amendments to Section 523.
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104 B.R. 976 (1989)
In re MARINE IRON & SHIPBUILDING COMPANY, Debtor.
MARINE IRON & SHIPBUILDING COMPANY and Historic Properties, Inc., Plaintiffs,
v.
CITY OF DULUTH, Defendant.
Civ. No. 5-89-166, Bankruptcy No. 5-86-434, Adv. No. 5-88-12.
United States District Court, D. Minnesota, Fifth Division.
August 8, 1989.
*977 Thomas C. Bartsh, Resnick & Bartsh, P.A., Minneapolis, Minn., for plaintiffs.
David R. Michelson, Van Evera, Clure, Butler & Michelson, P.A., Duluth, Minn., for Unsecured Creditors Committee.
Charles B. Bateman and Nikki M. Newman, Halverson, Watters, Bye, Downs & Maki, Ltd., Duluth, Minn., for defendant.
ORDER GRANTING DEFENDANT'S MOTION FOR ABSTENTION
RENNER, District Judge.
This adversary proceeding in bankruptcy comes on before the undersigned United States District Judge upon a Report and Recommendation by the United States Bankruptcy Court, made on July 17, 1989. No objections were filed to that Report and Recommendation. Based upon the record before this Court,
IT IS HEREBY ORDERED:
1. That this Court adopts the Report and Recommendation;
*978 2. That Defendant's motion for abstention under 28 U.S.C. § 1334(c) is granted, and this Court abstains from and dismisses the claims of Plaintiff Marine Iron & Shipbuilding Company against Defendant, without prejudice.
ORDER DISMISSING COMPLAINT OF PLAINTIFF HISTORIC PROPERTIES, INC.
AND
REPORT AND RECOMMENDATION ON DEFENDANT'S MOTION FOR ABSTENTION, AS TO COMPLAINT OF PLAINTIFF MARINE IRON & SHIPBUILDING COMPANY
At Duluth, Minnesota, this 17th day of July, 1989.
This adversary proceeding came on before the undersigned United States Bankruptcy Judge for hearing on Defendant's alternative motions for dismissal or abstention. Defendant appeared by its attorneys, Charles B. Bateman and Nikki M. Newman. Plaintiffs appeared by their attorney, Thomas C. Bartsh. Debtor's Unsecured Creditors Committee appeared by its attorney, David R. Michelson. Upon the moving and responsive documents and the other pleadings in this adversary proceeding, this Court:
1. dismisses all of the claims of Plaintiff Historic Properties, Inc. against Defendant without prejudice, for lack of subject-matter jurisdiction; and
2. makes the following report and recommendation to the District Court for disposition of Defendant's motion for abstention pursuant to BANKR.R. 5011(b), as to all remaining claims joined by Plaintiffs' complaint.
FINDINGS OF FACT AND PROCEDURAL BACKGROUND
Debtor, one of the two plaintiffs prosecuting this adversary proceeding, filed a voluntary petition under Chapter 11 of the Bankruptcy Code in this Court on December 4, 1986. Historic Properties, Inc. ("HPI"), the other plaintiff, is a Minnesota corporation.
Historically, Debtor was engaged in the business of industrial and commercial metal fabrication in Duluth, Minnesota, for over 100 years. By the time it commenced this adversary proceeding, Debtor had discontinued all of its metal-fabrication operations. By early 1988, its sole remaining major assets were several parcels of real estate on the Duluth waterfront, including the large office/industrial structure at 325 Lake Avenue South known as the "Meierhoff Building."
This Court confirmed Debtor's plan of reorganization on August 15, 1988. The plan is a liquidating plan; under it, Debtor will fund a distribution to unsecured creditors from its share of the proceeds from this lawsuit, if it is settled on terms favorable to Debtor or if Plaintiffs prevail after trial. The plan keys the aggregate amount of the unsecured creditors' distribution to the value of the lawsuit proceeds, via a percentage formula. It provides for interim partial distribution to unsecured creditors from other sources[1] if this litigation is not promptly resolved. In any event, it provides that unsecured creditors will realize from a recovery, as long as their percentage share of the lawsuit proceeds exceeds the "floor" amount set by the interim distributions.
Plaintiffs' complaint basically sounds in breach of contract. In it, Plaintiffs allege that:
1. On March 31, 1986, Debtor and HPI entered into an option agreement under which Debtor granted an exclusive first option to HPI for the purchase of the Meierhoff Building, for subsequent renovation and development as a hotel under the name of Waterfront Plaza. Under the terms of the option agreement, the parties contemplated HPI's assignment of its interest in the option to Historic Inns of America Limited Partnership ("HIA"); Debtor expressly consented to that assignment. One Ronald Jacob was at all relevant times a principal and/or employee of both HPI and HIA.
2. After Plaintiffs executed their option agreement, HPI began negotiations *979 with Defendant for entry into a development agreement.[2]
3. In a June 5, 1986 letter to Jacob,[3] David A. Sebok, Director of Defendant's Department of Planning and Development, notes "[t]he following [set of terms and conditions] forms the basis for negotiating a development agreement for the [Waterfront Plaza] development ..." He sets forth various obligations of both the developer (apparently contemplated to be HIA) and Defendant. In closing, Sebok noted "this outline will provide a basis for discussion of a final development agreement. This outline is not final but is subject to the following ..." He then set forth a number of other points for clarification, and various additional conditions precedent for Defendant's entry into a development agreement, such as the submission of a market feasibility study and evidence of adequate financing commitments.
4. In a July 10, 1986 letter to Jacob,[4] Sebok, confirmed a prior meeting among Jacob, an employee of Defendant's Department of Planning and Development, and Bill Meierhoff (Debtor's President), and set forth "the results of our further analysis" in the form of various additional conditions for the developers' use of tax-increment bond funding, the obligation of Defendant to apply for an Urban Development Action Grant ("UDAG") from the U.S. Department of Housing and Urban Development, and various other conditions. The letter closes with Sebok's statement that "I trust that this letter in conjunction with and as it modifies previous communications on this project, provides a basis upon which you can proceed with your financing arrangements."
In their complaint, Plaintiffs allege that these two letters constitute an "agreement" between Defendant and HPI apparently equating to "a contract enforceable at law or equity" by any direct or third-party beneficiary of it. They further allege that, in performance of this "agreement," HPI committed time and funds to the first stages of the proposed development; and that in reliance on the asserted agreement between HPI and Defendant, Debtor "chose not to cancel the option with [HPI], chose not to seek other buyers for its properties or further develop the building, and ... did not renew leases with its tenants or seek new tenants." Lastly, Plaintiffs allege that, in November, 1986, Defendant's responsible officials abruptly decided "not to proceed with the project," though apparently they did not formally notify Plaintiffs of that until March 11, 1987.
In separate, generally-phrased prayers for relief, Plaintiffs request awards of damages for Defendant's breach of the alleged agreement between HPI and Defendant. Under one, Debtor prays for an award of damages in excess of $1,700,000.00. In another, HPI prays for an award in an unspecified amount, to compensate it for its past advances of expenses, the loss of development and management fees, and the loss of its expectation of an equity interest in the development. The two plaintiffs also assert a third, joint "cause of action" in damages for breach of "implied warranties and covenants of good faith and fair dealing." Plaintiffs assert that this adversary proceeding is a "core proceeding" under 28 U.S.C. § 157(b)(2)(O) or, in the alternative, that this Court has "related-proceeding" jurisdiction under 28 U.S.C. § 157(c)(1).
In its answer, Defendant generally and specifically denies the existence of any enforceable contract running between it and either named plaintiff, alleging that the procedural formalities required under Minnesota law to bind Defendant to any contractual relationship were not performed; asserts that the attachments to Plaintiffs' complaint purportedly forming the agreement were addressed to HIA and *980 not to either named plaintiff; and asserts that Plaintiffs failed to allege the existence of any agreement between Debtor and Defendant which would support a cause of action by Debtor against Defendant. Defendant specifically denies that this adversary proceeding is either a core proceeding or a related proceeding; asserts lack of subject matter jurisdiction as an affirmative defense; declines to consent to the authority of a bankruptcy judge to enter final judgment; and prays for abstention in favor of adjudication in the Minnesota state courts. Defendant also demands a jury trial.
In the motions at bar, Defendant requests dismissal of this adversary proceeding on the ground that it does not constitute either a "core proceeding" within the meaning of 28 U.S.C. §§ 157(b), or a "related proceeding" within the meaning of 28 U.S.C. § 157(c), and that the federal courts therefore lack any jurisdiction to entertain it. In the alternative, Defendant requests that if the Court determines this adversary proceeding to be a "related proceeding," that it exercise "permissive abstention" under 28 U.S.C. § 1334(c)(1) to dismiss it.
DISCUSSION
I. Statutory Framework for Jurisdiction.
28 U.S.C. § 1334 grants general jurisdiction over bankruptcy cases and proceedings to the federal district courts. It provides that "the district courts shall have original and exclusive jurisdiction of all cases under [the Bankruptcy Code]," 28 U.S.C. § 1334(a), and that they "shall have original but not exclusive jurisdiction of all civil proceeding arising under [the Bankruptcy Code], or arising in or related to cases under [the Bankruptcy Code]," 28 U.S.C. § 1334(b).
Under this jurisdictional structure, the bankruptcy "case" over which the District Court has exclusive jurisdiction is only a framework for the present and future invocation of the federal courts' jurisdiction over the debtor and its financial affairs. The bankruptcy case is commenced by the filing of a bankruptcy petition, but the "case" is not an adversarial proceeding in and of itself. Under the jurisdiction conferred by the pendency of the bankruptcy case, however, parties in interest may commence proceedings to obtain judicial determinations of contested matters. These judicial proceedings have the attributes of various stages of civil litigation in nonbankruptcy forums. In re Arctic Enterprises, Inc., 68 B.R. 71, 76 at n. 4 (D.Minn. 1986); In re Northwest Cinema Corp., 49 B.R. 479, 480 at n. 4 (Bankr.D.Minn.1985).
For the purposes of the federal courts' bankruptcy jurisdiction, judicial proceedings in a bankruptcy case are divided into two classes: "core proceedings," as illustrated in 28 U.S.C. § 157(b)(2), and "proceedings related to a case under [the Bankruptcy Code]."[5]
28 U.S.C. § 157(b)(2)(A)-(O) contain a non-exclusive "laundry list" of various sorts of core proceedings. Title 28 does not define the phrase "core proceeding." In general, a core proceeding is a legal dispute between parties in interest to a bankruptcy case, one of whom is almost always the debtor. As fixed by the very nature of the parties' relationships to the debtor and the relief requested, core proceedings are those intrinsic to the adjustment of debtor-creditor relationships involved in bankruptcy relief. Gaslight Club, Inc. v. Official Creditors Committee, 46 B.R. 209, 211 (N.D.Ill.1985).
Similarly, Title 28 does not define the term "civil proceeding ... related to [a] case under title 11"; nor does it give any examples of a related proceeding.[6] The Eighth Circuit has held that
the test for determining whether a civil proceeding is related to bankruptcy is whether the outcome of that proceeding could conceivably have any effect on the estate being administered in bankruptcy.... *981 An action is related to bankruptcy if the outcome could alter the debtor's rights, liabilities, options, or freedom of action ... and which in any way impacts upon the handling and administration of the bankrupt estate.
National City Bank v. Coopers & Lybrand, 802 F.2d 990, 994 (8th Cir.1986) (quoting Pacor, Inc. v. Higgins, 743 F.2d 984, 994 (3d Cir.1984)). See also In re Dogpatch U.S.A., Inc., 810 F.2d 782, 786 (8th Cir.1987); In re Titan Energy, Inc., 837 F.2d 325, 329-30 (8th Cir.1988).
II. Summary of Defendant's Arguments.
Defendant moves for an order dismissing this adversary proceeding on alternative grounds. First, it argues that this lawsuit is neither a core proceeding nor a related proceeding, and notes that there is no independent basis for federal-court jurisdiction over it under the federal-question provisions of 28 U.S.C. § 1331 or the diversity-of-citizenship provisions of 28 U.S.C. § 1332. If this is the case, it would follow that the federal courts lack subject-matter jurisdiction to entertain this adversary proceeding, whether that jurisdiction be asserted as bankruptcy jurisdiction under 28 U.S.C. § 1334(b)-(c) or otherwise.
In the alternative, Defendant moves for an order abstaining from this lawsuit under the "discretionary abstention" provision of 28 U.S.C. § 1334(c)(1):
Nothing in this section prevents a district court in the interest of justice, or in the interest of comity with State courts or respect for State law, from abstaining from hearing a particular proceeding arising under title 11 or arising in or related to a case under title 11.
Dismissal, without prejudice, would be the necessary result of an exercise of discretionary abstention. These motions do not reach the merits of Plaintiffs' complaint, and only address the identity of the court which will render judgment on that complaint.
As a threshold point in analysis, it is important to note that the two plaintiffs to this adversary proceeding actually have distinct claims[7] against Defendant which necessarily proceed under different theories, even though they spring from the same event Defendant's breach of an alleged contract. HPI sues in its own right for redress of the damage which it alleges it suffered as a result of the alleged breach of contract. It sues as a named party to the alleged contract.
Beyond that, Debtor sues in its own right to recover damages for the injury which it alleges it suffered, but it does so from a different status as party-plaintiff. While it is not crystal clear from the complaint, Debtor seems to argue that it was a third-party beneficiary to the development agreement. The complaint could also be construed as an assertion that, at the very least, Debtor would have obtained substantial benefits from the option agreement; that Defendant's performance under the development agreement was a necessary prerequisite to HPI's performance under the option agreement; and that Sebok was aware of the option agreement and contemplated it as a necessary commitment collateral to and prerequisite to the development agreement.
These two causes of action involve some common legal and factual issues, and some which are greatly disparate. For the purposes of jurisdiction and abstention, the two claims must be considered separately, and really as potentially-independent lawsuits.
III. Classification of This Adversary Proceeding.
The threshold question, then, is whether this adversary proceeding is properly classified as a "core proceeding" under 28 U.S.C. § 157(b)(2); a "civil proceeding related *982 to [a] case ... under title 11" as contemplated by 28 U.S.C. § 1334(b); or neither. This Court has the authority and obligation to make this determination. 28 U.S.C. § 157(b)(3). "A determination that a proceeding is not a core proceeding shall not be made solely on the basis that its resolution may be affected by State law." Id.
A. Core proceeding?
Neither of the claims in this adversary proceeding are properly classified as core proceedings. HPI's claim against Defendant is an action for breach of contract between two parties, neither of whom was the petitioner for bankruptcy relief in Debtor's case, and neither of whom was a scheduled creditor or claimant against Debtor's bankruptcy estate. Debtor's claim against Defendant is a cause of action against a third party who similarly was a stranger to the process of adjustment of debtor-creditor relationships which took place in Debtor's Chapter 11 case. Neither claim falls within any of the more specific examples of a core proceeding set forth in 28 U.S.C. §§ 157(b)(2)(B)-(N).
This leaves the "catch-all" provisions of 28 U.S.C. §§ 157(b)(2)(A) ("matters concerning the administration of the estate") and 157(b)(2)(O) ("other proceedings affecting the liquidation of the assets of the estate or the adjustment of the debtor-creditor ... relationship ..."). In support of their argument that this adversary proceeding is a core proceeding within one or the other of these provisions, Plaintiffs argue that this is a proceeding to liquidate a cause of action for the benefit of a bankruptcy estate, and that "a speedy resolution of the matter would impact upon the Debtor's ability to reorganize." Aside from the fact that the confirmation of its Chapter 11 plan terminated the existence of Debtor's bankruptcy estate[8] and fully and finally reorganized Debtor by readjusting its debt structure,[9] the argument still ignores the limitation on the jurisdiction and authority of the Bankruptcy Court imposed by the Supreme Court's decision in Northern Pipeline Construction Co. v. Marathon Pipe Line Co., 458 U.S. 50, 102 S. Ct. 2858, 73 L. Ed. 2d 598 (1982), and Congress's response to it in the Bankruptcy Amendments and Federal Judgeship Act of 1984. As the Eighth Circuit has noted, the Courts must avoid an expansive application of the catch-all provisions of 28 U.S.C. §§ 157(b)(2)(A) and (O) to avoid violating the mandate of Marathon Pipe Line. In re Cassidy Land and Cattle Co., Inc., 836 F.2d 1130, 1132 (8th Cir. 1988). To the extent that the plurality opinion in Marathon unequivocally settled any point of jurisdiction under the scheme of the Bankruptcy Code of 1978, it held that, absent consent of the parties, a state-law breach-of-contract action by a bankruptcy trustee or Chapter 11 debtor against a non-creditor third party could not be heard and finally determined by a federal judicial officer who was not protected by life tenure conferred under Article III of the Constitution. 458 U.S. at 87 n. 40, 102 S. Ct. at 2880 n. 40.
In all jurisdictional respects, Debtor's breach-of-contract action against Defendant is indistinguishable from the action which spawned Marathon. Congress enacted 28 U.S.C. §§ 157(b) and (c) and 1334(a) and (b) to respond to the Supreme Court's ruling in Marathon, and "[t]he distinction between core and non-core proceedings is at the heart of Congress's response ..." In re Cassidy Land and Cattle Co., Inc., 836 F.2d at 1132. It necessarily follows that Congress did not intend an action such as Debtor's claim against Defendant to fall within the catch-all provisions of 28 U.S.C. § 157(b)(2)(A) and (O). See also In re Castlerock Properties, 781 F.2d 159 (9th Cir.1986).
It is more obvious, virtually beyond argument, that HPI's claim against Defendant cannot be a core proceeding in Debtor's bankruptcy case. HPI is not a petitioner in bankruptcy before this Court and hence cannot invoke the federal courts' bankruptcy jurisdiction by asserting the protected status of a liquidating or reorganizing *983 debtor. HPI's claim against Defendant has nothing to do with the adjustment of debtor-creditor relations which took place in Debtor's reorganization, and Debtor's creditors will not be impacted in the least by HPI's recovery of damages if HPI prevails. HPI almost certainly could have sued its breach-of-contract claim in the Minnesota state courts without Debtor's participation as co-plaintiff, whether Debtor had been in bankruptcy or not. If Debtor cannot vest its claims in this lawsuit with the status of a core proceeding by asserting its own status in this Court, HPI as a stranger to the bankruptcy process certainly can not do so for its claims.
B. Related proceeding?
This does not dispose of the question of whether this is a related proceeding, however. As Defendant acknowledges, for there to be subject matter jurisdiction over a related proceeding under 28 U.S.C. § 1334(b), there must be some cognizable nexus between the civil proceeding and the Title 11 case. In re Dickenson Lines, Inc., 47 B.R. 653, 656 (Bankr.D.Minn.1985).
That nexus is present, for Debtor's claim against Defendant. To be sure, there is no longer a bankruptcy estate in administration under the protection of this Court; thus, were the Pacor, Inc. v. Higgins test limited to the pinpoint of its technical wording, the ostensible fundament for related-proceeding jurisdiction the bankruptcy estate which would be impacted by the proceeding has now vanished and the federal courts' jurisdiction over such proceedings has lapsed forever.
However, pursuant to the terms of its confirmed liquidating plan, Debtor is administering assets to fund a mandatory distribution to its unsecured creditors. In proposing the plan, Debtor specifically offered the fruits of its claim against Defendant to its unsecured creditors, undoubtedly as an inducement to accept the plan. The unsecured creditors accepted the offer. If Debtor prevails on its claim, the proceeds will provide unsecured creditors with the major portion of their realization from Debtor's bankruptcy. The outcome of Debtor's claim thus will have an undeniable effect on the value of the corpus of assets ultimately available for the benefit of creditors. Compare In re Grell, 83 B.R. 652, 657 (Bankr.D.Minn.1988) (where property which is the subject of a proceeding is either property of the bankruptcy estate or property of the debtor, jurisdiction will lie under 28 U.S.C. § 1334(b)). Because it has a central position in the restructuring of the rights of Debtor and its unsecured creditors under a confirmed plan of reorganization, Debtor's claim against Defendant is fairly classified as a civil proceeding related to Debtor's bankruptcy case. See In re Titan Energy, Inc., 837 F.2d at 330 ("... even a proceeding which portends a mere contingent or tangential effect on a debtor's estate meets the broad jurisdictional test articulated in Pacor.").[10]
The same result does not obtain for HPI's claim against Defendant. This is so regardless of the relative breadth of related-proceeding jurisdiction under Titan Energy; and regardless of the fact that the intercession of 28 U.S.C. § 157(c)(2) and BANKR.R. 5011(b) prevents an Article III bar to the District Court's ultimate disposition of related proceedings.
Even the broad scope of related-proceeding jurisdiction is subject to a limit. Classifying HPI's cause of action against Defendant would go far beyond that boundary. HPI could bring a breach-of-contract action against Defendant in any *984 court of appropriate jurisdiction, whether it joined Debtor as a co-plaintiff or not. The award of damages which it seeks is attributable to pecuniary losses which are unique to HPI, and to its role in the proposed development. HPI's losses are wholly distinct, legally and financially, from the injury which Debtor alleges it suffered. While Debtor would have to prove the existence and breach of the development agreement before it could proceed on its derivative claim, nothing would prohibit HPI from suing and recovering on its contractual claim without Debtor's participation and, in that event, any recovery by HPI would have no impact whatsoever on the eventual consummation of Debtor's confirmed plan. The only conceivable effect which the outcome of HPI's lawsuit could have upon Debtor's creditors would be if it lost. Admittedly, in that event Debtor's dependent claim would be doomed. However, that connection is simply too tenuous to constitute the nexus which must exist for the exercise of related-proceeding jurisdiction, when the two plaintiffs' causes of action are considered as separate lawsuits. Thus, HPI's claim against Defendant is not a civil proceeding related to a bankruptcy case, as contemplated under 11 U.S.C. § 1334(b).
IV. EXERCISE OF THE FEDERAL COURTS' JURISDICTION OVER THIS LAWSUIT.
A. Over Debtor's Claim Against Defendant.
Because Debtor's claim against Defendant is a "civil proceeding ... related to" Debtor's Chapter 11 case, the District Court has original subject-matter jurisdiction over it under 28 U.S.C. § 1334(b). Thus, even though Defendant resists hearing and entry of final judgment by a Bankruptcy Judge,[11] the District Court has jurisdiction over this claim. See In re Northwest Cinema Corp., 49 B.R. at 480. Thus, this Court will not dismiss those portions of the complaint joining Debtor's claims for want of subject-matter jurisdiction.
B. Over HPI's Claim Against Defendant.
The federal courts have no basis for jurisdiction over HPI's claim against Defendant outside of any which may stem from Debtor's status as a petitioner under Chapter 11. HPI's claim against Defendant is neither a core proceeding nor a related proceeding in Debtor's bankruptcy case, so the federal courts do not have bankruptcy jurisdiction over it either. The only conceivable ground for an assertion of federal-court jurisdiction over this claim is under the doctrine of pendent jurisdiction. Though neither of the parties argued the applicability of pendent jurisdiction over HPI's separate claim (probably because they did not acknowledge the legally distinct nature of the plaintiffs' claims), the Court is compelled to address it.
Under the doctrine of pendent jurisdiction, a federal court may exercise jurisdiction over a claim arising under state law, as to which there otherwise would be no federal jurisdiction, where that claim is joined in a lawsuit involving a federal-law claim over which the federal courts do have jurisdiction. The main claim and the pendent claim "must derive from a common nucleus of operative fact." United Mine Workers of America v. Gibbs, 383 U.S. 715, 725, 86 S. Ct. 1130, 1138, 16 L. Ed. 2d 218 (1966). As the Supreme Court noted, the power to exercise pendent jurisdiction
... need not be exercised in every case in which it is found to exist. It has consistently been recognized that pendent jurisdiction is a doctrine of discretion, not of plaintiff's right. Its justification lies in considerations of judicial economy, convenience and fairness to litigants; if these are not present a federal court should hesitate to exercise jurisdiction over state claims, even though bound to apply state law to them ... *985 United Mine Workers of America v. Gibbs, 383 U.S. at 726, 86 S. Ct. at 1139 (citation omitted). The Eighth Circuit has been inclined to apply the doctrine of pendent jurisdiction somewhat broadly. See Kroger v. Owen Equipment & Erection Co., 558 F.2d 417 (8th Cir.1977), rev'd, Owen Equipment & Erection Co. v. Kroger, 437 U.S. 365, 98 S. Ct. 2396, 57 L. Ed. 2d 274 (1978); Hess v. St. Joseph Police Pension Fund, 788 F.2d 1344 (8th Cir.1986). The District Court for this District has not been quite so inclined. See Medical Inc. v. Angicor Ltd., 677 F. Supp. 1000 (D.Minn. 1988).
Gibbs involved a plaintiff's attempt to pend state-law claims to federal-law claims where it asserted both sets of claims against the same defendants in a federal-court lawsuit. Seizing upon the Supreme Court's broadening of the scope of pendent jurisdiction in Gibbs, litigants since have attempted to further extend its reach to join additional parties subject to non-federal claims, to actions over which the federal courts could properly exercise jurisdiction, even though the federal courts would not otherwise have jurisdiction over those parties or the claims against them.
The Supreme Court has not been as ready to sanction broad-ranging use of this so-called "pendent-party" jurisdiction:
From a purely factual point of view, it is one thing to authorize two parties, already present in federal court by virtue of a case over which the court has jurisdiction, to litigate in addition to their federal claim a state-law claim over which there is no independent basis of federal jurisdiction. But it is quite another thing to permit a plaintiff, who has asserted a claim against one defendant with respect to which there is federal jurisdiction, to join an entirely different defendant on the basis of a state-law claim over which there is no independent basis of federal jurisdiction, simply because his claim against the first defendant and his claim against the second defendant "derive from a common nucleus of operative fact."
Aldinger v. Howard, 427 U.S. 1, 14, 96 S. Ct. 2413, 2420, 49 L. Ed. 2d 276 (1975). Acknowledging that an exercise of jurisdiction over all claims against all parties to a single cause of action would serve judicial economy, the Supreme Court nonetheless cautioned that "... the addition of a completely new party would run counter to the well-established principle that federal courts, as opposed to state trial courts of general jurisdiction, are courts of limited jurisdiction marked out by Congress." Aldinger v. Howard, 427 U.S. at 15, 96 S. Ct. at 2420. To delimit the scope of pendent-party jurisdiction, the Supreme Court abjured:
In short, as against a plaintiff's claim of additional power over a "pendent party," the reach of the statute conferring jurisdiction should be construed in light of the scope of the cause of action as to which federal judicial power has been extended by Congress.
Resolution of a claim of pendent-party jurisdiction, therefore, calls for careful attention to the relevant statutory language.
. . . . .
Before it can be concluded that such jurisdiction exists, a federal court must satisfy itself not only that Art. III permits it, but that Congress in the statutes conferring jurisdiction has not expressly or by implication negated its existence.
Aldinger v. Howard, 427 U.S. at 17-18, 96 S. Ct. at 2421-22 (emphasis in original).
Thus, the context in which the non-federal claim against the pendent party is asserted is crucial. Owen Equipment and Erection Co. v. Kroger, 437 U.S. at 375-76, 98 S. Ct. at 2403-04. The Court plainly must consider the relationship between the claim against the pendent party and the claim upon which federal-court jurisdiction is properly invoked. Thus, where the claim against the pendent party is a third-party complaint, depending at least in part upon the resolution of the primary federal-court claim, the relationship "is thus not mere factual similarity but logical dependence," Owen Equipment and Erection Co. v. Kroger, 437 U.S. at 376, 98 S. Ct. at 2404, *986 and will generally support an assertion of pendent-party jurisdiction. Where, however, the claim against the pendent party is not "an ancillary and dependent claim," but "a new and independent one," it will not support an assertion of pendent-party jurisdiction. Id. (pendent-party jurisdiction inappropriately asserted in wrongful-death action against defendant as to whom there was no independent basis of federal jurisdiction, after dismissal of complaint against co-defendant over whom there had been federal jurisdiction, where alleged causative roles of each co-defendant, and factual and legal theories of relief against each co-defendant, were distinct); Finley v. United States, ___ U.S. ___, 109 S. Ct. 2003, 104 L. Ed. 2d 593 (1989).
Thus, satisfaction of the Gibbs threshold requirement that the claims arise from a "common nucleus of operative fact" is not sufficient in and of itself to invoke pendent-party jurisdiction; such a relationship is only one of "mere factual similarity," which will not support pendent jurisdiction in the absence of some explicit or implicit authorization under a jurisdictional statute. Owen Equipment and Erection Co. v. Kroger, 437 U.S. at 376-7, 98 S. Ct. at 2404-05; Finley v. United States, ___ U.S. at ___, 109 S.Ct. at 2008. See also Zahn v. Internat'l Paper Co., 414 U.S. 291, 94 S. Ct. 505, 38 L. Ed. 2d 511 (1973).
Here, neither the cross-relationship of the two plaintiffs' claims nor the statutory source of federal jurisdiction over Debtor's claim supports an assertion of pendent-party jurisdiction. For federal jurisdictional purposes, the pendent claim is HPI's, which otherwise has no place in federal court. However, for substantive purposes HPI's claim is in fact the main claim. Debtor's claim (that Defendant's breach of the development agreement deprived Debtor of the benefit of its grant of a sale option to HPI) derives entirely from HPI's original breach-of-contract claim, which was premised upon that asserted development agreement. Defendant asserts on the merits that there was no enforceable contract between HPI and Defendant; or, assuming there was, Defendant either did not breach it or its breach was subject to a contractual defense. If either of these is the case, Debtor's subsidiary claim is wholly defeated.
For the purposes of pendent jurisdiction, this is definitely a case of "the tail wagging the dog." The threshold and primary dispute is the one which Plaintiffs seek to "shoehorn" into federal court by initially asserting federal jurisdiction over the derivative, subsidiary claim. Neither the main doctrine of pendent jurisdiction nor its pendent-party extension are designed to operate this way; rather, they are intended to afford a means of comprehensively resolving less central, though nonetheless meritorious, state-law claims in one federal forum, after the proper invocation of federal jurisdiction over more central claims.
To the same effect, the statute conferring related-proceeding jurisdiction over Debtor's claim against Defendant does not, either explicitly or impliedly, suggest that the federal courts were to have pendent jurisdiction in the bankruptcy forum over claims such as HPI's claim against Defendant. Clearly, Congress intended the structuring of bankruptcy jurisdiction in the district courts under the Bankruptcy Amendments and Federal Judgeship Act of 1984 as a response to the Supreme Court's mandate in Marathon, as well as the general precept that the federal courts are courts of limited jurisdiction. The "careful attention to the relevant statutory language" of 28 U.S.C. § 1334 mandated by Aldinger v. Howard requires a conclusion that Congress never intended the federal courts to entertain breach-of-contract claims between two non-debtor and non-creditor parties, with as little connection to the central issues of the bankruptcy case as is present here. The Supreme Court has cautioned that the federal courts may "not assume that the full constitutional power has been congressionally authorized [in the case of pendent-party jurisdiction], and will not read jurisdictional statutes broadly." Finley v. United States, ___ U.S. ___, 109 S.Ct. at 2007. The broad construction for the statutory grant of related-proceeding *987 jurisdiction[12] is thus inapplicable where pendent-party jurisdiction is asserted. A narrow construction of 28 U.S.C. § 1334, particularly against the backdrop of the post-Marathon evolution of the federal courts' bankruptcy jurisdiction, compels the conclusion that Congress impliedly declined to extend jurisdiction over parties and claims like those joined by HPI, in the context of a proceeding related to a bankruptcy case. See Aldinger v. Howard, 427 U.S. at 18-19, 96 S. Ct. at 2422-23.
C. Result, as to Jurisdiction.
Given the conclusions laboriously reached above,[13] this Court declines to dismiss Debtor's claim against Defendant for lack of subject-matter jurisdiction under 28 U.S.C. § 1334(b). However, as the federal courts lack subject-matter jurisdiction over HPI's claim against Defendant, this Court must grant Defendant's motion to dismiss that claim. As Defendant has implicitly consented to the authority of a bankruptcy judge to finally dispose of this adversary proceeding via dismissal for lack of jurisdiction, this Court may and will enter a dispositive order as to the claims over which the federal courts have no jurisdiction.
V. ABSTENTION FROM HEARING AND DETERMINING DEBTOR'S CLAIM AGAINST DEFENDANT.
The remaining issue is whether the federal courts should abstain from hearing and disposing of Debtor's claim against Defendant. Defendant requests that the federal courts exercise their discretion to abstain pursuant to 28 U.S.C. § 1334(c), in favor of allowing the litigation of this action under state common law to proceed in the Minnesota state courts. In support of its motion, Defendant primarily argues that both Plaintiffs' claims and particularly Debtor's claim against it raise novel questions of state law, as to which there is little or no governing precedent from the Minnesota appellate courts, and as to which the law is unsettled elsewhere.[14] Plaintiffs summarily deny this argument, without citing any Minnesota caselaw authority which even remotely touches on their theories of relief.
Out of deference for concerns of federalism, the federal courts may properly abstain from hearing and determining state-law claims where the status of the governing law is unsettled. See, e.g., In re Artic Enterprises, Inc., 68 B.R. 71, 77-78 (D.Minn.1986) ("Abstention is called for where it is more appropriate to have a state court hear a particular matter of state law ..."); In re Drenckhahn, 77 B.R. 697, 712 (Bankr.D.Minn.1987). On the other hand, in the absence of binding, on-point precedent from a state Supreme Court, a federal court may utilize existing authority on related questions from the same state to arrive at the precise rule which that state Supreme Court would be likely to apply. Smith v. Mark Twain Nat'l Bank, 805 F.2d 278 (8th Cir.1986); Carlson v. Tandy Computer Leasing, 803 F.2d 391 (8th Cir. 1986).
The advisability of abstention on the sole ground of "respect for state law" is a close question here. As noted, there are fairly explicit caselaw requirements for formation *988 of contracts with entities such as Defendant; and, there is also some authority[15] on the question of whether Debtor, as a nonparty to the development agreement, could nonetheless sue asserting a breach of it. Finally, the law governing "covenants of good faith and fair dealing" is in flux all over the United States, and is properly being developed in much major commercial and lender-liability litigation both the state and the federal courts. Thus, the alleged novelty and unsettled status of the questions of law presented in Debtor's claim against Defendant do not strongly support an exercise of discretionary abstention.
However, the general interest of justice, the interests of judicial economy, and the courts' general interest in insuring finality and uniformity of judgments all merit an exercise of discretionary abstention. This Court has dismissed HPI's main claim, to which Debtor's claim is entirely derivative. The two claims involve numerous common factual issues, and sequential legal issues. Thus, they should be heard and decided by the same court in the same lawsuit. Given that only state-law contract issues are involved, the state courts should be the ones with a presumptive expertise in that law. At the very least, a renewed joinder of the claims under a single state-court complaint would avoid the prospect of complex collateral estoppel issues, and the possibility of inconsistent adjudications, which would otherwise result were the claims separately litigated in state and federal courts. To be sure, the central importance of Debtor's claim to the interests of its creditors is one factor auguring against abstention in and favor of retaining federal jurisdiction. However, the factual intertwining and derivative relationship of the two claims suggest that abstaining from Debtor's claim is the only appropriate result, given the inability of the federal courts to entertain HPI's claim.
Lastly, judicial economy supports abstention. Defendant has demanded a jury trial. As Plaintiffs' claims are "Suits at common law," under the meaning of the Seventh Amendment, Defendants are entitled to trial by jury. Granfinanciera, S.A. v. Nordberg, ___ U.S. ___, 109 S. Ct. 2782, 106 L. Ed. 2d 26 (1989). The same conclusion obtains under the comparable provision of MINN. CONST. art. 1, § 3. Landgraf v. Ellsworth, 267 Minn. 323, 126 N.W.2d 766 (1964). See also Dairy Queen, Inc. v. Wood, 369 U.S. 469, 477, 82 S. Ct. 894, 899, 8 L. Ed. 2d 44 (1962). As a result, Debtor's claims would be transferred to the District Court, for trial there. LOC.R.BANKR.P. (D.Minn.) 103(d) and (e). There is no reason why two courts should have to preside over separate jury trials, where the claims to be tried thereby have the relationship which is present here. A single litigation in a single court with the participation of all involved parties will conserve the courts' and the parties' resources, which is yet another appropriate reason why the federal courts should abstain.
CONCLUSION
On the basis of the foregoing,
IT IS HEREBY ORDERED that all of those claims set forth in the section entitled "Second Cause of Action" in Plaintiffs' complaint, and those claims joined by Plaintiff Historic Properties, Inc. in the section entitled "Third Cause of Action" in Plaintiffs' complaint, are dismissed for lack of subject-matter jurisdiction in the federal courts, without prejudice to their renewal in another court of appropriate jurisdiction.
FURTHER, IT IS RECOMMENDED TO THE U.S. DISTRICT COURT that Defendant's motion for abstention be granted, as to all other claims joined in Plaintiffs' complaint.
BY THE COURT:
s/ Gregory F. Kishel
GREGORY F. KISHEL
U.S. Bankruptcy Judge
NOTES
[1] Mainly the redevelopment of a portion of the Meierhoff Building into residential condominiums.
[2] Apparently HPI and/or HIA planned to utilize substantial amounts of public financing to carry out the development, to be provided by or obtained through the issuance of tax increment bonds, or some other participation by Defendant.
[3] The letter is attached as an exhibit to Plaintiffs' complaint.
[4] Again, this letter was attached as an exhibit to the complaint.
[5] This distinction is also significant to the question of which judicial officer of the District Court i.e. a District Judge or a Bankruptcy Judge has the authority to enter a final judgment or order in a given proceeding.
[6] In the shorthand of bankruptcy parlance, a "civil proceeding . . . related to a [bankruptcy] case" is a "related proceeding."
[7] At the risk of some confusion, this Court will use the term "claim," even though that term has a specific and different meaning in the context of a bankruptcy case. See, e.g., 11 U.S.C. §§ 101(4) and 502. The term seems preferable to "cause of action," which may not be entirely precise in this situation. See, e.g., United States v. Memphis Cotton Oil Co., 288 U.S. 62, 67-68, 53 S. Ct. 278, 280-81, 77 L. Ed. 619 (1933).
[8] See 11 U.S.C. § 1141(b).
[9] See 11 U.S.C. § 1141(d)(1).
[10] Counsel for Debtor's Unsecured Creditors Committee argues that this is no more than a simple proceeding to garner assets for distribution to creditors. Were this the case, Debtor's claim might be indistinguishable from the mortgage-foreclosure actions found to be core proceedings in In re Dogpatch U.S.A., Inc. and In re Cassidy Land & Cattle Co. However, in both of those cases the Eighth Circuit concluded that the judicial foreclosure actions, as the sole or near-sole assets of the respective estates, were actually proceedings for turnover of fixed and matured debts within the scope of 28 U.S. § 157(b)(2)(E). Here, Defendant strenuously contests liability on a claim for breach of contract, and in any event the amount of the "debt" is wholly unliquidated. As noted infra at p. 982, this lawsuit is indistinguishable from that which spawned Marathon the archetypal "related proceeding."
[11] Defendant seeks to have it both ways in one respect, however as it apparently consents to a bankruptcy judge's entry of an order for dismissal in its favor. As will be seen, the Bankruptcy and District Courts will not have to face the question of which of them would address this proceeding, and through which dispositional process, as the federal courts should abstain from entertaining any of Debtor's claims.
[12] See, e.g., In re Titan Energy, Inc., 837 F.2d at 330.
[13] The length of the analysis produced by present exercise further underlines Judge O'Brien's tart, epigrammatic observation:
Basic principles of federal jurisdiction, like basic principles of hearsay, were developed long ago to vex honest lawyers and to confound simple judges. Although easily understood and readily applied in the most elementary theoretical situations, they quickly become elusive and delusive in both understanding and attempted application in the real world.
In re Grell, 83 B.R. at 656-57.
[14] Defendant's position on the novelty of the legal issues is to some extent inconsistent, as in the same breath its counsel insists that Minnesota caselaw relating to the formation of contracts with municipal corporations mandates a conclusion that HPI and Defendant had no contract enforceable at law and, therefore, Defendant has no derivative right of action for breach of contract. Alexander Co. v. City of Owatonna, 222 Minn. 312, 24 N.W.2d 244 (1946); Morris v. Perpich, 421 N.W.2d 333 (Minn.App.1988), review denied (Minn. May 16, 1988).
[15] Cretex Cos., Inc. v. Construction Leaders, Inc., 342 N.W.2d 135 (Minn.1984), cited in Defendant's brief.
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833 F.Supp. 425 (1993)
Elias RODRIGUEZ, Plaintiff,
v.
WESTHAB, INC., Defendant.
No. 93 Civ 5484 (CLB/VLB).
United States District Court, S.D. New York.
October 15, 1993.
*426 Robert F. Graziano, Westchester/Putnam Legal Services, White Plains, NY, for plaintiff.
Ellen M. Mello, Cuddy & Feder, White Plains, NY, for defendant.
MEMORANDUM
VINCENT L. BRODERICK, District Judge.
I
This case involves the proper treatment of an eviction dispute where a resident seeks to interpose federal defenses.[1] Plaintiff Elias Rodriguez ("Rodriguez"), ordered evicted by the Yonkers City Court, filed suit in this court seeking to enjoin the eviction on grounds of violation of the Fair Housing Act, 42 U.S.C. § 3604, Rehabilitation Act, 29 U.S.C. § 794, and Americans With Disabilities Act, 42 U.S.C. § 12181.
Since state trial and appellate courts in which eviction controversies are pending have, pursuant to the Supremacy Clause of the Federal Constitution, the jurisdiction and authority to rule upon federal defenses, it is unnecessary and premature for this court to consider the same issues in the guise of affirmative suits once state court proceedings have been initiated. Dismissal of the federal case without prejudice is thus appropriate.
II
Rodriguez is a resident at premises maintained by Westhab, Inc. ("Westhab"), an organization which furnishes emergency accommodations to persons in need of them pursuant to licenses covering temporary occupancy. *427 Westhab experienced difficulties with Rodriguez' behavior, involving such events as overflowing bathroom facilities, food placed in toilets, unauthorized entry into portions of the premises contrary to the need of others for privacy, threats to other occupants and the like. Rodriguez agreed to refrain from various types of objectionable behavior including vandalism of property, but thereafter knocked down the door to his apartment when unable to open it with his key. Whether this was unintentional or irresponsible is disputed.
On March 12, 1993 Westhab commenced a summary eviction proceeding in Yonkers City Court, Index No SP1321-93. That court refused to consider federal defenses under the Fair Housing Act, 42 U.S.C. § 3604, Rehabilitation Act, 29 U.S.C. § 794, and Americans With Disabilities Act, 42 U.S.C. § 12181. In response, Rodriguez brought this action basing jurisdiction on 28 U.S.C. § 1331 and the cited federal statutes.
Because the state courts are obligated to consider federal defenses under the Supremacy Clause, the proper remedy for Rodriguez is to appeal the City Court's ruling and ask the state appellate court to rule on such federal defenses, or to direct the City Court to rule on those defenses. I have every confidence that the appellate court will do one or the other, because of the Constitutional mandate and because the factual issues raised by the federal defenses can be most efficiently considered as part of the eviction proceeding rather than in a duplicative fact-finding proceeding involving two different court systems in potential collision. See Fed.R.Civ.P. 1, sentence 2 and proposed 1993 amendments; Judicial Improvements Act of 1990, Pub.Law 101-650, 104 Stat. 5089, enacting 28 U.S.C. § 473.
III
The parties appear to be in agreement on the factual criteria for evaluation of the federal defenses to eviction asserted here. An "otherwise qualified person" under the Rehabilitation Act must be able to meet all of a program's requirements in spite of any handicap; if he does he may not be discriminated against because of the handicap. See Southeastern Community College v. Davis, 442 U.S. 397, 99 S.Ct. 2361, 60 L.Ed.2d 980 (1979).
Similarly, the Disabilities Act and the Fair Housing Act bar discrimination because of disability, but they do not bar eviction or other declination to deal with a person because of that person's inability to meet reasonable requirements of a provider (regardless of cause of such inability). 42 U.S.C. § 12182; 42 U.S.C. § 3604(f)(1)(A).
These statutes are intended to bar invidious discrimination. They are not intended to make it impossible for institutions such as Westhab to function effectively, or to prevent them from being in a position to provide quality service to other persons, or to prevent them from avoiding events threatening injury to others.[2] If Rodriguez' alleged objectionable behavior did not occur, or if it poses no serious problem to Westhab or its other residents, or if it has abated, or if it can reasonably be accommodated without harm to the functioning of Westhab, his eviction may be subject to challenge, assuming (as seems probable) that one or more criteria for coverage under one or more of the cited statutes are met.
IV
The Supremacy Clause, Article VI, cl. 2 of the Constitution of the United States, provides:
This Constitution, and the laws of the United States which shall be made in pursuance thereof ... shall be the supreme law of the land; and the judges in every State shall be bound thereby, anything in the constitution or laws of any state to the contrary notwithstanding.
While Congress has given federal courts exclusive jurisdiction over affirmative lawsuits under some federal statutes, it has never removed the power and responsibility of state courts to consider federal defenses. A federal defense, if valid, constitutes a prohibition *428 of the act to which the defense pertains. For a state or federal court to issue an order contrary to a valid federal defense would be a violation of federal law. One of the most widely relevant federal defenses applicable in cases brought in state court under state law is the Soldiers and Sailors Civil Relief Act, 50 U.S.C.App. § 520; see Le Maistre v. Leffers, 333 U.S. 1, 68 S.Ct. 371, 92 L.Ed. 429 (1948); Boone v. Lightner, 319 U.S. 561, 575, 63 S.Ct. 1223, 87 L.Ed. 1587 (1943); Chandler, "The Impact of a Request for a Stay of Proceedings Under the Soldiers and Sailors Civil Relief Act," 102 Mil.L.Rev. 169 (1983); Donough et al., "Crisis of the Soldiers and Sailors Civil Relief Act: A Call for the Ghost of Major (Professor) John Wigmore," 43 Mercer L.Rev. 667 (Winter 1992). Where federal law is applicable, its application is mandatory in all courts, state or federal. Testa v. Katt, 330 U.S. 386, 67 S.Ct. 810, 91 L.Ed. 967 (1947).
The intent of the Supremacy Clause to empower and call on the state judiciary to apply federal law where relevant to cases before state courts is emphasized in The Federalist No. 44 (Madison), expressing concern that without the Clause "it might happen that a ... national law, of great and equal importance to the States ... would consequently be valid in some of the States, at the same time that it would have no effect in others." This observation remains timely because state courts continue to be invested with broad powers to consider affirmative suits under federal statutes in many cases, and generally may do so unless specifically precluded,[3] as well as being permitted and required to consider federal defenses in all cases to which they apply.
The Federalist No. 82 (Hamilton) explains that when we "consider the State governments, and the national government, as they truly are ... as parts of ONE WHOLE, the inference seems to be conclusive, that the State courts would have a concurrent jurisdiction in all cases arising under the laws of the Union, where it was not expressly prohibited." No prohibition of consideration of federal defenses has been found.
Even if a local court ruling upon eviction applications were characterized as a quasi-administrative agency notwithstanding its title, it too would be obligated to obey and hence to consider federal law. See Gibson v. Berryhill, 411 U.S. 564, 93 S.Ct. 1689, 36 L.Ed.2d 488 (1973); Note, 90 Harv.L.Rev. 1682 (1977).
V
Marbury v. Madison, 5 U.S. (1 Cranch) 137, 2 L.Ed. 60 (1803), calls on all tribunals to give precedence to the Constitution of the United States, including the Supremacy Clause of Article VI, cl. 2, in making their decisions. The principle set forth in Marbury was applied by but is hardly limited to the duties of the Supreme Court of the United States. It applies equally to that Court, the United States district courts, the Yonkers City Court and the state appellate courts.
Should a local court erroneously decline to entertain federal defenses contrary to the Supremacy Clause, reconsideration on its part or consideration of the defense by whatever state court hears appeals from decisions of the local court would be the proper remedy. Collateral interference by a United States district court pursuant to a separate lawsuit involving whether a state court order should be implemented would be improper under the Anti-Injunction Act (28 U.S.C. § 2283) where a state proceeding dealing with the same subject matter has commenced, unless such interference was expressly authorized by federal statute, where necessary in aid of its jurisdiction or to protect or effectuate its judgments.
Once the state court adjudicates the case, direct appeal, culminating if necessary in an application for review to the Supreme Court of the United States pursuant to 28 U.S.C. § 1257, is the appropriate avenue for correcting any errors. Full faith and credit must be given to such state judgments *429 under 28 U.S.C. § 1738. If procedural barriers are improperly interposed preventing certain issues from being raised, correction by the state appellate courts and if necessary a petition to the Supreme Court of the United States for certiorari under 28 U.S.C. § 1257, rather than a collateral suit in United States district court, is the available recourse. See Friarton Estates Corp. v. City of New York, 681 F.2d 150 (2d Cir.1982).
VI
Westhab agreed to delay implementing Rodriguez' eviction to permit Rodriguez to appeal the eviction decision and to seek a stay pending appeal if available pursuant to applicable state procedure under the circumstances of this case.
VII
The present case in this court having been dismissed without prejudice at the hearing held on August 6, 1993, the Clerk is directed to close it.
SO ORDERED.
NOTES
[1] This matter came before me for hearing on August 6, 1993 pursuant to an order to show cause in the absence of Judge Charles L. Brieant of this court.
[2] See Traynor v. Turnage, 485 U.S. 535, 108 S.Ct. 1372, 99 L.Ed.2d 618 (1988); Civil Rights Restoration Act § 9, Pub.Law 100-259, amending 29 U.S.C. § 706(8) by adding a new subsection (C).
[3] See Charles Dowd Box Co. v. Courtney, 368 U.S. 502, 82 S.Ct. 519, 7 L.Ed.2d 483 (1962); Yellow Freight System v. Donnelly, 494 U.S. 820, 110 S.Ct. 1566, 108 L.Ed.2d 834 (1990); Tafflin v. Levitt, 493 U.S. 455, 110 S.Ct. 792, 107 L.Ed.2d 887 (1990).
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686 F.Supp. 461 (1988)
A.W. HOWE, On Behalf of Himself and All Others Similarly Situated, Plaintiff,
v.
The READER'S DIGEST ASSOCIATION, INC. and Dial Adjustment Bureau, Inc., Defendants.
No. 87 Civ. 2481 (MBM).
United States District Court, S.D. New York.
May 27, 1988.
*462 Kenneth A. Jacobsen, Greenfield & Chimicles, Haverford, Pa., for plaintiff.
David O. Wright, Stern, Zauderer, Ellenhorn, Frischer & Sharp, New York City, for defendant Reader's Digest.
Arthur R. Lehman, Lehman & Gikow, New York City, for defendant Dial Adjustment Bureau.
OPINION AND ORDER
MUKASEY, District Judge.
Defendants Reader's Digest Association, Inc. and Dial Adjustment Bureau, Inc. have moved pursuant to Rules 9(b) and 12(b), Fed.R.Civ.P., to dismiss plaintiff A.W. Howe's complaint for failure to plead fraud with particularity and for failure to state a claim on which relief can be granted. By order dated November 19, 1987, pursuant to Rule 12(b), Fed.R.Civ.P., Judge John M. Walker, Jr. converted defendants' motion into one for summary judgment under Rule 56, Fed.R.Civ.P., and invited the parties to submit affidavits and other documentation. For the reasons set forth below, defendants' motion for summary judgment is granted.
I.
In this action, which purports to be a class action,[1] plaintiff alleges that defendants engaged in a fraudulent scheme to sell subscriptions to Reader's Digest magazine by entering subscriptions for people who had not ordered them and then billing those people for the subscriptions. The sole basis for plaintiff's allegations is plaintiff's receipt of a Reader's Digest subscription *463 solicitation in December 1985, which he claims he ignored, and his receipt of a letter from Dial in July 1986 stating that he owed $9.99 for a Reader's Digest subscription. The letter, dated July 23, 1986, stated in pertinent part that "[w]e did not hear from you, so we must assume you ordered a Reader's Digest subscription. The responsibility to resolve this account is yours. A payment for $9.99 is all we need to resolve your account. Do not delay." Enclosed with the letter was an invoice and a printed statement (the "validation notice") which read:
In accordance with the stipulations of the Fair Debt Collection Practices Act, we inform you that:
... unless the consumer, within thirty days after receipt of the initial notice, disputes the validity of the debt, or any portion thereof, the debt will be assumed to be valid by the debt collector;
... if the consumer notifies the debt collector in writing within the thirty-day period that the debt, or any portion thereof, is disputed, the debt collector will obtain verification of the debt or a copy of a judgment against the consumer and a copy of such verification or judgment will be mailed to the consumer by the debt collector;
... upon the consumer's written request within the thirty-day period, the debt collector will provide the consumer with the name and address of the original creditor, if different from the current creditor.
Plaintiff claims that after receiving this letter he made a long distance telephone call to his wife who was vacationing in Nantucket to ask whether she had subscribed to Reader's Digest and she replied that she had not. Plaintiff also claims that he telephoned directory information in an unsuccessful attempt to locate Dial, and telephoned several Better Business Bureaus. Plaintiff claims further that he called the director of public relations at Reader's Digest, told him that he had never ordered the magazine and asked for an explanation of how his name had been turned over to a collection agency.
Plaintiff never sent any money to Reader's Digest or Dial, and received no further goods or communications from Reader's Digest or Dial after the July 23, 1986 letter.
In support of its motion for summary judgment, Reader's Digest submitted the affidavits of Francis G. Ronnenberg, its Vice President and Data Processing Director, and Armand Salomone, an auditor employed by the Audit Bureau of Circulations, the independent auditing agency which Reader's Digest employs to audit the accuracy of its subscriber information, describing the extensive measures taken to verify the accuracy of Reader's Digest's subscription and billing records and to monitor its operating procedures.
Reader's Digest claims that in December 1985, it conducted a home-delivery promotion in which it sent solicitation materials to 20,500,000 people, including the plaintiff. It claims that its records show that plaintiff mailed back the envelope marked "YES" (indicating a wish to subscribe), and that it sent him several issues of the magazine and a series of six invoices over the next few months. It received no response from plaintiff regarding the invoices or the subscription and, pursuant to its collection procedure, it turned over plaintiff's account to Dial, one of several agencies it contracts with for bill collection. Ronnenberg avers that Reader's Digest and Dial have no agency or employment relationship.
In support of its motion to dismiss and for summary judgment, Dial submitted the affidavit of Patricia Dwyer, its Account Manager, and two affidavits of Nancy Swan, its Secretary and Treasurer. Dwyer avers that Dial followed its standard collection procedure with respect to plaintiff's account and sent him two letters. Plaintiff claims he did not receive the first letter.[2]*464 After sending the second letter dated July 23, 1986, which plaintiff acknowledges receiving, Dial took no further action with respect to plaintiff's account. Plaintiff did not contact Dial at any time to dispute the bill.
Swan avers that Dial is not a credit reporting agency, and does not turn over information from its files to any credit reporting agency. In addition, she avers that Dial has no role in soliciting subscriptions for Reader's Digest.
In opposition to defendants' motion for summary judgment, plaintiff has submitted voluminous documents consisting almost entirely of consumer complaints against Reader's Digest and Dial which, plaintiff contends, demonstrate that Dial's July 23 letter was part of a scheme undertaken by Reader's Digest and Dial to defraud the public into purchasing subscriptions to Reader's Digest. On a motion for summary judgment, the Court may consider only evidence which would be admissible at trial. Rule 56(e), Fed.R.Civ.P.; see, e.g., Nadler v. Baybank Merrimack Valley, N.A., 733 F.2d 182, 184 (1st Cir.1984); Sires v. Luke, 544 F.Supp. 1155, 1160 (S.D.Ga.1982). For the reasons set forth below, the documents submitted by plaintiff are inadmissible on this motion.
Plaintiff has submitted approximately 45 complaints filed with various bureaus of consumer affairs nationwide against either Reader's Digest, Dial or Dialamerica, an affiliate of Dial which is not a defendant in this action and which is not claimed to have participated in the alleged scheme. Not only are these documents inadmissible because they constitute hearsay, they also must be excluded on grounds of relevance. Plaintiff has not established that any of the approximately 23 complaints against Reader's Digest related to the December 1985 subscription solicitation at issue. Indeed, only seven appear even to have involved magazine subscriptions; of these seven, one involved a misunderstanding concerning the correct name and address of a subscriber, and another was simply a request that a subscription be terminated because the subscriber had died. But, most important, none of the complaints against Reader's Digest involve Dial, and none of the complaints against Dial involve Reader's Digest. Thus, none of the complaints are probative of the alleged scheme of Reader's Digest and Dial to defraud the public into paying for subscriptions to the magazine.[3]
Plaintiff has submitted also the affidavit of Robert D. Segal, Esq., formerly associated with counsel for plaintiff, who claims to have telephoned Dialamerica and spoken to an employee who advised him that Dialamerica sales representatives solicit magazine subscriptions by telephone, and that because they are paid on a per subscription basis, they sometimes falsely indicate that subscriptions have been ordered. This evidence also is inadmissible on relevance grounds insofar as it involves Dialamerica, not defendant Dial, and because it relates to magazine subscription solicitations conducted by Dialamerica, and thus appears to have nothing to do with the Reader's Digest December 1985 subscription solicitation drive.[4]
*465 The Segal affidavit is inadmissible for the further reason that it constitutes hearsay. Swan avers that the Dialamerica employee with whom Segal spoke was not a sales representative, but a clerical employee with no responsibility or training in responding to billing inquiries. Accordingly, the employee's statements were not made within the scope of her employment and therefore are not admissible under Fed.R.Evid. 801(d)(2)(D) which excludes from hearsay those statements made by a party's "agent or servant concerning a matter within the scope of his agency or employment, made during the existence of the relationship." Litton Systems, Inc. v. American Telephone and Telegraph Co., 700 F.2d 785, 816-17 (2d Cir.1983); 4 J. Weinstein & M. Berger, Weinstein's Evidence XXX-XXX-XX (1987).
Finally, plaintiff has submitted a chart summarizing information set forth in the Statement of Circulation allegedly published by Reader's Digest. The chart purports to show that the "average number of copies of each issue" during successive 12 month periods has fallen from 17,120,995 in 1983 to 15,845,590 in 1987. The chart does not indicate whether these figures reflect the total sold by subscription only, or the total of all sales. In any event, without deciding whether the chart would be admissible at trial with proper authentication, it is at best only marginally probative of the subject for which it is offered, namely, Reader's Digest's purported motive for engaging in the alleged scheme.
II.
The complaint charges defendants with violating the Racketeer Influenced and Corrupt Organizations Act, 18 U.S.C. § 1961 et seq. (Count I), the Postal Reorganization Act, 39 U.S.C. § 101 et seq. (Count II), the Fair Debt Collection Practices Act, 15 U.S.C. § 1692 et seq. (Count III), the New York General Business Law, §§ 601, 349 and 396(2)(a) (Counts IV, V and VI, respectively), and with common law fraud (Count VII). I will address these counts in turn.
Summary judgment should be granted when there is no unresolved factual dispute as to any issue material to the outcome of the litigation. Knight v. U.S. Fire Insurance Co., 804 F.2d 9, 11 (2d Cir.1986), cert. denied, ___ U.S. ___, 107 S.Ct. 1570, 94 L.Ed.2d 762 (1987). Where the moving party has made a properly supported motion, the opposing party cannot rely on the allegations in his pleadings, but must demonstrate specific facts showing that there are genuine issues of material fact to be tried. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248-49, 106 S.Ct. 2505, 2510-11, 91 L.Ed.2d 202 (1986).
The RICO Claim (Count I)
Count I of the complaint charges defendants with violating the Racketeer Influenced and Corrupt Organizations Act, 18 U.S.C. § 1961 et seq. Section 1964c of Title 18 provides that a party may bring a civil action under the RICO statute to recover for "injur[y] in his business or property." A party cannot recover for personal injury under RICO. Drake v. B.F. Goodrich Co., 782 F.2d 638, 644 (6th Cir.1986); Von Bulow v. Von Bulow, 634 F.Supp. 1284, 1308-09 (S.D.N.Y.1986).
Here it is undisputed that the plaintiff has sustained no injury in his business or property by reason of the defendants' alleged misconduct. He never paid any money to Reader's Digest or Dial for the magazine subscription. His name was never reported to any credit rating agency and accordingly he suffered no harm to his credit status. The only inconvenience to which the plaintiff claims to have been put as a result of defendants' conduct was the making of several telephone calls, including one to his wife who was vacationing in Nantucket to ask whether she had ordered a Reader's Digest subscription. Curiously, the plaintiff does not claim to have incurred any out-of-pocket expense in making these calls, but even if he had, such de minimis expenses do not amount to injury "in business or property" cognizable under 18 U.S.C. § 1964(c). Because the plaintiff has sustained no injury in his business or property, he has no standing to pursue a *466 RICO claim. Sedima, S.P.R.L. v. Imrex Co., 473 U.S. 479, 496, 105 S.Ct. 3275, 3285, 87 L.Ed.2d 346 (1985). Accordingly, summary judgment is granted dismissing Count I of the complaint.
The Postal Reorganization Act Claim (Count II)
Count II of the complaint seeks damages and injunctive relief under Sections 3001(d), 3005 and 3009 of the Postal Reorganization Act, 39 U.S.C. § 101 et seq., which sections relate to the mailing of certain materials. Because there is no private right of action under these sections for damages or injunctive relief, Count II is dismissed.
Section 3001(d) provides in pertinent part that "Matter otherwise legally acceptable in the mails which(1) is in the form of, and reasonably could be interpreted or construed as, a bill, invoice, or statement of account due; but (2) constitutes, in fact, a solicitation for the order by the addressee of goods or services, or both; is nonmailable matter, shall not be carried or delivered by mail, and shall be disposed of as the Postal Service directs, unless such matter bears on its face, in conspicuous and legible type ... the following notice: `This is a solicitation for the order of goods or services, or both, and not a bill, invoice, or statement of account due. You are under no obligation to make any payments on account of this offer unless you accept this offer....'"
Section 3005, involving persons engaged in schemes to obtain money through the mail by means of false representations, provides that the Postal Service may issue orders "direct[ing] the postmaster of the post office at which mail arrives, addressed to such a person or to his representative," to take actions in connection with the activities covered by that section. Section 3009 involves the mailing of unordered merchandise and provides that recipients of such merchandise may keep it without incurring any obligation to the sender.
Plaintiff urges the Court to infer a private right of action for damages and injunctive relief under Sections 3001(d), 3005 and 3009[5] of the Postal Reorganization Act. I refuse even to consider inferring such a private right of action in this case because plaintiff has failed to demonstrate that he suffered any damages or that the objectionable conduct is continuing such as to warrant injunctive relief.
Accordingly, summary judgment is granted dismissing Count II under the Postal Reorganization Act.
The Fair Debt Collection Practices Act Claim (Count III)
Count III of the complaint seeks relief under the Fair Debt Collection Practices Act, 15 U.S.C. § 1692 et seq., which regulates the activities of debt collectors. Summary judgment dismissing Count III must be granted as against Reader's Digest because it is undisputed that Reader's Digest did not take part in the debt collection activity which plaintiff alleges violated the Act, but simply provided Dial with a list of allegedly unpaid accounts, including plaintiff's, for collection.
In addition, there is no disputed issue of fact as to whether Reader's Digest is a debt collector within the meaning of the Act. Section 1692a(6) defines a debt collector as "any person who uses any instrumentality of interstate commerce or the mails in any business the principal purpose of which is the collection of any debts, or who regularly collects or attempts to collect, directly or indirectly, debts owed or due or asserted to be owed or due another." Plaintiff does not contend that Reader's *467 Digest ever undertook to collect debts owed to third parties, and thus Reader's Digest is not a debt collector under the Act.[6]
Nor is there any basis for imposing liability on Reader's Digest under the Fair Debt Collection Practices Act on the grounds of agency or respondeat superior. Plaintiff has failed to adduce any evidence of any agency or employment relationship between Reader's Digest and Dial. Accordingly, summary judgment is granted dismissing plaintiff's claims against Reader's Digest under the Fair Debt Collection Practices Act.
Summary judgment is also granted dismissing Count III against defendant Dial. Plaintiff alleges that Dial's July 23, 1986 letter violated three sections of the Fair Debt Collection Practices Act, 15 U.S. C. §§ 1692d, 1692e, and 1692f. Section 1692d provides that "[a] debt collector may not engage in any conduct the natural consequence of which is to harass, oppress, or abuse any person in connection with the collection of a debt." Section 1692e prohibits a debt collector from using "any false, deceptive, or misleading representation or means in connection with the collection of any debt." Section 1692f prohibits a debt collector from using "unfair or unconscionable means to collect or attempt to collect any debt."
Section 1692k(c) of the Act provides that "[a] debt collector may not be held liable in any action brought under this subchapter if the debt collector shows by a preponderance of evidence that the violation was not intentional and resulted from a bona fide error notwithstanding the maintenance of procedures reasonably adapted to avoid any such error." Although plaintiff has conclusorily alleged that Dial knew that he had not ordered a Reader's Digest subscription, he has failed to adduce any evidence refuting the affidavits of Patricia Dwyer, Nancy Swan, Francis Ronnenberg and Armand Salomone which demonstrate that Dial and Reader's Digest maintain extensive systems and procedures designed to prevent billing errors, and that Dial reasonably relied on the accuracy of the information provided to it by Reader's Digest regarding unpaid bills. Accordingly, summary judgment is granted dismissing the claims against Dial under the Fair Debt Collection Practices Act.
III.
Having granted summary judgment dismissing all of plaintiff's federal claims, I must dismiss plaintiff's pendent state law claims because there is no federal jurisdiction over them.
I reject plaintiff's claim that there is diversity jurisdiction over the state law claims. Plaintiff did not plead the existence of diversity jurisdiction in his complaint. However, even if plaintiff had properly pleaded diversity jurisdiction, there is no such jurisdiction here because plaintiff cannot meet the requirement that the dispute involve at least $10,000. Plaintiff apparently concedes that he cannot meet this requirement with respect to Counts III through VI, but claims that the requirement may be satisfied by his punitive damages claim under Count VII, the common law fraud claim. However, as discussed below, plaintiff has failed to demonstrate the existence of any disputed fact issue with regard to his fraud claim, and accordingly, that claim must also be dismissed.
To set forth a claim for common law fraud, plaintiff must establish that defendant made a misrepresentation of a material fact, that the defendant knowingly made the misrepresentation, that plaintiff relied on the misrepresentation to his detriment and suffered injury as a result. Hong Kong Export Credit Insurance Corp. v. Dun & Bradstreet, 414 F.Supp. 153, 158 (S.D.N.Y.1975).
*468 Plaintiff has failed to demonstrate that there is a genuine issue of material fact as to any element of the fraud claim. First, the undisputed facts demonstrate that defendants made no misrepresentation to plaintiff. Dial simply sent plaintiff a letter indicating that "we did not hear from you so we must assume you ordered a Reader's Digest subscription."[7] By no stretch of the imagination can this statement be construed as plaintiff urges, as an affirmative misstatement of fact that plaintiff had ordered the magazine. Rather, the statement is an explicit declaration of assumption based on plaintiff's failure to communicate with the bill collector. Moreover, Dial's inclusion of the validation notice required under the Fair Debt Collection Practices Act was sufficient to notify plaintiff of his right to dispute the bill and thus dispelled any possible confusion that the letter might have engendered.
In addition, the plaintiff does not claim to have relied on the alleged misrepresentation. Indeed, he could hardly have been misled by the statement insofar as it related entirely to facts within his own knowledge, namely, whether he had ordered a subscription to Reader's Digest. To the contrary, he called Reader's Digest to complain about the bill and never paid any money to Reader's Digest or Dial.
Plaintiff has also failed to adduce any evidence that defendants knew that he had not ordered the subscription. Apart from his conclusory allegations of scienter, plaintiff has offered no evidence refuting defendants' averments that they had no knowledge or reason to believe that plaintiff had not ordered the subscription.
Finally, as discussed above in connection with the RICO claim, plaintiff does not allege that he suffered any injury as a result of the defendants' alleged fraud insofar as he paid no money and his credit rating was not affected. Accordingly, summary judgment is granted dismissing Count VII, plaintiff's common law fraud claim, and Counts IV, V and VI are dismissed for lack of jurisdiction.
IV.
Plaintiff requests a continuance pursuant to Rule 56(f), Fed.R.Civ.P., to take discovery concerning the annual turnover rate of Reader's Digest subscriptions. Plaintiff claims to have been advised that the turnover rate is "extremely high," and that it may thus "bear on defendant's motive for engaging in the practices alleged" in his complaint. This request for a denial of summary judgment pending further discovery is denied. It is well established that a plaintiff cannot defeat a motion for summary judgment by "merely restating the conclusory allegations contained in his complaint, and amplifying them only with speculation about what discovery might uncover.... Something more than a fanciful allegation is required to justify denying a motion for summary judgment when the moving party has met its burden of demonstrating the absence of any genuine issue of material fact." Contemporary Mission, Inc. v. U.S. Postal Service, 648 F.2d 97, 107 (2d Cir.1981) (citations omitted). The plaintiff has failed to offer any evidence tending to show that defendants' conduct was not simply the result of a billing error. On this record I find no reason for permitting plaintiff to conduct discovery which "would not be directed at filling a specific evidentiary gap, but rather would consist of blind groping, undertaken in the hope of finding something to which [his] suit could be anchored." Searer v. West Michigan Telecasters, Inc., 381 F.Supp. 634, 643 (W.D.Mich.1974), aff'd mem., 524 F.2d 1406 (6th Cir.1975).
For the foregoing reasons, summary judgment is granted in favor of defendants Reader's Digest and Dial Adjustment dismissing the complaint in its entirety.
SO ORDERED.
NOTES
[1] Although this purports to be a class action, plaintiff has not yet moved for class certification. Dismissal of this action is binding only on plaintiff A.W. Howe, and has only precedential effect on other putative class members. Manual for Complex Litigation, Second § 30.11 at 209 (1985). Consideration of this dispositive motion prior to consideration of class certification is appropriate in this case because the defendants are clearly entitled to summary judgment under Rule 56, Fed.R.Civ.P. See id. at 210.
[2] The first letter stated: "Collection of your READER'S DIGEST Magazine account has been referred to this office for immediate action. Several months ago you received a magazine offer from READER'S DIGEST. You responded by ordering a subscription. When you did this three things happened; (sic)
1. A subscription on credit was entered;
2. Three copies of READER'S DIGEST were sent to your address;
3. You incurred a responsibility to pay this bill;
If this is what you intended, then we feel you owe $9.99. If you do not feel that you should pay this debt, write on the back of the bill why this debt is not your responsibility. Let's resolve this account today."
Included with this letter was the validation notice pursuant to the Fair Debt Collection Practices Act which was also included in the July 23 letter to plaintiff.
[3] In addition, plaintiff has submitted an exhibit which purports to be a summary of 30 complaints against Dial and Dialamerica filed with the Bergen County (New Jersey) Office of Consumer Affairs during the years 1982 through 1986. This document is also inadmissible, not only because the underlying complaints are hearsay, but again, because there is no indication that the complaints involve Reader's Digest, and thus the information is not relevant to the scheme alleged in the complaint.
[4] Reader's Digest submitted an affidavit stating that it engaged in no telephone solicitation in connection with the December 1985 subscription drive, and Dial submitted an affidavit stating that it did not participate in subscription solicitation on behalf of Reader's Digest, but only in the collection of unpaid accounts.
[5] The Ninth Circuit has inferred a limited private right of action under Section 3009, holding that "[i]n order to protect fully the recipient's rights he must be able to bring suit to obtain a judicial declaration of those rights and, when necessary, to secure restitutionary relief." Kipperman v. Academy Life Insurance Co., 554 F.2d 377, 380 (9th Cir.1977). In Kipperman, plaintiff sought a declaratory judgment that an unsolicited insurance policy constituted "merchandise" within the meaning of the statute. The Kipperman court specifically rejected plaintiff's claim that a private right of action could be maintained under the statute for injunctive relief, stating that "[i]njunctive relief, however, possibly would interfere with the Federal Trade Commission's power to enforce section 3009." Id.
[6] I find meritless plaintiff's argument that Reader's Digest is a "creditor who, in the process of collecting his own debts, uses any name other than his own which would indicate that a third person is collecting or attempting to collect cash debts" and therefore comes within the statutory definition of a debt collector under Section 1692a(6). It is undisputed that Reader's Digest was not engaged in collecting its own debts, but that it contracted with Dial for the collection of the debt allegedly owed by plaintiff.
[7] As noted above, Dial claims that it mailed two letters to plaintiff, but plaintiff claims that he only received the second letter. I do not deem this to be a material factual dispute because defendants would be entitled to summary judgment even if Dial in fact only sent the second letter.
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115 F.2d 368 (1940)
Guy T. HELVERING, Commissioner of Internal Revenue, Petitioner,
v.
Carleton H. PALMER, Respondent.
No. 76.
Circuit Court of Appeals, Second Circuit.
November 18, 1940.
L. W. Post, Sp. Asst. to Atty. Gen., for petitioner.
Roswell L. Gilpatric, of New York City, for respondent.
Before L. HAND, SWAN, and AUGUSTUS N. HAND, Circuit Judges.
PER CURIAM.
Order affirmed on the authority of Commissioner v. Branch, 1 Cir., 114 F.2d 985.
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DENNIS FORD, Plaintiff-Appellant,
v.
MINTEQ SHAPES AND SERVICES, INCORPORATED, et al., Defendants-Appellees.
No. 09-2140.
United States Court of Appeals, Seventh Circuit.
Argued October 6, 2009.
Decided November 24, 2009.
Before BAUER and WOOD, Circuit Judges.[*]
BAUER, Circuit Judge.
Dennis Ford sued his employer, Minteq Shapes and Services, Inc., claiming that Minteq racially harassed him, paid him a discriminatory wage, and retaliated against him, all in violation of Title VII of the Civil Rights Act, 42 U.S.C. §§ 2000e et seq. The district court granted summary judgment to Minteq on all counts. We have reviewed the district court's decision de novo; finding no error, we affirm.
I. BACKGROUND
Dennis Ford has worked for thirteen years at Minteq, a company that manufactures refractories. Ford operates the forklift and strips, casts, and molds refractories at Minteq's facility in Portage, Indiana. Out of twenty employees on site, he has always been the only African-American.
Coworker Joseph Wampler referred to Ford as "black African-American" or "black man" for some period of time until his supervisor Steve Smith and coworker Miguel Altieri overheard Wampler and reprimanded him. Minteq says this period lasted only a couple days in April 2006. But Ford adduced evidence, which we must credit on this appeal, that Wampler's black-man comments had been occurring for fourteen months, i.e., numerous times per day since January 2005. Ford Aff. ¶¶ 6, 7, 12. Ford also adduced evidence that he had reported Wampler's comments in September 2005 to the Manager of Human Resources, Laura Beemsterboer, along with his concerns about a pay raise and the Christmas party. Ford Aff. ¶ 8.
In addition to Wampler's comments, Ford complained of three other circumstances giving rise to his claim for racial harassment. First, Ford's supervisor, Ronald Humphreys, once told Ford that he didn't have to worry about losing his job because Minteq wanted to appear integrated. Second, another supervisor, Lee Nuzzo, once called him a gorilla. Third, Minteq barred Ford from bringing his grandchildren to the company's Christmas parties although other employees were permitted to bring their families. Upon Ford's eighth year at Minteq, he was allowed to bring his grandchildren but had to pay for their gifts although Minteq purchased gifts for other partygoers.
Ford suffered an eye injury on the job in March 2006. On appeal, he no longer claims that Minteq failed to issue him proper safety equipment. Rather, he claims that his seeking medical attention outside Minteq's company clinic resulted in Minteq retaliatingagainst him by denying him phone privileges. Because of his denial of phone privileges, he missed a call one day and had to wait until that evening to discover that an ill family member had died.
On May 5, 2007, Ford initiated this case against Minteq after obtaining a right-to-sue letter from the Equal Employment Opportunity Commission. Minteq and Ford engaged in discovery and Minteq moved for summary judgment. The district court entered summary judgment in favor of Minteq on March 31, 2009, and Ford timely filed this appeal.
II. DISCUSSION
We review the district court's grant of summary judgment de novo, construing all facts and reasonable inferences in Ford's favor. Winsley v. Cook County, 563 F.3d 598, 602 (7th Cir. 2009). Summary judgment is proper if the pleadings, discovery materials, disclosures, and affidavits demonstrate no genuine issue of material fact such that Minteq is entitled to judgment as a matter of law. Fed R. Civ. P. 56(c).
A. Racial Harassment
To survive Minteq's motion for summary judgment on his racial harassment claim, Ford needed to present evidence that, if believed by a trier of fact, would show that Minteq's conduct was "severe or pervasive enough to create an objectively hostile or abusive work environment." Harris v. Forklift Sys., Inc., 510 U.S. 17, 21 (1993). Whether Minteq's work environment was hostile or abusive depends on factors that "may include the frequency of the discriminatory conduct; its severity; whether it is physically threatening or humiliating, or a mere offensive utterance; and whether it unreasonably interferes with an employee's work performance." Id. at 23.
We have examined these factors as applied to Ford and find that Wampler's black-man comments, Humphreys' affirmative-action comment, Nuzzo's gorilla comment, and Ford's Christmas-party treatment, considered separately or in the aggregate, do not support a legal claim for harassment.
Wampler's referring to Ford as "black man" and "black African-American," even for fourteen months as we must assume favorably to Ford, was not severe enough to alter Ford's working conditions and thereby constitute racial harassment, because he failed to adequately pursue his racial harassment complaint against Wampler. Ford admits he reported Wampler's behavior to Beemsterboer only once in fourteen months, and Ford presented no evidence that his chief concern in this conversation was Wampler's black-man comments rather than Minteq's Christmas-party treatment of him or his sought-after pay raise. Ford Dep. at 115. Nor did Ford follow up with Beemsterboer, his supervisor Smith, or anyone else when no apparent action was taken in the next seven months. Ford thus presented no evidence that he took reasonable steps to inform Minteq of Wampler's comments. This inaction by Ford belies the notion that Wampler's black-man comments created a hostile work environment. Hence, no reasonable jury could find that Wampler's comments rose to the level of harassment.
Nor did Humphreys' affirmative-action comment or Nuzzo's gorilla comment constitute harassment; they each happened only once, did not impair Ford's job performance, and were insufficiently severe to rise to the level of a hostile work environment. Although we find these comments rude and offensive, Title VII is "not . . . a general civility code" and will not find liability based on the "sporadic use of abusive language." Faragher v. City of Boca Raton, 524 U.S. 775, 788 (1998).
Nor did the Christmas-party treatment constitute racial harassment; it did not impair Ford's job performance, it happened too occasionally and outside the normal workday to rise to the level of a hostile work environment, and there is noevidence that it was because of his race.
We thus find no genuine issues of fact with respect to the existence of racial harassment. So we need not address whether Minteq can establish an affirmative defense under Faragher, 524 U.S. 775, and Burlington Industries, Inc. v. Ellerth, 524 U.S. 742 (1998).
B. Disparate Pay
To prevail on his claim for disparate pay, Ford was required to present evidence that (1) he is a member of a protected class; (2) he was meeting his employer's legitimate expectations; (3) he suffered an adverse employment action; and (4) he wastreated differently from similarly situated employees who were not members of the protected class. Hildbrandt v. Ill. Dep't of Natural Res., 347 F.3d 1014, 1029 (7th Cir. 2003).
Ford fails to satisfy the fourth element regarding disparate treatment because he adduced no evidence that higher paid workers were similarly situated. Ford was free during pretrial discovery to gather employees' pay stubs from Minteq, and to depose them or Minteq about their job responsibilities, but he failed to do so. Ford does present pay stub evidence that he received less pay than David Lewin, another employee with an identical job title. But equal title does not mean equal responsibilities. The record's only evidence of Minteq paying more to white employees with equal responsibilities is Ford's own conclusory, uncorroborated testimony. This is not enough to survive summary judgment.
C. Retaliation
To survive summary judgment on his retaliation claim, Ford was required to present evidence that he suffered an adverse employment action because he engaged in an activity protected by Title VII. Tomanovich v. City of Indianapolis, 457 F.3d 656, 662-63 (7th Cir. 2006). Ford fails under this standard because the activity that he alleges resulted in retaliationseeking medical treatment outside the company's clinicis not statutorily protected by Title VII, i.e., it does not consist of "oppos[ing] any practice made an unlawful employment practice by this subchapter" or "ma[king] a charge, testif[ying], assist[ing], or participat[ing] in any manner in an investigation, proceeding, or hearing under this subchapter." 42 U.S.C. § 2000e-3(a). Ford argues only that his activity was protected by two Indiana statutes, not Title VII of the Civil Rights Act. Pl. Br. 23.
III. CONCLUSION
For the reasons discussed above, we AFFIRM the district court's grant of summary judgment on Ford's employment discrimination claims.
NOTES
[*] Judge Ann Claire Williams recused herself after oral argument and has not participated in deciding this appeal. This decision is being issued by a quorum of the panel. See 28 U.S.C. § 46(d).
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686 F. Supp. 311 (1988)
Romaine BARNES
v.
HILLHAVEN REHABILITATION & CONVALESCENT CENTER.
Civ. No. 1:87-cv-619-ODE.
United States District Court, N.D. Georgia, Atlanta Division.
February 15, 1988.
*312 Robert C.D. McDonald, Norcross, Ga., for plaintiff.
Gary R. Kessler, David L. Gordon, Jackson, Lewis, Schnitzler & Krupman, Atlanta, Ga., for defendant.
ORDER
ORINDA D. EVANS, District Judge.
This ADEA action is before the court on Defendant's motion for summary judgment and for an extension of time in which to file a reply brief. As no opposition has been filed to the motion for an extension of time, said motion is granted nunc pro tunc.
Plaintiff Romaine Barnes alleges that her former employer, Hillhaven Rehabilitation and Convalescent Center ("Hillhaven"), discriminated against her on the basis of her age when she was forced to resign as administrator at Hillhaven's Marietta facility in April, 1986. Mrs. Barnes was 59 years old at the time she left Hillhaven and she had worked as administrator at the Marietta facility since 1969.
Defendant Hillhaven has moved for summary judgment on the basis that Mrs. Barnes did not timely file her charge of age discrimination with the EEOC. In order to file an age discrimination action, a plaintiff must first file an EEOC charge within 180 days of the alleged discriminatory action pursuant to 29 U.S.C. § 626(d)(1). This requirement is a condition precedent to an ADEA action so that the failure to timely file an EEOC charge does not deprive the court of jurisdiction. Jackson v. Seaboard Coast Line Railroad Company, 678 F.2d 992 (11th Cir.1982). Plaintiff contends that the EEOC charge was timely filed and that even if it were not, the filing period is subject to equitable tolling.
The 180 day filing period begins to run from the date the adverse employment decision is communicated to the employee. Delaware State College v. Ricks, 449 U.S. 250, 101 S. Ct. 498, 66 L. Ed. 2d 431 (1980); Chardon v. Fernandez, 454 U.S. 6, 102 S. Ct. 28, 70 L. Ed. 2d 6 (1981). The filing period begins to run once the employee has been notified of the employment decision even though the decision might not yet take effect. Ricks, supra. As another court has noted, the "proper focus under the Ricks rationale is on the time of the act of discrimination and not when the consequences of that act become most painful." Clark v. Resistoflex Company, 665 F. Supp. 1216, 1219 (M.D.La.1987), citing Ricks, supra, 449 U.S. at 258, 101 S.Ct. at 504.
The record reflects the following facts regarding the date Mrs. Barnes had notice of Hillhaven's decision that she must resign or face termination. Prior to April 4, 1986, Mrs. Barnes' superiors had discussed their dissatisfaction with Mrs. Barnes because of operational problems at the Marietta facility. Gary Witte, Hillhaven Vice President of Operations for the Southeast Region, attests that he and his immediate superior, Dan Mosca, Senior Vice President for the Southern Division, had decided in March 1986 that Mrs. Barnes should leave as administrator of the Marietta facility. Shortly before April 4, 1986, Witte learned that Mrs. Barnes' son, Jim Barnes, who *313 was employed as the housekeeping supervisor at the Marietta facility, had been arrested for cocaine distribution. Mrs. Barnes had not informed her immediate supervisor, Dick Ebersole, District Director, of this fact nor had she suspended her son. Dan Mosca attests that when he learned that Jim Barnes had been arrested, was still working at the facility and Mrs. Barnes had not informed any Hillhaven management, Mosca instructed Witte to visit the Marietta facility and tell Mrs. Barnes that "it was no longer in Hillhaven's best interests for her to remain as administrator at the Marietta facility." As Witte was unable to go to Marietta, Dick Ebersole travelled to Marietta on April 4, 1986 to meet with Mrs. Barnes. Ebersole attests that Witte instructed him to try to persuade Mrs. Barnes to retire or resign and if she refused, to terminate her.
Ebersole met with Mrs. Barnes for 10 to 15 minutes late in the day on Friday, April 4, 1986. Ebersole states that he told her about the operational problems at the facility and the problem with her son. Mrs. Barnes testified in her deposition that she does not recall discussion of operational problems at the facility, although she does recall discussing her son's arrest and subsequent return to work. Ebersole offered Plaintiff the choice between resigning and being fired. As Mrs. Barnes had already scheduled vacation for Monday, April 7 through Friday, April 11, 1986, Ebersole told her she must give Hillhaven her decision by 10:00 a.m. on Monday, April 7. Ebersole states that Mrs. Barnes asked whether she would keep her job if she suspended her son but he informed her she could not. Mrs. Barnes did suspend her son as of April 4, 1986.
On Monday, April 7, 1986, Mrs. Barnes telephoned Witte to protest Hillhaven's decision. Witte attests that he did not tell her that the decision would be reconsidered. However, he did state that he would speak with Mosca and call her back. Witte and Mosca telephoned her back on April 7 and the parties agree that the conversation primarily concerned Mrs. Barnes' benefits upon retirement or resignation and that Mrs. Barnes was asked to prepare a letter of resignation. Witte and Mosca attest that at no time during the conversation did they suggest that Mrs. Barnes might keep her job as administrator or be employed in another position with Hillhaven.
When Mrs. Barnes returned to work on April 14, 1986, Ebersole asked her to prepare a letter of resignation showing a final work date of April 25, 1986 and to send it by overnight mail. Plaintiff did so, and left Hillhaven on Monday, April 28. She was replaced on May 12, 1986 by Bill Heintz, age 48.
Sometime in May, 1986, Plaintiff learned through another former Hillhaven employee that Hillhaven allegedly planned to terminate those employees earning more than $30,000-$35,000 on account of salary and age. On September 26, 1986, after Mrs. Barnes received her final paycheck from Hillhaven, she decided to pursue a claim of age discrimination. She met with an attorney on October 7, 1986; an EEOC charge was mailed the following day, and was received by the EEOC on October 10, 1986. The charge was timely filed only if the filing period was triggered on April 14, 1986. If the filing period began earlier than April 14, the charge was untimely.
Mrs. Barnes argues that the filing period was not triggered until April 14, 1986 when Ebersole asked her to submit her letter of resignation and send it overnight mail. However, the record shows that on April 4, Mrs. Barnes had been clearly informed that she would have to resign or be terminated. Either was an adverse employment action. No indication was given to her that this decision was anything other than final. She did attempt to dissuade Witte and Mosca on April 7 from following through on the decision, but they reiterated what Ebersole had informed her and instructed her to prepare a letter of resignation. Under the reasoning of Ricks, Mrs. Barnes was notified on April 4, 1986 of Hillhaven's adverse employment decision. The fact that she did not prepare her resignation letter until April 14 and worked until April 28, does not render the April 4 decision any less final. Accordingly, Mrs. Barnes' EEOC charge was not timely filed.
*314 Mrs. Barnes next argues that the 180 day filing period is subject to equitable tolling. Equitable tolling is an "extraordinary remedy" and is not a method to preserve a claim out of sympathy. Baldwin County Welcome Center v. Brown, 466 U.S. 147, 104 S. Ct. 1723, 80 L. Ed. 2d 196 (1984). Equitable tolling may suspend a filing period "until the facts which would support a cause of action are apparent or should be apparent to a person with a reasonably prudent regard for his rights." Cocke v. Merrill Lynch & Co., 817 F.2d 1559, 1561 (11th Cir.1987), quoting Reeb v. Economic Opportunity Atlanta, Inc., 516 F.2d 924, 930 (5th Cir.1975).
Mrs. Barnes first argues that tolling is appropriate because she did not learn facts to support an age discrimination theory until her discussions in May with a former Hillhaven employee and her replacement, age 48 was hired in May, 1986. This does not constitute a basis for equitable tolling in the instant case. Mrs. Barnes testified in her deposition that at the time she was asked to resign, she believed that age was a factor in Hillhaven's decision. By her own testimony, Mrs. Barnes had a basis for believing on April 4, 1986, that she had an age discrimination claim. Moreover, the fact that Mrs. Barnes did not learn who her replacement was until May, 1986 does not warrant tolling. Another court has rejected tolling the filing period until an ADEA plaintiff discovered his or her younger replacement when the employer had not used the timing delay in hiring a replacement as a means to delay plaintiff's filing and when the plaintiff still delayed almost six months after discovering the younger replacement before filing a charge. English v. Pabst Brewing Company, 828 F.2d 1047, 1050-51 (4th Cir.1987). Similarly, in the instant case, discovery in late April or May, 1986, that her replacement was 48 years old does not warrant tolling when there has been no showing that Hillhaven delayed in order to prejudice Mrs. Barnes and she still did not file an EEOC charge until October, 1986.
Mrs. Barnes next argues that equitable tolling is appropriate because she had an insufficient knowledge of the EEOC filing requirements. This argument also fails to support a basis for equitable tolling. The record reflects that as administrator, Mrs. Barnes had responsibility for personnel matters, including equal employment opportunity policies. She posted the Hillhaven notice of its equal employment opportunity policies which reflected an employee's rights under ADEA. An ADEA plaintiff is not required to have specific knowledge of actual filing requirements before the filing period begins to run. Rather, "[w]hen an employee is generally aware of his rights, ignorance of specific legal rights or failure to seek legal advice should not toll the 180-day notification period." McClinton v. Alabama By-Products Corporation, 743 F.2d 1483, 1486 (11th Cir. 1984). In the instant case, Mrs. Barnes had a general familiarity with EEOC policies from her position as administrator and cannot claim lack of specific knowledge as a basis for equitable tolling. Accordingly, the 180 day filing period is not subject to equitable tolling.
Mrs. Barnes further argues that Hillhaven should not be able to argue the position in its summary judgment motion that she was forced to resign when this position is contrary to its affirmative defense stated in its answer that she voluntarily resigned. Plaintiff's argument is without merit. As Hillhaven notes, Plaintiff's contention would prevent a party from accepting her allegations as true for the purposes of summary judgment and still contest the truth of these allegations in its answer. Plaintiff's citation of Miller v. IT & T Corporation, 755 F.2d 20 (2nd Cir.1985), cert. denied, 474 U.S. 851, 106 S. Ct. 148, 88 L. Ed. 2d 122 (1985) for the proposition that a party may not contradict a sworn admission to create a question of fact is inapposite to the case at hand. Hillhaven has simply taken the facts in the light most favorable to Plaintiff for this motion for summary judgment.
In light of the above, Defendant's motions for leave to file a reply brief and for summary judgment are GRANTED.
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36 F. Supp. 7 (1940)
ANDERSON et ux.
v.
STANDARD ACCIDENT INS. CO.
No. 91 Civ. A.
District Court, E. D. Louisiana. Baton Rouge Division.
December 18, 1940.
*8 J. Elton Huckabay, Justin C. Daspit, and Claude E. Fernandez, all of Baton Rouge, La., for plaintiffs.
Eraste Vidrine and James G. Schillin, both of New Orleans, La., for defendant.
CAILLOUET, District Judge.
The plaintiffs, citizens of Louisiana, residing within the New Orleans Division of this Eastern District of Louisiana, bring their suit in the Baton Rouge Division of said District, against the defendant foreign corporation, incorporated under the laws of Michigan, and domiciled in the City of Detroit, on the theory that said defendant being duly authorized to do business in this State, and being actually so doing, has for its agent for the service of process the Secretary of State, and may, therefore, be sued at the domicile of said officer which, it is alleged, is the only "domicile" within this State that said foreign corporation may be said to have, and because, so plaintiffs contend, such defendant can not be sued except at its said "domicile".
The defendant corporation carried public liability insurance upon the automobile of one Peter Ferrara, which was the car involved in the fatal accident that resulted in the death of Mary Anderson, the minor daughter of the plaintiffs. The accident took place within the limits of the New Orleans Division of the Eastern District of Louisiana.
This damage suit for her death is brought against the insurer alone.
Peter Ferrara, the assured, is alleged to be also residing, as do plaintiffs, within the New Orleans Division of the Eastern District of Louisiana.
When the jurisdiction of the Court, in any civil suit, is founded exclusively on the fact that the action is between citizens of different states, such suit must be brought only in the district of the residence of either the plaintiff or the defendant. Jud. Code § 51, as amended, 28 U.S.C.A. § 112.
Despite the positive language of this venue statute, which reads: "* * * no civil suit shall be brought in any district court against any person by any original process or proceeding in any other district than that whereof he is an inhabitant; but where the jurisdiction is founded only on the fact that the action is between citizens of different States, suit shall be brought only in the district of the residence of either the plaintiff or the defendant", it is well settled that these provisions do not operate as a deprivation of the original jurisdiction conferred upon federal District Courts by Jud.Code § 24, as amended, 28 U.S.C.A. § 41, as to all suits "between citizens of different States", where the value of the matter in controversy, exclusive of interest and costs, exceeds $3,000; but merely accord and establish a privilege concerning the place where a defendant may be sued; and such privilege may be waived either before or after suit, or simply by failing to assert it. McLean v. State of Mississippi ex rel. Roy, etc., 5 Cir., 1938, 96 F.2d 741, 119 A.L.R. *9 670, and United States Supreme Court cases therein cited.
In this civil suit, now before the Court, the Eastern District of Louisiana is the district of the residence of the two plaintiffs.
The corporation's place of residence can legally be nowhere else than within the limits of the sovereignty that created it. No corporation can change its domicile at will, and although one may be permitted to transact business where its charter does not operate, this does not bring about a "residence" beyond the limits of the State where the corporation had its legal birth. Germania Fire Insurance Company v. John R. Francis, 1871, 78 U.S. 210, 11 Wall. 210, 20 L. Ed. 77; Booth et al. v. St. Louis Fire Engine Mfg. Co., etc., C.C.E.D.Mo.E.D., 1889, 40 F. 1; Myers et al. v. Murray, Nelson & Co., C. C.S.D.Iowa, W.D., 1890, 43 F. 695, 11 L. R.A. 216; Baughman v. National Water-Works Company, C.C.W.D.Mo.W.D., 1891, 46 F. 4; Babcock & Wilcox Co. et al. v. Spaulding et al., etc., 1 Cir., 1936, 86 F.2d 256.
When federal jurisdiction depends exclusively on diversity of citizenship, a corporation can only be sued in the state of its incorporation or in the district of the plaintiff's residence. Southern Pacific Co. v. Denton, 1892, 146 U.S. 202, 13 S. Ct. 44, 36 L. Ed. 942.
This suit, therefore, was properly brought in the Eastern District of Louisiana.
The real question at issue is: Did plaintiffs have the legal right to bring the suit in the Baton Rouge Division, and should it now be transferred for trial to the New Orleans Division?
Under 28 U.S.C.A. § 114, when, by statute, a District contains more than one division, such as is the case with respect to the Eastern District of Louisiana, every suit (not of a local nature) against a single defendant must be brought in the division wherein he resides, unless such privilege be waived expressly or impliedly.
Since this provision only applies when a suit is brought within the District where the defendant actually resides, it has no application here in determining the question whether plaintiffs may maintain their present suit in the Baton Rouge Division, rather than in the New Orleans Division, of this Eastern District of Louisiana: the defendant foreign corporation does not reside in the District. Reich v. Tennessee Copper Co., D.C.E.D. Tennessee, S.D., 1913, 209 F. 880; Sartor et al. v. United Gas Public Service Co. Inc., D.C.W.D. Louisiana, Monroe Division, 1933, 3 F. Supp. 946; Sartor et al. v. Arkansas Nat. Gas. Co., D.C.W.D. Louisiana, Monroe Division, 1933, 7 F. Supp. 1016.
The suit here in question is not of a local nature, and it is against a single defendant; but the defendant does not "reside" in the Baton Rouge Division, nor within any other portion of the Eastern District. Gray v. Reliance Life Ins. Co. of Pittsburgh, et al., D.C.W.D. Louisiana, 1938, 24 F. Supp. 144; 23 American Jurisprudence, 524.
Plaintiffs' counsel, however, earnestly contend that, under Louisiana law, the defendant foreign corporation, for the purposes of this suit, has the domicile of the Secretary of State as its legal domicile, and that, therefore, the action was properly brought, and should be maintained, in the Baton Rouge Division, since that officer is domiciled in the City of Baton Rouge, and has been instituted the agent of the corporation for the service of process, by virtue of the Louisiana Act No. 105 of 1898.
This is clearly untenable, even if this court's decision, under the circumstances, were to be governed by Louisiana law; which it is not.
The general rule that, in civil matters, one must be sued at his domicile (Louisiana Code of Practice, Art. 162), gives way to various exceptions; as, for instance, those contained in paragraph 10 of Art. 165 of said Code (as amended by Act No. 156 of 1934), viz.:
"10. Insurance. In all suits on a policy of * * * accident insurance * * * the defendant may be sued at the domicile of the insurance company, or in the place where its principal agency is established, * * * or * * * at the domicile of the insured, or in the parish where the accident occurred, or in the parish where the accident policy was written, * * *".
Liability insurance, such as is alleged to be here involved, is accident insurance, inasmuch as said insurance has for its primary purpose, indemnification of the assured against the effects of accidents resulting in bodily injury and/or death to *10 others, and for which the assured is legally liable. State v. Ætna Life Ins. Co., 69 Ohio St. 317, 69 N.E. 608, 610; Lawrason v. Owners' Automobile Ins. Co. of New Orleans, 172 La. 1075, 136 So. 57, 77 A. L.R. 1412.
Notwithstanding the appointment of a local agent for the service of process upon a foreign corporation, its domicile remains unchanged, and it is still a foreign corporation with but its one original domicile located in the State of its incorporation. Were this not so, and the appointment of such agent operated a transfer of domicile, or added a new domicile, then, in a case where jurisdiction depends exclusively upon diversity of citizenship, such diversity could not legally be asserted to exist and a District Court, as would be the case in this present action, would find itself without jurisdiction to entertain the suit. Barber Asphalt Paving Co. v. City of New Orleans, 1889, 41 La.Ann. 1015, 6 So. 794; Simms Oil Co. v. Wolfe, Tax Collector, etc., 5 Cir., 1925, 6 F.2d 504.
The defendant foreign corporation, even under Louisiana law and jurisprudence, has no other domicile than its original one, located within the State whose laws gave it corporate existence. It is not domiciled in the State of Louisiana; it is asserted to be a foreign corporation, and were it not so, this Court would be without jurisdiction.
In any event, the operation of no State law respecting the venue of causes can impair the jurisdiction and power of the District Courts of the United States. Goldey v. Morning News of New Haven, 1895, 156 U.S. 518, 15 S. Ct. 559, 39 L. Ed. 517; East Tennessee, V. & G. R. Co. et al. v. Atlanta & F. R. Co., C.C.S.D. Georgia, W.D., 1892, 49 F. 608, 15 L.R.A. 109; Butler Bros. Shoe Co. v. U. S. Rubber Co., 8 Cir., 1907, 156 F. 1; Creager v. P. F. Collier & Son Co. et al., D.C.S.D. Texas, Brownsville, 1929, 36 F.2d 781; Junk v. R. J. Reynolds Tobacco Co., D.C.W.D. Virginia, 1938, 24 F. Supp. 716.
Because the defendant foreign corporation is not domiciled in Louisiana, and, naturally, does not reside in the Baton Rouge Division of this Eastern District of Louisiana, the provisions of 28 U.S.C.A. §§ 113 and 114 do not here apply, and because the plaintiffs do reside in said Eastern District they were compelled, under the circumstances, to bring their suit in that district, and nowhere else, in keeping with the requirements of 28 U.S.C.A. § 112.
The terms of the statute are clear and unambiguous. Their suit had to be brought in the District wherein they resided; since the defendant, as a matter of course, resided in neither of the two Louisiana Districts, they were left no choice as to venue.
They, therefore, brought the suit in the District of their residence; that the law required of them, but no more. It was not necessary that such residence be within the limits of the district's particular division wherein the filing was done. Merchants' Nat'l. Bank et al. v. Chattanooga Construction Co., C.C.E.D. Tennessee, S. D., 1892, 53 F. 314; Dinzy v. Illinois Central R. R. Co., C.C.N.D. Iowa, Cedar Rapids Division, 1894, 61 F. 49; Reich v. Tennessee Copper Co., D.C.E.D. Tennessee, S.D., 1913, 209 F. 880; United States v. Southern Ry. Co., D.C.E.D. Tennessee N.D., 1921, 285 F. 766; Hughes Federal Practice, 1931, Vol. 3, p. 376, § 2150.
In view of the foregoing and considering the equally clear and unambiguous provisions of 28 U.S.C.A. § 119, relative to the transfer of civil causes from one division to another in the same district, only on the "written stipulation" of the parties or their attorneys of record and the "written order" of the Judge, the plaintiffs, in the present state of the record, may maintain their action in the Baton Rouge Division.
There is no question here of a case made returnable, by inadvertence, in a division other than that in which the defendant resides; under such circumstances, and granting the making of proper service, the District Court, whose jurisdiction extends to the uttermost limits of the District and is operative throughout its area, may order the transfer of the case for trial from the wrong to the proper division. Tyler et al. v. Stanolind Oil & Gas Co. et al., 5 Cir., 1935, 77 F.2d 802, at page 804; Sanders v. Royal Indemnity Co., Inc., D.C.W.D. Louisiana, Monroe Division, 1929, 33 F.2d 512.
Defendant's motion to dismiss plaintiffs' suit for alleged improper venue and lack of jurisdiction rationae personae must, therefore, be denied; and the appropriate decree may be presented.
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36 F. Supp. 596 (1939)
MAY
v.
MULLIGAN.
No. 25.
District Court, W. D. Michigan, S. D.
June 15, 1939.
Howard, Howard & Howard, of Kalamazoo, Mich., for plaintiff.
Mason, Sharpe & Stratton, of Kalamazoo, Mich., for defendant.
RAYMOND, District Judge.
Findings of Fact.
1. Plaintiff is a resident of the State of Illinois and is a management and industrial engineer engaged in the business of installing systems covering sales and administrative expenses, budgets, accounting, cost methods, etc.
2. Defendant was a resident of the State of Illinois at the time the contracts hereinafter referred to were entered into, but since January 1, 1939, has been and, at the time of the commencement of this suit, was a resident of the State of Michigan.
3. On or about May 10, 1937, defendant entered the employ of plaintiff under a written contract (Exhibit C), which recited the use by plaintiff of certain trade secrets and his desire to protect and preserve them for his own use. This contract contained certain restrictive covenants and, among others, the following: "4. (a) Second party agrees that he will not while this agreement remains in effect or at any time within two years thereafter * * * enter into the employ of any individual, partnership, corporation, or associate corporations having interlocking directors who may be *597 or about to become a client or clients of the First party."
The contract further provided that if defendant, while the contract was in force or at any time within two years thereafter, should violate this restrictive covenant, plaintiff would be entitled to an injunction restraining defendant from the continuance thereof.
4. Defendant entered plaintiff's employ under said contract and continued thereunder until on or about June 18, 1938, on which date six engineer's working agreements were entered into between the plaintiff and defendant containing restrictive covenants applicable to various territories but including in the aggregate the entire United States and considerable portions of the Dominion of Canada. The one pertaining to Chicago territory (including the State of Michigan) is attached to the bill of complaint as Exhibit 1, the restrictive provision of which, pertinent to this case, reads: "4. Employee agrees that he will not, while this agreement remains in effect, or at any time within a period of two years from the date of cancellation or termination of this agreement * * * Enter into the employ of any individual, partnership, corporation, or associate corporations having interlocking Directors, who have or are about to become a client or clients of Employer."
Defendant remained in the employ of plaintiff under these contracts until about January 1, 1939.
5. During the term of his employment, defendant worked as operating engineer for several of plaintiff's clients and on October 31, 1938, became a supervisory engineer.
6. On or about August 8, 1938, the Kalamazoo Stove & Furnace Company, of Kalamazoo, Michigan, employed the plaintiff to make a preliminary analysis or survey of its business to determine where and how reductions in costs or improvement in methods could be effected.
7. A survey report with recommendations was made to the Kalamazoo Stove & Furnace Company by employees of plaintiff on September 8, 1938, and a supplemental report was made on September 19, 1938. The Kalamazoo Stove & Furnace Company did not authorize plaintiff to proceed with installation of the recommendations made and did not thereafter renew its relationship with plaintiff.
8. Defendant was in no way connected with either the survey or the report of the Kalamazoo Stove & Furnace Company but was at that time engaged in a similar survey of the A B Stove Company at Battle Creek, Michigan.
9. On or about October 15, 1938, the Kalamazoo Stove & Furnace Company advertised for an experienced plant executive with mechanical and industrial engineering background to fill a position made vacant through the transfer of a former employee to a newly acquired plant located in the East. Defendant applied for and obtained the position and on December 31, 1938, terminated his contract with the plaintiff and entered and still remains in the employ of the Kalamazoo Stove & Furnace Company where he was given complete charge of production.
10. The evidence is not clear and convincing that at the time defendant entered the new employment the Kalamazoo Stove & Furnace Company was or was about to become a client of plaintiff within the meaning of the agreement of May 10, 1937, and if the purpose of the contract of June 18, 1938, was to restrict employment with those who "have been clients" of plaintiff, such intent is imperfectly expressed.
11. While there is considerable circumstantial evidence leading to the conclusion that the contract of the defendant with and his employment by the Kalamazoo Stove & Furnace Company was brought about by reason of his connection with and employment by plaintiff, the direct testimony is to the contrary. However, determination of this issue is not necessary.
12. The Kalamazoo Stove & Furnace Company is not engaged in business in any way competing with that of plaintiff and the record does not indicate that plaintiff has been or will be deprived of any business through the fact that defendant is employed by the Kalamazoo Stove & Furnace Company.
Conclusions of Law.
1. The contract in suit was made between citizens of Illinois and is an Illinois contract.
2. Contract provisions such as those here sought to be enforced are declared by Section 16667, Compiled Laws of Michigan of 1929, to be against public policy and illegal, in the following language: "All agreements and contracts by which any *598 person, co-partnership or corporation promises or agrees not to engage in any avocation, employment, pursuit, trade, profession or business, whether reasonable or unreasonable, partial or general, limited or unlimited, are hereby declared to be against public policy and illegal and void."
3. Assuming (without determining) the validity in the State of Illinois of the contracts of defendant with plaintiff, the public policy of the State of Michigan declared by its legislature is binding not only upon the courts of the State of Michigan but upon the federal courts sitting therein in a suit which seeks enforcement of contracts which are contrary to the public policy of the state thus declared.
4. It is the settled law in Michigan that a contract which is void as against the public policy of the state will not be enforced by its courts even though the contract was valid where made.
5. Where the legislature has clearly declared the public policy of the state, the courts may not determine the degree of importance to the State of Michigan involved in enforcing contracts contrary to such public policy.
6. Judgment of no cause of action will be entered in favor of defendant.
The findings herewith filed sufficiently disclose the nature of the issues. The ambiguous language of the restrictive covenant relied upon and the uncertainty as to whether plaintiff has established by clear and convincing evidence that the Kalamazoo Stove & Furnace Company "have" or was "about to become" a client of plaintiff seem to preclude a conclusion that plaintiff has established by sufficiently clear and convincing evidence facts upon which could be predicated the discretionary power of the court to grant plaintiff remedy by way of injunction. Determination of these questions, however, becomes unnecessary since they are of consequence only if the validity and enforceability in Michigan of the restrictive covenant are resolved in favor of plaintiff. The court is satisfied in any event that the provisions of the Michigan statute, Section 16667, Compiled Laws Michigan, 1929, quoted in the findings, bar the remedy sought by plaintiff. Plaintiff urges that this statute applies only to Michigan contracts between Michigan citizens. The authorities do not support this contention. The correct principle is stated with ample citation of cases in 11 Am.Jur., Conflict of Laws, Sec. 125, 126, as follows,
"The public policy of a state, established either by express legislative enactment or by the decisions of its courts, is supreme and when once established will not, as a rule, be relaxed even on the ground of comity to enforce contracts, which, though valid where made, contravene such policy.
"Courts which declare a contract void as against public policy are not declaring the intention of the parties, as in the ordinary case, but are acting under the obligation of the higher law, which requires the enforcement of that which is for the public good. * * *"
"* * * Ordinarily, the lex fori will not permit the enforcement of a contract regardless of its validity where made or when to be performed, where the contract in question is contrary to good morals, where the state of the forum or its citizens would be injured through the enforcement by its courts of contracts of the kind in question, where the contract violates the positive legislation of the state of the forum that is, is contrary to its constitution or statutes, or where the contract violates the public policy of the state of the forum. * * *"
Plaintiff also contends that the constitutional provisions against impairment of the obligations of contracts forbid the application of the Michigan statute to the contract here under consideration. This argument ignores the fact that the statute, enacted in 1905, antedated the contract by many years and that it must be presumed that, as to remedies provided for, the contract was entered into in contemplation of the then existing laws of Michigan, as well as of the other states included in the various contracts relating to different territories. See 12 Am.Jur., Constitutional Law, sec. 387, 435, where it is said:
"The provision of the Constitution which declares that no state shall pass any law impairing the obligation of contracts does not apply to a law enacted prior to the making of the contract, the obligation of which is claimed to be impaired, but only to a statute of a state enacted after the making of the contract. The obligation of a contract cannot properly be said to be impaired by a statute in force when the *599 contract was made, for in such cases it is presumed that it was made in contemplation of the existing law. * * *"
"Frequently, parties, in executing contracts, stipulate in the body of the contract what remedy is to be pursued in the event of a breach. In such cases the remedy agreed upon becomes a part of the obligation of the contract and any subsequent statute which affects the remedy impairs the obligation and is unconstitutional. * * *" (Italics added.)
These principles have recently been recognized and applied in the case of Home Building & Loan Ass'n v. Blaisdell, 290 U.S. 398, 434, 54 S. Ct. 231, 238, 78 L. Ed. 413, 88 A.L.R. 1481, wherein Chief Justice Hughes stated, "Not only is the constitutional provision qualified by the measure of control which the state retains over remedial processes, but the state also continues to possess authority to safeguard the vital interests of its people. It does not matter that legislation appropriate to that end `has the result of modifying or abrogating contracts already in effect.' Stephenson v. Binford, 287 U.S. 251, 276, 53 S. Ct. 181, 189, 77 L. Ed. 288 [87 A.L.R. 721]. Not only are existing laws read into contracts in order to fix obligations as between the parties, but the reservation of essential attributes of sovereign power is also read into contracts as a postulate of the legal order. The policy of protecting contracts against impairment presupposes the maintenance of a government by virtue of which contractual relations are worth while,a government which retains adequate authority to secure the peace and good order of society. This principle of harmonizing the constitutional prohibition with the necessary residuum of state power has had progressive recognition in the decisions of this Court."
Plaintiff further urges that in any event it is incumbent on defendant to show a strong public interest on behalf of the citizens of Michigan in enforcement of the declaration that certain contracts are against public policy, and says that here that interest is but slight. Whatever of weight might be accorded such a contention in cases where the public policy relied on finds its source in other than statutory enactments, it is the view of the court that in cases where, as here, a rule of public policy has been determined by legislative enactment, the courts may not consider the degree of public interest involved. Such declarations are prerogatives of the legislature. See 12 Am.Jur., Contracts, Sec. 171, where it is said,
"What the public policy is must be determined from a consideration of the Constitution, the laws, the decisions of the courts, and the course of administration, not by the varying opinions of laymen, lawyers, or judges as to the demands of the interests of the public. * * *
"Where there are constitutional or statutory provisions, they govern as to what is the public policy. Where the lawmaking power speaks on a particular subject over which it has constitutional power to legislate, public policy in such a case is what the statute enacts. * * * Primarily, it is the prerogative of the legislature to declare what agreements and acts are contrary to public policy and to forbid them. Where a statute prohibiting an act is an expression of public policy of the state that the act is against good morals and public interest and provides no penalty, an agreement in violation of the statute is illegal. Some of the courts, speaking upon this subject, have said that the immediate representatives of the people, in legislature assembled, would seem to be the fairest exponents of what public policy requires, since they are most familiar with the habits and fashions of the day and with the actual condition of commerce and trade their consequent wants and weaknesses and that legislation is least objectionable, because it operates prospectively, as a guide in future negotiations, and does not, like a judgment of a court, annul an agreement already concluded. Courts have no right to ignore or set aside a public policy established by the legislature. Therefore, it is the duty of the judiciary to refuse to sustain that which is against the public policy of the state as manifested by the legislation or fundamental law of the state."
In the case of Thompson v. Waters, 25 Mich. 214, 225, 12 Am.Rep. 243, it is stated, "* * * since the legislatures are the proper representatives of the public interest, and, having the exclusive power to determine what shall be the public policy of the state, if they have chosen to make no enactment upon the subject, it is natural to infer they omitted to do so because they thought it unnecessary, and that the generally recognized principles would be sufficient for such cases."
*600 See, also, Bond v. Hume, 243 U.S. 15, 21, 37 S. Ct. 366, 61 L. Ed. 565; Grosman v. Union Trust Co., 5 Cir., 228 F. 610, Ann.Cas.1917B, 613; Id., 245 U.S. 412, 38 S. Ct. 147, 62 L. Ed. 368.
The legislature of Michigan having declared such a restrictive provision as is here being considered to be "against public policy and illegal and void", this court may not set aside or ignore that declaration on the ground that the public interest in its enforcement is but slight. Judgment will therefore be entered in favor of defendant, and the complaint will be dismissed.
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432 F. Supp. 1122 (1977)
Lawrence BUTLER et al., Plaintiffs.
v.
GOLDBLATT BROS., INC., et al., Defendants.
No. 74 C 3000.
United States District Court, N. D. Illinois, E. D.
April 15, 1977.
As Modified May 5, 1977.
*1123 John C. Hendrickson, H. Ayres Moore, Chicago, Ill., for plaintiffs.
Richard L. Curry, Kenneth J. Cortesi, Asst. Corp. Counsel, Julius L. Sherwin, Sherwin & Sherwin, Bernard Rosencranz, Chicago, Ill., for defendants.
*1124 MEMORANDUM OPINION
DECKER, District Judge.
I. Background
This action arises out of the warrantless arrest[1] on September 25, 1974, of the eight plaintiffs[2] for conspiracy to commit murder. The allegations of the complaint have been summarized in detail in this court's memorandum opinion of January 27, 1976.
In brief, the plaintiffs charge that defendant Walker transmitted to the police the false report of a private informant employed by Goldblatts, since revealed to be defendant Wayne Young, that the plaintiffs were conspiring to murder him through the instrumentality of a social club in the event that he would testify at a criminal proceeding against another Goldblatts' truck driver. Six days later, following Walker's testimony at that hearing, Walker reported that he had been verbally threatened by one of the plaintiffs, Ernest Lewis. Lewis was promptly arrested, and the other plaintiffs were shortly thereafter either arrested or brought to police headquarters for questioning. The charge of intimidation brought against Lewis was subsequently stricken with leave to reinstate. No criminal charges were ever brought against any of the other plaintiffs, who were all released by 2:00 A.M. on September 26th.
The plaintiffs assert that the defendant police officers ("police defendants") conspired with Walker, Young, Thomas Marsh, the Chief of Goldblatts' Special Service Division, and Dennis McFarland, another employee of that division, and Goldblatts itself (to be collectively called "Goldblatts' defendants") to effect the above arrests.
The suit is in four counts: the first alleges that the defendants acted in violation of 42 U.S.C. § 1983, under color of law to deprive plaintiffs of their constitutional rights; the second count alleges a conspiracy to deprive plaintiffs of equal protection and of their privileges and immunities under the law in violation of 42 U.S.C. § 1985(3); counts three and four are pendent state claims for false arrest and false imprisonment and defamation.
There are now pending before the court two motions for partial summary judgment filed by the plaintiffs. The first seeks summary judgment on liability against the police defendants on Count I (§ 1983 due process) and Count III (the state claim for false arrest and false imprisonment). The second motion seeks partial summary judgment on liability against the Goldblatts' defendants on Count III.
II. Plaintiffs' Motion Against the Police Defendants
After extensive discovery certain undisputed facts are found in the record. All of the plaintiffs, except Cecil Davis, were formally arrested on September 25th. No warrants were ever obtained, nor were any complaints sworn out prior to the arrests.
The police agree that they were initially contacted in this matter by Marsh and Walker on September 19th. The Goldblatts' security employees stated that an informant had provided them with information regarding an assassination attempt to be made on Walker should he testify on September 25th, against Jesse Green, a Goldblatts' employee charged with grand theft. Marsh and Walker refused to identify their informant. The informant was said to have reported that the plaintiffs had taken up a collection to hire a "hit man" to commit the murder.
Walker was under police surveillance when he testified on September 25th. He reported to the police that Ernest Lewis grabbed him by the arm when he was leaving the courthouse and said, "That's it for you." Although the police officers guarding Walker did not see this incident, they arrested Lewis. Walker safely left the area *1125 of the courthouse in his own vehicle, and was kept under police surveillance.
The police then made the decision to arrest the other plaintiffs. The police did not learn of the identity of the informer, nor did they interview him, until after this decision was made and after the arrests had begun.
The police defendants appear to base their defense upon an assertion of their "good faith" in making the arrests. The leading Seventh Circuit case of Joseph v. Rowlen, 402 F.2d 367 (7th Cir. 1968), permits a good faith defense for a warrantless arrest only where the police officers can demonstrate that they had a reasonable belief that there was probable cause for the arrest. The mere assertion that the police thought they had probable cause is insufficient. Glasson v. City of Louisville, 518 F.2d 899 (6th Cir. 1975). Thus the police defendants can escape liability for a warrantless arrest only by establishing that they reasonably believed that they had probable cause.
The undisputed facts of the case indicate that these arrests were based solely upon the hearsay recounting of the report of an unidentified private informant, and upon Walker's narration of Lewis' remark.
The court does find that there is a genuine factual dispute as to whether there was probable cause to arrest Lewis on the basis of Walker's claim that he had just been threatened.
The police were familiar with Walker as a reliable individual who had previously provided accurate information leading to convictions. The words purportedly uttered by Lewis might be construed as an immediate threat, particularly in light of Walker's earlier assertions that he had heard of a plot upon his life. It is true that the officers guarding Walker had not witnessed this interchange, but they apparently did not doubt that it could have taken place while they were not looking.
This is not to say that these circumstances clearly justified an immediate arrest. The possibility that Walker had been threatened with imminent harm must be balanced against the fact that he was being guarded by the police. Since Lewis did not pursue Walker, the police had a chance to obtain a warrant, while guarding Walker from possible harm. Furthermore, the reliability of Walker's information must be weighed against the ambiguity of the remark. Whether the entirety of these circumstances provided the police with probable cause to arrest Lewis is therefore a factual question to be resolved by a jury.
The basis for the arrests of the other plaintiffs, however, differs markedly from that of Lewis. While Lewis was arrested upon the immediate report of a perceived threat by a direct witness, the other plaintiffs were connected to the purported conspiracy only by the unverified charge of an unknown informant. In the six days since this hearsay had been presented to the police, the law enforcement officials had attempted no investigation of its veracity. Unlike the case of Lewis, no new report of actual incriminating conduct had been brought against these plaintiffs.
Under Illinois law, "arresting officers may have reasonable grounds for believing a defendant was committing a crime based upon information supplied by an informant if the reliability of the informant has been previously established or independently corroborated." People v. McCray, 33 Ill. 2d 66, 70, 210 N.E.2d 161, 163 (1965) (emphasis added). The Illinois Supreme Court went on to note that "information obtained from a source unknown to the police officer is not sufficient in itself to establish such reasonable grounds for belief as to justify an arrest and incidental search without a warrant."
This accords with the principle that a magistrate cannot issue a warrant without information "from which the officer concluded that the informant . . . was `credible' or his information `reliable'." Aguilar v. Texas, 378 U.S. 108, 114, 84 S. Ct. 1509, 1514, 12 L. Ed. 2d 723 (1964).
While the police may have had reason to trust the reliability of Walker, because he *1126 had previously supplied information that had proved accurate, they had no basis for such confidence in the unnamed informant.
The police defendants apparently recognize that the arrests cannot be justified upon the reliability of the informant. They thus state that "it was not the informant that provided the information concerning the plot to kill Mr. Walker but rather Mr. Walker himself and Mr. Marsh". This does not cure the unreliability of the story. Walker and Marsh lacked first-hand knowledge of the truth of their information. There is no shortcut to probable cause. It can be no more obtained by filtering a second-hand tale through a well-known informant than will pure hearsay become admissible because the witness has a reputation for honesty.
Furthermore, it is not without significance that the police defendants failed for six days to either investigate the charges against the plaintiffs, or attempt to secure a warrant.[3]
It appears that the police initially sought the name of the informant. This, in itself, indicates that they were aware of the importance of confirming his reliability. The failure to pursue this inquiry, or to otherwise substantiate the story indicates that the police did not feel that the Walker hearsay justified any immediate action. Yet it remains true that the evidence against these plaintiffs was no greater at the time of the arrest than on September 19th, when Walker first approached the police. Lewis' purported threat could have no bearing upon these individuals unless the story linking all the defendants in a conspiracy had some independent credibility.
The court must conclude as a matter of law that these arrests were not founded upon probable cause, and that the defendant police officers could not reasonably believe that there was probable cause for these arrests. As a result, the court must conclude that plaintiffs Butler, Jenkins, James, Jackson, and the two Nashes were deprived of due process of the law.
As noted above, the defendants deny that plaintiff Cecil Davis was ever arrested. They concede that he was stopped at the Goldblatts' warehouse and brought in to police headquarters for questioning. Although the police did not formally label this an arrest, under Illinois law an arrest occurs when there is "submission to custody". Ill.Rev.Stat. ch. 38 § 107-5(a). The questioning of Cecil Davis could not be exempted as "temporary questioning without arrest" under Ill.Rev.Stat. ch. 38 § 107-14 since it was not "conducted in the vicinity of where the person was stopped".
This issue is the only basis upon which the claims of Cecil Davis can be distinguished from those of the six plaintiffs whose civil rights were clearly violated by the conduct of the police defendants.
It is, of course, highly plausible that Davis had submitted to custody by acceding to a direction to leave work to undergo stationhouse questioning. Still the fact of an arrest remains a dispute that cannot be resolved by summary judgment in this case.
The recent case of People v. Wipfler, 37 Ill.App.3d 400, 346 N.E.2d 41 (3d Dist. 1976), attempted to define the circumstances under which stationhouse interrogation constitutes an arrest under Illinois law. The court held that "simply by acceding to a police request to come to the station to answer some questions, defendant was not thereby under arrest", at 403, 346 N.E.2d at 44. This court imposed a standard of whether "a reasonable, innocent man, would . . . have felt himself under arrest or in any significant way restrained in his freedom", at 403-04, 346 N.E.2d at 44. The court stressed that the essential issue was whether a reasonable man would *1127 feel constrained, rather than the subjective feelings of the actual interrogatee. The court also viewed "[t]he communication of an intent to arrest, on the part of an officer" as a critical factor, and relied heavily upon the fact that the police did not suggest or say that the defendant had to stay, at 404, 346 N.E.2d at 44.
The facts of Wipfler may be somewhat distinguished from Davis' case since Wipfler was not physically brought to the station by the police but went in response to a message passed on by his mother that "they simply wished to ask [him] some questions about some burglaries", at 402, 346 N.E.2d at 43. While this may be a significant difference, the application of the "reasonable man" standard is one for the jury and precludes summary judgment for plaintiff Cecil Davis against the police defendants.
III. Plaintiffs' Claims Against the Goldblatts' Defendants
Since the case of Dodds v. Board, 43 Ill. 95 (1867), Illinois law has held that a private citizen who procures an arrest must prove the guilt of the person arrested or be liable for false imprisonment. The plaintiffs' motion for summary judgment asserts that the undisputed facts reveal that the Goldblatts' defendants "procured" their arrest, and are therefore liable as a matter of law on the pendent count based on false arrest.
In support of their motion they note that the Goldblatts' defendants have stipulated that they "are the only persons who ever, at any time, stated to the police that the Plaintiffs were engaged in a conspiracy to murder Walker". As noted, supra, the police also stress that the decision to make the arrests was based on the statements of Marsh and Walker relating the observations of the informer, Wayne Young. The plaintiffs also point out that Goldblatts' defendant McFarland went with the police officers in a police vehicle in search of plaintiff James Nash, and that the Goldblatts' defendants allowed the police on company property in order to make the arrests, and assisted in the identification of the plaintiffs.
The plaintiffs rely heavily on the language of the Seventh Circuit in Odorizzi v. A. O. Smith Corporation, 452 F.2d 229, 231 (7th Cir. 1971) (affirming judgment n. o. v. for defendants in false imprisonment action), to the effect that
"In Illinois cases holding a private party guilty of false imprisonment, the defendant has either directed an officer to arrest the plaintiff or has procured the arrest by giving information which was the sole basis for the arrest." (Emphasis added.)
The plaintiffs argue rather effectively that the Goldblatts' defendants fall within this language since it is undisputed that they provided the sole source of information leading to these arrests. Except for quotation of language from Odorizzi that "giving information to police in itself is insufficient to constitute participation in an arrest", 452 F.2d at 232, the Goldblatts' defendants do not really attempt to counter plaintiffs' theory of the law.
Nonetheless, it seems improbable that merely providing the only information leading to an arrest which was not followed by a criminal conviction could by itself establish liability for false arrest. Good citizenship requires that individuals having knowledge of facts relating to possible criminal activities should contact the police.[4] Of course, before making an arrest, *1128 the police should either obtain a warrant or find probable cause. But the citizen confiding in the police should not be subjected to liability merely because the officers were hasty and failed to follow the rules. Nor should the law place a good citizen in jeopardy merely because of the manner in which he phrased his report. Liability should not lie on technicalities such as the difference between "you might want to consider my evidence" and "here is what I heard."[5]
A review of Illinois law substantiates the belief that more is required to establish liability for false arrest or imprisonment than the bare provision of information which turns out to be the sole evidence relied upon in an unlawful arrest.
The court cannot find any case in which liability was established on the basis of such limited conduct. In each case liability rested upon a direct or implied command[6] given to the police to make an arrest, or upon some unjustified participation in the arrest.
Thus, although the defendant did not expressly request the police to arrest the plaintiff in Aldridge v. Fox, 348 Ill.App. 96, 108 N.E.2d 139 (1st Dist. 1952), he was liable because he had detained the plaintiff by trickery until the arrival of the police and then stated "there is your man". Other prominent Illinois cases pose still greater factual disparity from plaintiffs' case for summary judgment.[7] In Enright v. Gibson, 219 Ill. 550, 76 N.E. 689 (1906), the defendant "directed" the officer to make the arrest, and then accompanied the plaintiff to the police station. In Ferrell v. Livingston, 344 Ill.App. 488, 101 N.E.2d 599 (1st Dist. 1951), the defendant directed the police officer to "lock up plaintiff, whereupon plaintiff was taken to the police station and remained there until the next day", at 494, 101 N.E.2d at 602.
Most importantly, the same type of conduct underlay the judgment against the private defendants in Green v. No. 35 Check Exchange, Inc., 77 Ill.App.2d 25, 222 N.E.2d 133 (1st Dist. 1966). In that case the president of the check exchange told an employee "to call the police and have the plaintiff arrested". When the police arrived, the employee told them "she had a man in the lobby who had cashed a forged or bad check with her". The police officer testified that the employee told him that the plaintiff was "to be locked up because he was the same man who had cashed the bad check", at 31, 222 N.E.2d at 136. Thus, while the officer did testify that "he relied solely on what she and the other clerks told him", it was clear that the defendants went beyond the providing of information, and also actually requested and obtained an immediate arrest.
As noted supra, the plaintiffs' case for summary judgment relies heavily upon the passage from Odorizzi which states that Illinois law will find liability for "giving information which was the sole basis for the arrest". It is significant that this quote refers to Green v. No. 35 Check Exchange, Inc. A careful reading of the facts of this state court case reveals that it was inaccurate to phrase the basis of liability in the *1129 disjunctive (directing arrest or giving the sole information leading to arrest). The case does not stand for a finding of liability based on a simple complaint. In any event, this passage from Odorizzi is unessential dictum to the result. Illinois law is more accurately stated in the latter quote cited by the Goldblatts' defendants.
This is in accord with the general principles of tort law as applied by courts throughout the country.
In Armstead v. Escobedo, 488 F.2d 509 (5th Cir. 1974), the plaintiff was unjustly arrested when a bus driver erroneously identified him to the police as an individual who had previously threatened him with a knife and threw a brick at his bus. This was the sole grounds for the arrest. Applying Texas law, the court noted that "a private citizen does not incur liability simply because he mistakenly informs the police that the suspect has committed a crime whenever the suspect is not thereafter successfully prosecuted. . . . Rather, the citizen must actually direct the police to make the arrest", at 511 (emphasis in original).
This was the same result that was reached in Alvey v. United Airlines, Inc., 161 U.S.App.D.C. 112, 494 F.2d 1031 (1974). In that case a stewardess identified the plaintiff to a deputy sheriff as a person who had upset passengers on the plane when he spoke about a bomb and then jumped up and left his seat. The sheriff's deputies then detained, and possibly arrested, the plaintiff. The court concluded that United was not liable for this "arrest", finding that "the arrest was made wholly on the initiative of the sheriff's men", 494 F.2d at 1033.[8]
In Stueber v. Admiral Corporation, 171 F.2d 777, 780 (7th Cir. 1949), the Seventh Circuit cited language from Chesapeake & Potomac Tel. Co. v. Lewis, 69 App.D.C. 191, 99 F.2d 424, 425 (1938), with similar import:
"`Mere information to the officers of the law by a citizen, tending to show that an offense has been committed and that some person named may be suspected of its commission, is not sufficient, of itself, to warrant the inference that the informer or his agents participated in the unlawful arrest and imprisonment of the accused by the officer.'"
A review of other authorities buttresses this court's conclusion that summary judgment cannot be based on those facts which are undisputed in this case. It is stated at 35 C.J.S. False Imprisonment § 24 that "[o]ne who merely gives information regarding an offense justifying arrest does not incur liability, even though the party giving the information acted maliciously or without probable cause."[9]
Elsewhere in this same section the general rule is stated that "[a]n individual who directs or requests an illegal arrest is liable for false imprisonment, but one who merely gives information regarding an offense does not incur liability." In expanding upon this rule, it is noted that "[w]hat is a direction or request sufficient to impose liability within the meaning of this rule depends on the facts of each case". This concept is repeated at 35 C.J.S. False Imprisonment § 38 where it is stated that "[n]o fixed set of rules can be laid down with which to measure acts constituting instigation of an arrest, for each case must be decided on the particular facts thereof and the inferences to be drawn therefrom."
The practical effect of this concept is that summary judgment is inapposite where there exists a question of fact regarding the exact connection between the conduct of the police and the activities of the complainant. Fine v. Paramount Pictures, 171 *1130 F.2d 571 (7th Cir. 1948) (motion of defendants for summary judgment denied).
The court is also aware that the plaintiffs' motion for summary judgment is based on more than the allegations that the Goldblatts' defendants provided the information leading to these arrests. Plaintiffs argue that the undisputed facts show that these defendants permitted the police to wait on Goldblatts' property for nearly six hours to effectuate the arrests, and diligently assisted in identifying the plaintiffs to the officers.
Illinois follows the general rule, stated in 35 C.J.S. False Imprisonment § 24 that "[a]n individual incurs liability for an arrest without process, if going beyond merely giving information he participates in making an arrest which turns out to have been unlawful." I.L.P. False Imprisonment § 6,[10]Dear v. Locke, 128 Ill.App.2d 356, 364, 262 N.E.2d 27 (2d Dist. 1970). However, it is also true that "[w]hat constitutes participation depends on the facts and circumstances of each case." 35 C.J.S. False Imprisonment § 28b.(c). It is also true that, under some circumstances, persons participating in making an arrest at the request of the police may be safe from liability for false arrest. 35 C.J.S. False Imprisonment § 43.
Although the court does have some undisputed information regarding the extent of participation by the Goldblatts' defendants in the arrests, it is not sufficient for a determination of this cause. It is not certain whether the Goldblatts' defendants volunteered their assistance in the arrests, or did nothing more than accede to police instructions. Summary judgment therefore is inappropriate.[11]
IV. Summary
Since there remain genuine issues of material fact, the motion of plaintiffs Ernest Lewis and Cecil Davis for summary judgment against the defendant police officers on the issue of liability in Count I and Count III is hereby denied.
The motion of plaintiffs Lawrence Butler, Ron Jackson, Charles James, Monroe Jenkins, James Nash and Ralph Dixon, as administrator of the estate of Nathan Nash, for summary judgment against the defendant police officers on the issue of liability in Count I and Count III is hereby ordered granted.
The motion of all the plaintiffs for summary judgment against defendants Goldblatt Brothers, Inc., Thomas Marsh, Dennis McFarland, Andre Walker, and Wayne Young (the Goldblatt defendants) on the issue of liability in Count III is hereby denied.
NOTES
[1] The defendants deny that plaintiff Cecil Davis, who was brought in to police headquarters for questioning, was actually arrested.
[2] All of the plaintiffs, except Ernest Lewis, were employees of Goldblatt Brothers, Inc., a Chicago department store chain. Plaintiff Nathan Nash has since died, and his administrator has been substituted as plaintiff in Counts I-III.
[3] This delay would deprive the defendants of any claim that exigent circumstances compelled a warrantless arrest. The recent case of U. S. v. Watson, 423 U.S. 411, 96 S. Ct. 820, 46 L. Ed. 2d 598 (1976), casts some doubt as to whether police must show such urgency, so long as probable cause exists for the arrest. While the facts of this case may otherwise distinguish Watson, it is not necessary to base this decision on the exigent circumstances theory, since the undisputed facts reveal no probable cause.
[4] In Enright v. Gibson, 219 Ill. 550, 554, 76 N.E. 689, 691 (1906), there is language that "[i]f the citizen knows a crime has been committed it is his duty to appear before a magistrate and make a complaint, in which he states that the crime has been committed, and in which he may state, upon reasonable information and belief, that the party named is the guilty party". The court goes on to state that the magistrate will give the warrant to the law enforcement officers, and warns that private citizens should not avoid these formalities of law by constituting himself as officer and jailer. This language reappears in Lindquist v. Friedman's Inc., 366 Ill. 232, 236, 8 N.E.2d 625 (1937), and more recently in Green v. No. 35 Check Exchange, Inc., 77 Ill.App.2d 25, 30, 222 N.E.2d 133 (1st Dist. 1966). The gist of this passage is that private citizens should avoid risk of liability by deferring the task of effecting an arrest to the proper authorities. There appears to be no justification to view it as holding that a mere complaint may be the basis of liability for false arrest solely because it is made before police officers rather than a magistrate.
[5] Otherwise the police might have to provide the equivalent of Miranda warnings to wouldbe informants, warning them of the possible liability that might ensue in the event that action were taken upon their information.
[6] Various verbs have been utilized without great success to define the type of conduct which will sustain a false imprisonment action. In Odorizzi, supra, the court referred to "procuring" an arrest. In 35 C.J.S. False Imprisonment § 24 one who "directs or requests" an arrest may be liable. In Palmentere v. Campbell, 344 F.2d 234, 238 (8th Cir. 1965), the court found that one could be liable if he "directed, advised, countenanced, encouraged, or instigated" the arrest.
[7] Lindquist v. Friedman's Inc., 366 Ill. 232, 236, 8 N.E.2d 625 (1937), is apparently another case where liability was sustained against private citizens despite the absence of any express request for an arrest. However, the opinion appears to be based on the finding that the defendants restrained the plaintiffs in their store until the arrival of the police.
[8] Similar language may be found in the opinion of Judge Waterman in Burke v. New York, New Haven & Hartford R.R. Co., 267 F.2d 894 (2d Cir. 1959), "We agree that a person who does nothing more than supply information upon which a warrant of arrest is to be issued cannot be held liable for false imprisonment if that warrant is issued in an invalid form. Prosser on Torts, p. 51 (2d ed. 1955); Restatement of Torts § 37, comment b (1934)." 267 F.2d at 899.
[9] The black letter law is similarly stated at I.L.P. False Imprisonment § 6, which draws upon Steuber v. Admiral Corp., supra.
[10] I.L.P. gives the black letter law as follows, "A person is not liable for false imprisonment unless he personally participated therein by direct act or by indirect procurement."
[11] The argument of the Goldblatts' defendants that they cannot be liable for conduct under color of state law has been previously discussed and rejected by this court. The court has previously determined that Count III is a properly pendent count to the § 1983 claim of Count I. This being the case, there is no reason whatsoever why this court cannot resolve Count III on its merits at the appropriate time.
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432 F. Supp. 601 (1977)
Martin FITZPATRICK, John Nelson, Curtis Johnson, Plaintiffs,
v.
Ronald WERT, Guard Union, Local 1040, David E. Lynch, William J. Conners III, Benjamin J. Ward, Commissioner, N.Y.S. Department of Correctional Services, and Harold J. Smith, Superintendent, Attica C.F., Defendants.
Civ. No. 77-249.
United States District Court, W. D. New York.
May 27, 1977.
Martin Fitzpatrick, pro se.
CURTIN, Chief Judge.
Plaintiffs have submitted to the court a civil rights complaint (42 U.S.C. §§ 1983 and 1985) along with an affidavit of poverty and seek permission to proceed in forma pauperis. 28 U.S.C. § 1915.
On December 2, 1976, the Buffalo Courier-Express carried a story, written by reporter David E. Lynch, which was headlined: "Attica Inmates Reported Ready to Demonstrate." The first two paragraphs of that story read:
*602 Attica prisoners plan to demonstrate if the state legislature does not act favorably on their proposals by mid-January, according to the head of the guards' union there.
"They say they are going to do their thing," union president Ronald Wert said, "and it's not going to be peaceful this time."
Mr. Wert was referring to the peaceful demonstration of inmate support for a proposed prison reform package which many Attica inmates sought to bring to public attention by remaining in their cells during a seven-day period in August 1976. The remainder of the news story focused on aspects of corrections reform legislation, particularly on proposed revisions in the parole procedures.
Plaintiffs have alleged that this single reported statement by Mr. Wert deprives them, and the class they purport to represent, of equal protection of the laws and of other privileges and immunities under the Constitution. This allegation is founded on plaintiffs' expressed belief that Mr. Wert's statement was made in an attempt to intimidate, threaten and put fear of loss of life into plaintiffs and other inmates.
Plaintiffs also seek to sue the following:
(1) Reporter David Lynch, whom plaintiffs contend conspired with defendant Wert to deprive them of rights, privileges and immunities under the Constitution, in violation of 42 U.S.C. § 1985, by reporting defendant Wert's statement;
(2) Guard Union, Local 1040, which allegedly condoned defendant Wert's statement;
(3) Commissioner Benjamin Ward and Superintendent Harold Smith, who allegedly failed to use their authority to stop publication of the article and other acts of defendant Wert; and
(4) William J. Conners, III, president and publisher of the Buffalo Courier-Express, who allegedly allowed publication of the December 2, 1976 article and of an editorial entitled "Prisoner Threats Could Hamper Reforms" which appeared in the Courier-Express on December 4, 1976.
After reviewing the claims made by plaintiffs, I have concluded that this action is patently frivolous and must be dismissed pursuant to 28 U.S.C. § 1915(d).
At the outset, the claim against the prison guards' union is clearly not cognizable here since the union is not a "person." See Monell v. Dept. of Social Services, 532 F.2d 259, 262-63 (2d Cir. 1976).
Even read liberally, the statement attributed to Mr. Wert cannot be said to constitute an abuse of prisoners by corrections personnel. Plaintiffs' pleadings indicate that this was an isolated instance where a prison guard (who is also president of the guards' union) expressed a personal opinion to the news media that inmates intended "to do their thing" in support of proposed prison reform legislation and that the inmates might not be peaceful in doing it. This alone fails to support a claim under 42 U.S.C. § 1983 that words or actions of corrections personnel posed an immediate threat to the safety and welfare of inmates or that supervisory personnel directly abused inmates. See, e. g., Holt v. Hutto, 363 F. Supp. 194, 215 (E.D.Ark.1973), modified sub nom. Finney v. Arkansas Board of Correction, 505 F.2d 194 (8th Cir. 1974). Plaintiffs have not alleged that disturbances occurred at Attica or that anyone was injured as a direct result of Mr. Wert's statement to the press. Nor is there any indication in the complaint of an evil intent or recklessness on Mr. Wert's part, or even deliberate indifference to the consequences of his conduct for the inmates for whom he was responsible. See Williams v. Vincent, 508 F.2d 541, 546 (2d Cir. 1974); Williams v. Field, 416 F.2d 483 (9th Cir. 1969), cert. denied, 397 U.S. 1016, 90 S. Ct. 1252, 25 L. Ed. 2d 431 (1970); Gittlemacker v. Prasse, 428 F.2d 1 (3d Cir. 1970).
For these same reasons, I must conclude that the complaint is also frivolous with respect to Commissioner Ward and Superintendent Smith, who are charged with having condoned Mr. Wert's words *603 and actions. In addition, Commissioner Ward and Superintendent Smith cannot be held liable in a § 1983 action for any of Mr. Wert's actions merely because of the fact that they are Mr. Wert's superiors. See Johnson v. Glick, 481 F.2d 1028, 1034 (2d Cir.), cert. denied, 414 U.S. 1033, 94 S. Ct. 462, 38 L. Ed. 2d 32 (1973).
Defendants Lynch and Conners cannot be held liable under 42 U.S.C. §§ 1983 or 1985 for doing that which is their constitutionally-protected right as newsmen. There is a well-entrenched tradition in this country that freedom of expression should not be limited or infringed by either public or private authority. This basic and essential principle is articulated in the first amendment and has been affirmed by a long series of Supreme Court decisions. See, e. g., Stromberg v. California, 283 U.S. 359, 369, 51 S. Ct. 532, 75 L. Ed. 1117 (1931); Bridges v. California, 314 U.S. 252, 270, 62 S. Ct. 190, 86 L. Ed. 192 (1941); Roth v. United States, 354 U.S. 476, 484, 77 S. Ct. 1304, 1 L. Ed. 2d 1498 (1957); Nebraska Press Association v. Stuart, 427 U.S. 539, 96 S. Ct. 2791, 49 L. Ed. 2d 683 (1976).
In his concurring opinion in Whitney v. California, 274 U.S. 357, 375-76, 47 S. Ct. 641, 648, 71 L. Ed. 1095 (1927), Justice Louis D. Brandeis gave the principle of freedom of expression its classic formulation:
Those who won our independence believed . . . that public discussion is a political duty; and that this should be a fundamental principle of the American government. They recognized the risks to which all human institutions are subject. But they knew that order cannot be secured merely through fear of punishment for its infraction; that it is hazardous to discourage thought, hope and imagination; that fear breeds repression; that repression breeds hate; that hate menaces stable government; that the path of safety lies in the opportunity to discuss freely supposed grievances and proposed remedies; and that the fitting remedy for evil counsels is good ones. Believing in the power of reason as applied through public discussion, they eschewed silence coerced by lawthe argument of force in its worst form. Recognizing the occasional tyrannies of governing majorities, they amended the Constitution so that free speech and assembly should be guaranteed.
More recently, the Supreme Court has recognized the significance of the role of the press in our system of free expression:
The Constitution specifically selected the press . . . to play an important role in the discussion of public affairs. Thus the press serves and was designed to serve as a powerful antidote to any abuses of power by governmental officials . . .. Suppression of the right of the press to praise or criticize governmental agents and to clamor and contend for or against change . . . muzzles one of the very agencies the Framers of our Constitution thoughtfully and deliberately selected to improve our society and keep it free.
Mills v. Alabama, 384 U.S. 214, 219, 86 S. Ct. 1434, 1437, 16 L. Ed. 2d 484 (1966).
In other contexts, inmates have sought to broaden the scope of free expression and to facilitate access to the news media. See, e. g., Procunier v. Martinez, 416 U.S. 396, 94 S. Ct. 1800, 40 L. Ed. 2d 224 (1974); Pell v. Procunier, 417 U.S. 817, 94 S. Ct. 2800, 41 L. Ed. 2d 495 (1974); Nolan v. Fitzpatrick, 451 F.2d 545 (1st Cir. 1971); Burnham v. Oswald, 342 F. Supp. 880 (W.D.N.Y.1972). In this action, inmates seek to limit such free expression and to put strictures on a news reporter, a publisher and their sources. For plaintiffs to allege that defendants Lynch and Conners, by reporting the news and providing editorial comment on current events, were thereby involved in a conspiracy to deprive plaintiffs of equal protection of the laws and of equal privileges and immunities under the laws, borders on the preposterous. Any efforts that plaintiffs and other inmates may be engaged in to foster a peaceful and rational atmosphere at Attica are to be commended. However, this suit is not the appropriate vehicle for plaintiffs to seek redress of their expressed grievances.
*604 For the reasons stated above, the suit is dismissed as frivolous pursuant to 28 U.S.C. § 1915(d).
Permission to proceed further in forma pauperis is denied except that the Clerk is directed to file the complaint without payment of fees by the plaintiffs.
Permission to appeal in forma pauperis is also denied, with the qualification that the plaintiffs may file with the Clerk of the United States District Court, United States Court House, Buffalo, New York, a notice of appeal, without the payment of filing fees.
Further requests for permission to appeal in forma pauperis should be directed, on motion, to the United States Court of Appeals for the Second Circuit, Foley Square, New York City, in accordance with the requirements of Rule 24(a) of the Federal Rules of Appellate Procedure.
So ordered.
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793 F. Supp. 716 (1992)
Nancy WOOD, Plaintiff,
v.
The CROSBY ARBORETUM FOUNDATION, a Mississippi nonprofit corporation, Defendant.
Civ. A. No. H90-0059(R).
United States District Court, S.D. Mississippi, Hattiesburg Division.
July 8, 1992.
Michael Cavanaugh, Biloxi, Miss., Dennis J. Sladek, Colorado Springs, Colo., for plaintiff.
Frank D. Montague, Jr., Montague, Pittman & Schwartz, Hattiesburg, Miss., E. Howell Crosby, Chaffe, McCall, Phillips, Toler & Sarpy, New Orleans, La., Phineas Stevens, Butler, Snow, O'Mara, Stevens & Cannada, Point Clear, Ala., for defendant.
MEMORANDUM ORDER
DAN M. RUSSELL, Jr., District Judge.
This cause is before this Court on Motion of the defendant, The Crosby Arboretum Foundation, to Deny Jury Trial. The plaintiff, Nancy Wood, demands a jury trial on twelve causes of action for the defendant's alleged infringement upon the plaintiff's copyrighted material. The defendant submits that the plaintiff is not entitled to a jury trial since the relief she seeks is limited to injunctive and statutory damages.
The defendant relies primarily on Raydiola Music v. Revelation Rob, Inc., 729 F. Supp. 369 (D.Del.1990), in which the Delaware United States District Court presented an exhaustive review of the statutory *717 and constitutional analysis on whether a right to a jury trial exists. The Raydiola Music court noted the divergence of opinion within the various circuits; specifically, the First, Second, Fifth, Ninth and Eleventh Circuit have held there is no right to a jury trial, while the Fourth and Seventh Circuits have held the opposite.[1]Id. at 370.
The defendant cites Twentieth Century Music Corp. v. Frith, 645 F.2d 6 (5th Cir. Unit B 1981) as authority from the United States Circuit Court of Appeals in which this Court sits. In Twentieth Century Music Corp., the plaintiff sought injunctive relief and the statutory minimum damages pursuant to 17 U.S.C. Section 501(b)(1909), and 17 U.S.C. Section 504(c)(1976) on thirteen alleged copyright infringements of plaintiff's musical compositions by public performance for profit during 1977 and 1978. The district court denied the defendant's motion for jury trial in the copyright infringement action. On appeal, the appellate court held that the defendants were not entitled to a jury trial. The Twentieth Century court stated that "[t]he whole case before the court was equitable in nature as to which the appellant had no constitutional or statutory right to a jury trial." Id. at 7. Citing Chappell & Co. v. Palermo Cafe Co., 249 F.2d 77, 78 (1st Cir.1957); Broadcast Music, Inc. v. Dici Naz Velleggia, 490 F. Supp. 1342 (D.Md. 1980).
Furthermore, the defendant cites Cable/Home Communication Corp. v. Network Productions, Inc., 902 F.2d 829, 852-53 (11th Cir.1990), which cites Twentieth Century. In Cable the court held that "the latitude granted the district court's great discretion in awarding statutory damages does not entitle defendants to a jury ... trial as to an award of damages within the statutory limits of both the Copyright Act....". Id. at 853.
The plaintiff suggests in her response that the authorities cited by the defendant are distinguishable because they refer to plaintiffs who sought injunctive relief and statutory damages, and in some cases, statutory minimum damages. The plaintiff states said cases were equitable in nature, and state that in the case sub judice, she is not asking for any equitable relief since "the defendant has complied with her requests to remove the infringed material. Plaintiff only seeks statutory damages." Plaintiff's Response, May 27, 1992, p. 1.
The plaintiff contends that various courts have held that a plaintiff is entitled to a jury trial when the plaintiff seeks only statutory damages, and cites Video Views, Inc. v. Studio 21, Ltd., 925 F.2d 1010 (7th Cir.1991), cert. denied, ___ U.S. ___, 112 S. Ct. 181, 116 L. Ed. 2d 143 (1991); Gnossos Music v. Mitken, Inc., 653 F.2d 117 (4th Cir.1981); Educational Testing Services v. Katzman, 670 F. Supp. 1237 (D.N.J.1987). The plaintiff additionally submits that she does not seek minimal statutory damages, but rather she is asking for maximum statutory damages on twelve of the alleged infringements, and an increased amount on five of the alleged infringements for willfulness. The plaintiff contends that she is seeking a remedy at law and not equity, and that she is entitled to a jury trial.
However, as the defendant discusses in its reply brief, the argument advanced in Studio 21, Ltd., 925 F.2d 1010, and Mitken and Katzman, supra, is based primarily on the Seventh Amendment right to a jury trial. Said arguments advanced in Katzman and Mitken were specifically addressed in Raydiola Music v. Revelation Rob, Inc., 729 F. Supp. 369, 376 (D.Del. 1990). Furthermore, Raydiola Music also addresses the plaintiff's claims that since her claim is for the maximum rather than the minimum statutory damages, the relief sought is one in law and not equity.
*718 The Raydiola Music court concluded that the characterization of statutory damages is equitable and does not turn upon whether a plaintiff requests the minimum or maximum statutory damages.
The fact that the Supreme Court has rejected the concept that statutory damages are penal or constitute a forfeiture, opting instead to characterize them as remedial, that statutory damages provide a remedy for what would otherwise be a non-remedial wrong, and that exercise of discretion plays a significant role in determining statutory damages convinced [the court] that statutory damages in the copyright infringement context should be characterized as equitable.
Title 17 of the United States Code, Section 504(c)(1), sets a mandatory range of statutory damages for violation such as those alleged by the plaintiff; the district courts are granted discretion and latitude in awarding such damages within those limits set forth in 17 U.S.C. Section 504(c)(1), and upon certain proof being shown as set forth in 17 U.S.C. Section 504(c)(2), such as a statutory damage award, may be increased or decreased by the Court.
The fact that the plaintiff claims damages for willfulness does not change the status of this cause from being equitable; an award of such damages is governed by statutory amounts as set forth in Section 504(c)(2).
"[T]he employment of the statutory yardstick, within set limits, is committed solely to the court which hears the case, and this fact takes the matter out of the ordinary rule with respect to abuse of discretion." Douglas v. Cunningham, 294 U.S. 207, 210, 55 S. Ct. 365, 366, 79 L. Ed. 862 (1935); see also [Broadcast Music, Inc. v.] Xanthas [Inc.], 855 F.2d [233] at 237 [(5th Cir.1988)] ("The statute by its terms places no further limits on the district court's discretion."); Harris [v. Emus Records Corp.], 734 F.2d [1329] at 1335 [(9th Cir.)] ("The court has wide discretion in determining the amount of statutory damages to be awarded, constrained only by the specified maxima and minima." (citing L.A. Westermann Co. v. Dispatch Printing Co., 249 U.S. 100, 39 S. Ct. 194, 63 L. Ed. 499 (1919))). In awarding statutory damages, the court "may take into account the attitude and conduct of the parties." Warner Bros. [Inc. v. Dae Rim Trading, Inc.], 877 F.2d [1120] at 1126 [(2nd Cir. 1989)]; see also F.W. Woolworth Co. [v. Contemporary Arts, Inc.], 344 U.S. [228] at 233, 73 S.Ct. [222] at 225 [97 L. Ed. 2d 276 (1952)] ("The statutory rule ... is designed to discourage wrongful conduct.... Even for uninjurious and unprofitable invasions of copyright the court may, if it deems it just, impose a liability within statutory limits to sanction and vindicate the statutory policy."); Fitzgerald Publishing Co. [v. Baylor Publishing Co.], 807 F.2d [1110] at 1117 [(2nd Cir.1986)] ("[T]he potential for discouraging the defendant is factored into the determination of the award."). In its broad discretion for determining statutory damages, the district court should consider both the willfulness of the defendant's conduct and the deterrent value of the sanction imposed.
Cable/Home Communication Corp. v. Network Productions, Inc., 902 F.2d at 852.
A court's exercising of discretion in setting statutory damages is recognized in this jurisdiction as being equitable in nature. As such, the defendant's Motion to Deny Jury Trial is well taken and should be granted.
IT IS THEREFORE ORDERED AND ADJUDGED that the Motion of the defendant, the Crosby Arboretum Foundation, to Deny Jury Trial is hereby GRANTED.
SO ORDERED AND ADJUDGED.
NOTES
[1] See Chappell & Co. v. Palermo Cafe Co., 249 F.2d 77 (1st Cir.1957); Oboler v. Goldin, 714 F.2d 211 (2d Cir.1983) (determination of statutory damages is a question for the trial judge); Twentieth Century Music Corp. v. Frith, 645 F.2d 6 (5th Cir.1981); Sid & Marty Krofft Television Productions, Inc. v. McDonald's Corp., 562 F.2d 1157, 1177 (9th Cir.1977); Cable/Home Communication Corp. v. Network Productions, Inc., 902 F.2d 829 (11th Cir.1990); Gnossos Music v. Mitken, Inc., 653 F.2d 117 (4th Cir.1981); and Video Views, Inc. v. Studio 21, Ltd., 925 F.2d 1010 (7th Cir.1991), cert. denied, ___ U.S. ___, 112 S. Ct. 181, 116 L. Ed. 2d 143 (1991).
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530 F. Supp. 2d 879 (2008)
Dennis K. KUCINICH; Kucinich for President 2008, Inc.; and Willie Nelson, Plaintiffs,
v.
TEXAS DEMOCRATIC PARTY; Boyd L. Richie; and Phil Wilson, Individually and in his Official Capacity as Secretary of State of the State of Texas, Defendants.
No. 1-08-CV-00007-LY.
United States District Court, W.D. Texas, Austin Division.
January 17, 2008.
*880 *881 Donald J. McTigue, John M. Stephan, Mark A. McGinnis, McTigue Law Group, Columbus, OH, Joseph Andrew Turner, Law Office of Joseph A. Turner, P.C., Austin, TX, for Plaintiffs.
FINDINGS OF FACT AND CONCLUSIONS OF LAW
LEE YEAKEL, District Judge.
BE IT REMEMBERED that on January 11, 2008, this Court called the above styled and numbered cause of action for trial. Plaintiffs Dennis Kucinich, United States Congressman from the State of Ohio and a candidate for President of the United States, Kuchinich for President 2008, Inc., and Willie Nelson, an individual Texas voter and supporter of Kucinich for President,[1] and Defendants the Texas Democratic Party, Boyd L. Richie, Chairman of the Texas Democratic Party,[2] and Phil Wilson, Secretary of State for the State of Texas,[3] appeared by counsel.[4] After rendering judgment and preliminary findings and conclusions in open court on *882 January 11, the Court signed a Final Judgment, which dismissed Kucinich's requests for a temporary restraining order and preliminary injunction, denied TDP's motion to dismiss, and ordered that Kucinich take nothing by his action against all Defendants (Doc. # 24). The Court now renders complete findings of fact and conclusions of law in support of the Final Judgment. See Fed.R.Civ.P. 52(a).[5]
Background
On December 18, 2007, the Federal Election Commission notified Kucinich that he qualified for presidential primary election federal matching funds (Doc.# 20, Exhibit 2). See 26 U.S.C. § 9033. On December 28, Kucinich timely filed his application for a place on the TDP presidential primary ballot for the March 4, 2008 Texas primary elections. On January 2, 2008, the last day for filing for a place on the ballot, TDP informed Kucinich that his application was deficient and his candidacy would not be certified to the Texas Secretary of State for a place on the TDP presidential primary ballot, because Kucinich had crossed out the following portion of the loyalty oath on the application, "I further swear that I will fully support the Democratic nominee for President whoever that shall be."[6] The TDP further informed Kucinich that the application would only be accepted if Kucinich re-signed the application with the full oath and faxed it to the TDP the same day, January 2. The TDP informed Kucinich that in all other respects, the application was sufficient. Despite signing an identical ballot application, in 2004, which, contained the same oath, Kucinich informed the TDP that he would only pledge to support a nominee who would not employ war as an instrument of foreign policy, and that he would not re-sign the oath based on this firm belief.
Kucinich commenced this action, asking the Court to: (1) declare the TDP's loyalty oath invalid and unconstitutional under the First and Fourteenth Amendments to the United States Constitution as an improper restriction of his speech and his right of association and, because a similar loyalty oath is not required by the Texas Republican Party or by the TDP for other public offices, the oath violates his right of equal Protection;[7] (2) temporarily and permanently enjoin TDP from enforcing the oath; (3) order TDP Chairman Richie to certify to Secretary of State Wilson that Kucinich is a candidate for the March 4, 2008 TDP presidential primary; and (4) order Wilson to include Kucinich's name on the March 4 TDP presidential primary ballot.[8] Kucinich also filed a Motion for Temporary Restraining Order and Preliminary Injunction (Doc. # 2), an Amended Complaint On January 4, 2008 (Doc. # 8), and a brief on the merits in support of his claims on January 8 (Doc. # 12). TDP opposes Kucinich's requests and moved to *883 dismiss the action for failure to state a claim (Doc. # 13). See Fed.R.Civ.P. 12(b)(6). Kucinich responded to TDP's motion to dismiss and replied to TDP's opposition brief (Doc. # 21). TDP also replied to Kucinich's brief on the merits (Docs.# 19). Also submitted for the Court's consideration is a declaration by Kucinich (Doc. # 23).
Jurisdiction and venue
The Court has federal-question jurisdiction over this action and has jurisdiction to grant declaratory, and injunctive relief. See 28 U.S.C. §§ 1331, 2201, & 2202. Additionally, venue is proper in the Austin Division of the Western District of Texas because a substantial part of the events giving rise to the claims occurred in the Austin Division. See id. at § 1391(b).
Analysis
The issues for this Court to determine are: (1) whether the TDP's loyalty oath affects Kucinich's fundamental rights of association and future speech rights and places an undue burden upon those rights under the First and Fourteenth Amendments;[9] (2) whether the fact that the TDP only includes a loyalty oath for those seeking access to its primary ballot for the Office of President of the United States violates the Equal Protection Clause of the Fourteenth Amendment;[10] and (3) whether the TDP loyalty oath is unconstitutionally vague.
A. Texas's statutory scheme for political party rule-making
In Texas, primary elections are used to determine the political party's nominee to appear on the general-election ballot. See Tex. Elec.Code Ann. § 191.001 (West 2003) (requiring political parties to have presidential primary election in most cases). State law requires a political party to adopt rules for, inter alia, selecting the party's candidates. See id. at § 163.002. Further, state law requires that the rules be adopted only by a state convention of the party. See id. at § 163.004, A party's state executive committee, however, is granted the authority to adopt rules governing how a candidate's name is included on a party's ballot. Id. at § 191.008. Temporary rules may be adopted by a state executive committee, but only if doing so is necessary before the next state convention, and further, any temporary rule must be voted on by the party at the next convention. See id. at § 163.004. The Court notes that lacking from the record in this action is any challenge that the TDP improperly promulgated the oath.
B. Standard Anderson/Burdick Analysis
Candidate-eligibility restrictions may implicate fundamental constitutional rights, including the right of association and speech. See Anderson v. Celebrezze, 460 U.S. 780, 786-87, 103 S. Ct. 1564, 75 L. Ed. 2d 547 (1983). However, not all such restrictions impose constitutionally suspect burdens. Id. at 788, 103 S. Ct. 1564. For example, "[a] State may require parties to demonstrate `a significant modicum of support' before allowing their candidates a place on that ballot." California Democratic Party v. Jones, 530 U.S. 567, 572, 120 S. Ct. 2402, 147 L. Ed. 2d 502 (2000). Courts analyze constitutional challenges to a state's election laws by (1) "consider[ing] the character and magnitude of the asserted injury to the rights protected by the First and Fourteenth Amendment that the Plaintiff seeks to vindicate," (2) "identify[ing] and evaluat[ing] the precise interests put forward by the State as justifications *884 for the burden imposed by its rule," and (3) weighing the "legitimacy and strength of each of the State's proffered justifications against "the extent to which those interests make it necessary to burden the plaintiffs' rights." Id. at 789, 103 S. Ct. 1564; Burdick v. Takushi, 504 U.S. 428, 433, 112 S. Ct. 2059, 119 L. Ed. 2d 245 (1992); Texas Ind. Party v. Kirk, 84 F.3d 178, 182 (5th Cir.1996).
To some extent, all election laws will impact constitutional associational rights. Burdick, 504 U.S. at 433, 112 S. Ct. 2059. The Supreme Court does not require strict-scrutiny analysis or narrow tailoring in every election-law case with First and Fourteenth Amendment implications. Id. Instead, "[t]he rigorousness of the inquiry into the propriety of the state election law depends upon the extent to which the challenged regulation burdens First and Fourteenth Amendment rights." Texas Ind. Party, 84 F.3d at 182. An election law that severely restricts constitutional rights must be narrowly tailored to advance a compelling state interest. Burdick, 504 U.S. at 434, 112 S. Ct. 2059. But a state's important interests in regulating elections are generally sufficient to justify reasonable, nondiscriminatory, restrictions. Anderson, 460 U.S. at 788, 103 S. Ct. 1564; Texas Ind. Party, 84 F.3d at 182.
The Anderson/Burdick standard evolved to address state election laws and Anderson and California Democratic Party address issues related to a state's candidate-eligibility restrictions. This Court finds these authorities apply to the issues presented in this cause because of the connection between the TDP and Texas election laws. See Smith v. Allwright, 321 U.S. 649, 660, 64 S. Ct. 757, 88 L. Ed. 987 (1944) ("recognition of the place of the primary in the electoral scheme makes clear that state delegation to a party of the power to fix the qualifications of primary elections is delegation of a state function that may make the party's action the action of the state.") (discussing United States v. Classic, 313 U.S. 299, 61 S. Ct. 1031, 85 L. Ed. 1368 (1941) and overruling Grovey v. Townsend, 295 U.S. 45, 55 S. Ct. 622, 79 L. Ed. 1292 (1935)).
These standards, of course, have been established for a reason: courts should involve themselves sparingly in the political process. Although courts should intervene to protect a fundamental right of a candidate or potential candidate, the judiciary should not engage in revising the rules of a political party merely because a potential candidate, or even the court itself, disagrees with the party's determination. A rule may be ill advised, an anachronism, disagreeable to some, or legally unenforceable, but unless the rule impinges on a fundamental right implicating constitutional protection, a political party may enact and enforce it.
C. Application
1. Kucinich's First and Fourteenth Amendment Rights
Kucinich argues that the oath impermissibly violates his constitutional right to associate and his future speech rights because attesting to the oath compels Kucinich to give up future association and speech rights in order to "fully support" the Democratic Party nominee. The parties agree that the oath is a moral obligation that is likely unenforceable at law. See Westerman v. Mims, 111 Tex. 29, 227 S.W. 178, 180-81 (1921) (determining that oath gives rise to moral obligation as opposed to legal obligation; former of which is enforceable only through conscience of promisor and not courts). The Court agrees and finds that the oath at issue fails to give rise to any legal obligation to "fully support" the TDP's nominee. Kucinich is *885 free to define "fully support" however he sees fit and act accordingly. Additionally; Kucinich has a choice of whether to associate with TDP. See Ray v. Blair, 343 U.S. 214, 230, 72 S. Ct. 654, 96 L. Ed. 894 (1952) ("A candidacy in the primary is a voluntary act of the applicant. He is not barred, discriminatorily, from participating but should he choose to associate the party requires that he must comply with the rules of the party."). These considerations impact the Court's assessment of the character and magnitude of the asserted constitutional injury.
An Alabama Democratic Party oath required electors to pledge their support for "the nominees of the National Convention of the Democratic. Party for President and Vice-President of the United States." Id. at 215, 72 S. Ct. 654. The Supreme Court specifically analogized a party's ability to require its electors to pledge an oath with the party's ability to require its primary election candidates to do the same, which is the issue presented here. Id. at 227, 72 S. Ct. 654. Just as the elector in Ray had a choice of whether to associate with the party and assume the obligation to vote a certain way at the national convention, Kucinich has a choice of whether to associate with TDP and assume an obligation to support the TDP's nominee. The Court finds and concludes that it is bound by the holding in Ray.
Although courts have at times struck down discriminatory party rules, the oath before the Court is not an instance of a party seeking to disenfranchise classes of people on the basis of race, sex, national origin, or religion. See Allwright, 321 U.S. at 664, 64 S. Ct. 757; Nixon v. Herndon, 273 U.S. 536, 47 S. Ct. 446, 71 L. Ed. 759 (1927).[11] Kucinich's allegedly-infringed speech and associational rights pale in comparison with the rights sought to be vindicated in cases such as Allwright, in which the Supreme Court struck down a TDP rule prohibiting any non-white person from voting in party primaries. Id.
The oath only restricts Kucinich's speech to the extent his conscience chooses to be restricted. Accordingly, the Court determines that TDP's requirement that its presidential candidates sign a loyalty oath does not so significantly restrict Kucinich's First Amendment speech and associational rights that it requires a strict-scrutiny analysis and narrow tailoring to achieve a compelling state objective. See Texas Ind. Party, 84 F.3d at 182. It is enough that the party supports its requirement by asserting its important interests in regulating elections and in preventing association with those who will not support the party. The dominant right of association in this case lies with the party.
Kucinich may still exercise his speech rights in myriad ways. Also, Kucinich could have chosen to be a candidate in the Texas Republican Party primary, a third-party candidate, or an independent candidate. To the extent the oath's effect on his conscience prevents him from associating *886 with TDP, that right of association is outweighed by the associational rights of TDP members.
2. TDP's Interests
TDP asserts that the Supreme Court has recognized the ability of political parties to use loyalty oaths substantially similar to the one at issue in this case. See Ray, 343 U.S. at 231, 72 S. Ct. 654. Additionally, as justification for requiring Kucinich's compliance with its loyalty oath, TDP responds that it too has significant associational rights.
The First Amendment guarantees the right to associate for the advancement of beliefs and ideas as well as the right not to associate. See Democratic Party v. Wisconsin, 450 U.S. 107, 122, 101 S. Ct. 1010, 67 L. Ed. 2d 82 (1981); Healy v. James, 408 U.S. 169, 181, 92 S. Ct. 2338, 33 L. Ed. 2d 266 (1972). The right to associate or not extends to political parties. See Tashjian v. Republican Party, 479 U.S. 208, 214, 107 S. Ct. 544, 93 L. Ed. 2d 514 (1986). The right of association is a two-way street. Indeed in no area is the political party's right to exclude more important than in the process of selecting its nominee. See California Democratic Party, 530 U.S. at 575, 120 S. Ct. 2402. "That process often determines the party's positions on the most significant public policy issues of the day and even when those positions are predetermined it is the nominee who becomes the party's ambassador to the general electorate in winning it over to the party's views." Id. (citing Timmons v. Twin Cities Area New Party, 520 U.S. 351, 372, 117 S. Ct. 1364, 137 L. Ed. 2d 589 (1997)). In Texas, the primary election will determine the TDP's nominee, thus it is a party affair and "the constitutional rights of those composing the party cannot be disregarded." California Democratic Party, 530 U.S. at 573 n. 4, 120 S. Ct. 2402.
Here Kucinich seeks the benefits of the TDP organization, infrastructure, and substantial membership; however, Kucinich is disinclined to follow the rules adopted by TDP's membership. Allowing Kucinich to be certified as a candidate forces the TDP's members to associate with Kucinich. The Court recognizes that just as Kucinich has a constitutional right to choose with whom he associates, TDP also has the right to set the terms under which it is willing to allow people to associate with it, so long as those terms are nondiscriminatory. See Allwright, 321 U.S. at 649, 64 S. Ct. 757.
3. Balancing
The Court finds that the TDP's right to not associate with Kucinich, should he decline to sign a properly promulgated party-loyalty oath, which does not seek to disenfranchise him on the basis of race, sex, religion, or national origin, outweighs Kucinich's right to associate with the TDP. Further, even if this Court were to determine that a fundamental right of Kucinich has been impinged, the Court finds that no undue burden is placed upon him by the TDP's requiring his signing its loyalty oath. In the final analysis, Kucinich seeks to associate with the TDP, but only on Kucinich's terms.
D. Equal Protection
Kucinich argues TDP's loyalty oath violates the Fourteenth Amendment's Equal Protection clause because a similar oath is not required of TDP candidates for offices other than President, and because Republican candidates for President are not required to sign a similar oath. He asserts any relationship between the loyalty-oath requirement and seeking the TDP Presidential nomination is tenuous, and that TDP has failed to establish a justification for the distinction or to demonstrate its *887 oath is tailored to achieve its objective without burdening his First Amendment rights of association and future speech.
The TDP responds that Ray established that an oath requirement does not violate constitutional equal-protection guarantees, and that an oath requirement is reasonably related to a legitimate legislative objective. Additionally, the TDP argues Kucinich's Equal Protection argument fails because he has not demonstrated that he is being treated differently than similarly-situated people; he is being treated like every other person seeking the Democratic nomination for President.
The Equal Protection Clause requires states to treat all similarly-situated people alike. City of Cleburne, Tex. v. Cleburne Living Center, 473 U.S. 432, 439, 105 S. Ct. 3249, 87 L. Ed. 2d 313 (1985). If no fundamental right is implicated, states generally have wide latitude to enact legislation. See Clements v. Fashing, 457 U.S. 957, 962-63, 102 S. Ct. 2836, 73 L. Ed. 2d 508 (1982).
The Equal Protection Clause allows the States considerable leeway to enact legislation that may appear to affect similarly situated people differently. Legislatures are ordinarily assumed to have acted constitutionally. Under traditional equal protection principles, distinctions need only be drawn in such a manner as to bear some rational relationship to a legitimate state end. Classifications are set aside only if they are based solely on reasons totally unrelated to the pursuit of the State's goals and only if no grounds can be conceived to justify them. See e.g., McDonald v. Board of Election Comm'rs, 394 U.S. 802, 808-09, 89 S. Ct. 1404, 22 L. Ed. 2d 739 (1969); McGowan v. Maryland, 366 U.S. 420, 425-26, 81 S. Ct. 1101, 6 L. Ed. 2d 393 (1961).
Id.
Kucinich argues the Court should evaluate TDP's required loyalty oath with a high level of scrutiny because the oath infringes his First Amendment rights. See Buckley v. Valeo, 424 U.S. 1, 25, 96 S. Ct. 612, 46 L. Ed. 2d 659 (1976). However, as the Court has previously discussed, Anderson and Burdick provide the appropriate framework for evaluating an election-law case, or in this case, a party-rule case. The Court concludes that the character and magnitude of the asserted injury to Kucinich's First Amendment rights is not so significant to require strict scrutiny and narrow tailoring.
TDP has amply demonstrated its legitimate purposes for requiring the oath; parties too have associational rights and this oath is one of the ways TDP seeks to assure its presidential primary candidates share the party's philosophies. Ray is also instructive; there the Supreme Court upheld an oath that was "reasonably related to a legitimate legislative objective-namely, to protect the party system by protecting the party from fraudulent invasion by candidates who will not support the party." Ray, 343 U.S. at 226, n. 14, 72 S. Ct. 654. Additionally, "[t]his requirement of a pledge does not deny equal protection or due process." Id.
In another context, Anderson recognized that presidential elections differ from state and local elections. Anderson, 460 U.S. at 794-95, 103 S. Ct. 1564. For instance, a presidential-primary election transcends state lines and impacts a party's choice of its national candidate for President. There is not a constitutional impediment to a party's having different rules to select a presidential candidate or having rules different from other political parties. Kucinich is not similarly situated *888 to Democrats running for offices other than President of the United States.
E. Vagueness
A basic principle of due process is that vague laws, those that fail to duly define the prohibitions which would "give the person of ordinary intelligence a reasonable opportunity to know what is prohibited so that he may act accordingly" are void. Grayned v. Rockford, 408 U.S. 104, 108-09, 92 S. Ct. 2294, 33 L. Ed. 2d 222 (1972). The parties agree that the oath is a moral obligation that is legally unenforceable at law. See Westerman, 227 S.W. at 180-81 (determining that oath gives rise to moral obligation as opposed to legal obligation, former of which is enforceable only through conscience of promisor and not courts).
The Court agrees and finds that the oath at issue fails to give rise to any legal obligation to "fully support" the TDP's nominee. Kucinich argues, however, that the word "fully" causes the oath to be unconstitutionally vague. It is difficult to see how the addition of "fully" requires a different moral obligation than would arise from loyalty oaths without "fully", which have previously been upheld. See Ray, 343 U.S. at 231, 72 S. Ct. 654. See also Jones v. State of Ala., No. 00-CA-0442-RV-L, 2001 WL 303533, at *3 (S.D.Ala. Mar. 6, 2001). Lacking from the record is any attempt by Kucinich, prior to filing this action, to persuade TDP to change its rule regarding the oath. In the event Kucinich were to sign the oath, he must abide by the oath to the degree his conscience requires. The oath as it exists is a moral obligation, which is unenforceable at law. Although the oath is inartfully worded and arguably vague, the extent to which Kucinich must comply with its terms is solely within Kucinich's discretion. To compel Kucinich to sign the oath as a condition of candidacy violates no due-process right of Kucinich. Consequently, the Court finds and concludes that Kucinich's contention that the oath is unconstitutionally vague is without merit.
Conclusion
The Court concludes that Kucinich fails to show that the TDP's loyalty oath violates his right of association and future speech rights or violates his right of equal protection.
Having addressed all issues presented to the Court, this case is hereby Closed.
NOTES
[1] Kucinich for President 2008, Inc. is the official presidential campaign committee of Dennis J. Kucinich. Willie Nelson is identified as "a qualified elector in the State of Texas who intends to support Dennis J. Kucinich for President in the primary election." As Plaintiffs' interests are aligned, for convenience, the Court refers to Plaintiffs collectively as "Kucinich".
[2] For convenience, the Court refers to the Texas Democratic Party and Richie as "TDP".
[3] The Secretary of State for the State of Texas also serves as the Chief Election Officer of the State of Texas. The Secretary of State is responsible for prescribing the form of the presidential primary ballots.
[4] All Defendants waived formal service of Complaint and Summons and the parties agreed to proceed with this action in an expedited manner on an agreed record (Doc. # 20), briefing, and oral argument on the merits.
[5] All findings of fact contained herein that are more appropriately considered conclusions of law are so deemed. Likewise, any conclusion of law more appropriately considered a finding of fact is so deemed.
[6] The oath being contested by Kucinich reads: "I, ____________ of ____________, __________ County/Parish, __________, being a candidate for the Office of President of the United States, swear that I will support and defend the constitution and laws of the United States. I further swear that I will fully support the Democratic nominee for President whoever that shall be:" Texas Democratic Party Rules, Article VIIA.2(b), http://www.txdemocrats.org/ (select "Rules" under "The Party" menu and select "Rules of the TDP"; then follow the hyperlink entitled "Article VII-National Delegate Selection Rules") (last visited Jan. 9, 2008).
[7] U.S. Const. amend. I, XIV.
[8] 28 U.S.C. §§ 2201, 2202 (1994).
[9] See U.S. Const. amend. I, XIV.
[10] See U.S. Const. amend. XIV, § 1.
[11] In Texas, because African-Americans were systematically denied the right to vote, during the 1920's a series of cases began, which became known as as the white-primaries cases. White primaries, originally established by state law, were declared unconstitutional. See Nixon v. Herndon, 273 U.S. 536, 47 S. Ct. 446, 71 L. Ed. 759 (1927). The Texas Legislature replaced the white-primary law with a law that authorized each political party to determine who shall be qualified to vote or otherwise participate in the party. The TDP then enacted "white-primary rules," which were upheld as private rather than state action. See Grovey v. Townsend, 295 U.S. 45, 55, 55 S. Ct. 622, 79 L. Ed. 1292 (1935). Ultimately the white-primary rules were declared unconstitutional as well. Smith v. Allwright, 321 U.S. 649, 64 S. Ct. 757, 88 L. Ed. 987 (1944). For an historical review see Morse v. Republican Party, 517 U.S. 186, 212, 116 S. Ct. 1186, 134 L. Ed. 2d 347 (1996).
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10-30-2013
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https://www.courtlistener.com/api/rest/v3/opinions/1369621/
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530 F. Supp. 633 (1982)
Hoyle E. GREEN, Individually and as Guardian of Takuye Green, Incompetent, Plaintiffs,
v.
UNITED STATES of America, Defendant and Third Party Plaintiff,
v.
William SIGNORINI, Patricia McNabb-Kaminski, James Zischler, Dr. Derward Lepley, Dr. Robert Flemma, Cardiovascular Surgery Associates, S. C., and St. Paul Fire and Marine Insurance Co., Third Party Defendants.
Civ. A. No. 80-C-854.
United States District Court, E. D. Wisconsin.
January 21, 1982.
*634 *635 *636 William M. Cannon, Milwaukee, Wis., for plaintiffs.
Barbara B. Berman, Melvin Washington, Asst. U. S. Attys., Milwaukee, Wis., for the U. S.
DECISION and ORDER
TERENCE T. EVANS, District Judge.
This is a medical malpractice action brought under the Federal Tort Claims Act, 28 U.S.C. §§ 2671, et seq., alleging that Dr. William Stanford, an Air Force surgeon, acting within the scope of his employment, was negligent in an operation performed on Takuye Green. A 12-day trial to the court on the claims between the plaintiffs and the government began October 6, 1981. The case was very well presented by William Cannon, counsel for the plaintiffs, and Assistant United States Attorneys Barbara Berman and Melvin Washington on behalf of the government. The following are my findings of fact and conclusions of law.
Facts
THE OPERATION
On May 2, 1978, Takuye Green, then 54 years old, underwent coronary bypass surgery at Milwaukee Lutheran Hospital. During the connection of the heart-lung machine, the lines to and from the machine were reversed, resulting in oxygen-depleted blood being sent to Mrs. Green's brain. She suffered extensive, irreversible brain damage and has been a patient at the Veterans Administration Hospital at Wood, Wisconsin, under extensive nursing care, almost continuously since the operation.
The operation on May 2, 1978, was performed by Dr. Donald Mullen, who with two other Milwaukee doctors, Derward Lepley and Robert Flemma, works through a service corporation, Cardiovascular Surgery Associates, S. C. (CVSA). Dr. Stanford was a fellow with CVSA as a result of a permissive temporary duty (TDY) order from the Air Force, and on May 2 was acting as first assistant to Dr. Mullen during the operation on Mrs. Green.
Under the routine practice of CVSA, the initial work of preparing Mrs. Green for surgery was done by physician's assistants and a first assistant physician. Perfusionist James Zischler readied the heart-lung machine, in part by setting up the tubing which would connect the patient with the machine. He then handed the tubing to William Signorini, a physician's assistant, whose task was to straighten out the lines, place connectors on the two venous lines but not on the arterial line, and clamp the lines to the operating table with the arterial line closest to the patient's head.
At this point the first of a number of tragic errors was made. Signorini placed a connector on the arterial line and placed a venous line closest to Mrs. Green's head.
The next step was performed by the first assistant, Dr. William Stanford. It was Dr. Stanford's duty to open the chest and cannulate the patient.
Although no witness had ever encountered or heard of a case in which line reversal occurred, the physicians at CVSA were aware that because the lines used were all the same diameter, texture and color, precautions were necessary to be certain connections were properly made. Out of this concern, CVSA had ordered new, marked lines which were not yet available on May 2, 1978.
According to all trial witnesses acquainted with CVSA, except Dr. Stanford, CVSA had also instituted procedures to be used in making the actual connection of the lines with the patient, which had as a primary purpose, insuring that the lines were connected in the proper manner. The first procedure was to be performed when the arterial line from the machine was connected to the cannula which was in the patient's heart. The surgeon would ask the perfusionist to give a quarter turn from the pump. With the quarter turn, fluid would run through the tubing, signaling that the tube was in fact the proper one. The second procedure was to be performed after *637 the arterial line was connected. The surgeon would order that the patient's head be lowered and 200 cc's of fluid be infused into the patient to make sure that there was no obstruction in the flow, no air in the line, and that the line was properly attached.
Dr. Stanford did not perform these tests, and the lines incorrectly clamped to the operating table were improperly connected to Mrs. Green. Dr. Stanford claims that he was never told to use the procedures during all operations, that the procedures he used were acceptable for cannulating a patient, that the physicians at CVSA did not use the procedures in all operations, and that if they did, then Signorini, Zischler, and/or Patricia McNabb-Kaminski, another member of CVSA, were negligent in not insisting that he perform the tests. I find specifically that the two procedures were routine, were in large part to function as safety procedures to prevent line reversals, and that Dr. Stanford had been instructed to use the procedures.
After Mrs. Green was prepared for the operation Dr. Mullen entered the room and ordered that the heart-lung machine be turned on. At this point in an operation, when the blood first begins to flow through the lines, it is possible to observe which way the blood is running. Although an observation at this time was possible, no one was watching.
After the operation began, the monitor showed that Mrs. Green had low arterial pressure and unusually high venous pressure. These pressures were not entirely uncommon, but did cause some concern. The perfusionist was ordered to administer neo-synephrine and to increase the arterial flow from the machine. Those procedures were done but the pressures did not improve. In addition, the blood in the venous lines was a brighter red than would ordinarily be expected. The unusual indications persisted during the early part of the operation and, when uncorrected, caused increased concern. Dr. Mullen tried to readjust the superior vena cava line to lower the pressure. That did not work. When the conditions continued, at from 15-20 minutes into the operation, a thorough search was undertaken to discover what was wrong. The lines were traced back to the machine and the error discovered. The discovery came too late.
WILFORD HALL
Dr. Stanford received his medical degree from the University of Iowa in 1956. He was board certified in general surgery in 1965, and in thoracic surgery in 1966. As an Air Force officer, he was Chief of the Cardiothoracic Surgery Service at Wilford Hall, Lackland Air Force Base, San Antonio, Texas, from 1969 to 1980. He was Chairman of the Department of Surgery at Wilford Hall from July, 1975 to September, 1977.
At least by mid-1976, a suspicion was spreading throughout Wilford Hall that Dr. Stanford's surgical skills were not what they should be. Members of the Cardiology Department were manipulating case presentations to prevent Dr. Stanford from performing surgery on their patients.
In early 1977, Dr. Carey Akins, a young cardiac surgeon in the Air Force under the Berry Plan[1], began quietly to gather statistics on mortality rates of Dr. Stanford's patients. Checking data from 1975 through 1977, he discovered that Dr. Stanford's death rate was over 40%, while that of the other surgeons was less than 10%. Unsatisfied with raw statistics, he consulted a medical treatise to obtain expected mortality rates for the kinds of operations Dr. Stanford was performing. When a range of expected mortalities was given, he used the higher rate. When he knew about a patient personally, he adjusted the expected mortality figure upward if appropriate, never downward, thus giving Dr. Stanford the benefit of the doubt. He found that a *638 predicted mortality rate for the operations Dr. Stanford was performing was 12%; Dr. Stanford's actual rate was 43%.
Dr. Akins tried to confront Dr. Stanford with the data in April, 1977. Dr. Stanford would not listen. Dr. Akins decided to present the statistics to Dr. William Kemmerer, an Air Force officer at Randolph Air Force Base, also in San Antonio. Dr. Kemmerer, in turn, presented the statistics to General Paul Myers, a neurosurgeon who was the Chief of the Wilford Hall Medical Center from 1973 until 1978. General Myers is now Surgeon General of the Air Force. As far as Dr. Akins could tell, nothing happened as a result of his study.
In late May, 1977, two children were scheduled for difficult operations to be performed by Dr. Stanford. Dr. John Waller, another Berry Plan physician, an anesthesiologist, decided that as a matter of ethics, he would not provide anesthesia for the operations. His superior officer, Dr. Francis Dannemiller, supported Waller's decision.
As a result of Dr. Waller's refusal, a long meeting was held in Gen. Myer's office on May 26, 1977. Several people, including Dr. Stanford, were present. Finally, Dr. Waller conceded that if Gen. Myers issued a direct order to administer the anesthesia, he would have to consider obeying it. But if he obeyed, he would write a dissenting note on the patients' records. Gen. Myers became angry and left the room. However, word came back that the operations would be cancelled.
Two days later, Gen. Myers summoned Dr. Akins to his office and during the course of the meeting, Dr. Akins informed Gen. Myers as to how he had compiled his statistics. Dr. Akins suggested that an outside investigator be called in to study the problem. Dr. Akins was also called in to Dr. Stanford's office, at which time he informed Dr. Stanford that he found his surgical skills insufficient.
In response to these events, on June 1, 1977, Dr. Stanford presented his own statistical data to Gen. Myers. Gen. Myers found Dr. Stanford's statistics inaccurate and almost meaningless. The statistics did, however, show a 40% mortality rate from January, 1975 to June, 1977.
By July 12, 1977, Gen. Myers apparently became convinced that he was confronted with a problem. He wrote to Dr. Paul A. Ebert, a pediatric cardiac surgeon, who for six years had been a national consultant to the Air Force. Gen. Myers told Dr. Ebert that an extraordinarily well-trained cardiac anesthesiologist had alleged that the open heart surgery program at Wilford Hall had a high mortality rate; that he had received two different sets of statistics, which left him "no closer to a solution"; and that cardiologists were reluctant to refer cases within the institution. In a classic understatement, General Myers continued, "You can well imagine that this has caused an undue amount of consternation." He went so far as to perceive that part of the problem had been resolved "with the departure of the cardiac anesthesiologist." With his back to the wall and action of some kind being necessary, Myers requested that Dr. Ebert review the Open Heart Program at Wilford Hall.
On September 9, 1977, yet another study was presented to General Myers by Dr. Charles Beckmann, Chief of Cardiology. This was a study done by Drs. Robert D. Slama and Charles A. Boucher on the graph patency and mortality rates for all cardiac surgeons. Again, Dr. Stanford's mortality rate was highest, 43% for operations performed from September 1, 1975, to September 1, 1977. In addition, his patency rate was the worst of all the surgeons.
On September 13, 1977, Dr. Homer Woosley, Vice Commander at Wilford Hall, drafted a document setting forth options available to Gen. Myers for handling the Stanford problem. Option 1 was to leave it alone. Dr. Woosley urged rejection of this solution because the problem had already surfaced. Option 2 was to credential Stanford, i.e. to officially limit or restrict his surgical privileges. Option 2 was seen as a last resort. Option 3 was to give Dr. Ebert all the data and to seek his recommendation. Option 4 was to confront Dr. Stanford *639 with the fact that "his results are consistently bad" and state that if he did not voluntarily agree to limit his activities as a surgeon, he would be given research responsibilities or a year's fellowship somewhere to correct his deficiencies.
Dr. Ebert visited Wilford Hall from September 19 through September 21, 1977, and submitted his report on September 28, 1977. He was given only limited information with which to work and claimed in a trial deposition, that he was not in a position to decide the issue of the competence of Dr. Stanford. However, his report states: "The question of one surgeon, Col. William Stanford, having considerably worse operative results than other surgeons cannot be dismissed." He went on to indicate that Dr. Stanford had operated on "high risk" patients, "one in which the operative results would be of doubt in any center ..." He recommended that high risk patients not be operated on, and that other patients be "randomized" among the surgeons in an attempt "to define whether or not the question of competence of Col. Stanford and the staff are comparable."
The experiment was not carried out, however. It was unacceptable to the cardiologists. Rather, Dr. Stanford received a permissive TDY (temporary duty) order, allowing him to accept the fellowship he had sought and secured with CVSA in Milwaukee.
Dr. Stanford obtained the fellowship by requesting it from Dr. Flemma, whom he had known when Flemma was in Texas at an Army hospital. In applying for the fellowship he told Dr. Flemma that he was spending a lot of his time in administration and was not doing as much surgery as he would like. He claimed to want the fellowship to be brought up to date on surgical procedures. Dr. Flemma never investigated Dr. Stanford's background because the story was plausible, Dr. Stanford, after all, being the Chief of Surgery at a major Air Force hospital.
The physicians at CVSA were not warned that Dr. Stanford was, in a word used by Drs. Akins, Waller, and Daniel Knauf, "rough." CVSA was not told that Dr. Stanford was, in the words of Dr. Knauf, who testified for the government, inconsistent, sometimes careless, and difficult to sway from his own notion of how an operation should be carried out. Gen. Myers, who was seriously concerned about the allegations against Dr. Stanford at Wilford Hall, signed the permissive TDY orders and sent Stanford to CVSA without comment. Although Dr. Stanford was sent to Milwaukee without comment, his activities at Wilford Hall following the fellowship were significantly restricted. Upon his return he resumed the title of Chief of the Cardiothoracic Surgery Service but Dr. Knauf scheduled all operations. In addition, Dr. Stanford was not allowed to perform surgical procedures unless Dr. Knauf was present to supervise.
The Claims
Plaintiffs claim that Dr. Stanford did not possess the reasonable degree of skill, experience, or judgment of other members of his specialty, that he did not apply his skill with reasonable care, and that he did not exercise his best judgment. They also claim that under the requirements for informed consent, Dr. Stanford should have informed either CVSA or the Greens of his mortality rates. Plaintiffs argue that Dr. Stanford and William Signorini were causally negligent and that Dr. Mullen was not causally negligent or was at the very most only minimally responsible for what happened.
The government argues that under the borrowed servant doctrine, it is not liable for Dr. Stanford's negligence. Furthermore, defendant argues, under the FTCA, the court lacks jurisdiction on the issue of informed consent pleaded in the amended complaint, or alternatively, that if the failure to disclose the Texas information constitutes misrepresentation, the claim is barred by 28 U.S.C. 2680(h). Defendant also claims that the Texas events are irrelevant to a determination of negligence and that Dr. Stanford was under no duty to inform CVSA or Mrs. Green of his mortality rates.
*640 On the apportionment of negligence, defendant argues that Dr. Stanford was not causally negligent. It argues that Dr. Mullen, who was primarily responsible for the surgery, was primarily responsible for the injury to Mrs. Green. Furthermore, any errors made by Signorini or Stanford are seen by the government as correctable by Mullen, who is also seen to be negligent for failing to stop the operation to find the problem. In addition, the government argues that Dr. Mullen was negligent for failing to watch the direction of flow in the lines when the machine was turned on; that William Signorini was negligent in improperly placing the connectors on the lines and the lines on the table; and that others in the operating room, particularly Zischler, Signorini and Patricia McNabb-Kaminski, were negligent for failing to insist that Dr. Stanford perform the safety procedures.
Dr. Stanford and the government have presented an array of claims and excuses for the problems at Wilford Hall and the events during the operation on Takuye Green. The incompatible positions undermine both Dr. Stanford's credibility and the defense here. Dr. Stanford claims that his mortality rates were high because he was operating on high risk patients. If that were true to a significant degree, the cardiologists at Wilford Hall, those most familiar with the patients on whom he operated, would have recognized that high risk surgery accounted for his results. His claim that he was doing high risk surgery is also incompatible with his statement to Dr. Flemma that he had been doing primarily administrative work, had been away from surgery, and needed to brush up on new techniques.
Dr. Stanford claims that he is not causally negligent, even though he admits that he was not watching the directional flow of the fluid as the heart-lung machine was turned on. However, he claims that because they were not watching, Dr. Mullen and McNabb-Kaminski were causally negligent. Dr. Stanford claims that he was not causally negligent because of his failure to perform the safety procedures, but Zischler and Signorini were negligent for not insisting that he perform them. In short, he points the finger at everyone else when, instead, he should be looking in the mirror.
The Borrowed Servant Doctrine
By order filed September 21, 1981, I ruled that the Medical Malpractice Immunity Act, 10 U.S.C. § 1089, and the Federal Tort Claims Act must be read in pari materia, i.e. that "acting within the scope of his office or employment," means the same thing in both acts. I found that policy reasons prevent the government from obtaining dismissal of a defendant because he was acting within the scope of his employment, and then later, after the statute of limitations had run, obtain summary judgment because although he was acting within the scope of his employment for purposes of immunity, he was not covered by the FTCA, because he was a borrowed servant of another employer. I adhere to that view.
Nevertheless, at trial, the government was allowed to establish its record with regard to the issue. On the basis of that record, I find that, even were the doctrine available as a defense in this action, Dr. Stanford was not a borrowed servant under Wisconsin law.
The four questions pertinent to the analysis of whether a person is a borrowed servant are set forth in Meka v. Falk Corp., 102 Wis. 2d 148, 151, 306 N.W.2d 65 (1981):
"(1) Did the employee actually or impliedly consent to work for the special employer?
"(2) Was the employee performing the special employer's work at the time of the injury?
"(3) Did the special employer have the right to control the details of the work being performed?
"(4) Was the work of the employee primarily for the benefit of the special employer?"
It is the final requirement which the government fails to meet. It is conceivable *641 that a civilian doctor could request help from an Air Force doctor and that if the help were given, the civilian doctor would have benefitted. Whether the Air Force would allow such an event is, however, highly questionable. Gen. Myers testified that the purpose of permissive TDY orders was to benefit the Air Force, not an individual officer. It is highly unlikely then, that any benefit to a civilian doctor would form a legitimate basis for TDY to be granted.
Viewing the events charitably, one could perhaps see that the reason for Dr. Stanford's TDY was, as Gen. Myers testified, to improve Dr. Stanford's surgical skills for the benefit of the Air Force. Being less charitable, one sees that the real benefit to the Air Force was to get Dr. Stanford off its hands for a while to prohibit scandal and further dissension among the doctors at Wilford Hall. In short, sending Dr. Stanford to Milwaukee was a good way to avoid a nasty embarrassment to the Air Force.
On the other hand, CVSA offered fellowships to provide training to surgeons. That through this method they also obtained inexpensive, or in this case, free labor is not really the point; they could have offered the fellowship to a number of persons. There were many more applicants for fellowships with CVSA than there were positions available.
That Dr. Stanford was not working primarily for the benefit of CVSA is virtually admitted in the government's post-trial brief at 28, 29, in which reliance is placed on Dr. Flemma's testimony:
"The Milwaukee doctors accepted a trainee to teach and supervise. Dr. Stanford came to Milwaukee to be trained and to be taught by CVSA. He was not in Milwaukee merely to help CVSA with their heavy surgery schedule ... There was no question that Dr. Stanford was stating to CVSA that he felt he needed some training ... Dr. Stanford served in that capacity only."
This is, in short, not a situation in which Dr. Stanford's work was primarily for the benefit of the special employer.
Informed Consent and the Amended Administrative Claim
In July, 1981, plaintiffs amended their administrative claim nunc pro tunc, and filed a motion for leave to amend their complaint here by adding allegations that the United States was negligent in failing to advise CVSA or plaintiffs of the incompetence of Dr. Stanford, in failing to advise CVSA and plaintiffs of the mortality and morbidity rates of Dr. Stanford, in failing to make Exhibits 1 and 2 available to CVSA and the plaintiffs, and in engaging in conduct that prevented dissemination of information pertaining to the competence of Dr. Stanford. At the conclusion of the trial, I allowed plaintiffs to amend the complaint to conform to the proof.
The United States argues that this court lacks jurisdiction over the amendment, which raises, in its view, a separate issue of informed consent. The government argues that there is no administrative procedure to allow for an amendment nunc pro tunc, and because the filing of a claim six months prior to bringing suit is a jurisdictional prerequisite to an FTCA claim, this court lacks jurisdiction over the claim. The government acknowledges that so long as plaintiffs characterize the failure to communicate mortality figures to CVSA as a "risk" of Mrs. Green's surgery, the claim could be litigated if the jurisdictional requirements had been met. However, the government argues that if a misrepresentation occurred, then the amendment is barred because no action for negligent misrepresentation is available. See: 28 U.S.C. § 2680(h).
It is unnecessary to enter the jurisdictional maze. The allegations of the amended complaint that Dr. Stanford and the government prevented CVSA and Mrs. Green from knowing about the events at Wilford Hall are another facet of alleged negligence against Dr. Stanford, a facet revealed through the pretrial discovery procedures of the federal rules. The allegation that the government apparently through persons other than Dr. Stanford prevented dissemination of the information will not be considered in the apportionment of negligence.
*642 To prevail in a medical malpractice action a plaintiff must prove that a doctor failed to exercise the degree of skill usually exercised by the average practitioner acting in the same or similar circumstances. Shier v. Freedman, 58 Wis. 2d 269, 206 N.W.2d 166 (1973); Scaria v. St. Paul Fire & Marine Ins. Co., 68 Wis. 2d 1, 227 N.W.2d 647 (1975). In order to exercise the appropriate degree of skill, a doctor must possess that degree of skill or care or the medical judgment necessary to allow him to exercise it. By taking the responsibility for a surgical procedure, a surgeon represents that he possesses the skill and care ordinarily possessed by persons performing similar procedures. See: Perin v. Hayne, 210 N.W.2d 609, 615 (Iowa 1973); 61 Am.Jur.2d § 205, p. 338.
Events in Texas show, to my satisfaction, that Dr. Stanford did not possess or regularly exercise, ordinary care. He was rough, sometimes careless. He did not possess good medical judgment. On one occasion, he scheduled an extremely risky operation, left it to residents, was not in the hospital when an emergency arose, and in fact did not go to the hospital when informed of the problem.
Dr. Stanford clearly knew or should have known that his skills were lacking. Both Dr. Knauf and Dr. Akins testified that they told him so. He was fully aware of the rebellion of the cardiologists. He knew that part of Dr. Ebert's job was to evaluate his performance. He knew Gen. Myers was searching for a solution to the problem. He claims that no one told him in so many words that he was incompetent, assuming apparently that if no one told him he was incompetent, he could not have known that his skills were lacking. His position on this issue is untenable.
The events in Texas are relevant to the operation on Mrs. Green. They lend credibility to the testimony of others that Dr. Stanford carelessly neglected to perform safety checks which he was instructed to perform. They place the responsibility for what he did directly on him that is, because Dr. Stanford knew what had happened in Wilford Hall and Dr. Mullen did not, Dr. Stanford is directly responsible for his own negligence. Dr. Mullen, as primary physician, was justified in relying in the absence of knowledge of Dr. Stanford's background on the skill to be reasonably expected of a cardiothoracic surgeon who presented himself as did Dr. Stanford.
Negligence
Under the standard of care applicable to him, Dr. Stanford was, beyond any doubt, causally negligent. He was responsible for cannulating Mrs. Green. He had been instructed as to how it should be done. He was told to use two safety procedures, either one of which would have prevented the reversal of the lines. He performed neither one. Furthermore, by his own admission, it was his responsibility to watch the directional flow of the liquid in the line when the machine was turned on. He failed to do so.
Plaintiffs presented expert witnesses, all of whom stated that having been instructed to perform the tests, Dr. Stanford, by not performing the tests, deviated from the standard of care required. In fact, many defense witnesses do not disagree with that judgment.
There is a type of negligence where a doctor's medical judgment may have been bad on a close question of, for instance, the amount of drugs to prescribe. On the other hand, there is negligence such as involved in the Green operation, negligence which no one can dispute:
"... Laymen may be able to conclude that there was negligence, without expert testimony, where a sponge or surgical instrument was left in an incision or where the wrong organ or other body part was removed in surgery." Christianson v. Downs, 90 Wis. 2d 332, 279 N.W.2d 918 (1979).
In such a case, there comes a time when one cannot shift the blame, when every denial of responsibility weakens one's case. Dr. Stanford argues that most of the other persons in the operating room were negligent during the line reversal; however, he *643 maintains that he was not causally negligent. That position is not only untenable, but arrogant.
Dr. Stanford was negligent, and his negligence was a direct cause of the tragic injury that occurred in this case.
Comparison of Negligence
Although the claim for contribution was severed prior to trial, I deem it appropriate to state my views as to the apportionment of negligence based on what I have seen presented during this trial.
William Signorini, an experienced physician's assistant, was causally negligent. He placed a cannula on the aortic line, which should have been left without one. The improper connection caused him to arrange the lines improperly on the operating table, thus setting the stage for what followed. Without Mr. Signorini's initial acts of negligence, the line reversal would not have occurred.
Dr. Mullen was also causally negligent. Five minutes into the operation, he knew something was wrong. He made attempts to discover the problem while continuing the surgery. About 15-20 minutes into the operation, he stopped the procedures and the reversal of the lines was discovered. He is not to be faulted for not thinking immediately that the lines might be reversed, for no one at trial had ever seen a line reversal before. It is not the sort of thing that usually goes wrong. However, Dr. Mullen must bear responsibility as lead surgeon because of his failure to more quickly investigate and find the cause of the irregular pressure readings and the bright red blood in the caval lines.
Dr. Stanford was the board certified surgeon responsible for the cannulation of the patient. He had given no notice to CVSA that he was anything less than an experienced cardiovascular surgeon who wanted to further improve his skills. He neglected to perform two procedures which he had been told to do, procedures which would have caught Mr. Signorini's error. As did the others, he neglected to watch the directional flow of the fluid when the machine was turned on.
I have reviewed the evidence presented on the activities of others alleged to have been negligent and found it unpersuasive. The causal negligence in this case, based on what I have seen, is shared only by Dr. Stanford, Dr. Mullen and Mr. Signorini.
The next step is a comparison of the causal negligence. Dr. Mullen, in my view, was 16% negligent. As between Mr. Signorini and Dr. Stanford, it must be noted that Signorini was a mere assistant to the physician in the operating room. Signorini, and for that matter no one else, can be held responsible for failing to supervise or question the procedures of Dr. Stanford who held himself out to be a competent and experienced cardiothoracic surgeon. It was Dr. Stanford's responsibility to see that Mrs. Green was properly connected to the heart-lung machine, and he failed to discharge that responsibility. Based on the evidence presented during this trial, I find Signorini's negligence to be 22%. Dr. Stanford must shoulder 62% of the responsibility for what happened to Mrs. Green.
DAMAGES
1. Past Medical Expenses
Plaintiffs argue that the collateral source rule to which Wisconsin adheres prevents an offset from any eventual damage award of the $195,899.00 in expenses incurred at the Veterans Administration (VA) Hospital in Wood, Wisconsin. Plaintiffs argue that because Mrs. Green is a veteran, she would be entitled to stay at the VA if she were injured by a tortfeasor other than the government, and that any award would not be diminished by the amount incurred at the VA. Therefore, plaintiffs distinguish the case from a situation in which a defendant injures the person and then provides gratuitous medical services, citing Smith v. United Services Automobile Association, 52 Wis. 2d 672, 190 N.W.2d 873 (1971).
Wisconsin follows the collateral source rule. Rixmann v. Somerset Public *644 Schools, 83 Wis. 2d 571, 266 N.W.2d 326 (1978); Foss v. Town of Kronenwetter, 87 Wis. 2d 91, 273 N.W.2d 801 (1978). However, the question on which Wisconsin law does not control is whether a benefit received from the government is, in fact, collateral to an FTCA judgment. To answer that question one must look to federal law. See: Savannah Sledge v. United States, C.A. # 76-C-493 (E.D.Wis. 4/30/81); United States v. Brown, 348 U.S. 110, 75 S. Ct. 141, 99 L. Ed. 139 (1954).
Courts analyze the question of whether VA benefits are collateral to an FTCA judgment by discussing whether the fund from which each is paid is the same. Both are paid out of the general treasury, and to allow plaintiff to recover both is to allow a double recovery from the same source. The court stated in Feeley v. United States, 337 F.2d 924, 927 (3d Cir. 1964):
"To allow the plaintiff to recover for this item in his damages would not only result in a double recovery for him, but also a double payment out of the general treasury by the United States."
See also: Smith v. United States, 587 F.2d 1013 (3d Cir. 1978); Mosley v. United States, 538 F.2d 555 (4th Cir. 1976). Plaintiffs' damage award here will not include the expenses incurred at the VA.
Under this reasoning, the government cannot attempt to recover that amount from Mr. Green. The government, however, will be entitled to a setoff representing the percentage of negligence attributable to Dr. Mullen[2] and will have contribution rights on this item against other tortfeasors[3].
The $33,304 incurred at Milwaukee Lutheran Hospital and the University of Wisconsin Hospital is collateral to a tort claims judgment, and plaintiff is entitled to recover that amount for past medical expenses.
2. Future Medical Care
In assessing damages in cases such as this, one of the most difficult tasks is arriving at a fair and just figure for future medical care. Ideally, the system would allow an open-ended award requiring the tortfeasors to provide the necessary care for Mrs. Green for the rest of her life. Unfortunately, the law does not permit an award to be made in this fashion. Rather, the law requires that the trier of fact determine a claimant's life expectancy and award damages based on that determination. Inherent in such a system, of course, is the risk to each side. If Mrs. Green dies before reaching her life expectancy, more is paid than was actually necessary. Conversely, if she lives longer than expected, the tortfeasor is off without paying what actually should have been required. In proceeding on this issue, the hazards and potential injustices I have mentioned remain in my mind.
Testimony varied as to Mrs. Green's life expectancy. Dr. Mullen testified that viewing only her cardiovascular condition she has a normal life expectancy; he acknowledged, however, that taking her entire condition into account she does not have a normal life expectancy. Dr. John Melvin testified that her normal life expectancy would be reduced by 20%, to about 20 years. Dr. Shetty, the physician treating her at the VA, stated that she could be expected to live less than 10 years from the time of the brain damage. Drs. Flemma and Dudley Johnson, both cardiovascular surgeons, indicate that she is unlikely to live more than five years from the time of the operation. I find most realistic the testimony that Mrs. Green can be expected to live approximately ten years from the date she sustained her brain damage. For future medical care, I will allow a sum that is based on a seven-year life expectancy from the date of this decision.
Plaintiffs claim that the type of care which will be required for the rest of her *645 life can only be provided by a major hospital. In Milwaukee, apparently only the VA and the Milwaukee County Medical Complex are presently able to give her the care urged by the plaintiffs. The latter's index cost figure is $513.00 per day. The government argues that Mrs. Green can be cared for at Sage Nursing Home for about $180.00 per day, plus some additional expenses for such things as physical therapy and medical supplies.
I find that Mrs. Green requires intensive hospital care. Dr. Gerda Klingbeil is board certified in physical medicine and rehabilitation, and works at Milwaukee County Medical Complex with patients such as Mrs. Green. She stated her conclusion that Mrs. Green would require 8-9 hours of nursing care per day, and that Sage Nursing Home could not care for her. In fact, Mr. Sam Morris, the Administrator of Sage Nursing Home, was unclear as to the number of hours which could be provided a patient at Sage. If Mrs. Green required five hours of care, she would be at the top of what Sage could provide. Dr. Shetty appeared comfortable in acknowledging that she required the kind of care VA was giving her. He said he was not aware of a nursing home which could provide proper care.
Mrs. Green is apparently receiving excellent care at the VA. That standard of care should be continued. The only way to insure that level of care is to provide sufficient funds to cover private hospital costs. It would be inappropriate to award damages to cover VA care if the VA were to decide that Mrs. Green could not remain there. Therefore, the cost of her future medical needs accepted by me will be $513.00 per day.
Economists for both sides, Karl Egge and Peter Danner, agree that the annual increase in medical costs equals the discount rate. Therefore, for future medical costs, I award $1,310,715 based on a present seven-year life expectancy, a portion of the ten-year expectancy I find to be appropriate today.
3. Pain and Suffering
Mrs. Green has severe brain damage; she is blind, quadriplegic, and has significant contractures of her extremities. She has a nasal gastric tube and has had a tracheostomy. She requires suppositories and has a Foley catheter. She requires daily range of motion exercises to keep her joints pliable.
The degree to which she is aware of her condition is in dispute. Her EEG's show primarily low level delta and theta activity those brainwaves which are abnormal in an adult who is awake. However, a few alpha rhythms are present in some tests. Alpha rhythms are normal in an adult who is awake but who has closed eyes and is inattentive to surroundings. An evoked potential test performed by Dr. Bernard Cohen shows some functioning of the cortex of Mrs. Green's brain. Plaintiffs' Exhibit 26 a compilation of comments made by hospital personnel on Mrs. Green's chart shows that some of the nurses, doctors, and therapists who work with her have on occasion concluded that she has a low level of awareness. Dr. Francis J. Millen, a neurologist who conducted several of the EEG's, stated that Exhibit 26 reveals that Mrs. Green is being dealt with by the hospital staff as if she is aware. Mr. Green and Mrs. Green's sister, Lucy Genian, both appear certain that Mrs. Green is on occasion aware. Mrs. Genian stated that the family has never treated Mrs. Green as anything but aware, that this is their way of dealing with the situation.
On the other hand, Dr. Assa Mayersdorf, a neurologist with the VA, states quite emphatically his belief that Mrs. Green does not respond to commands in any way whatsoever, and that all parts of her brain receiving stimuli are damaged.
It is difficult to know to what degree, if any, Mrs. Green is aware of her plight. It is not disputed that she responds to painful stimuli. One has to admire the approach taken by the family and the hospital staff in not losing sight of the chance, even if it is only a chance, that Mrs. Green is aware of her surroundings. As a legal matter, *646 however, I find that she is at best only occasionally aware and that that awareness is minimal. I find that appropriate damages to compensate her for past and future pain and suffering is $333,333.00.
4. Lost Earning Capacity
Plaintiffs also seek damages for Mrs. Green's loss of earning capacity. I find, however, that the evidence is insufficient that Mrs. Green would have been able to work if the operation had been successful. The record indicates that she suffered several other ailments in addition to her heart condition, and that her general health was not good. Therefore, the evidence is insufficient to support an award for loss of earning capacity.
5. Loss of Society and Companionship
Plaintiffs also seek damages for the loss suffered by Hoyle Green of the society and companionship of his wife. The evidence shows that prior to the operation, Mr. and Mrs. Green looked forward to living in Arkansas. The evidence also shows that they enjoyed a close relationship. Since the operation, his nearly daily trips to her bedside to help care for her evidence his feeling of loss. He has stated his firm faith that she can understand that he is there. Mr. Green has suffered a grievous loss that cannot, in real terms, be translated into a monetary award. Surely, were he to have the choice, Mr. Green would decline all the money in the world for the healthy return of his wife. Recognizing, therefore, that any award here will not be appropriate "compensation", I set past and future loss of society and companionship at $500,000.00.
IT IS THEREFORE ORDERED that plaintiffs recover:
(1) $33,304.00 in past medical expenses.
(2) $1,310,715.00 in future medical expenses.
(3) $333,333.00 for pain and suffering.
(4) $500,000.00 for loss of society and companionship; for a total of $2,177,352.00[4].
NOTES
[1] The Berry Plan was a draft deferral system that permitted the postponement of military service while pursuing medical studies with an obligation to complete that service after the student acquired more training. The system was named for its formulator, Dr. George Parker Berry, Dean of the Harvard Medical School.
[2] I have found Dr. Mullen's negligence to be 16%. Therefore, 16% of $195,899.00, or $31,344.00, is a credit due the government from the ultimate award.
[3] If the 22% negligence figure ascribed to Mr. Signorini were accepted, the government would be entitled to contribution totalling $43,098.00 on this aspect of the claim.
[4] Because Dr. Mullen has "Pierringered" (see Pierringer v. Hoger, 21 Wis. 2d 182, 124 N.W.2d 106 (1963), incorrectly noted and cited as Pieringer v. Hoger, 21 Wis.2d 82 on page 2 of the release executed on May 29, 1980 by Hoyle Green individually and as Guardian for Takuye Green) out of this case, judgment against the government will be entered for $2,177,352.00 less 16% ($348,376.00) of that sum and 16% ($31,344.00) of the $195,899.00 in past medical expenses incurred at the VA, for a total of $1,797,632.00, plus statutory costs. The government's contribution rights against tortfeasors other than Dr. Mullen are preserved. As to the Greens, they have actually received $1,797,632.00 here, $575,000.00 previously paid by Dr. Mullen and $195,899.00 from the government's general treasury in the form of medical benefits at the VA, for a total of $2,568,531.00, less costs of collection.
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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/1370020/
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530 F. Supp. 2d 356 (2008)
UNITED STATES of America
v.
Arthur Michael KINSELLA, Defendant.
No. CR-05-27-B-W.
United States District Court, D. Maine.
January 11, 2008.
*357 Daniel J. Perry, U.S. Attorney's Office, District of Maine, Portland, ME, Joel B. Casey, Office of the U.S. Attorney District of Maine, Bangor, ME, for Plaintiff.
Matthew S. Erickson, Norumbega Law Office, Brewer, ME, Virginia G. Villa, Federal Defender's Office, Bangor, ME, for Defendant.
ORDER ON DEFENDANT'S MOTION FOR SEVERANCE OF COUNTS
JOHN A. WOODCOCK, JR., District Judge.
Arthur Michael Kinsella faces a threecount indictment for drug offenses and *358 failure to appear. On November 13, 2007, he moved to sever the counts. Def's Severance of Counts (Docket # 84). Although joinder of the counts is proper under Federal Rule of Civil Procedure 8(a), Mr. Kinsella is entitled to a severance of Counts One and Two from Count Three, because he may wish to testify in defense of Counts One and Two and remain silent as to Count Three.
I. STATEMENT OF FACTS
On March 19, 2005, Arthur Michael Kinsella, a Canadian citizen, was arrested in the United States on drug trafficking charges, and on April 12, 2005, a federal grand jury returned a two-count indictment against him:. Count One alleged a violation of 21 U.S.C. §§ 846 and 841(a)(1), conspiracy to distribute controlled substances, and Count Two alleged a violation of 21 U.S.C. § 841(a)(1), possession with intent to distribute controlled substances. Indictment (Docket # 16). On April 19, 2005, Mr. Kinsella pleaded not guilty. Minute Entry (Docket # 19). On May 10, 2005, Mr. Kinsella requested that he be permitted to live in Canada pending trial, Def's Mot. to Modify Conditions of Release (Docket # 32), and on the same day, the Court granted the motion, issuing an Amended Order Setting Conditions of Release, mandating that Mr. Kinsella appear, as required, at the United States District Court in Bangor. Am. Order Setting Conditions of Release (Docket # 33).
On July 12, 2005, a federal grand jury returned a two-count superseding indictment, charging Mr. Kinsella with the same counts as in the original indictment, but changing the duration of the alleged conspiracy. Superseding Indictment (Docket # 51). After an extension of time due to Mr. Kinsella's inability to pay to travel from Canada to Bangor, the Court scheduled Mr. Kinsella's arraignment on the superseding indictment for August 2, 2005.
Mr. Kinsella did not appear for his arraignment and the Court issued a bench warrant for his arrest. Order (Docket # 62). Mr. Kinsella was arrested in Canada and subsequently was extradited to the United States. On November 9, 2005, the grand jury returned a three-count second superseding indictment, charging Mr. Kinsella with the same two counts of the first superseding indictment and adding a third count alleging that Mr. Kinsella violated 18 U.S.C. § 3146(a)(1), failure to appear. Second Superseding Indictment (Docket # 66).
Mr. Kinsella moved for severance on November 13, 2007. Def's Mot. for Severance of Counts with Mem. (Docket # 84) (Def's Mot.). The Government, responded on December 4, 2007. Government's Opp'n to Def's Mot. to Sever (Docket # 90) (Government's Opp'n). On December 14, 2007, Mr. Kinsella replied, with affidavits from David Kelly, a solicitor in New Brunswick, Canada, and Matthew Erickson, an attorney in Maine. Def's Reply to Government's Opp'n to Mot. for Severance (Docket # 92) (Def's Reply); Def's Reply Attach. 1; Def's Reply Attach. 2.
II. DISCUSSION
A. Joinder of Counts under Federal Rule of Criminal Procedure 8(a)
A defendant may be charged on an indictment or information with multiple counts if they "are of the same or similar character, or are based on the same act or transaction, or are connected with or constitute parts of a common scheme or plan." Fed.R.Crim.P. 8(a). Thus, separate offenses may be charged together if there is "`substantial identity of facts or participants' underlying the charged offenses." United States v. Yefsky, 994 F.2d 885, 895 (1st Cir.1993). Under First Circuit law, *359 "`[s]imilar' does not mean `identical.'" United States v. Meléndez, 301 F.3d 27, 35 (1st Cir.2002) (citing United States v. Edgar, 82 F.3d 499, 503 (1st Cir.1996)). To determine whether counts are properly joined, the Court will consider "whether the charges are laid under the same statute, whether they involve similar victims, locations, or modes of operation, and the time frame in which the charged conduct occurred." United States v. Taylor, 54 F.3d 967, 973 (1st Cir.1995) (citations omitted). "A plausible basis for the joinder of multiple counts ordinarily should be discernible from the face of the indictment." United States v. Fenton, 367 F.3d 14, 21 (1st Cir.2004).
1. Counts One and Two
Mr. Kinsella argues that the two oxycodone counts are not properly joined "[b]ecause the time period alleged in Count 1 does not cover the time period alleged in Count 2, Count 2 presumably is not part of any `common scheme or plan' to distribute or possess with intent to distribute Oycodone." Def's Mot. at 2. He further argues that they cannot "practically be part of the `same act or transaction,'" and that "they are not `of the same character' because Count 1 is an inchoate crime, punishing an illegal agreement to distribute and to posses with intent to distribute Oxycodone, whereas Count 2 is a substantive crime." Id. at 3. The Government did not respond to Mr. Kinsella's arguments.
The First Circuit "has repeatedly held that a conspiracy count can be a sufficient connecting link between . . . multiple offenses that tips the balance in favor of joinder." United States v. Rehal, 940 F.2d 1, 3 (1st Cir.1991). "For such a joinder to be proper, however, two requirements must be met: 1) the charges must have been joined in good faith and, 2) the joinder must have a firm basis in fact, considering the face of the indictment and the evidence adduced at trial." Id.; United States v. Plumadore, 221 F. Supp. 2d 12, 14 (D.Me.2002). Mr. Kinsella does not claim that Counts One and Two were hot joined in good faith.
Concerning the second requirement, considering the face of the indictment, joinder of Counts One and Two does have a firm basis in factthe Counts are of the same or similar character. One Count charges that Mr. Kinsella conspired to violate § 841(a)(1) by possessing Oxycodone within the state of Maine with the intent to distribute it; the other charges that he violated § 841(a)(1) by intentionally and knowingly possessing Oxycodone within the state of Maine with the intent to distribute it. See Meléndez, 301 F.3d at 35-36 (finding that joinder was proper where the charges were aiding and abetting distribution' of cocaine base and possession of cocaine base with intent to distribute); United States v. DeLuca, 137 F.3d 24, 36 (1st Cir.1998) (concluding that the Government can join multiple defendants in a single indictment provided that at least one count alleges a conspiracy and the indictment separately alleges that the defendants committed a substantive offense "during the course and in furtherance of the umbrella conspiracy or [continuing criminal enterprise]"). The differences between conspiracy to possess and actual possession are insufficient to deny joinder.
That several months separate the activity alleged in Counts One and Two does not change this determination. See, e.g., United States v. Turner, 93 F.3d 276, 283-84 (7th Cir.1996) (finding that even though separate charges of conspiracy to possess methamphetamine and possessing methamphetamine with intent to distribute allegedly occurred during different time periods, "the indictment alleges the violation *360 of two closely-related statutory prohibitions, and each count involves the same controlled substance"); United States v. Shue, 766 F.2d 1122, 1134 (7th Cir.1985) (allowing joinder of several bank robberies occurring fifteen months apart from each other and emphasizing that evidence of the various robberies would overlap). Here, the allegations involve the same statute and similar modes of operation. Edgar, 82 F.3d at 503. While the alleged drug activity did not occur at exactly the same date, the "same or similar character" of the offenses permits joinder under Rule 8(a).
2. Count Three
Mr. Kinsella argues that "Count 3 charges a different type of crime than do Counts 1 and 2. Mr. Kinsella's actual guilt as to Counts 1 and 2 largely is irrelevant as to Count 3, because he may be found guilty of that count even if he is found to be not guilty of Counts 1 and 2." Def.'s Mot. at 3. The Government responds that a bail jumping charge may be joined with the underlying offense under Rule 8(a) and that "pit is well established that a charge of bail jumping or escape may be deemed sufficiently `connected' with a substantive offense to permit a single trial, or at least where the charges are related in time, the motive for flight was avoidance of prosecution, and appellant's custody stemmed directly from the substantive changes." Government's Opp'n at 5 (quoting United States v. Ritch, 583 F.2d 1179, 1181 (1st Cir.1978)); see also United States v. Gabay, 923 F.2d 1536, 1539-40 (11th Cir. 1991).
In Ritch, the Court affirmed the joinder of possession and importation of cocaine under 21 U.S.C. § 841(a) and failure to appear under 18 U.S.C. § 3150. Ritch, 583 F.2d at 1181. Here, as in Ritch, the charges are related in time, and the custody stemmed directly from the substantive charge. Finally, Mr. Kinsella asserts that his failure to appear was "due to fear of overreaching from the prosecutor," Def's Reply at 1; thus, he concedes that his motive was, at least in part, to avoid prosecution on Counts One and Two. Counts One, Two, and Three are properly joined.
B. Severance of Count Three from Counts One and Two under Rule 14(a)
If proper joinder "appears to prejudice a defendant or the government, the court may order separate trials of counts . . . or provide any other relief that justice requires."[1] Fed.R.Crim.P. 14. According to the First Circuit:
Generally, there are three types of prejudice that may result from trying a defendant for several different offenses at one trial: (1) the defendant may become embarrassed or confounded in presenting separate defenses; (2) proof that defendant is guilty of one offense may be used to convict him of a second offense, even though such proof would be inadmissible in a separate trial for the second offense; and (3) a defendant may wish to testify in his own behalf on one of the offenses but not another, forcing him to choose the unwanted alternative of testifying as to both or testifying as to neither.
United States v. Scivola, 766 F.2d 37, 41-42 (1st Cir.1985) (citations omitted). Mr. Kinsella argues that all three Scivola types of prejudice are present.
*361 1. Mr. Kinsella's Potential Testimony
Mr. Kinsella explains that the reason he did not return to face the pending drug charges was that he had been subjected to an overly zealous and aggressive prosecution. He claims that an Assistant United States Attorney called him a "criminal" in court and falsely accused him of smuggling cocaine into the United States and attempting to smuggle drugs into the Penobscot County Jail. Def's Reply Attach. 1 at 1. He also claims that one of the Drug Enforcement Agency agents told him that if he did not admit to dealing drugs, they would arrest his mother, and repeatedly referred to him as a "dumb Canuck." Dej's Reply Attach. 2 at 2. He further alleges that as he was ushered to his cell block in the Penobscot County Jail, a guard hollered out, "fresh meat," and that while en route to Canada, following his release on bail conditions, his vehicle was repeatedly stopped by Maine State Troopers. Id. at 2-4. He also asserts that he was subjected to repeated harassment at United States Customs whenever he attempted to cross the border. Id. at 3. He has presented the affidavit of his Canadian solicitor, who advised him not to return to ,the United States for trial, because "these matters would likely be unfair." Def.'s Reply Attach. 1 at 1-2.
2. The First and Second Types' of Prejudice under Scivola: Admissibility and Presentation of Evidence
Mr. Kinsella's argument arises from the different way the rules of evidence apply to the same evidence with regard to the drug counts and the failure to appear count.[2] On the drug charges, Mr. Kinsella's reason for his failure to appearthat he was worried about prosecutorial overreachingcould be admissible to rebut an inference of "consciousness of guilt." On the failure to appear charge, however, Mr. Kinsella's reason for his non-appearance would not be admissible, since it does not meet the legal standard for an affirmative defense. The differing ways the same evidence would play out in separate and joined trials forms the basis for his request for severance. The Court considers these issues in the following order: first, as to the failure to appear count alone; second, as to the drug counts alone; and then third, as to all three counts if tried together.
a. Admissibility of the Defendant's Evidence as to Count Three
Mr. Kinsella has been charged with a failure to appear' before a court as required by the conditions of release, a violation of 18 U.S.C. 3146(a)(1). Mr. Kinsella himself acknowledges that if Count Three were tried separately, he would not be able to take the stand and defend himself by explaining the reasons he did not appear. Def's Mot. at 3 ("Normally, the reasons why a defendant may not have appeared, if such non-appearance is otherwise voluntary, is irrelevant and inadmissible at trial.").
He is correct. The law allows an affirmative defense for failure to appear if the defendant can demonstrate that "`uncontrollable circumstances' prevented the person from appearing or surrendering, that the person did not contribute to the creation *362 of such circumstances in reckless disregard of the requirement to appear or surrender, and that the person appeared as soon as such circumstances ceased to exist." 18 U.S.C. § 3146(c). The First Circuit has narrowly circumscribed the situations in which this defense may be properly asserted. These "circumstances" fall "into two categories, physical and mental." United States v. Veilleux, 40 F.3d 9, 10 (1st Cir.1994); see United States v. Odufowora, 814 F.2d 73, 74 (1st Cir.1987). As in Veilleux, Mr. Kinsella has made no claim of physical prevention. Veilleux, 40 F.3d at 10. This leaves uncontrollable duress, which the First Circuit has interpreted to "be sufficient to produce an unavoidable fear of serious bodily injury or death." Id. (quotation marks omitted). There is no proffer of evidence of uncontrollable duress within this definition.
Instead, Mr. Kinsella's excuse is similar to the excuse the First Circuit rejected in Veilleux: a loss of faith in the judicial system. Id. As the First Circuit wrote in Veilleux, if a loss of faith in the system or a fear of an improper sentence could justify a failure to appear, "[t]his would practically put appearance . . . on a voluntary basis." Id. In fact, in his memorandum, Mr. Kinsella admits as much. Def's Mot. at 3. Thus, if Count Three were tried separately, Mr. Kinsella's reasons for not appearing are likely inadmissible.
b. Admissibility of Evidence Explaining The Failure to Appear as to Counts One and Two
Mr. Kinsella first argues that evidence of his non-appearance should be inadmissible as to Counts One and Two. He explains that if the Government were allowed to present evidence of his non-appearance, he would seek to provide an alternative explanation for his non-appearance to rebut the inference of consciousness of guiltthat he failed to appear due to numerous instances of prosecutorial and law enforcement overreaching. Mr. Kinsella raises the specter that his alternative explanation would "create a mini-trial on peripheral issues, leading to confusion of the issues to be resolved by the jury, such evidence would not be admissible as the evidence of flight would be more prejudicial than probative." Def's Reply at 4.
Contrary to Mr. Kinsella's position, however, the Court concludes that' if the drug charges were tried separately, Mr. Kinsella's failure to appear would probably be admissible. The. Government notes that First Circuit law allows the Court to admit proof of flight: "Evidence of a defendant's flight . . . may be, presented at trial as probative of a guilty mind if there is an adequate factual predicate creating an inference of guilt of the crime charged." United States v. Otero-Mendez, 273 F.3d 46, 53 (1st Cir.2001) (quoting United States v. Candelaria-Silva, 162 F.3d 698, 705 (1st Cir.1998)). Here, the factual predicate is present.[3] A defendant will sometimes argue that his flight or absence is insufficiently related to the charge to be admissible. See Candelaria-Silva, 162 F.3d at 705; United States v. Hernandez, 995 F.2d 307, 314-15 (1st Cir.1993). But, here, there is no dispute that Mr. Kinsella's absence was directly related to the pending drug charges, since he was on bail for those charges. See United States v. Camilo Montoya, 917 F.2d 680, 681-83 (1st Cir.1990) (discussing evidence that the defendant knew that he was required to be present for trial and that he did not appear at trial on the same charges for which he *363 was released on bail); Tracy, 989 F.2d at 1285 ("[T]he government established that Tracy had been scheduled for trial in August 1991 and had failed to appear"; his non-appearance was admissible at trial on the same charges). It is likely, therefore, that evidence of Mr. Kinsella's failure to appear would be admissible at the trial of the drug counts.
If evidence of his non-appearance were admitted, Mr. Kinsella could decide not to take the stand and to simply rely on the standard jury instruction, which reminds the jury that intentional flight alone is not sufficient to conclude that the defendant is guilty and that the jury should consider that there may be reasons for his actions that are fully consistent with innocence. Camilo Montoya, 917 F.2d at 683; United States v. Hyson, 721 F.2d 856, 864 (1st Cir.1983); Judge Hornby's 2007 Revisions to the Pattern Criminal Jury Instructions for the District Courts of the First Circuit § 2.10.
Alternatively, he could elect to present evidence to rebut the inference of consciousness of guilt. Mr. Kinsella questions whether a jury would be unduly prejudiced under Rule 403 by this evidence, since his explanation involves accusations of other drug dealing and he fears this would sidetrack and prejudice the jury. This is an odd argument. Mr. Kinsella is not required to present. rebuttal evidence. He may logically conclude that the rebuttal evidence is more harmful than helpful to his case, but the Court cannot protect him from the consequences of his own trial strategy. To argue that the Government's evidence is inadmissible because the Defendant's rebuttal contains evidence harmful to the Defendant is to argue a nonsequitur.[4]
As to Mr. Kinsella's fear that such evidence could "create a mini-trial on peripheral issues; leading to confusion of the issues to be resolved by the jury," Def's Mot. at 4, if he decides to seek the admission of the rebuttal evidence, the Court will remain vigilant in enforcing Rule 403 by excluding evidence that confuses the issues, misleads the jury, creates undue delay, wastes time, or needlessly presents cumulative evidence. Fed.R.Evid. 403. Further, a motion to sever is not a motion in limine and the Court has not been asked to rule on the admissibility of any particular evidence.
The Court concludes that if the drug counts were tried separately, evidence of his nonappearance would likely be admissible.
c. Admissibility of Evidence Explaining Mr. Kinsella's Failure to Appear if Counts One, Two, and Three Are Tried Jointly
Mr. Kinsella raises a number of potential issues if all three counts are tried together. First, he claims that evidence of his non-appearance would be inadmissible in a trial on the drug charges, but admissible in a trial on the failure to appear charge. Det's Mot. at 3. For the reasons just described, however, the Court disagrees. Evidence of his non-appearance *364 would be admissible on all counts, regardless whether tried separately or together, and this does not present a reason for severing the trials.
Alternatively, Mr. Kinsella argues the second type of Scivola prejudice: If he takes the stand and explains his non-appearance to rebut the "consciousness of guilt" inference on the drug charges, his explanation would be inadequate as a defense and inadmissible on the failure to appear charge alone. The Court is not convinced that this presents an insurmountable problem.
The second type of prejudice under Scivola is "proof that defendant is guilty of one offense may be used to convict him of a second offense, even though such proof would be inadmissible in a separate trial for the second offense." Scivola, 766 F.2d at 41-42. The issues raised by Mr. Kinsella do not implicate this second type of prejudice. If evidence of guilt would be inadmissible on one of the charges, Scivola strikes the balance in favor of separate trials. But, here, evidence of Mr. Kinsella's guiltnamely that he failed to appearwould be admissible in both trials, so Scivola does not apply.
Evidence of Mr. Kinsella's defense namely that he had good reason not to appearwould be admissible regarding the drug counts only. But, Mr. Kinsella has not demonstrated why this evidence, if admitted in the trial on Count Three, would be prejudicial to the trial of Count Three. The jury would hearand be instructed to disregard as to Count Three that he had what, in his mind, was a good reason to remain in Canada. Thus, while Mr. Kinsella's explanation may not be admissible as a defense to Count Three, this inadmissibility does not implicate Scivola's second type of prejudice. An alternative would be for Mr. Kinsella not to present evidence of his reason for failing to appear.
As to the drug counts, the jury could, but would not be required to, draw an inference of consciousness of guilt; as to the failure to appear count, the jury would not hear evidence that, if admitted, it would be instructed to disregard.
None of the other potential problems prevents a joint trial on the drug and failure to appear counts. Regarding the admissibility of evidence which may be applied to two of the three counts, it is not uncommon for the evidence to be admitted for some purposes and not for others and for some charges and not for others, nor is it uncommon for evidence to be treated differently among different charges depending on the charge.
It is true that if the drug and failure to appear counts were tried separately, Mr. Kinsella could present evidence to attempt to rebut the consciousness of guilt inference on the drug charges and not present the same evidence on the failure to appear count. However, to the extent that Mr. Kinsella's rebuttal on the drug counts could influence the jury in its deliberations on the failure to appear count, the Court could address this possibility with cautionary and limiting, instructions. The Court can give the standard jury instruction on the drug counts, instructing about the inference of consciousness of guilt and its substantial limitations. Regarding his explanation, if he offers one, the Court can instruct the jury that it may consider such evidence only on the drug counts to rebut the inference of consciousness of guilt, but may not consider such evidence on the failure to appear count. This does not present a reason for severing trials on the drug and failure to appear counts.
3. The Third Type of Prejudice Under Scivola: The Fifth Amendment
Mr. Kinsella cites the third type of prejudice described in Scivola a desire to *365 testify as to one offense, but not to others. He asserts that if the evidence regarding his non-appearance were admitted in the same trial as Counts One and Two, "his right not to incriminate himself will be jeopardized by the joinder of the Counts as [he] may wish to testify as to some of those counts, but not to others." Def's Mot. at. 1. This he paints as a Fifth Amendment right not to incriminate himself. Id.
The third type of Scivola prejudice takes place when a defendant wishes to testify "on one of the offenses but not another, forcing him to choose the unwanted alternative of testifying as to both or testifying as to neither." Scivola, 766 F.2d at 42. A court may sever properly joined counts when the defendant "makes a convincing showing that he has both important testimony to give concerning one count and strong need to refrain from testifying on the other." United States v. Alosa, 14 F.3d 693, 695 (1st Cir.1994) (citations and quotations omitted). The defendant "must timely offer enough information to the court to allow it to weigh the needs of judicial economy versus the defendant's freedom to choose whether to testify as to a particular charge." United States v. Jordan, 112 F.3d 14, 17 (1st Cir.1997) (quoting Scivola, 766 F.2d at 43) (quotation marks omitted).
"[W]hile the courts zealously guard a defendant's Fifth Amendment right not to testify at all, the case law is less protective of a defendant's right to testify selectively. . . ." Alosa, 14 F.3d at 695. Alosa discussed "just how `important' must be the defendant's proffered testimony or what kind of `strong' reasons explain the need not to testify on other counts." Id. The First Circuit determined that a defendant, who was charged with both drug and related gun crimes, could not sever the gun crimes, in part because his desire to present evidence that he was a "gun enthusiast" did not present a "credible alibi." Id.
Here, Mr. Kinsella's proffered evidence is "important testimony" within Alosa. Mr. Kinsella has been charged with drug trafficking in Counts One and Two. Mr. Kinsella does not propose to present evidence Of his actual innocence of these Grimes or his subjective belief that he was not breaking the law. See Cheek v. United States, 498 U.S. 192, 203-04, 111 S. Ct. 604, 112 L. Ed. 2d 617 (1991) (holding that a defendant is entitled to present his subjective belief that he did not violate the law; even if such belief is objectively unreasonable); Alosa, 14 F.3d at 695 (suggesting that a "credible alibi that only the defendant can supply showing him to have been elsewhere at the time of the crime" would be enough). Mr. Kinsella's proposed testimony does not address any elements of the offenses; but he does seek to blunt an inference of guilt from his non-appearance while on bail.
Further, Alosa requires that the evidence be something that "only the defendant can supply." Id. Here, if admissible at all, Mr. Kinsella's evidence of the governmental harassment, as he has described it, can be substantially presented through other witnesses. He would be free to argue that a jury may infer that his nonappearance was related to the harassment, not to his guilty conscience. However, if he were required to rely upon other witnesses, he would not be able to present direct evidence of his "subjective belief' that he was going to be harassed if he returned to the United States.
This is sufficient. In Jordan, the First Circuit reversed a district court's refusal to sever, where the defendant wished to present testimony of his "subjective belief' in defense of one charge, but wished to remain silent as to other counts. Jordan, 112 F.3d at 17. The *366 First Circuit concluded that similar evidence from another witness would be an ineffective substitute for the defendant's own testimony about his own subjective belief. Id. The circumstances here are a step removed from Jordan, since in Jordan the defendant's testimony went directly to an element of the charge and here, Mr. Kinsella's testimony would go only to an inference the jury could draw as a result of his failure to appear. But, the inference is "of guilt of the crime charged." Otero-Mendez, 273 F.3d at 53. On balance, the Court concludes that Mr. Kinsella has met the Alsoa criterion for "important testimony."
Mr. Kinsella also meets the second prong of the testhe has a "strong need to refrain from testifying on the other count." Id. If all three counts are tried at the same time, Mr. Kinsella's proposed testimony in Counts One and Two would constitute an admission that he is guilty of Count Three, since his proffered explanation would confirm his knowing absence and would not amount to a legitimate defense to the failure to appear charge. To explain his reasons for non-appearance, he would not only have to admit the fact that he did not appear, but also the fact that he knowingly failed to appear, two elements of 18 U.S.C. § 3146. Moreover, as his reason for not appearing is not a defense, the Court would likely instruct the jury to disregard his testimony.
In contrast, if Counts One and Two are tried separately Mr. Kinsella could choose to testify regarding the inference without that testimony adversely impacting his decision to testify regarding Count Three. He could exercise his Fifth Amendment right not to testify as to Count Three and put the Government to its burden of proving that he is guilty of that Count. U.S. Const. amend. V. The Court concludes that Mr. Kinsella has met Alosa's "strong need" prong.
Scivola instructs that the overriding test is between the defendant's freedom to choose whether to testify and considerations of judicial economy. If Counts One and. Two were tried first and if Mr. Kinsella took the stand to rebut the inference of conscious guilt, his testimony would be admissible in the second trial on his failure to appear. To make severance an effective remedy, the failure to appear count would have to be tried first, Mr. Kinsella would have the freedom to choose whether to testify on Count Three. If he is not convicted, a later trial would proceed on Counts One and Two without reference to the earlier trial.[5] If he is convicted, the conviction would likely be admissible in the trial of Counts One and Two to establish the fact of his failure to appear, unless the parties agreed to an Old Chief stipulation. See Old Chief v. United States, 519 U.S. 172, 117 S. Ct. 644, 136 L. Ed. 2d 574 (1997).
Judicial economy weighs heavily in favor of granting severance. The trial of Count Three appears unusually straightforward. The Court's own records reflect the conditions of release, the scheduling of his arraignment, and his failure to appear and Mr. Kinsella himself recognizes that the excuse he offers is not a legal defense. Of course, a separate trial on Count Three would impose additional costs in money and time on the jury, the lawyers, the witnesses, law enforcement, the Bureau of Prisons, and the Court generally. But, given the straightforward nature of the charge, to the extent judicial economy is a *367 factor, it is less an issue here than in most cases.
Severance is not appropriate merely because Mr. Kinsella wishes to rebut the Government's argument regarding the inference that can be drawn from his failure to appear. See, e.g., United States v. Greo, No. 85 Cr. 961, 1994 WL 533579, *2, 1994 U.S. Dist. LEXIS 13876, *4-5 (S.D.N.Y. Sept. 30, 1994) ("The fact that [the defendant] has to make a choice whether to testify does not result in undue prejudice."). But, Mr. Kinsella has presented a convincing argument that the joint trial of the drug and failure to appear charges would prejudice his Fifth Amendment right not to testify and would force him to choose between incriminating himself as to Count Three and testifying as to Counts One and Two. Striking a balance in favor of the Defendant's right to avoid self-incrimination, as there are no compelling reasons to deny a severance, the Court will grant it.
III. CONCLUSION
The Court GRANTS the Defendant's Motion for Severance of Counts One and Two from Count Three (Docket # 84).[6]
SO ORDERED.
NOTES
[1] Mr. Kinsella argues that Counts One and Two are improperly joined, but does not make a Rule 14 severance argument with regard to these counts. His severance argument is limited to Count Three.
[2] While Scivola provides separate tests for when a Defendant is "confounded" in presenting defenses and when evidence is inadmissible for some counts but not others, Mr. Kinsella conflates these issues, arguing that admission of evidence regarding Count One will result in a "mini-trial" when he explains his non-appearance as to Counts Two and Three. Thus, the Court considers these issues together.
[3] This Order assumes that at trial the Government will not rely solely upon Mr. Kinsella's failure to appear to prove its case and will present "[o]ther independent evidence establishing his drug dealings." United States v. Tracy, 989 F.2d 1279, 1285 (1st Cir.1993).
[4] Mr. Kinsella's argument is premised on the questionable theory that evidence of government harassment would be unequivocally prejudicial to his defense of the drug charges. The evidence could be prejudicial to Mr. Kinsella; however, it is equally true that if a jury concluded that the Government had been harassing him, had threatened to bring unwarranted criminal charges against innocent persons, including his mother, had made unwarranted police stops of his vehicle, and had levied false accusations of criminal activity against him, it could conclude that this evidence is wholly consistent with his claim of overall innocence. Whether the explanation is more helpful than hurtful is a matter of trial strategy, not a ground for inadmissibility.
[5] This presumes, as Mr. Kinsella's entire argument assumes, that he would not testify at the trial of Count Three. If he did testify, his testimony would likely be admissible in the trial of Counts One and Two.
[6] The Court will hold a conference with counsel to discuss scheduling issues.
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384 F. Supp. 464 (1974)
UNITED STATES of America, Plaintiff,
v.
Robert REINGOLD, Defendant.
No. CR-1971-135.
United States District Court, W. D. New York.
November 14, 1974.
John T. Elfvin, U. S. Atty. (Richard E. Mellenger, Buffalo, N. Y., of counsel), for the Government.
*465 William B. Mahoney, Buffalo, N. Y., for defendant.
CURTIN, Chief Judge.
This matter is before the court on a motion of the defendant filed pro se on September 20, 1973, for an order to dismiss the indictment in CR-1971-135 for failure to afford the defendant a speedy trial.
This motion came upon my calendar in February of 1974 after the death of Chief Judge John O. Henderson. By that time the government had responded to the motion of the defendant. In order to familiarize myself with the history of the proceedings, I directed the United States Attorney to file a supplementary response to the motion to dismiss. After considering the original response filed on April 15, 1974, I directed the United States Attorney to file an additional affidavit, which was done on June 19, 1974. Following the receipt of this affidavit, the defendant's attorney responded with a letter and affidavit of his own on June 21, 1974.
The indictment in this case, CR-1971-135, which was filed on September 8, 1971, charged the defendant with distributing hashish in violation of 21 U.S. C. § 841(a)(1). The defendant was originally arrested on this charge on June 29, 1971. Under the Second Cir-Rules Regarding Prompt Disposition of Criminal Cases, 28 U.S.C.A. App. (Supp. 1973) [Rules], and its offspring, the current Western District of New York Plan For Achieving Prompt Disposition of Criminal Cases [Plan], the government is required to be ready for trial within six months of the time of arrest, excluding certain enumerated time periods [United States v. Scafo, 480 F.2d 1312 (2d Cir. 1973); United States v. McDonough, 2d Cir., 504 F.2d 67].
Before analyzing the question of whether or not the United States Attorney complied with the applicable standards in this case, however, it is necessary to explain in some detail other charges pending against the defendant at the time of his arrest on this charge, and indictments filed against him subsequent to his arrest.
On June 29, 1971 when the defendant was arrested by federal agents on the hashish charge, eventually CR-1971-135, he was awaiting trial in the Erie County Court of New York State on a 1969 indictment charging him with assault, burglary, attempted robbery, and other crimes. Represented there by attorney William B. Mahoney, the defendant was tried on these state charges from September 10, 1971 until September 27, 1971, when the jury reported in disagreement. The second trial on the state court charges, in which he was represented by attorney Harold J. Boreanaz, began on November 22, 1972 and continued until December 5, 1972, when the jury returned a verdict of guilty of burglary, first degree, and grand larceny, third degree. On January 8, 1973 the state court imposed sentences on these charges, the longest of which was twenty-five years. On April 12, 1974 the Appellate Division of New York State Supreme Court reversed the state court convictions and that case is awaiting retrial in the state court.
On September 8, 1971 the defendant was indicted in federal court on the hashish charge, CR-1971-135. He was represented by attorney William B. Mahoney at arraignment and throughout the pretrial proceedings. No trial was held on this charge and it is the subject of the present motion to dismiss.
On December 9, 1971 the defendant was indicted in this court on a counterfeiting charge, CR-1971-219. Represented by attorney Harold J. Boreanaz, he was tried on that charge from June 1 through June 14, 1972, when the jury returned a verdict of guilty. After a presentence report was received, Judge Henderson sentenced the defendant for a period of study pursuant to 18 U.S.C. § 4208(b) on July 31, 1972. On August 19, 1972 he was transported to a federal penitentiary for study and was returned to the district on October 30, 1972. Upon his return, the defendant appeared *466 initially for sentencing on November 20, 1972 but sentencing was delayed until December 11, 1972, at which time Judge Henderson imposed a sentence of five years. On August 17, 1973 an appeal on the counterfeiting charge, CR-1971-219, was dismissed for failure to prosecute. However, in October of 1973, upon application of the defendant, the appeal was reinstated and it is now pending on the Appellate docket.
On January 10, 1973 the defendant was indicted again in federal court on an obstruction of justice charge, CR-1973-28, which arose out of the murder of a witness in the counterfeiting case, CR-1971-219. On January 15, 1973 Mr. Reingold appeared for arraignment on the obstruction charge before me, represented by attorney Harold J. Boreanaz who advised that he was appearing to expedite the arraignment and to arrange for his own withdrawal from the case. He also assisted the defendant in petitioning for assignment of another attorney and represented to the court that the defendant was indigent. After examining all of the circumstances, I determined that Reingold was indigent under the applicable standards and entitled to assignment of counsel. On the following day I assigned attorney George P. Doyle to represent the defendant, but he withdrew because of a conflict and was replaced by attorney Carl H. Dobozin. After extensive pretrial proceedings, the obstruction charge was dismissed on motion of the government on May 24, 1974.
Having reviewed the defendant's procedural history, we can now turn to the speedy trial question. The government has not offered an explanation of why there was a delay in the proceedings from the date of arrest, June 29, 1971, until September 8, 1971 when Reingold was indicted on the hashish charge, CR-1971-135. Therefore, the 73 days which elapsed from the date of arrest until the eve of trial in the state court, which began on September 10, 1971, must be charged to the government.
The period from September 10, 1971 until September 30, 1971 should be excluded because the defendant was involved in the state court trial and Mr. Mahoney, his attorney, made arrangements to delay the arraignment before Judge Henderson until September 30. The period from September 30 until October 18, 1971 is excludable because a delay to file pretrial motions was granted at the request of the defendant's counsel. On October 18, 1971 Mr. Mahoney filed a motion for inspection of grand jury minutes. The pendency of this defense motion excuses the government from proceeding to trial under Section 5(a) of the Rules.
In spite of the pending motion, on the following day, October 19, 1971, the United States filed a notice of readiness. While the act of filing a notice comports with the procedure approved in United States v. Pierro, 478 F.2d 386 (2d Cir. 1973), the filing of such a notice alone, however, is not dispositive regarding any future delays. The government opposed the defendant's motion for inspection of the grand jury minutes and this motion was not granted by Judge Henderson until January 11, 1972. Under the circumstances, it appears that the notice of readiness filed on October 19, 1971 was meaningless. See United States v. Pollack, 474 F.2d 828 (2d Cir. 1973), and the same case on remand, 364 F. Supp. 1047 (S.D.N.Y.1973).
From January 12, 1972, after Judge Henderson had filed his order granting inspection of the grand jury minutes, until March 30, 1972, 78 days elapsed in which no activity was evident on the part of the government. On March 30, 1972 the government sent a letter to the defendant's attorney, which can be considered as the operative notice of readiness. This second notice advised Mr. Mahoney that the government would seek a trial date in the hashish case on April 3, 1972 before Judge Henderson.
Adding the period of delay from January 12, 1972 until March 30, 1972 to the prior period tolled from June 29, 1971 until September 10, 1971 results in *467 a total lapse of 151 days chargeable to the government.
On April 3, 1972 when Mr. Mahoney appeared for the purpose of setting a trial date, the matter was "held generally." From the court records and the affidavits filed, it appears that this was done to allow the defendant's attorney in the counterfeiting case, Harold J. Boreanaz, and representatives from the government to meet in regard to the counterfeiting case. However, there is no evidence to indicate that either Mr. Mahoney or Reingold requested or acquiesced in the delay regarding the hashish charge. There is nothing in the court records to indicate any activity in the hashish case from April 3, 1972 until November 20, 1972.
During this period, however, the defendant and his counsel were busy in the state court proceedings and in this court. The counterfeiting case, CR-1971-219, was tried in June and the defendant was sent for study in July of 1972, and was not returned from study until October 30, 1972. At that time preparations were under way for the defendant's trial in state court. When the defendant appeared before Judge Henderson for final sentencing in the counterfeiting case, CR-9171-219, on November 20, 1972, the government immediately moved the hashish case for trial, but further postponement was needed to allow the state court trial to go forward.
It is clear that the trial of the later counterfeiting charge, CR-1971-219, cannot be used by the government as justification for failure to reach the older hashish charge. See United States of America v. Kaye, 334 F. Supp. 326 (E.D.N.Y.1971). In fact, the pendency of the hashish charge appears to justify exclusion of that time from the six months applicable to the counterfeiting charge. See United States of America v. Cangiano, 491 F.2d 906, 909 (2d Cir. 1974). Nevertheless, when one considers the other proceedings, state and federal, confronting the defendant, the court is forced to conclude that there were exceptional circumstances justifying the delay under Section 5(h) of the Rules. Therefore, the court determines that the period from March 30, 1972 until November 20, 1972 should not in fairness be charged to the government. United States v. Rollins, 487 F.2d 409 (2d Cir. 1973).
The events following November 20, 1972 until September 20, 1973, however, when the defendant moved for dismissal for failure to afford a speedy trial, show a failure of the government to follow the Rules and require a dismissal of the indictment.
On November 20, 1972, the date of sentencing in the counterfeiting case, the Assistant United States Attorney charged with prosecuting the hashish case advised Judge Henderson in court as follows:
To set date for trial, Criminal 1971-135, United States versus Robert Reingold, Your Honor, this is another matter concerning Mr. Reingold. We have been advised that Mr. Mahoney does not represent this man in this matter. Also, as before, the man is on trial in County Court. We request a two week adjournment at this time so we can see about an attorney for Mr. Reingold and let the other trial conclude.
The court granted the adjournment until December 4, 1972. When the counterfeiting case, CR-1971-219, appeared again on the court's docket for sentence, the hashish case, CR-1971-135, also appeared again for the setting of a date for trial. Because the defendant was still on trial in state court, however, the sentencing in the counterfeiting case was adjourned until December 11, 1972. With regard to the hashish case, the following information was given to the court by the Assistant United States Attorney:
ASSISTANT: To set date for trial, Criminal 1971-135, United States versus Robert Reingold. As the Court pointed out before, Mr. Reingold is presently on trial in County Court. His attorney in this case used to be William Mahoney. He called me and *468 advised that he no longer represented Mr. Reingold. I don't know what Mr. Reingold's financial status is at this time. I would presume that perhaps this could be handled at the time of Mr. Reingold's sentencing.
THE COURT: Bring it up at that time.
ASSISTANT: I will, your Honor.
On December 11, 1972 Mr. Reingold, represented by Harold J. Boreanaz, was sentenced by the court for a period of five years on the counterfeiting charge. However, in spite of the court's prior direction, no mention of the hashish case was made by anyone at that time. Nothing further occurred in the hashish case until September 20, 1973 when the court received a motion from Robert Reingold, pro se, to dismiss the hashish case for failure to provide a speedy trial.
It is important to note that nine months earlier, on January 15, 1973, the defendant appeared before me for arraignment in the obstruction of justice case, CR-1973-28. He represented that he was an indigent and, after the court was satisfied of that fact, counsel was assigned to represent him. There can be no dispute that this information was clearly available to the United States Attorney's office.
Under Section 4 of the Rules, the government must be ready to proceed to trial within six months of arrest. In computing the time within which the government must be ready for trial, certain periods may be excluded under Section 5 of the Rules. Section 5(g) excludes:
The period during which the defendant is without counsel for reasons other than the failure of the court to provide counsel for an indigent defendant or the insistence of the defendant on proceeding without counsel.
The Plan is identical in this report.
The circumstances presented here indicate inexcusable neglect by the government. First, because of the reputed conversations with attorney Mahoney, the government representatives believed that the defendant was without counsel in the hashish case. Secondly, on November 20, 1972 the government made representations to Judge Henderson that they would check into Reingold's finances and inquire into the attorney problem. Thirdly, although directed by Judge Henderson to report back to him on December 11, 1972, nothing was done. Fourthly, the government was aware that Reingold was determined to be an indigent as of January 15, 1973 when counsel was assigned to him in the obstruction case. Fifthly, no action whatever was taken in the hashish case from December 4, 1972 until September 20, 1973 when Reingold filed his pro se motion. During this period of time it appears that the defendant was unrepresented, indigent, and that this period must be charged to the government.
It should be noted that after the defendant filed his pro se motion in September of 1973, Judge Henderson assigned attorney Carl H. Dobozin to represent Reingold on the motion. When this information was relayed to Reingold, the defendant informed the court that he still considered Mr. Mahoney as his attorney. This fact was confirmed by Mr. Mahoney in a letter addressed to the court. But whether or not Reingold was represented by Mr. Mahoney from December 1972 until September 1973 is beside the point. During this time the government believed that the defendant was not represented and no steps were taken by the government to see to it that representation was obtained, nor was the case moved for trial.
Therefore, under all of the circumstances, the indictment in CR-1971-135 must be dismissed with prejudice. Hilbert v. Dooling, 476 F.2d 355 (2d Cir. 1973) en banc; cert. denied, 414 U.S. 878, 94 S. Ct. 56, 38 L. Ed. 2d 123 (1973).
So ordered.
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384 F. Supp. 1294 (1974)
PARAMOUNT FARMS, INC., Plaintiff,
v.
Rogers C. B. MORTON, Secretary, United States Department of Interior, et al., Defendants.
No. 73-C-162.
United States District Court, W. D. Wisconsin.
November 13, 1974.
*1295 Hiram D. Anderson, Jr., of Peickert, Anderson, Fisher, Shannon & O'Brien, Stevens Point, Wis., for plaintiff.
David C. Mebane, U. S. Atty., by Warren W. Wood, Asst. U. S. Atty., Madison, Wis., for defendants.
JAMES E. DOYLE, District Judge.
This is a civil suit in which plaintiff seeks to compel compliance by defendants with certain provisions of 42 U.S.C. § 4651. Jurisdiction is claimed under 28 U.S.C. § 1331(a). The matter is presently before the court on defendants' motion to dismiss for lack of jurisdiction or, alternatively, for plaintiff's failure to state a claim upon which relief can be granted.
The complaint alleges that plaintiff is a family-owned corporation holding title to an island in Lake Superior which the United States Government seeks to acquire under legislation authorizing acquisition of certain of the Apostle Islands for recreational purposes. 16 U. S.C. § 460w. Plaintiff is seeking an order requiring defendants to comply with the provisions of 42 U.S.C. § 4651 (Title III, § 301, Uniform Relocation Assistance and Real Property Acquisition Policies Act of 1970), in all respects before proceeding further to acquire plaintiff's land by condemnation.
Plaintiff alleges that defendants failed to follow the policies for land acquisition by federal agencies as set out in § 4651(1), (2), (3), and (7). Specifically, they allege that defendants failed to provide plaintiff with a written statement of, or summary of the basis for, the amount of the offering price; that defendants failed in their duty to determine the fair market value of plaintiff's property; that defendants refused to negotiate the offering price for plaintiff's property; and that defendants have both advanced the time for condemnation and deferred condemnation in order to compel plaintiff to agree to defendants' offering price.
Plaintiff moved for a preliminary injunction which I denied in an order entered July 3, 1973.
Plaintiff contends that this court has jurisdiction under 5 U.S.C. § 702 to review the manner in which defendants have acted in trying to acquire plaintiff's property. This statute provides
A person suffering legal wrong because of agency action, or adversely affected or aggrieved by agency action within the meaning of a relevant *1296 statute, is entitled to judicial review thereof.
As I noted in my earlier order, this provision is a part of the Administrative Procedure Act. § 701 of that same act provides that the act is to apply except to the extent that "statutes preclude judicial review" or "agency action is committed to agency discretion by law." It was the intent of Congress that the provisions of the Administrative Procedure Act were to have wide application to actions of the federal agencies and that reviewability of agency actions was to be the rule and not the exception. The legislative history of the act is clear (H.R. Rep.No.1980, 79th Cong., 2d Sess., 41 (1946)):
To preclude judicial review under this bill a statute, if not specific in withholding such review, must upon its face give clear and convincing evidence of an intent to withhold it.
Defendants contend that § 4651 is not subject to judicial review. Since their alleged noncompliance with that section is the sole basis for this lawsuit, I must determine whether the statute precludes judicial review, either in specific terms or by "clear and convincing evidence" on its face of an intent to withhold review.
There is no language in the Real Property Acquisition Act which precludes judicial review in specific terms. § 4602 (Title I, § 102 of the act), however, states
(a) The provisions of section 4651 of this title create no rights or liabilities and shall not affect the validity of any property acquisitions by purchase or condemnation.
The legislative history of this act, which is reviewed extensively in Barnhart v. Brinegar, 362 F. Supp. 464 (W.D.Mo. 1973), indicates that Congress intended by this language to preclude judicial review of agency actions under the real property acquisition practices of § 301 (42 U.S.C. § 4651) of the act. Judicial review of other sections of the act is available under the Administrative Procedure Act; review of § 301 is precluded by the fact that if one has "no rights or liabilities," under § 4651 then one cannot be said to be "adversely affected or aggrieved" by any agency action or inaction under that statute.
I am persuaded that the evidence is clear and convincing that Congress intended to withhold judicial review of the real property acquisition procedures of § 4651. See, also, Rubin v. Department of Housing and Urban Development, 347 F. Supp. 555, 558 (E.D.Pa.1972): "The Act does not create rights in favor of property owners enforceable in this Court; the purpose of the Act is merely to set policy guidelines to be followed in the acquisition of real property;" Will Tex Plastics Mfg., Inc. v. Department of Housing and Urban Development, 478 F.2d 1399 (1973); Martinez v. Department of Housing and Urban Development, 347 F. Supp. 903 (E.D.Pa.1972).
I conclude that this court is without jurisdiction to entertain plaintiff's suit to compel compliance by defendants with the provisions of 42 U.S.C. § 4651. Accordingly, defendants' motion to dismiss is hereby granted and this suit is dismissed for lack of jurisdiction.
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384 F. Supp. 1 (1974)
Rose Bud BIGGLES, Petitioner,
v.
Louis BREWER, Warden, Iowa State Penitentiary at Fort Madison, Iowa, Respondent.
Civ. No. 74-155-2.
United States District Court, S. D. Iowa, C. D.
November 20, 1974.
Robert A. Wright, Polk County-Des Moines Offender Advocate Office, Des Moines, Iowa, for petitioner.
Richard C. Turner, Iowa Atty. Gen., and Asst. Atty. Gen. Thomas D. McGrane, Des Moines, Iowa, for respondent.
MEMORANDUM AND ORDER
HANSON, Chief Judge.
The Court has before it a petition for a writ of habeas corpus filed by Rose Bud Biggles. The principal issue raised by this petitioner is that he has been denied the right to appeal his December 1971 conviction for the crime of carrying a concealed weapon, and that this denial is in violation of the Due Process Clause of the Fourteenth Amendment to the United States Constitution. As this Court set out in its September 13, 1974 Order, petitioner has satisfied the exhaustion requirements necessary to obtain federal habeas corpus relief under 28 U.S.C. § 2254 (1970).
FINDINGS OF FACT
Petitioner Biggles was convicted for the crime of carrying a concealed weapon in Polk County District Court in December 1971. He was sentenced to a twenty-five year prison term for being a "habitual criminal."
Seventeen days after his sentencing, on December 23, 1971, petitioner requested appointment of counsel to perfect his appeal. He provided the state court with an affidavit of poverty, and *2 sought funds to cover transcript costs, and other costs incident to his appeal.
Approximately sixty-three days after petitioner's sentencing, counsel was appointed to assist him with his appeal. This appointment was untimely by three days, for § 793.2, Code of Iowa (1973), provides that "[a]n appeal can only be taken from the final judgment, and within sixty days thereafter."
Because the sixty-day period had run, application was made to the Iowa Supreme Court for permission to file a delayed appeal. On September 8, 1972, the Supreme Court denied this request. A few months later the petitioner again sought the Supreme Court's permission to appeal, and on March 23, 1973, he was again refused.
Thereafter, petitioner availed himself of the post-conviction relief provisions of § 663A of the Iowa Code. On April 25, 1974, Judge Harry Perkins denied post-conviction relief, stating that the petitioner should again seek the Iowa Supreme Court's permission to file a late appeal.
On June 20, 1974, this application for a writ of habeas corpus was filed.
CONCLUSIONS OF LAW
The issue before this Court is whether the inability of this petitioner to pursue an appeal of his December 1971 conviction has deprived him of Due Process. Viewed in light of the controlling caselaw, the facts of this case clearly indicate that the petitioner's rights to due process have been violated.
Chapter 793 of the Code of Iowa (1973) delineates the prerequisites for appealing a criminal conviction from the Iowa district courts. The appeal must be taken from a "final judgment, and within sixty days thereafter." § 793.2, Code of Iowa (1973).
Notwithstanding the provisions of the Iowa Code, the Iowa Supreme Court has recognized that a criminal appeal can be taken later than the sixty days after the judgment entry. In Ford v. State, 258 Iowa 137, 138 N.W.2d 116 (1965), it was stated:
We should entertain a delayed appeal where the grounds seeking to excuse the delay set forth a denial of a constitutional right in the appellate process due to malfeasance or misfeasance of the state or its agents. 138 N.W.2d at 119.
This principle was fully recognized by Judge Roy L. Stephenson in Blanchard v. Brewer, 318 F. Supp. 28 (S.D.Iowa 1969), aff'd, 429 F.2d 89 (8th Cir. 1970), cert. denied, 401 U.S. 1002, 91 S. Ct. 1224, 28 L. Ed. 2d 535 (1971). As stated in Blanchard:
[A]t common law there was no review of criminal convictions as of right. Due Process, then, does not comprehend the right of appeal . . . However, Iowa law gives the right to appeal to the Iowa Supreme Court from convictions in criminal cases. Where such right is given it is substantial and an accused may not be deprived thereof by any act or failure to act upon the part of the state which unfairly denies him his appeal. 318 F.Supp. at 31 (emphasis added.)
In Blanchard the petitioner's attorney had improperly perfected his client's appeal. This fact was known to the assistant county attorney, but not communicated to petitioner or his counsel. After the sixty-day period had run, the state moved to dismiss the appeal, and the Iowa Supreme Court sustained this motion. Thus, the appeal was dismissed for a procedural defect, with no prior notice having been given to the petitioner or his attorney. 318 F.Supp. at 30-31.
Judge Stephenson noted that the state was "in no way prejudiced by the lack of strict compliance with the statute," and further stated that "when all the circumstances presented by this case are considered as a whole, it must be concluded that the state has contributed to the loss of petitioner's appellate rights" in violation of the Due Process Clause of *3 the Fourteenth Amendment. 318 F. Supp. at 31.
The facts of this case are quite simple. Indeed, they are stronger than those in Blanchard.[1] On December 23, 1971, petitioner filed an affidavit of poverty with the Polk County District Court. In this document Mr. Biggles affirmed his inability to finance an appeal, and requested the appointment of Mr. Charles F. Glenn or Mr. Garry Garrison to defend him. This request came to the court's attention within three weeks after the convictionat least forty days prior to the sixty-day deadline of § 793.2 of the Iowa Code. Judge Leo Oxberger subsequently appointed Mr. Glenn as requested, but this appointment was made three days after the expiration of the statutory cut-off period.
Thus, the facts plainly reveal that petitioner's timely request was met with an untimely appointment. Thereafter, the Iowa Supreme Court twice denied petitioner's request to file a late appeal. Under these circumstances it is quite apparent that the state has "contributed to the loss of petitioner's appellate rights," and that petitioner was deprived of due process of law under the rule of Blanchard v. Brewer.
The appropriate relief under these circumstances is to provide petitioner with the opportunity to appeal his 1971 conviction. As was the case in Blanchard, vacating the 1971 sentence will serve this end. Upon resentencing, the petitioner can avail himself of the right to appeal within sixty days which Chapter 793 of the Iowa Code provides.
Accordingly, it is ordered that the sentence of the Iowa District Court, in and for Polk County, imposed upon petitioner on December 6, 1971, upon his conviction of carrying a concealed weapon be and hereby is vacated and set aside.
It is further ordered that, unless the Polk County District Court promptly resentences petitioner and upon proper notice and application by petitioner, an appeal therefrom is granted within sixty days thereafter, petitioner be released from the custody of Lou V. Brewer, the defendant herein, and be discharged from any obligations under the state court sentence heretofore imposed.
NOTES
[1] See Judge Bright's concurrence in Blanchard v. Brewer, 429 F.2d 89, 92 (8th Cir. 1970).
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526 F. Supp. 686 (1981)
UNITED STATES of America, Plaintiff,
v.
Raymond A. PHELPS and Dennis W. Phelps, Defendants.
No. CR-81-6-D.
United States District Court, W. D. Oklahoma.
February 5, 1981.
*687 Larry D. Patton, U. S. Atty., by John R. Osgood, Asst. U. S. Atty., Oklahoma City, Okl., for plaintiff.
Martha R. Kulmacz and Robert T. Keel, Oklahoma City, Okl., for defendants.
ORDER
DAUGHERTY, Chief Judge.
On January 8, 1981, the grand jury returned an Indictment against the above named Defendants charging them with various crimes. Presently before the Court in this matter are Defendants' Motion for Return of Seized Property and Suppression of Evidence and Motion to Dismiss Indictment Due to Abuse of Process. Said Motions are supported by Briefs and the government has filed Briefs in opposition thereto. An evidentiary hearing was held on January 30, 1981, in connection with Defendants' Motion for Return of Seized Property and Suppression of Evidence at which Defendants appeared in person and with their attorneys, Robert Keel and Martha R. Kulmacz, and the government was represented by John R. Osgood, Assistant United States Attorney. The Court will consider the pending Motions seriatim.
MOTION FOR RETURN OF SEIZED PROPERTY AND SUPPRESSION OF EVIDENCE
At the hearing on this Motion, Defendants indicated that they are seeking suppression of certain business records which were taken from Defendants' place of business by Phyllis Springer (Springer), a former employee of Defendants, and which were later turned over to agents of the Federal Bureau of Investigation (FBI) by Ms. Springer pursuant to a grand jury subpoena served on her on September 26, 1978. Defendants contend that these records were illegally obtained from them and should therefore be suppressed as evidence herein and returned to them.
At the evidentiary hearing herein, Special Agent Gerald Zeringue, who is one of the case agents in this case, testified that the FBI's investigation of this matter began in mid-1978. Sometime thereafter, a telephone call from a citizen to the local FBI office alerted the FBI to the fact that Ms. Springer had been an employee of the Defendants and may have some knowledge pertinent to the FBI's investigation of Defendants. Upon inquiring of Ms. Springer, Special Agent Zeringue learned that she had the records involved in the instant Motion. Subsequently, on September 26, 1978, Special Agent Zeringue served a grand jury subpoena on Ms. Springer that directed her to appear before the grand jury on October 3, 1978, and to bring with her the records in question. This subpoena further stated that compliance with the same could be had by making said records available for inspection and copying by an FBI agent prior to said date. Ms. Springer elected to comply with the subpoena in this manner and turned the records over to Special Agent Zeringue who in turn later turned the records over to the office of the United States Attorney for this district. Special Agent Zeringue further testified that prior to his initial contact with Ms. Springer, he had no knowledge that she had the records in question. Also, Special Agent Zeringue stated that neither he nor any other government agent directed Ms. Springer to obtain the records in question from the Defendants and that Ms. Springer obtained the same on her own initiative.
Ms. Springer also testified at the hearing on the instant Motion. She stated that she had been employed by the Defendants as a secretary and bookkeeper and that she possessed a key to Defendants' office. During her employment with Defendants, one of the Defendants told her to "take a few days off." It was during this time when she was not at Defendants' office that Ms. Springer received several phone calls from various people who were concerned that Defendants' business had closed. Ms. Springer then went to Defendants' business location in order to retrieve some personal items from her desk and let herself in with the key she had to the business whereupon she observed that the business had apparently been vacated and that all of the business *688 records had been removed except for one box of records. Ms. Springer testified that she removed this box of records "for safe keeping" and kept them in her possession until they were turned over to the FBI in compliance with the grand jury subpoena involved herein. Ms. Springer further testified that she advised the Defendants that she had these records but Defendants never came to get them from her and Ms. Springer never refused to return them to Defendants. Also, Ms. Springer stated that she took these records completely of her "own volition" and not at the direction of the FBI or any other government agent or agency.
It has clearly been established that a search and seizure of property by a private individual without any governmental involvement is not subject to the dictates of the exclusionary rule. Burdeau v. McDowell, 256 U.S. 465, 467, 41 S. Ct. 574, 65 L. Ed. 1048 (1921); United States v. Gibbons, 607 F.2d 1320, 1324 (Tenth Cir. 1979); United States v. Haes, 551 F.2d 767, 770 (Eighth Cir. 1977). In the instant case, the evidence before the Court establishes that the "search" of Defendants' business was conducted solely by a private person who was not acting in collusion with or at the behest of government officials. Thus, the "seizure" of the box of records under consideration was accomplished by purely private action. Therefore, the search of Defendants' business and seizure of the box of records by Ms. Springer is not subject to Fourth Amendment strictures. See United States v. Gibbons, supra; United States v. Haes, supra. Furthermore, the Court determines that under the circumstances of this case, Defendants' Fifth Amendment rights have not been violated as the records in question were obtained by the government from a third party and not from the Defendants. Matter of Grand Jury Empanelled, 597 F.2d 851, 861-862 (Third Cir. 1979); In re Grand Jury Subpoena, No. Misc.-39 (W.D.Okla. June 30, 1980); see Fisher v. United States, 425 U.S. 391, 96 S. Ct. 1569, 48 L. Ed. 2d 39 (1976).
In view of the foregoing and after due consideration of all of the grounds for suppression presented by Defendants in support of the instant Motion, the Court finds and concludes that said Motion should be overruled. Accordingly, the records in question were legally obtained by the government and are admissible in evidence at the forthcoming trial herein.
MOTION TO DISMISS INDICTMENT DUE TO ABUSE OF PROCESS
In this Motion, Defendants ask the Court to dismiss the Indictment herein on the grounds that the same was obtained as a result of abuse of process of the federal grand jury. Defendants contend in support of their Motion that the grand jury's power of process was abused in this case in that the grand jury subpoena for the production of the documents involved herein was issued at the request of Assistant United States Attorney Susie Pritchett subsequent to a request of Ms. Pritchett by Special Agent Zeringue and the documents were turned over to the FBI and used to build and formulate a case against the Defendants without presenting said documents to the grand jury that subpoenaed the same.
The government responds that the grand jury which indicted the Defendants was not the same grand jury which issued the original subpoena and that the records in question were never physically presented to the grand jury that indicted Defendants. However, the government maintains that the summary testimony presented to the grand jury by the government and through Special Agent Ronnie F. Ware, one of the case agents in this matter, is sufficient to sustain the Indictment in this case. A transcript of Special Agent Ware's testimony before the grand jury in this case is attached to the government's Brief in opposition to the instant Motion.
At the outset, the Court notes that a presumption of regularity attaches to a grand jury's proceedings and hence to a grand jury subpoena. United States v. Woods, 544 F.2d 242, 250 (Sixth Cir. 1976), cert. denied, 429 U.S. 1062, 97 S. Ct. 787, 50 L. Ed. 2d 778 (1977), 430 U.S. 969, 97 S. Ct. 1652, 52 L. Ed. 2d 361 (1977), and 431 U.S. *689 954, 97 S. Ct. 2675, 53 L. Ed. 2d 270 (1977); Universal Manufacturing Co. v. United States, 508 F.2d 684, 685 (Eighth Cir. 1975); Beverly v. United States, 468 F.2d 732, 743 (Fifth Cir. 1972). Furthermore, the burden is on the Defendants herein as parties challenging such a subpoena to show that an irregularity exists. Id. Defendants have made no such showing in this case.
A grand jury subpoena duces tecum which provides that it may be satisfied by delivery of the described documents to agents of the FBI is an acceptable grand jury procedure. United States v. Duncan, 598 F.2d 839, 867 (Fourth Cir. 1979), cert. denied, 444 U.S. 871, 100 S. Ct. 148, 62 L. Ed. 2d 96 (1979). Furthermore, materials subpoenaed by a grand jury may be analyzed and summarized by government counsel with the assistance of investigative personnel of a government law enforcment agency for presentation to the grand jury. United States v. Universal Manufacturing Co., 525 F.2d 808, 812 (Eighth Cir. 1975). In the instant case, the record before the Court indicates that the information contained in the subpoenaed documents was presented to the grand jury through extensive summary testimony and that the grand jury apparently could have obtained the actual documents from government counsel by requesting the same if it so desired. Under these circumstances, the Court is not persuaded that there has been an abuse of process in this case requiring dismissal of the Indictment against Defendants. Therefore, the Court finds and concludes that Defendants' Motion to Dismiss Indictment Due to Abuse of Process should be overruled.
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723 F. Supp. 2d 1138 (2010)
Gary Leon TETER, Jr., Plaintiff,
v.
GLASS ONION, INC., Defendant.
No. 08-6097-CV-SJ-FJG.
United States District Court, W.D. Missouri, St. Joseph Division.
July 12, 2010.
*1143 Arthur K. Shaffer, Kansas City, MO, for Plaintiff.
Roger W. Slead, Amy J. Tillery, Horn Aylward & Bandy, LLC, Kansas City, MO, for Defendant.
ORDER
FERNANDO J. GAITAN, JR., Chief Judge.
Pending before the Court is defendant Glass Onion, Inc.'s ("GOI") Motion for Summary Judgment (Doc. No. 69) and plaintiff Gary L. Teter, Jr.'s Motion for Partial Summary Judgment (Doc. No. 70).
I. BACKGROUND
Teter is a renowned artist that paints fine art depicting historic scenes of American frontier life, and sells his work at selected art galleries. In January 2007, Brad and Diana Walpole, owners of Glass Onion, Inc. ("GOI"), entered negotiations with Jim Sanders, owner of Treasure Palace Ltd. ("TPL") doing business as 83 Spring Street Gallery ("Gallery"), to purchase the Gallery and related assets. The real estate and asset purchase agreements were contingent, in part, on the Walpole's obtaining a satisfactory agreement with Teter that he would continue his existing relationship with the Gallery. At the time, Teter sold artwork to TPL for resale at the Gallery, allowed advertisement of his artwork on the Gallery's website and occasionally made personal visits to the Gallery.
A. Jamesport Meeting
On February 27, 2007, Brad and Diana Walpole met with Lee Teter, his wife Barbara Teter, Teter's daughter Shawnee Herbst and her husband Wyatt Herbst, at Teter's home in Jamesport, Missouri. At the meeting, the parties came to an understanding that Teter's relationship with 83 *1144 Spring Street Gallery would continue as it had existed under Jim Sanders' ownership. Teter also informed the Walpoles that Shawnee would soon be joining the "family business," Summer Field Fine Art ("SFFA"), and would handle publication of Teter's work and generally act on his behalf. Any agreement reached between the parties was not reduced to writing. Nonetheless, being satisfied with the outcome of the Jamesport meeting, on March 30, 2007, Jim Sanders and the Walpoles executed the asset purchase agreement and real estate contract, through which GOI purchased the 83 Spring Street Gallery from Jim Sanders, which included the art inventory, the website, domain names and other real and intellectual property associated with TPL's business.
B. GOI and Teter's Business Relationship
Between May 18, 2007, and February 7, 2008, GOI and Teter entered into approximately eight sales transactions, through which GOI purchased original paintings and prints in various quantities at a time. Teter received payment upon GOI's receipt of the artwork. Each time GOI completed a sales transaction with Teter, GOI posted an image of the newly acquired work on the Gallery's website.
During late Spring 2007, GOI began revamping the Gallery's website. On June 30, 2007, Brad Walpole sent an email to SFFA that stated, "we are about to begin our website overhaul in earnest .... [m]ay we use pictures from your website to display Lee's work that we are carrying?" (Doc. No. 71-12). Shawnee responded on July 2, 2007, and stated, "I wanted to answer your question about your website makeover: Yes, use any images from Summer Field's website." (Doc. No. 71-13).
On January 4, 2008, Barbara Teter sent a letter on behalf of Lee Teter to the "Authorized Lee Teter Galleries," including 83 Spring Street Gallery, which informed the dealers of Lee and Barbara Teters' official retirement from the publishing business, and announced that Shawnee and Wyatt Herbst would be taking over SFFA. On March 27, 2008, SFFA sent a proposed Dealership Agreement to GOI, which included the terms and conditions for becoming an authorized SFFA dealer, including minimum order requirements, assertion of rights over the advertisement of copyrighted material and terms of sale (Doc. No. 69-9).
On April 24, 2008, GOI sent a letter to Shawnee informing that it would not agree to the terms of the proposed Dealership Agreement, as written. GOI asserted its position that it had an "existing verbal agreement covering our relationship with Summer Field Fine Art," and referred to the February 27, 2007, meeting amongst the parties where Teter agreed that 83 Spring Street Gallery would continue to be an authorized dealer with an exclusive territory that included the State of Arkansas as well as the Branson, Missouri metro area (Doc. No. 69-10).
C. Events Preceding the Instant Lawsuit
On May 20, 2008, Shawnee sent a letter to Mr. and Mrs. Walpole that "conclude[d] the permissible use of copyrighted images of Lee Teter art," since any use was a "privilege reserved for Authorized Dealers of Summer Field Fine Art." (Doc. No. 76-17). The letter requested that GOI remove all images of Teter art from any form of advertising, including websites. SFFA sent GOI a second notice on June 2, 2008, requesting that all copyrighted images be removed from the Gallery's advertising (Doc. No. 76-18).
Following the second notice, GOI temporarily removed the images from the Gallery's website. On July 7, 2008, GOI sent *1145 a letter to Shawnee Herbst stating that, pursuant to the standing agreement with Teter, GOI was well within its legal rights to use "thumbnail" images for the purpose of advertising lawfully owned art, and that GOI would re-display such images on its website with digital watermarks reading "83 Spring Street" to protect Teter from unauthorized copies of the digital images from the website (Doc. No. 69-12). Teter commenced this lawsuit on September 24, 2008, at which time GOI maintained the watermarked images displayed on the Gallery's website.
GOI moves for summary judgment on all of Teter's causes of action, which include: (I) copyright infringement, (II) false designation of origin, (III) unfair competition, (IV) trademark infringement (V) trademark dilution, and (VI) violation of the Visual Arts Rights Act (VARA), 17 U.S.C. § 106A.
Teter moves for judgment as a matter of law on his copyright infringement claim, and on defendant's counterclaims for (I) breach of contract,[1] (II) promissory estoppel, and (III) breach of covenant of good faith and fair dealing.
II. SUMMARY JUDGMENT STANDARD
Summary judgment is appropriate if the movant demonstrates that there is no genuine issue of material fact and that the movant is entitled to judgment as a matter of law. Celotex Corp. v. Catrett, 477 U.S. 317, 327, 106 S. Ct. 2548, 91 L. Ed. 2d 265 (1986). The facts and inferences are viewed in the light most favorable to the nonmoving party. Fed.R.Civ.P. 56(c); Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 586-590, 106 S. Ct. 1348, 89 L. Ed. 2d 538 (1986). The moving party must carry the burden of establishing both the absence of a genuine issue of material fact and that such party is entitled to judgment as a matter of law. Matsushita, 475 U.S. at 586-90, 106 S. Ct. 1348.
Once the moving party has met this burden, the nonmoving party may not rest on the allegations in the pleadings, but by affidavit or other evidence must set forth facts showing that a genuine issue of material fact exists. Fed.R.Civ.P. 56(e); Lower Brule Sioux Tribe v. South Dakota, 104 F.3d 1017, 1021 (8th Cir.1997). To determine whether the disputed facts are material, courts analyze the evidence in the context of the legal issues involved. Lower Brule, 104 F.3d at 1021. Thus, the mere existence of factual disputes between the parties is insufficient to avoid summary judgment. Id. Rather, "the disputes must be outcome determinative under prevailing law." Id. (citations omitted). Furthermore, to establish that a factual dispute is genuine and sufficient to warrant trial, the party opposing summary judgment "must do more than simply show that there is some metaphysical doubt as to the facts." Matsushita, 475 U.S. at 586, 106 S. Ct. 1348. Demanding more than a metaphysical doubt respects the appropriate role of the summary judgment procedure: "Summary 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 *1146 every action." Celotex, 477 U.S. at 327, 106 S. Ct. 2548.
III. DISCUSSION
Teter claims copyright infringement in violation of the Copyright Act of 1976, trademark infringement, false designation of origin, unfair competition and trademark dilution under the Lanham Act, and violation of the Visual Artist's Rights Act. GOI seeks judgment as a matter of law on all of Teter's claims. Teter seeks summary judgment on his claim of copyright infringement, and on GOI's counterclaims of breach of contract, promissory estoppel and breach of covenant of good faith and fair dealing.
A. COPYRIGHT INFRINGEMENT
Teter alleges defendant has "unlawfully reproduced, unlawfully distributed, unlawfully prepared a derivative work of LEE TETER Copyrighted Works, and unlawfully displayed LEE TETER Copyrighted Works." (Doc. No. 1). Plaintiff adds that both the thumbnails and the higher resolution images displayed on the Gallery website are unauthorized works that infringe upon Teter's copyright ownership rights.
To establish copyright infringement, plaintiff must show: "(1) ownership and validity of the copyright, and (2) potential violation of the copyright owner's exclusive rights by, for example, unauthorized reproduction and distribution of the copyrighted work." Pinkham v. Sara Lee Corp., 983 F.2d 824, 830 (8th Cir.1992). Here, Teter's copyright ownership is undisputed; thus, the only issue is whether GOI infringed Teter's exclusive rights under 17 U.S.C. § 106(1)(2)(3) and (5) to reproduce, prepare derivative works, distribute copies, or display his work publicly. Section 106(1) grants the copyright owner an exclusive right to reproduce the work in copies, and to authorize such reproductions. A "copy" is defined as a tangible form or "material object" in which a work is "fixed by any method now known or later developed," and from which that work "can be perceived, reproduced, or otherwise communicated, either directly or with the aid of a machine or device." 28 U.S.C. § 101.
GOI does not dispute that it created digital images of Teter's copyrighted works. Brad Walpole photographed the artwork, reduced the digital image in size and resolution, and uploaded it to the host for display on the Gallery's website, which included thumbnail size and larger, low resolution images. Thus, creation and storage of the electronic images of Teter's copyrighted works constitute copies within the meaning of the Act. See Perfect 10, Inc. v. Amazon.com, Inc., 508 F.3d 1146,1160 (9th Cir.2007) (explaining "[a] photographic image is a work that is `fixed' in a tangible medium of expression' ... when embodied (i.e. stored) in a computer's server (or hard disk, or other storage device). The image stored in the computer is the `copy' of the work for purposes of the copyright law.").
Based on the applicable law and the undisputed facts, Teter has not established that GOI infringed § 106(2) by creating derivative works because the copy images are not an "original work of authorship" that constitute a derivative work under § 101, nor has Teter established that GOI unlawfully distributed copies of the copyrighted work to the public by sale or other transfer of ownership under § 106(3). There are sufficient facts in the record, however, to support a finding that GOI infringed Teter's exclusive rights under 17 U.S.C. § 106(1) and (5) of the 1976 Copyright Act by creating copies and publicly displaying the copyrighted works on the 83 Spring Street Gallery website. Finding Teter has established a claim for copyright infringement, the Court considers GOI's affirmative defenses.
*1147 1. Implied License
GOI argues Teter granted an implied license to GOI to use Teter's copyrighted works for advertising purposes, and, therefore, GOI was within its rights to display the digital images on the Gallery website.
"A license is a defense to a claim of copyright infringement," Oddo v. Ries, 743 F.2d 630, 634, n. 6 (9th Cir.1984), and must be affirmatively pleaded. Fed. R.Civ.P. 8. While a copyright owner may expressly grant a license to use the copyrighted work, a nonexclusive implied license can be granted verbally or implied from conduct. See Pinkham, 983 F.2d at 831; Melville B. Nimmer & David Nimmer, Nimmer on Copyright § 10.03[A] at 10-36.1 (3d ed.1995). "Consent given in the form of mere permission or lack of objection is also equivalent to a nonexclusive license and is not required to be in writing." I.A.E., Inc. v. Shaver, 74 F.3d 768, 775 (7th Cir.1996). By granting an implied license, the copyright owner permits the use of a copyrighted work in a particular manner. See id.
While the particular facts of each case are most relevant, an implied license may be granted when (1) a person (the licensee) requests the creation of a work, (2) the creator (the licensor) makes that particular work and delivers it to the licensee who requested it, and (3) the licensor intends that the licensee-requestor copy and distribute his work. See Effects Associates v. Cohen, 908 F.2d 555, 558-59 (9th Cir.1990).
GOI claims an implied license existed as early as the Jamesport meeting on February 27, 2007, where Teter agreed to continue his existing relationship with 83 Spring Street Gallery, which, thus far, allowed for the Gallery to display images of Teter's artwork on its website that it lawfully owned and had for sale. GOI argues Teter granted GOI an implied license because he remained silent and never objected to display of the images on the Gallery's website until GOI refused to sign the SFFA Dealer Agreement.
Teter responds that GOI only had permission to use images from the official SFFA website to use for advertising on the Gallery website, but did not grant GOI permission to create copies of his work for display. Teter claims he did not know, and had no reason to know, that GOI was creating its own electronic images for use on the Gallery website. Teter further contends that GOI did not inherit or acquire a right from TPL to create its own electronic images since it was Jim Sanders, the prior owner of the Gallery, who obtained permission to display electronic images of Teter's work on the Gallery's website.
Based on its evaluation of the undisputed facts, the Court finds Teter granted GOI a nonexclusive implied license to display Teter's copyrighted works on the Gallery website. In so finding, the Court relies most heavily on the third prong of the Effects test, which is Teter's intent pertaining to the display and distribution of Teter's work. Effects suggests several objective factors to determine whether an implied license exists, including deposition testimony and the delivery of the copyrighted material without warning that its further use would constitute copyright infringement. See Effects, 908 F.2d at 559 n. 6.
The record makes clear that Teter did not restrict the use of the copyrighted works that he sold to the Gallery. When Sanders and the Walpoles entered into an agreement for the sale of 83 Spring Street Gallery, the general understanding that Mr. and Mrs. Walpole would continue to run the Gallery, including the aspects of website advertising, just as Sanders had run the business.[2] At that time, the Lee *1148 Teter/SFFA website listed 83 Spring Street Gallery as an authorized dealer and included a direct link to the 83 Spring Street Gallery website. The Gallery's website included the location, history and contact information as well as photo images of the artwork it had for sale. Jim Sanders had previously obtained broad permission from Barbara Teter to operate the website and use images of the artwork for advertising purposes.[3] Teter provided electronic images to Sanders to display on the website; however, Sanders also testified that he and/or his computer technician created electronic images for a few original paintings for which Teter did not provide electronic images.[4] When Sanders informed Teter that he was going to sell the Gallery, Teter did not request his images be removed from the website, such that when the Walpole's purchased 83 Spring Street Gallery, its website included the same Teter images that preexisted the sale. Teter sold new works to GOI with the understanding that GOI would advertise the newly acquired piece on its website (Doc. No. 69-8, p. 193).[5] The record plainly reveals Teter was aware that images of his copyrighted works were displayed on the Gallery's website throughout *1149 TPL and GOI's ownership of the Gallery (Doc. No. 69-8).
The U.S. Court of Claims explains that by conveying a copyrighted work to another party with the understanding of how the party intends to use it, a copyright holder conveys an implied license to that use as a matter of law. See Herbert v. United States, 36 Fed. Cl. 299, 310-311 (1996). The Court finds Teter granted GOI an implied license to display the copyrighted works for advertising purposes; however, questions remain as to, first, whether the license included permission for GOI to create copies of Teter's copyrighted work for display on the Gallery website, and, second, whether the license to display Teter's work on the Gallery website was revoked.
(a) Scope of Implied License
Next, the Court examines the scope of use that Teter granted to GOI through the implied license, and whether GOI had permission to create copies of the copyrighted works for display on the GOI website.
Since a nonexclusive license does not transfer ownership of the copyright from the licensor to the licensee, the licensor can bring suit for copyright infringement if the licensee's use goes beyond the scope of the nonexclusive license. Effects Assocs., 908 F.2d at 558 n. 5. Under Missouri law, "[i]t is the actions, and not the intentions or suppositions, of the parties that determine whether or not there is a contract and the terms of the contract." Don King Equipment Co. v. Double D Tractor Parts, Inc., 115 S.W.3d 363, 369 (Mo.Ct.App.2003) (citing B-Mall Co. v. Williamson, 977 S.W.2d 74, 78 (Mo.Ct. App.1998)). "The scope of an implied license takes its form from the circumstances and conduct that created them.... [t]he core focus lies in determining what scope of the parties' conduct reasonably suggests as the range of permitted use of the licensed rights." Raymond T. Nimmer, Jeff Dodd, Modern Licensing Law, § 10:17 (2009). Importantly, intent is not a factor in determining copyright infringement. See Pinkham, 983 F.2d at 829 ("The defendant's intent is simply not relevant: The defendant is liable even for `innocent' or `accidental' infringements.").
Teter argues GOI exceeded the scope of any license because GOI created its own images of Teter's artwork for display on the Gallery website rather than only using images SFFA supplied or authorized. GOI took photographs of the newly acquired works, uploaded them onto the computer, modified the resolution and uploaded them to the server. Contrary to GOI's fervent assertions, the record does not establish Teter had actual knowledge that GOI created its own copies of Teter's works.
In addition, the parties strongly disagree about the meaning of an email exchange between Brad Walpole and Shawnee pertaining to permission of use. On June 30, 2007, Mr. Walpole sent an email to the SFFA email account regarding the Gallery's website, and asked, "may we use pictures from your website to display Lee's work that we are carrying?" (Doc. No. 71-12). Mr. Walpole maintains he sought permission "as a courtesy," since he believed the permission to display was part of the ongoing understanding with Teter, and inherent to GOI's responsibility to promote Teter's artwork. Shawnee responded via email on July 2, 2007, and stated in relevant part, "I wanted to answer your question about your website makeover: Yes, use any images from Summer Field's website." (Doc. No. 71-13). Teter maintains the email merely granted permission to use images from the SFFA website, but did not grant GOI permission to create and reproduce electronic images of Teter's work. GOI argues Shawnee *1150 Herbst's email does not exclude use of other images, nor specify that GOI may only use images from Teter's website.
The record supports the determination that Teter granted GOI an implied license to display the copyrighted works on the Gallery website, but there are disputed material facts upon which reasonable jurors may differ in determining whether the license also permitted GOI to create copies of Teter's works or whether permission to display was limited to images SFFA and/or Teter supplied to GOI.
(b) Revocation of License
The Court need not determine the definite time when the implied license arose, yet Teter's permission for use was made clear at the Jamesport meeting on February 27, 2007. While Teter certainly acceded to GOI's use of the copyrighted works, the license was not indefinite, and, as such, the Court must determine if and when Teter revoked the license.
Where no consideration is given, a nonexclusive implied license is revocable. See Avtec Sys. Inc. v. Peiffer, 21 F.3d 568, 574 n. 12 (4th Cir.1994) (noting in dictum that "an implied license is necessarily nonexclusive and revocable absent consideration"); see also Keane Dealer Services, Inc. v. Harts, 968 F. Supp. 944, 947 (S.D.N.Y.1997) ("If no consideration was given, the license was revocable, and the institution of this lawsuit would constitute revocation.").
Neither party argues that GOI paid money or gave legal consideration for the license-that is, consideration for the specific licensing right to display images of Teter's works on its website; therefore, Teter was free to revoke his consent at any time. The Court finds Teter revoked the license with the May 20, 2008, letter from SFFA to the Walpoles, which unequivocally revoked permission for use of the copyrighted works and directed GOI to remove Teter's copyrighted works from the Gallery's website. Accordingly, any display of Teter's copyrighted work on the 83 Spring Street Gallery website after May 20, 2008, constitutes copyright infringement as a matter of law, absent successful pleading of GOI's remaining affirmative defenses.
2. Agreement for the Sale of Goods
GOI contends it had a contractual right under the Uniform Commercial Code (UCC) to the continued use of the copyrighted images on its website and elsewhere.
The UCC is adopted in Missouri through Mo.Rev.Stat. § 400 et seq. The statute applies to transactions in goods, and goods are defined as "all things which are movable." Mo.Rev.Stat. § 400.2-105(1). Accordingly, artwork is a "good," and the sale of artwork is governed by the UCC. Generally, a contract for the sale of goods must be in writing, but there is an exception for transactions in which payment has been made and accepted, or where goods have been received and accepted. Mo.Rev.Stat. § 400.2-201(3)(c). Thus, an implied contract based on the parties' course of dealing can arise even though it was not reduced to writing. See Smith-Scharff Paper Co. v. P.N. Hirsch & Co. Stores, Inc., 754 S.W.2d 928, 930 (Mo. Ct.App.1988) (finding course of dealing for custom goods over period of 36 years gave rise to implied contract). An agreement is "the bargain of the parties in fact, as found in their language or inferred from other circumstances, including the course of performance, course of dealing, or usage of trade ..." Mo.Rev.Stat. § 400.1-201(3).
GOI contends the course of dealing between the parties gave rise to an enforceable agreement that includes permission for GOI to copy and display the Teter works that it lawfully owns on the Gallery's website. The Court has already *1151 found the implied license granted GOI permission to display Teter's copyrighted works; thus, the issue is whether any implied agreement that arose from the sale of goods between Teter and GOI included permission to make copies of those works.
GOI claims an agreement was formed beginning with the events prior to the Walpole's purchase of the Gallery. The real estate contract between GOI and TPL included a contingency clause that allowed GOI to "obtain satisfactory results with the contractual agreement with the artist[]... Lee Teter ... in the Buyer's sole discretion ..." prior to executing the contract (Doc. No. 76-16). Jim Sanders had informed the Walpoles that Teter "did not do business in writing." (Doc. No. 69-1). On February 27, 2007, the Walpoles met with Teter at his home in Jamesport, Missouri, to "obtain assurances that [they] would continue with the same rights and privileges and expectations and personal appearances as had occurred with Sanders." (Doc. No. 69-1). GOI claims Teter unquestionably assured the Walpoles that the same business relationship would continue under their ownership.
GOI refers to the conduct of the parties subsequent to the February 27, 2007, meeting as evidence that the expected course of performance was realized in fact. After GOI purchased the Gallery, it entered into approximately eight purchase transactions with Teter between May 2007 and February 2008.[6] Teter sent an invoice to GOI for each purchase, and GOI paid the invoice. After each purchase, GOI created an image copy of the newly acquired work and posted it on the Gallery's website. In addition, Teter attended a marketing event at the Gallery in August 2007 for current and prospective clients interested in Teter's work. Teter did not object to the images on the website until SFFA proposed the Dealership Agreement in May 2008, which required GOI to abide by new terms in order to remain an authorized SFFA dealer and be permitted to make use of Teter's copyrighted works. GOI claims the parties' conduct demonstrates Teter and GOI had an agreement that included permission to copy and display Teter's works.
Teter disputes any formal agreement, and further claims that any course of dealing between the parties did not give rise to implied license to reproduce or display the copyrighted works. Teter argues the purchase transactions did not give rise to any enforceable agreement in connection with the use of the copyrighted works, emphasizing that each sale was a single purchase transaction, which did not guarantee any future obligation. The transactions varied in quantity, type of work (i.e. original painting or prints), and occurred irregularly over a nine-month period. More importantly, plaintiff argues that any implied agreement under the UCC did not include a license to copy Teter's copyrighted works.
The applicable law supports plaintiff's position. Any implied agreement between the parties for the purchase and sale of Teter's artwork did not include a transfer of Teter's exclusive rights under his copyrighted works because the Copyright Act mandates that ownership of the tangible object does not equate to ownership of the exclusive rights of a copyright.
Section 202 of the Copyright Act provides:
Ownership of a copyright, or of any of the exclusive rights under a copyright, is *1152 distinct from ownership of any material object in which the work is embodied. Transfer of ownership of any material object, including the copy or phonorecord in which the work is first fixed, does not of itself convey any rights in the copyrighted work embodied in the object; nor, in the absence of an agreement, does transfer of ownership of a copyright or of any exclusive rights under a copyright convey property rights in any material object.
17 U.S.C.A. § 202; see also Nika Corp. v. City of Kansas City, Mo., 582 F. Supp. 343, 367-68 (W.D.Mo.1983) ("[U]nder both the Federal Copyright Act, 17 U.S.C. § 101 et seq., and under the doctrine of "common law copyright" ... ownership of a copyright is something distinct from ownership of a physical object in which the copywritten work is embodied, so that ownership of one can (and often will) be transferred without transferring ownership of the other.").
Here, it is undisputed that GOI and Teter did not have an agreement that transferred Teter's exclusive rights to copy and publicly display his copyrighted works. Thus, any implied agreement that arose under the UCC as a result of the parties' course of dealing did not include the exclusive rights to copy or reproduce Teter's copyrighted works.
3. Estoppel
GOI argues Teter's conduct bars his copyright infringement claim under the doctrine of estoppel.
A defendant in a copyright infringement case must prove four conjunctive elements to establish estoppel: (1) the plaintiff must know the facts of the defendant's infringing conduct; (2) the plaintiff must intend that its conduct shall be acted on or must so act that the defendant has a right to believe that it so intended; (3) the defendant must be ignorant of the true facts; and (4) the defendant must rely on the plaintiff's conduct to its injury. See Carson v. Dynegy, Inc., 344 F.3d 446, 453 (5th Cir.2003); see also Hampton v. Paramount Pictures, Corp., 279 F.2d 100, 104 (9th Cir.1960).
To establish the first element, GOI must show Teter knew of GOI's infringing conduct. Specifically, GOI must show Teter was aware that GOI made electronic copies and displayed images of Teter's copyrighted work on the Gallery website. For the reasons discussed in Section A(1) above, the Court cannot find Teter had full knowledge of GOI's alleged infringing conduct. The record makes clear that Teter knew GOI that displayed images of his artwork on the Gallery's website, but the evidence does not establish Teter knew that GOI was creating its own digital images of the copyrighted work. Thus, there is a triable fact as to whether Teter had full knowledge of GOI's allegedly infringing conduct. As GOI did not establish the first requirement for its estoppel defense, the Court need not proceed to the remaining elements.
4. First Sale Rule Defense
GOI argues the first sale rule bars plaintiff's copyright infringement claim because it only uses images of Teter's copyrighted works that GOI lawfully owns.
Under the first sale rule codified in 17 U.S.C. § 109, certain exclusive rights of the copyright owner may be limited. The Copyright Act grants the copyright owner the exclusive rights to distribute copies of the work to the public by sale or other transfer of ownership. 17 U.S.C. § 106(3). The first sale rule terminates this exclusive distribution right with respect to a particular copy of a work that has been lawfully made and sold, and allows the owner of that particular copy to sell or otherwise dispose of it. If, however, the *1153 copy being sold was not lawfully made, the first sale rule does not apply.
The first sale rule does not bar Teter's copyright infringement claim because his claim is based on GOI's reproduction and display of Teter's copyrighted works, thus implicating Teter's exclusive rights under §§ 106(1) and (5) to copy and publicly display his copyrighted works. Here, application of the first sale rule extends only to Teter's sale of copyrighted paintings and prints to the Gallery for resale, but such transfer is limited to exhaustion of his distribution right under § 106(3).
5. Fair Use Defense
GOI claims Teter's copyright infringement claim is barred because GOI's use of Teter's copyrighted works constitutes fair use.
The fair use doctrine allows courts to avoid rigid application of the copyright statute "when, on occasion, it would stifle the very creativity which that law is designed to foster." Campbell v. Acuff-Rose Music, Inc., 510 U.S. 569, 575, 114 S. Ct. 1164, 127 L. Ed. 2d 500 (1994). The goal of copyright law is to protect the creators' work product in order to encourage and allow the development of new ideas. See Perfect 10, 508 F.3d at 1163. To fulfill this purpose, the fair use defense permits the use of copyrighted works without the copyright owner's permission in certain situations. Fair use may include reproduction in copies for purposes such as criticism, comment, news reporting, teaching, scholarship, or research. 17 U.S.C. § 107. The statute does not set forth an exclusive list of non-infringing uses, and, in fact, the doctrine has been adapted to fair use of copyrighted material on the internet. See id. (finding operator's display of thumbnail images of copyright owner's photographs was fair use because thumbnails were tools that enabled users to locate full-sized images). In determining whether the use made of a work in a particular case is a fair use the factors considered shall include-
(1) the purpose and character of the use, including whether such use is of a commercial nature or is for nonprofit educational purposes;
(2) the nature of the copyrighted work;
(3) the amount and substantiality of the portion used in relation to the copyrighted work as a whole; and
(4) the effect of the use upon the potential market for or value of the copyrighted work.
17 U.S.C. § 107.
The Court applies these factors and considers the circumstances of this case in the context of the broader aim of copyright law. Use of a work may be fair use where its purpose is transformative or supercedes the function of the original work. GOI's images are not transformative, as they do not alter the original work "with new expression, meaning, or message." Campbell, 510 U.S. at 579, 114 S. Ct. 1164. Unlike the scenario where a general internet search engine "transforms the [thumbnail] image into a pointer directing a user to a source of information," GOI's use of the images is limited to an informative and promotional function on the Gallery's website-to show customers the Teter works available at the Gallery. See Perfect 10, 508 F.3d at 1165. The images advertise Teter's works, which is a basic commercial purpose and suggests against a finding of fair use.
The copyrighted paintings themselves are highly creative, thus, they are far removed from the core of intended copyright protectionto develop new ideas for broader utility. See id. at 586, 114 S. Ct. 1164. GOI does not curtail the amount or portion of the copyrighted works in use, as its thumbnail images are complete photographs of the paintings. On the other *1154 hand, GOI's use of thumbnail images does not create a substitute market for Teter's copyrighted paintings because GOI placed a watermark over the images to protect from unlawful reproduction. Examining these facts within the broader purpose of copyright law, the Court concludes the fair use defense would be misapplied and inconsistent with its purpose.
Based on the foregoing, GOI's motion for summary judgment on Teter's copyright infringement claim is DENIED, and Teter's motion for summary judgment on the same claim is DENIED IN PART. The Court finds Teter granted GOI an implied license to display the copyrighted works on the Gallery website beginning on or about the Jamesport meeting on February 27, 2007, until SFFA revoked permission via letter on May 20, 2008; however, there is a question material fact as to whether GOI exceeded the scope of the implied license by copying and reproducing Teter's copyrighted works during that period.
In addition, none of GOI's affirmative defenses preclude copyright infringement liability after SFFA revoked the implied license in the May 20, 2008 letter. Accordingly, Teter's motion for summary judgment on copyright infringement is GRANTED IN PART for any use of the copyrighted works after May 20, 2008.
B. TRADEMARK INFRINGEMENT
Plaintiff alleges violations of section 43 of the Lanham Act, 15 U.S.C. § 1125(a), on the grounds of (1) false designation of origin, (2) unfair competition, and (3) trademark infringement under both 15 U.S.C. §§ 1114 and 1125 et seq. Plaintiff also alleges trademark dilution under the Lanham Act, 15 U.S.C. § 1125(c).
Section 43 of the Lanham Act provides a civil action to:
(1) Any person who, on or in connection with any goods or services, or any container for goods, uses in commerce any word, term, name, symbol, or device, or any combination thereof, or any false designation of origin, false or misleading description of fact, or false or misleading representation of fact, which
(A) is likely to cause confusion, or to cause mistake, or to deceive as to the affiliation, connection, or association of such person with another person, or as to the origin, sponsorship, or approval of his or her goods, services, or commercial activities by another person ...
15 U.S.C. § 1125(a).
Teter uses the mark "LEE TETER" to identify his works of art, and often in the form of his signature. Under 15 U.S.C. § 1052(e) federal trademark registration is not available if the mark "is primarily merely a surname"; however, section 43 grants protection to qualifying, unregistered trademarks from infringement and unfair competition. Everest Capital Ltd. v. Everest Funds Management, L.L.C., 393 F.3d 755, 759 (8th Cir.2005) (citing Two Pesos, Inc. v. Taco Cabana, Inc., 505 U.S. 763, 767-68, 112 S. Ct. 2753, 120 L. Ed. 2d 615 (1992)). As a preliminary matter, the Court determines whether Teter's unregistered mark is distinct, and, thus, qualifies for trademark protection under section 43. See Frosty Treats, Inc. v. Sony Computer Entertainment America, Inc., 426 F.3d 1001, 1003 (8th Cir.2005) ("Because none of the marks at issue has been federally registered... [plaintiff] bears the burden of establishing that its marks are protectible under trademark law.").
A mark is protected if it falls into one of four categories: (1) generic, (2) descriptive, (3) suggestive, or (4) arbitrary or fanciful. See id. at 1005. A descriptive mark conveys an "immediate idea of the ingredients, qualities or characteristics of the goods," id. (citing Stuart Hall Co., Inc. v. Ampad Corp., 51 F.3d 780, 785-86 (8th *1155 Cir.1995)), and is protected only if shown to have acquired a secondary meaning. Id. "Secondary meaning is an association formed in the minds of consumers between the mark and the source or origin of the product." Id. (citing Co-Rect Prods., Inc. v. Marvy! Adver. Photography, Inc., 780 F.2d 1324, 1330 (8th Cir.1985)). To establish secondary meaning, Teter must show that LEE TETER identifies his goods and distinguishes them from those of others. Id. Teter may prove secondary meaning through circumstantial evidence such as the "exclusivity, length and manner of use of the mark; the amount and manner of advertising; the plaintiff's established place in the market." Id.
The evidence demonstrates the LEE TETER mark is associated with Teter's works of fine art, which depict scenes of American frontier life, and has acquired secondary meaning by being distinct in their subject matter, style and quality. The works are distributed nationally, are sought-after by established clients, and have acquired a place in the fine art market. Teter has set forth sufficient evidence for the Court to conclude LEE TETER is a sufficiently distinct descriptive mark that has acquired a secondary meaning, and is entitled to protection under the Lanham Act.
1. Claims Under Section 43 of the Lanham Act. 15 U.S.C. § 1125.
The LEE TETER mark appears on the electronic images and other places on the Gallery's website. Teter alleges GOI's use of the LEE TETER mark constitutes (I) false designation of origin, (II) unfair competition, and (III) trademark infringement in violation of 15 U.S.C. § 1125.
To establish a claim for trademark infringement Teter must show that GOI's use of the LEE TETER mark on the Gallery's website creates a "likelihood that consumers will be confused about the source of the allegedly infringing product." Everest Capital Ltd. v. Everest Funds Management, L.L.C., 393 F.3d 755, 759 (8th Cir.2005). The Court considers the following factors to evaluate the likelihood of confusion: (1) the strength of the owner's mark; (2) the similarity between the owner's mark and the alleged infringer's mark; (3) the degree to which the products compete with each other; (4) the alleged infringer's intent to pass off its goods as those of the trademark holder; (5) incidents of actual confusion; and, (6) whether the degree of purchaser care can eliminate any likelihood of confusion which would otherwise exist. SquirtCo v. Seven-Up Co., 628 F.2d 1086, 1091 (8th Cir.1980).
In the Eighth Circuit, likelihood of confusion is a finding of fact, and GOI is entitled to judgment as a matter of law only if "there is no legally sufficient evidentiary basis for a reasonable jury to find" that GOI did not infringe upon Teter's mark. Fed.R.Civ.P. 50(a)(1).[7] The strength of the Teter's mark is weak, given that descriptive marks are entitled to the weakest protection. First Bank v. First Bank System, Inc., 84 F.3d 1040, 1045 (8th Cir.1996). The degree of similarity of the LEE TETER mark weighs heavily in favor of plaintiff, since GOI uses the identical LEE TETER mark in its electronic copies. There is competition between GOI and authorized SFFA dealers who are permitted to use the LEE TETER mark. While GOI did not intend to "pass off" its goods as Teter's, the relevant *1156 inquiry is whether GOI intended to pass itself off as an authorized dealer when, in fact, it was not.
On the other hand, GOI's use of the mark was nominative in that it merely identified the Teter works, thus, indicating GOI did not possess an intent to confuse the public. Importantly, Teter produced no evidence of actual confusion by the consuming public. Finally, the Court considers the type of product, its cost, and conditions of purchase, and finds a typical purchaser of fine art is sophisticated in her ability to distinguish the origin or source as being a verifiable Teter piece.
Not all use of a trademark constitutes infringement, and defendants argue the nominative fair use doctrine and the first sale doctrine bar Teter's trademark infringement claims. The nominative fair use doctrine protects trademark use "`when the only practical way to refer to something is to use the trademarked term.'" Century 21 Real Estate Corp. v. Lendingtree, Inc., 425 F.3d 211 (3d Cir. 2005). For the nominative fair use doctrine to apply, the "user must do nothing that would, in conjunction with the mark, suggest sponsorship or endorsement by the trademark holder." New Kids on the Block v. News America Publishing Inc., 971 F.2d 302, 308 (9th Cir.1992).
The well-established first sale doctrine provides that "resale by the first purchaser of the original article under the producer's trademark is neither trademark infringement nor unfair competition." Sebastian Int'l, Inc. v. Longs Drug Stores Corp., 53 F.3d 1073, 1074 (9th Cir.1995). The doctrine does not, however, protect "resellers who use other entities' trademarks to give the impression that they are favored or authorized dealers for a product when in fact they are not." Australian Gold, Inc. v. Hatfield, 436 F.3d 1228, 1241 (10th Cir.2006); see also Prompt Elec. Supply Co., Inc. v. Allen-Bradley Co., 492 F. Supp. 344 (D.C.N.Y. 1980) (finding continued unauthorized use of sign and trademark created a likelihood that public would be confused or deceived into believing distributor was authorized distributor of products where distributorship agreement had been terminated).
The likelihood of confusion factors "do not operate in a mathematically precise formula; rather, we use them at the summary judgment stage as a guide to determine whether a reasonable jury could find a likelihood of confusion." Duluth News-Tribune v. Mesabi Publ'g Co., 84 F.3d 1093 (8th Cir.1996). The Court finds sufficient evidence of GOI's use of the LEE TETER mark to create the impression in the mind of a consumer that 83 Spring Street Gallery is an authorized dealer of Teter works, when in fact, it is not. GOI uses the LEE TETER trademark in the electronic images of Teter's works, on marketing collateral, and it appears in other places on the Gallery's website. In addition, the "83 Spring Street" watermark on the electronic images could create the impression 83 Spring Street Gallery is an authorized dealer of Teter artwork. Because GOI's use of Teter's mark may create confusion as to the source and affiliation Teter's works and the Gallery, the Court declines to apply the nominative fair use and first sale doctrines to bar plaintiff's claims.
Accordingly, summary judgment is DENIED as to Teter's causes of action for false designation of origin, trademark infringement and unfair competition under section 43 of the Lanham Act. 15 U.S.C. § 1125(a).
2. Trademark Infringement Under 15 U.S.C. § 1114.
Teter alleges trademark infringement under section 1114 of the Lanham Act, which provides protection from trademark *1157 infringement to holders of federally registered trademarks.[8] Section 1052(2) bars federal registration to a mark that "is primarily merely a surname." 15 U.S.C. § 1052(2). It is undisputed that LEE TETER is not a federally registered trademark. Summary judgment is GRANTED in favor of GOI with regard to Teter's trademark infringement claim under 15 U.S.C. § 1114.
C. TRADEMARK DILUTION
Teter alleges trademark dilution in violation of the Lanham Act, 15 U.S.C. § 1125(c). Teter contends GOI's creation and use of digital images of Teter's copyrighted works "will continue to dilute the distinctive quality of LEE TETER Copyrighted Works and diminish and destroy the association of the LEE TETER Copyrighted Works with G.L. Teter." (Doc. No. 1).
Dilution concerns "the lessening of the capacity of a famous mark to identify and distinguish the goods or services." Luigino's Inc. v. Stouffer Corp., 170 F.3d 827, 832 (8th Cir.1999). "Dilution occurs when consumers associate a famous mark that has traditionally identified the holder's goods with a new and different source." Id. To establish a claim for trademark dilution the plaintiff must show that (1) its mark is famous, (2) the defendant began using the mark after plaintiff's mark became famous, and (3) that defendant's mark dilutes the distinctive quality of plaintiff's mark by causing consumers to connect plaintiff's mark with different products. Id.
To show that a mark is "famous" is a rigorous standard. Everest Capital, 393 F.3d at 763. "Dilution is a cause of action invented and reserved for a select class of marks-those marks with such powerful consumer associations that even non-competing uses can impinge their value." Id. The Court is mindful that "fame for likelihood of confusion purposes and for dilution are not the same, and that fame for dilution purposes requires a more stringent showing; dilution fame is an either/or proposition-sufficient fame for dilution either exists or does not exist." 7-Eleven, Inc. v. Lawrence I. Wechsler, 83 U.S.P.Q.2d 1715, 1722 (TTAB 2007).[9] In addition, a claim for dilution requires proof of actual dilution. Moseley v. V Secret Catalogue, Inc., 537 U.S. 418, 123 S. Ct. 1115, 155 L. Ed. 2d 1 (2003). That is, plaintiff must prove an actual lessening of the capacity of its trademark to identify and distinguish plaintiff's product. Everest, 393 F.3d at 763.
Under current Eighth Circuit law, Teter's mark is not famous within the meaning of the statute to the general consuming public. Further, Teter has offered no evidence of proof of actual dilution as required by Moseley. GOI has been "using" the Teter mark over a period of years, and in fact helped the LEE TETER mark gain broader recognition. The Court cannot conceive how GOI's use dilutes the distinctive quality of the mark, as its use is primarily nominative and GOI does not place the mark on products aside from Teter's own artwork. Because the LEE TETER mark is not famous, and there is no evidence of actual dilution the Court hereby GRANTS judgment as a matter of law in favor of defendant on Teter's claim *1158 for trademark dilution in violation of 15 U.S.C. § 1125(c).
D. VISUAL ARTIST'S RIGHTS ACT
Teter claims GOI's unauthorized display of the "83 Spring Street" watermark over the electronic images of his work distort, mutilate or modify his artwork in violation of the Visual Artist's Rights Act (VARA). 17 U.S.C. § 106A.
VARA was designed to protect the moral rights of artists in their works. Moral rights protect an artist's interest in the proper use of the artist's name and in maintaining the physical integrity of the artist's work. Berrios Nogueras v. Home Depot, 330 F. Supp. 2d 48, 50 (D.P.R.2004). VARA created a new category of "works of visual art," defined as:
(1) a painting, drawing, print, or sculpture, existing in a single copy, in a limited edition of 200 copies or fewer that are signed and consecutively numbered by the author, or, in the case of a sculpture, in multiple cast, carved, or fabricated sculptures of 200 or fewer that are consecutively numbered by the author and bear the signature or other identifying mark of the author; or
(2) a still photographic image produced for exhibition purposes only, existing in a single copy that is signed by the author, or in a limited edition of 200 copies or fewer that are signed and consecutively numbered by the author.
17 U.S.C.A. § 101.
A "work of visual art" does not include:
(A)(i) any poster, map, globe, chart, technical drawing, diagram, model, applied art, motion picture or other audiovisual work, book, magazine, newspaper, periodical, data base, electronic information service, electronic publication, or similar publication;
(ii) any merchandising item or advertising, promotional, descriptive, covering, or packaging material or container;
17 U.S.C.A. § 101.
GOI created electronic copies of the Teter artwork for sale in the Gallery and displayed those images on the Gallery's website. The record provides substantial support that GOI's sole purpose for displaying the images on the Gallery's website was to advertise to potential customers the Teter artwork available at the Gallery. In maintaining a responsible advertising practice, GOI placed the watermarks over the images to protect from unlawful copying or downloading on the internet.
GOI's electronic images are used for advertising purposes and fall comfortably within the works that are excluded from liability under the VARA. The VARA does not protect "any merchandising items or advertising" presumably because the intent in such items is to successfully promote the artist, which requires preserving integrity in how the artist's work is portrayed. See Berrios Nogueras, 330 F.Supp.2d at 50 ("[T]he rights of attribution and integrity to do not apply to reproduction... or other uses of the otherwise protected work when used in connection with those works specifically excluded from the definition of `works of visual art' under 17 U.S.C. Section 101."). Because GOI's digital images are not within the definition of a "work of visual art" under the VARA, there is no basis for Teter's cause of action and summary judgment is GRANTED.
E. BREACH OF CONTRACT
Turning to GOI's counterclaims, Teter seeks summary judgment on GOI's counterclaim for breach of contract. Teter disputes the existence of any agreement between the parties, much less an enforceable *1159 agreement that permitted GOI to indefinitely make use of Teter's copyrighted works. Teter argues the initial meeting with the Walpoles in Jamesport on February 27, 2007, did not conclude in any terms, conditions or obligations by either party to do anything.
GOI maintains that it possesses contractual rights under the UCC to use Teter's images for advertising purposes. GOI contends that an agreement for the sale of goods was formed, based on the agreement reached during the Jamesport meeting where Teter agreed to (1) "show" or participate in joint marketing events, (2) sell art to GOI for resale under the same course of dealing it had with TPL, and (3) provide GOI with geographic exclusivity.
GOI refers to the parties' subsequent conduct as illustration that agreement between GOI existed in fact. The parties' course of dealing was based on approximately eight purchase transactions between May 18, 2007, and February 7, 2008, as described in detail in section A(2). GOI claims Teter breached the existing agreement by revoking GOI's geographic exclusivity, imposing the SFFA dealer agreement, and revoking GOI's rights to use the copyrighted works when GOI declined to enter into the SFFA dealer agreement.
The "existence of a contract is a jury question only to the extent that the facts surrounding the alleged contract are in dispute; where relevant facts are not in dispute, the existence of a contract is a question of law for the court." O.R.S. Distilling Co. v. Brown-Forman Corp., 972 F.2d 924, 926 (8th Cir.1992). The UCC encourages contract formation in that "a contract for the sale of goods may be made in any manner sufficient to show agreement, including conduct by both parties which recognizes the existence of such a contract." § 400.2-204(1). Nonetheless, a sale of goods contract under the UCC does not displace principles of the common law of contracts. See Computer Network, Ltd. v. Purcell Tire & Rubber Co., 747 S.W.2d 669, 673 (Mo.Ct.App.1988); Mo. Rev.Stat. § 400.1-103.
An enforceable contract requires that the parties be (1) competent to contract, (2) be of proper subject matter, (3) have legal consideration, (4) mutuality of agreement and (5) obligation. Id. (citing Bengimina v. Allen, 375 S.W.2d 199, 201 (Mo.Ct.App.1964)). Thus, the core issue here is whether the parties intended a legally binding agreement to arise from the Jamesport meeting and their subsequent dealings. Because GOI's arguments are premised on the existence of an overarching or ongoing agreement between GOI and Teter, the Court focuses on whether the purported agreement created any future obligation on Teter's part. Simply put, the question is whether the purported agreement is supported by legal consideration.
Consideration is found where both parties have obligated themselves by mutual promises that impose some legal duty or liability on each promisor. See Bengimina, 375 S.W.2d at 202-03. "If, on the other hand, plaintiffs have not bound themselves to such an obligation by a promise on their part, there is no legal contract between the parties because there is a failure of consideration." Id. In the realm of the UCC, where a contract need not be in writing, § 2-201(3)(c), and may arise from the mere sale of goods, "[t]he essentials to formation of a contract ... must be gathered from the intention of the parties as expressed or manifested by their words or acts." Computer Network, 747 S.W.2d at 675. Furthermore, "[u]nder the UCC, the ultimate test of definiteness with respect to the sale of goods is that there be a reasonably certain basis for giving an appropriate remedy." Id. at 676.
*1160 According to GOI, the parties reached an agreement at the Jamesport meeting, and the parties' subsequent conduct confirms the agreement existed. Any agreement was not reduced to writing. Between May 18, 2007, and February 7, 2008, GOI made approximately eight purchases of Teter artwork. The purchase transactions consisted of Teter sending GOI an invoice for the goods sold, GOI would pay the invoice, and Teter accepted payment. In themselves, the individual transactions constitute enforceable contracts for the sale of goods under the UCC because the conduct of the parties is sufficient to show agreement. Mo.Rev.Stat. § 400.2-204(1). Thus, for example, if one of the goods was defective or damaged upon receipt, GOI could enforce its rights for replacement or repair under the contract.
Based on the undisputed facts, the Court cannot, however, find a broader enforceable agreement based on the terms alleged by GOI. The agreement fails for indefiniteness and lack of consideration. Even GOI cannot point to a specific obligation that Teter assumed. Instead, GOI claimed that Teter agreed to "sell art to GOI for resale under the same course of dealing it had with TPL" (Doc. No. 75). Yet, Teter was under no legally enforceable obligation to continue selling artwork to the Gallery at any point in time, neither under TPL nor GOI's ownership. Teter could stop selling or refuse to sell a painting to the Gallery if he so chose, and the Gallery would have had no legal recourse to enforce the sale.
The Court finds GOI's claim for breach of contract fails because an enforceable agreement does not exist as a matter of law. Accordingly, the Court GRANTS summary judgment for plaintiff on GOI's counterclaims for breach of contract, and the remaining counterclaims of promissory estoppel and breach of the covenant of good faith and fair dealing, which are premised on the existence of a contract.
IV. CONCLUSION
Based on the foregoing, there are triable issues of fact as to whether:
(1) GOI exceeded the scope of the implied license by creating electronic images of Teter's copyrighted works; and,
(2) GOI engaged in trademark infringement under 15 U.S.C. § 1125 by holding itself out as an authorized SFFA dealer after permission for use of the mark had been revoked.
Accordingly, GOI's motion for summary judgment on Teter's claim of copyright infringement is DENIED, and Teter's motion for summary judgment on his copyright infringement claim is DENIED IN PART as to GOI's use of the copyrighted works prior to May 20, 2008, and GRANTED IN PART as to GOI's use of the copyrighted works after SFFA revoked the implied license on May 20, 2008.
GOI's motion for summary judgment on Teter's trademark infringement claim is DENIED, as there is a question of material fact whether GOI's use of Teter's mark created a likelihood of confusion regarding affiliation between Teter and the Gallery.
As to the remaining claims, the Court hereby:
(A) GRANTS GOI's motion as to Teter's trademark infringement claim under 15 U.S.C. § 1114 because Teter is not a registered trademark holder;
(B) GRANTS GOI's motion as to Teter's trademark dilution claim under 15 U.S.C. § 1125(c) because the LEE TETER mark is not famous, and Teter has not set forth any evidence of actual dilution;
(C) GRANTS GOI's motion as to Teter's claim under the Visual Artist's *1161 Rights Act, 17 U.S.C. § 106A because GOI's use of Teter's artwork is for advertising purposes, and, thus, is not a protected work of visual art; and,
(D) GRANTS Teter's motion as to GOI's counterclaims for breach of contract, promissory estoppel and breach of the covenant of good faith and fair dealing because any agreement was not supported by legal consideration.
IT IS SO ORDERED.
NOTES
[1] Based on GOI's pleadings, the Court will assume its counterclaims originally styled as "(I) Breach of Contract (the TPL/Teter Agreement)," and "(II) Breach of Contract (Sale of Goods Contracts)," are now consolidated into one general counterclaim for breach of contract. Defendant's Suggestions in Opposition to plaintiff's Motion for Partial Summary Judgment states, "GOI's motion for summary judgment clearly establishes that the UCC is the controlling substantive contract law ..." and does not advance a separate argument in support of the "Breach of Contract (TPL/Teter Agreement") counterclaim.
[2] Jim Sanders stated in his deposition:
Q: When you turned over the keys to Brad and Diana Walpole in late March of 2007, you were selling to them your business, including your Web site, correct?
A: Yeah.
Q: In other words, Mr. Sanders, you expected that once they started running 83 Spring Street Gallery, they'd continue to run it essentially as you had before, correct?
A: Yes.
(Doc. No. 69-2).
[3] Jim Sanders stated in his deposition:
Q: Sir, before you used images of Lee Teter Art in your advertising, such as on your Web site ... was your practice to first obtain permission from Teter before using the image?
A: I do know that I had permission from Barbie to do the Web site to advertise his work ... I didn't call back each time and ask for permission each month for each specific image....
Q: Sir, did you believe it was necessary to have Teter's permission before you could use an image of his artwork in your advertising?
A: Well, once, yes. But once the Web site was set up, it was pretty much understood, I felt like. I felt like it was understood that each available print, as I bought them, was something that I could place on the Web site. It would be kind of silly not to. Each new item, as it became available, could be advertised in order to sell the piece.
(Doc. No. 76-11)
[4] Jim Sanders testified:
Q: Sir, when you were using images of Teter artwork for use in your advertising, such as on your Internet site, did you obtain the images from Teter?
A: We did have the image available from Barbie that we could put on the Web site early so that we could begin letting people know that it was coming, and this is a new piece. I don't know what she sent us, I don't know in what form it was sent. The technological part is out of my ballpark.
Q: So you believe you were using images provided by Teter to use in your advertising; is that right?
A: Uh-huh. And they sent me some brochures to hand out.
Q: You were not taking photographs of the Teter work that you had and then using those photographs to use in your advertising; is that right?
A: Well, I had some originals which are one-of-a-kinds that there were never any prints made. And I'm sure those images made it onto the film, and probably my Web site.... So those images were not provided by the Teters.
Q: Okay. Do you remember how many originals like that you had?
A: Well, there's two, and then there may have been another one or two. (Doc. No. 76-11).
[5] Teter testified:
Q: You had told them [Brad and Diana Walpole] that they could use your images on their Web site; correct?
A: I gave them permission to. (Doc. No. 69-8).
[6] There is a discrepancy amongst the parties as to the number of purchase transactions. Plaintiff states there were six (6) purchase transactions (Doc. No. 76), whereas defendant states there were eight (8) purchase transactions (Doc. No. 69). For purposes of the Court's analysis, however, the discrepancy is immaterial.
[7] The Eighth Circuit finds Lanham Act claims appropriate for a jury, stating, "likelihood of confusion is a finding of fact ... and properly so, in our view ... a jury ... represents a cross-section of consumers [and] is well-suited to evaluating whether an `ordinary consumer' would likely be confused." Everest Capital, 393 F.3d at 762.
[8] Section 1114 states, "(1) Any person who shall, without the consent of the registrant...." (emphasis added). 15 U.S.C. § 1114.
[9] Whether a mark's fame in a limited or "niche" market is sufficient to prove a claim under section 1125(c) remains unsettled in the Eighth Circuit. See Everest Capital, 393 F.3d at 763 (noting disagreement amongst the circuits, and declining to decide whether a mark's fame in a "niche" market is sufficient to prove a claim under § 1125(c)(1)).
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373 F. Supp. 453 (1974)
CITY OF PHILADELPHIA, Plaintiff,
v.
William and Gloria PAGE, Defendants,
v.
UNITED STATES DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT et al., Additional Defendants.
Civ. A. No. 72-1706.
United States District Court, E. D. Pennsylvania.
April 2, 1974.
*454 George D. Gould, Community Legal Services, Inc., Philadelphia, Pa., for third-party plaintiff.
Gilbert J. Scutti, Asst. U. S. Atty., Robert E. J. Curran, U. S. Atty., for third-party defendants.
MEMORANDUM
JOHN MORGAN DAVIS, District Judge.
Presently before this Court is the Government's Motion to vacate this court's Order of September 7, 1973, granting a motion for summary judgment in favor of William and Gloria Page and against HUD. City of Philadelphia v. Page, 363 F. Supp. 148 (1973).
It should be noted that this motion is one more skirmish in the continuing battle against lead based paint in homes reconditioned by HUD and/or carrying FHA insured mortgages. The battle began in our court in the case of Davis v. Romney, 355 F. Supp. 29 (E.D.Pa.1973); then continued in Judge VanArtsdalen's court in the case of City-Wide Coalition v. FHA, 356 F. Supp. 123 (1973); and finally returned to our court in the Page case, supra.[1] After these three decisions, the Court of Appeals considered the Davis case, supra, and affirmed it as to all points except that the injunction was held to be overbroad, and the court vacated it and remanded the case to this court to draw the injunction in more narrow terms. Davis v. Romney, 490 F.2d 1360 (3rd Cir., filed Jan. 14, 1974, amended Order, Jauary 28, 1974). This Court of Appeals decision is the basis for the government's present motion to vacate the Order of September 7, 1973.
The Opinion we filed supporting this Order, see Page, supra, cites the City-Wide Coalition case, but not the Davis case. The fact that it did not cite another case previously decided by this *455 same court, in that same year, is significant. The obvious reason is that the Davis case involved different issues than the present case, and therefore could not stand as precedent for the present case. Therefore, the decision of the Court of Appeals in the Davis case has no effect on our decision in this case.
The distinguishing factor between the two cases is that the Davis case was concerned with HUD as an insurer of mortgages, whereas the Page decision was concerned with HUD as a seller of homes.
Accordingly, the Davis case considered whether an implied warranty arose from § 221(d)(2) of the National Housing Act; whereas the Page decision considered whether an implied warranty arose from the contract of sale.
The Government states that the decision in the instant action was based upon the theory that the duty imposed upon HUD under Section 221(d)(2) creates a warranty that mortgages insured under these sections complies with local housing code standards, and, that said warranty was breached because the dwelling did not comply with the Philadelphia Lead Paint Poisoning Prevention Ordinance. The Government, however, did not realize that this theory, which constituted only one paragraph of a fifteen page decision, was one of the many surrounding circumstances tending to show that an implied warranty arose from the contract of sale; or at most, this theory was only an alternative theory of relief.
The prime thrust of the case at bar is based upon HUD as a seller of properties and not as an insurer of mortgages.[2] This Court held in its September 7th decision that HUD as the seller of properties, breached an implied warranty of habitability by selling a house that contained dangerous amounts of lead paint. The doctrine that an implied warranty of habitability arises from the sale of a home has recently been restated in the case of Rattigen et ux. v. Cooke Jr. et al., 21 Chester 224 (1973).
This holding was based entirely on contract law and was not concerned with Section 221(d)(2) of the National Housing Act. Section 221(d)(2) only applies to HUD's role as an insurer of mortgages and not as a seller of properties.
For these reasons, the Appellate decision in the Davis case provides no basis for vacating this Court's Order of September 7, 1973.
Parenthetically, we note that in the present motion, as in the previous motion by the Government to Extend the time to answer, move or otherwise plead (See Order of September 25, 1973), the Government has failed to comply with Local Rule 36, which requires five (5) days notice to opposing counsel prior to the filing of a Motion.
NOTES
[1] The battle is still raging. See Philadelphia Inquirer, March 20, 1974, Sec. B (Metropolitan News), p. 1; Act of Nov. 9, 1973, P.L. 93-151, 87 Stat. 565 et seq., amending 84 Stat. 2078 et seq., 42 U.S.C. 4801 et seq.; 28 Am.Jur., Proof of Facts 457.
[2] This point was made abundantly clear in defendants Page memorandum in support of their cross-motion for summary judgment. In fact, defendants Page never argued that 221(d)(2) created a warranty that their property complies with local codes.
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81 F. Supp. 33 (1948)
C. A. DURR PACKING CO., Inc.
v.
SHAUGHNESSY.
Civ. No. 2779.
United States District Court N. D. New York.
July 23, 1948.
*34 Ferris, Burgess, Hughes & Dorrance, of Utica (Russell Dunmore, of Utica, of counsel), for plaintiff.
Irving J. Higbee, U. S. Atty., of Syracuse, and Ruppert Bingham, Sp. Asst. to Atty. Gen. (Edmond Port, of Syracuse, of counsel), for defendant.
BRENNAN, Chief Judge.
The plaintiff seeks a money judgment which represents an alleged overpayment of income taxes in the amount of $5,301, paid by the plaintiff in accordance with its income tax return filed for the fiscal year ending October 31, 1940.
The facts are undisputed, and will be briefly outlined.
The plaintiff (hereinafter called "Durr"), has been engaged for a number of years in the processing of meat at Utica, New York. At all times referred to herein its books were kept and income tax returns were made upon an accrual basis. In 1933, 1934 and 1935, the plaintiff paid substantial processing taxes under the provisions of the Agricultural Adjustment Act of 1933, 7 U.S.C.A. § 601 et seq. The sums so paid were claimed as deductions upon its income tax returns filed for such years. Such taxes were held to be invalid June 6, 1936. United States v. Butler, 297 U.S. 1, 56 S. Ct. 312, 80 L. Ed. 477, 102 A.L.R. 914. On June 29, 1937, the plaintiff filed claims for refund of processing tax in the amount of $350,289.56, and for floor stocks taxes in the amount of $4,568.87. The claims were filed under the provisions of Title VII of the Revenue Act of 1936, § 901 et seq., 7 U.S.C.A. §§ 623 note, 644 et seq., which became effective on June 22, 1936, after conferences and negotiations, and on October 29, 1940, a check in the amount of $27,900, plus interest of about $10,000, was issued by the Treasury Department to the plaintiff in settlement of its claim for processing and floor stocks taxes paid by it during the years above mentioned. The claim for floor stocks tax refund was apparently denied in toto, and this litigation involves only the claim for refund of processing tax. The plaintiff had not accrued any sum of money on account of said refund or claim upon its books or in its income tax returns prior to 1940, but did report the sum of $27,900 so refunded upon the taxpayer's income tax return for the fiscal year ending October 31, 1940. The tax thereon was paid, and on November 9, 1943, the plaintiff filed a claim for refund in the amount of $5,301, claiming in substance that it was a mistake or error to include the above item of $27,900 in its 1940 tax return, but that it did in fact accrue in the fiscal year 1936. It appears that in 1936, the income tax return filed by the plaintiff resulted in no tax being imposed, and, even if the sum of $27,900 had been accrued and reported in that year, no tax would be payable. *35 The claim for refund was denied and this action followed.
Plaintiff contends that having kept its books upon an accrual basis, the refund of $27,900 in fact and in law accrued in the year 1936, by reason of the Supreme Court decision above referred to, and the subsequent passage of Title VII of the Revenue Act of 1936, which in substance provides for and limits the right to the repayment of the invalid tax above referred to. Its contention is based upon the claim that its right to a refund was unconditionally fixed in 1936, and that every fact fixing the amount thereof also existed in 1936. It relies upon the cases of Commissioner v. Dumari, etc., 2 Cir., 142 F.2d 897, and the Continental Tie and Lumber Co. v. United States, 286 U.S. 290, 52 S. Ct. 529, 76 L. Ed. 1111.
The defendant contends that the refund did not in fact accrue until 1940, and was properly includable in the taxpayer's income tax for that year. He contends that the plaintiff's right to receive the income did not become fixed or readily ascertainable in the year 1936, and further urges that the plaintiff is estopped from including the amount thereof in its taxable income during the year 1936, since it did not accrue any part of the refund claimed, either in that year or in any year prior to 1940. The defendant also claims that in the event that it is held that the claimed refund accrued in 1936 so as to be includable in the taxpayer's 1936 income tax return, the total amount of claimed refund; to wit, about $350,000, should be so included, and that defendant is entitled to set off the amount of the refund in this action against the tax which would have been imposed had the total claim for processing taxes been accrued in 1936.
The main point in this litigation involves the determination of the much litigated question as to whether or not the facts and circumstances exist which would warrant a finding that the amount of the refund did in fact and law accrue in 1936.
Judicial precedents designed to clarify and define a taxpayer's right of accrual do not always accomplish their purpose. The opening paragraphs of the opinion in Frost Lumber Industries v. Commissioner, 5 Cir., 128 F.2d 693, are descriptive of the problem which is found here. The logical approach seems to be the determination of the attributes which the courts have found must exist in a claim or liability before it may be said to have accrued.
The case of United States v. Anderson, 269 U.S. 422, 46 S. Ct. 131, 70 L. Ed. 347, is repeatedly urged as an authority holding that when all of the events have occurred which fixed the amount of the tax and determined the liability of the taxpayer to pay, then it may be said that the liability therefor has accrued. This rather broad rule seems to have been limited in its application to such claims or liabilities which are reasonably certain in fact, and ascertainable in amount. Lucas v. American Code Co., 280 U.S. 445, 50 S. Ct. 202, 74 L. Ed. 538, 67 A.L.R. 1010. "It is settled by many decisions that a taxpayer may not accrue an expense the amount of which is unsettled or the liability for which is contingent * * *." Security Flour Mills Co. v. Commissioner, 321 U.S. 281, at page 284, 64 S. Ct. 596, at page 597, 88 L. Ed. 725. "The requirement of valuation comprehends the element of collectibility." Helvering v. Enright's Estate, 312 U.S. 636, 61 S. Ct. 777, 782, 85 L. Ed. 1093.
From the above authorities it appears that a claim may be accrued by a taxpayer for tax purposes when, (a), all of the events have occurred, which fix the amount of the claim and determine the question of liability; (b), the amount is readily ascertainable; (c), the liability therefor is determined rather than contingent.
The question here is whether or not the sum of $27,900 was includable in the taxpayer's income for its taxable year ending October 31, 1940, in which year it was paid and reported in the taxpayer's tax return or was such amount includable by the taxpayer in its taxable year of 1936. The determination of the question requires the application of the rules above referred to.
It would seem that the facts or events fixing the amount of the claimed refund and Durr's right to recover in the instant case were in existence in 1936. It is true that a claim had not been filed by *36 the taxpayer until 1937, but this was a procedural requirement which does not prevent the application of the rule. See Commissioner v. Dumari, etc., supra.
The determinations as to whether or not the taxpayer's right to a refund was fixed and the amount thereof readily ascertainable in 1936 are more difficult problems.
Since the ultimate conclusion must be subjected to a practical rather than a legal test (Lucas v. American Code Co., supra), two arguments advanced by the defendant will first be considered. The defendant urges, not without force, that the discrepancy between the amount claimed by Durr, to wit, approximately $350,000, and the actual amount of the refund, $27,900, is in itself proof that the true amount of the refund due the plaintiff was not readily ascertainable. The defendant also contends that the fact that the taxpayer did not accrue as an item of income any part or percentage of its claim for refund in 1936 is a further indication that the taxpayer itself was unable to ascertain with any degree of certainty the amount thereof. The practicalities of the existing situation, however, are not overlooked. The statute dealing with Durr's right to a refund was new legislation in 1936; its provisions were capable of different interpretations, and its application was uncertain, as attested to by the number of decisions referring thereto. The filing of the claim in the amount in which it was filed may well be considered as a matter of precaution rather than indicating any distinct effort on the part of the taxpayer or its counsel to ascertain the exact amount of the refund due. The defendant's arguments are not conclusive.
The statute under the provisions of which the claim for refund was made, Title VII, Sections 901-917 of the Revenue Act of 1936, has been the subject of much discussion in many reported cases, which are cited by the litigants in support of their respective contentions. In brief, the Act set up an administrative procedure, subject to judicial review, which was designed to provide that a refund of processing taxes paid to the government should be made to the taxpayer only in the event that he, in fact, bore the burden of the tax. Claims supported by verified evidence were to be filed, which would warrant the Commissioner in acting thereon. A procedure was outlined by which a comparison was made between the margin of profit received by the taxpayer during the period when the taxes were collected with the margin before and after the passage of the Agricultural Adjustment Act. If such comparison showed that the margin to the taxpayer was lower during the period of tax collection, that fact constituted prima facie evidence that the burden of the tax was to that extent borne by the claimant. If the comparison showed that the margin was not lower, then that fact was prima facie evidence that the taxpayer bore none of the burden of the tax. The presumptions thus created were rebuttable. Either party might offer proof in support of its contention, and such proof is not limited to that referred to in the statute, so that any relevant evidence, including expert testimony, would be competent. The evidence must be weighed, and the decision made accordingly. Anniston Mfg. Co. v. Davis, 301 U.S. 337, 57 S. Ct. 816, 81 L. Ed. 1143; Webre Steib Co. v. Commissioner, 324 U.S. 164, 65 S. Ct. 578, 89 L. Ed. 819. It would, therefore, follow that, unlike the Continental Tie and Dumari cases, where all the data was contained in the books and records of the taxpayer, the taxpayer here could not tell whether or not the government would accept the prima facie proof afforded by the comparison of margins, and correspondingly no one could be certain that the taxpayer would rely upon its book records for the final determination of the amount of tax actually assumed by it. In the last two mentioned cases the computation of the amount of the claim was a ministerial act, confined within prescribed limits. Here the computation was subject to an adversary administrative proceeding, wherein the rules of evidence applicable in courts of equity of the District of Columbia were to apply. At best the determination in many cases was a difficult one. Webre Steib Co. v. Commissioner, supra. The burden of proof imposed upon the claimant was a heavy one. Franklin Peanut Co. v. Commissioner, 4 Cir., 144 F.2d 979. Impossibility of determination *37 after the receipt of evidence has been urged as preventing the application of the statute. Anniston Mfg. Co. v. Davis, supra See also affidavit herein attached to application for refund of floor stocks taxes.
No weighty inference can be drawn from the fact that the claim was eventually settled after conferences and negotiation. The record does not disclose the basis of the settlement, except to show that it involved other and separate controversies, all of which were disposed of in the one settlement, although as separate items. It is apparent, however, that either the amount of the claim or the liability therefor was unsettled.
One would be obliged to discard the "practical test" to conclude that the amount of Durr's claim for refund was readily ascertainable in the year 1936. The statute involved, the rules laid down in the reported cases and the act of the taxpayer itself in failing to accrue and report any part of the claim until 1940 when subjected to such test, all lead to the opposite conclusion.
The fact that Durr had paid an invalid tax gave him no absolute or determined right of recovery. Its right was limited by the Revenue Act of 1936 to the qualification that such right did not exist unless and until it satisfied the burden of establishing that it had absorbed the tax as an economic fact. Cudahy Packing Co. v. United States, 7 Cir., 126 F.2d 429. The liability of the government was not unalterably fixed by the statute. Jamaica Water Supply Co. v. Commissioner, 2 Cir., 125 F.2d 512. It came into existence only when there was a determination by a commissioner or an administrative board acting in a judicial capacity that it had in fact paid and absorbed the tax sought to be recovered. Its right of recovery was contingent either upon the action of the commissioner or upon findings based upon proof the extent and nature of which was unlimited, except by the applicable rules of evidence. "When the right to receive an amount becomes fixed, the right accrues." Spring City Foundry Co. v. Commission 292 U.S. 182-184, 54 S. Ct. 644, 645, 78 L. Ed. 1200.
Claims which are subject to what amounts to judicial determination both as to liability and amount, such as in Lucas v. American Code Co., supra, are not accruable unless special circumstances exist. The basis of liability may be found in the law, but there must exist also a reasonable certainty that the claimant by reason of existing facts will bring himself within the basis prescribed. Practically no such certainty existed here, because whether or not a processor is able to show that he absorbed the tax involves the element of speculation up to at least the point that the evidence is produced for consideration.
The Court is aware that in some reported cases something less than a fixed right to receive monies has been accepted as a proper base for the right of accrual, such as in Commissioner v. Brooklyn Union Gas Co., 2 Cir., 62 F.2d 505, but here no reason is found which would warrant the slighting of the language of Section 902 of the Revenue Act, which in its title, viz.: "Conditions on allowances of refunds", and in the opening statement of the first paragraph, viz.: "No refund shall be made or allowed * * * unless the claimant establishes * * *" is persuasive that Congress intended to take away the absolute right of recovery of this particular invalid tax, and substitute a remedy which was contingent upon evidence to be produced and a finding to be made in the future, which concededly did not occur in 1936. "The line is hard to draw, (Continental Tie & Lumber Co. v. United States, 286 U.S. 290, 52 S. Ct. 529, 76 L. Ed. 1111); but when the claim was open to such contest both as to existence and amount, and especially when the taxpayer accepted a settlement of about half its face, it was not accruable." Buffalo Union Furnace Co. v. Helvering, 2 Cir., 72 F.2d 399, at page 404.
The conclusion is reached that the amount of the refund is properly includable in Durr's tax return for 1940, and that the complaint must be dismissed.
In addition to the statements made in distinguishing the Continental Tie and Dumari cases, supra, upon which the plaintiff relies, it might be pointed out that the statutes involved in both decisions are entirely different than the one in the instant case. *38 In the Dumari case the taxpayer had actually accrued the claim as income, and the Court ruled that his action was proper. Here, the taxpayer made no such accrual. To permit such accrual now would involve the determination of equitable principles which are urged by the defendant, and the possible application of the statute of limitations, which, in view of the decision, are not herein determined.
Judgment is directed accordingly.
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875 F. Supp. 235 (1995)
Wallace MATURA, Petitioner,
v.
UNITED STATES of America, Respondent.
No. 94 Civ. 6923 (DNE).
United States District Court, S.D. New York.
February 6, 1995.
Wallace Matura, pro se.
OPINION & ORDER
EDELSTEIN, District Judge:
Petitioner, Wallace Matura, brings this motion to vacate, set aside, or correct his sentence, pursuant to 28 U.S.C. § 2255.[1]
*236 BACKGROUND
On October 18, 1989, petitioner and his co-defendant Philip Harris were arrested after Harris handed a bag containing two quart bottles filled with phencyclidine ("PCP") to an informant and an undercover Drug Enforcement Administration ("DEA") agent who were sitting in a car on 137th street in Manhattan. In this drug transaction, Matura allegedly acted only as a lookout and wheelman.
After a jury trial, petitioner was convicted of conspiracy to distribute and possess with intent to distribute more than one kilogram of PCP in violation of 21 U.S.C. §§ 812, 841(a)(1), and 841(b)(1)(A). Petitioner was also convicted of distributing and possessing with intent to distribute more than one kilogram of PCP in violation of 21 U.S.C. §§ 812, 841(a)(1), and 841(b)(1)(A). Pursuant to the Federal Sentencing Guidelines, this Court sentenced petitioner to a ten-year term of imprisonment, followed by a five-year term of supervised release.
Thereafter, petitioner appealed his convictions. In an unpublished opinion, the Court of Appeals for the Second Circuit affirmed petitioner's convictions.
Petitioner now moves, pursuant to 28 U.S.C. § 2255, to vacate, set aside, or correct his sentence. Petitioner contends that he is entitled § 2255 relief because his trial counsel was ineffective. Petitioner claims that his trial counsel made several errors. First, petitioner contends that trial counsel "failed to perform an adequate and timely pre-trial factual and legal investigation." (Petitioner's motion ¶ 10(a).) Second, petitioner claims that counsel "failed to timely and properly file a pre-trial motion for severance from co-defendants." Id. Third, petitioner contends that his counsel "failed to investigate, consider, or present concrete physical evidence as to petitioner's automobile that was a part of this case and which would have explained why petitioner was outside of itwhich was a crucial question in this case." Id. Fourth, petitioner contends that his counsel "failed to investigate, consider, or present evidence" that petitioner was legitimately employed and did not work as a drug dealer. Id. Fifth, petitioner claims that his trial counsel failed "timely and adequately [to] question the main prosecutorial witnesses" regarding the fact that petitioner allegedly did not fulfill the standard profile for a lookout in a drug case. Id.
For the reasons discussed below, all of petitioner's claims are without merit, and therefore, petitioner's motion is denied.
DISCUSSION
Petitioner's claim of ineffective assistance of counsel is within the scope of § 2255 because his claim alleges that his sentence was imposed in violation of the Constitution of the United States. See 28 U.S.C. § 2255 (petitioner may bring a § 2255 motion on the ground that his sentence was imposed in violation of the Constitution of the United States).
The sixth amendment to the Constitution guarantees criminal defendants the right to counsel. As the Supreme Court has noted, "the Sixth Amendment right to counsel exists, and is needed, in order to protect the fundamental right to a fair trial." Strickland v. Washington, 466 U.S. 668, 684, 104 S. Ct. 2052, 2063, 80 L. Ed. 2d 674, reh'g denied, 467 U.S. 1267, 104 S. Ct. 3562, 82 L. Ed. 2d 864 (1984). The right to counsel protects a defendant's right to a fair trial because "access to counsel's skill and knowledge is necessary to accord defendants ... `ample opportunity to meet the case of the prosecution.'" Id. at 685, 104 S.Ct. at 2063. (quoting Adams v. United States ex rel. McCann, 317 U.S. 269, 275-76, 63 S. Ct. 236, 240, 87 L. Ed. 268 (1942)). Because counsel plays such a crucial role, the Supreme Court has recognized that "`the right to counsel is the right to the *237 effective assistance of counsel.'" Id. at 686, 104 S.Ct. at 2063 (quoting McMann v. Richardson, 397 U.S. 759, 771 n. 14, 90 S. Ct. 1441, 1449 n. 14, 25 L. Ed. 2d 763 (1970)). Thus, if a defendant's counsel fails to render adequate legal assistance, the defendant's sixth amendment rights are violated. See id. (citing Cuyler v. Sullivan, 446 U.S. 335, 344, 100 S. Ct. 1708, 1716, 64 L. Ed. 2d 333 (1980)).
The Supreme Court has established a two-part test for determining whether an attorney's representation constitutes ineffective assistance of counsel. "First, the defendant must show that counsel's performance was deficient." Id. at 687, 104 S.Ct. at 2064. "Second, the defendant must show that the deficient performance prejudiced the defense." Id.
To satisfy the first prong of the Strickland test, a defendant must show that "his attorney's performance `fell below an objective standard of reasonableness.'" See Mayo v. Henderson, 13 F.3d 528, 533 (2d Cir.1994) (quoting Strickland, 466 U.S. at 688, 104 S.Ct. at 2064). The Supreme Court has eschewed articulating a rigid set of standards for determining whether an attorney's conduct is reasonable, stating instead that "[t]he proper measure of attorney performance remains simply reasonableness under prevailing professional norms." Strickland, 466 U.S. at 688, 104 S.Ct. at 2065.
The Supreme Court has, however, explained the method that a federal court should employ in determining whether an attorney's performance was reasonable. The Court has instructed that "a court must indulge a strong presumption that counsel's conduct falls within the wide range of reasonable professional assistance; that is, the defendant must overcome the presumption that, under the circumstances, the challenged action `might be considered sound trial strategy.'" Id. at 689, 104 S.Ct. at 2065 (quoting Michel v. Louisiana, 350 U.S. 91, 101, 76 S. Ct. 158, 164, 100 L. Ed. 83 (1955)). This presumption is necessary because "[i]t is all too tempting for a defendant to second-guess counsel's assistance after conviction or adverse sentence, and it is all too easy for a court, examining counsel's defense after it has proved unsuccessful, to conclude that a particular act or omission of counsel was unreasonable." Id. at 689, 104 S.Ct. at 2065 (citation omitted). Further, a court may not use hindsight in evaluating whether an attorney's conduct was reasonable. See Id.
With the standard for ineffective assistance of counsel in clear view, each of petitioner's claims is examined in turn.
1. Failure To Conduct an Adequate Investigation
Petitioner contends that counsel was ineffective because counsel "failed to perform an adequate and timely pre-trial factual and legal investigation." (Petitioner's Motion ¶ 10(a).) Petitioner claims that, because of this failure, he "was prevented from having a fundamentally fair trial; and, but for these failures the results would have been different." Id.
Because this claim is merely a conclusory allegation, petitioner has failed to establish that his counsel's performance was deficient. Petitioner's bald assertion that counsel should have conducted a more thorough pretrial investigation fails to overcome the presumption that counsel acted reasonably. See Strickland, 466 U.S. at 689, 104 S.Ct. at 2065 ("a court must indulge a strong presumption that counsel's conduct falls within the wide range of reasonable professional assistance"). A mere conclusory allegation is insufficient to substantiate a § 2255 motion. See United States v. Romano, 516 F.2d 768, 771 (2d Cir.) (holding that district court properly rejected petitioner's § 2255 motion, which alleged prosecutorial misconduct, because the motion was based on conclusory allegations), cert. denied, 423 U.S. 994, 96 S. Ct. 420, 46 L. Ed. 2d 368 (1975); United States v. Malcom, 432 F.2d 809, 812 (2d Cir.1970) (district court may deny petitioner's § 2255 motion without a hearing "where the allegations are insufficient in law, undisputed, immaterial, vague, conclusory, palpably false, or patently frivolous") (citations omitted); see also United States v. Holmes, 44 F.3d 1150, 1158 (2d Cir.1995) (rejecting defendant's argument that counsel's "shortcomings" denied defendant effective assistance of counsel because defendant "cannot satisfy either prong of the *238 Strickland test without specifying what the `shortcomings' are").
In the instant case, petitioner's claim that counsel failed to conduct an adequate investigation is entirely conclusory. Although petitioner contends that a more thorough investigation would have established his innocence, petitioner has failed to allege any facts that support this contention. Petitioner has not stated why his counsel's investigation was inadequate, what his counsel should have investigated, what this investigation would have produced, or how the fruits of this investigation would have aided petitioner's case. Petitioner has entirely failed to overcome the strong presumption that his counsel acted reasonably, and therefore, petitioner's claim is meritless.
2. Failure To Sever Petitioner's Trial from the Trial of His Co-Defendants
Petitioner claims that counsel "failed to timely and properly file a pre-trial motion for severance from co-defendants." (Petitioner's Motion ¶ 10(a).) As a result of this alleged failure, petitioner claims that he was unable to call one of his co-defendants as a defense witness. See id. Moreover, petitioner contends that if his co-defendant had testified on his behalf, then petitioner could have offered credible testimony of his own innocence. See id.
Petitioner's claim is meritless because, as noted in petitioner's appellate brief, trial counsel made a timely motion to sever. (Brief for Appellant Matura at 25, United States v. Harris, 90-1490 (2d Cir.1990) ("Counsel for Mr. Matura thereupon made a timely severance motion....") (footnote omitted); Id. at 10 ("On March 26, 1990, counsel for Mr. Matura made a motion for severance...."); see also id. at 11 ("Matura's counsel renewed his severance motion at the end of the government's case and prior to the Court's charge.").) In fact, when petitioner appealed his conviction, he argued that this Court had erred in failing to grant his motion to sever. See id. at 24-28. Because there is no factual basis for petitioner's claim that his attorney failed to make a timely motion to sever, petitioner's claim is without merit.
3. Failure To Investigate Evidence Regarding Petitioner's Automobile
Petitioner contends that his counsel "failed to investigate, consider, or present concrete physical evidence as to petitioner's automobile that was part of this case and which would have explained why petitioner was outside of it which was a crucial question in this case." (Petitioner's Motion ¶ 10(a).)
Once again, petitioner has made a bald assertion that fails to demonstrate that his counsel's performance was deficient and that fails to overcome the presumption that counsel acted reasonably. See Strickland, 466 U.S. at 687, 689, 104 S.Ct. at 2064, 2065. Petitioner has not alleged any facts that support his argument. Petitioner does not explain what counsel should have investigated, considered, or presented. Moreover, petitioner does not explain how such investigation, consideration, or presentation would have helped to cast doubt on petitioner's guilt. Instead, petitioner bases his argument on the conclusory allegation that if his counsel had acted differently, the jury's verdict would have been different. As previously discussed, a conclusory allegation of this kind is insufficient to substantiate a § 2255 motion. See United States v. Romano, 516 F.2d 768, 770 (2d Cir.), cert. denied, 423 U.S. 994, 96 S. Ct. 420, 46 L. Ed. 2d 368 (1975); United States v. Malcolm, 432 F.2d 809, 812 (2d Cir.1970). Because petitioner has failed to demonstrate that his counsel's performance was deficient, petitioner's claim is meritless.
4. Counsel's Alleged Failure to Present Evidence that Petitioner Was Legitimately Employed
Petitioner contends that he was denied effective assistance of counsel because his attorney failed to "investigate, consider, or present evidence of petitioner's legitimate livelihood of support for months prior to this offense and that living was not supported by any illegal drug activities." (Petitioner's Motion ¶ 10(a).)
*239 Because petitioner has failed to satisfy both parts of the Strickland test, his argument is meritless. Under the first part of the Strickland test, petitioner must demonstrate that counsel's performance was deficient. In the instant case, defense counsel did not act unreasonably in failing to present evidence that petitioner held a legitimate job. The central issue in this case was whether petitioner acted as a lookout and a wheelman in a specific drug transaction. Three DEA agents testified that petitioner had acted in these capacities. Defense counsel could reasonably have believed that evidence of petitioner's employment would do little to counter this testimony. Indeed, counsel may have feared that such evidence might have opened the door to damaging cross-examination.
Petitioner has also failed to demonstrate that trial counsel's alleged error prejudiced petitioner's defense. Under the second part of the Strickland test, "the defendant must show that [counsel's] deficient performance prejudiced the defense." Strickland, 466 U.S. at 687, 104 S.Ct. at 2064. Even if petitioner had established that he was legitimately employed, the outcome of the trial would not have been different. Petitioner was convicted based on his participation in a single narcotics transaction. At trial, three DEA agents testified that they saw Mr. Matura participate in this transaction. Thus, even if Mr. Matura had presented evidence at trial that he held a legitimate job, such evidence would not cast a reasonable doubt on the agents' testimony.
Therefore, petitioner's claim is meritless.
5. Failure To Question Witnesses Regarding the Fact that Petitioner Allegedly Did Not Fulfill the Profile of a Lookout in a Drug Case
Petitioner contends that he was denied effective assistance of counsel because "[c]ounsel failed to timely and adequately question the main prosecutorial witnesses as to petitioner's complete lack of fulfilling the `look-out person' drug profile behavior as is recognized by the DEA and federal courts nationwide."
Once again, petitioner's argument fails to satisfy both prongs of the Strickland test. First, petitioner has not demonstrated that his counsel acted unreasonably in failing adequately to cross-examine the prosecution's witnesses regarding petitioner's failure to fulfill the DEA's profile of a lookout in a drug case. Under a Strickland analysis, "the defendant must overcome the presumption that, under the circumstances, the challenged action `might be considered sound trial strategy.'" Id. at 689, 104 S.Ct. at 2065 (quoting Michel v. Louisiana, 350 U.S. 91, 101, 76 S. Ct. 158, 164, 100 L. Ed. 83 (1955)). In the instant case, petitioner has failed to overcome this presumption. In defending petitioner at trial, counsel's primary objective was to cast doubt on the testimony of the three DEA officers who testified that they saw petitioner participate in a narcotics transaction. A reasonable attorney might well choose not to pursue a line of questioning regarding the DEA profile because it had little bearing on the case. Moreover, a reasonable attorney might also decline to ask such questions on cross-examination for fear of opening the door to damning testimony. See United States v. Dukes, 727 F.2d 34, 42 (2d Cir.1984) (attorney's failure to cross-examine a prosecution witness was reasonable where attorney could conclude that such cross-examination "might make [the witness] move closer to the government's position").
Further, petitioner has not demonstrated that he suffered any prejudice, and thus petitioner has failed to satisfy the second prong of the Strickland test. Strickland, 466 U.S. at 689, 104 S.Ct. at 2065 ("defendant must show that the deficient performance prejudiced the defense"); United States v. Reiter, 897 F.2d 639, 645 (2d Cir.) (although defendant demonstrated that his counsel acted unreasonably by inadequately cross-examining a witness, defendant failed to demonstrate that he was denied effective assistance of counsel because "given the overwhelming evidence of [defendant's] guilt, he was not prejudiced by [counsel's] performance"), cert. denied 498 U.S. 817, 111 S. Ct. 59, 112 L. Ed. 2d 34, 498 U.S. 868, 111 S. Ct. 186, 112 L. Ed. 2d 149, 498 U.S. 990, 111 S. Ct. 533, 112 L. Ed. 2d 543 (1990). The Government's case against petitioner was not based on the fact *240 that petitioner looked like a lookout in a drug case. Rather, the Government's case was based on the testimony of three DEA agents who witnessed petitioner's participation in a narcotics transaction. Even if petitioner's attorney could have established on cross-examination that petitioner does not fit the DEA's profile of a lookout, such testimony would not have cast a reasonable doubt on the strong evidence of petitioner's guilt.
Accordingly, petitioner's § 2255 motion is DENIED.
SO ORDERED.
NOTES
[1] In relevant part, § 2255 states:
A prisoner in custody under sentence of a court established by Act of Congress claiming the right to be released upon the ground that the sentence was imposed in violation of the Constitution or laws of the United States, or that the court was without jurisdiction to impose such sentence, or that the sentence was in excess of the maximum authorized by law, or is otherwise subject to collateral attack, may move the court which imposed the sentence to vacate, set aside or correct the sentence.
See also Rules Governing Section 2255 Proceedings in the United States District Courts, Rule 1 advisory committee's note (comparing § 2255 motion with writ of habeas corpus).
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96 F. Supp. 1004 (1951)
GONZALES et al.
v.
SHEELY et al.
Civ. No. 1473.
United States District Court D. Arizona.
March 26, 1951.
*1005 Ralph Estrada and Greg Garcia, of Phoenix, Ariz., and A. L. Wirin, of Los Angeles, Cal., for petitioners.
Warren L. McCarthy, County Atty., Joseph F. Walton and Robert Renaud, Deputy County Attys., all of Phoenix, Ariz., for respondents.
LING, District Judge.
By this action petitioners seek to redress the deprivation by respondents herein, under color of state law, of Petitioners' civil rights, secured to them by the laws of the United States, and as guaranteed to them by the laws and Constitution of the United States.
The principle established in Westminster School District of Orange County v. Mendez, 9 Cir., 161 F.2d 774 appears to be controlling.
The segregation practices of the school authorities of the Westminster District denounced by the Court of Appeals, are comparable with those followed in the Tolleson District, and I think petitioners are correct in their contention that such practices as applied to them are discriminatory.
Petitioners are entitled to judgment.
Findings of Fact.
I.
It is true that the Tolleson Elementary School District Number 17 is a legally constituted School District in the County of Maricopa, State of Arizona, town of Tolleson, and Ross L. Sheely, James W. Johnston and Frank E. Babcock are the duly elected, qualified and acting Board of Trustees, and Kenneth Dyer is the School Principal for said School District.
II.
It is true that for many years past the foregoing School District has been and now is the owner of and beneficially interested in, and has and does now maintain, operate, manage, and control the public schools within the above mentioned District and system, for the benefit, health, recreation and education of the public and particularly the children residing in the district and system, and for their use and benefit.
III.
It is true that the said school district and system and facilities are being maintained, *1006 operated, managed and controlled by and through their said Board of Trustees and Principal as before named.
IV.
It is true that the respondents and each of them, acting with a common plan, design and purpose, by aiding, abetting, advising and assisting each other in the District and system, have adopted and do practice by regulation, custom and usage, rules and regulations and orders in the operation, management and control of their said district, system and facilities as hereinafter stated.
V.
It is true that for several years last past respondents have, in furtherance and in the execution of their common plan, design and purpose within their system and district, by their regulations, customs and usages, and in execution thereof, adopted and declared and do now adopt and declare: That all children of persons of Mexican or Latin descent or extraction, though citizens of the United States of America, shall be, have been and now are excluded from attending, using, enjoying and receiving the benefits of the education, health and recreation facilities of certain schools within their district and system. That said children of Mexican or Latin descent or extraction are now and have been segregated and required to and must attend and use that certain school in said district and system, reserved for and attended solely and exclusively by children and persons of Mexican or Latin descent or extraction, while other schools are maintained, attended and used exclusively by and for the persons and children purportedly known as white or Anglo-Saxon children.
VI.
It is true that petitioners and each of them, are citizens of the United States, residents and taxpayers of said town, county and district, and it is true that each and all of petitioners are Mexican or Latin descent or extraction.
VII.
It is true that petitioners Porfirio Gonzales is the father and next of friend of Gloria and Mary Ellen Gonzales; that he lives and resides in the Tolleson School District No. 17 as aforesaid, and that said children, all minors, are subject to said rules and regulations of said district and segregated and required to attend separate schools within said district.
VIII.
It is true that petitioner Faustino Curiel is the father and next of friend of Faustino, Jr. and Dora Curiel, who lives and resides within the aforesaid school district, and said children are subject to said rules and regulations of said school district and segregated and required to attend separate schools within said district.
IX.
It is true that in execution of said rules and regulations, each, every and all the foregoing children are compelled and required to and must attend and use the school in said district reserved for and attended solely and exclusively by the children of Mexican or Latin descent or extraction, and are forbidden, barred and excluded from attending any other school in said district or system, solely for the reason that said children are of Mexican or Latin descent or extraction.
X.
It is true that each of the petitioners is beneficially interested in the privileges, management, control and operation of said school district and system and its facilities, and as a member of the public and a citizen of the United States, is entitled to the use and enjoyment of the school within his district and system and is privileged and entitled to the use of the school in his district without segregation or discrimination because petitioners are of Mexican or Latin descent or extraction.
XI.
It is true that petitioners are of good moral habits, not suffering from disability or infectious disease, and are qualified to be admitted to the use of the schools and facilities within their district and system.
*1007 XII.
It is true that respondents and each of them through their agents and employees, acting with common plan, design and purpose, by aiding, abetting, advising and assisting each other within their district and system, have by their regulations, custom and usage, and in execution thereof, at all times mentioned, barred, precluded and denied petitioners and all others of Mexican or Latin descent or extraction from attending, using and receiving the benefits and education furnished to other children residing in said school district and system, and have segregated said children in school attended solely by children of Mexican or Latin extraction, and have denied them the use and right of attendance in other schools, solely for the reason that petitioners are of Mexican or Latin descent or extraction.
XIII.
It is true that petitioners and others of Mexican or Latin extraction, citizens of the United States, at various times, have sought admission and the right to use and attend other schools within said district, which they otherwise would attend and use, but respondents have, by their regulations, custom and usage, denied them such right and privilege based solely upon the fact that petitioners were of Mexican or Latin descent; that by reason thereof, the injury to petitioners is continuous, great, and irreparable, is calculated to affect and does affect their health, rights, and privileges as citizens of the United States.
XIV.
Spanish-speaking children are retarded in learning English by lack of exposure to its use because of segregation, and commingling of the entire student body instills and develops a common cultural attitude among the school children which is imperative for the perpetuation of American institutions and ideals. It is also clear that the methods of segregation prevalent in the respondent school district foster antagonisms in the children and suggest inferiority among them where none exists.
XV.
The only tenable ground upon which segregation practices in the respondent school district can be defended lies in the English language deficiencies of some of the children of Mexican ancestry as they enter elementary public school life as beginners, but such situations do not justify the general and continuous segregation in separate schools of the children of Mexican ancestry from the rest of the elementary school population as has been shown to be the practice in the respondent school district.
XVI.
The tests that are applied in the respondent school district have been generally hasty, superficial and not reliable, and separate classification has been determined largely by the Latinized or Mexican name of the child. Such methods of evaluating language knowledge are illusory and are not conducive to the inculcation and enjoyment of civil rights which are of primary importance in the public school system of education in the United States.
XVII.
There is a substantial inequality in the accommodations accorded the petitioners when compared to the facilities and accommodations made available by respondents to children in the district of Anglo-American extraction.
From the foregoing Findings of Fact, and from all the evidence adduced herein, the Court concludes as matters of law the following:
Conclusions of Law.
I.
This action is brought on behalf of petitioners and some 300 other persons of Mexican and Latin descent and extraction, all citizens of the United States of America, residing within said district; the questions involved by these proceedings are of a common and general interest; the parties are numerous, and it is impractical to bring all of them before the court. Therefore, these petitioners sue for the benefit of all.
*1008 II.
This action is brought under the provisions of Section 24 of the Judicial Code of the United States, 28 U.S.C.A. § 1343(3) to prevent the respondents from unlawfully interfering with petitioners' right to the equal protection of the laws to due process of law.
III.
That by this suit and proceedings, petitioners seek to redress the deprivation by respondents herein, under color of regulation, custom and usage, of petitioners' civil rights, privileges, and/or immunities secured to them by the laws of the United States, and as guaranteed to each of them by the Constitution of the United States of America.
IV.
The respondents' conduct of segregating public school children of Mexican descent or extraction is discriminatory and is illegal and is in violation of petitioners' rights and privileges as guaranteed by the Constitution of the United States. Such official conduct as Public School authorities in the State of Arizona operates to injure and oppress petitioners herein in the free exercise and enjoyment of their rights and privileges as secured and guaranteed to them as citizens of the United States by the Constitution of the United States, and particularly as provided under the Fourteenth Amendment. That petitioners are entitled to equal accommodations, advantages and privileges in the Public Schools in the State of Arizona and to equal rights and treatment with other persons as citizens of the United States in the use and enjoyment of the facilities of said Public Schools, and to equal protection of the laws in their use and enjoyment of said Public School rights and privileges as provided and afforded to other persons at all times when the same are open and used by them.
V.
That said regulations, customs and usages whereby Public School pupils in the respondent School District are segregated are unconstitutional, illegal and void, and are being enforced against petitioners and each of them by discriminatory conduct and practices by respondents and by each of them, through their unlawful acts and conduct; and by their execution of such plan, design and purpose in barring petitioners from the uses and privileges of said Public Schools solely for the cause and reasons as stated in the Findings of Fact, respondents violate petitioners' rights and privileges as citizens of the United States. Such acts are discriminatory, illegal and void.
VI.
Petitioners have no plain, speedy or adequate remedy at law, and petitioners are suffering great and irreparable damage and are entitled to injunctive relief against all respondents, restraining further discriminatory practices against the pupils of Mexican descent in the Public Schools of respondent school district.
VII.
It is clear from the Constitution and laws of the State of Arizona that the respondents herein should be and are classified as representatives of the State of Arizona to such an extent and in such a sense that the great restraints of the Constitution of the United States set limits to the action of such school boards and such trustees and all of the respondents in this action.
VIII.
The substantial inequality in accommodations accorded to petitioners as compared to the facilities and accommodations made available by respondents to children of Anglo-Saxon extraction constitutes a denial of the equal protection of the laws as guaranteed to petitioners as citizens of the United States by the provisions of the Fourteenth Amendment to the Constitution of the United States.
IX.
Segregation of school children in separate school buildings because of racial or national origin, as accomplished by regulations, customs and usages of respondent, constitutes a denial of the equal protection of the laws guaranteed to petitioners as citizens *1009 of the United States by the provisions of the Fourteenth Amendment to the Constitution of the United States. Discriminations less acute than those practiced by respondents have recently been held in violation of the Equal Protection clause of the Fourteenth Amendment in McLaurin v. Oklahoma State Regents, 339 U.S. 637, 70 S. Ct. 851, 94 L. Ed. 1149, where the very act of setting plaintiff apart from other students in the same room because of the racial origin of the plaintiff was held to deny plaintiff equal protection. A paramount requisite in the American system of public education is social equality. It must be open to all children by unified school associations, regardless of lineage.
X.
English language deficiencies of some of the children of Mexican ancestry as such children enter elementary public school life as beginners may justify differentiation by public school authorities in the exercise of their reasonable discretion as to the pedagogical methods of instruction to be pursued with different pupils, and foreign language handicaps may exist to such a degree in the pupils in elementary schools as to require separate treatment in separate classrooms. Such separate allocations, however, can be lawfully made only after credible examination by the appropriate school authorities of each child whose capacity to learn is under consideration, and the determination of such segregation must be based wholly upon indiscriminate foreign language impediments in the individual child, regardless of his ethnic traits or ancestry. But even such situations do not justify the general and continuous segregation in separate schools of children of Mexican ancestry from the rest of the elementary school population, as has been shown to be the practice in respondent school district. Omnibus segregation of children of Mexican ancestry from the rest of the student body in the elementary grades in the schools involved in this action because of language handicaps is not warranted by the record before us.
XI.
The persons constituting a class are so numerous as to make it impractical to bring them all before the court and, therefore, under Rule 23, Fed.Rules Civ.Proc. 28 U.S.C.A. this action has been properly brought by petitioners as the adequate representatives of the class of persons affected by the official action and activities of the respondents; and as the character of the right sought to be enforced herein is several, and as there is a common question affecting the several rights of such persons constituting a class, and as a common relief is sought by such persons and is available to such persons, the action has been and is properly brought by the petitioners herein, and said petitioners herein are authorized to maintain the action.
XII.
That a preliminary injunction, pendente lite herein issue declaring that the regulations, customs, usages and practices of respondents herein in segregating persons of Latin and Mexican descent in separate schools within the Tolleson School District Number 17 in the town of Tolleson, County of Maricopa, State of Arizona, are and each is arbitrary, discriminatory, illegal and void, and are and each is violative of petitioners' rights under the Constitution and laws of the United States; and that said respondents, and each of them be restrained and enjoined pendente lite from segregating persons of Latin or Mexican descent in separate schools within the respondent school district in the County of Maricopa, State of Arizona.
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470 F.Supp. 125 (1979)
Charles J. KOBIELNIK
v.
INTERNATIONAL BROTHERHOOD OF TEAMSTERS, CHAUFFEURS, WAREHOUSEMEN AND HELPERS OF AMERICA and Local 107 of the International Brotherhood of Teamsters, Chauffeurs, Warehousemen and Helpers of America and Eastern States Transportation Co., Inc. and Union Carbide Corporation.
Civ. A. No. 78-2553.
United States District Court, E. D. Pennsylvania.
April 20, 1979.
*126 S. Robert Levant, Philadelphia, Pa., for plaintiff.
Edward Davis, Philadelphia, Pa., for International Broth., etc.
Peter D. Walther, Bala Cynwyd, Pa., for Union Carbide.
Thomas W. Jennings, Philadelphia, Pa., for Local 107.
James A. Matthews, Jr., Philadelphia, Pa., for Eastern States Transp. Co.
MEMORANDUM AND ORDER
TROUTMAN, District Judge.
Pursuant to the Labor Management Relations Act of 1947, 29 U.S.C. § 185, plaintiff instituted this action against his employer, defendant Eastern States Transportation Company, Inc. (Eastern) and the International Brotherhood of Teamsters, Chauffeurs, Warehousemen and Helpers of America (Union) and Local 107, of which plaintiff is a member. Plaintiff alleges that his placement on lay-off status violated his seniority rights under the existing collective bargaining agreement[1] between defendant Eastern and the Union, and that the Union, the collective bargaining representative of plaintiff as an Eastern employee, breached its duty of fair representation.
Defendant Eastern, a labor broker which leases drivers to the Linde Division of co-defendant Union Carbide Corporation, employed plaintiff to deliver Linde products to customers from the Linde plant in Essington, Pennsylvania. The Linde division is Eastern's only customer in the Philadelphia area; consequently, all drivers are assigned to the Linde account.
On February 5, 1976, plaintiff allegedly made a delivery to a Linde customer, pumped product into the wrong tank and contaminated thousands of cubic feet of liquid nitrogen. The error forced Linde's customer to close its plant for three days. After "exhaustive investigation" Linde held plaintiff responsible for the incident and informed Eastern that plaintiff would no longer be allowed to deliver Linde products. Eastern then advised plaintiff that he would be maintained on its seniority list and that he would be offered any available work from customers other than Union Carbide. With no such other customers, plaintiff was laid off. Complaining that this arrangement violated his seniority rights, plaintiff filed a grievance with defendant Local 107.
The grievance machinery established by the collective bargaining agreement between Eastern and the Union includes a catena of joint employer-union committees *127 which hear grievances and attempt to resolve them. Any committee level decision, based upon a majority vote, terminates the matter, and such decision cannot be appealed.
Plaintiff's grievance reached the Eastern Conference Joint Area Committee (ECJAC) stage. In prosecuting plaintiff's grievance before the ECJAC, Local 107 contended that the grievance involved a seniority violation, not a discharge, and that any Union Carbide-Eastern agreement by which Eastern agreed to honor a Union Carbide demand to exclude a given driver violated the collective bargaining agreement. Eastern, on the other hand, argued that Union Carbide, as a customer, could refuse to allow any driver to deliver its product. The ECJAC agreed with Eastern and decided that plaintiff had no "claim for work at Union Carbide but the company is obligated to allow the grievant to perform any other work they have in line with his seniority." ECJAC Submission and Decision No. C-112-76.
Plaintiff then instituted this action and alleged that the Union's failure to join Union Carbide as a party to the grievance procedure breached the Union's duty of fair representation. Plaintiff further alleged that defendant Eastern is nothing more than a device to disguise Union Carbide's evasion of its responsibilities under the collective bargaining agreement. Finally, plaintiff alleged that he had no hearing or opportunity to defend himself against the charges and that Local 107 offered no exculpatory evidence on his behalf. Eastern, now moving to dismiss under Fed.R.Civ.P. 12(b)(6), contends that the complaint, which does not allege exhaustion of internal union remedies, fails to state a claim against Eastern.[2] Subsequently, the Union and Local 107 joined in this motion.
As a general rule, a union member charging unfair representation must exhaust available internal union remedies before he may bring an action against the union. Brady v. Trans World Airlines, 401 F.2d 87 (3d Cir. 1968), cert. denied, 393 U.S. 1048, 89 S.Ct. 681, 684, 21 L.Ed.2d 691 (1969); Hubicki v. ACF Industries, Inc., 484 F.2d 519 (3d Cir. 1973). Article XIX of the Union's Constitution provides plaintiff with a procedure by which local union members may file charges against a local union officer for violations of the duties imposed thereunder. Section 12(a) further provides that
(e)very member . . . against whom adverse rulings or decisions have been rendered or who claims to be aggrieved shall be obliged to exhaust all remedies provided for in this Constitution and by the International Union before resorting to any court, tribunal or agency against the International Union, any subordinate body or any officer or employee thereof.
As a union member plaintiff contractually bound himself to follow this procedure. Aldridge v. Ludwig-Honold Manufacturing Co., 385 F.Supp. 695 (E.D.Pa.1974), aff'd, 517 F.2d 1397 (3d Cir.) cert. denied, 423 U.S. 937, 96 S.Ct. 298, 46 L.Ed.2d 270 (1975). Plaintiff has neither fulfilled this requirement nor suggested that to do so would be futile. Instead plaintiff argues that requiring him to bring charges against Local 107 to compel a grievance procedure including Union Carbide "is to suggest that plaintiff be his own representative". Plaintiff's Brief at 9. That is just the point. A union member does indeed have an obligation to use internal union procedures prior to bringing an action against the Union, Vaca v. Sipes, 376 U.S. 171, 184-85, 87 S.Ct. 903, 17 L.Ed.2d 842 (1967); Hubicki v. ACF Industries, Inc., supra; Pawlak v. Teamsters Local 764, 444 F.Supp. 807, 810 (M.D.Pa. 1977), aff'd, 571 F.2d 572 (3d Cir. 1978), and where the adequacy and availability of the internal union remedies are demonstrated, exhaustion of such remedies is an essential prerequisite to bringing suit against the union.
*128 Furthermore, had plaintiff exhausted his internal union remedies, it might have been shown that the Union did not breach its duty to plaintiff. Under these circumstances the direct action, permitted by Vaca v. Sipes, supra, against the employer (Eastern) would not lie. Neipert v. Arthur G. McKee & Co., 448 F.Supp. 206 (E.D.Pa.1978). Because plaintiff has challenged neither the availability nor the adequacy of the internal union remedies provided by the Union constitution and has not explained satisfactorily his failure to utilize them, the motion of defendants Eastern, the Union and Local 107 will be granted.
Although defendant Union Carbide has not filed or joined in this motion to dismiss, plaintiff's failure to use available internal union remedies impels this Court, sua sponte, to recognize the absence of jurisdiction and to dismiss the complaint against Union Carbide as well.[3]
NOTES
[1] The National Master Freight Agreement and Philadelphia, Pennsylvania and Vicinity Local Cartage Supplement Agreement (NMFA).
[2] We do not reach defendants' argument that plaintiff's claim against Eastern is barred by the final and binding decision of the ECJAC.
[3] See Pawlak v. International Brotherhood of Teamsters, Chauffeurs, Warehousemen, and Helpers of America, Local Union 764, 444 F.Supp. 807, 811-12 (E.D.Pa.1977).
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875 F.Supp. 1422 (1995)
Kathleen ELY, Plaintiff,
v.
WAL*MART, INC., an Arkansas Corporation; and Does 1 through 50, inclusive, Defendants.
No. ED CV 94-0284 RT (BQRx).
United States District Court, C.D. California, Eastern Division.
February 9, 1995.
*1423 Marc D. Roberts and David Mule, Marc D. Roberts and Associates, Palm Desert, CA, for plaintiff.
John L. Barber, Gray, York, Duffy & Rattet, Encino, CA, for defendants.
ORDER DENYING DEFENDANT WAL*MART, INC.'s MOTION TO DISMISS PLAINTIFF ELY'S FIRST AND SEVENTH CLAIMS FOR RELIEF
TIMLIN, District Judge.
Defendant Wal*Mart, Inc.'s (Wal*Mart's) motion to dismiss plaintiff Kathleen Ely's (plaintiff's) first and seventh claims for relief in her original complaint[1] (motion) was heard on or about 10 a.m. on January 23, 1995 before the Honorable Judge Robert J. Timlin.
Marc D. Roberts and David Mule, Marc D. Roberts and Associates, appeared for plaintiff. John L. Barber, Gray, York, Duffy & Rattet appeared for Wal*Mart.
The court having taken the matter under submission, and after consideration of oral argument and all papers presented to the court, the court will deny Wal*Mart's motion to dismiss for the reasons set forth in the following opinion.
I.
Procedural History
On October 31, 1994, plaintiff filed, in Riverside County Superior Court, a complaint against her former employer, Wal*Mart. The complaint contained seven claims:
(1) wrongful discharge in contravention of public policy (public policies as stated in the California Family Care and Medical Leave Act, Government Code section 12945.2 et seq.),[2]
(2) breach of contract,
(3) breach of the implied covenant of good faith and fair dealing,
(4) intentional interference with prospective business advantage,
(5) defamation,
(6) violation of California Labor Code section 1050, and
(7) intentional infliction of emotional distress.
Wal*Mart removed the action to this court based on diversity of citizenship, and then filed the instant motion, asserting that plaintiff failed "to state a cognizable legal theory as well as ... sufficient facts under a cognizable legal theory" (1) as to her first claim, for wrongful discharge in contravention of public policy as stated in the Moore-BrownRoberti Family Rights Act, Government Code section 12945.2 et seq. (Family Rights Act), and (2) as to her seventh claim for relief, for intentional infliction of emotional distress.
*1424 II.
Factual Background
According to the allegations of the complaint, Wal*Mart is an employer with more than five employees. On August 13, 1992, plaintiff was hired as a department manager at Wal*Mart's La Quinta store. In November 1992, she became department manager of the women's department at that store, and as such earned $7.65 per hour.
On or about April 19, 1994, she had a ruptured hernia and required emergency surgery. The next morning, plaintiff's spouse contacted plaintiff's assistant store manager, Gene Scales, and told him that plaintiff had undergone emergency surgery and was unable to report to work. Later that day, plaintiff's spouse called and spoke to assistant store manager, Ken Rice, and told him that plaintiff would be hospitalized for five to six days, and would then need five to six weeks of recuperation at home.
Two days later, plaintiff herself called her manager, Krista Feaster, and local personnel officer, Billie Jay, and told them she would give them a back-to-work date as soon as she would be released by her doctor.
On or about June 20, 1994, plaintiff was released to return to work. Upon her return, the store manager, Michael Halbert, advised her that she would not be reinstated in her former position. Instead, she could return as a cashier, a position not comparable to her former position as department manager, and which position paid only $6.50 per hour. Halbert told her that if she did not take this position, she would be terminated. Plaintiff refused the position and, according to the allegations of her complaint, "was thereby constructively terminated."
In August 1994, plaintiff interviewed with Woman's World Shops in Palm Desert, and that company agreed to hire her as a full-time employee at a rate of $7.50 per hour. Plaintiff accepted the offer and arranged the dates upon which she would report to work. Thereafter, Woman's World Shops rescinded its offer. Plaintiff's complaint alleges, on information and belief, that this occurred because Woman's World Shops contacted Wal*Mart and spoke to Feaster to verify plaintiffs prior employment, and Feaster then told Woman's World Shops that plaintiff was in litigation with Wal*Mart, knowing that such statement was false, and with the intent to stigmatize plaintiff as a troublemaker so as to prevent her from being employed by Woman's World Shops, which conduct plaintiff alleges would be a violation of California Labor Code section 1050.
Plaintiff further alleges that there was a written contract of employment between herself and Wal*Mart as evidenced by the Wal*Mart Employee Handbook. This handbook included written personnel policies which provided for:
(a) medical leaves of absence, allowing employees to be absent from work for the purpose of receiving medical treatment, and to be reinstated upon recovery, and
(b) emergency leaves of absence for the purpose of allowing an employee to handle a crisis or emergency such as a serious illness, and then to be reinstated upon recovery.
An excerpt from the handbook as to these policies is attached as Exhibit A to the complaint.[3] Plaintiff alleges that she fully complied with all the conditions of this contract as required by the procedures and policies in the handbook; Wal*Mart, however, breached its responsibilities under the contract.
Wal*Mart contends in its motion that plaintiff's first claim, for wrongful discharge in contravention of public policy, as stated in the Family Rights Act, must be dismissed, because California law requires that claims for wrongful discharge in contravention of public policy must be predicated upon a statute or constitutional provision which has been recognized as embodying "fundamental" and well-established public policy. According to Wal*Mart, plaintiff is attempting to advance her claim under the auspices of the Family Rights Act portion of California's Fair Employment and Housing Act, (FEHA), which it describes as "a statute which cannot *1425 be relied upon for a tortious wrongful discharge."
Wal*Mart also urges that because plaintiff cannot state a claim for wrongful discharge in violation of public policy and she does not allege any outrageous conduct by Wal*Mart outside the employment relationship, she also cannot state a claim for intentional infliction of emotional distress, and thus her seventh claim must be dismissed, too. Wal*Mart also asserts that plaintiff's claim for intentional infliction of emotional distress is subsumed by the exclusive remedies of the worker's compensation system.
Plaintiff in opposition contends that Wal*Mart has misread the case law, and that violations of FEHA's provisions relating to the Family Rights Act may form the basis for a claim for wrongful discharge in violation of public policy.
Plaintiff further argues that case law demonstrates that worker's compensation laws do not preempt a claim for intentional infliction of emotional distress based on violations of FEHA.
III.
Discussion
A. Plaintiff Has Stated a Sufficient Claim for Wrongful Termination in Violation of the Public Policy Contained in The Family Rights Act
In California, an at-will employee may bring a tort action for wrongful discharge in violation of public policy so long as the basis for the public policy at issue is rooted in a statutory or constitutional provision. Gantt v. Sentry Insurance, 1 Cal.4th 1083, 1090, 1095, 4 Cal.Rptr.2d 874, 824 P.2d 680 (1992).
The reason for requiring that the public policy be delineated by a statute or constitutional provision is that "A public policy exception carefully tethered to fundamental policies that are delineated in constitutional or statutory provisions strikes the proper balance among the interests of employers, employees and the public. The employer is bound, at a minimum, to know the fundamental public policies of the state and nation as expressed in their constitutions and statutes; so limited, the public policy exception presents no impediment to employers that operate within the bounds of law. Employees are protected against employer actions that contravene fundamental state policy. And society's interests are served through a more stable job market, in which its most important policies are safeguarded." (1 Cal.4th at p. 1095, 4 Cal.Rptr.2d 874, 824 P.2d 680.)
Although the court in Gantt did not specifically define what it meant by a "fundamental" policy, the above-noted quote clearly implies that a public policy is fundamental if it is expressed in a statute or constitution, rather than in case law and administrative rules and regulations. (See 1 Cal.4th at pp. 1089-1095, 4 Cal.Rptr.2d 874, 824 P.2d 680; sep. opn. by Kennard, J., conc. & diss. at pp. 1102-1104.) The term "fundamental," when used to describe the kind of public policy which must form the basis for a claim of wrongful discharge in contravention of public policy, also means that the public policy is one which benefits the public in general, not just the discharged employee. Rojo v. Kliger, 52 Cal.3d 65, 89, 276 Cal.Rptr. 130, 801 P.2d 373 (1990): the underlying public policy "must be `fundamental' and `public' in nature, i.e., `one which inures to the benefit of the public at large rather than to a particular employer or employee.' [Citation.]"
Here, plaintiff's tort claim for wrongful discharge in violation of public policy is premised on the Family Rights Act, which provides, in relevant part:
"(a) Except as provided in subdivision (b), it shall be an unlawful employment practice for any employer, as defined in paragraph (2) of subdivision (c), to refuse to grant a request by any employee with more than 12 months of service with the employer, and who has at least 1,250 hours of service with the employer during the previous 12-month period, to take up to a total of 12 workweeks in any 12-month period for family care and medical leave. Family care and medical leave requested pursuant to this subdivision shall not be deemed to have been granted unless the employer provides the employee, upon granting *1426 the leave request, a guarantee of employment in the same or a comparable position upon the termination of the leave. The commission shall adopt a regulation specifying the elements of a reasonable request.
"(b) Notwithstanding subdivision (a), it shall not be an unlawful employment practice for an employer to refuse to grant a request for family care and medical leave by an employee if the employer employs less than 50 employees within 75 miles of the worksite where that employee is employed.
"(c) For purposes of this section:
"....
"(3) `Family care and medical leave means any of the following:
"....
"(C) Leave because of an employee's own serious health condition that makes the employee unable to perform the functions of the position of that employee,...."
"(4) `Employment in the same or comparable position' means employment in a position that has the same or similar duties and pay that can be performed at the same or similar geographic location as the position held prior to the leave....."
As originally enacted,[4] the Family Rights Act only referred to family care leave, and did not contain any provisions for medical leave required due to an employee's own health problem. The provisions relating to medical leave for employees were added and became effective on October 5, 1993.[5]
Additionally, the public policy behind FEHA, of which the Family Rights Act is a part, is set out in California Government Code section 12920. Section 12920 states that it is "the public policy of this state that it is necessary to protect and safeguard the right and opportunity of all persons to seek, obtain and hold employment without discrimination or abridgment on account of ... physical disability, ... [and] medical condition, ..." and that discriminatory practices foments "strife and unrest, deprives the state of the fullest utilization of its capacities for development and advance, and substantially and adversely affects the interest of employees, employers and the public in general."[6]
It would thus appear that a claim for relief premised on a violation of the Family Rights Act is based upon clear public policy which is fundamental in the sense required by Gantt and Rojo: the public policy is contained in a statutory provision and it is a policy "which inures to the benefit of the public at large rather than to a particular employer or employee."
Wal*Mart, however, contends that case law has held that FEHA, in which the Family Rights Act is found, is "inadequate as a source of public policy sufficient to support a wrongful discharge claim." Wal*Mart cites Strauss v. Randall, 144 Cal.App.3d 514, 518-520, 194 Cal.Rptr. 520 (1983) for this proposition, acknowledging that its holding was "slightly modified" by Rojo v. Kliger, 52 Cal.3d 65, 276 Cal.Rptr. 130, 801 P.2d 373, supra. It also cites Jennings v. Marralle, 8 Cal.4th 121, 32 Cal.Rptr.2d 275, 876 P.2d 1074 (1994) as support for this contention.
*1427 As discussed below, neither Strauss v. Randall nor Jennings v. Marralle held that a violation of a statutory provision contained in FEHA cannot be a violation of fundamental public policy as grounded in certain portions of the FEHA.
In Strauss v. Randall, supra, 144 Cal. App.3d 514, 194 Cal.Rptr. 520, an age discrimination case, the employee filed a civil suit alleging a common law cause of action for wrongful discharge in violation of public policy. Asserting that no common law remedy for age discrimination predated the Fair Employment Practices Act (FEPA) (FEPA is now subsumed in FEHA), the court of appeal held that when the Legislature created this statutory right of redress for such discrimination, it intended it to be the exclusive remedy. (144 Cal.App.3d at p. 524, 194 Cal.Rptr. 520; Rojo v. Kliger, 52 Cal.3d at p. 81-82, 276 Cal.Rptr. 130, 801 P.2d 373, supra.)
However, the decision in Strauss v. Randall was called into question by Rojo v. Kliger, and the Rojo court specifically rejected Strauss v. Randall's conclusion that there could be no common-law action for wrongful discharge in violation of public policy unless there had been a preexisting cause of action for the particular kind of discrimination involved:
"Strauss and its progeny needlessly invoked the `new right exclusive remedy' doctrine of interpretation. Because the FEHA, like its predecessor the FEPA, expressly disclaims any intent to displace other relevant state laws, no resort to interpretative aids is required and the existence vel non of a preexisting cause of action for the particular discrimination is irrelevant. While the FEHA conferred certain new rights and created new remedies, its purpose was not to narrow, but to expand the rights and remedies available to victims of discrimination. (§§ 12993, 12920.) Under the act, plaintiffs are free to seek relief for injuries arising from discrimination in employment under any state law, without limitation.
"In sum, we hold that the FEHA does not displace any causes of action and remedies that are otherwise available to plaintiffs." 52 Cal.3d at p. 82, 276 Cal.Rptr. 130, 801 P.2d 373, fn. omitted; see also Blom v. N.G.K. Spark Plugs, Inc. (1992) 3 Cal.App.4th 382, 387-388, 4 Cal.Rptr.2d 139, which concluded that after Rojo, plaintiffs may pursue common-law tort causes of action for wrongful discharge in violation of the policies contained in FEHA, even when the policies did not preexist FEHA.
Wal*Mart argues, nonetheless, that despite the holding in Rojo v. Kliger, a plaintiff can only pursue a common-law cause of action for an alleged violation of FEHA if the actionable conduct is also prohibited by the California Constitution or some other, independent statutory source reflecting a fundamental public policy against such conduct. It cites Jennings v. Marralle, 8 Cal.4th 121, 135, 32 Cal.Rptr.2d 275, 876 P.2d 1074, supra, for this proposition.
In Jennings, the California Supreme Court concluded that there is no fundamental public policy supporting a wrongful discharge for age discrimination by a small employer, i.e., by an employer of four or fewer employees: "It would be unreasonable to expect employers who are expressly exempted from the FEHA ban on age discrimination to nonetheless realize that they must comply with the law from which they are exempted under pain of possible tort liability." (8 Cal.4th at pp. 135-136, 32 Cal.Rptr.2d 275, 876 P.2d 1074.)
Jennings does contain some dicta which Wal*Mart cites as proving its point, to wit, that there must be some statutory basis other than FEHA to support a common-law tort cause of action for wrongful discharge: "The reasoning which supported our holding in Gantt v. Sentry Insurance, supra, 1 Cal.4th 1083, 4 Cal.Rptr.2d 874, 824 P.2d 680, makes it clear that the inclusion of age in the policy statement of the FEHA alone is not sufficient to establish a `fundamental' public policy for the violation of which an employer may be held liable in a common law tort action." (8 Cal.4th at p. 135, 32 Cal.Rptr.2d 275, 876 P.2d 1074.)
However, this language is not helpful to Wal*Mart. First, the Jennings court specifically noted that it was not deciding whether employment discrimination on the basis of *1428 age violated a fundamental public policy: "Whether discrimination in employment on the basis of age violates a `fundamental' public policy has not been resolved by this court. We need not decide that question here since the `public policy' on which plaintiff relies is not applicable to defendant [because defendant employed four or fewer employees]." (8 Cal.4th at p. 130, 32 Cal.Rptr.2d 275, 876 P.2d 1074.)
Second, the reasoning in Gantt which was referred to in the above-quoted language from Jennings does not support a conclusion that to be fundamental, a public policy must be expressed in multiple statutes, or at least in some statute in addition to FEHA.
Finally, the language from Jennings upon which Wal*Mart relies said that "the inclusion of age in the policy statement of the FEHA alone is not sufficient to establish a `fundamental' public policy for the violation of which an employer may be held liable in a common law tort action." (8 Cal.4th at p. 135, 32 Cal.Rptr.2d 275, 876 P.2d 1074, emphasis added.)
The policy statement of FEHA is contained in section 12920. In relevant part, such policy statement refers to discrimination on the basis of "physical disability" and "medical condition." It is easy to see why this reference alone would be insufficient to establish a fundamental public policy within the meaning of Gantt, because the policy statement does not put an employer on notice of what would constitute a discriminatory practice: physical disability and medical condition are not described, nor is there any description of what employment practices related to these conditions would be considered discriminatory.
However, FEHA also contains, in the form of the Family Rights Act, a detailed description of what conditions are protected by FEHA, as well as what employment practices are proscribed. It would be ridiculous to read Jennings as requiring the California Legislature to enact some statute in addition to the Family Rights Act in order to inform either employers or the judiciary as to what the Legislature has decided is the public policy of California.
Given this last-stated reason, it is unnecessary to rely on Brooks v. Bell Savings & Loan Association (1994) 29 Cal.App.4th 565, 34 Cal.Rptr.2d 785, a case cited by plaintiff. In Brooks, the court of appeal held that the plaintiff could state a common-law cause of action for wrongful discharge in violation of the public policy against age discrimination only after the court first concluded that there was a fundamental public policy against age discrimination which predated FEHA.
In my opinion, the court in Brooks missed the point when it concentrated on trying to find a public policy which predated FEHA. As stated in Rojo, the enactment of FEHA was not intended to supplant employees' existing common-law remedies, one of which was a cause of action for wrongful discharge in violation of public policy. Nothing in Rojo or Gantt requires that the public policy which has allegedly been violated have been in existence before FEHA; the only requirement is that it be fundamental and well-established, i.e., that it has been contained in a constitutional or statutory provision long enough for an employer to have notice of it.
It would be irrational, as well as an improper meddling of the judiciary in legislative affairs, to create a judicial rule that would limit employees to a tort cause of action for wrongful discharge based only on public policy as it existed before some arbitrarily-selected date, e.g., before the enactment of FEHA. Public policy is not static; it develops in response to changing economic, social and environmental conditions. As the California Supreme Court has acknowledged by finding statutory provisions to be a valid source of public policy, it is the Legislature's prerogative to declare what the public policy is at any given time. The Legislature is presumed to be aware of the common law cause of action for wrongful discharge in violation of public policy, and to intend, unless it declares otherwise, that such common law remedy apply to all violations of public policy irrespective of when the public policy has been enunciated in a statute or constitutional provisions. The common law, too, is not static: "The concept that there are no causes of action except those that have been recognized by precedent, assumed at some *1429 point in the common law, was not accepted generally at early common law, nor is it accepted today." (Rosefield v. Rosefield, 221 Cal.App.2d 431, 435, 34 Cal.Rptr. 479 (1963); 5 Witkin, Summary of California Law (9th ed. 1988) Torts, § 16, pp. 75-77.)
For the foregoing reasons, plaintiff has stated a sufficient claim for wrongful discharge in violation of the public policy against employment discrimination on the basis of a medical condition, as such public policy is stated in the Family Rights Act.
B. Plaintiff Has Stated a Sufficient Claim for Intentional Infliction of Emotional Distress
"The elements of the tort of intentional infliction of emotional distress are: `"(1) extreme and outrageous conduct by the defendant with the intention of causing, or reckless disregard of the probability of causing, emotional distress; (2) the plaintiff's suffering severe or extreme emotional distress; and (3) actual and proximate causation of the emotional distress by the defendant's outrageous conduct...." ....' [Citation.]" (Potter v. Firestone Tire and Rubber Company, 6 Cal.4th 965, 1001, 25 Cal.Rptr.2d 550, 863 P.2d 795 (1993) quoting Christensen v. Superior Court, 54 Cal.3d 868, 903, 2 Cal. Rptr.2d 79, 820 P.2d 181 (1991).)
Wal*Mart contends that because plaintiff cannot state a claim for wrongful discharge in violation of public policy, her claim for intentional infliction of emotional distress automatically fails. According to Wal*Mart, the worker's compensation system provides the exclusive remedy for aggrieved employees' claims of intentional infliction of emotional distress because employment discharge is a normal part of the employment relationship. (Cole v. Fair Oaks Fire Protection Dist. (1987) 43 Cal.3d 148, 160, 233 Cal.Rptr. 308, 729 P.2d 743.)
As explained above, plaintiff's first claim is, in fact, sufficient. Thus, this contention fails; as Wal*Mart itself notes, when an employee is discharged in violation of a fundamental public policy, a claim for intentional infliction of emotional distress caused by such discharge will lie. Gantt, 1 Cal.4th at pp. 1100-1101, 4 Cal.Rptr.2d 874, 824 P.2d 680, supra; Rojo, 52 Cal.3d at p. 81, 276 Cal.Rptr. 130, 801 P.2d 373, supra.
Furthermore, even if plaintiff's first claim was insufficient, she has sufficiently stated an independent claim for intentional infliction of emotional distress, because that claim is based not only on the circumstances surrounding her discharge from employment, but also on conduct allegedly committed by Wal*Mart after her discharge. Such post-discharge conduct consisted of Wal*Mart's employee Feaster's alleged false statements to Woman's World Shops, by whom plaintiff had been offered a job, that plaintiff was then involved in litigation with Wal*Mart, which statements were allegedly made to disrupt the economic relationship between Woman's World Shops and plaintiff.
Wal*Mart, in its reply, also argues that plaintiff's claim for intentional infliction of emotional distress does not contain specific allegations of outrageous conduct, and notes that plaintiff was not a witness to the conversation between Feaster and Woman's World Shops, so she could only have learned of it through hearsay.
Wal*Mart, however, fails to cite any authority for its implicit contention that plaintiff's seventh claim must be dismissed because it contains an allegation about a conversation to which plaintiff was not a party, or because it does not contain more specific facts about the outrageous nature of Feaster's conduct. The lack of such authority is not surprising, given that claims are filed in court before a plaintiff normally uses the discovery tools often necessary to ferret out more specific facts. Furthermore, plaintiff has specifically stated facts sufficient to support the outrageous conduct element of a claim for intentional infliction of emotional distress, i.e. conduct "`so extreme as to exceed all bounds of that usually tolerated in a civilized community.' [Citation.]" (Potter v. Firestone Tire and Rubber Company, 6 Cal.4th 965, 1001, 25 Cal.Rptr.2d 550, 863 P.2d 795, supra, quoting Christensen v. Superior Court, 54 Cal.3d 868, 903, 2 Cal. Rptr.2d 79, 820 P.2d 181, supra.)
In sum, plaintiff has stated sufficient facts to allege the necessary elements for a claim *1430 of intentional infliction of emotional distress against Wal*Mart.
IV.
DISPOSITION
IT IS THEREFORE ORDERED THAT:
Wal*Mart's motion to dismiss plaintiff's first and seventh claims for relief is DENIED.
NOTES
[1] After the motion was filed, plaintiff filed a first amended complaint which resulted in her seventh claim becoming her eighth claim.
[2] Plaintiff's name for this act is incorrect, and she has since corrected it in her amended complaint; it is actually the Moore-Brown-Roberti Family Rights Act of 1991.
[3] The written excerpt from the employee handbook does not say anything specific about employees being reinstated to the same or comparable position upon return.
[4] Stats.1991, ch. 462, § 4 (A.B. 77).
[5] Stats.1993, ch. 827, § 1 (A.B. 1460).
[6] Notably, the provisions in the Family Rights Act related to medical leave parallel those of the federal Family and Medical Leave Act of 1993 (P.L. 103-3), 29 U.S.C. § 2601 et seq., which contains similar family care and medical leave provisions. Congress found, in 29 U.S.C. § 2601(a)(4), that "there is inadequate job security for employees who have serious health conditions that prevent them from working for temporary periods;" and that the purpose of the Act was to "(b)(1) ... balance the demands of the workplace with the needs of families, to promote the stability and economic security of families, and to promote national interests in preserving family integrity; ¶ (2) to entitle employees to take reasonable leave for medical reasons, ... ¶ (3) to accomplish the purposes described in paragraphs (1) and (2) in a manner that accommodates the legitimate interests of employers; ¶ (4) to accomplish the purposes described in paragraphs (1) and (2) in a manner that, consistent with the Equal Protection Clause of the Fourteenth Amendment, minimizes the potential for employment discrimination on the basis of sex by ensuring generally that leave is available for eligible medical reasons.... on a gender-neutral basis; and ¶ (5) to promote the goal of equal employment opportunity for women and men, pursuant to such clause."
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301 B.R. 181 (2003)
In re Shireen M. BLAIR.
United States Department of Education,
v.
Shireen M. Blair.
No. CIV.A.DKC 2003-1281.
United States District Court, D. Maryland.
November 12, 2003.
*182 *183 Kristine L. Sendek Smith, Office of the United States Attorney, Baltimore, MD, for Appellant.
Richard Brian Rosenblatt, Linda Dorney, Law Offices of Richard B. Rosenblatt, PC, Rockville, MD, for Appellee.
Shireen M. Blair, Seabrook, MD, pro se.
MEMORANDUM OPINION
CHASANOW, District Judge.
This case is before the court on appeal from the order of visiting Bankruptcy Judge Gerald Schiff, of the United States Bankruptcy Court for the Western District of Louisiana, imposing a two-year moratorium on the obligation of Debtor Appellee Shireen Blair to Appellant United States Department of Education (USDE). Oral argument is deemed unnecessary because the facts and legal arguments are adequately presented in the briefs and record, and the decisional process would not be significantly aided by oral argument. See Fed. R. Bankr.P. 8012. For the reasons that follow, the court will reverse the bankruptcy court's imposition of the moratorium.
I. Background
The following facts are uncontroverted. Debtor Appellee Shireen Blair filed a voluntary petition for relief under Chapter 7 of the Bankruptcy Code on July 13, 2001. An order for relief was duly entered on that same day. On October 12, 2001, Appellee instituted an adversary proceeding for determination of the dischargeability of her student loan obligation, of approximately $57,300, to Appellant United States Department of Education (USDE), pursuant to 11 U.S.C. § 523(a)(8). See Fed. R. Bankr.P. 7001(6). The bankruptcy court conducted a trial of the adversary proceeding on March 10, 2003. On April 3, 2003, the bankruptcy court dismissed Appellee's complaint without prejudice, finding that Appellee failed to make the statutorily required showing of "undue hardship," but the court also ordered a moratorium on Appellee's obligation to Appellant until April 1, 2005.[1] The moratorium excused Appellee from making any payments to Appellant, and precluded Appellant from accruing any interest based on Appellee's obligation, during that time.
Appellant filed a timely appeal and presented a single issue for review:
Whether the Court below erred as a matter of law in granting equitable relief to the Plaintiff/Debtor in the form of a moratorium on payments and interest accrual until April 1, 2005, when it concurrently held that Plaintiff/Debtor did not meet two of the three prongs of the test set forth in Brunner v. New York State Higher Educ. Servs. Corp., 831 F.2d 395 (2d Cir.1987), for undue hardship and consequently did not discharge Plaintiff/Debtor's educational loan debt pursuant to 11 U.S.C. § 523(a)(8).
Designation of Contents of Record on Appeal and Statement of Issue (Paper 34) at 2. Appellant filed its notice of appeal on April 11, 2003, properly "within 10 days of the date of the entry of the judgment" by the bankruptcy court (April 3, 2003). Fed. R. Bankr.P. 8002(a). There was no timely cross-appeal filed by Appellee, as she *184 failed to file a notice of appeal within 10 days of Appellant's notice. See Fed. R. Bankr.P. 8002(a). Instead, on August 12, 2003, Appellee filed a statement of issue, offering six additional issues for consideration on appeal. See Paper 11.
Appellee's failure to file a timely notice of cross-appeal is "a jurisdictional defect barring appellate review by the district court" and thus this court lacks jurisdiction to entertain Appellee's statement of issue. Hallock v. Key Fed. Sav. Bank (In re Silver Oak Homes, Ltd.), 169 B.R. 349, 350-51 (D.Md.1994) (internal quotation omitted); see also Smith v. Dairymen, Inc., 790 F.2d 1107, 1111 (4th Cir.1986) ("absent exceptional circumstances not present here, only a party who files a notice of appeal properly invokes the appellate jurisdiction of the district court"). Accordingly, the court will grant Appellant's motion to strike Appellee's statement of issue as an untimely effort to cross-appeal.
II. Standard of Review
On appeal from the bankruptcy court, the district court acts as an appellate court and reviews the bankruptcy court's findings of fact for clear error and conclusions of law de novo. See Canal Corp. v. Finnman (In re Johnson), 960 F.2d 396, 399 (4th Cir.1992); Travelers Ins. Co. v. Bryson Prop., XVIII (In re Bryson Prop., XVIII), 961 F.2d 496, 499 (4th Cir.), cert. denied sub nom., Bryson Prop., XVIII v. Travelers Ins. Co., 506 U.S. 866, 113 S.Ct. 191, 121 L.Ed.2d 134 (1992). Thus, this court will review de novo the bankruptcy court's determination of "undue hardship" and imposition of the moratorium. See U.S. Dep't of Health and Human Serv. v. Smitley, 347 F.3d 109, 115-16 (4th Cir.2003) (internal citation omitted). Review of the bankruptcy court's factual findings, which underlie the legal orders, will be for clear error.
III. Analysis
A debtor's educational loans are not dischargeable in bankruptcy, "unless excepting such debt from discharge . . . will impose an undue hardship on the debtor and the debtor's dependents." 11 U.S.C. § 523(a)(8). The debtor has the burden of proving the existence of undue hardship by a preponderance of the evidence. See Grogan v. Garner, 498 U.S. 279, 291, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991); United States v. McGrath, 143 B.R. 820, 825 (D.Md.1992), aff'd, 8 F.3d 821 (4th Cir.1993) (Table). Because the Bankruptcy Code does not define the term, the Fourth Circuit has adopted a three-part test to determine whether the debtor has demonstrated "undue hardship" within the meaning of § 523(a)(8). To do so, the debtor must establish:
(1) that he cannot maintain a minimal standard of living for himself and his dependents, based upon his current income and expenses, if he is required to repay the student loans; (2) that additional circumstances indicate that his inability to do so is likely to exist for a significant portion of the repayment period of the student loans; and (3) that he has made good faith efforts to repay the loans.
In re Ekenasi, 325 F.3d 541, 546 (4th Cir.2003) (citing Brunner v. New York State Higher Educ. Servs. Corp., 831 F.2d 395, 396 (2d Cir.1987) (per curiam)).[2]
*185 The bankruptcy court found that Appellee had satisfied the first requirement of the "undue hardship" test but had failed the second and third requirements. On the first prong, the bankruptcy court determined that Appellee maintained a deficiency of $944 per month between her income and expenses; as a result, Appellee "could not maintain a minimal standard of living if forced to repay the USDE loans at the present time." Judgment Order (Paper 31) at 4. However, on the second prong, the bankruptcy court found that a change in circumstances was feasible and thus could enable Appellee to pay at least a portion of her debt to Appellant. The bankruptcy court noted that this finding "recognizes the substantial burden a debtor faces in seeking discharge of government guaranteed student loans." Judgment Order (Paper 31) at 7. Similarly, on the third prong, the bankruptcy court concluded that Appellee failed to show that she had made good faith efforts to repay her loans, namely because she had not applied for participation in the Income Contingent Repayment Plan (ICRP) offered by Appellant. See Judgment Order (Paper 31) at 10-11.[3]
The bankruptcy court dismissed Appellee's complaint without prejudice but also ordered a moratorium on Appellee's obligation to Appellant until April 1, 2005.[4] The moratorium would excuse Appellee from making any payments to Appellant and would preclude Appellant from accruing any interest on account of Appellee's obligation. See Judgment (Paper 30); Judgment Order (Paper 31) at 11. That Appellee failed to satisfy the second and third requirements of the "undue hardship" test, the bankruptcy court concluded, "does not mean, however, that the Debtor is not entitled to some relief." Judgment Order (Paper 31) at 11. This court disagrees.
Congress has made clear in § 523(a)(8) that, absent proof of undue hardship, student loans are nondischargeable in bankruptcy "and, thus, pass unaffected through the bankruptcy estate for purposes of the debtor's liability." In re Kielisch, 258 F.3d 315, 320-21 (4th Cir.2001). See also In re Ekenasi, 325 F.3d at 545; In re Banks, 299 F.3d 296, 300 (4th Cir.2002). Moreover, post-petition interest on the student loan continues to accrue during bankruptcy proceedings and, absent proof of undue hardship, "the debtor remains personally liable for the full amount of the student loan debt" i.e., both the principal and interest. In re Kielisch, 258 F.3d at 321; see also In re Banks, 299 F.3d at 300 ("Post-petition interest on a nondischargeable debt also is nondischargeable"). The statutory language reinforces the legislative intent behind § 523(a)(8), by which Congress sought "to prevent indebted college or graduate students from filing for bankruptcy immediately upon graduation, thereby absolving themselves of the obligation to repay their student loans." In re Kielisch, 258 F.3d at 320 (internal quotation omitted).
*186 The bankruptcy court's imposition of the moratorium effectively functions as a partial discharge because it prevents Appellant from accruing any interest on Appellee's student loans; that is, during its period of operation, the moratorium would relieve Appellee of personal liability on the interest portion of her obligation. The failure of Appellee to prove undue hardship, as required by § 523(a)(8) for discharge of her student loans, precludes the creative relief, however laudable, fashioned here by the bankruptcy court.
Appellee argues that the bankruptcy court had authority to impose the moratorium as an equitable power pursuant to 11 U.S.C. § 105(a).[5] Although bankruptcy courts, as courts of equity, have broad authority to grant relief they deem appropriate, "whatever equitable powers remain in the bankruptcy courts must and can only be exercised within the confines of the Bankruptcy Code." Norwest Bank Worthington v. Ahlers, 485 U.S. 197, 206, 108 S.Ct. 963, 99 L.Ed.2d 169 (1988). The plain language of § 523(a)(8) provides that discharge from a student loan, an otherwise nondischargeable debt, may be ordered only upon proof of undue hardship. To permit enforcement of any type of discharge, such as the novel relief crafted by the bankruptcy court in this case, in the absence of proven undue hardship would chip away at § 523(a)(8); the collective force of such piecemeal exceptions ultimately would eviscerate the statute. Because Appellee failed to prove undue hardship within § 523(a)(8), as the bankruptcy court itself concluded, that court exceeded its equitable authority under § 105(a) in ordering the moratorium.[6]
IV. Conclusion
For the foregoing reasons, the court will grant Appellant's motion to strike Appellee's cross-appeal and will reverse the bankruptcy court's moratorium order. A separate Order will follow.
ORDER
For the reasons stated in the foregoing Memorandum Opinion, it is this 12th day of November, 2003, by the United States District Court for the District of Maryland ORDERED that:
1. The motion by Appellant United States Department of Education (USDE) to strike Debtor Appellee Shireen Blair's cross-appeal (Paper 13) BE, and the same hereby IS, GRANTED;
2. The JUDGMENT of the bankruptcy court, to the extent that it IMPOSED a moratorium on the obligation of Appellee Shireen Blair to Appellant BE, and the same hereby IS, REVERSED; and
*187 3. The Clerk is directed to transmit copies of this Memorandum Opinion and this Order to Appellee Shireen Blair, to counsel for Appellant, and to the United States Bankruptcy Court, and CLOSE this case.
NOTES
[1] Judgment was entered on April 3, 2003, although Judge Schiff signed the order on March 27, 2003.
[2] The so-called Brunner test has been adopted by a number of other circuits. See In re Brightful, 267 F.3d 324 (3d Cir.2001); In re Gerhardt, 348 F.3d 89 (5th Cir.2003); Goulet v. Educ. Credit Mgmt. Corp., 284 F.3d 773 (7th Cir.2002); In re Saxman, 325 F.3d 1168 (9th Cir.2003); In re Cox, 338 F.3d 1238 (11th Cir.2003).
[3] Although not before the court because there was no cross-appeal on the issue, the court has reviewed the record and finds no clearly erroneous factual determinations nor any incorrect legal determinations by the bankruptcy court.
[4] In dismissing Appellant's complaint without prejudice, the bankruptcy court noted that Appellant once again could seek discharge of her student loans after the moratorium based on undue hardship. Aside from imposition of the moratorium, discussed infra, such dismissal is proper because "the Bankruptcy Code establishes a general rule that dismissal of a case is without prejudice." Colonial Auto Ctr. v. Tomlin (In re Tomlin), 105 F.3d 933, 937 (4th Cir.1997).
[5] Section 105(a) provides:
The court may issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of this title. No provision of this title providing for the raising of an issue by a party in interest shall be construed to preclude the court from, sua sponte, taking any action or making any determination necessary or appropriate to enforce or implement court orders or rules, or to prevent an abuse of process.
11 U.S.C. § 105.
[6] At least two other circuits also have resolved the purported tension between § 523(a)(8) and § 105(a) in this manner. See In re Cox, 338 F.3d 1238, 1243 (11th Cir.2003) ("Because the specific language of § 523(a)(8) does not allow for relief to a debtor who has failed to show `undue hardship,' the statute cannot be overruled by the general principles of equity contained in § 105(a)"); In re Saxman, 325 F.3d 1168, 1175 (9th Cir.2003) ("before the bankruptcy court can partially discharge student debt pursuant to § 105(a), it must first find that the portion being discharged satisfies the requirements under § 523(a)(8)").
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113 F.Supp. 80 (1953)
UNION TRUST CO. OF DISTRICT OF COLUMBIA et al.
v.
UNITED STATES (two cases).
Civ. Nos. 4691-50, 4692-50.
United States District Court for the District of Columbia.
May 5, 1953.
*81 Galiher & Stewart, Washington, D. C., and Bigham, Englar, Jones & Houston, New York City, for defendant Eastern Air Lines, Inc.
David G. Bress and Sheldon Bernstein, Washington, D. C., for Union Trust Co.
Ross O'Donoghue and Vincent Burke, Jr., Asst. U. S. Attys., Washington, D. C., for U. S.
McGUIRE, District Judge.
These are wrongful death actions by the executor of the estates of Ralph E. Miller and Mildred Miller, husband and wife, who died in an air collision of November 1, 1949, in the vicinity of Washington National Airport while they were passengers in an Eastern Airlines plane.
Before trial the parties had stipulated and agreed on the following facts:
At approximately 11:46-11:47 A.M., E.S.T., on November 1, 1949, an Eastern Airlines DC-4 No. N88727, denominated as Eastern flight 537, and a P-38 military type aircraft No. NX-26927 collided in mid-air while the Eastern DC-4 plane was approximately 300 feet in the air on final approach for landing on runway number 3 at the Washington National Airport, Washington, D. C. Eastern flight 537 was carrying a crew of 4 persons (pilot, copilot, steward and stewardess) and 51 passengers, all of whom, including plaintiffs' decedents, were killed in and as a direct and proximate result of said accident. The P-38 was carrying only the pilot, Eric Rios Bridoux, a citizen of Bolivia and an officer in the Bolivian Air Force who was then operating the P-38. Bridoux was seriously injured in said collision but survived. Both aircraft were completely wrecked and such debris or components of the planes as were thereafter found in or near the scene of the collision are indicated on a stipulated chart.
Eastern's flight 537 was enroute from Boston, Massachusetts, via intermediate points to Washington, D. C. Over Beltsville, Maryland, 15 miles northeast of the Washington National Airport, flight 537 contacted the Washington control tower on 119.1 megacycles voice radio communications and the flight was cleared by the tower to enter a left traffic pattern for landing on runway number 3. One minute before that clearance, that is, at 11:37 A.M., E.S.T., the P-38 had taken off from runway number 3 at Washington National Airport on a test flight. From the time the P-38 departed until after the accident, visibility in the vicinity of the airport remained at 15 miles, ceiling was 6,500 feet with scattered clouds at 3,500 and surface wind was from the northeast 20-25 miles per hour.
As to the defendant Eastern Airlines, there was a jury verdict against it, while the defendant Bridoux was exonerated.
The case of the defendant United States was tried to the Court at the same time, the plaintiff alleging negligence of a concurring character specifically set forth in a pretrial stipulation:
a. The failure of the control tower personnel to issue a timely warning to the Eastern plane as to the P-38 being on final approach;
b. The failure of the tower personnel to take appropriate steps to warn the P-38 that the Eastern plane was on final approach and to deter him from flight actions inconsistent with or dangerous thereto;
c. The failure of the tower personnel to take appropriate action to separate the two planes involved so as to avoid collision;
d. The failure of the tower personnel to employ simultaneous radio transmissions to both planes to assure each being advised as to the actions of and the directions to the other;
e. The failure of the tower personnel to require the Eastern plane to follow the prescribed landing pattern and toleration of a shortcut thereof;
f. The failure of the tower to warn the P-38 that the Eastern plane was not following the prescribed landing pattern but was shortcutting same;
g. Violation of air regulations then and there in full force and effect, as follows: Civil Air Regulations, Part 26, § 26.26, Aeronautical Rules for the Washington National Airport, § 571.3.
I conclude under the statute, the Federal Tort Claims Act, 28 U.S.C.A. §§ *82 1346, 2671 et seq.; so-called, relied upon by the plaintiff in its suit against the Government, that the United States has waived immunity, and the Court has jurisdiction.
The case of Feres, Executrix v. United States, 340 U.S. 135, 71 S.Ct. 153, 95 L.Ed. 152, relied on heavily by the Government in support of its motion for a directed judgment in its favor, can be distinguished.
True, Mr. Justice Jackson, who spoke for the Court and interpreting the statute said: "* * * It will be seen that this is not the creation of new causes of action but acceptance of liability under circumstances that would bring private [emphasis supplied] liability into existence." 340 U.S. at page 141, 71 S.Ct. at page 157.
And it is on this language that the Government seizes with avidity. It contends that since the United States, through the Civil Aeronautics Board and the Administrator of Civil Aeronautics, in discharge of a congressional mandate, has promulgated exhaustive and complete air traffic rules governing all phases of air traffic operation and control, which have nationwide force and applicationthat this is a function sovereign in character and constitutional in genesis:
"Congress has recognized the natural responsibility for regulating air commerce. Federal control is intensive and exclusive. Planes do not wander about in the sky like vagrant clouds. They move only by federal permission, subject to federal inspection, in the hands of federally certified personnel and under an intricate system of federal commands. The moment a ship taxis onto a runway it is caught up in an elaborate and detailed system of controls. It takes off only by instruction from the control tower, it travels on prescribed beams, it may be diverted from its intended landing, and it obeys signals and orders. [Emphasis supplied] Its privileges, rights, and protection, so far as transit is concerned, it owes to the Federal Government alone and not to any state government." Northwest Air Lines v. State of Minnesota, 1944, 322 U.S. 292, 303, 64 S.Ct. 950, 956, 88 L.Ed. 1283.
With the duty thus imposed of the "regulation of air commerce in such manner as to best promote its development and safety * * *", Title 49 U.S.C.A. § 402(e), there follows as a matter of course the corollary responsibility to promote safety of flight, by the prescription of air traffic rules, and their revision from time to time as circumstances and conditions warrant and dictate, "* * * for the prevention of collisions between aircraft, and between aircraft and land or water vehicles." 49 U.S.C.A. § 551(a) (7).
Thus the Government concludes since this function is purely governmentalthat is, sovereignthere is no liability since the only allowable claims are those which "* * * in the same manner and to the same extent a private individual under like circumstances * * *" would be liable for, with certain exceptions not material here, and since there is no liability of a private individual "even remotely analogous to that * * *" now asserted against the United States, the claim falls.
For it is argued no private individual has power to assume the prerogatives of sovereignty, for no private person, individual or corporate could possibly act in the capacity in which the United States acts in its regulation of air commerce, citing Feres, supra.
But the Feres case as has been said can be distinguished for it went off on the matter of status. And the distinction is one of substance. Feres was a soldier who perished in a barracks fire while on active duty; the negligence alleged being the quartering him in barracks which were known or should have been known to have been unsafe because of a defective heating plantthe Court concluding:
"We know of no American law which ever has permitted a soldier to recover for negligence, against either his superior officers or the Government he is serving. [Italics supplied.] Nor is there any liability `under like circumstances,' for no private individual has power to conscript or mobilize a private army with such authorities over persons as the Government vests in echelons of command." *83 340 U.S. supra, at page 141, 71 S.Ct. at page 157.
It is upon this language which the Government strongly relies, but in support of the distinction made, it is suggested that the concluding paragraph of the opinion, 340 U.S. supra, at page 146, 71 S.Ct. 153, clearly and conclusively shows that the Government's argument is actually what it purports to beanalogous only, and remotely so. That paragraph as is germane reads as follows:
"We conclude that the Government is not liable under the Federal Tort Claims Act for injuries to servicemen where the injuries arise out of or are in the course of activity incident to service. * * * We do not think that Congress, in drafting this Act, created a new cause of action dependent on local law for service-connected injuries or death due to negligence." (Emphasis supplied.) 340 U.S. supra, at page 146, 71 S.Ct. at page 159.
Thus it appears emphasizing the distinction made.
In this connection it is interesting to note the case of United States v. Spelar, 338 U.S. 217, 70 S.Ct. 10, 94 L.Ed. 3, decided in October Term 1949 and just about eleven months before the decision in Feres. There, the District Court of the United States for the Eastern District of New York dismissed an action brought against the United States under the Act to recover for the wrongful death of a flight engineer at an airfield in Newfoundland leased by the United States from Great Britain, alleging, it appears, negligence upon the part of the United States in the operation of the field. Spelar v. U. S., D.C., 75 F.Supp. 967. The Court of Appeals, 2 Cir., reversed, 171 F.2d 208.
The decedent Spelar was an employee of American Overseas Airlines and was killed in a take-off crash. The plane involved was that of the decedent. The District Court as has been said dismissed the action,not, however, on the ground of governmental immunity but predicated its action on the fact of the incident occurring in a "foreign country" and thus within a specific exception set forth in the statute.[1] The Supreme Court reversed the Court of Appeals, holding with the Court of first instance.
Now this is of interest solely as an indication that apparently the government in the Spelar case was not quite so certain of the point it argues here with such urgency, and it must have had some doubt about it, because it preferred to take its position on the more certain ground of a statutory exception. Nor was an appeal taken in Cerri v. United States, 80 F.Supp. 831 at page 833, in which Judge Roche met the issue head on and decided it adversely to the government, and in an opinion that has since been liberally quoted and relied on.
Certainly if the regulation of air commerce is a sovereign function that of the Coast Guard is sovereign also, being as it is "a military service and a branch of the armed forces of the United States at all times * * *", Title 14, U.S.C.A. § 1, and an essential part of its function is aids to navigation. 14 U.S.C.A. § 81.
And further, part of its function in this respect is to maintain Loran stations "(b) required to serve the needs of the maritime commerce of the United States; or (c) required to serve the needs of the air commerce of the United States as determined by the Administrator of Civil Aeronautics." (Italics supplied.) Id.; cf. also 14 U.S.C.A. § 82.
Yet it has been held that a case was stated against the United States under the Federal Tort Claims Act, the negligence alleged being that of creating and marking the wreck of an old battleship. The Court, citing and adopting the distinction herein made of the reach and effect of the Feres case, supra.
Somerset Seafood Co. v. United States, 4 Cir., 1951, 193 F.2d 631, 633, 634, 635, citing Cerri v. U. S., supra, with approval.
The conclusions thus reached, it seems to me, are indicative of the fact that *84 the technical niceties hitherto drawn between what are governmental and other functions are rapidly being done away with in an age in which the activities of the Government impinge so manifoldly upon the individual citizen in nearly all of his. The present climate of public opinion, of which the Federal Tort Claims Act is the most conspicuous example, is to the effect that the fiction of sovereign immunity is for the most part outmoded and as far as it relates to the act in question, preserved only in those specific exceptions which Congress has specifically indicated and of which the activity with which we are here concerned is not one. See generally, Federal Crop Ins. Co. v. Merrill, 1947, 332 U.S. 380, 383, 68 S.Ct. 1, 92 L.Ed. 10.
As the Supreme Court has further said, in United States v. Yellow Cab Co., 1950, 340 U.S. 543, at page 547, 548, 549 and 550, 71 S.Ct. 399, 402, 95 L.Ed. 523, in relation to the Federal Tort Claims Act:
"The Federal Tort Claims Act waives the Government's immunity from suit in sweeping language. It unquestionably waives it in favor of an injured person. * * *
"This Act does not subject the Government to a previously unrecognized type of obligation. Through hundreds of private relief acts, each Congress for many years has recognized the Government's obligation to pay claims on account of damage to or loss of property or on account of personal injury or death caused by negligent or wrongful acts of employees of the Government. This Act merely substitutes the District Courts for Congress as the agency to determine the validity and amount of the claims. It suggests no reason for reading into it fine distinctions between various types of such claims. * * *
"* * * The proceedings emphasized the benefits to be derived from relieving Congress of the pressure of private claims. Recognizing such a clearly defined breadth of purpose for the bill as a whole, and the general trend toward increasing the scope of the waiver by the United States of its sovereign immunity from suit, it is inconsistent to whittle it down by refinements."
New York State has had a similar statute for some years. See: Jackson v. State of New York, 1933, 261 N.Y. 134, 184 N.E. 735; Bloom v. Jewish Board of Guardians, 1941, 286 N.Y. 349, 36 N.E.2d 617; Foley v. State of New York, 1945, 294 N.Y. 275, 62 N.E.2d 69, citing Jackson v. State of New York and Bloom v. Jewish Board of Guardians, supra. Moch Co. v. Rensselaer Water Co., 247 N.Y. 160, 159 N.E. 896, 62 A.L.R. 1199 can be distinguished.
All of which leads to this: When the Government, as here, takes upon itself the functionas it claims it mustof the regulation of air commerce and the responsibility, among other things, of regulating the flow of traffic at a public airport, the assumption of such a responsibility involves something further, namely, not only an activity designed to be protective of the interest of that amorphous group known as the public as a whole, but that of individuals as well, against potential hazards incident to such performance and implicit in its undertaking. And if injury or death results as a consequence of the negligence of its servants or agents so engaged, Congress has decreed that the mantle of sovereignty which heretofore has protected it, falls from its shoulders and thus what was formerly at best an unenforceable moral obligation is thus transmuted into an actionable legal right. And whatever exceptions there are, this is not one of them.
Such I find to be the situation here and so hold.
So much for liability. As to negligence, I find that there was failure of the control tower personnel to issue a timely warning to the Eastern plane as to the P-38 being on final approach; in the failure, also, to warn the P-38 that Eastern was on final approach; in clearing both planes for the same runway at approximately the same time, having in mind their respective positions in relation to each other and the speed of both their approach and descent, and the failure to keep both planes advised as to the activities of the *85 other; I find this to be negligence and concurrent both in character and in relation to that found by the jury with respect to the defendant Eastern. I find, further, that such negligence contributed proximately to the injury complained of.
With respect to the locale, the Court concurs in the finding of the jury that the accident occurred in the District of Columbia. This particular question was not easy of resolution. The presentation of evidence with respect to it took many trial days and it was a very long trial. But a careful evaluation of it, having in mind such pertinent and persuasive factors as the narrowness, so to speak, of the geographical area involved in relation to the line of demarcation between the District of Columbia and the Commonwealth of Virginia; the allowing for the widening angle of vision from the position of an observer on the ground in relation to an object in the air unless directly overhead; and the grave possibility of error resulting therefrom; the very suddenness of the business, so to speak; the nature and character of the terrain, etc., all lead to this conclusion. In addition, by way of corollary and in support of this finding, the testimony of an expert, skilled in the science of aerodynamics and predicated basically on admitted facts as to where the major wreckage of the carrier was found, and his mathematical reconstruction as a consequence of the episode, allowing as he did for such factors as speed, wind velocity, weight, altitude, position, direction; the type of aircraft involved; the character of the collision, and result to the passenger plane and where, in relation to its fusilage; the aerodynamic characteristics involved from the time its tail fell off; the horizontal advance of the forward section; the character and nature of falling bodies generally and those specifically involved here; conclusively resolves the question as far as the Court is concerned, indicating as it did in relation to all of the evidence that it preponderated decisively in favor of the factual resolution reached.
With reference to damages, I also concur in the verdict of the jury and find accordingly, i. e., $50,000 for the estate of the male decedent and $15,000 for that of the female. Nor do I in the present state of the economic worth of the dollar and the evidence adduced herein conclude in either case such sums to be in any way excessive. Counsel will prepare tentative findings of fact and judgment. Order accordingly.
NOTES
[1] 28 U.S.C. § 2680(k).
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96 F. Supp. 79 (1951)
SPRING-AIR CO.
v.
RAGAINS et al.
Civ. A. No. 1268.
United States District Court W. D. Michigan, S. D.
January 29, 1951.
*80 Robert E. Woodhams, Peter P. Price and Laurence, Woodhams & Mills, all of Kalamazoo, Mich., Edward C. McCobb and McCobb, Heaney & Dunn, all of Grand Rapids, Mich., for plaintiff.
Frank E. Liverance, Jr., R. M. Shivel and Linsey, Shivel, Phelps & VanderWal all of Grand Rapids, Mich., for defendants.
*81 STARR, District Judge.
Plaintiff Spring-Air Company, a corporation, of Holland, Michigan, successor to the Charles Karr Company, is principally engaged in the manufacture of spring structures for use in the making of mattresses. The defendants, doing business as the Wire Products Company of Holland, Michigan, are also engaged in the manufacture of spring structures for use in mattresses.
On January 31, 1949, plaintiff filed complaint alleging wilful infringement of the following United States Letters Patent: No. 1,887,058 issued November 8, 1932 (expired November 8, 1949) for a spring assembly; No. 1,922,002 issued August 8, 1933 (expired August 8, 1950) for a spring-assembling machine; and No. 2,026,276 issued December 31, 1935 (expires December 31, 1952) for a spring-assembling machine. Plaintiff asks for an injunction against further infringement, an accounting for profits and damages, and for costs.
Defendants filed answer and counterclaim, denying the charges of infringement and alleging the invalidity of the three patents in suit. They also allege malicious and vexatious conduct on the part of the plaintiff and ask damages therefor, and also for costs of suit and attorney fees. In support of their claim of invalidity defendants cite the following prior-art patents: Heuer, 1,930,715; Kirchner, 1,907,323; Gail, 1,905,459; Kirchner, 1,881,672; Stackhouse, 1,835,819; Lofman, 1,817,087; Stackhouse, 1,812,611; Meister et al., 1,785,839; F. Karr, 1,744,389; Kroehler, 1,706,889; C. D. Karr, 1,656,204; Jackson, 482,965. They also put in evidence the following additional patents: C. D. Karr, 1,938,489; Wunderlich, 1,932,566; Foster, 1,899,087; Karpen, 1,882,649; F. Karr, 1,798,885; F. Karr, 1,596,273; Holtfoth, 1,473,989; Lewis, 1,262,814; Mellon, 1,103,526; Simmons, 1,021,431; Bonnell, 630,967; Templin, 593,406; Templin, 581,316; Bonnell, 405,821.
The plaintiff contends that the spring structures manufactured and sold by the defendants infringe claims 2 and 4 of its spring-assembly patent No. 1,887,058, and that the spring-assembling machines constructed and used by defendants infringe claims 1, 2, 7, 8, 10, 15, and 16 of its machine patent No. 1,922,002, and Claims 1 to 9, inclusive, and claim 14 of its machine patent No. 2,026,276.
Plaintiff's three patents in suit are presumed to be valid, and the burden is upon the defendants to establish their claims of invalidity by clear and satisfactory proof. Crosley Corporation v. Westinghouse Electric & Mfg. Co., 3 Cir., 152 F.2d 895; Babson Bros. Co. v. Perfection Manufacturing Corp., D.C., 86 F. Supp. 754; Mueller v. Campbell, D.C., 68 F. Supp. 464, affirmed 6 Cir., 159 F.2d 803. See also 2 Walker on Patents, Deller's Ed., pp. 1272, 1273, § 276. However, this presumption of validity is rebuttable and not conclusive. J. J. Warren Co. v. Rosenblatt, 7 Cir., 80 F. 540, certiorari denied 168 U.S. 710, 18 S. Ct. 943, 42 L. Ed. 1211; Dennis v. Great Northern Ry. Co., D. C., 51 F.2d 796; Reynolds v. Emaus, D.C., 87 F. Supp. 451. There is undoubtedly a stronger presumption of validity as to plaintiff's spring-assembly patent 1,887,058 because of its involvement in interference proceedings in the Patent Office, in which certain prior-art patents were considered. However, this stronger presumption is not conclusive and is rebuttable upon a convincing showing of invalidity. In considering the question of the validity of the patents in suit, the court cannot disregard the fact that the decisions of the Supreme Court of the United States in recent years clearly indicate a trend toward a higher standard of invention. In Foxboro Co. v. Taylor Instrument Companies, 2 Cir., 157 F.2d 226, 234, the court said: "Finally, when all else is said, we cannot ignore the change in recent years in the standard of invention adopted by the Supreme Court. It is as idle to pretend that there has been no change (In re Shortell, 142 F.2d 292, 31 C.C.P.A., Patents, 1062), as it would be to protest against it; and it is as much the duty of a lower court to give effect to it, as it is its duty to give effect to any other of the decisions of that court. We are to dispose of the question of invention, so far as we can divine, as we think the Supreme Court would dispose of it". See also Great Atlantic & Pacific Tea Co. v. Supermarket Equipment Corp., 340 U.S. 147, 71 S.Ct. *82 127; Trabon Engineering Corp. v. Dirkes, 6 Cir., 136 F.2d 24; Perkins v. Endicott Johnson Corp., 2 Cir., 128 F.2d 208; Picard v. United Aircraft Corporation, 2 Cir., 128 F.2d 632.
A device or structure, to be patentable, must be more than new and useful; it must satisfy the requirements of invention or discovery and must represent more ingenuity than the work of a mechanic skilled in the art. Funk Brothers Seed Co. v. Kalo Inoculant Co., 333 U.S. 127, 68 S. Ct. 440, 92 L. Ed. 588; Cuno Engineering Corp. v. Automatic Devices Corp., 314 U.S. 84, 62 S. Ct. 37, 86 L. Ed. 58; Continental Machines, Inc., v. Grob, 8 Cir., 137 F.2d 470; Emmett v. Metals Processing Corporation, 9 Cir., 118 F.2d 796; American Laundry Mach. Co. v. Strike, 10 Cir., 103 F.2d 453. An extended application of prior-art teachings, mere perfection of workmanship, a change only in size, form, strength, proportions, degree, or the substitution of equivalents doing substantially the same thing by substantially the same means, does not amount to patentable invention. Allen-Bradley Co. v. Square D. Co., 7 Cir., 168 F.2d 334, certiorari denied 335 U.S. 845, 69 S. Ct. 68, 93 L. Ed. 395; National Pressure Cooker Co. v. Aluminum Goods Mfg. Co., 7 Cir., 162 F.2d 26; Crosley Corporation v. Westinghouse Electric & Mfg. Co., 3 Cir., 152 F.2d 895; B. F. Sturtevant Co. v. Massachusetts Hair & Felt Co., 1 Cir., 122 F.2d 900, certiorari denied 315 U.S. 823, 62 S. Ct. 917, 86 L. Ed. 219; Schreyer v. Chicago Motocoil Corporation, 7 Cir., 118 F.2d 852; Mueller v. Campbell, D.C., 68 F. Supp. 464. In Sinclair & Carroll Co., Inc., v. Interchemical Corporation, 325 U.S. 327, 330, 65 S. Ct. 1143, 1145, 89 L. Ed. 1644, the court said: "A long line of cases has held it to be an essential requirement for the validity of a patent that the subject-matter display `invention', `more ingenuity * * * than the work of a mechanic skilled in the art.' * * * This test is often difficult to apply; but its purpose is clear. Under this test, some substantial innovation is necessary, an innovation for which society is truly indebted to the efforts of the patentee."
In the recent case of Shaffer v. Armer, 10 Cir., 184 F.2d 303, the court said at page 307: "`The design of the patent laws is to reward those who make some substantial discovery or invention, which adds to our knowledge and makes a step in advance in the useful arts.' Atlantic Works v. Brady, 107 U.S. 192, 200, 2 S. Ct. 225, 231, 27 L. Ed. 438. The device must not only be `new and useful,' it must also amount to `invention or discovery'. Thompson v. Boisselier, 114 U.S. 1, 11, 5 S. Ct. 1042, 1047, 29 L. Ed. 76; and `perfection of workmanship, however much it may increase the convenience, extend the use, or diminish expense, is not patentable.' Reckendorfer v. Faber, 92 U.S. 347, 356-357, 23 L. Ed. 719; Cuno Engineering Corp. v. Automatic Devices Corp., 314 U.S. 84, 91, 62 S. Ct. 37, 86 L. Ed. 58."
In considering the question as to the validity of each of the three patents here in suit, it should be kept in mind that the patentee in each instance is presumed to know and is chargeable with knowledge of everything disclosed by prior-art patents. Zephyr American Corporation v. Bates Mfg., Co., 3 Cir., 128 F.2d 380; Cutler Mail Chute Co. v. Capitol Mail Chute Corporation, 2 Cir., 118 F.2d 63; Detroit Stoker Co. v. Brownell Co., 6 Cir., 89 F.2d 422.
Plaintiff's spring-assembly patent in suit, Karr 1,887,058, was issued to F. (Francis) Karr November 8, 1932, on application filed December 21, 1927, and by assignment became the property of the Charles Karr Company, predecessor of the plaintiff corporation. The defendants contend that this patent is invalid because lacking invention and because fully anticipated and disclosed in prior-art patents, particularly in Karr 1,744,389 issued to F. (Francis) Karr January 21, 1930, on application filed August 27, 1927. Defendants further contend that plaintiff's claim of infringement of 1,887,058 would render it invalid because of double patenting and illegal extension of the protection granted by 1,744,389.
The first question presented is whether plaintiff's patent 1,887,058 for a spring assembly is valid and, if valid, *83 whether it has been infringed by defendants. The testimony indicates that plaintiff never manufactured or marketed a spring assembly constructed in strict conformance with this patent and, therefore, as a paper patent, it can claim no scope of coverage beyond that specifically disclosed. Roberts v. General Electric Co., 3 Cir., 85 F.2d 964, 965; Stewart-Warner Corporation v. Jiffy Lubricator Co., 8 Cir., 81 F.2d 786. Furthermore, it is a combination patent in a crowded field of the art and, if valid, must be strictly construed.
Prior-art Karr 1,744,389 for a spring assembly expired on January 21, 1947, and thereafter defendants associated together as copartners, acquired factory space, and about January 1, 1948, began the manufacture of spring assemblies. Since that time they have continued to manufacture and market spring assemblies. It is admitted that the spring-assembly structures manufactured and sold by plaintiff and those manufactured and sold by the defendants are substantially the same, and defendants contend that both structures are within the claims of prior-art Karr 1,744,389. It should be noted that applications for 1,744,389 and plaintiff's patent in suit 1,887,058 were both filed by Francis Karr; that he filed application for 1,744,389 August 27, 1927, which was several months before he applied for 1,887,058; also that 1,744,389 was issued January 21, 1930, while 1,887,058 was issued nearly three years later and expired shortly after this suit was begun. Claims 2 and 4 of 1,887,058, which plaintiff contends are infringed, provide as follows:
"2. In a spring assembly, spiral springs arranged in rows, each spring being provided with a distorted portion in its terminal coil forming shoulders, the distorted portions of the springs lapping the terminal coils of the adjacent springs of the same row and helicals encircling the portions that are lapped, the internal diameter of the helical being slightly greater than the combined diameters of the wires of the spring coils, whereby said helicals will hold the lapped portions in lapped position, said helicals engaging said shoulders, thereby preventing rotation of said springs."
"4. In a spring assembly, a plurality of spiral springs, each spring having its terminal coil provided with distorted portions having shoulders at each side thereof, the terminal coils of adjacent springs lapping each other, helicals encircling the lapped portions of said springs and holding them in lapped position, the lapped portion of each coil engaging opposite portions of the interior of said helicals for preventing relative movement thereof, and said helicals engaging said shoulders thereby preventing rotation of said spirals."
The above claims of the patent in suit should be considered in connection with claims 2, 3, and 4 of prior patent Karr 1,744,389, which provide as follows:
"2. In a spring assembly, a plurality of rows of spiral springs, the terminal coils of adjacent springs being lapped and the lapped portions being provided with distorted portions, and helical springs encircling said lapped portions at each side of said distorted portions only for connecting said springs and rows together.
"3. In a spring assembly for cushions and the like, a plurality of resilient spirals arranged in rows, the terminal coils of each spiral lapping the terminal coils of the adjacent spirals in the same row, one of the lapped portions of each terminal coil being provided with a distorted portion, helicals extending about the engaging parts of the lapped portions of said coils for connecting said coils and said rows together.
"4. In a spring assembly, a plurality of rows of spiral springs, the terminal coils of adjacent springs of each row being lapped, and one of said lapped portions of each terminal coil being provided with a distorted portion forming shoulders, and helical connecting coils extending transversely to said rows and encircling a part of said lapped portions of the corresponding springs of adjacent rows for connecting said springs and rows together, said helical connecting coils engaging said shoulders for preventing rotation of said spiral springs."
The claims of both of these Karr patents provide in general for a spring assembly comprising a plurality of spiral springs arranged *84 in adjacent rows with each spring having its terminal coil distorted at opposite sides to form shoulders, with the distorted portions of the coils overlapping those of the adjacent rows, and with helical springs encircling the lapped portions so as to connect the rows by engaging the shoulders of the distorted portions and holding such portions in permanent overlapping relation to prevent rotation of the spiral springs. The only material change which plaintiff's patent in suit made over Karr 1,744,389 was the provision for "the internal diameter of the helical being slightly greater than the combined diameters of the wires of the spring coils." In its brief plaintiff summarizes the innovations of its patent in suit 1,887,058 as comprising a combination of "two adjacent spirals having distorted terminal coils, which coils are overlapped along their distorted portions, and are engaged snugly by a helical connecting member at the point of their overlap." It claims that in Karr 1,744,389 the internal diameter of the connecting helicals which engage the terminal turns of the adjacent spirals, is substantially greater than the combined diameters of the spiral wires in said terminal turns and that this looseness of the helical permits lateral movement of the spiral turns, causing a clicking of wires; while in its patent in suit, Karr 1,887,058, the inside diameter of the helical is "only slightly greater" than the combined diameters of the lapped wires of the adjacent spiral springs, and that such tightness prevents lateral movement of the spiral turns, thus preventing clicking of wires. In other words, the only new element of any consequence that plaintiff claims for 1,887,058 is the "tight helical" to overcome a clicking noise which, it contends, had previously occurred between the terminal coils of the spirals and the inside surface of the helicals because of looseness of the helicals.
The overlapping of curved or distorted portions of spiral springs and their connection by helicals at the overlapped portions is old and shown in many prior patents, particularly F. Karr, 1,798,885; F. Karr, 1,744,389; Kroehler, 1,706,889; C. D. Karr, 1,656,204; F. Karr, 1,596,273; Mellon, 1,103,526; Bonnell, 405,821; and Bonnell, 630,967, which latter Bonnell patent indicates connecting helicals which tightly engage the overlapped portions of the spring spirals, preventing loose motion thereof. It is significant that the specifications of 1,744,389 and 1,887,058 both describe their spring-connecting arrangements as being "practically noiseless in use." Examination indicates that defendants' accused spring assembly is constructed substantially in conformance with prior patent 1,744,389, which expired before they began their manufacture. Therefore, as plaintiff contends that defendants' accused assembly infringes its patent 1,887,058, it could be argued with some force that plaintiff's patent was fully anticipated by 1,744,389.
Patent in suit 1,887,058 is a combination patent for an improvement in the method of connecting spiral springs. It comprises elements old in the art, combined with a reduction in the internal diameter of the connecting helical and a slight change in the shape of the distorted portions of the spring coils which the helical encircles. It is clear that this combination of old elements with a slight change in the internal diameter of the connecting helical and a slight change in the shaping of the distorted portions of the spring coils does not give rise to valid, patentable claims embracing the entire spring-assembly structure. Simplex Paper Box Corporation v. Boxmakers, Inc., 7 Cir., 116 F.2d 914; National Brass Co. v. Michigan Hardware Co., D.C., 71 F. Supp. 980; 1 Walker on Patents, Deller's Ed., 1950 supp. to page 217; 2 Walker on Patents, Deller's Ed., page 789, § 166. In Lincoln Engineering Co. v. Stewart-Warner Corp., 303 U.S. 545, 549-550, 58 S. Ct. 662, 664, 82 L. Ed. 1008, the court said: "the improvement of one part of an old combination gives no right to claim that improvement in combination with other old parts which perform no new function in the combination."
In Vischer Products Co. v. National Pressure Cooker Co., D.C., 71 F. Supp. 973, 978, the court said: "Improving one element in a combination gives no right *85 to reclaim the old combination with the new element." See also Bassick Manufacturing Co. v. R. M. Hollingshead Co., 298 U.S. 415, 56 S. Ct. 787, 80 L. Ed. 1251; 1 Walker on Patents, Deller's Ed., pages 211-218. Mere difference in design and construction of patented device over prior art, involving no new principle and accomplishing nothing more than what one skilled in the art would readily discern, does not amount to invention. H. W. Gossard Co. v. Loeber's, Inc., 7 Cir., 114 F.2d 166, certiorari denied 312 U.S. 680, 61 S. Ct. 450, 85 L. Ed. 1119. Trivial modification of a product does not show invention. Benjamin Electric Mfg. Co. v. Bright Light Reflector Co., Inc., 7 Cir., 111 F.2d 880. Improvements over the prior art, to be patentable, must be the product of some exercise of the inventive faculties and something more than what is obvious to persons skilled in the art. Crosley Corporation v. Westinghouse Electric & Mfg. Co., 3 Cir., 152 F.2d 895, 903. A patent should not be granted for the discovery of a result that would flow naturally from the teachings of the prior art. In re Kepler, 132 F.2d 130, 30 C.C.P.A., Patents, 726. A patentee must make some addition to the common stock of knowledge and not be merely the first to use in combination what was known before without producing a new and different result. Electric Vacuum Cleaner Co., Inc., v. P. A. Geier Co., 6 Cir., 118 F.2d 221, 224. In Thompson v. American Tobacco Co., 4 Cir., 174 F.2d 773, 777, the court said: "mere structural changes which involve nothing more than the exercise of the skill of the art do not rise to the dignity of invention." In considering a patent comprising a combination of old elements which it was claimed produced a new and useful result, the court in Great Atlantic & Pacific Tea Co. v. Supermarket Equipment Corp., 340 U.S. 147, 152, 71 S. Ct. 127, 130, said in part: "Courts should scrutinize combination patent claims with a care proportioned to the difficulty and improbability of finding invention in an assembly of old elements. The function of a patent is to add to the sum of useful knowledge. Patents cannot be sustained when, on the contrary, their effect is to subtract from former resources freely available to skilled artisans. A patent for a combination which only unites old elements with no change in their respective functions, such as is presented here, obviously withdraws what already is known into the field of its monopoly and diminishes the resources available to skillful men. This patentee has added nothing to the total stock of knowledge, but has merely brought together segments of prior art and claims them in congregation as a monopoly."
Plaintiff's patent 1,887,058 claims a combination for an improvement in a crowded field of the art. In considering combination claims in a crowded field, the court said in Shaffer v. Armer, supra, 184 F.2d at page 307: "to make sure that a monopoly is not granted for mere perfection of workmanship, the courts closely scrutinize claims to combinations for improvements in a crowded art. Halliburton Oil Well Cementing Co. v. Walker, 329 U.S. 1, 10, 67 S. Ct. 6, 91 L. Ed. 3; Hollywood-Maxwell Co. v. Streets of Tulsa, 10 Cir., 183 F.2d 261."
In summary, the court is convinced that plaintiff's spring assembly as described in its patent 1,887,058 lacks such novelty, utility, and substantial advance in the art as is necessary to establish invention. The possible, slight improvement in the connecting helical by lessening its internal diameter, and the slight change in the shape of the distorted portions of the spiral springs which the helical encircles, do not entitle plaintiff to a combination or structural patent on its entire spring assembly. Substantially the same results by substantially the same means have been obtained in the prior art. The slight change in the internal diameter of the connecting helical and the slight change in the shape of the distorted portions of the spiral springs represent nothing beyond the ability and adaptation of a skilled and experienced mechanic. The court concludes that patent in suit 1,887,058 is invalid because fully anticipated in the prior art, and for the further reason that it does not represent discovery or invention within the meaning of the patent law. Having concluded that this patent is invalid, the question of its infringement by defendants does not arise.
*86 Plaintiff also charges infringement of its spring-assembly-machine patents, C. D. Karr No. 1,922,002 (expired August 8, 1950) and Erickson No. 2,026,276, which will expire December 31, 1952. These patents are, of course, presumed to be valid, and the burden is upon the defendants to establish their claims of invalidity by satisfactory proof. However, this presumption of validity is rebuttable and is not conclusive. The defendants contend that 1,922,002 is invalid because lacking invention and because fully anticipated and disclosed in prior patents, particularly in Gail 1,905,459 issued April 25, 1933, on application filed November 18, 1929. Defendants further contend that 2,026,276 is invalid because lacking invention and because fully anticipated and disclosed in prior patents, particularly in Karr 1,922,002. These two machine patents are in a crowded field of the art relating to the connecting of rows of spiral springs with helicals to form a spring assembly. Each patent combines elements old in the art with some changes or additions, which combinations the plaintiff contends establish invention and the validity of the patents. The authorities hereinbefore cited relative to the validity of combination improvement patents in a crowded field, and as to what constitutes invention, apply with equal force to these machine patents.
Patent 1,922,002 provides in general for a machine to connect rows of spiral springs with helicals to form a spring assembly for use in mattresses, cushions, and the like. The patent describes a machine comprising a table movably supported on a frame to support rows of spiral springs; upper and lower spring-holding members referred to as jigs[1] mounted in spaced relation in a vertical plane for positioning and releasably holding the adjacent upper and lower portions of the terminal coils of spiral springs in contiguous relation; means for guiding and rotating said helicals about their longitudinal axes to engage the adjacent terminal coils; and manually operated means for releasing the helically connected spirals from the spring-holding members and moving them rearward on the table. Claims 10, 15, and 16 of plaintiff's patent 1,922,002, which are reasonably illustrative, read as follows:
"10. In a spring assembling machine, a frame, a table movably supported on said frame and adapted to support rows of spiral springs, a spring holding member associated with said table, said member comprising spring positioning and holding elements, guides on said member, means for causing a helical to engage said guides for guiding said helical about the adjacent portions of the terminal coils of spirals of adjacent rows, means for releasing said springs, and means for elevating said table for releasing said spirals from said spring-holding means."
"15. In an assembling machine for connecting adjacent rows of spiral springs with connecting helicals for forming a spring assembly, a supporting frame, upper and lower spring holding members mounted on said frame in spaced relation in a substantially vertical plane, said members having channels facing each other, the sides of said channel having cut-away portions for receiving the adjacent portions of the terminal coils of adjacent rows of said spiral springs at each end thereof, means for positioning and holding said spiral springs, means for rotating said helicals for engaging the portions of said springs extending through said cut-away portions into said channels, and for advancing said helicals, and means for releasing said holding means."
"16. In a spring assembling machine for connecting rows of spiral springs together by helicals, comprising a support, a table movable vertically relative to said support, said table being adapted to support rows of spiral springs, upper and lower spiral spring holding members, means for raising and lowering said upper member, said lower member being secured to said support in such position that said table may be elevated above the same, means on said members for positioning and holding the adjacent portions of the terminal turns of each spiral spring, means for weaving helicals about *87 the adjacent portions of said terminal turns of adjacent rows, and means for elevating said table and for releasing said spirals whereby the same may be pushed rearwardly on said table."
The idea of connecting rows of spiral springs with helicals was old when plaintiff's machine patent 1,922,002 was applied for. Kroehler 1,706,889 issued March 26, 1929, provided for the connection of adjacent rows of spiral springs by the use of helicals, referred to as "spiral connector-wires." It also provided means for engaging and holding the terminal coils of the spirals, for guide grooves, and for means for driving said helicals through the guides to form connecting engagement with the end rings of the adjacent rows of the lower coils of the spiral springs. Karr 1,656,204, applied for September 30, 1926, and issued January 17, 1928, described a mechanism for connecting rows of spiral springs, comprising a platform, means for supporting spiral wire units in rows with portions of said spirals adjacent to each other, fixtures about which the lower end forms of the vertical spirals were placed, grooves for the connecting helicals to follow, and means for rotating and advancing said helicals to encircle and connect the lower end portions of the spiral springs of adjacent rows. Other prior-art patents provide divers means for connecting rows of spiral springs with helicals to form a spring-assembly unit. See Wunderlich, 1,932,566, application filed November 21, 1930; also Lofman, 1,817,087; Templin, 593,406; Templin, 581,316. The idea of connecting both the lower and upper ends of adjoining rows of spiral springs by helicals in one operation is shown in prior patents, Stackhouse, 1,812,611, issued June 30, 1931, on application filed March 5, 1930, and Stackhouse, 1,835,819, issued December 8, 1931, on application filed March 5, 1930. Defendants rely principally on prior-art Gail, 1,905,459, applied for November 18, 1929, issued April 25, 1933, as fully anticipating the combination of elements, or equivalents thereof, shown in plaintiff's patent 1,922,002. It is apparent that Gail and Karr both sought a more efficient means of assembling rows of spiral-coil springs by the use of connecting helicals. It may be noted that application for the Gail patent was filed about two years prior to the application for 1,922,002 and was issued several months prior to 1,922,002. Claims 4, 15, and 18 of the Gail patent, which are reasonably illustrative, are set forth in the margin below.[2]
*88 Gail 1,905,459, and Karr 1,922,002 both provide for elements in common as follows: A supporting table, with jigs separable and movable toward and away from each other for holding overlapped parts of the lower end coils of spiral springs arranged in rows on the table, and means for guiding the connecting helical as it is rotated to encircle the adjacent portions of the spiral springs; an upper support for jigs to hold the upper end coils of the rows of spiral springs, and with means for guiding the connecting helical as it is rotated, to connect the coils; a movement of the rows of spiral springs over the table to a connecting engagement with the holding jigs, said jigs being opened and closed automatically in Gail and manually in Karr; simultaneous feeding of helicals to connect both the upper and lower ends of the spiral springs, the helicals used in the Karr machine being preformed, while Gail provides for a helical-forming-and-feeding mechanism but with the statement that a mechanism to feed preformed helicals may be substituted for the combined helical-forming-and-feeding mechanism; the guidance of the helicals through the use of tubular guides flared out at the entrance ends; the disengagement of the spiral springs from the jigs after their helical connection, this disengagement being automatically performed by a rotating cam in Gail and by manual, foot-pedal operation in Karr. The disengagement in Gail is by members exerting downward pressure on the upper ends of the helically connected springs and pushing upward on the lower connected ends thereof to accomplish a vertical movement of the springs and holding jigs; while the disengagement in Karr is performed by manually lifting the upper jigs and lifting the springs at their lower ends. Gail provides for lifting the springs at their lower ends but reverses the movement at the upper ends by pushing the springs down. The same result, that is, the disengagement of the spring spirals, is accomplished by equivalent mechanisms and operations.
Both Karr 1,922,002 and Gail 1,905,459 produce the same result, that is, a substantially similar spring-assembly product comprising rows of spiral springs connected by helicals. Gail provides for a machine that is fully automatic in operation while Karr provides for a less complete machine, partially manually operated. The Karr foot-lever operation for releasing the spiral coils from the holding jigs is indicated by prior-art patent Holtfoth 1,473,989. The Gail machine would in many particulars appear to be a more complete machine than that of Karr. Karr apparently omitted certain of the mechanical elements of Gail and adopted all other elements, or equivalents thereof. The principal difference between the two machines is in the methods employed to open and close the holding jigs and release the spiral springs after their helical engagement. This difference represents only the varying means that different mechanics conversant with the art of forming spring structures might adopt for opening and closing the holding jigs and for releasing the helically connected spirals. The same results are accomplished by substantially the same means in both Gail and Karr, and the possible, minor improvements in the Karr holding-and-releasing mechanisms certainly do not constitute invention within the meaning of the patent law. The fact that in Karr the helicals connecting the upper and lower terminal coils of adjacent spiral springs are fed into the same side of the machine, whereas in Gail they are fed into opposite sides, is merely a choice of method and an adaptation which any mechanic skilled in the art could readily discern.
In summary, Karr patent in suit 1,922,002 is fully anticipated in Gail and other prior patents and does not represent invention. It is a combination patent for an improvement in a crowded field and merely *89 combines elements old in the art, or equivalents thereof, and represents no more than the work of a skilled mechanic. It is invalid because fully anticipated and because lacking invention. As it is invalid, no question is presented as to its infringement by defendants.
The defendants further contend that plaintiff's patent 2,026,276 for a spring-assembling machine is invalid because lacking invention and because fully anticipated in prior-art patents, particularly in plaintiff's patent, Karr 1,922,002. It may be noted that application for No. 2,026,276 was made by Erickson September 30, 1933, or about two months after 1,922,002 had been issued to Karr, and further that Erickson had initially appeared with Karr as a joint inventor in the application for 1,922,002. It is, therefore, obvious that when 1,922,002 was issued, Erickson as an original coinventor and versed in the art, immediately conceived certain minor changes in the adjustability of parts which he embodied in his application for 2,026,276. Claims 3, 6, and 14 of 2,026,276, which are reasonably illustrative, read as follows:
"3. In a spring assembling machine, a platform for supporting two rows of springs adjacent to each other, a plurality of upper jigs and a plurality of lower jigs arranged in rows one above the other for holding said springs in assembling position, and means interlocking with said support for supporting and independently adjusting each of said jigs longitudinally of said rows for making spring assemblies of different constructions."
"6. In a spring assembling mechanism, a jig for holding and guiding elements of a spring assembly, said jig comprising a stationary portion having a U-shaped projection thereon for receiving a terminal turn of a spiral spring, a movable section having an inwardly extending finger for engaging said turn for holding the same in position, means for guiding a helical around said turn and a supporting plate having a slot therein for adjustably securing said jig to a supporting member."
"14. In combination, a frame, a table pivoted to said frame and having an opening extending across its forward end portion, a lower bar mounted on said frame beneath said opening, a plurality of spring holdings jigs adjustably secured to said bar, a lever at each side of said frame, means for pivotally connecting said levers to said frame, an upper bar secured to said levers, a plurality of wire holding jigs adjustably secured to said upper bar, each of said jigs comprising a stationary jaw and a movable jaw, an operating arm rigidly secured to each of said movable jaws and extending outwardly therefrom, operating bars pivotally connected to said upper and lower bars, operating levers pivoted to said frame and having pin and slot connections with said operating bars, means for resiliently clamping said operating arms and operating bars together, pins on said operating levers for engaging beneath said first named levers for elevating the same when said operating levers are elevated, links pivoted to said table and having pin and slot connections with said first named levers, a lever pivoted at its intermediate portion to each side of said frame, link connections between the rear ends of said last named levers and said operating levers, and means including a treadle for raising and lowering the forward ends of said levers, and a spring for holding said treadle elevated whereby upon initial downward movement of said treadle said jigs will be released and upon further depression said table and upper bar and jigs attached thereto will be elevated."
The only improvements which plaintiff claims for 2,026,276 over 1,922,002 is in making the holding jigs adjustable to different positions on their supporting bars, a redesigning of certain parts of the jigs so that they may be moved and located at different positions on the supporting bars, and some minor change in the mechanism for guiding the connecting helicals. In other words, in Karr 1,922,002 the jigs are in fixed position on the supporting bars and only one spring-assembly pattern can be made with such jigs, and to change the assembly pattern would require a change of the bars; while in 2,026,276 the holding jigs are adjustable to different positions on the supporting bars and different patterns *90 of spring assemblies can be made by the adjustment of the jigs without the substitution of new bars. To accomplish this adjustability of the jigs in 2,026,276, the plate of the jig is slotted in order that a set screw can be passed through the slot into an interiorly threaded hole in the supporting bar. It is obvious that this constitutes only an adjustability of parts which in prior-art 1,922,002 were in fixed position.
The minor change shown in 2,026,276 for guiding the connecting helicals, represents no more than the work of a mechanic familiar with the art. The more serious question is whether making the jigs adjustable on their supporting bars by the use of a slotted plate and set-screw attachment, constitutes invention. The advantage of having the jigs adjustable in horizontal positions on their supporting bars was, of course, readily apparent to inventor Erickson, who was an initial inventor with Karr in the application for prior patent 1,922,002. However, it has long been recognized that adjustability alone does not constitute invention. See Peters v. Hanson, 129 U.S. 541, 9 S. Ct. 393, 32 L. Ed. 742; Karl Kiefer Mach. Co. v. United States Bottlers Machinery Co., 7 Cir., 114 F.2d 169; Smyth Mfg. Co. v. Sheridan, 2 Cir., 149 F. 208; Continental Machines, Inc., v. Grob, 137 F.2d 470; Westinghouse Air Brake Co. v. Schwarze Electric Co., 6 Cir., 108 F.2d 352; Detroit Stoker Co. v. Brownell Co., 6 Cir., 89 F.2d 422; Williams Mfg. Co. v. United States Shoe Mach. Corporation, 6 Cir., 121 F.2d 273; Paquette v. Potter Mfg. Co., 6 Cir., 46 F.2d 271. In the Smyth Mfg. Co. Case the court said, 149 F. at page 211: "If we had the particular combination of complainant's groups of sewing devices, spoolholders, and reels with `one part of each group of sewing devices,' as its expert says, `arranged on a particular part of the machine, to wit, the sheet-holder bar, * * * and another part of the group upon another part of the machine, to wit, the stationary transverse bar,' but all rigidly affixed to their respective mountings, it would require no more than the ordinary ingenuity of the skilled mechanic to cut slots and arrange washers, set screws, etc., so as to give to each part of each group capacity for lateral adjustment."
In the Peters Case the court said, 129 U. S. at pages 550-551, 9 S. Ct. 393 at page 396; "The use of a bolt passing through a hole, and secured by a nut, to fasten one article of iron to another, was a well-known device; and so was the use for the same purpose of a slot which admitted of the adjustability or change of position of the bolt."
Plaintiff's patent 2,026,276 is an improvement patent in a crowded field and comprises only a combination of elements old in the art of spring connection, with the new element of adjustable holding jigs instead of stationary jigs. The Erickson assembling machine described in 2,026,276 is substantially a reproduction of the earlier Karr machine described in patent 1,922,002, with the one change of adjustable jigs instead of stationary jigs for holding the adjacent wires of spring spirals while they are being connected with helicals. The Erickson machine produces the same results, that is, the same assembly of spring spirals, by substantially the same method and means as that disclosed in the prior Karr patent. No new or better results are obtained. Merely making the jigs adjustable in position on their supporting bars by the use of a slot and set screw certainly does not represent invention within the meaning of the patent law. The use of a slot and set screw as a means of fastening one part to another to effect adjustability is common practice and old in many arts. Although such adjustability may represent some improvement in the means for assembling spring structures, it nevertheless represents only such an improvement as would be obvious to any mechanic skilled in the art or who had ever noted the adjustability of license plates in the holding brackets on automobiles.
A device to be patentable must be more than new and useful it must satisfy the requirements of invention or discovery and must represent more ingenuity than the work of a mechanic skilled in the art. Mere perfection of workmanship or difference in design and construction over the *91 prior art, involving no new principle and accomplishing nothing more than a skilled mechanic would readily discern, does not amount to invention. The improvement of one part of an old combination gives no right to claim that improvement in combination with other old parts which perform no new function or accomplish no new result in the combination. Improvements over the prior art, to be patentable, must be the product of some exercise of the inventive faculties. Mere structural changes which involve nothing more than the exercise of skill in the art do not constitute invention. See authorities hereinbefore cited; also Crosley Corporation v. Westing-house Electric & Mfg. Co., 3 Cir., 152 F.2d 895; Reynolds v. Emaus, D.C., 87 F. Supp. 451; National Brass Co. v. Michigan Hardware Co., D.C., 71 F. Supp. 980. The jigs in the prior Karr patent were in fixed positions on their supporting frame, while in the Erickson patent in suit 2,026,276, the jigs are made adjustable as to their distance apart on their supporting frame by the use of slots and set screws. The court is convinced that this adjustability in position, when combined with other elements old in the art, does not constitute invention entitling the plaintiff to a monopoly on the idea of adjustability through the use of a slot and set screw, or to a monopoly on the spring-assembling machine shown in 2,026,276. For the reasons herein stated, the court concludes that plaintiff's patent in suit 2,026,276 is invalid and, being invalid, the question of its infringement does not arise.
Other questions as to the business practices of the parties in hiring employees and in their methods of selling in the mattress industry do not merit consideration or determination.
The defendants are entitled to a judgment determining the plaintiff's three patents in suit to be invalid and dismissing the complaint.
Findings of Fact
1. The plaintiff is the assignee and owner of the three Letters Patent in suit, F. Karr No. 1,887,058, C. D. Karr No. 1,922,002, and Erickson No. 2,026,276.
Re: F. Karr No. 1,887,058
2. No. 1,887,058 is a combination patent for an improvement in spring assembly and is in a crowded field of the art. This patent combines elements old in the art of spring assembly with a slight reduction in the internal diameter of the spring helical connecting the spiral spring coils, and a slight change in the shaping of the distorted portions of the spring coils which the helical encircles; this combination of old elements with slight changes in the internal diameter of the connecting helical and in the shape of the spring coils does not represent discovery or invention within the meaning of the patent law; these changes represent only the mechanical skill of one conversant with and skilled in the art; the structure described in this patent lacks such novelty, utility, and advance in the art as is necessary to establish invention.
3. The spring-assembly structure described in patent 1,887,058 was fully anticipated in F. Karr 1,744,389 and other prior-art patents cited by defendants.
4. Patent 1,887,058 is invalid.
Re: C. D. Karr No. 1,922,002 and Erickson No. 2,026,276
5. Patents in suit Nos. 1,922,002 and 2,026,276 are both combination patents for improvements in spring-assembling machines and are in a crowded field of the art.
6. Patent 1,922,002 combines elements old in the art with merely a change in the methods employed to open and close the holding jigs and release the spiral springs after their helical engagement; these changes in method are merely equivalents of elements shown in the prior art and represent no more than the accomplishment of a skilled mechanic.
7. The methods employed to open and close the holding jigs and release the spiral springs after their helical engagement as shown in 1,922,002 do not represent discovery or invention within the meaning of the patent law.
8. Patent 1,922,002 was fully anticipated in Gail 1,905,459 and other prior-art patents cited by defendants.
*92 9. Patent 1,922,002 is invalid.
10. The only changes which patent in suit 2,026,276 shows over prior patent 1,922,002 are in making the jigs holding the upper and lower ends of the spiral coils, movable and laterally adjustable to spaced-apart positions on their supporting bars, and some minor change in the mechanism for guiding the connecting helicals.
11. The adjustability of the jigs on their supporting bars, as shown in 2,026,276 is accomplished by the slotting of the plate of the jig so that a set screw can be passed through the slot into an interiorly threaded hole in the supporting bar. This change constitutes only an adjustability of the parts which in prior patent 1,922,002 were fixed.
12. Patent in suit 2,026,276 is substantially a reproduction of Karr 1,922,002, with the holding jigs made adjustable in distance-apart position on their supporting bars through the use of a slotted plate and a set screw. This adjustability does not represent discovery or invention, but only such an improvement as would be apparent to any mechanic skilled in the art. The slight change in the mechanism for guiding the connecting helical, and other minor changes shown in 2,026,276, do not represent invention or more than the work of a skilled mechanic.
13. Patent 2,026,276 was fully anticipated in prior patent 1,922,002 and other prior-art patents cited by defendants.
14. Patent 2,026,276 is invalid.
Conclusions of Law
1. The court has jurisdiction of the parties and of the subject matter of this suit.
2. As the plaintiff's three patents in suit are combination, improvement patents in a crowded field of the art, they must be strictly construed.
3. None of plaintiff's three patents in suit represents discovery or patentable invention within the meaning of the patent law.
4. Each of plaintiff's three patents in suit was fully anticipated in prior-art patents.
5. Each of plaintiff's patents in suit is invalid.
6. As each of plaintiff's three patents in suit is invalid, there is no infringement by defendants.
7. Other questions raised by the pleadings as to the business practices of the parties do not merit consideration or determination.
Judgment will be entered in favor of the defendants dismissing the complaint. The defendants may recover court costs, but not costs of suit or attorney fees.
NOTES
[1] Also referred to as clips, jaws, and fixtures.
[2] "4. Spring assembling mechanism of the character described, comprising in combination means for supporting parallel rows of coil springs with corresponding end coils of two rows lying adjacent to each other, means for feeding a wire helix endwise between said end coils and simultaneously rotating said helix on its axis, means for guiding said helix so as to cause the coils thereof to be wrapped around adjacent portions of said spring coils, means for displacing said helix from said guiding means, and means for shifting said rows of springs laterally of said guiding means whereby to bring a new row into register with said guiding means."
"15. In a machine for assembling and connecting parallel rows of coil springs, the combination of a frame structure, spaced bed and top plates mounted on said frame structure, means on the opposed surfaces of said plates for guiding the end coils of rows of springs inserted between said plates, opposed jaws slidably mounted on the upper face of said bed plate and on the under face of said top plate, the inner faces of said jaws being spirally grooved and forming, in the inner position of said jaws, guide channels adapted to be entered by adjacent portions of the end coils of adjacent rows of springs, spirally grooved strips forming the bottom walls of said guide channels, means for feeding wire helicals endwise through said channels and simultaneously rotating said helicals on their axes, and means for separating said jaws to release said helicals."
"18. In a machine for assembling and connecting parallel rows of coil springs, the combination of a frame structure, spaced bed and top plates mounted on said frame structure, means on the opposed surfaces of said plates for guiding the end coils of rows of springs inserted between said plates, guide channels on the opposed surfaces of said plates extending crosswise of said coil guiding means and adapted to be entered by adjacent portions of the end coils of adjacent rows of springs, cross-heads slidably mounted on said frame structure, upper and lower rock shafts journaled in and between said cross-heads, stripper fingers mounted on said rock shafts extending across the bottoms of said channels, means for feeding wire helicals endwise through said channels and simultaneously rotating said helicals on their axes, means for tilting said rock shafts to thereby cause said stripper fingers to dislodge said helicals from said guide channels, and means for imparting a reciprocating movement to said cross-heads."
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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/1395904/
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166 F. Supp. 684 (1958)
PARAMOUNT PICTURES CORPORATION, a corporation, Plaintiff,
v.
William HOLDEN; The Mirisch Company, Inc., a corporation; United Artists Corporation, a corporation, Defendants.
No. 638-58.
United States District Court S. D. California, Central Division.
October 13, 1958.
*685 *686 Mitchell, Silberberg & Knupp, Los Angeles, Cal., by Arthur Groman, Los Angeles, Cal., for plaintiff.
Belcher, Henzie & Fargo, Los Angeles, Cal., by Frank B. Belcher, Los Angeles, Cal., for defendant William Holden.
Kaplan, Livingston, Goodwin & Berkowitz, Beverly Hills, Cal., by Eugene S. Goodwin, Beverly Hills, Cal., for defendant The Mirisch Co., Inc.
Gang, Tyre, Rudin & Brown, Los Angeles, Cal., by Martin Gang, Los Angeles, Cal., for defendant United Artists Corporation.
YANKWICH, Chief Judge.
On June 26, 1958, plaintiff, Paramount Pictures Corporation, a New York corporation,to be referred to as Paramount, instituted an action for declaratory relief against William Holden, a well-known motion picture artist.[1] Our jurisdiction is based solely on diversity.[2]
I
Brief Summary of the Pleadings
The original Complaint set forth a contract entered into on the 16th day of April, 1951, between Paramount and Holden which was to continue for a period sufficient to produce fourteen photoplays, "the production year" being defined in terms which need not be gone into in detail. This will be referred to as "the old contract". The Complaint then alleged that, pursuant to negotiations on October 12, 1956, plaintiff and defendant entered into a new oral agreement, to be referred to hereinafter as "the new contract",to take the place of the old one, the terms of which it modified. A memorial of this agreement was to be executed later.
The Complaint then stated that on November 29, 1957, Paramount sent to Holden a notice designating January 2, 1958, as the starting date for the first of six photoplays in which the defendant was to render his services under the new contract.
On February 10, 1958, the Complaint continued, Holden advised them that the had never entered into the new contract, after allegedly the time for the commencement of his services under it had been extended at the request of Holden's agent. Whereupon Paramount declared him in default and suspended him in accordance with the provisions of the new contract.
The notice and letter of suspension will be set forth in full further on in the discussion.
The prayer requested that the rights of the parties be declared and that the Court decree that the contract of October 22, 1956, is a valid and enforceable contract. It also prayed for general relief.
In the Amended Complaint filed on September 10, 1958, Mirisch Company, Inc., a corporation, and United Artists were joined as defendants. The first cause of action was, in substance, the same as the one contained in the original Complaint. A second cause of action set forth the fact that, since the commencement of the first action, Holden had given *687 them notice that he intended to perform services in a photoplay to be produced by Mirisch Company and released by United Artists.
Alleging that the production of such picture ("The Horse Soldiers") would result in irreparable damage to them, and that, as a result of an alleged conspiracy entered into by Holden, Mirisch and United Artists, the Complaint again asked that the contract of October 22, 1956, be declared valid and that Holden be enjoined from performing any services for the other defendants and that they be enjoined from employing him or advertising the fact that he will make a motion picture for them.
Other allegations will be referred to in the discussion to follow.
Before us is an application for interlocutory injunction pending trial. Because of their bearing upon that issue, it is well to advert to Clauses Three (b) (1) and (2), of the "old contract", which relate to the obligations of Holden to the Company with regard to the photoplays to be produced by Paramount or others, his right to produce within one of the yearly periods "outside photoplays" and the requirement as to notice to be given by him to the Company and their right to preempt his services.
In substance they provide: Paramount agrees to give written notice to Holden on the starting date on which and the place where he shall report for work on any of the photoplays at least thirty days prior to the date specified in the written notice. Holden agrees to report in accordance with the written notice on the starting date specified ready to render his services in conjunction with the photoplay. He also agrees to give written notice to the company specifying each date on which he has agreed to begin rendition of services in conjunction with an outside photoplay. Written notice must be given immediately after the date is made known to him and shall specify the approximate length of time required in connection with the outside photoplay, also the title of the photoplay, the name of person, firm or corporation which proposes to employ his services, the name of the person, firm or corporation which proposes to release and distribute the photoplay and the billing and credits to be accorded to him with respect to such outside photoplay. The clause then states:
"Within four (4) days (excluding Saturdays, Sundays and holidays) after the Corporation shall notify the Artist in writing whether or not it is the intention of the corporation to utilize the services of the Artists in connection with a motion picture photoplay hereunder during the period of the Artist's proposed engagement in such Outside Photoplay or during any portion thereof. Failure by the Corporation to so notify the Artist shall be deemed advice to the Artist that it is not the intention of the Corporation so to utilize his services. In the event the Corporation shall advise the Artist that it does not desire so to utilize his services, the Artist shall be free to render his services in such proposed Outside Photoplay."
On August 11, 1958, Holden notified Paramount that he intended to produce a motion picture for Mirisch, to be released by United Artists. Under the old contract, Paramount had four days to notify Holden under the preemption clause whether it intended to utilize his services in one of Paramount's pictures. Paramount failed to do so.
II
Interlocutory Injunctions
The basic problems involved in this lawsuit are: (1) which of the contracts is in existence, and (2) whether the notice of January 2, 1958, and the subsequent declaration of default are valid either under the old or the new contract.
These are questions which cannot be resolved in a preliminary proceeding of this character. For their determination would determine the entire lawsuit. The question for us to determine on this motion is more limited: Should the Court, in the exercise of its discretion, before trial, issue a temporary injunction preventing *688 Holden, a distinguished motion picture artist, from making one photoplay for another company, he having given due notice under the written contract of April 16, 1951, of his intention to do so and the plaintiff not having, within the period allowed by that contract, preempted his services?
As this is a diversity case, the law relating to the contract, its interpretation and the policy it embodied is California state law.[3] As stated by the Supreme Court:
"The essence of diversity jurisdiction is that a federal court enforces State law and State policy."[4]
This is especially true in a case of this character because by specific provisions of California law, a contract of this character for the services of an artist is exempt from the general provision of California law which forbids the specific performance of contracts for personal services.[5] The exception is contained in both the Civil Code of California[6] and the California Code of Civil Procedure,[7] and reads:
"other than a contract in writing for the rendition or furnishing of personal service from one to another where the minimum compensation for such service is at the rate of not less than six thousand dollars per annum, and where the promised service is of a special, unique, unusual, extraordinary or intellectual character which gives it peculiar value the loss of which cannot be reasonably or adequately compensated in damages in an action at law."[8]
The Supreme Court of California, soon after the enactment of the statute, stated its scope and the condition which it sought to rectify in this manner:
"`With the exception of such special, unique, and extraordinary personal services as fall within the purview of the amendments of May 6, 1919 (Stats. 1919, pp. 325, 328), to section 3423 of the Civil Code and section 526 of the Code of Civil Procedure, the general rule is that a contract for service will not be specifically enforced, either directly by means of a decree directing the defendant to perform it, or indirectly by an injunction restraining him from violating it. Especially is this the rule where the relation between the parties to the contract is one of mutual confidence and the contract stipulates for acts that require special knowledge, skill, or ability, or the exercise of judgment, discretion, integrity, and like personal qualities.'"[9]
It is true that, when a case based on diversity is begun in the federal district court, our own rules of procedure govern. But when we interpret a provision in a contract which, under state law, allows specific performance of contracts for personal services and the use of injunctive process in derogation of old established equity rules, we are in a field where the policy of the State should apply.[10]*689 At times, this may make a difference in the relief awarded. However, the policy of the State of California and that of the federal courts as to injunctions is, generally, identical. California law specifically provides that an injunction may be granted, when it appears by the complaint or affidavits that the plaintiff (1) "is entitled to relief demanded",[11] (2) that the commission or continuance of some act during litigation would produce "great or irreparable injury",[12] or (3) "when pecuniary compensation would not afford adequate relief".[13]
This, in the main, accords with the federal norm.[14] As to interlocutory injunctions the rule declared both by California and federal cases is that the power is discretionary and should not be exercised except where it is clear that the question presented by the litigant who seeks the injunction is free from doubt.
A few references to cases both state and federal will indicate the general accord between courts on this subject.
We begin by referring to a leading California case in which the rule is stated in this manner:
"`To issue an injunction is the exercise of a delicate power, requiring great caution and sound discretion and rarely, if ever, should be exercised in a doubtful case. "The right must be clear, the injury impending and threatened, so as to be averted only by the protecting preventive process of injunction." St. Louis St. Flushing Machine Co. v. Sanitary St. Flushing Machine Co., 8 Cir., 161 F. 725 (88 C.C.A. 585)'"[15]
It is very significant that the Supreme Court of California, in announcing this decision, made reference to a federal case decided by the Court of Appeals for the Fifth Circuit which clearly illustrates what is meant by a doubtful case. In that case, it was sought to compel specific performance of an oral contract to assign a patent. In reversing the Order of the trial court granting a preliminary injunction, the Court said:
"For another reason, also, the preliminary injunction ought not to have been granted. It is a fundamental principle that injunctions ought not to issue unless the right alleged to be invaded or threatened is clear. * * * The affidavits in support of and against the motion for injunction leave the existence of the verbal license relied on by complainant in grave doubt and uncertainty, too doubtful and uncertain, at least, to warrant interference with the status quo until the right can be deliberately ascertained and declared at final hearing."[16] (Emphasis added.)
The Court, in its opinion, referred to an old decision of the Supreme Court in which the principle was declared in a *690 form, which, although not original with the Court, has become classic:
"`There is no power, the exercise of which is more delicate, which requires greater caution, deliberation, and sound discretion, or more dangerous in a doubtful case, than the issuing an injunction. It is the strong arm of equity, that never ought to be extended, unless to cases of great injury, where courts of law cannot afford an adequate and commensurate remedy in damages. The right must be clear, the injury impending, and threatened so as to be averted only by the protecting preventive process of injunction.' Baldw. 218"[17]
In a later case, Mr. Justice Brewer stated the principle in this succinct way:
"It is familiar law that injunction will not issue to enforce a right that is doubtful, or to restrain an act the injurious consequences of which are merely trifling."[18]
And even where the question is not doubtful, it is the duty of the Court to balance the conveniences of the parties:
"The award of an interlocutory injunction by courts of equity has never been regarded as strictly a matter of right, even though irreparable injury may otherwise result to the plaintiff. Compare Scripps-Howard Radio v. Federal Communications Comm'n, 316 U.S. 4, 10, 62 S. Ct. 875, 86 L. Ed. 1229 and cases cited. Even in suits in which only private interests are involved the award is a matter of sound judicial discretion, in the exercise of which the court balances the conveniences of the parties and possible injuries to them according as they may be affected by the granting or withholding of the injunction. Meccano, Ltd. v. John Wanamaker, 253 U.S. 136, 141, 40 S. Ct. 463, 465, 64 L. Ed. 822."[19] (Emphasis added)
The Court of Appeals for the Second Circuit has summed up the doctrine of balancing of conveniences succinctly:
"The judge must consider whether irreparable harm is likely to result to plaintiff if, pendente lite (i. e., `immediately') the injunction is denied, and against this harm he must balance the harm to defendant likely to result if the relief is granted."[20]
(Emphasis theirs.)
Another principle observed strictly is that the Court must determine whether the final judgment will be of a character that can compensate for any intervening damage:
"Upon application for an interlocutory injunction, the relative adequacy of other remedies depends mainly upon whether the final judgment ultimately available in those remedies will satisfactorily repair or compensate for the injury which the plaintiff will probably suffer in the meantime if interlocutory injunctive relief is denied."[21]
III
Résumé of Principles
Certain principles are deducible from the discussion which precedes, both under federal and state law.
Generally, injunctions, whether final or interlocutory, will not issue unless irreparable injury will flow from the act or threatened act, which damages *691 will not compensate. An injunction pending suit should not issue where to do so will call for a decision of the fact ultimately involved in the law suit. Neither the amended nor supplemental complaint in this case seeks damages. So the granting of injunction to Paramount is a decision on all issues in their favor. If Holden is unable to proceed he loses the profit of one picture and the other defendants lose not only their prospective profits but the possibility of retrieving any loss for expenditures incurred to the present time in the preparation for the making of the picture, and occasioned by the failure of Paramount to exercise its preemption. By contrast, the expenditures allegedly incurred by Paramount are not current or prospective but retrospective. The loss they have incurred in making preparations prior to the notice of January 2, 1958, aside from any contractual provisions, is recoverable, under general legal principles, from Holden, should the final judgment be for Paramount. The contention that the making of another picture might saturate the market does not command assent. Companies other than Paramount have released pictures made by Holden with Paramount's acquiescence. There is no showing that the picture to be made is beneath his talent or below the standard expected of him. And, absent such a showing, it is unbelievable that the making of just one additional picture will depreciate the value of Holden as an artist. Indeed, the fact that Paramount did not seek to enforce its rights here asserted for months after the default, that, even now, it is only willing to reinstate Holden if he makes his "trip of penance to Canossa", under conditions which have not yet been spelled out, and there has been no demand for his return to work since January 2, 1958, would indicate that Paramount is more interested in preventing the making by Holden of one picture by others than in securing his services for themselves.
If a contract for personal services is not enforceable, except by reason of a special statute in derogation of common equity rules, the statute should be interpreted strictly. So, even those courts which enforce contracts for personal services will not compel acting or activities of similar character.[22] So here, if the contention of Paramount is correct, and they have an oral contract only, they could not have the benefit of the injunction under the California Code because both sections specifically speak of a "contract in writing".[23] And we know of no principle of estoppel which would change an oral contract into a written one, even if equitable considerations should call for the enforcement of such contract. The cases which enforce an oral promise to make a written contract do so on the ground of induced change of position, unjust enrichment, fraud or other equitable considerations.[24]
Another principle which is applied and which is stressed in the cases discussed is that an interlocutory injunction should not issue in doubtful cases. Here the very purpose of the action is to determine whether a contract is in existence or has been superseded by a subsequent contract, an alleged memorial of which the defendant has repudiated.
The very object of the declaratory judgment is to seek a court's determination of the rights of the parties when a controversy exists, even before the acts of the parties result in damage.[25]
*692 Summary and Conclusion
In what precedes we have indicated the reasons why no interlocutory injunction should issue at this state of the litigation. However, certain other considerations should be adverted to as a guide to counsel in preparing findings as required by the federal rules.[26]
The notice to report for work dated November 27, 1957, which is printed in the margin,[27] was given, not under the old contract but under the new contract. As it is approved as to form by counsel for Paramount any contention that an error was made loses its appeal. The letter shows distinctly that Paramount was claiming,as it does even now,that the old contract had been terminated and that a new contract was in effect. The attempt is made to escape the consequence of this notice by reference to the subsequent letter of February 21, 1938, which is also reproduced in the margin.[28] This lacks substance, for this notice is tied to the preceding notice by its very wording. The first paragraph refers to the previous notice and the reference to "under our contract of employment with you" cannot be turned into a designation of the new contract. When a party to a contract deliberately refers *693 to a notice as given under a specific contract, it cannot be heard to say in a proceeding to secure an interlocutory injunction that the notice was a general one under whatever contract may exist. This is especially true when the object of the notice is to place the other party to the contract in default and the contract is one which is required to be written. To say the least, an interpretation that would, in effect, reform the notice should await a final decision which, alone, after a full hearing, would and could determine whether there is a default, whether it is remediable, what rights exist, if, as Paramount contends, the old contract has been terminated and what the terms of the new contract are which Holden denies having assented to.
Equity will intervene by injunctive process
"* * * where the injury is of such a nature that it cannot be adequately compensated by damages at law, or is such, as from its continuance or permanent mischief, must occasion a constantly recurring grievance, which cannot be prevented otherwise than by injunction."[29]
And our Court of Appeals in a leading case has stated that in the matter of injunctions
"it is proper to consider all of the facts and circumstances of the case in order to determine the equities, including comparative damages, where, as in the present case, it is sought to enjoin a lawful business, and to withhold the writ where it appears that it will necessarily operate contrary to the real justice of the case."[30]
And whether injunction is granted or refused, whether irreparable injury would follow refusal depends not so much on general principles as upon the equities in each particular case.[31]
On the balancing of equities, it is clear that the only harm which could result to the plaintiff would be a delay of thirteen weeks, the period required for Holden to complete the picture which he desires to make for Mirisch and United Artists. In view of the fact that the defendants did not, between February 21, 1958 and June 26, 1958, seek any redress against Holden, it is doubtful if the injury they will suffer is of a character which is not compensable in damages.
There is a further consideration: Paramount, after receiving the notice of August 11, 1957, indicating Holden's intention to make the picture, could have, within four days, preempted his services. It failed to do so, convinced that its previous notice of default was sufficient. It is at least questionable whether a notice given under a contract specifically designated by date and content can be used to defend an alleged default declared under another contract predating it by several years.
Paramount may be right in its contention. So may Holden. By denying an injunction, Paramount is merely deprived of his services for the period required for the production of one picture. By granting it, the undertaking between Holden, Mirisch and United Artists is at an end and they cannot recoup their damages in any manner, even if, ultimately, they should be proved right by a judgment of this court. Paramount, by simply exercising its preemption right, could have remedied the entire situation. Such a preemption would not affect its contention as to the existence or non-existence of the new contract. For it is still arguable that it had the right to resort to the preemption clause, despite its contention that Holden was in *694 default under the new contract. Its present request for a declaration in the alternative would not have been impaired by such preemption. For it would have been consistent with it. Holden had a right to assume that their failure to act, between February 21, 1958 and June 26, 1958, and the nature of the relief they asked under the original complaint, that, if they were primarily interested in securing his services, they would have exercised the right of preemption and left to the courts the determination of the controversy as to which contract was in effect, which was the sole object of the original complaint. When they did not, he was free to act as he chose under his own interpretation as to the status of the relationship between them. The fact, much stressed at the argument and in the memoranda filed by Paramount, that Holden concedes that the Contract of 1951 is still in effect, does not call for the granting of an interlocutory injunction. The fact remains that there is a controversy between the plaintiff and Holden as to which contract is in effect and that the notice of default is based upon the alleged existence of a new contract which Holden has repudiated. These questions, as already stated, can be resolved only after a trial of the case. To grant to Paramount now all the relief they ask in the amended complaint would be to determine in their favor questions which are, to say the least, doubtful. And it is fundamental equitable doctrine that injunctions, especially interlocutory injunctions, should be granted only
"in clear cases reasonably free from doubt."[32] (Emphasis added.)
The Motion for Interlocutory Injunction will be denied. Findings and order to be prepared by counsel for the defendants under Rule 52(a) of the Federal Rules of Civil Procedure and Local Rule 7, West's Ann.Cal.Code.
NOTES
[1] 28 U.S.C.A. §§ 2001, 2202; Rule 57, Federal Rules of Civil Procedure, 28 U.S. C.A.
[2] 28 U.S.C.A. § 1332.
[3] Erie R. Co. v. Tompkins, 1938, 304 U.S. 64, 58 S. Ct. 817, 82 L. Ed. 1188.
[4] Angel v. Bullington, 1947, 330 U.S. 183, 190, 67 S. Ct. 657, 662, 91 L. Ed. 832.
[5] California Civil Code, § 3390(1) and (2). This is also the general rule. 81 C.J.S. Specific Performance § 82; 49 Am. Jur., Specific Performance, §§ 134-136. And the Supreme Court of the United States, in a noted case, recognized this as the general rule of equity jurisprudence as enforced in federal courts. Karrick v. Hannaman, 1897, 168 U.S. 328, 336, 18 S. Ct. 135, 138, 42 L. Ed. 484:
"In the somewhat analogous case of a contract of hiring and service, it is well settled that a court of equity cannot compel the performance of the service, although it may in some cases enforce a negative stipulation not to serve any third person within the time agreed."
[6] California Civil Code, § 3423.
[7] California Code of Civil Procedure, § 526 (5).
[8] California Code of Civil Procedure, § 526(5).
[9] Poultry Producers of Southern California v. Barlow, 1922, 189 Cal. 278, 288, 208 P. 93, 97.
[10] Guaranty Trust Co. of New York v. York, 1945, 326 U.S. 99, 65 S. Ct. 1464, 89 L. Ed. 2079; Bernhardt v. Polygraphic Co., 1956, 350 U.S. 198, 76 S. Ct. 273, 100 L. Ed. 199.
"The propriety of the issuance of a preliminary injunction, of course, is to be determined by the rules and decisions of federal courts." General Electric Co. v. American Wholesale Co., 7 Cir., 1956, 235 F.2d 606, 608.
[11] California Code of Civil Procedure, § 526(1).
[12] California Code of Civil Procedure, § 526(2).
[13] California Code of Civil Procedure, § 526(4). Additional situations in which injunctions may or may not issue, spelled out in this section, are omitted, as they have no particular bearing on the principles of law to be discussed in this opinion.
[14] Rule 65, Federal Rules of Civil Procedure; Truly v. Wanzer, 1847, 5 How. 141, 142-143, 12 L. Ed. 88; Parker v. Winnipiseogee Lake Cotton & Woolen Co., 1862, 2 Black 545, 551, 17 L. Ed. 333.
[15] Willis v. Lauridson, 1911, 161 Cal. 106, 117, 118 P.530, 535; and see, McPheeters v. McMahon, 1933, 131 Cal. App. 418, 425, 21 P.2d 606.
[16] St. Louis Street Flushing Machine Co. v. Sanitary Street Flushing Machine Co., 8 Cir., 1908, 161 F. 725, 728.
[17] Truly v. Wanzer, supra, 5 How. at pages 142-143, Note 14.
[18] Consolidated Canal Co. v. Mesa Canal Co., 1900, 177 U.S. 296, 302, 20 S. Ct. 628, 630, 44 L. Ed. 777.
[19] Yakus v. United States, 1944, 321 U.S. 414, 440, 64 S. Ct. 660, 674, 88 L. Ed. 834.
[20] Hamilton Watch Co. v. Benrus Watch Co., 2 Cir., 1953, 206 F.2d 738, 743.
[21] Restatement, Torts, § 938, Comment (d).
[22] See illustrations in 81 C.J.S. Specific Performance § 82, p. 592, and cases cited in Notes 71-78 to the text.
[23] California Civil Code, § 3423; California Code of Civil Procedure § 526.
[24] Halsey v. Robinson, 1942, 19 Cal. 2d 476, 481-482, 122 P.2d 11; Columbia Pictures Corp. v. DeToth, 1945, 26 Cal. 2d 753, 759-760, 161 P.2d 217, 162 A.L.R. 747; Wilk v. Vencill, 1947, 30 Cal. 2d 104, 108, 180 P.2d 351.
[25] 28 U.S.C.A. §§ 2201, 2202; Rule 57, Federal Rules of Civil Procedure; Aetna Life Insurance Co. of Hartford, Conn. v. Haworth, 1937, 300 U.S. 227, 240-241, 57 S. Ct. 461, 81 L. Ed. 617. As stated in Scott-Burr Stores Corp. v. Wilcox, 5 Cir., 1952, 194 F.2d 989, 990:
"While the date of the beginning of the claimed extended term was in the future, the assertion of right to its enjoyment was presently being made. The facts of the case disclosed an actual controversy, and the settlement of such controversies `before they ripen into violations of law or some breach of contractual duty' is a fundamental purpose of the Declaratory Judgment Act, 28 U.S.C.A. § 2201." (Emphasis added.)
See also, the writer's article on Declaratory Judgment, 1940, 1 F.R.D. at pages 295, 297-298; Universal Sales Corp. v. California Press Mfg. Co., 1942, 20 Cal. 2d 751, 774, 128 P.2d 665; Collumbia Pictures v. DeToth, supra, 26 Cal. 2d at pages 760-761, 161 P.2d at pages 220-221, note 4.
[26] Rule 52(a), Federal Rules of Civil Procedure.
[27] "November 27, 1957
"Mr. William Holden
c/o Famous Artists Corporation
9441 Wilshire Boulevard
Beverly Hills, California
"Dear Mr. Holden:
"Please take notice that we hereby designate January 2, 1958, as the date on which you shall be required to report to our studios in Hollywood, California, ready to render your services in connection with the first of the six (6) motion picture photoplays referred to in Subdivision (a) of Paragraph First of the employment agreement between you and the undersigned corporation dated as of October 22, 1956.
"Very truly yours,
Paramount Pictures
Corporation
By s/ Jacob H. Karp
Assistant Secretary
Form O.K. s/ Frank"
[28] "February 21, 1958
"Mr. William Holden
c/o Famous Artists Corporation
9441 Wilshire Boulevard
Beverly Hills, California
"Dear Mr. Holden:
"We recently gave you notice of a starting date of January 2, 1958, upon which you were required to report to our studio ready to render your services in a motion picture photoplay under our employment contract with you.
"However, you have now expressed your unwillingness to appear in the scheduled picture; and you have not reported to our studio as required by our notice.
"You are accordingly in default in your obligations to us under our contract.
"Please take notice that we have accordingly elected to refrain from paying you any salary under our employment agreement during the period of nonperformance in accordance with the terms of our contract.
"Please take further notice that we hereby reserve the right to take such other and further action as we may deem appropriate by reason of your said nonperformance.
"Very truly yours,
Paramount Pictures
Corporation
By s/ Jacob H. Karp
Assistant Secretary"
[29] Parker v. Winnipiseogee Lake Cotton & Woolen Co., 1862, 2 Black, 545, 551, 17 L. Ed. 333.
[30] Bliss v. Washoe Copper Co., 9 Cir., 1911, 186 F. 789, 827.
[31] 43 C.J.S. Injunctions § 12; see, Anderson v. Souza, 1952, 38 Cal. 2d 825, 834, 845, 243 P.2d 497.
[32] The quotation is from 28 Am.Jur., Injunctions, § 24. The paragraph from which it is taken sums up succinctly the principles here discussed and the rulings in the cases cited in Notes 15 to 19. It is reproduced in its entirety:
"The extraordinary character of the injunctive remedy and the danger that its use in improper cases may result in serious loss or inconvenience to an innocent party require that the power to issue it should not be lightly indulged in, but should be exercised sparingly and cautiously, only after thoughtful deliberation, and with a full conviction on the part of the court of its urgent necessity. In other words, the relief should be awarded only in clear cases reasonably free from doubt, and, when necessary to prevent great irreparable injury. * * * Likewise, a temporary injunction will be denied in all cases where the right is doubtful and particularly where to grant it would interfere with an industry promotive or public utility." (Emphasis added.)
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166 F. Supp. 240 (1958)
In the Matter of LINCOLN INDUSTRIES, Inc., Bankrupt.
No. 1768.
United States District Court W. D. Virginia, Abingdon Division.
September 4, 1958.
*241 *242 Thomas C. Phillips, of Penn, Stuart & Phillips, Abingdon, Va., for May Co. and Textile Banking Co., Inc.
John M. Keefe, New York City, for Textile Banking Co., Inc.
H. E. Widener, Jr., Bristol, Va., trustee of Lincoln Industries, Inc.
THOMPSON, Chief Judge.
The Lincoln Industries, Inc. (herein referred to as the Bankrupt), was engaged in the manufacture of furniture, school desks and other related merchandise, at Damascus, Virginia, until it was adjudicated bankrupt July 16, 1956, on an involuntary petition filed June 23, 1956.
The May Department Stores Company, a New York corporation, operates a store at Cleveland, Ohio, under the name of The May Company and operates a store at Akron, Ohio, under the name of The M. O'Neil Company. It will be referred to herein as the "May Company".
Cordell Industries, Inc., herein called "Cordell", is a New York corporation engaged *243 in the furniture brokerage business. It and the Bankrupt had interlocking boards of directors, and both were owned by the same financial interests.
Textile Banking Company, Inc., herein called "Textile", is a New York corporation engaged in factoring accounts receivable of manufacturing concerns and in making loans to such concerns with inventory as security.
The bankrupt estate involves several hundred thousand dollars. There are numerous creditors and various classes of liens which necessitated the Referee entering numerous orders. Some of his orders are now before the Court for review.
Truckload of Furniture Claimed by May Company
In May, 1956, prior to adjudication, the Bankrupt had received two orders for furniture; one direct from The May Company, at Cleveland, in the amount of $4,970.21; one from The M. O'Neil Company, at Akron (owned by The May Company), through Cordell, in the amount of $879.57. These orders aggregated $5,849.78. It was agreed between the May Company, Cordell, and the Bankrupt that the furniture covered by these two orders should be delivered by the Bankrupt in its trucks to the points of destination in Ohio, transportation costs to be paid by May Company.
The Bankrupt issued its invoices for both of these orders and discounted them through its financial broker, Textile, under a factoring agreement, whereby Textile had an admittedly valid factor's lien on all Bankrupt's inventories and accounts receivable. May Company paid Textile the amount of both invoices.
The Bankrupt removed the furniture described in these invoices from its inventory and loaded the same in its truck at its plant site for transportation to the purchasers in Ohio. Some of Bankrupt's employees, whose wages had not been paid in full, refused to allow this truckload of furniture to leave Bankrupt's plant site. The furniture was in the truck at Bankrupt's plant site when bankruptcy ensued.
The Trustee claimed the furniture as part of Bankrupt's estate or, in the alternative, under Section 70, sub. c of the Bankruptcy Act, 11 U.S.C.A. § 110, sub. c. May Company executed indemnifying bonds in the penalty of the two invoices and took possession of the furniture.
The Trustee admits that if the Court finds the furniture belongs to Bankrupt's estate, it is subject to Textile's factoring lien. The Referee held that title to the furniture had passed to the purchaser and ordered the bonds cancelled. This decision is before the Court for review.
Had the title to the furniture in the truck passed to the purchaser and beyond the reach of the Trustee?
The parties appear to be in agreement that the Ohio law controls in the construction of the sales agreement; one of the purchase orders so provided. If the parties were not in agreement on this point, the Court is of the opinion that the Ohio law governs, since Ohio was the place of performance, i. e., the place delivery of the furniture was required to be made. Hall v. Cordell, 1891, 142 U.S. 116, 12 S. Ct. 154, 35 L. Ed. 956; Louis-Dreyfus v. Paterson Steamships, Ltd., 2 Cir., 1930, 43 F.2d 824, 72 A.L.R. 242; Poole v. Perkins, 1919, 126 Va. 331, 101 S.E. 240, 18 A.L.R. 1509.
Ohio has adopted the Uniform Sales Act; therefore, we must look to that Act in resolving the question of the title to the furniture in the truck.
"Where there is a contract to sell unascertained goods no property in the goods is transferred to the buyer unless and until the goods are ascertained, * * *." Section 17, Uniform Sales Act, 99 Ohio Laws, p. 417.
The furniture in question was unascertained in contradistinction to specific furniture. Although the purchase orders described the type of furniture, *244 they did not identify any specific furniture. The orders could have been filled from any of Bankrupt's inventory which met the description contained in the purchase orders. American Aniline Products v. D. Nagase & Co., 1919, 187 A.D. 555, 176 N.Y.S. 114; Gile & Co. v. Lasselle, 1918, 89 Or. 107, 171 P. 741.
The situation is analogous to that of an order from an automobile dealer to a factory for a number of cars of a particular model, make and design, which the factory could fill from its inventory of cars meeting those specifications. Indeed, this furniture could have been manufactured after the receipt of these orders and, therefore, could not have been presently ascertained. Ellis & Meyers Lumber Co. v. Hubbard, 1918, 123 Va. 481, 96 S.E. 754; Illustrated Postal Card & Novelty Co. v. Holt, 1912, 85 Conn. 140, 81 A. 1061.
"Where there is a contract to sell unascertained or future goods by description, and goods of that description and in a deliverable state are unconditionally appropriated to the contract, either by the seller with the assent of the buyer, or by the buyer with the assent of the seller, the property in the goods thereupon passes to the buyer. * * *" Section 19, Rule 4(1), Uniform Sales Act, 99 Ohio Laws, p. 418.
Inasmuch as the furniture in question was unascertained, title could not pass to the purchaser until the furniture was unconditionally appropriated to the purchaser. The furniture may have been ascertained when segregated from Bankrupt's inventory and placed in the truck, but it was not unconditionally appropriated to the buyer with buyer's assent. It remained in possession of the seller. The seller could exercise all rights of ownership over it; the buyer had no knowledge that the furniture it ordered had been placed in the truck, and if the seller had chosen to unload the furniture and sell it to any other purchaser, it could have done so without incurring any liability to the purchaser, May Company. See Procter & Gamble Co. v. Peters, White & Co., 1922, 233 N.Y. 97, 124 N.E. 849; Enterprise Wall Paper v. Nilson Rantoul Co., 1918, 260 Pa. 540, 103 A. 923.
It cannot be argued that the placing of the furniture in Bankrupt's truck constituted constructive delivery, for the seller, Bankrupt, was required to make actual delivery of the furniture to the purchaser in Ohio in its own trucks. Title to the furniture would not pass to the purchaser until the furniture was delivered to the purchaser in Ohio.
"If a contract to sell requires the seller to deliver the goods to the buyer, or at a particular place, or to pay the freight or cost of transportation to the buyer, or to a particular place, the property does not pass until the goods have been delivered to the buyer or reached the place agreed upon." Section 19, Rule 5, Uniform Sales Act.
"`Delivery' means voluntary transfer of possession from one person to another." Section 76, Uniform Sales Act, 99 Ohio Laws, p. 434.
Delivery to a servant or employee of the seller for the purpose of delivery to the purchaser is no delivery, as the possession remains in the seller.
"A distinction is made between a sale of goods in the hands of a bailee or agent, and goods in the hands of a mere servant. A sale of goods in the possession of a mere servant of the seller, whose possession to all the world is that of his master, though notice of the sale is given to the servant, is not upheld, unless there is some further change of possession, as the possession of a mere servant or hired man is but the possession of the master, and does not, like the possession of other third persons, put the creditor on inquiry." 24 R.C.L. 62, and cases cited.
*245 Since the furniture in question was unascertained and there was no unconditional appropriation thereof with the assent of the purchaser, and no delivery of the furniture to the purchaser as provided in the sales agreement, the Court is of the opinion that the title to the furniture in the truck had not passed to the purchasers and that it is a part of the Bankrupt's estate.
Even if it could be held that title to the furniture passed when Bankrupt segregated it from its inventory and placed it in the truck, certainly there was no delivery or transfer of possession to the purchaser, and if title had passed, the purchaser would have been in the position of having obtained title to the furniture and of having left it in the possession of the seller as the ostensible owner thereof; possession having remained with the Bankrupt, the Trustee would be in the position of a lien creditor of the Bankrupt by virtue of Sec. 70, sub. c of the Bankruptcy Act. United States v. Eiland, 4 Cir., 1955, 223 F.2d 118; B-W Acceptance Corp. v. Benjamin T. Crump Co., 1957, 199 Va. 312, 99 S.E.2d 606.
"The trustee may have the benefit of all defenses available to the bankrupt as against third persons, including statutes of limitation, statutes of fraud, usury, and other personal defenses; and a waiver of any such defense by the bankrupt after bankruptcy shall not bind the trustee. The trustee, as to all property, whether or not coming into possession or control of the court, upon which a creditor of the bankrupt could have obtained a lien by legal or equitable proceedings at the date of bankruptcy, shall be deemed vested as of such date with all the rights, remedies, and powers of a creditor then holding a lien thereon by such proceedings, whether or not such a creditor actually exists." Sec. 70, sub. c (11 U.S.C.A. § 110, sub. c) of the Bankruptcy Act.
The order of the Referee holding that the purchaser was entitled to the furniture in the truck and ordering the bond of May Company cancelled is hereby reversed, and an order will be entered requiring May Company or its surety to pay to the Trustee in Bankruptcy the sum of $5,849.78, the amount of the bonds executed by May Company when it took possession of the furniture.
It is agreed between the parties that the said sum of $5,849.78 is to be impressed with Textile's factor's lien and it will be so ordered.
Labor Liens
Certain employees of the Bankrupt perfected labor liens against the Bankrupt in the amount of $7,591.65, in accordance with Secs. 43-24 and 43-25, Code of Virginia, 1950, as amended. These liens attached to all the real and personal property of the Bankrupt, as provided in the above cited code sections. No one of these labor liens exceeded the sum of $600.
The Referee ordered all the property, both real and personal, sold free from all liens and ordered that the proceeds of the sale be impressed with all of the valid liens existing against the property sold, to which order Textile objected.
Sale of the furniture on which Textile had its lien was completed on or about September 30, 1956. Textile, subject to its objections to the sale free of its factor's lien, cooperated with the Trustee in the sale of the same. The furniture on which Textile had a lien sold for $62,737.50, from which amount Textile agreed that the labor account incident to the protection of the furniture pending the sale, the advertising costs and other miscellaneous expenses incident to the sale, aggregating $3,775.92, could be deducted from the proceeds of the sale of the property on which it had its lien. (Textile, however, did not agree that any part of the general administrative expense, advertising costs, or Trustee's commission should be charged against the proceeds of the sale of this furniture.)
The net amount realized from the sale of this furniture was $58,961.58, which *246 amount was placed in a separate bank account known as the "furniture account".
Bankrupt was indebted to Textile in the sum of $72,000 as of June 23, 1956, the date these bankruptcy proceedings were commenced.
Reconstruction Finance Corporation, herein referred to as RFC, held a deed of trust on Bankrupt's land, plant and machinery; this property was sold by the Trustee free of liens for the sum of $382,403.53. RFC was paid, from the proceeds of the sale of the property on which it had a deed of trust, the sum of $238,437.93, on January 26, 1957, which amount was payment in full of the principal and interest due RFC, plus attorneys' fees. There was a surplus of $143,965.60 remaining from the sale of this property after the RFC lien had been satisfied in full.
Thus, it appears that the property on which Textile had a lien did not bring a sufficient amount to pay its debt in full and that the property on which RFC had a lien sold for $143,965.60 more than was required to pay the RFC debt in full.
By agreement of the parties, the Referee ordered the laborers' liens paid from the general fund and reserved his decision as to which fund the same should ultimately be charged. It does not appear from the record that the Referee ever designated to which fund the laborers' liens should be charged.
The lien of RFC and the lien of Textile were subordinate to the laborers' liens of $7,591.65. Secs. 43-24 and 43-25, Code of Va.1950, as amended.
The Trustee claims that as to Textile he had the right, under the provisions of Sec. 67, sub. c(2) of the Bankruptcy Act, 11 U.S.C.A. § 107, sub. c(2), to be subrogated to the laborers' liens and to have the laborers' liens charged against the "furniture account", which was insufficient to satisfy Textile's lien. The Trustee did not make a subrogation claim against the principal amount paid to RFC, although its lien was on personal property as well as real estate, but paid the RFC lien in full, plus attorneys' fees.
Under Sec. 67, sub. c(2) of the Bankruptcy Act, only so much of any labor lien as is in excess of the restricted amount could pass to the Trustee; since no one labor lien exceeded $600 (the limitation prescribed by Sec. 64, sub. a(2), 11 U.S.C.A. § 104, sub. a(2)), there was no excess of the restricted amount to pass to the Trustee. It follows that the Trustee's claim for subrogation to the laborers' liens against Textile is without merit.
The equitable principle of marshaling assets is another impelling reason for holding that the Trustee should not be permitted to charge the amount of laborers' liens against Textile. Here the laborers' liens were the first liens on (1) the land, plant and machinery on which RFC held a lien, (2) the inventory on which Textile held a factor's lien, and (3) the assets of the Bankrupt on which neither RFC nor Textile had a lien, which sold for $36,076.66; the laborers had the first lien on all three of these separate classifications of property. This is true because the laborers' liens, pursuant to Secs. 43-24 and 43-25, Code of Va.1950, as amended, are made a prior lien on all the Bankrupt's property. See Mathews v. Meyers, 1928, 151 Va. 426, 145 S.E. 352.
Textile had a lien only on Bankrupt's inventory and accounts receivable. There were ample funds from the proceeds of the property on which RFC had its lien to pay first the laborers' liens in full and to discharge the RFC lien in full, and to leave a substantial surplus for subsequent lienors and creditors. There were insufficient funds realized from the sale of the property on which Textile had a lien to pay its indebtedness in full. Equity demands that the principle of marshaling assets be applied.
"* * * (T)he equitable doctrine of marshaling * * * rests upon the principle that a creditor having two funds to satisfy his *247 debt may not, by his application of them to his demand, defeat another creditor, who may resort to only one of the funds * * *." Merchants' & Mechanics' Bank v. Sewell, 5 Cir., 1932, 61 F.2d 814, 816.
In Remington on Bankruptcy, Sec. 2522.8, at p. 396, it is stated:
"Where there are various liens against certain property, but some of the liens extend to and cover other property as well, the bankruptcy court, by virtue of its underlying equity jurisdiction, may require, where equitable, that the holder of any particular lien resort to other available property subject to his lien before having recourse to the particular property."
See also 12 M.J., Marshaling Assets and Securities, Sec. 4 (rev. ed.) 1950, pp. 425, 426.
The Referee held that the Trustee was not entitled to be subrogated to the laborers' liens against Textile, but did not decide to which fund the amount of the laborers' liens should be charged. The Referee's finding, "the lien of Textile Banking Company is considered valid and not to be subordinated to the claim of wages paid by the Trustee", is hereby affirmed; the Court being of the opinion that the amount of the laborers' liens, $7,591.65, should be charged against the fund realized from the sale of the property on which the RFC had a lien, an order will be entered directing the Trustee to charge the amount of the laborers' liens to the fund realized from the sale of the property on which RFC had a lien, and ordering that no part of the laborers' liens be charged to the funds realized from the sale of the property on which Textile had its lien.
Administrative Costs
The Referee held that the proceeds from the sale of the property on which Textile had a lien should bear a proportionate part of the costs of the sale and administrative costs to include Trustee's commission, a proportionate part of the advertisement, and 2% of the administrative expense. Counsel agree that these items would amount to approximately $2,100.
Textile objected to the sale by the Bankruptcy Court of the property on which it had its factor's lien; the Referee ordered the property sold over its objection. Textile's failure to appeal from the Referee's decision did not constitute an agreement by Textile to the sale. Neither did Textile's cooperation with the Trustee in the sale constitute consent to the sale. RFC v. Rhodes, 5 Cir., 1954, 214 F.2d 606, 48 A.L.R. 2d 1339. Textile did agree that certain items of expense incident to the protection of the furniture and advertising of the sale and other items, in the amount of $3,775.92, could be paid from the proceeds of the sale of the furniture on which it had its factor's lien, but at no time did it agree that the items above mentioned, in the approximate sum of $2,100 in addition to the $3,775.92, could be paid therefrom.
In Remington on Bankruptcy, Sec. 2609, at p. 135, it is stated:
"It is well settled that, ordinarily, general bankruptcy administration expenses are not chargeable against proceeds from the sale of assets covered by the mortgages or liens to the detriment of the lienholder or secured creditor." (Citing numerous cases.)
Further, in 4 Collier on Bankruptcy, Sec. 70-99, at p. 1614:
"There is a general agreement in the decisions, however, that `where the lienholder has objected to the sale of the property, free and clear of his lien, and the administering of it in bankruptcy, * * * he cannot be charged with the general expenses of administration, including referee's, trustee's and counsel fees, or the expenses of the care and preservation of the property, which were not incurred with his consent, except when the latter were for his benefit, as distinguished from the general creditors, and were such as he would of necessity *248 have had to incur; nor with any costs and expenses of the sale of the property in excess of those which he would have been required to expend in order to foreclose his lien in an appropriate forum of his own choice.'" (Citing numerous cases.)
See also Virginia Securities Corp. v. Patrick Orchards, Inc., 4 Cir., 1927, 20 F.2d 78; Mills v. Virginia-Carolina Lumber Co., 4 Cir., 1908, 164 F. 168.
Therefore, the Court is of the opinion that the Referee erred in requiring Textile to pay the aforesaid items of approximately $2,100. However, there is no sound reason for making the Bankruptcy Court a charity court in which lienholders can realize upon the sale of their securities, without the costs they would ordinarily be charged in liquidating their securities in the State court. See Remington on Bankruptcy, Sec. 2610, p. 144. With the numerous liens on the Textile property, including the laborers' prior liens, it is fairly certain that Textile could not have enforced its lien without a creditors' suit in the State court to ascertain the priorities of the several liens and the respective rights of the parties. If a creditors' suit had been pursued a Special Commissioner of the Court would have been appointed to sell the property after the respective rights of the lienholders had been ascertained. Sec. 8-669, Code of Va., 1950, as amended, provides that a Special Commissioner shall receive 5% of the first $10,000 and 2% of the residue of any such sale. Applying this formula to the net amount of the sale, $58,961.58, this item of cost alone would amount to $1,479.23, and there would have necessarily been other costs such as bond premiums, court costs, and the like. The Court is, therefore, of the opinion that the fund realized from the sale of the property on which Textile had its factor's lien, should be charged with the sum of $1,600, which is the amount the Court finds it would have cost Textile to liquidate its security if the Bankruptcy Court had not done so. The Trustee should transfer the said sum of $1,600 from the "furniture account" to the Trustee's "general account".
Guarantor Question
Textile is in the business of loaning money and discounting invoices, whereby, for a consideration, it assumes the seller's credit risk. Textile had such an arrangement with Bankrupt, but before any of Bankrupt's invoices were discounted Textile required the Bankrupt to enter into a factoring agreement pursuant to Section 55-145, Code of Va., 1950, as amended, whereby Textile would have a factor's lien on all of Bankrupt's inventory and accounts receivable. Textile further required Cordell (Bankrupt's affiliate) to guarantee the payment of all Bankrupt's invoices discounted by Textile. Textile also discounted other invoices for Cordell. Textile required Cordell to keep a substantial balance on deposit with Textile as security for the payment of the invoices discounted by it.
On July 25, 1957, Cordell had $30,000 in its "guaranty account" with Textile. It appears that Cordell is also indebted to the Bankrupt. Cordell is not a party to these proceedings.
The Trustee, upon learning that Textile held $30,000 of Cordell's funds, made a motion before the Referee to attach the Cordell funds held by Textile for application to the payment of Cordell's indebtedness to the Bankrupt. No action appears to have been taken on the Trustee's motion; however, Textile immediately after this motion was made, on the 25th of July, 1957, applied the net balance of the $30,000 Cordell fund it held in Cordell's "guaranty account" as a credit upon the debt owed to it by the Bankrupt.
The record as to the exact amount of Bankrupt's indebtedness to Textile as of the date of the bankruptcy proceedings is very indefinite; no transcript of the proceedings was made and the pleadings on this point are conflicting. However, counsel for Textile and the Trustee, in their argument of this case before the Court, agreed that the approximate amount due Textile as of the date of *249 filing the petition was $72,000. The Court, therefore, finds as a fact that the amount due Textile by the Bankrupt on June 23, 1956, was $72,000.
The furniture covered by Textile's factor's lien was sold on September 30, 1956, for the net sum of $58,961.58. From this amount there should be deducted the sum of $1,600 which the Court has held should be charged against this fund as costs. There will remain a balance of $57,361.58 as the true net amount realized from the sale of the furniture on which Textile had its factor's lien, to be applied to the principal of Bankrupt's indebtedness, which amount is insufficient to pay Textile's debt of $72,000 in full. Since the security on which Textile had its lien brought an insufficient amount to pay the principal of Textile's indebtedness as of the time when the security was sold, Textile is not entitled to collect post-bankruptcy interest from the Bankrupt. Sexton v. Dreyfus, 1911, 219 U.S. 339, 31 S. Ct. 256, 55 L. Ed. 244; In re Tele-Tone Radio Corp., D.C.N.J.1955, 133 F. Supp. 739. However, as between Textile and Cordell, it appears that Cordell, under its guaranty agreement with Textile, is liable to Textile for post-bankruptcy interest and attorneys' fees.
On March 11, 1957, the Referee ordered the Trustee to pay to Textile $43,500 from the "furniture account"; after this sum was credited to the $72,000 there remained a balance due by Bankrupt to Textile of $28,500.
On July 25, 1957, Textile applied as an additional credit on Bankrupt's indebtedness the net amount of $30,000 which it held in Cordell's "guaranty account". However, the exact amount of this credit on Bankrupt's principal indebtedness does not appear from the record and, in the absence of this proof, the Court has calculated the credit from information gleaned from the record at large.
The principal of the debt due by Bankrupt to Textile on June 23, 1956, was $72,000. On March 11, 1957, the Trustee paid Textile $43,500 leaving a balance due on the principal indebtedness of $28,500. Textile was entitled to collect interest from Cordell on the $72,000 from June 23, 1956, until March 11, 1957, in the amount of $3,072. The net proceeds of the $30,000 in the "guaranty account" was credited on July 25, 1957. The interest on $28,500 from March 11, 1957, until July 25, 1957, is $636.50. The total interest which Textile was entitled to recover from Cordell from the date of bankruptcy until the net credit from the "guaranty fund" was made is, therefore, $3,708.50. Textile had incurred attorneys' fees in the sum of $4,200 in connection with this proceeding, for which Cordell was liable under its guaranty agreement. The attorneys' fees of $4,200 and the interest of $3,708.50 total $7,908.50. When this amount is subtracted from the $30,000 "guaranty fund", there remains $22,091.50 as a credit on the principal amount due by Bankrupt to Textile.
The $30,000 "guaranty fund" of Cordell was held by Textile as security for Cordell's guarantee to Textile of the payment of the invoices discounted by Textile. Textile was not obligated to use Cordell's "guaranty fund" as a credit on Bankrupt's indebtedness, but it elected to do so on July 25, 1957, and having done so it thereby reduced the amount Textile could recover (for its own benefit) from the Bankrupt by the amount of the credit of $22,091.50. Therefore, as of July 25, 1957, after crediting the sum of $22,091.50 to the balance of $28,500 due Textile from Bankrupt, there remained a balance of $6,408.50, chargeable against the "furniture account", due Textile from Bankrupt. Textile will then have received the principal sum of its indebtedness of $72,000 and interest thereon from date of bankruptcy to July 25, 1957, and $4,200 as attorneys' fees. If Textile claims that Cordell under its guaranty agreement is further indebted to Textile for interest subsequent to July 25, 1957, or for other items, it, of course, has the right to assert its claim against Cordell for the same.
*250 After deducting the $1,600 charged to the cost of liquidation, the Trustee has in the "furniture account" the sum of $13,861.58 as the true net balance realized from the sale of the furniture on which Textile had its factor's lien. To this sum shall be added the amount of the May Company bond, $5,849.78. The Trustee will then have $19,711.36 in the "furniture account". From this amount there shall be deducted the sum of $6,408.50, balance of the principal indebtedness owing to Textile from Bankrupt. There will remain $13,302.86 in the "furniture account".
Cordell's funds held by Textile in its "guaranty account" having been used to reduce the indebtedness of Bankrupt to Textile, equity requires that Cordell be subrogated to the rights of Textile in the balance of the proceeds in the "furniture account" realized from the sale of the furniture on which Textile had its factor's lien in the amount of $13,302.86.
However, it appears from the record that Cordell is indebted to the Bankrupt in some unascertained amount. The Trustee will, therefore, retain the said sum of $13,302.86 in the "furniture account" until it is determined if Cordell is indebted to Bankrupt. If Cordell is indebted to the Bankrupt, the Trustee shall apply so much of the $13,302.86 to the payment of said indebtedness as may be required to satisfy the same, and, if there is a residue of said $13,302.86 after satisfying such indebtedness, the Trustee shall pay the same to Textile to be held by Textile for the benefit of Cordell. Young v. Gordon, 4 Cir., 1914, 219 F. 168; Swarts v. Fourth Nat'l Bank, 8 Cir., 1902, 117 F. 1.
The question of the indebtedness and the amount thereof due by Cordell to Bankrupt, if any, will be remanded to the Referee for appropriate proof and determination of this question.
The Trustee will pay to Textile from the "furniture account" the sum of $6,408.50, being the balance due it. Textile having been paid the full amount it is entitled to recover from the Bankrupt it, therefore, no longer has a lien for its own benefit on the balance in the "furniture account". The Court has held that Cordell is subrogated to Textile's lien on the balance in the "furniture account" and, if it appears that Cordell is indebted to the Bankrupt, the Trustee shall apply so much of the balance in the "furniture account" to the payment of Cordell's indebtedness to the Bankrupt as may be necessary to satisfy the same, and the Trustee shall pay the residue, if any, to Textile to be held for the benefit of Cordell. Young v. Gordon, supra; see Ivanhoe Building & Loan Assoc. v. Orr, 1935, 295 U.S. 243, 55 S. Ct. 685, 79 L. Ed. 1419. Textile shall have no rights in the balance in the "furniture account" until the indebtedness of Cordell, if any, to the Bankrupt has been satisfied therefrom.
An appropriate order will be entered in accordance with these findings.
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877 F. Supp. 750 (1995)
Scott ARMSTRONG, et al., Plaintiffs,
v.
EXECUTIVE OFFICE OF the PRESIDENT, et al., Defendants.
Civ. A. No. 89-142 (CRR).
United States District Court, District of Columbia.
February 27, 1995.
As Changed February 28, 1995.
*751 Michael E. Tankersley, for Public Citizen Litigation Group, Washington, argued the case, for plaintiffs. With him on the brief was Alan B. Morrison, for Public Citizen Litigation Group, Washington, DC.
Anthony J. Coppolino, U.S. Dept. of Justice, Civ. Div., argued the case for, defendants. With him on the brief was Jason R. Baron, U.S. Dept. of Justice, Civ. Div., Frank W. Hunger, Asst. U.S. Atty. Gen., U.S. Dept. of Justice, Eric H. Holder, U.S. Atty. for, District of Columbia, David J. Anderson and Elizabeth A. Pugh, U.S. Dept. of Justice, Civ. Div., Washington, DC.
MEMORANDUM OPINION OF CHARLES R. RICHEY UNITED STATES DISTRICT JUDGE
CHARLES R. RICHEY, District Judge.
INTRODUCTION
Before the Court is the Defendants' Motion and Memorandum seeking a Stay Pending Appeal of this Court's Memorandum Opinion and Order issued on February 14, 1995, ___ F.Supp. ___, which held, inter alia, that the National Security Council is an "agency" subject to the Freedom of Information Act. Upon careful consideration of the pleadings the applicable law, and the Plaintiffs' Opposition thereto, the Court finds that the Defendants do not meet the requirements for the issuance of a Stay pending appeal. Accordingly, their Motion shall be denied.
DISCUSSION
I. The Defendants' Motion For A Stay Pending Appeal Shall Not Be Granted Because The Defendants Do Not Satisfy the Requirements For The Issuance Of A Stay.
To obtain a Stay pending appeal, a party must satisfy the three pronged test as set forth by this Circuit in Washington Metropolitan Area Transit Commission v. Holiday *752 Tours, Inc., 559 F.2d 841 (D.C.Cir.1977). Accordingly, a party must show: (1) a likelihood of success on the merits of an appeal; (2) irreparable harm should the Stay not be granted; and (3) no harm will befall the adverse party or the public if the Stay is granted. Id. at 842-43. As set forth below, the Defendants are not entitled to a Stay because they do not meet any of the aforementioned requirements.
First, the Defendants' likelihood of success on the merits of the appeal is de minimis. As more thoroughly explained in the Court's February 14, 1995 Opinion, the Defendants' position that the NSC functions solely to advise and assist the President is meritless. By virtue of its exercise of rule-making and adjudicatory functions and its role in no less than seven areas, to wit Intelligence, protection of National Security Information, Telecommunications, Emergency Preparedness policy, Arms Control Verification, Nonproliferation, and Public Diplomacy, the NSC exercises authority independent of the President. Under the law of this Circuit, the exercise of independent authority in only one area is enough to conclude that an entity is an agency. E.g., Soucie v. David, 448 F.2d 1067 (D.C.Cir.1970). In this very litigation itself and up until the March 25, 1994 Memorandum by William H. Itoh, Executive Secretary of the National Security Council, declaring that the NSC is not an agency, the NSC has acknowledged that it is an agency and that it performs agency functions. (See also Dep. of David Van Tassel, National Security Council Director of Access Management at 23-24 ¶¶ 19-18). Moreover, the Defendants have admitted that they are an agency in a formal pleading filed with this Court. (E.g., Joint Statement of Facts ¶¶ 171-72). Therefore, the NSC's functions and past practice clearly demonstrate and support the correctness of this Court's Opinion and Order of February 14, 1995. Thus, no Stay should be granted.
Second, the Defendants are not entitled to a Stay because they cannot show that the Court's February 14, 1995 Order causes them irreparable harm. The Court observes initially that prior to Mr. Itoh's Memorandum, the NSC operated under the Freedom of Information Act for nineteen years without any demonstrable harm. Nevertheless, in their request for a Stay, the Defendants principally object to two aspects of the Court's Order: the declaration that they are an agency, and the mandate that they promulgate new guidelines. (See Defs.' Mot. and Mem. in Support of a Stay Pending Appeal at 4-5). However, neither of these cause them irreparable harm. The declaration that they are an agency does not cause irreparable harm because, as previously noted, the NSC itself has previously stated that it is an agency. Moreover, the mandate that the NSC issue new guidelines likewise does not cause irreparable harm.
Prior to the March 25, 1994 Declaration, the Defendants previously maintained both Presidential and Federal Records in accordance with their own internal guidelines. In addition, the Court observes that major components of the Executive Office of the President, to wit the Office of Administration, the Office of the United States Trade Representative, the Office of Science and Technology Policy, the Office of Management and Budget, the Office of National Drug Control Policy, and the Council on Environmental Quality, have already issued new recordkeeping guidelines in response to this litigation. Armstrong v. Executive Office of the President, 877 F. Supp. 690, 695 n. 3 (D.D.C. February 14, 1995). Moreover, the National Archives and Records Administration has, in response to this litigation, proposed new regulations for the management and preservation of electronic records for all Federal government agencies. Id. Because the NSC has previously issued recordkeeping guidelines in accordance with the Presidential Records Act and the Federal Records Act, and because other components of the Executive Office of the President have had no noticeable difficulty in issuing new guidelines in response to this litigation, the Defendants' claim of irreparable harm is unfounded.
Third, the Defendants' request for a Stay must be denied because the Plaintiffs' rights and the public interest would be harmed if a Stay were granted. The Defendants incorrectly claim that issuing a Stay *753 would not cause any harm because an NSC March 21, 1994 Declaration ensures the preservation of the records. (Defs.' Mot. for Stay at 5). The Defendants' assertion is incorrect because, as demonstrated by past experience, the Defendants' assurances that the records will be preserved are unreliable.
On November 20, 1992 the Court in Armstrong v. Bush, 807 F. Supp. 816, 823 (D.D.C. 1992) entered a Temporary Restraining Order ("TRO") which required that backup tapes containing NSC records be preserved. The TRO expired shortly before the Court decided the merits in which the Court entered a permanent injunction requiring preservation of the materials. During the interval in which no Court Order was in effect, three backup tapes were overwritten. (Mem. of Roy King, Deputy Commander of Data Systems Unit on "Summary Overwritten CPU A Backup Tapes" dated January 8, 1993). In response to the Court's show cause Order requiring an accountability for the destruction of the tapes, the Defendants argued that they should not be held responsible for the erasure because no Court Order was in effect at the time. (See Defs.' Oppos. to Pls.' Combined Mots. to Show Cause and Enforce This Court's Orders at 23 n. 20, 25 n. 23).
Furthermore, at the beginning of this litigation the Defendants ignored a TRO and an agreement they had with the Plaintiffs. In 1989 Judge Parker of this Court entered a TRO requiring the Defendants to preserve the electronic records of the Reagan Administration. Plaintiffs initially filed a Motion for a preliminary injunction but later withdrew the Motion after the Defendants' agreed to preserve the materials pending the Court's decision on the merits. See Armstrong v. Bush, 721 F. Supp. 343, 348, 348 n. 9 (D.D.C.1989). Despite the agreement, the Defendants destroyed several of the backup tapes in violation of the TRO and the agreement. (See Order of January 14, 1993 in Armstrong v. Executive Office of the President, Civil Action 89-142 at 6 n. 6, ___ F.Supp. at ___ n. 6). As this past experience indicates, there is a strong possibility that should the Court grant the Stay, the Defendants will begin disposing of the records at issue. Therefore, the Court finds that the Plaintiffs' rights and the public interest would be harmed if a Stay were granted in this case.
Finally, as this Court's Order and Opinion of February 14, 1995 made clear, the Plaintiffs' argument made in its papers and at oral argument about the distinction between declaratory and injunctive relief under the terms of this Court's Order, is persuasive as well as dispositive of the issue as to whether the Defendants are entitled to a Stay, herein. (Pls.' Oppos. to Defs.' Mot. for Stay Pending Appeal at 6-8). Therefore, the Defendants should immediately adopt guidelines consistent with the Court's February 14, 1995 Opinion and Order. The Court observes that this does not place any undue burden on the Defendants because up until the March 25, 1994 Declaration, the Defendants had in place guidelines with respect to the Presidential Records Act and the Federal Records Act.
II. The Portion Of The Court's February 14, 1995 Order Requiring New Guidelines To Be Adopted By February 27, 1995 Shall Be Extended To Allow The Defendants Until March 2, 1995 Within Which To Comply.
Notwithstanding the foregoing, the Court shall enlarge the time within which Defendants must issue new guidelines. At a status call held on February 24, 1995, the parties entered into an oral stipulation that allows the Defendants until March 2, 1995 to comply with the Court's February 14, 1995 Order. The parties indicated that the grant of such an extension will allow the Defendants a full opportunity to present their case to the Court of Appeals should they so choose. Accordingly, this Court shall grant the enlargement of time to allow the Defendants until March 2, 1995 to adopt new guidelines for the National Security Council.
CONCLUSION
For the reasons set forth herein, the Court shall deny the Defendants' Motion for a Stay pending Appeal as the same is wholly without merit in this instance. Accordingly, the Court shall issue an Order of even date *754 herewith in accordance with this Memorandum Opinion.
ORDER
Upon careful consideration of the parties' papers, the arguments of Counsel, the record in the case and the underlying law, and for the reasons articulated in the Opinion of the Court of even date herewith, it is, by the Court, this 25 day of February, 1995,
ORDERED that the Defendants' Motion for a Stay shall be, and hereby is, DENIED; and it is
FURTHER ORDERED that the Court's February 14, 1995 shall remain in full force and effect except as herein modified in accordance with the following Ordered paragraph; and it is
FURTHER ORDERED that the Defendants shall have until March 2, 1995 within which to comply with that portion of the Court's February 14, 1995 Order requiring the Executive Office of the President and the Archivist to adopt new guidelines for the National Security Council, in place of those vacated and nullified on March 25, 1994.
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877 F. Supp. 1011 (1994)
HOBET MINING, INC., Plaintiff,
and
Bituminous Coal Operators' Association, Involuntary Plaintiff,
v.
INTERNATIONAL UNION, UNITED MINE WORKERS OF AMERICA; District 17, United Mine Workers of America; and Local Union 2286, Defendants.
No. 2:92-0569.
United States District Court, S.D. West Virginia, Charleston Division.
September 19, 1994.
*1012 *1013 Forrest H. Roles, Donna M. Colberg, Smith, Heenan & Althen, Charleston, WV, for plaintiff.
Maureen Geraghty, UMWA Intern. Union, Washington, DC, Robin Jean Davis, Charleston, WV, for defendants.
MEMORANDUM ORDER
COPENHAVER, District Judge.
This matter is before the court on the cross motions for summary judgment filed by plaintiff Hobet Mining, Inc., and defendants International Union, United Mine Workers of America, United Mine Workers of America District 17 and Local Union 2286 (hereinafter, International UMWA and District 17, or, collectively the Unions). The action arises *1014 under section 301 of the Labor Management Relations Act of 1947, 29 U.S.C. § 185.
In its amended complaint, Hobet seeks vacation of an arbitration award unfavorable to it entered by Arbitrator Lawrence Roberts on January 10, 1992; vacation of a portion of an award adverse to it entered by Arbitrator David S. Tanzman on May 24, 1992; reimbursement for all amounts paid pursuant to the two awards; and an order disqualifying Arbitrator Roberts from further service on District Arbitration Panels in District 17. Defendants, by way of counterclaim, ask inter alia, that the arbitration awards be upheld.
Plaintiff Bituminous Coal Operators Association, (hereinafter, BCOA), an involuntary plaintiff, takes no position with respect to vacation or enforcement of the arbitration awards but states that it will comply with any order of the court either removing or retaining Arbitrator Roberts as an arbitrator, subject to its right to select, jointly with defendant International UMWA, new panels of arbitrators under the National Bituminous Coal Wage Agreement of 1993. (Statement of BCOA, filed 9/23/93.)
By stipulation filed on April 22, 1994, Hobet and the Unions submitted the case for disposition on their cross motions for summary judgment.[1] The sole ground relied on by Hobet for vacation of the arbitration award rendered by Arbitrator Roberts is that of evident partiality and is based on Roberts' failure to disclose that he has a brother who is an employee of the International UMWA. The subsequent award entered by Arbitrator Tanzman, Hobet asserts, should also be vacated insofar as it gave res judicata effect to a portion of Arbitrator Roberts' decision.
By further stipulation, Hobet and the Unions agree that the issue of whether Arbitrator Roberts should be disqualified from further service on District Arbitration Panels has become moot during the pendency of this action. The court accordingly does not address that issue.
I. Background
Hobet and the Unions are signatories to a collective bargaining agreement, the National Bituminous Coal Wage Agreement of 1988. After exhaustion of a grievance procedure, the Agreement provides a mechanism for the settlement of disputes between the Unions and signatory employers by final and binding arbitration conducted before district arbitrators. (Defs.' App. A, 1988 Wage Agreement at Art. XXIII.) District arbitrators are selected by the president of the International UMWA and the president of BCOA, which acts on behalf of its members, including Hobet. (Id. at Art. XXIII(b)(1).) Once a district arbitrator is selected, he serves for a period of eighteen months unless removed from the panel by "mutual consent" of the International UMWA and BCOA. (Id. at Art. XXIII(b)(1); Phalen 2d Aff. at ¶ 5.) At the expiration of the term of service, the arbitrator's performance is reviewed and, if satisfactory to both BCOA and the International UMWA, a reappointment is made for the duration of the Wage Agreement. (Phalen 2d Aff. at ¶ 5.)
At all times pertinent, the arbitration selection process for District 17 was conducted by Steven Winsor Lindner, co-administrator of the Coal Arbitration Service, on behalf of the International UMWA, and Tom Waddington, co-administrator of the Coal Arbitration Service, on behalf of BCOA. (Defs.' App. D, Lindner Aff. at ¶¶ 2-4.) The process used by the Coal Arbitration Service in the selection of district arbitrators calls for both the International UMWA and BCOA to submit nominees to the Federal Mediation and Conciliation Service, (hereinafter, FMCS), which adds its own nominees and compiles a list containing nominees selected by all three. (Lindner Aff. at ¶¶ 5, 8.) In selecting nominees, the International UMWA confers with its district unions and BCOA consults with its member companies. (Lindner Aff. at ¶¶ 6-7.) Once FMCS compiles the joint list, *1015 the International UMWA and BCOA are free to check references and any other sources of information about the nominees and may conduct personal interviews. (Lindner Aff. at ¶ 9.) After the investigations are completed, each side is entitled to strike a number of names. (Lindner Aff. at ¶ 13.) Those nominees who remain on the list constitute the final panel of arbitrators for a particular union district. (Lindner Aff. at ¶ 14.)
As part of the selection process, the International UMWA and BCOA have jointly developed a "Prescribed Resume." (Lindner Aff. at ¶ 10.) The Prescribed Resume asks about the applicant's present occupation or profession, his educational background, his arbitration experience, his customary fee, and his willingness to travel. It also asks the following questions:
HAVE YOU EVER BEEN EMPLOYED AS EITHER A LABOR RELATIONS CONSULTANT OR AS LEGAL COUNSEL BY A COMPANY IN A CAPACITY IN WHICH YOU REPRESENTED THE EMPLOYER'S INTEREST IN LABOR RELATIONS MATTERS? IF SO, PLEASE GIVE THE PARTICULARS.
HAVE YOU EVER BEEN EMPLOYED BY A UNION OR REPRESENTED A UNION'S INTEREST IN LABOR RELATIONS MATTERS? IF SO, PLEASE GIVE THE PARTICULARS OF YOUR EMPLOYMENT.
DO YOU, OR DOES ANY MEMBER OF YOUR IMMEDIATE FAMILY, HOLD ANY ECONOMIC INTEREST IN ANY COAL OR COAL-RELATED COMPANY? IF SO, PLEASE GIVE THE PARTICULARS.
HAVE YOU EVER BEEN A MEMBER OF THE UMWA? IF SO, PLEASE GIVE THE PARTICULARS OF YOUR MEMBERSHIP DURATION AND ACTIVITIES.
(Lindner Aff. at Ex. A.) In completing the Prescribed Resume, Roberts answered each of the quoted questions in the negative.
Following the procedure developed by BCOA and the International UMWA, Roberts was selected as an arbitrator for District 17 in 1990.[2] (Lindner Aff. at ¶ 31.) From the time of his appointment until December 12, 1992, Arbitrator Roberts decided twenty-one cases in District 17. (Defs.' App. C, Phalen Aff. at ¶¶ 4 & 5.) Eight decisions were in favor of the Unions and ten were in favor of the employer, with two decisions being "split," and one case being withdrawn before decision. (Phalen Aff. at ¶ 5.) Two of the proceedings held before Arbitrator Roberts involved Hobet. Hobet prevailed in one case but lost a work jurisdiction dispute decided by Arbitrator Roberts on September 8, 1992. (Phalen Aff. at ¶ 6 & attached Ex. A.)
Arbitrator Roberts is a member of the American Arbitration Association, (hereinafter, AAA), which requires its members to subscribe to the Code of Professional Responsibility for Arbitrators of Labor-Management Disputes, (hereinafter, the Code).[3] The Code requires disclosures of certain relationships between the arbitrator and parties to the arbitration. In particular, arbitrators governed by the Code have the following duties of disclosure:
The duty to disclose includes membership on a Board of Directors, full-time or part-time service as a representative or advocate, consultation work for a fee, current stock or bond ownership (other than mutual fund shares or appropriate trust arrangements) or any other pertinent form of managerial, financial or immediate family interest in the company or union involved [in a proceeding to be heard by him].
(Code at 7-8.) The Code further states that "[a]n arbitrator must not permit personal relationships to affect decision-making" and that "[p]rior to acceptance of an appointment, an arbitrator must disclose to the parties ... involved any close personal relationships or other circumstances, in addition to those specifically mentioned earlier in this section, *1016 which might reasonably raise a question as to the arbitrator's impartiality." (Code at 8.)
On December 17, 1991, Hobet and District 17 submitted a contracting out dispute to arbitration in accordance with the provisions of the 1988 Wage Agreement. The dispute was heard by Arbitrator Roberts and his award in favor of District 17 was entered on January 10, 1992. A second contracting out dispute between Hobet and District 17 was submitted to Arbitrator Tanzman, who rendered a damage award in favor of District 17 on May 24, 1992, based in part on Arbitrator Roberts' award, which found that Hobet used a "sixteen hour work schedule." The parties in both proceedings were Hobet, District 17 and Local 2286. (Defs.' App. F & G.) The International UMWA is not listed as a party and no health or safety matter was an issue in either proceeding.
By memorandum from BCOA's president, dated May 26, 1992, and received shortly thereafter by Hobet, Hobet learned for the first time that Arbitrator Roberts has a brother, Thomas Rabbitt Zajac, who is an employee of the International UMWA. BCOA apparently became aware of the relationship from a newspaper article published on March 24, 1992. It is undisputed that Roberts did not disclose the relationship to BCOA during the arbitrator selection process or to Hobet prior to hearing the dispute between Hobet and District 17. After learning of the relationship between Arbitrator Roberts and Zajac, BCOA asked Roberts to resign from the District 17 arbitration panel. He refused to do so and the International UMWA rejected a request made by BCOA on May 13, 1992, that he be removed by mutual agreement.
Since approximately May 1989, Zajac has been the International Representative for Health and Safety for UMWA Districts 4 and 5, located in Pennsylvania. (Zajac Aff. at ¶ 7.) His duties include advising and representing UMWA members in his districts on matters concerning health and safety. (Zajac Aff. at ¶ 7.) He is not an elected official of the UMWA, has no responsibilities for matters of a contractual nature between the Unions and BCOA, and has not been involved in an arbitration case on behalf of the International UMWA since 1982. (Zajac Aff. at ¶¶ 4, 7.) At times in the past, Roberts resided with Zajac and the two brothers jointly own a laundromat. (Zajac Aff. at ¶ 11.)
This action to vacate the award entered by Arbitrator Roberts on January 10, 1992, and a portion of the one entered by Arbitrator Tanzman on May 24, 1992, was commenced on June 17, 1992. On the basis of the disclosure requirements of the Code, Hobet asserts that Arbitrator Roberts was ethically compelled to inform BCOA that he has a brother who is a "high ranking employee" or "official" of the International UMWA and that his failure to make the disclosure warrants vacation of the award he entered in favor of District 17. It is maintained by the defendants, however, and Hobet does not assert otherwise, that under the 1988 Wage Agreement, neither membership in the AAA nor adherence to the Code is required, leaving such matters as disclosure within the discretion of the arbitrators.[4] (Lindner Aff. at ¶ 20.) Hobet also contends that the familial relationship between Arbitrator Roberts and Zajac constitutes evident partiality per se.
For their part, the defendants first contend that Hobet's action to vacate Arbitrator Roberts' award is barred by the applicable statute of limitations. They also maintain that Arbitrator Roberts had no duty to disclose his relationship to Zajac. Further, they assert, the relationship itself cannot support a finding of evident partiality, particularly in light of Arbitrator Roberts' history of impartial rulings in District 17 disputes he has arbitrated under the 1988 Wage Agreement.
II. Discussion
A. Timeliness of Motion to Vacate
Neither section 301 of the Labor Management Relations Act of 1947, 29 U.S.C. § 185(a), nor West Virginia law, provide a *1017 statute of limitations for actions to vacate arbitration awards. Sheet Metal Workers Int'l v. Power City Plumbing & Heating, Inc., 934 F.2d 557, 559 (4th Cir.1991). Consequently, the Fourth Circuit Court of Appeals has approved borrowing the limitations period found in section 12 of the Federal Arbitration Act, (hereinafter, FAA), 9 U.S.C. § 12, for section 301 actions brought in the federal courts of West Virginia to vacate arbitration awards. Id. at 560. In accordance with section 12, "[n]otice of a motion to vacate, modify or correct an award must be served upon the adverse party or his attorney within three months after the award is filed or delivered." 9 U.S.C. § 12.
In the context of section 301 motions to vacate, the Fourth Circuit Court of Appeals has not had occasion to address whether there are any exceptions to the three month limitations period borrowed from the FAA. The possibility of exceptions was discussed in Taylor v. Nelson, 788 F.2d 220 (4th Cir. 1986), a case brought directly under the FAA. In Taylor, the motion to vacate was untimely, but the district court vacated the award on the reasoning that the pendency of a motion to confirm served to toll the statute of limitations and that Taylor acted with due diligence in moving to vacate. Id. at 225. The Fourth Circuit Court of Appeals reversed, holding that "once the three-month period has expired, an attempt to vacate an arbitration award [can] not be made even in opposition to a later motion to confirm." Id. (adopting the rule enunciated in Florasynth, Inc. v. Pickholz, 750 F.2d 171 (2d Cir.1984)); see also, Sverdrup Corp. v. WHC Constructors, Inc., 989 F.2d 148, 151 (4th Cir.1993) (citing Taylor, 788 F.2d at 225) (stating in dicta that inasmuch as the language of § 12 "is mandatory," motions pursuant to its provision "made beyond three months after the award are time barred").
The court further noted in Taylor that the existence of tolling and due diligence exceptions to the limitations period of section 12 "is questionable, for they are not implicit in the language of the statute, and cannot be described as common-law exceptions." Taylor, 788 F.2d at 225. In any event, it was not necessary to decide whether exceptions might exist, there having been nothing to prevent Taylor from timely filing the motion to vacate. Id. at 225-26. The district court order vacating the arbitration award was accordingly vacated and the case remanded for entry of an order confirming the award. Id. at 226.
Courts in other jurisdictions have similarly viewed with skepticism the suggestion that tolling or due diligence exceptions to the notice provisions of section 12 of the FAA might be available. Cullen v. Paine, Webber, Jackson & Curtis, Inc., 863 F.2d 851, 854 (11th Cir.), cert. denied, 490 U.S. 1107, 109 S. Ct. 3159, 104 L. Ed. 2d 1022 (1989); Sanders-Midwest, Inc. v. Midwest Pipe Fabricators, Inc., 857 F.2d 1235, 1238 (8th Cir.1988); Piccolo v. Dain, Kalman & Quail, Inc., 641 F.2d 598, 601 (8th Cir.1981); Franco v. Prudential Bache Sec. Inc., 719 F. Supp. 63 (D.P.R.1989). Indeed, only one reported federal case, Holodnak v. Avco Corp., 381 F. Supp. 191 (D.Conn.1974), aff'd in part, rev'd in part, 514 F.2d 285 (2d Cir.), cert. denied, 423 U.S. 892, 96 S. Ct. 188, 46 L. Ed. 2d 123 (1975), seemingly recognizes an exception. In Holodnak, a complaint seeking to vacate was timely filed but plaintiff was unable to obtain service of process within the three months allowed by section 12, largely because of an overload of business in the United States Marshal's office and the inability of a substitute process server to effect service until one day after the expiration of the limitations period. Id. at 197. Under the circumstances, the court found that plaintiff's "due diligence" in attempting to comply with the statute would not bar the action. Id. However, as the court noted in Piccolo, the Holodnak decision rests as well on the alternative ruling that inasmuch as the last day of the limitations period fell on a Sunday, application of Rule 6(a) of the Federal Rules of Civil Procedure would result in a finding that the section 12 notice was timely. Piccolo, 641 F.2d at 601 n. 5, (citing Holodnak, 381 F.Supp. at 198).
None of the cited cases involve a situation where the party seeking vacation of an arbitration award did not discover the asserted basis for its motion until after the limitations period had expired. Nonetheless, *1018 the language of section 12 neither expressly nor implicitly, see Taylor, supra, page 1017, allows of any exceptions, even for grounds such as "evident partiality," 9 U.S.C. § 10(a)(2), which might not become known until more than three months has passed. The court accordingly agrees that it is questionable that Hobet can avoid the three month limitations period borrowed from section 12 on the reasoning that it had no knowledge of the relationship between Arbitrator Roberts and International UMWA employee Zajac until after the limitations period governing the Roberts' award expired.[5] Nonetheless, the statute of limitations would bar vacation of only Arbitrator Roberts' award, not that of Arbitrator Tanzman. The court accordingly finds it appropriate to address Hobet's claim of evident partiality.
B. Evident Partiality
Although it is agreed by the parties that the FAA "does not apply to disputes stemming from collective bargaining agreements," Domino Sugar Corp. v. Sugar Workers Local Union 392, 10 F.3d 1064, 1067 (4th Cir.1993) (citing 9 U.S.C. § 1), it is also recognized that courts in other jurisdictions have entertained FAA section 10 evident partiality challenges to arbitration awards rendered pursuant to a collective bargaining agreement,[6]Apperson v. Fleet Carrier Corp., 879 F.2d 1344 (6th Cir.1989), cert. denied, 495 U.S. 947, 110 S. Ct. 2206, 109 L. Ed. 2d 533 (1990) (approving district court's adoption of the evident partiality provision of the FAA in suit brought to vacate an arbitration award rendered pursuant to a collective bargaining agreement); Toyota of Berkeley v. Automobile Salesmen's Union, Local 1095, 834 F.2d 751 (9th Cir.1987), cert. denied, 486 U.S. 1043, 108 S. Ct. 2036, 100 L. Ed. 2d 620 (1988) (applying evident partiality provision of the FAA without discussion of its applicability to arbitration award rendered pursuant to an arbitration provision in a collective bargaining agreement); Morelite Constr. Corp. v. New York City Dist. Council Carpenters Benefit Funds, 748 F.2d 79 (2d Cir.1984) (same). On the strength of the cited authority, the court finds that it is appropriate to borrow from the FAA the evident partiality ground for vacation and apply it to this action.
In general, to demonstrate "evident partiality" under the FAA, the party seeking vacation has the burden of proving that "a reasonable person would have to conclude that an arbitrator was partial to one party to the arbitration."[7]Morelite, 748 F.2d at 84; accord Peoples Sec. Life Ins. Co. v. Monumental Life Ins. Co., 991 F.2d 141, 146 (4th Cir.1993) (citing with approval the Morelite standard as quoted in Apperson); Apperson, 879 F.2d at 1358 (adopting Morelite standard); Austin South I, Ltd. v. Barton-Malow Co., 799 F. Supp. 1135, 1142 (M.D.Fla. 1992) (applying Morelite standard); cf. Sunkist Soft Drinks v. Sunkist Growers, 10 F.3d 753, 758 (11th Cir.1993), petition for cert. filed, 63 USLW 3065 (July 6, 1994) (party alleging evident partiality must prove conduct creating "a reasonable appearance of bias"); Sheet Metal Workers Int'l Ass'n Local Union # 420 v. Kinney Air Cond. Co., 756 F.2d 742, 745 (9th Cir.1985) (party alleging evident partiality must establish "a reasonable impression" of partiality). "The alleged partiality must be `direct, definite, and capable of demonstration rather than remote, uncertain or speculative.'" Peoples, 991 F.2d at 146 (quoting Health Servs. Mgt. Corp. v. Hughes, 975 F.2d 1253, 1264 (7th Cir.1992) (quoting Florasynth, Inc. v. Pickholz, 750 F.2d 171, 173-74 (2d Cir.1984)); see also Middlesex Mut. Ins. Co. v. Levine, 675 F.2d 1197, 1202 (11th Cir.1982) (quoting Tamari v. Bache Halsey Stuart, Inc., 619 F.2d *1019 1196, 1200 (7th Cir.), cert. denied, 449 U.S. 873, 101 S. Ct. 213, 66 L. Ed. 2d 93 (1980)). Moreover, the party asserting evident partiality "must establish specific facts that indicate improper motives on the part of the arbitrator." Peoples, 991 F.2d at 146.
The enunciated general principles are utilized in evaluating claims of evident partiality based on both the failure to disclose a relationship and the relationship itself. The court accordingly examines, in turn, Hobet's claim that Arbitrator Roberts' failure to disclose that he has a brother who is an employee of the International UMWA is a sufficient basis for vacation and the additional claim that the relationship between Arbitrator Roberts and Zajac, without more, establishes evident partiality.
1. Failure to Disclose
Arbitrators are encouraged to make advance disclosure of relationships with parties appearing before them and the failure to do so may justify setting aside an award on the ground of evident partiality. Sanford Home for Adults v. Local 6, IFHP, 665 F. Supp. 312, 317 (S.D.N.Y.1987). Disclosure enables parties to select an arbitrator intelligently, Schmitz v. Zilveti, 20 F.3d 1043 (9th Cir.1994), precludes a disgruntled party from claiming partiality as a pretext for vacating an unfavorable award, Sun Refining & Mktg. Co. v. Statheros Shipping Corp., 761 F. Supp. 293, 300 (S.D.N.Y.), aff'd 948 F.2d 1277 (2d Cir.1991); Sanford Home, 665 F.Supp. at 318, and serves the goal of minimizing judicial interference in the arbitral process, Sun Refining, 761 F.Supp. at 301 (quoting Marc Rich & Co. v. Transmarine Seaways Corp., 443 F. Supp. 386, 387 (S.D.N.Y.1978)). Nonetheless, courts are reluctant to set aside awards on the basis of nondisclosure, Sanford Home, 665 F.Supp. at 317, and the failure to disclose does not alone warrant vacation, Sun Refining, 761 F.Supp. at 300. See also Merit Ins. Co. v. Leatherby Ins. Co., 714 F.2d 673, 680-81 (7th Cir.), cert. denied, 464 U.S. 1009, 104 S. Ct. 529, 78 L. Ed. 2d 711 (1983). Nondisclosure instead only subjects the award to review for evident partiality. Sun Refining, 761 F.Supp. at 300-01.
Indeed, it is held that even where the failure to disclose is "a material violation of the ethical standards applicable to arbitration proceedings, it does not follow that the arbitration award may be nullified judicially" inasmuch as codes of ethics "do not have the force of law." Merit, 714 F.2d at 680. In that regard, it is recognized that private arbitration services, such as the AAA, who compete with others offering the same services, may "set its standards as high or as low as it thinks its customers want," but the standards it sets in its code of ethics "does not lower the threshold for judicial intervention." Id. at 681. Thus, a technical violation of an ethical standard does not, standing alone, justify setting aside an award on the ground of evident partiality. Id.
Courts also recognize that where parties have selected arbitrators in accordance with the requirements of a collective bargaining contract, the selection method should be presumed fair. See Sheet Metal Wkrs. Int'l Ass'n Local Union # 420 v. Kinney Air Cond. Co., 756 F.2d 742, 746 (9th Cir.1985). Similarly, inasmuch as expertise in the field is frequently an attractive feature of arbitration, "parties can justifiably be held to know at least some kinds of basic information about an arbitrator's personal and business contacts." Andros Compania Maritima v. March Rich & Co., 579 F.2d 691, 701 (2d Cir.1978). For the same reason, the parties should expect that arbitrators, as "expert adjudicators," are more likely than judges "to be precommitted to a particular substantive position." Merit Ins., 714 F.2d at 679. In other words, "[p]arties to an arbitration choose their method of dispute resolution, and can ask no more impartiality than inheres in the method they have chosen." Id. Consequently, where information about an arbitrator is not known in advance, but could have been ascertained by more thorough inquiry or investigation, a post-award challenge suggests that nondisclosure is being raised merely as a "tactical response to having lost the arbitration," id. at 683, or an inappropriate attempt to seek a "second bite at the apple" because of dissatisfaction with the outcome, Remmey v. Paine Webber, Inc., 32 F.3d 143, 146 (4th Cir. Aug. 19, 1994).
*1020 To the extent that Hobet seeks vacation on the basis of Arbitrator Roberts' failure to disclose that he has a brother, Thomas Zajac, who is employed by the International UMWA, it relies primarily on Roberts' membership in the AAA and its requirement that members adhere to the Code of ethics applicable to labor-management disputes. It is agreed, however, that insofar as Roberts performed arbitral services under the 1988 Wage Agreement, he was not required by the Coal Arbitration Service to be a member of the AAA or to abide by the disclosure requirements of the Code. It is reasonable to assume that the only conflict of interest disclosures deemed pertinent by BCOA and the International UMWA are those set forth in the Prescribed Resume. Inquiry is there made as to whether the applicant has ever been a member of the UMWA or employed by a union. No similar query is made with respect to persons in the applicant's immediate family. Rather, the only question directed to members of the applicant's immediate family is whether they have any economic interest in any coal or coal-related company. Had BCOA, including its member, Hobet, wanted disclosure of any immediate relative's membership in, or employment with, a union or the UMWA in particular, questions of that nature could have been included in the Prescribed Resume. Alternatively, separate inquiry could have been made. Hobet, through BCOA, having made the decision to ask only the questions contained in the Prescribed Resume and having undertaken no additional investigation directed to Roberts' family, should not now strive to place the fault for nondisclosure on Roberts. Their effort to do so suggests that they are simply dissatisfied with the award.
Moreover, assuming without deciding that Roberts was required by the Code to disclose that he had a brother who was employed by the International UMWA, the failure to make that disclosure must be viewed as merely a technical violation of the Code which does not, standing alone, warrant vacation unless Hobet can otherwise demonstrate evident partiality. The court accordingly examines the allegation that the relationship itself establishes evident partiality.
2. The Relationship
Hobet relies primarily on the decision in Morelite Construction Corp. v. New York City District Council Carpenters Benefit Funds, 748 F.2d 79 (2d Cir.1984), for its contention that the relationship between Roberts and Zajac establishes evident partiality per se and warrants vacation of the award rendered by Roberts. Morelite, having been compelled to arbitrate a dispute with a district union, moved in federal court to disqualify the designated arbitrator because the arbitrator's father was then a vice president of the international union of which the district union was a local. Morelite, 748 F.2d at 81. The motion was denied on the reasoning that the court lacked authority to entertain an attack on an arbitrator's partiality until after an award was entered. Id. Arbitration was commenced, during which proceedings the arbitrator's father was named general president of the international union. Id. An award was entered in favor of the union and Morelite thereafter appealed the district court's denial of its motion to vacate on the ground of evident partiality based on the father-son relationship. Id. at 81-82.
In formulating and applying the "reasonable person" standard for evident partiality, see, supra, page 1018, the Second Circuit Court of Appeals concluded that the father-son relationship established evident partiality and warranted per se vacation of the arbitrator's award. Id. at 84-85. In reaching its decision, the court noted that it did not know how close the father and son were, or "how independent the son is of the father, or how divergent their views on the issues giving rise to the arbitrated dispute." Id. at 84. Without knowing more about the relationship, the court felt bound by its "strong feeling that sons are more often than not loyal to their fathers, partial to their fathers, and biased on behalf of their fathers." Id. It accordingly "perceiv[ed] ... unfairness" in allowing the award to stand. Id. At the same time, the court recognized that any "list of familial or other relationships that will result in the per se vacation of an arbitration award ... would most likely be very short." Id. at 85. It further cautioned that by its *1021 finding of evident partiality based solely on the father-son relationship, it did not "intend that unsuccessful parties to arbitration may have awards set aside by seeking out and finding tenuous relationships between the arbitrator and the successful party." Id.
On the basis of Morelite, Hobet urges the court to expand the list of familial relationships which would warrant a per se vacation of an arbitration award to include brothers. The court declines to do so, finding that Zajac's position as an employee of the International UMWA is not comparable to that of the father in Morelite, which was that of president of the international union. An employee of a union simply does not have the same identity with the organization as that of its president. Nor is the court prepared to find that the father/son loyalty and partiality assumed by the court in Morelite most likely exists in a sibling relationship. It is accordingly more appropriate to examine the nature of the relationship and its connection to the arbitration dispute to determine whether Hobet has met its burden of proving direct and definite partiality or specific facts indicating improper motive such that a reasonable person, looking at all of the circumstances, would have to conclude that Arbitrator Roberts, because of his relationship with Zajac, was partial to District 17.
In undertaking its examination, the court utilizes the following factors considered by other courts in evaluating a claim of evident partiality based on the relationship between an arbitrator and one of the parties to the arbitration: (1) any personal interest, pecuniary or otherwise, the arbitrator has in the proceeding, Sanford Home for Adults v. International Fed'n of Health Professionals, Local 6, 665 F. Supp. 312, 320 (S.D.N.Y.1987); Austin South, 799 F.Supp. at 1142; see also Apperson, 879 F.2d at 1360 & n. 21 (citing Sanford Homes, 665 F.Supp. at 320); (2) the directness of the relationship between the arbitrator and the party he is alleged to favor, Sanford Home, 665 F.Supp. at 320, keeping in mind that the relationship must be "substantial," rather than "trivial," in order to establish evident partiality, Austin South, 799 F.Supp. at 1142; cf. Merit Ins. Co. v. Leatherby Ins. Co., 714 F.2d 673 (7th Cir.1983) (relationship must be "so intimate personally, socially, professionally, or financially as to cast serious doubt" on the arbitrator's impartiality); (3) the relationship's connection to the arbitration, see Local 814, IBT v. J & B Systems Installers & Moving, Inc., 878 F.2d 38, 40 (2d Cir.1989); Hunt v. Mobil Oil Corp., 654 F. Supp. 1487, 1499-1500 (S.D.N.Y.1987); and (4) the proximity in time between the relationship and the arbitration proceeding, Sanford Home, 665 F.Supp. at 320; see Austin South, 799 F.Supp. at 1142.
Looking to the first factor, it is seen that Arbitrator Roberts had no financial or personal interest in the outcome of the dispute between Hobet and District 17 which would suggest partiality toward District 17. As to the fourth factor, it must be conceded that the sibling relationship alleged to demonstrate partiality existed simultaneously with the arbitration proceeding. However, with respect to the second factor, it cannot be said that the relationship between Arbitrator Roberts and District 17, the party he is alleged to favor, is a direct or substantial relationship. Neither the International UMWA nor Zajac was a party to the arbitration. Consequently, even though Arbitrator Roberts might be inclined to favor Zajac in a dispute involving him, that favoritism cannot be presumed to carry over to a local unit of Zajac's employer. In addition, as to the third factor, the relationship between Arbitrator Roberts and Zajac, which creates only an indirect and tenuous relationship between Roberts and District 17, has no connection to the dispute heard by Roberts. Zajac had no discernible interest in the outcome of a dispute centered around the contracting-out of union work. Zajac's interest, as an employee of the International UMWA, instead centered on health and safety issues, matters having no connection with the dispute between Hobet and District 17.
In sum, the partiality alleged by Hobet is based on an indirect relationship between Arbitrator Roberts and District 17, the party to the arbitration proceeding. The indirect relationship identified as establishing impartiality, in turn, has no connection with the issues submitted to arbitration. Neither Arbitrator *1022 Roberts, nor Zajac, the person supposedly creating partiality toward District 17, nor any of the union members Zajac represents on health and safety matters, has any demonstrable interest in the outcome of the contracting-out dispute between Hobet and District 17. The court thus concludes that Hobet's claim of alleged partiality toward District 17, based on Arbitrator Roberts having a brother employed by the International UMWA to represent union employees in another district on matters not involved in the dispute heard by Roberts is at best remote, uncertain and speculative.
Furthermore, inasmuch as there is no evidence that either Arbitrator Roberts or his brother, Zajac, would gain anything personally from a decision favorable to District 17, Hobet has failed to establish specific facts which indicate improper motive on the part of Arbitrator Roberts. The absence of evidence demonstrating improper motive is accentuated by the uncontroverted showing that in disputes involving District 17, Arbitrator Roberts has a history of ruling against the union more than half the time.
Considering all of the circumstances, the court finds that a reasonable person would not have to conclude that Arbitrator Roberts' was partial to District 17 because he has a brother employed by the International UMWA in another district. Vacation of the arbitration award rendered by Arbitrator Roberts in favor of District 17 on January 10, 1992, on the ground of evident partiality is accordingly not warranted. Having determined that Hobet has failed to demonstrate that the award entered by Arbitrator Roberts should be vacated on the ground of evident partiality, it follows that there is no basis for vacating the award entered by Arbitrator Tanzman on May 24, 1992.
III. Conclusion
For the reasons stated, it is ORDERED that the motion for summary judgment filed by Hobet Mining, Inc., be, and the same hereby is, denied. It is further ORDERED that the motion for summary judgment filed by defendants International Union, United Mine Workers of America, United Mine Workers of America District 17 and Local Union 2286 be, and the same hereby is, granted insofar as it seeks to uphold the arbitration award entered by Arbitrator Lawrence Roberts on January 10, 1992, and a portion of an arbitration award entered by Arbitrator David S. Tanzman on May 24, 1992, in favor of District 17 and against Hobet Mining, Inc.
The Clerk is directed to forward copies of this order to all counsel of record.
NOTES
[1] Defendants' counterclaim also seeks a preliminary and permanent injunction and compensatory and punitive damages. However, neither injunctive nor monetary relief are sought in the defendants' motion for summary judgment and inasmuch as it is stipulated that the case is to be decided on the basis of the cross motions for summary judgment, the requests for injunctive and monetary relief are deemed abandoned.
[2] Beginning in 1988, Roberts has also served as an arbitrator in other districts and on other occasions has been stricken by BCOA. (Lindner Aff. at ¶ 19.)
[3] The Code is published by the National Academy of Arbitrators, the AAA and the Federal Mediation and Conciliation Service.
[4] By its language, the Code applies only to members of the National Academy of Arbitrators, arbitrators appointed or referred by the AAA and the Federal Mediation and Conciliation Service, and others who voluntarily adopt it. (Code, Defs.' App. H, at 4.)
[5] In this respect, it is also noted that although Hobet maintains it did not learn of the relationship until it received BCOA's memorandum of May 26, 1992, BCOA itself discovered the relationship by reading a newspaper account dated March 24, 1992, a date within three months of the January 10, 1992, award by Arbitrator Roberts.
[6] The FAA provides, inter alia, for vacation of an arbitration award "[w]here there was evident partiality or corruption in the arbitrators, or either of them." 9 U.S.C. § 10(a)(2).
[7] The "reasonable person" standard requires a showing of something more than the "appearance of bias," but not the "insurmountable" standard of "proof of actual bias." Morelite, 748 F.2d at 84.
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932 F. Supp. 687 (1996)
Addie WILLIAMS, et al.
v.
PRINCE GEORGES COUNTY HOSPITAL CENTER, et al.
Civil Action No. CCB-94-3505.
United States District Court, D. Maryland.
April 19, 1996.
Memorandum Denying Reconsideration and Imposing Sanctions July 9, 1996.
*688 Pamela L. Lyles, Washington, DC, for Plaintiff.
J. Michael McGuire, Shaw and Rosenthal, Baltimore, MD, for Defendant.
MEMORANDUM OPINION
BLAKE, District Judge.
Now pending are the defendants' motion to amend answer and affirmative defenses; motion for summary judgment; motion for sanctions; and motion to strike plaintiffs' response. For the reasons that follow, these motions will be Granted.
The undisputed facts of this case are that the individual defendant, a doctor at Prince George's County Hospital Center, on October 21, 1993 made an inappropriate race-based comment directed at the two plaintiffs, both then Hospital employees. The Hospital immediately investigated the matter and issued a reprimand to the doctor, who apologized publicly for his remarks on November 8, 1993. There is no evidence that the doctor had ever before made any inappropriate racial comments to anyone at the Hospital. *689 The plaintiffs suffered no adverse employment action or economic damages, and, according to their deposition testimony, sought no medical or psychological treatment as a result of the remark.
Based on these facts, the plaintiffs, represented by attorney Pamela Lyles, filed a complaint in this court on December 19, 1994 alleging claims under Title VII, defamation, false light, and RICO conspiracy.[1]
Rule 56(c) of the Federal Rules of Civil Procedure provides that:
[Summary judgment] shall be rendered forthwith 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 a judgment as a matter of law.
As stated by the Supreme Court, this does not mean that any factual dispute will defeat the motion:
By its very terms, this standard provides that the mere existence of some alleged factual dispute between the parties will not defeat an otherwise properly supported motion for summary judgment; the requirement is that there be no genuine issue of material fact.
Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247-48, 106 S. Ct. 2505, 2509-10, 91 L. Ed. 2d 202 (1986) (emphasis in original).
Moreover, the Supreme Court has explained that the Rule 56(c) standard mirrors the standard for a directed verdict under Federal Rule of Civil Procedure 56(a): "... there is no issue for trial unless there is sufficient evidence favoring the nonmoving party for a jury to return a verdict for that party." Anderson v. Liberty Lobby, Inc., supra, 477 U.S. at 249-50, 106 S.Ct. at 2511; White v. Rockingham Radiologists, Ltd., 820 F.2d 98, 101 (4th Cir.1987). "The party opposing a properly supported motion for summary judgment may not rest upon mere allegations or denials of his pleading, but must set forth specific facts showing that there is a genuine issue for trial." Rivanna Trawlers Unlimited v. Thompson Trawlers, Inc., 840 F.2d 236, 240 (4th Cir.1988). Further, the court has an affirmative obligation to prevent factually unsupported claims and defenses from proceeding to trial. Felty v. Graves-Humphreys Co., 818 F.2d 1126, 1128 (4th Cir.1987), citing Celotex Corp. v. Catrett, 477 U.S. 317, 323, 106 S. Ct. 2548, 2553, 91 L. Ed. 2d 265 (1986). "[A] defendant ... should not be required to undergo the considerable expense of preparing for and participating in a trial" unless the plaintiff has produced "evidence on which a jury might rely" in support of the claims alleged. E.F. Hutton Mortgage Corp. v. Equitable Bank, N.A., 678 F. Supp. 567, 573 (D.Md.1988).
As defendants' counsel pointed out to Ms. Lyles on several occasions in an effort to have the case voluntarily dismissed before motions had to be filed, the facts that can be shown by the plaintiffs fall far short of establishing a viable hostile environment claim under Title VII.[2]See Harris v. Forklift Sys., Inc., 510 U.S. 17, 23, 114 S. Ct. 367, 371, 126 L. Ed. 2d 295 (1993). An isolated racial remark, even though offensive and entirely inappropriate, does not establish an abusive working environment. See, e.g., Carter v. Ball, 33 F.3d 450, 461 (4th Cir.1994); Autry v. North Carolina Dep't of Human Resources, 641 F. Supp. 1492, 1501 (W.D.N.C. 1986), aff'd. 820 F.2d 1384 (4th Cir.1987). Further, an employer with no prior notice of inappropriate behavior by an employee, who takes timely and adequate corrective action when such behavior is reported, will not be held liable under Title VII. See Dennis v. County of Fairfax, 55 F.3d 151, 155-56 (4th Cir.1995); Carter, 33 F.3d at 461.
The plaintiffs' other claims have even less merit than their racial harassment claim. The charge of defamation, premised solely on the doctor's remark and subsequent apology, is barred by Maryland's one year statute of limitations. Md.Cts. & Jud.Proc.Code Ann. *690 § 5-105.[3] The remark, if "defamatory" at all, was not actionable per se, and no monetary loss has been alleged or proved. See Hearst Corp. v. Hughes, 297 Md. 112, 118-26, 466 A.2d 486, 489-93 (1983); Metromedia, Inc. v. Hillman, 285 Md. 161, 164-65, 400 A.2d 1117, 1119-20 (1979). The apology was accurate, did not refer to the plaintiffs or repeat the remark, and therefore cannot be defamatory. Hughes, 297 Md. at 119, 466 A.2d at 489.
For the same reasons, and because there was no "public" disclosure of the remark, the plaintiffs' claim for false light invasion of privacy is without merit. See Phillips v. Washington Magazine, Inc., 58 Md.App. 30, 36 n. 1, 472 A.2d 98, 101 n. 1, cert. denied, 300 Md. 89, 475 A.2d 1201 (1984); Hollander v. Lubow, 277 Md. 47, 57, 351 A.2d 421, 426, cert. denied, 426 U.S. 936, 96 S. Ct. 2651, 49 L. Ed. 2d 388 (1976).
The facts alleged by the plaintiffs also fall far short of the extreme conduct required under Maryland law to establish intentional infliction of emotional distress. See, e.g., Beye v. Bureau of Nat'l Affairs, 59 Md.App. 642, 657-58, 477 A.2d 1197, 1205, cert. denied, 301 Md. 639, 484 A.2d 274 (1984); Continental Casualty Co. v. Mirabile, 52 Md.App. 387, 404, 449 A.2d 1176, 1187 (1982). Nor have the plaintiffs suffered any severe emotional distress. See Hamilton v. Ford Motor Credit Co., 66 Md.App. 46, 60-61, 502 A.2d 1057, 1064-65 (1986).
Finally, the plaintiffs have entirely failed to establish a basis for a RICO conspiracy under 18 U.S.C. § 1962(d) as they have not identified any predicate acts under 18 U.S.C. § 1961(1) that were the subject of the alleged conspiracy. See Fowler v. Burns Int'l Sec. Servs., Inc., 763 F. Supp. 862, 864 (N.D.Miss.1991), aff'd. 979 F.2d 1534 (5th Cir.1992); Flinders v. Datasec Corp., 742 F. Supp. 929, 934 n. 7 (E.D.Va.1990).
Ms. Lyles filed without permission an untimely opposition to the defendants' motion for summary judgment. It is an abysmally inadequate response unsupported by any evidentiary material whatsoever which would not defeat summary judgment even if the court were inclined to consider an untimely filing. The defendants' motion to strike will be granted.
The defendants also have filed a motion for sanctions under Fed.R.Civ.P. 11 and 28 U.S.C. § 1927, after first serving a copy on Ms. Lyles as required by Rule 11(c)(1)(A) and also having given her by letter ample notice and an opportunity to dismiss this case voluntarily. Ms. Lyles insisted on unnecessary depositions, failed to respond to written discovery requests, and failed to respond to the defendants' draft Rule 11 motion, requiring the defendants to expend attorneys fees and costs unnecessarily for discovery and the filing of motions. The sequence of events in this litigation and the statement of facts and law set forth above amply demonstrate that this case was brought and continued in violation of both Rule 11 and 28 U.S.C. § 1927: it was in bad faith for the purpose of harassment and needless cost, it was not warranted by existing law or a nonfrivolous argument for modification, reversal or establishment of new law, and some of the allegations lacked evidentiary support. See Brubaker v. City of Richmond, 943 F.2d 1363 (4th Cir.1991); In re Kunstler, 914 F.2d 505 (4th Cir.1990), cert. denied, 499 U.S. 969, 111 S. Ct. 1607, 113 L. Ed. 2d 669 (1991).
In her "Response to Defendants' Motion for Sanctions,"[4] Ms. Lyles again misconstrues and fails entirely to respond to the substance of the defendants' motion. Upon receipt of appropriate documentation establishing the costs and fees incurred by the defendants, a monetary sanction sufficient to satisfy Rule 11 will be awarded against Ms. Lyles. See Kunstler, 914 F.2d at 522-525.
A separate Order follows.
MEMORANDUM ON RECONSIDERATION
Various matters are now pending in this case and have been considered. My rulings follow.
*691 The plaintiffs' motion for reconsideration will be Denied as untimely, inadequately supported by evidentiary materials, and ultimately without merit. The defendants' motion to strike will be Denied as moot.
The plaintiffs' objection to the defendants' statement of fees and costs also is totally inadequate. The defendants' statement setting forth a total of $26,481.75 in fees and $1,114.31 in costs is sufficiently detailed to allow the court to determine the reasonableness of the time spent and the amounts claimed. Reasonableness of fees, however, is only one of the four factors to be considered under Fourth Circuit precedent. The others are (2) the minimum sanction needed to deter the conduct, (3) the ability of Ms. Lyles to pay, and (4) the severity of the Rule 11 violation. See Brubaker v. City of Richmond, 943 F.2d 1363, 1374 (4th Cir.1991); In re Kunstler, 914 F.2d 505, 523 (4th Cir.1990).
The violation was severe, and costly to the defendants. Ms. Lyles' ability to pay is questionable, in light of her suspension from practice by the District of Columbia Bar Association in December 1995 and her reciprocal suspension from practice in the District of Maryland on March 8, 1996. She has submitted no affidavit regarding her financial circumstances, however. See Brubaker, 943 F.2d at 1387; In re Kunstler, 914 F.2d at 524 ("the burden is upon the parties being sanctioned to come forward with evidence of their financial status"). Considering the necessity of a sanction that will deter her unprofessional conduct, and in light of the other factors cited above, a sanction in the amount of $10,000 will be imposed. This should be sufficient to acknowledge the severity of the violation and to deter Ms. Lyles in the future, while also recognizing the likelihood that her ability to continue her occupation, and therefore her ability to pay a sanction, is probably limited.
A separate Order follows.
Date July 9, 1996.
NOTES
[1] Their administrative charge of discrimination was found to be without merit by the Prince George's County Human Relations Commission.
[2] There is no basis whatsoever for a disparate treatment claim.
[3] The defendants' unopposed motion to amend to assert the statute of limitations as an affirmative defense will be Granted.
[4] When Ms. Lyles failed to respond to the defendants' motions for summary judgment and sanctions, the court by letter order directed her to respond to the sanctions motion. See Local Rule 105.8.b.
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626 F. Supp. 137 (1985)
COMPTROLLER OF the CURRENCY, Plaintiff,
v.
CALHOUN FIRST NATIONAL BANK, et al., Defendants.
Civ. A. No. 85-2800.
United States District Court, District of Columbia.
December 20, 1985.
*138 Charles M. Horn, Robert B. Serino, Eugene M. Katz, Deborah S. Hechinger, Ralph E. Sharpe, Robert S. Pasley, Ellen Broadman, Comptroller of the Currency, Washington, D.C., for plaintiff.
John D. Hawke, Howard N. Cayne, Arnold & Porter, Washington, D.C., Kenneth L. Millwood, John L. Latham, Smith, Gambrell & Russell, Atlanta, Ga., for defendant Calhoun First Nat. Bank.
Nickolas P. Chilivis, Gary G. Grindler, Anthony L. Cochran, Chilivis & Grindler, Atlanta, Ga., Jamie S. Gorelick, Miller, Cassidy, Larroca & Lewin, Washington, D.C., for defendant T. Bertram Lance.
MEMORANDUM
HAROLD H. GREENE, District Judge.
Plaintiff Comptroller of the Currency (Comptroller) brought this action for a preliminary injunction against defendants Calhoun First National Bank (CFNB) and T. Bertram Lance (Lance), seeking injunctive relief to remedy alleged violations of the federal securities laws. Both defendants have responded by filing a series of preliminary motions which are now pending, including motions to transfer this case to the Northern District of Georgia.[1] For the reasons stated herein, the Court grants defendants' motions to transfer and leaves resolution of the remaining motions to the transferee court.
I
The Comptroller of the Currency is a federal agency with authority, inter alia, to administer and enforce the reporting and proxy provisions of the Securities Exchange Act against entities with securities registered at the office of the Comptroller of the Currency.[2] CFNB is a national banking association located in Calhoun, Georgia, with its common stock registered with the Comptroller. CFNB and its officers and agents are thus subject to the securities laws and the regulations promulgated thereunder and are policed in their compliance by the Comptroller.[3] The Comptroller instituted an investigation of CFNB in October 1984, which resulted in the institution of several actions against the defendants, including this civil action.
In this suit, the Comptroller requests a preliminary injunction against CFNB and Lance, the bank's chairman and principal shareholder, seeking to restrain defendants "from further violations of the reporting and proxy provisions of the Securities Exchange *139 Act of 1934...."[4] The Comptroller alleges that the defendants have violated and will continue to violate the securities laws in two ways: (1) by failing to disclose material information to CFNB shareholders in the bank's proxy solicitation statements, and (2) by failing to disclose material information to the Comptroller in the annual reports CFNB is required under law to file with the Office of the Comptroller.[5]
As relief from these alleged violations, the Comptroller seeks injunctive orders from the Court as follows: an injunction to restrain the defendants from issuing proxy materials and annual reports in the future which contain the material omissions complained about above; another to require defendants to amend the allegedly misleading proxy materials and annual reports issued in the past to include the material information previously omitted; and a third to require Lance to tender to CFNB all information within his possession necessary to enable CFNB to comply with the order to amend its past filings.
II
Both defendants have responded to the Comptroller's complaint by a multitude of preliminary motions. Most pressing are motions filed by each defendant to transfer this action to the Northern District of Georgia, Rome Division, pursuant to 28 U.S.C. § 1404(a).[6] Defendants contend that this action more properly belongs in the Northern District of Georgia because the transactions underlying the alleged securities violations all occurred there; all but one prospective witness resides there; all original documents are located there; and several other legal actions arising out of the same investigation have already been instituted there. The Comptroller opposes the motion on several grounds which are discussed infra.
Section 1404(a) of Title 28 permits transfer of an action from a district in which venue is proper to another district in which the action might have been brought if the transfer is "for the convenience of parties and witnesses, [and] in the interest of justice."[7] Since there is no dispute that venue is proper in this district or that this action "might have been brought" in the Northern District of Georgia,[8] the question of whether this action should be transferred to the Northern District of Georgia depends *140 on whether the plaintiff's choice of forum[9] outweighs "the convenience of the parties and witnesses, [and] ... interest of justice."[10]
Defendants contend that trial of this action in Georgia will be more convenient for both of the defendants and the plaintiff than a trial here. The bank's principal place of business is in northern Georgia; Lance resides and works in northern Georgia;[11] and all of the employees and management of CFNB, many of whom defendants claim will be called as witnesses, reside in northern Georgia. Consequently, defendants argue, it would be extremely disruptive to the bank's business and thus inconvenient to try the case in this district. See Securities and Exchange Commission v. Page Airways, supra, 464 F.Supp. at 463-64 (disruption of defendant's business due to trying forum in distant forum which would cause prolonged absence from business of top executives and employees factor to be weighed under section 1404(a)). Defendants also claim that the transfer will not be inconvenient for the plaintiff because the Comptroller maintains a fully-staffed field office in Atlanta, Georgia, which actually conducted the investigation giving rise to this suit, and that almost all of the government employees having knowledge of this matter will be employees of that office.[12] Further, since the investigation was conducted there, all of the depositions taken, records obtained, and other evidence gathered in the course of the investigation are in locations embraced by the Northern District of Georgia. Finally, since it is undisputed that all of the underlying transactions at issue in this case took place in northern Georgia,[13] most of the witnesses who would be expected to testify about the underlying transactions reside in Georgia.[14]
The Comptroller does not dispute the claims regarding the location of the witnesses, the evidence, or the residence of the parties. He contends instead that convenience should carry little weight here because this case will be largely a documentary one and will require a minimum of live testimony. If that characterization were correct, the Court might indeed discount defendants' assertions regarding the convenience of witnesses and parties. However, the Comptroller's argument rests upon an assumption that is deficient.
The Comptroller asserts that the case will be largely a documentary one because only two issues will be involved whether *141 the underlying transactions occurred and whether their disclosure was required by lawand that neither of these issues involves fraud or even scienter. That assumption does not take account of the fact, however, that necessary prerequisites to the element of disclosuree.g., whether the bank made improper inside loansmay turn out to be fiercely contested on the facts. If that is so, and there is reason to believe that it will be so,[15] the testimony of the individuals involved on both sides of the various transactions will clearly be important. On that basis, the Northern District of Georgia is a more appropriate forum than this District.
A second significant factor bearing upon a decision regarding a section 1404(a) motion is whether the transfer would be in the interest of justice. See 15 Wright, Miller & Cooper, Federal Practice and Procedure: Jurisdiction, § 3854 (1976).
In this regard, defendants rely primarily upon the fact that a number of other actions are currently pending in various courts in northern Georgia which arose from the same Comptroller investigation leading to the institution of this lawsuit, and that transfer of the case would allow coordination of pretrial discovery and otherwise with respect to all these cases.
There are, indeed, at least five related actions pending in various stages in the courts in northern Georgia: (1) actions to quash subpoenas related to the Comptroller's investigation; (2) a civil action in federal court filed by Lance alleging Privacy Act violations arising from the Comptroller's handling of the investigation; (3) an administrative cease and desist proceeding pursuant to 12 U.S.C. § 1818(b) pending before an administrative law judge; (4) an administrative proceeding to remove Lance from office pursuant to 12 U.S.C. § 1818(e), also currently pending before an administrative tribunal; and (5) an ongoing federal criminal grand jury investigation.
To be sure, as the Comptroller asserts, some of these actions, or all of them, involve legal issues different than those underlying the lawsuit before this Court. However, all of these actions clearly have the same factual underpinning as this case since they all arise from the same Comptroller investigation. While a transfer of this case would not be likely to result in the consolidation of this action with the others, at a minimum such a transfer could facilitate the coordination of pretrial discovery. Additionally, since the same witnesses and documents will probably be important to all actions, it would save the time and energies of the witnesses, the parties, and the attorneys to have all the actions litigated in the same geographical area. By contrast, it would probably result in a waste of judicial and other resources to litigate one case arising out of these facts in the District of Columbia and all the others in Georgia.[16]
For the reasons stated, the Court concludes that a transfer is warranted pursuant to section 1404(a). Accordingly, defendants' motions to transfer this cause of action to the Northern District of Georgia will be granted.
NOTES
[1] Defendant Lance has also filed a motion for a stay, a request for an extension of time to respond to the Comptroller's complaint, and three motions to dismiss on various jurisdictional grounds. Defendant CFNB has filed similar motions for an extension of time to respond to the Comptroller's complaint and one motion to dismiss. The Comptroller has opposed all nine motions.
[2] See § 12(i), 13(a) and 14(a), 15 U.S.C. §§ 781(i), 78m(a), and 78n(a).
[3] See § 12(i), 13(a), and 14(a), and the regulations promulgated thereunder. One of the defendants' motions to dismiss disputes the Comptroller's jurisdiction under the relevant statutory provisions to enforce the securities laws. The Court does not pass on the merits of that motion, leaving that issue to the transferee court. The Court merely assumes for present purposes that the Comptroller has indeed power to do under the statute what he claims he may do.
[4] Specifically, plaintiff alleges that defendants have violated section 14(a) of the Securities Exchange Act of 1934, 15 U.S.C. § 78n(a), as well as the regulations promulgated thereunder, codified at 12 C.F.R. 11.5 and 11.51.
[5] The "material information" the defendants allegedly failed to disclose in the proxy statements and the annual reports falls roughly into four categories: (1) that Lance engaged in repeated check-kiting at the expense of CFNB; (2) that Lance made or caused the bank to make several improper "insider" loans; (3) that Lance improperly received money which rightfully belonged to CFNB from a credit life insurance policy; and (4) that CFNB bought real estate in which Lance had a material interest.
[6] Although both defendants have filed separate motions to transfer, the motions are virtually identical and will be treated together here as one.
[7] Section 1404(a) provides:
For the convenience of the parties and witnesses, in the interest of justice, a district court may transfer any civil action to any other district or division where it might have been brought.
[8] Defendants do not dispute that the action was properly brought in this district. The special venue provision governing the Comptroller's action, 15 U.S.C. § 78aa, provides that an enforcement action may be brought in any district where any act or transaction instituting the violation occurred or where the defendant resides or transacts business. See Investors Funding Corp. v. Jones, 495 F.2d 1000, 1002 (D.C.Cir. 1974). This Circuit has held that filing an allegedly false and misleading statement constitutes an "act or transaction constituting the violation" within the meaning of 15 U.S.C. § 78aa. Securities and Exchange Commission v. Savoy Industries, 587 F.2d 1149, 1155 (D.C.Cir.1978); accord Securities and Exchange Commission v. Carriba Air, Inc., 681 F.2d 1318 (11th Cir.1982). The filing of the proxy materials and the annual reports at issue in this case occurred in the District of Columbia at the office of the Comptroller of the Currency. Consequently, venue is properly laid in the District of Columbia. See Investors Funding Corp. v. Jones, supra, at 1002. It is worthwhile to note, however, that although venue is proper in the District of Columbia, there is no factual nexus between this case and the District of Columbia other than that the filings were made at the office of the Comptroller here.
Similarly, there does not appear to be any dispute that the action "might have been brought" in the Northern District of Georgia. Both defendants reside in and transact business in Calhoun, Georgia, located in the Northern District of Georgia, thus making venue proper in the Northern District of Georgia under the terms of section 78aa.
[9] The Court notes that some decisions in this Circuit suggest that the plaintiff's choice of forum is no longer entitled to a great deal of weight (Securities and Exchange Commission v. Savoy Industries, Inc., 587 F.2d at 1154; Securities and Exchange Commission v. Page Airways, 464 F. Supp. 461, 464 n. 7 (D.D.C.1978)), particularly when there is an insubstantial factual nexus with the plaintiff's choice. In any event, section 1404(a) factors militate strongly enough in favor of transfer.
[10] In consideration whether to transfer a case pursuant to section 1404(a), the District Court has broad discretion to give "individual, case-by-case consideration of convenience and fairness." Van Dusen v. Barrack, 376 U.S. 612, 622, 84 S. Ct. 805, 812, 11 L. Ed. 2d 945 (1964). The defendant has the burden of proving why there should be a change of forum. Securities and Exchange Commission v. Savoy Industries, Inc., 587 F.2d 1149, 1154 (D.D.C.1978); 15 Wright, Miller & Cooper, Jurisdiction and Related Matters § 3848.
[11] CFNB's principle place of business is at 215 North Wall Street, Calhoun, Georgia. Defendant Lance resides in Calhoun, Georgia.
[12] Plaintiff does not dispute this claim.
[13] Only the filing of the proxy statements and annual reports occurred in the District of Columbia.
[14] It should also be noted that based upon the witnesses called at an administrative proceeding related to this litigation currently pending before an administrative tribunal, see discussion infra, defendant CFNB claims that the Comptroller could call as many as 34 witnesses and the bank 33 witnesses. Only two out of the possible 67 witnesses do not reside in the northern district of Georgia.
[15] Defendants' numerous filings in this relatively new case indicate that neither defendant intends simply to acquiesce in the Comptroller's factual descriptions.
[16] The Comptroller asserts that these considerations are outweighed by his claim for speedy relief. But there is no reason to believe that in that respect a transfer would make any difference. There is no evidence either that significant docket congestion exists in the Georgia courts which might delay trial (see Securities and Exchange Commission v. Page Airways, supra, 464 F.Supp. at 464, 465) or that the litigation in this Court has advanced to such a stage that transfer would result in delay. See Securities and Exchange Commission v. Savoy Industries, Inc., supra, 587 F.2d 1149, 1156 (D.C.Cir. 1978).
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885 F. Supp. 180 (1995)
TOP NOTCH FOOD CENTER, INC., Plaintiff,
v.
UNITED STATES DEPARTMENT OF AGRICULTURE, Defendant.
No. 94 C 7263.
United States District Court, N.D. Illinois, Eastern Division.
May 9, 1995.
Burton A. Gross, Chicago, IL, for plaintiff.
Brian R. Havey, U.S. Attorney's Office, Chicago, IL, for defendant.
OPINION AND ORDER
NORGLE, District Judge:
Before the court is the motion of Defendant United States Department of Agriculture ("USDA") for summary judgment. For the following reasons, the motion is granted.
FACTS[1]
Plaintiff Top Notch Food Center, Inc. ("Top Notch") is a medium-sized grocery store at 5041 South Prairie Avenue in Chicago, Illinois and is a participant in the federal food stamp program (the "program"). Top Notch obtained authorization to participate in the food stamp program in 1994 from the Food and Nutrition Service ("FNS") after its owner, Salim Zayyad, certified that he had reviewed and understood the program regulations. He also certified that he accepted responsibility on behalf of the firm to prevent violations of the program (such as trading cash for food stamps) that he accepted responsibility for violations committed by the firm's employees, and that he knew that the *181 firm's authorization to accept food stamps could be revoked for any violation of the program's regulations by him or any of the people working in the store.
Top Notch opened for business on January 1, 1994. In a letter dated February 2, 1994, the Illinois Department of Public Aid notified FNS that it had received an anonymous complaint that Eddie Zayyad was willing to buy food stamps at the store located at 5041 South Prairie in Chicago, Illinois.
On April 6, an FNS investigator went to the store and sent an undercover aide into the store. The undercover aide was directed by the cashier to the store's butcher when he inquired about exchanging food stamps for cash. The butcher gave the undercover aide thirty dollars in cash in exchange for sixty-five dollars in food stamps. On April 7, the investigator and undercover aide went to the store again. Once again, after being directed to the butcher by the cashier, the undercover aide exchanged $115 in food stamps for $50 cash. During her visits to the store, the investigator noticed that the sign on the store read "Judeh Bros. Food & Liquor."
Based on the investigator's reports, the FNS charged Top Notch with violating the program's regulations. Top Notch did not deny the charges, but requested that the FNS impose a monetary penalty instead of disqualification from the program. Top Notch asserted that its owner was unaware of the trafficking violations and that he had instructed the store's cashiers about the program and regulations. The owner did not, however, instruct the butcher about the food stamps since he did not expect that the butcher would have any occasion to accept payment for food. Top Notch also stated that it had fired the butcher and the cashier after learning of the violations.
After considering the evidence and the Top Notch's response, the FNS concluded that the violations had occurred and that Top Notch should be permanently disqualified from participating in the program. Top Notch appealed to the FNS Administrative Review Division which found that the violations did occur and that the sanction of permanent disqualification was appropriate.
DISCUSSION
Federal Rule of Civil Procedure 56(c) provides that summary judgment "shall be rendered forthwith 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 a judgment as a matter of law." Fed.R.Civ.P. 56(c); Salima v. Scherwood South, Inc., 38 F.3d 929, 931 (7th Cir.1994); Transportation Communications Int'l Union v. CSX Transp., Inc., 30 F.3d 903, 904 (7th Cir.1994). Summary judgment is not a discretionary remedy and must be granted when the movant is entitled to it as a matter of law. Jones v. Johnson, 26 F.3d 727, 728 (7th Cir.1994). Even though all reasonable inferences are drawn in favor of the party opposing the motion, Associated Milk Producers, Inc. v. Meadow Gold Dairies, 27 F.3d 268, 270 (7th Cir.1994), presenting only a scintilla of evidence will not suffice to oppose a motion for summary judgment, Walker v. Shansky, 28 F.3d 666, 671 (7th Cir.1994). Nor will some metaphysical doubt as to the material facts suffice. Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 586, 106 S. Ct. 1348, 1356, 89 L. Ed. 2d 538 (1986).
Moreover, the disputed facts must be those that might affect the outcome of the suit to properly preclude summary judgment. Tolle v. Carroll Touch, Inc., 23 F.3d 174, 178 (7th Cir.1994). A dispute about a material fact is "genuine" only if the evidence is such that a reasonable jury could return a verdict for the non-moving party. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S. Ct. 2505, 2510, 91 L. Ed. 2d 202 (1986). Therefore, the non-moving party is required to go beyond the pleadings with affidavits, depositions, answers to interrogatories, and admissions on file to designate specific facts showing a genuine issue for trial. Bank Leumi Le-Israel, B.M. v. Lee, 928 F.2d 232, 236 (7th Cir.1991).
Congress enacted the Food Stamp Act of 1964 (the "Act") to provide low-income households with food stamp coupons for the purchase of food from retail and wholesale stores. 7 U.S.C. § 2011-2032; East Food & *182 Liquor, Inc. v. United States, No. 94-1902, 1995 WL 136526 (7th Cir. Mar. 29, 1995). The Act vests the USDA with authority to promulgate regulations for the efficient administration of the program. 7 U.S.C. § 2013. Under the regulations, participating grocery stores may accept food stamps as payment for food products, but not for non-food items. 7 C.F.R. § 278.2(a). Stores that fail to comply with the regulations are subject to penalties which vary depending on the severity of the violation. See 7 U.S.C. § 2021; 7 C.F.R. 278.6.
A store that is penalized for violating the regulations may obtain judicial review of that determination in the district court. 7 U.S.C. § 2023(a); 7 C.F.R. 279.10(a). As the plaintiff, Top Notch has the burden of showing that the violations of the Act and the regulations did not occur, Brooks v. United States Department of Agriculture, 841 F. Supp. 833, 839 (N.D.Ill.1994), and the administrative decision must be upheld unless Top Notch demonstrates by a preponderance of the evidence that the decision is invalid. Id.
Here, it is clear from the evidence presented by the USDA in its 12(M) Statement that the violations occurred. On two occasions, an undercover aide was directed by the store's cashier to the butcher who exchanged cash for the undercover aide's food stamps. This is a violation of the regulations, 7 C.F.R. § 278.2(a), for which permanent disqualification from the program is appropriate. 7 C.F.R. § 278.6(e)(1)(i).
Salim Zayyad's assertion that he was unaware of the trafficking violations, Amended Complaint at ¶ 10, is insufficient to escape disqualification. The Act requires permanent disqualification for trafficking in food stamps unless the "Secretary determines that there is substantial evidence (including evidence that neither the ownership nor management of the store or food concern was aware of, approved, benefited from, or was involved in the conduct or approval of the violation) that such store or food concern had an effective policy and program in effect to prevent violations of the chapter and the regulations." 7 U.S.C. § 2021(b)(3)(B).
With respect to the severity of the sanction, a penalty will be set aside only if arbitrary and capricious. Carlson v. United States, 879 F.2d 261, 263 (7th Cir.1989); Brooks, 841 F.Supp. at 840. Top Notch has presented this court with no evidence that it had an effective policy and program to insure that violations would not occur. Thus, permanent disqualification was appropriate, and the imposition of that sanction by the FNS was not arbitrary and capricious. Accordingly, summary judgment for the USDA is appropriate.
Additionally, under Local Rule 12(P) of the United States District Court for the Northern District of Illinois, if a party fails to file a memorandum in opposition to a motion, the court may grant the motion without further hearing. Local Rule 12(P); Finch v. Chapman, 785 F. Supp. 1277, 1280 (N.D.Ill.1992). Top Notch has not submitted to the court a memorandum in opposition to the USDA's motion. Thus, the court invokes Local Rule 12(P) as an additional reason for granting the USDA's motion for summary judgment.
CONCLUSION
For the reasons stated above, the USDA's motion for summary judgment is granted.
IT IS SO ORDERED.
NOTES
[1] The facts are taken from the USDA's Statement of Material Facts submitted in compliance with Local Rule 12(M) of the United States District Court for the Northern District of Illinois. Plaintiff has not submitted a responding statement as required by Local Rule 12(N). Therefore, all facts properly asserted by the USDA in its Statement of Material facts are admitted. See Johnson v. Gudmundsson, 35 F.3d 1104, 1108 (7th Cir.1994); Zoltek v. Safelite Glass Corp., 884 F. Supp. 283 (N.D.Ill.1995).
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331 F. Supp. 165 (1971)
ELEVATOR MANUFACTURER'S ASSOCIATION OF NEW YORK, an unincorporated association, on behalf of its member, Otis Elevator Company, Plaintiff,
v.
INTERNATIONAL UNION OF ELEVATOR CONSTRUCTORS LOCAL NO. 1, OF NEW YORK AND VICINITY, an unincorporated association, and Vincent Watson, individually and as President of said unincorporated association, Defendants.
No. 71 Civ. 3949.
United States District Court, S. D. New York.
September 8, 1971.
Putney, Twombly, Hall & Hirson, New York, N. Y., for plaintiff.
Wilderman, Markowitz & Kirschner, Philadelphia, Pa., and Schulman, Abarbangel, Perkel & McEvoy, for defendants.
*166 MEMORANDUM OPINION
GURFEIN, District Judge.
The plaintiff, an association, has as its members Otis Elevator Company, Westinghouse Electric Corp. Elevator Division, and Houghton Elevator Company. It has entered into a collective bargaining agreement with defendant Local No. 1 of the International Union of Elevator Constructors. The contract runs to June 30, 1972.
There is a work stoppage by the defendant Local at a building under construction at 1633 Broadway. The reason given for the stoppage is that the Otis Elevator Company, which has the elevator construction subcontract, has permitted an electrical union to install one of two cables required on each elevator instead of permitting this work to be done by members of the defendant Union. The Union is striking to get Otis to install a third cable constructed by members of the defendant Union although Otis contends that a third cable is unnecessary.
The association, on Otis' behalf, seeks an injunction against the continuance of the strike or work stoppage (29 U.S.C. § 185[a]). It now moves for a preliminary injunction (Rules 65 F.R. Civ.P.). It contends that the strike is a breach of the collective agreement which provides for arbitration and has a no-strike clause. It argues that under Boys Markets, Inc. v. Retail Clerk's Union Local 770, 398 U.S. 235, 90 S. Ct. 1583, 26 L. Ed. 2d 199 (1970) this Court has power to issue an injunction in this labor dispute in spite of the provisions of the Norris-LaGuardia Act (29 U.S.C. § 104). The Union contends that it is not bound to honor the no-strike convenant when the employer deliberately breaches the agreement.
Section XI, paragraph 1 of the collective bargaining agreement reads:
"1. It is agreed by both parties to this agreement that so long as the provisions herein contained are conformed to no strikes or lockouts shall be ordered against either party" (emphasis supplied). The Union points to the italicized part of the paragraph as justification for the stoppage. If there were no arbitration clause the position of the Union would be sound. But there is an arbitration clause which reads:
"1. All differences and disputes regarding the application and construction of this agreement shall be settled locally between the local union and the Employer. In the event the matter cannot be settled on a local basis, then either the Union or the Employer shall submit the dispute to the New York Arbitration Committee which it is hereby understood and agreed shall have the power to enforce its decision by mutual consent for protection of the public and the entire elevator industry. Pending the appeal to the New York Arbitration Committee there shall be no stoppage of work, strikes or lockouts."
The dispute here is one "regarding the application and construction of this agreement." It involves the question of whether Section IV of the agreement which defines "construction work" embraces the construction of these elevator cables and whether the employer was obliged to use only mechanics and helpers who were in the Union shop under the agreement. That question is arbitrable and the Union may not, in advance of arbitration, decide the issue itself and thus free itself from the no-strike clause. The limitation in the no-strike clause may be taken to mean that if the employer refuses to arbitrate or refuses to abide by an award, then the Union has not given up its economic weapon. But it would be defeating the very purpose of a no-strike clause coupled with arbitration procedure to hold that the Union may, on its own, determine the issue even before it is submitted.
The second argument of the Union that the case of Standard Food Products Corp. v. Brandenburg, 436 F.2d 964 (2 Cir. 1970) precludes an injunction here is not correct. There specific paragraphs *167 of the collective agreement were excepted from the no-strike provision and hence by agreement of the parties strikes in particular situations were not interdicted. There is no such exception to be found here.
Yet, the reliance of the plaintiff on Boys Markets, Inc., supra, is misplaced. There Mr. Justice Brennan, for the Court, laid down guidelines for the lower Courts. Having based the decision in favor of injunctive relief on the Congressional policy to favor arbitration in labor disputes, the Court said:
"When a strike is sought to be enjoined because it is over a grievance which both parties are contractually bound to arbitrate, the District Court may issue no injunctive order until it first holds that the contract does have such effect [which I do]; and the employer should be ordered to arbitrate, as a condition of his obtaining an injunction against the strike." (398 U.S. at 254, 90 S.Ct. at 1594).
Although the plaintiff here has expressed its willingness to arbitrate in the papers before the Court it has chosen not to avail itself of the arbitration procedure provided for in the collective bargaining agreement. It has made no demand for arbitration on the Union and the Union has not refused to arbitrate. The stoppage is not a refusal to arbitrate in the absence of a demand to arbitrate.
As I read the instructions in Boys Markets, Inc., supra, they are jurisdictional and delimit what may be excepted from the restrictions of the Norris-LaGuardia Act. In the Boys Markets case the employer actually "sought to invoke the grievance and arbitration procedures specified in the contract" (398 U.S. at 239, 90 S.Ct. at 1586).
The employer must seek arbitration before he may seek injunctive relief.
Accordingly, as a preliminary to considering injunctive relief, the employer is ordered to seek arbitration as a condition to applying for injunctive relief. If the Union refuses to arbitrate plaintiff may come back with an application for injunctive relief.
I have made this decision before the hearing scheduled for September 14 because the plaintiff asserts hardship which undoubtedly exists. To avoid raising the jurisdictional point only after the September 14 hearing I thought it better to raise it now so that additional time will not be lost without adjudication on the merits.
The motion for a preliminary injunction is denied with leave to renew in conformity with this opinion. The parties may appear at 2:30 September 14 in Room 318 for further proceedings if required. The foregoing shall constitute findings of fact and conclusions of law under Rule 52(a) F.R.Civ.P.
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331 F. Supp. 507 (1971)
Special Grand Jury Proceedings.
In re Eugene S. RENO.
Misc. No. 71-135.
United States District Court, E. D. Michigan, S. D.
September 15, 1971.
*508 Laurence Left, U. S. Dept. of Justice, Detroit, Mich., Atty. in Charge, Detroit Strike Force, for the Government.
Armand D. Bove, Harper Woods, Mich., for the witness Eugene s. Reno; Robert S. Harrison, Norman L. Lippitt, Detroit, Mich., of counsel.
MEMORANDUM
(Immunity Hearing)
THORNTON, District Judge.
The Government here seeks an order granting immunity to the witness, Eugene s. Reno, with respect to testimony the Government seeks to elicit from him before the Special Grand Jury for the Eastern District of Michigan, presently in session. The immunity sought is pursuant to 18 U.S.C. § 2514. Reno, a sergeant in the Detroit Police Department, through his counsel, in objecting to the offered immunity stated in his argument to the Court at the court hearing in this matter, as follows:
"* * * [I]f this witness is ordered and compelled to testify before the Grand Jury, his testimony is taken by the Grand Jury, and he is immune from criminal prosecution, but under Section 3333 he is not immune to disciplinary action as a result of a resort issued by the Grand Jury at the expiration of its term or an extension of that term, to the Police Commissioner and to the public thereby recommending disciplinary action and removal from office as a police officer." (Tr. p. 4)
Some background of the situation here present is succinctly supplied in the Government's Memorandum in Support of the Validity of the Grant of Immunity to the Witness Eugene S. Reno. We quote the following four paragraphs:
"On May 6, 1971, a Special Grand Jury in the Eastern District of Michigan returned an indictment charging sixteen (16) members of the Detroit Police Department and eighteen (18) syndicated gamblers with engaging in a conspiracy to violate the anti-gambling statutes of the State of Michigan and obstructing the enforcement of said statutes in order to facilitate the operation of a gambling enterprise, all of which violated Federal law (Title 18, United States Code, Sections 1955, 1511, 371 and 2).
On May 12, 13, and 14, 1971, fourteen (14) additional Police Officers, unindicted, appeared, pursuant to subpoenae, before the Grand Jury. In each case, the witness was asked about acquaintanceships, meetings, or conversations with named, known gamblers. Without exception, the witnesses declined to answer the questions on various grounds, including the peril of self-incrimination, the invalidity of the subpoena which brought them before the Grand Jury, and the right to have counsel at their side in the Grand Jury room during their examination.
Subsequently, Judge Philip Pratt, United States District Judge, was asked to rule on the issues raised by the witness's unwillingness to testify before the Grand Jury. Judge Pratt held that the invocation by the witnesses of their privilege of self-incrimination constituted a valid justification for declining to answer the questions. However, the remaining grounds asserted by them, the Court found to be without merit.
Thereafter, four (4) of the previously mentioned Police Officer witnesses were granted immunity from prosecution, pursuant to Title 18, United States Code, Section 2514, and were directed by the District Court to testify in the Grand Jury. They each testified, without objection to the grant of immunity."
The Government has indicated that the issue here is one of first impression, Section 3333 having been in existence only since the enactment of the Organized Crime Control Act of 1970. Neither counsel for the Government nor counsel for Reno has cited a case to the Court where Section 3333 was at issue vis-a-vis the Fifth Amendment. The Court has likewise been unable, despite considerable *509 ble research, to find case law on this point involving Section 3333 or any comparable statutory reporting provision that might shed light by way of analogy. The trail doubles back again and again to Ullmann v. United States, 350 U.S. 422, 76 S. Ct. 497, 100 L. Ed. 511 (1956). The cases since Ullmann pay homage to it. We are unable to find a legal basis or any justification for circumventing that which has been expressed exactly in Ullmann by Mr. Justice Frankfurter:
"Petitioner, however, attempts to distinguish Brown v. Walker [161 U.S. 591, 16 S. Ct. 644, 40 L. Ed. 819]. He argues that this case is different from Brown v. Walker because the impact of the disabilities imposed by federal and state authorities and the public in general such as loss of job, expulsion from labor unions, state registration and investigation statutes, passport eligibility, and general public opprobrium is so oppressive that the statute does not give him true immunity. This, he alleges, is significantly different from the impact of testifying on the auditor in Brown v. Walker, who could the next day resume his job with reputation unaffected. But, as this Court has often held, the immunity granted need only remove those sanctions which generate the fear justifying invocation of the privilege: `The interdiction of the Fifth Amendment operates only where a witness is asked to incriminate himself in other words, to give testimony which may possibly expose him to a criminal charge. But if the criminality has already been taken away, the Amendment ceases to apply.' Hale v. Henkel, 201 U.S. 43, 67, 26 S. Ct. 370, 50 L. Ed. 652. Here, since the Immunity Act protects a witness who is compelled to answer to the extent of his constitutional immunity, he has of course, when a particular sanction is sought to be imposed against him, the right to claim that it is criminal in nature." Ullmann v. United States, supra, pp. 430-431, 76 S.Ct. p. 502.
In the case of Carter v. United States, 417 F.2d 384 (9th Cir. 1969) the loss of job possibility as a result of testifying under a grant of immunity was rejected as a sustainable basis for refusal to testify. See Carter at page 387 and the cases cited, including Ullmann. See also De Vita v. Sills, 422 F.2d 1172, 1179 (3rd Cir. 1970) and December 1968 Grand Jury v. United States, 420 F.2d 1201, 1203 (7th Cir. 1970).
Section 3333 provides for reporting procedures based on information obtained through testimony from Grand Jury witnesses. The overall effect is somewhat similar to that of presentments. In each situation Grand Jury proceedings are not kept in absolute secrecy. A full discussion of this aspect of Grand Jury proceedings is found in In Re Grand Jury January, 1969, 315 F. Supp. 662 (D.Md. 1970).
The grant of immunity hereby offered to the witness, Reno, is coextensive with his privilege and, therefore, sufficient.
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604 F. Supp. 201 (1984)
William Ray RUSSELL, Plaintiff,
v.
SHELTER FINANCIAL SERVICES, et al., Defendants.
No. 83-4448-CV-C-5.
United States District Court, W.D. Missouri, Central Division.
October 24, 1984.
Timothy C. Harlan, Columbia, Mo., D. Eric Sowers, Kennedy & Sowers, St. Charles, Mo., for plaintiff.
*202 Richard S. Brownlee, III, John E. Burruss, Jr., Jefferson City, Mo., for defendants Shelter Financial and Shelter Insurance.
Dale C. Doerhoff, Jefferson City, Mo., for defendant Murfreesboro.
ORDER
SCOTT O. WRIGHT, Chief Judge.
Defendant Shelter Financial Services, Inc. (Shelter Financial) is a consumer loan company and a frequent user of consumer reports as defined in the Fair Credit Reporting Act (FCRA). 15 U.S.C. § 1681a(d). The Credit Bureau of Murfreesboro, Inc. (Murfreesboro) is a consumer reporting agency as defined in the FCRA. Id. § 1681a(f). Shelter Financial and Murfreesboro had a working relationship whereby the loan company would request and obtain consumer reports concerning prospective borrowers.
Plaintiff worked for Shelter Financial as its Murfreesboro, Tennessee branch manager until April 4, 1983. On that date, plaintiff voluntarily announced his resignation. On April 5, 1984, Shelter Financial requested and obtained from Murfreesboro a consumer report summarizing plaintiff's recent credit history. Shelter Financial did not represent to Murfreesboro the specific purposes for which the report was requested; instead, Shelter Financial and Murfreesboro operated under a pre-existing agreement by which the loan company certified that all requests for consumer reports would be for one of the purposes authorized by the FCRA.
There can be no dispute but that the report provided by Murfreesboro to Shelter Financial was a consumer report. The information contained in the report bore directly on plaintiff's credit standing and undoubtedly was both "expected to be used" and "collected [by Murfreesboro] for the purpose of" evaluating plaintiff's credit-worthiness. See 15 U.S.C. § 1681a(d); Heath v. Credit Bureau Service of Sheridan, Inc., 618 F.2d 693, 696 (10th Cir.1980); Boothe v. TRW Credit Data, 523 F. Supp. 631, 634 (S.D.N.Y.1981). Nor is there any dispute but that Shelter Financial intentionally obtained the report from Murfreesboro. Thus, the crucial issue is whether Shelter Financial arguably had a proper purpose in requesting the report.
The FCRA sets forth an exclusive list of permissible purposes for which consumer reports may be obtained. See 15 U.S.C. § 1681b. Only two of these permissible purposes are at issue in the instant case. First, Shelter Financial asserts that it obtained the report on plaintiff "for employment purposes." See 15 U.S.C. § 1681b(3)(B). That purpose cannot justify defendant's actions in the instant case, however, because the undisputed facts of the case contradict the statutory definition of "employment purposes."
The term "employment purposes" when used in connection with a consumer report means a report for the purpose of evaluating a consumer for employment, promotion, reassignment or retention as an employee.
15 U.S.C. § 1681a(h). Here, it is uncontradicted that defendant requested the consumer report after plaintiff had announced his resignation from Shelter Financial. Consequently, defendant cannot invoke the "employment purposes" provision to justify its actions; there is simply no evidence that the company obtained plaintiff's consumer report in connection with any employment decision.
Shelter Financial's second argument in justification of its actions is that it had "a legitimate business need for the information" in the consumer report. See 15 U.S.C. § 1681b(3)(E). Specifically, defendant contends that it obtained the report because it was surprised when plaintiff suddenly announced his resignation and wanted to ascertain if plaintiff had been embezzling funds from the company. *203 Assuming arguendo that the evidence conclusively establishes that this was defendant's motivation for obtaining the consumer report, the Court holds that this defense is insufficient as a matter of law. The FCRA does not authorize the use of consumer reports whenever a user has a legitimate business need for the information; instead, the user must have a "legitimate business need for the information in connection with a business transaction involving the consumer." 15 U.S.C. § 1681b(3)(E) (emphasis added). Defendant has not adduced a shred of evidence indicating that it requested plaintiff's consumer report "in connection with" a business arrangement involving plaintiff. Therefore, the Court holds that the evidence in this case establishes that Shelter Financial willfully violated the FCRA as a matter of law. See Heath v. Credit Bureau of Sheridan, Inc., 618 F.2d at 696 ("Congress meant to prevent intrusions into consumers' private affairs when no legitimate transaction was actually imminent"); Boothe v. TRW Credit Data, 557 F. Supp. 66, 70 (S.D.N.Y.1982) (absent "consumer relationship" between requesting party and subject of consumer report, investigation of suspected counterfeiter is not a proper purpose under FCRA); Henry v. Forbes, 433 F. Supp. 5, 9 (D.Minn.1976) (§ 1681b(3)(E) justifies acquisition of consumer report only if there is a "consumer relationship" between requesting party and subject of report). Consequently, although he has not shown any actual injury resulting from Shelter Financial's violation of the FCRA, plaintiff is entitled to nominal damages in the sum of one dollar and punitive damages in an amount to be determined by the jury. See 15 U.S.C. § 1681n; Boothe v. TRW Credit Data, 557 F.Supp. at 71-72.
In accordance with the foregoing, it is hereby
ORDERED that plaintiff's motion for a directed verdict is sustained. It is further
ORDERED that defendant's motion for a directed verdict is overruled.
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604 F. Supp. 717 (1985)
Kevin GRIFFIN, et al., Plaintiffs,
v.
O'NEAL, JONES & FELDMAN, INC., et al., Defendants.
No. C-1-84-1228.
United States District Court, S.D. Ohio, W.D.
March 14, 1985.
Stanley M. Chesley, Waite, Schneider, Bayless & Chesley, Cincinnati, Ohio, for plaintiffs.
James Q. Doran, Cincinnati, Ohio, Charles R. Janes, Trial Atty., Knepper, White, Arter & Hadden, Columbus, Ohio, for defendants; Michael R. Gallagher, Gallagher, Sharp, Fulton & Norman, Cleveland, Ohio, of counsel.
OPINION AND ORDER GRANTING MOTION TO DISMISS
SPIEGEL, District Judge:
This matter came on for consideration of the motion to dismiss filed by defendants Carter-Glogau Laboratories, Inc. and Revco D.S., Inc. (doc. 6). A brief in opposition has been filed by plaintiffs (doc. 11), to which defendants have replied (doc. 13). For the reasons set forth below, we hereby Order that counts four and six be stricken from plaintiffs' Complaint and, consequently, that plaintiffs' Complaint be dismissed in its entirety, as we are without jurisdiction to hear their case.
Plaintiffs Kevin and Maureen Griffin, individually, and as Next Friends and Guardians of their minor daughter Meghan, seek *718 recovery from all defendants based on events that had their inception when Meghan was born prematurely at Good Samaritan Hospital in Cincinnati, Ohio. They sue for damages for themselves and for Meghan that stem from injuries suffered by her as a result of the administering of E-Ferol Aqueous Solution to her for an extended period of time following her birth. Plaintiffs assert seven causes of action: negligence; breach of the warranty of merchantibility and fitness for an intended purpose; strict liability; violation of the Federal Food, Drug and Cosmetic Act (FDCA); fraud; violation of Title IX of Organized Crime Control Act (hereinafter the Racketeer Influenced and Corrupt Organizations Act or RICO); and willful and wanton conduct. There exists no diversity of citizenship between the parties. Rather, plaintiffs claim jurisdiction by way of 28 U.S.C. § 1331, citing their allegations of liability grounded on the FDCA and RICO, both federal statutes, and upon the doctrines of pendent and ancillary jurisdiction.
Through their motion to dismiss, defendants challenge sufficiency of plaintiffs' federal claims under the FDCA and RICO, arguing that no private cause of action can be implied under the former and that the facts of this case are inapplicable to the latter. If defendants are correct on both counts, we would lack federal question or "arising under" jurisdiction. Absent diversity of citizenship, this case would warrant dismissal, thus leaving plaintiffs to their remedies in state court.
Specifically, pursuant to Rules 12(b)(1) and 12(b)(6), Fed.R.Civ.P., defendants move for an order striking counts four (FDCA) and six (RICO) of plaintiffs' Complaint and then for dismissal of plaintiffs' Complaint for lack of subject matter jurisdiction. The standard of review by which we are bound has been set forth in Conley v. Gibson, 355 U.S. 41, 78 S. Ct. 99, 2 L. Ed. 2d 80 (1957). A motion to dismiss ought not to be granted "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." Id. at 45-46, 78 S.Ct. at 101-102 (footnote omitted). In addition, we must "accept as true all the well-pled allegations in the complaint under attack." Great Lakes Steel v. Deggendorf, 716 F.2d 1101, 1105 (6th Cir.1983); Westlake v. Lucas, 537 F.2d 857, 858 (6th Cir.1976). It is within this framework that we evaluate defendants' motion.
I
The Federal Food, Drug and Cosmetic Act (FDCA), 21 U.S.C. § 301 et seq., is a public protection statute, one designed, among other things, to keep misbranded and/or adulterated articles from entering interstate commerce. See United States v. Walsh, 331 U.S. 432, 434, 67 S. Ct. 1283, 1284, 91 L. Ed. 1585 (1947). Congress has provided criminal penalties to be imposed on those found to violate the prohibited acts set forth in § 331. It is clear from the face of the statute that no civil private right of action exists. Notwithstanding this omission, plaintiffs ask this Court to imply a cause of action because "there is no language contained in the statute that prohibits a civil claim" (doc. 11, p. 4, emphasis ours). In response, defendants represent that no court considering the issue has ever implied a civil cause of action under the FDCA and that we ought to rule similarly.
Our research confirms, and plaintiffs do not dispute, defendants' contention that there is no legal precedent supporting plaintiffs' theory that private citizens may bring suit against alleged violators of the FDCA. See, e.g., Pacific Trading Co. v. Wilson and Co., Inc., 547 F.2d 367 (7th Cir.1976); National Women's Health Network, Inc. v. A.H. Robins Co., Inc., 545 F. Supp. 1177 (D.Mass.1982); Keil v. Eli Lilly and Co., 490 F. Supp. 479 (E.D.Mich. 1980); Gelley v. Astra Pharmaceutical Products, Inc., 466 F. Supp. 182 (D.Minn.), aff'd on other grounds, 610 F.2d 558 (8th Cir.1979). While it is true that none of these cases serve as binding precedent upon us, we are inclined to follow them. In particular, we believe that Judge Nelson's treatment of the question presented is a *719 correct application of the legal issues at hand. See National Women's Health Network, 545 F.Supp. at 1178-80.
Assuming we were not wont to adopt the findings of the Seventh Circuit and the district courts listed above, we could undertake an independent analysis of whether we ought to imply a private right of action under the FDCA pursuant to Cort v. Ash, 422 U.S. 66, 95 S. Ct. 2080, 45 L. Ed. 2d 26 (1975), and its progeny. In Cort, of course, the Supreme Court teaches that four factors merit attention when divining a private remedy: (1) did the legislature intend for plaintiffs to be within the protected class; (2) did the legislature intend, in any fashion, to create a private cause of action; (3) would the legislative purpose be compromised if a private right were implied; and (4) would an implied right under federal law interfere with a state's province to regulate a particular area? Id. at 78, 95 S.Ct. at 2088. See also Cannon v. University of Chicago, 441 U.S. 677, 689-709, 99 S. Ct. 1946, 1953-1964, 60 L. Ed. 2d 560 (1979). These four factors, however, do not command equal weight. Rather, the intent of Congress looms as the all-important inquiry. See Daily Income Fund, Inc. v. Fox, 464 U.S. 523, 104 S. Ct. 831, 839, 78 L. Ed. 2d 645 (1984); Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Curran, 456 U.S. 353, 377, 102 S. Ct. 1825, 1838, 72 L. Ed. 2d 182 (1982); Middlesex County Sewerage Authority v. National Sea Clammers Ass'n, 453 U.S. 1, 13, 101 S. Ct. 2615, 69 L. Ed. 2d 435 (1981); Northwest Airlines, Inc. v. Transport Workers Union of America, 451 U.S. 77, 91, 101 S. Ct. 1571, 1580, 67 L. Ed. 2d 750 (1981); Transamerica Mortgage Advisors, Inc. v. Lewis, 444 U.S. 11, 23-24, 100 S. Ct. 242, 249, 62 L. Ed. 2d 146 (1979); Touche Ross & Co. v. Redington, 442 U.S. 560, 568, 99 S. Ct. 2479, 2485, 61 L. Ed. 2d 82 (1979). As a result of these recent rulings, it is apparent that the Supreme Court intends to limit the availability of private causes of action, a trend recognized by our parent circuit. See, e.g., Rauchman v. Mobil Corp., 739 F.2d 205, 207 (6th Cir.1984); Howard v. Pierce, 738 F.2d 722, 731 (6th Cir.1984) (Engel, J., dissenting).[1]
In support of the position that the FDCA permits a private civil cause of action, plaintiffs proffer policy arguments. They maintain that the Food and Drug Administration (FDA) is overworked and underfunded; consequently, society is exposed to unapprovedand presumably unsafe drugs. Plaintiffs present their case as the "perfect" example of the FDA's impotence to afford protection to citizens using licit drugs. They allege that defendants
marketed more than fifty (50) unapproved drugs despite government warnings... [;] improperly marketed more than a dozen other drugs in unapproved strengths and sizes as well as thirty-four (34) vitamin and mineral products... [;] [and received] sixteen (16) letters between 1976 and 1981 informing [it that the FDA] considered some of its products unsafe or ineffective,
(doc. 11, p. 5), all without FDA sanction. Plaintiffs characterize the FDA's inaction as a helpless inability instead of a deliberate unwillingness to act. Naturally defendants have a differing view of the significance of these facts, assuming, for argument's sake, that they are true. We need not resolve said conflict, however. In essence, plaintiffs ask us to imply a private remedy because, in so doing, we only would be furthering Congress's purpose in enacting the FDCAthat is, preventing introduction of misbranded and/or adulterated drugs into the stream of commerce. Plaintiffs thus urge that we focus on Factor Three of the Cort v. Ash analysis. But because the recent relevant Supreme Court case law forbids us from considering Cort's third factor before we are satisfied that we have met the second, we cannot *720 adopt the reasoning urged upon us by plaintiffs.[2]
We have established that the plain language of the FDCA implies no civil private right of action. Neither plaintiffs nor defendants cite any legislative history to the Court. Judge Nelson, though, in National Women's Health Network, indicates that a rejected version of the FDCA would have incorporated a private right of action for damages. 545 F.Supp. at 1179-80. Given this legislative indication, albeit indirect, and the actual statutory language, we do not hesitate in concluding that Congress intended no private remedy under the FDCA.
There being "no set of facts" entitling plaintiffs to relief on their claim grounded on a violation of the FDCA, defendants' motion to dismiss is granted in part and plaintiffs' fourth cause of action is Ordered stricken from the Complaint.
II
Plaintiffs' Complaint also claims jurisdiction arising under Title IX of the Organized Crime Control Act of 1970, the Racketeer Influenced and Corrupt Organizations Act (RICO), 18 U.S.C. § 1961 et seq. Defendants maintain that plaintiffs' RICO cause of action is wrought with infirmities and cannot stand; generally, they state that plaintiffs have no cognizable RICO injury and that plaintiffs have not alleged the necessary enterprise. After setting forth the pertinent statutory sections, we will proceed to discuss the questions defendants present.
RICO has both a criminal and civil component. Its civil remedy, the one sought by plaintiffs herein, reads as follows:
Any person injured in his business or property by reason of a violation of section 1962 of this chapter ... shall recover threefold the damages he sustains and the cost of the suit, including a reasonable attorney's fee.
Id. § 1964(c). Section 1962(c)[3] is reproduced below:
It shall be unlawful for any person employed by or associated with any enterprise engage in, or the activities of which affect, interstate or foreign commerce, to conduct or participate, directly or indirectly, in the conduct of such enterprise's affairs through a pattern of racketeering activity or collection of unlawful debt.
These definitions are relevant to the statute now under scrutiny:
(1) "racketeering activity" means ... (B) any act which is indictable under any of the following provisions of title 1, United States Code: ... section 1341 (relating to mail fraud);
(3) "person" includes any individual or entity capable of holding a legal or beneficial interest in property;
(4) "enterprise" includes any individual, partnership, corporation, association, or other legal entity, and any union or group of individuals associated in fact although not a legal entity;
(5) "pattern of racketeering activity" requires at least two acts of racketeering *721 activity, one of which occurred after the effective date of this chapter and the last of which occurred within ten years.
Id. § 1961(1), (3), (4), (5).
The Sixth Circuit has broken down § 1962(c) into this list of elements:
[A person]
(1) engaging in an enterprise,
(2) affecting interstate commerce,
(3) conducted through a pattern of racketeering, and
(4) involving two or more statutorily-named racketeering crimes.
See United States v. Sutton, 642 F.2d 1001, 1008 (6th Cir.1980), cert. denied, 453 U.S. 912, 101 S. Ct. 3143, 69 L. Ed. 2d 995 (1981). We will use these elements to order our examination of defendants' contentions.
Defendants quarrel not with the notion that they each, as corporations, may be considered a "person." They do dispute, however, that they can be considered simultaneously a "person" and an "enterprise." Their reading of the statute contemplates interaction of a "person" with an "enterprise," but as completely separate, conceptually discrete entities.
Defendants' position parrots that taken by this Court in Bays v. Hunter Savings Ass'n, 539 F. Supp. 1020, 1023-24 (S.D.Ohio 1982), wherein we relied on, among other cases, Sutton to conclude that the "person" must be distinct from the "enterprise." We refer the parties to our Opinion in that case for a full-blown analysis. Upon examination, we glean nothing from plaintiffs' Complaint from which we can infer that there exists a "person" apart from an "enterprise;" in fact, we read plaintiffs' memorandum in opposition to state as much (see doc. 11, p. 12).
Not every court considering the issue has ruled as we did in Bays. See, e.g., United States v. Hartley, 678 F.2d 961, 986 (11th Cir.1982), cert. denied, 459 U.S. 1170, 103 S. Ct. 815, 74 L. Ed. 2d 1014 (1983); United States v. Benny, 559 F. Supp. 264 (N.D.Cal.1983).[4] But a sufficient number has approved and adopted our reasoning,[5] and we are satisfied that, until a contrary decision issues from our parent circuit or the Supreme Court, our thinking remains sound. The fact that plaintiffs do notand presumably cannotallege a "person" separate from an "enterprise" impedes them from setting forth all the elements necessary *722 under § 1962(c). Absent a proper allegation of a § 1962(c) violation, no recovery may be had under § 1964. See Bays, 539 F.Supp. at 1023. Under the Conley v. Gibson standard, then, plaintiffs' sixth cause of action, in addition to the fourth, must be stricken from their Complaint.[6]
III
Our ruling today strikes plaintiffs' fourth and sixth causes of action from their Complaint. These were the causes of actions on which federal jurisdiction was based; those claims remaining are state claims and were pendent to those dismissed. Accordingly, on the principles set forth in United Mine Workers v. Gibbs, 383 U.S. 715, 86 S. Ct. 1130, 16 L. Ed. 2d 218 (1966), plaintiffs' causes of action must be litigated in state court. As we are without subject matter jurisdiction in this case, it is hereby dismissed.
SO ORDERED.
NOTES
[1] We note that both Justice Stevens and Justice Blackmun bemoan the evolution of the Cort v. Ash multifactor test into a single-step touchstone that pivots upon the ever elusive concept of Congressional intent. See Middlesex County, 453 U.S. at 25, 101 S.Ct. at 2629 (Stevens, J., concurring in part and dissenting in part).
[2] Even assuming we could have mustered the necessary Congressional intent and thus met Factor Two in the Cort analysis, Factor One would present a problem. Laws enacted for the benefit of the general public stand apart from those designed to focus on and protect only indentifiable members of a protected class. The Supreme Court has made clear that, in the former, private causes of action ought not to be implied. See Cannon, 441 U.S. at 690-93, 99 S.Ct. at 1954-55; Howard, 738 F.2d at 725-26. We read the FDCA as a statute enacted to protect our citizenry at large. On balance, therefore, we conclude that plaintiffs fall far short of satisfying the test in Cort, as modified or not. Furthermore, we observe with interest that part of the Sixth Circuit's reasoning that recognizes whether other courts have implied private remedies with respect to particular federal statutes. See, e.g., Jennings v. Alexander, 715 F.2d 1036, 1040 (6th Cir.1983); Chartwell Communications Group v. Westbrook, 637 F.2d 459, 466 (6th Cir.1980). Under this "standard," if it can be so labelled, and with our previous string citation in mind, plaintiffs in the instant case surely would fail.
[3] Although plaintiffs do not reference specifically § 1962(c) in their Complaint, of the four subsections available, (c) strikes us as most appropriate in light of plaintiffs' allegations.
[4] Commonly cases such as Hartley and Benny that hold that a "person" and an "enterprise" can coincide in identity are criminal rather than civil. See Saine v. A.I.A., Inc., 582 F. Supp. 1299, 1306 n. 7 (D.Colo. 1984). But see United States v. Computer Sciences Corp., 689 F.2d 1181, 1190 (4th Cir.1982), cert. denied, 459 U.S. 1105, 103 S. Ct. 729, 74 L. Ed. 2d 953 (1983). And we note that Judge Peckham in Benny is not opposed completely to our viewpoint as he states, in dictum, that "[t]he argument against identification of defendant and enterprise might be viable where [as here and in Bays] a corporate defendant is involved." 559 F.Supp. at 268.
[5] See Lopez v. Dean Witter Reynolds, Inc., 591 F. Supp. 581, 585-86 (N.D.Cal.1984); Saine v. A.I.A., Inc., 582 F. Supp. 1299, 1306-07 (D.Colo. 1984); Kaufman v. Chase Manhattan Bank, N.A., 581 F. Supp. 350, 357-58 (S.D.N.Y.1984); Willamette Savings & Loan v. Blake & Neal Finance Co., 577 F. Supp. 1415, 1426-27 (D.Or. 1984); D & G Enterprises v. Continental Illinois National Bank and Trust Co., 574 F. Supp. 263, 270 (N.D.Ill.1983); Barker v. Underwriters at Lloyd's, London, 564 F. Supp. 352, 356 (E.D. Mich.1983).
At this point we are obliged to mention that the Seventh Circuit apparently takes exception to our reasoning in Bays. In a case scheduled for argument before the Supreme Court (see infra note 6), Judge Cudahy, writing for the panel, determined that the "person" must be distinct from the "enterprise," unless the "corporation[-enterprise] is also a perpetrator." Haroco, Inc. v. American National Bank and Trust Co., 747 F.2d 384, 402 (7th Cir.1984), cert. granted, ___ U.S. ___, 105 S. Ct. 902, 83 L. Ed. 2d 917 (1985). Here, obviously, plaintiffs allege that the defendant corporations are "perpetrators." While citation to Haroco is absent from their brief in opposition, we trust they would seek the benefit of that court's favorable ruling.
Having considered the Seventh Circuit's analysis in which subsection (a) of § 1962 is read together with subsection (c), we indicate only our respectful disagreement. From our reading United States Law Week's list of questions presented on certiorari, the person/enterprise identity issue will not be considered on appeal. Therefore, we are comfortable in so grounding our decision in the instant case.
[6] While we rule based on the person/enterprise identity issue, we recognize that defendants proffer alternative grounds in derogation of plaintiffs' RICO count. Defendants assert additionally, and urge us to agree, that plaintiffs have no cognizable RICO injury as required by § 1964(c), for one or both of these arguments. First, they claim that plaintiffs must demonstrate they have suffered harm over and above that incident to the predicate offense. Second, they contend that plaintiffs' damages, properly characterized, actually are no more than the accoutrements of a personal injury suit and thus are not recoverable under the "business or property" injury standard set forth in RICO.
For reasons that we hope will become evident in the balance of this footnote, we make no ruling on the additional grounds defendants raise. Further, we take this opportunity to clarify on what other grounds we do not resolve this matter. In their papers the parties squabble over whether the fact that there has been no allegation of a link between defendants and organized crime ought to have a bearing on our decision. While this issue has been the topic of much debate, see, e.g., Lopez, 591 F.Supp. at 589 n. 6, we recognize that, in a recent case, the Sixth Circuit declined to "address the issue of whether a business entity must be affiliated with organized crime in order to be liable for damages in a private civil RICO action." Bender v. Southland Corp., 749 F.2d 1205 at 1216 n. 9 (6th Cir. 1984). As an organized crime link really is not pertinent to our ruling with respect to the deficiencies identified in plaintiffs' RICO cause of action, for the record we state that said linkor lack thereofplayed no part in our deliberations.
To suggest that the scope of civil RICO is a current legal issue would be an absurd understatement. As expected, our research has unturned scores of cases relevant to the question of how far the statute should be construed to reach. The Supreme Court itself will be deciding a conflict that has arisen between the Second and Seventh Circuits, as certiorari has been granted in the cases of Sedima, S.P.R.L. v. Imrex Co., Inc., 741 F.2d 482 (2d Cir.1984), cert. granted, ___ U.S. ___, 105 S. Ct. 901, 83 L. Ed. 2d 917 (1985) and Haroco, Inc. v. American National Bank and Trust Co., 747 F.2d 384 (7th Cir.1984), cert. granted, ___ U.S. ___, 105 S. Ct. 902, 83 L. Ed. 2d 917 (1985). (Sedima is part of a trilogy of cases decided by the Second Circuit, and the only one in which certiorari has been granted.) The other two cases are Bankers Trust Co. v. Rhoades, 741 F.2d 511 (2d Cir.), petition for cert. filed, 53 U.S. L.W. 3367 (U.S. Oct. 24, 1984) (No. 84-657) and Furman v. Cirrito, 741 F.2d 524 (2d Cir. 1984).
Of course we cannot predict which questions of law the Supreme Court will chose to resolve. Those presented include whether conviction of a predicate act listed in § 1961(1) is a prerequisite to civil suits by a private litigant under § 1964(c) and whether a civil RICO plaintiff must prove injury to business or property beyond that resulting from the underlying acts of racketeering, a notion otherwise elusively dubbed proof of "racketeering enterprise injury." Possibly the Justices will determine whether an organized crime nexus is the sine qua non of recovering civil damages under RICO. Whatever the breadth of the inquiry the Court elects to take, however, its opinion will provide lower courts with welcome answers to many of these troubling issues. As we are able to resolve the matter presently before us on much narrower groundsgrounds that presumably will not be addressed at oral argument before the Courtand given that much needed guidance as to the reach of civil RICO will be forthcoming, we think it prudent for us not to rule on defendants' alternative grounds to dismiss plaintiffs' sixth cause of action. On this note, then, we conclude our discussion.
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604 F. Supp. 726 (1985)
Cherri WOLFE, Plaintiff,
v.
UNITED STATES of America, Defendant.
Civ. No. 80-0207-B.
United States District Court, S.D. California.
March 14, 1985.
David C. Siegel, Olins, Foerster & Siegel, San Diego, Cal., Mark P. Friedlander, Jr., Arlington, Va., for plaintiff.
Karen M. Shichman, Asst. U.S. Atty., San Diego, Cal., for defendant.
MEMORANDUM DECISION
BREWSTER, District Judge.
This action arises under the Federal Tort Claims Act, 28 U.S.C. § 2671, et seq. (hereinafter FTCA) and 28 U.S.C. § 1346(b) in *727 conjunction with the National Swine Flu Immunization Act of 1976.[1] It was transferred to the United States District Court for the District of Columbia for coordinated pretrial proceedings, after which it was remanded to this Court for trial.
Early in 1976, medical doctors at the Fort Dix Army Hospital in New Jersey isolated the virus which causes a strain of flu known as the Swine Influenza. Concerned that this illness could cause a nationwide epidemic the following winter, the United States government enacted the above legislation on an emergency basis, and implemented one of the largest immunization programs this country has ever undertaken. The Swine Flu Act provided for free immunization of all persons in the country. Public health clinics throughout the country were utilized as distribution centers. Serum was distributed to hospitals, clinics and doctors' offices. Every clinic, hospital or physician who dispensed the vaccine without charge and who obtained the recipient's signature on the government consent form provided was considered a "program participant."[2] Although not applicable here, the Swine Flu Act assumed all legal liability for any injuries caused by such program participants to the same extent as such participant could be held liable under the law of the state where the inoculation occurred.[3] If any inoculation was administered by any entity other than a program participant, the United States still subjected itself to liability for injury in accordance with the provisions of the FTCA.[4] The Swine Flu Act imposed exclusively on the United States the duty to warn recipients of the risks and benefits of the vaccine.[5] The defendant sought to perform this obligation by furnishing its comprehensive consent form with the serum to be dispensed by the health care providers. During the summer and fall of 1976 the defendant conducted a mass media promotion of this free immunization program, which commenced inoculations in October of 1976.
Plaintiff received a bivalent Swine Flu inoculation on November 29, 1976, from a nurse at the office of Harvey M. Bloom, M.D. She was motivated to take the flu shot by the extensive national media advertising described above. However, plaintiff neither saw nor signed the government consent form at the time she received her shot, because the dispensing office for an unknown reason had not used the form. Accordingly, the dispensing doctor was not a "program participant" as defined in the Swine Flu Act, and the defendant's liability in the instant case must be analyzed under negligence principles applicable to the government under the FTCA.
The defendant's vaccine administration program did set up a distribution system by which an adequate supply of printed consent forms accompanied all vaccine batches distributed to all inoculation facilities from the distribution center, whether program participants or not. In this case the dispensing doctor's employee picked up the vaccine from the center, but the doctor did not recall ever seeing the form in his office. The defendant, in its extensive media promotion of the vaccine program did not advise the public of the possible risks of adverse reactions which might occur, although certain possible reactions were foreseen by the defendant. In fact, sporadic reports of infrequent but serious neurological reactions[6] led to a sudden halt in the immunization program on or about December 16, 1976, after approximately 42 million persons had been inoculated within only seven weeks.
The defendant's consent form fully and completely describes this egg-based vaccine, and adequately apprises the reader of *728 possible adverse reactions which might occur, from allergic reaction up to and including death. For purposes of this case, the form, if used, would have fulfilled the defendant's obligation to warn. Moreover, the form would have provided the plaintiff with an informed basis for deciding whether or not to have the inoculation. Plaintiff contended she would not have had the shot had she seen the formnot for concern over possible allergic reaction, but just on general principles.
Plaintiff became ill within approximately forty-five minutes after the inoculation. Although she felt fine for the twenty minutes she stayed in the doctor's office after receiving her shot, she became ill while driving home from the doctor's office. She experienced rapid heart beat, shortness of breath, dizziness, flushed face, shakiness, a feeling of nausea and a sense of fear that she might die. She did not observe any heat or rash at the site of injection, nor wheezing. She pulled into a food establishment and with help contacted a neighbor who came and took the plaintiff home. Within minutes thereafter her husband took her to a hospital emergency room where she presented the above symptoms approximately two hours after the shot. She believed she had suffered a reaction to the flu shot. The initial diagnosis was "acute reaction to flu shot," but no specific findings of allergic reaction or antiphilactic shock were made, and no medication to reverse an allergic reaction or antiphilactic shock was administered. She was given a tranquilizer and anti-nausea medication and sent home. The following day she returned with complaints of persistent rapid heart beat, shakiness and nausea. No objective findings of any system abnormalities were made. Plaintiff was reassured and again sent home. She again returned to Grossmont Hospital on December 3 with persistent complaints of rapid heart beat, shakiness and her adamant belief that she had suffered a reaction to the flu shot. At that time she was diagnosed as suffering an anxiety reaction, a psychological condition. No physical abnormalities were found.
The court notes that the plaintiff had been treated for anxiety reactions during the year immediately preceding her inoculation, although she did not list that fact on the brief questionnaire she filled out in the office where she was inoculated.
After December 3, 1983, batteries of diagnostic studies were performed on the plaintiff, and it appeared that she had a mild to moderate allergic sensitivity to a number of airborne irritants and some foods. Specifically, plaintiff tested as mildly to moderately sensitive to eggs, of which she was totally unaware, having eaten eggs all her life without known problems. Over the next two years she underwent a complete desensitization treatment for all of her allergies. Although her allergy condition was improved, her state of anxiety was not. Finally, after treatment for over four years by various psychologists and psychiatrists, she was treated by a psychiatrist with whom she apparently made progress toward complete recovery. During this entire period her personal problems were substantial, consisting primarily of marital and family difficulties which culminated in a divorce approximately three years after receiving her flu shot. She is now essentially recovered and leading a normal life. The entire course of plaintiff's medical treatment over five years cost approximately $80,727.47 and she lost approximately $13,800 in wages from her employment.
In actions brought under the Federal Tort Claims Act, the United States is liable only for negligent or wrongful acts or omissions of its employees while acting within the scope of their office or employment. 28 U.S.C. § 2671, et seq. The FTCA has been held to exclude liability under theories of strict or absolute liability. Dalehite v. United States, 346 U.S. 15, 73 S. Ct. 956, 97 L. Ed. 1427 (1953), reh. denied, 346 U.S. 841, 74 S. Ct. 13, 98 L. Ed. 362 (1953). In weighing the negligent or wrongful conduct, state law determines the standard of care required of a government agent. Laird v. Nelms, 406 U.S. 797, 92 *729 S.Ct. 1899, 32 L. Ed. 2d 499 (1972). In California, the duty of a health care provider to warn a patient of danger in order to give the patient a basis for an informed consent is well summarized in Cobbs v. Grant, 8 Cal. 3d 229, 104 Cal. Rptr. 505, 502 P.2d 1 (1972) where the court required a physician to make "a reasonable disclosure of dangers inherently and potentially involved." Id. at 243, 104 Cal. Rptr. 505, 502 P.2d 1.
Plaintiff contends the defendant was negligent in the following respects: 1) Overemphasis of the danger of the illness and the effectiveness of the vaccine and failure to warn of risks from the inoculation in the national advertising of the program; 2) failure to adequately warn through the substantive content of the consent form which the defendant distributed; and 3) failure to set up a distribution system for the consent form which was more reasonably likely to reach each recipient of the shot, including the plaintiff.
Defendant contends the duty to warn was fulfilled by both the content of the consent form and the system for its distribution, and that the defendant was not negligent in warning its citizens of the possible danger of swine flu and the desirability of obtaining a flu shot. Defendant also maintains that plaintiff's anxiety reaction was not proximately caused by the flu shot in any event, but was merely temporarily related by coincidence.
The dispensing physician, not being a "program participant," is not the agent of the defendant. Even if that doctor be considered negligent in failing to use the consent form or in failing to warn the plaintiff of any risks, he was not sued and his liability is not before this court. Defendant's evidence of the use of a distribution system which joined the consent forms with the vials of vaccine distributed by the distribution centers to the dispensing offices was unrefuted. It appeared reasonably conceived and executed to assure reasonable likelihood of use of the forms in the dispensing process.
Applying the applicable legal standards to the facts of this case, this court holds that the defendant was not negligent in the design or the distribution of its consent form. Furthermore, the defendant was not negligent in viewing the possibility of a swine flu epidemic with alarm and strenuously urging its citizens to immunize themselves against it. The fact that the epidemic never materialized does not persuade this court that the concern was unfounded. With 42 million persons inoculated 1/5 of the entire United States populationwho can say that the extent of inoculations was not a significant factor in the relatively light impact of swine flu during the winter of 1976-77? Certainly plaintiff did not suffer one of the dangerous reactions which were foreseen, or which would be reasonably foreseeable by an entity in like circumstances administering inoculations en masse. There is no duty to warn of every possible risk, no matter how remote or bizarre.[7]
In any event, the court also finds that the inoculation on November 26, 1976, did not proximately contribute to or cause the plaintiff's extended psychological problem of an anxiety reaction. There was no evidence of allergic reaction within thirty minutes of the inoculation as would have been expected. The plaintiff was enduring a stressful period in her life due primarily to marital and family problems and secondarily to financial problems. These difficulties framed her psychological vulnerability to anxiety reactions and panic attacks, both of which she had suffered during the year immediately preceding her flu inoculation. Both of those problems were acute at the time of the inoculation, and the court finds from the preponderance of the evidence that such psychological problems, rather than an allergic reaction to the egg-based vaccine, were the proximate contributing cause of her acute anxiety reaction.
Finally, even if the flu shot had in fact precipitated an anxiety attack, such an unusual and bizarre reaction could not have *730 been so foreseeable that the defendant should be held to a duty to warn of it in addition to those warnings in the consent form. Even assuming some relationship between the inoculation and the anxiety reaction, the evidence would not support a finding that the inoculation caused any more than two weeks of adverse effects. It is far more likely that the relatively severe contemporaneous sources of anxiety in the plaintiff's life were the cause of her psychological problems.
For the reasons stated, judgment will be entered for the defendant with costs.
NOTES
[1] 42 U.S.C. § 247b(j)-(l) (Public Law 94-380; 90 Stat. 1113) (hereinafter Swine Flu Act)
[2] 42 U.S.C. § 247b(k)(2)(B)
[3] 42 U.S.C. § 247b(k)(2)(A)(i)
[4] 42 U.S.C. § 247b(k)(1)(B), and § 247b (k)(2)(A)
[5] 42 U.S.C. § 247b(j)(1)(F)
[6] I.e., Landry-Guillain-Barre Syndrome and Transverse Myelitis
[7] Cobbs v. Grant, supra, at 243, 104 Cal. Rptr. 505, 502 P.2d 1
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347 F. Supp. 13 (1972)
E. A. HALL and John Bachelor, Plaintiffs,
v.
GURLEY MILLING COMPANY OF SELMA, N. C., Inc., Defendant and Third Party Plaintiff,
v.
COKER'S PEDIGREED SEED COMPANY and H. C. Newton, Third Party Defendant.
Civ. No. 2833.
United States District Court, E. D. North Carolina, Raleigh Division.
June 22, 1972.
W. Arnold Smith, Raleigh, N. C., for plaintiffs.
Howard E. Manning, John B. McMillan, Manning, Fulton & Skinner, Raleigh, N. C., for defendant.
William Joslin, Joslin, Culbertson & Sedberry, Raleigh, N. C., for third-party defendants.
MEMORANDUM OF DECISION
DUPREE, District Judge.
In this diversity action the plaintiffs, E. A. Hall and John Bachelor, seek recovery of damages for the breach of express and implied warranties in connection with the separate sales to them by defendant, Gurley Milling Company, on March 15, 1967, of two lots of soybean seeds. In the first count in the complaint it is alleged that defendant expressly warranted to the plaintiffs "that the said soybeans were of a new and improved type which would produce stronger stalks and higher yields and were suitable to the growing conditions in Alabama where plaintiffs were to plant them". In the second count it is alleged that "the defendant impliedly warranted to the plaintiffs that said soybeans were merchantable and fit for the purpose for which they were purchased". By reason of the alleged breach of these warranties plaintiff Hall demands damages in the amount of $17,600 and plaintiff Bachelor alleges that he has been damaged in the amount of $17,500.[1] The defendant Gurley Milling *14 Company filed a general denial and pleaded the three and four-year statutes of limitations. Shortly thereafter Gurley filed third-party complaints for indemnity against one H. C. Newton and Coker's Pedigreed Seed Company.[2] Newton has not answered and is in default. Coker's answered and pleaded a general denial, failure of the third-party complaint to state a claim and the three and four-year statutes of limitations.
The case is now before the court on defendant Gurley's motion for summary judgment against the plaintiffs based on the statute of limitations and the motion for summary judgment of Coker's against Gurley based on the failure of the third-party complaint to state a claim and the statute of limitations. The novel questions raised by Coker's motion need not be decided, for in the court's view Gurley's motion for summary judgment must be allowed, and this will dispose of the case.
North Carolina has a three-year statute of limitations for actions on contracts or obligations and liabilities aris-G.S. § 1-52(1). Plaintiffs here stressfully maintain, however, that their action is governed by the four-year statute contained in Section 2-725 of the Uniform Commercial Code,[3] which became ing out of contracts, express or implied. effective in North Carolina on July 1, 1967, and pointing specifically to Subsection 2 of that statute they argue that they did not know and could not have discovered that the seeds were defective until sometime in September of 1967 when the crop was harvested. From this they reason that the institution of this action in August, 1971, was within the four-year period and therefore timely.
In support of their contention that the UCC applies, plaintiffs rely on G.S. § 25-10-101 which reads:
"This act shall become effective at midnight on June 30, 1967. It applies to transactions entered into and events occurring after that date."
While conceding that the transaction whereby Gurley sold the seed to plaintiffs occurred before the effective date *15 of the Act, plaintiffs assert that the failure of the seed to produce as warranted was an "event" which transpired thereafter and that it marked the date of the accrual of plaintiffs' cause of action.
A review of the North Carolina law has revealed no case defining the word "event" as used in this statute, and the authorities elsewhere are not helpful in this respect.[4] The North Carolina law in effect in 1967 determining the accrual date for causes of action for breach of warranty, however, was fairly well defined. The date was reckoned from the time the first injury, however slight, was sustained. Jewell v. Price, 264 N.C. 459, 142 S.E.2d 1 (1965). In that case it was said:
"It is unimportant that the actual or the substantial damage does not occur until later if the whole injury results from the original tortious act . . . `[P]roof of actual damage may extend to facts that occur and grow out of the injury, even up to the day of the verdict. If so, it is clear the damage is not the cause of action.' . . . It is likewise unimportant that the harmful consequences of the breach of duty or of contract were not discovered or discoverable at the time the cause of action accrued (citing numerous North Carolina cases).
"In this case, defendant's negligent breach of the legal duty arising out of his contractual relation with plaintiffs . . . occurred on November 15, 1958, when he delivered to them a house with a furnace lacking a draft regulator and, also, having been installed too close to combustible joists. There was no prospective warranty, as was present in Heath v. [Moncrieff] Furnace Co., 200 N.C. 377, 156 S.E. 920, 75 A.L.R. 1082; nor did defendant, after the furnace began to malfunction, guarantee to `remedy the situation' and to be `entirely responsible' as did the defendant in Nowell v. Great Atlantic & Pacific Tea Company, 250 N.C. 575, 108 S.E.2d 889. Plaintiffs here sustained an invasion of their rights on November 15, 1958, although they had no knowledge of the invasion until the first week in January, 1959. The fire which destroyed their home on January 18, 1959, `the whole injury' resulted proximately from defendant's original breach of duty."
Tested by these principles this court is constrained to hold that the cause of action sought to be enforced by the plaintiffs here accrued at the time defendant sold the soybeans to plaintiffs in March, 1967, which was prior to the effective date of the Uniform Commercial Code on July 1, 1967. The defective condition of the seed at the time of the sale resulted in a breach of defendant's warranty at that time, and the defendant did nothing thereafter to toll the statute. The case is therefore distinguishable from those cases in which contractors charged with furnishing defective *16 materials or workmanship continued to make repairs and remedy defects in equipment long after the original contract had been completed. See Heath v. Moncrieff Furnace Company, 200 N.C. 377, 156 S.E. 920, 75 A.L.R. 1082 (1931); Nowell v. Great Atlantic & Pacific Tea Company, 250 N.C. 575, 108 S.E.2d 889 (1959); and Styron v. Loman-Garrett Supply Company, 6 N.C.App. 675, 171 S.E.2d 41 (1969).[5]
The North Carolina rule which has been frequently criticized as productive of injustices[6] has now been changed by statute, but unfortunately for the plaintiffs here, the new law does not apply to their case.[7]
Having concluded that plaintiffs' cause of action accrued at the time the soybeans were sold and delivered to them, by its express terms the section of the Uniform Commercial Code relating to statute of limitations in contracts for sale is not applicable. G.S. § 25-2-725(4). It follows that the three-year statute in effect in March, 1967 applies and plaintiffs' claims therefore became time barred in March, 1970. Defendant's motion for summary judgment must be allowed, and judgment will be entered accordingly.
NOTES
[1] In their brief filed herein plaintiffs stated that plaintiff Hall instituted an action against defendant on May 26, 1970 in the Circuit Court of Escambia County, Alabama; that the action was thereafter removed to the U. S. District Court where on November 28, 1970 an order quashing service of summons on the defendant was entered. Plaintiff Bachelor apparently did not sue in Alabama. He joined as plaintiff in this action which was instituted in this court on August 23, 1971.
[2] Against Newton it was alleged that he was engaged in the business of growing and selling certified soybean seed; that Gurley had purchased from Newton 1,460 bushels of "Certified Coker's 240 Soybeans" on February 2, 1967 which Newton had warranted to be "ninety-nine per cent pure with germination in excess of ninety per cent and that this was a real good seed"; and that Gurley had transshipped the seed without removal from the bags to Alabama where it was delivered to the plaintiffs.
Against Coker's it was alleged that "the foundation or registered seed" for the seed purchased by Gurley from Newton had been acquired from Coker's and that "Coker's breached its implied warranty to Gurley and whoever bought this seed that said soybeans were fit for the use for which they were intended". In their briefs and on oral argument it has been conceded that the "foundation seeds" were in fact purchased by Gurley from Coker's in 1966 and resold to Newton who planted them in that year and sold the yield to Gurley which in turn sold to the plaintiffs in March, 1967.
[3] § 25-2-725. Statute of limitations in contracts for sale.(1) An action for breach of any contract for sale must be commenced within four years after the cause of action has accrued.
"(2) A cause of action accrues when the breach occurs, regardless of the aggrieved party's lack of knowledge of the breach. A breach of warranty occurs when tender of delivery is made, except that where a warranty explicitly extends to future performance of the goods and discovery of the breach must await the time of such performance the cause of action accrues when the breach is or should have been discovered.
"(3) Where an action commenced within the time limited by subsection (1) is so terminated as to leave available a remedy by another action for the same breach such other action may be commenced after the expiration of the time limited and within twelve months after the termination of the first action.
"(4) This section does not alter the law on tolling of the statute of limitations nor does it apply to causes of action which have accrued before this chapter becomes effective."
[4] That an event occurring after the effective date of the Code but associated with a transaction which occurred prior thereto may be governed by the Act is illustrated by Baillie Lumber Company v. Kincaid Carolina Corporation, 4 N.C.App. 342, 167 S.E.2d 85 (1969). In that case plaintiff sued to recover the balance due on an account for lumber sold defendant prior to July 1, 1967. The defense was based on an alleged accord and satisfaction entered into subsequent to that date. The North Carolina Court of Appeals held that plaintiff's reservation of its rights in connection with the accord and satisfaction was governed by the Code. Had the suit been on the accord instead of the original account for purposes of the statute of limitations the cause of action obviously could not have occurred before the date of the accord. In such case the three-year statute of limitations for contract actions would seem to apply since the action would not be for breach of a "contract for sale" within the meaning of Section 2-725(1) of the Code. On the other hand, if the post-Code "event" arises out of a contract for sale and the event itself constitutes the cause of action as distinguished from the mere ripening of an already accrued cause of action, it would seem to follow that the four-year statute of the Code would apply although the post-Code event was related to a transaction antedating the Code.
[5] Of this trilogy, Heath, because it speaks in terms of "prospective warranty" is the most troublesome. A careful reading of the case, however, reveals that its true rationale is that because for three years plaintiff was "patiently relying upon the repeated assurance of defendant that it would make the [heating] plant comply with its warranty . . . the cause of action did not accrue at the date of warranty, but at the date on which it was finally determined that the plant was not free from all defects and flaws". This is the construction placed on the case by the North Carolina Court of Appeals in Styron.
In Heath the Supreme Court expressly approved two very old cases, Baucum v. Streater, 50 N.C. 70 (1857), and Taylor v. McMurray, 58 N.C. 357 (1860), in which it was held that the statute of limitations against an action to recover for breach of warranty begins to run at the date of the warranty and not thereafter. The court said:
"In each of these cases, the warranty was construed as a contract by the vendor that if the vendee should suffer damages resulting from a condition existing at the date of the warranty, vendor would pay such damage to the vendee. The cause of action accrued at the date of the warranty, for if breached at all, the warranty was breached at its date. For this reason it was held that the statute of limitations began to run at the date of the warranty, and not at the date when the damage resulting from the breach of the warranty was sustained. The principle on which the decision in each of these cases rests, has been generally recognized as sound. 37 C.J., 835"
This case, incidentally, has only been cited twice by the North Carolina appellate courts, once in Jewell v. Price, supra, in which it was distinguished and again in the Styron case, supra, where it was given the construction indicated. Federal courts in other jurisdictions have declined to follow it. Bobo v. Page Engineering Company, 285 F. Supp. 664 (W.D.Pa. 1967); Owens v. Combustion Engineering, Inc., 279 F. Supp. 257 (E.D.Va. 1967); and Smith v. American Flange & Manufacturing Company, 139 F. Supp. 917 (S.D.N.Y.1956).
[6] See Note, 19 N.C. Law Review 599 (1941) which first urged that the rule be changed by statute. For thirty years thereafter the North Carolina courts dutifully followed the rule, sometimes with harsh results. See, for instance, Shearin v. Lloyd, 246 N.C. 363, 98 S.E.2d 508 (1957), an action for malpractice in which the plaintiff, a patient of the defendant surgeon, did not discover that a sponge had been left in the operative wound until quite some time following the operation. His action brought within three years after the discovery but more than three years after the operation was held barred by the statute.
[7] G.S. § 1-15(b) enacted in 1971 and which became effective upon ratification provides that causes of action, other than for wrongful death, which have as an essential element bodily injury or a defect in or damage to property not readily apparent to the claimant at the time of origin is deemed to have accrued at the time the injury or damage was discovered, or ought reasonably to have been discovered, by the claimant. The Act provided that it should become effective upon ratification but should not affect pending litigation. While the present action was not pending at that time, the cause of action was already barred, and it could not be revived by an act of the legislature. Jewell v. Price, supra.
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725 F. Supp. 821 (1989)
Edward J. MAGUIRE, III, Plaintiff,
v.
HUGHES AIRCRAFT CORPORATION, et al., Defendants.
Civ. No. 87-4706 (CSF).
United States District Court, D. New Jersey.
November 8, 1989.
Steinberg, Ginsberg & Weitzman by Saul J. Steinberg, Paul F. Kulinski, Voorhees, N.J., for plaintiff.
Shanley & Fisher by Theodore S. Smith, Raymond M. Tierney, Jr., Morristown, N.J., for defendant Allison Gas Turbine Div. of Gen. Motors Corp.
Schwartz & Andolino by Wayne D. Greenfeder, Livingston, N.J., for defendant MPB Corp.
OPINION
CLARKSON S. FISHER, District Judge.
The court is called upon today to decide a motion for summary judgment brought by *822 defendant Allison Gas Turbine Division of General Motors Corporation ("Allison") and a cross-motion for summary judgment brought by defendant MPB Corporation ("MPB") in the above-captioned matter. Plaintiff, Edward J. Maguire, III ("Maguire"), filed suit in the Superior Court of New Jersey, Law Division, Monmouth County, on August 5, 1987, seeking damages for personal injuries which he allegedly sustained in a helicopter accident on August 14, 1984, and in a motorcycle accident four days later. The superior court complaint named Hughes Aircraft Corporation ("Hughes"), Allison and several fictitious aliases for additional defendants that were unidentified at the time of filing.
The case was removed to this court by Allison on November 20, 1987, based on diversity jurisdiction pursuant to 28 U.S.C. § 1332. An unopposed motion for summary judgment was granted in favor of Hughes (which had come to be known as McDonnell Douglas Helicopter) on November 23, 1988. On February 7, 1989, Allison received permission of the court to file a third-party complaint against MPB, and filed same on February 17, 1989. On June 28, 1989, United States Magistrate Freda L. Wolfson granted plaintiff leave to file an amended complaint naming MPB as a direct defendant. Maguire filed such a complaint on July 21, 1989. The instant motions followed.
Facts
Maguire was piloting a helicopter on a solo night training mission for the New Jersey Army National Guard on August 14, 1984. The aircraft, which was powered by an engine manufactured by Allison which included bearings manufactured by MPB, suffered an apparent engine failure, so Maguire conducted a forced landing.
An emergency-room physician examined plaintiff the night of the incident, and an army flight surgeon examined him the following day. Two days later, the army flight surgeon returned Maguire to active flight status, determining that he was medically fit. On August 18, 1989, Maguire collided with a curb while operating a motorcycle, thereby suffering personal injuries. Plaintiff claims that he had suffered injuries from the forced landing of the helicopter which caused him to lose consciousness while operating the motorcycle, and therefore the helicopter engine failure was the proximate cause of any and all injuries he received in both the helicopter incident and the motorcycle accident.
The helicopter engine was developed by Allison under contract with the United States Army. Both the engine's design concept and its individual designed components were reviewed, evaluated and approved by the defense department. The inspection and testing of the engine and its components were also approved and witnessed by the defense department. (Plaintiff's Opposition Brief, Exhibit A, Army Investigation Report). There is evidence that the engine failure was caused by a defect in the design of the MPB bearing. (Allison's Appendix, Exhibit 10). This bearing was not part of the original engine design, but was incorporated later. The substitution was the result of an engineering change proposal, the purpose of which was to prolong the service life of the engine bearing. Defendants base their summary-judgment motions on the government contractor defense, which was clarified by the Supreme Court in Boyle v. United Technologies Corp., 487 U.S. 500, 108 S. Ct. 2510, 101 L. Ed. 2d 442 (1988), reh. denied, ___ U.S. ___, 109 S. Ct. 1182, 103 L. Ed. 2d 248 (1989).
Summary Judgment
The purpose of summary judgment is to eliminate unnecessary trials which would cause needless expense and delay. Goodman v. Mead Johnson & Co., 534 F.2d 566, 573 (3d Cir.1975), cert. denied, 429 U.S. 1038, 97 S. Ct. 732, 50 L. Ed. 2d 748 (1977). Rule 56(c) of the Federal Rules of Civil Procedure provides that summary judgment shall be granted:
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 a judgment as a matter of law.
*823 The Rule directs the entry of summary judgment, after adequate time for discovery and upon motion, against a party who fails to make a showing sufficient to establish the existence of an element essential to that party's case, and on which that party bears the ultimate burden of proof at trial. Celotex Corp. v. Catrett, 477 U.S. 317, 323, 106 S. Ct. 2548, 2553, 91 L. Ed. 2d 265 (1986); Spangle v. Valley Forge Sewer Auth., 839 F.2d 171, 173 (3d Cir.1988).
The current standard for summary judgment requires that before judgment is entered as a matter of law, there be no "genuine" issue of "material" fact; however, the mere existence of some alleged factual dispute between the parties is an insufficient basis on which to deny a motion for summary judgment. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247-48, 106 S. Ct. 2505, 2509-10, 91 L. Ed. 2d 202 (1986). A fact is "material" only if it will affect the outcome of a lawsuit under the applicable law, and a dispute over a material fact is "genuine" if the evidence is such that a reasonable fact finder could return a verdict for the nonmoving party. Id.
The court is mindful that, in deciding a motion for summary judgment, it must construe the facts and inferences therefrom in a light most favorable to the nonmoving party. Pollock v. American Telephone & Telegraph Long Lines, 794 F.2d 860, 864 (3d Cir.1986).
Government Contractor Defense
The government contractor defense provides that
[l]iability for design defects in military equipment cannot be imposed, pursuant to state law, [on the manufacturer], when (1) the United States approved reasonably precise specifications; (2) the equipment conformed to those specifications; and (3) the supplier warned the United States about the dangers in the use of the equipment that were known to the supplier but not to the United States.
Boyle, 108 S.Ct. at 2518. The Court reasoned that imposing liability on government contractors would have a direct effect on the terms of government contracts: either the contractor would raise the price it charged for the product, or it would decline to manufacture the product according to the government specifications. Id. at 2515.
The Court found that the defense for government contractors fits within the "discretionary function" exception of the Federal Tort Claims Act ("FTCA"), 28 U.S.C. § 2680(a).[1] The Court held that design selection for military equipment constitutes a discretionary function within the meaning of the FTCA exception. Boyle, 108 S.Ct. at 2517. The design selection process involves the evaluation of a whole host of military, technical and social considerations, including the balancing of safety concerns against the need for combat effectiveness. Id.
Maguire opposes defendants' motions on the grounds that summary judgment would violate the underlying policies of Boyle and that there are genuine issues of material fact which preclude application of the Boyle criteria to the instant action. Plaintiff contends that there is no evidence of significant government involvement in the decision to use the MPB bearing. He also asserts that the bearing did not conform to the design project specifications. Plaintiff further argues that there is no evidence which indicates that defendants warned the government of potential risks of the MPB bearing of which the defendants were aware, but the military were not.
Maguire concedes that the government may have participated actively in the original engine design. (Plaintiff's Opp. Brief at 14). It is his contention that this same level of participation was required for, but was missing from, the subsequent incorporation of the MPB bearing into the overall design. However, a court within this circuit has held that the first government contractor defense criterion is met by *824 a showing of government approval of the overall design. It is not necessary that there be "continuous back and forth discussions ... regarding the inclusion or exclusion of the specific design deficiency alleged in [the] case." Wilson v. Boeing Co., 655 F. Supp. 766, 773 (E.D.Pa.1987).[2] Plaintiff's argument is incompatible with the Wilson holding.
Additionally, Maguire's assertion that there is no evidence of government involvement in the decision to change the bearing is inaccurate. Defendants have proffered evidence that the army was in full control of the process and was responsible for the determination to utilize the MPB bearing in the Allison engine. (See Supplemental Certification of Robert L. Jones). Plaintiff has submitted no evidence to indicate that the government was not actively involved in this decision-making process.
Maguire also argues that the bearing did not conform to specifications, because the Technical Data Report on the bearing change stated that the new bearing would have a B10 life of 1870 hours. (Allison's Appendix, Exhibit 5, 9th page). This means that ten percent of the MPB bearings are calculated to fail (theoretically) within 1870 hours of operation. (Affidavit of Robert L. Jones, ¶ 18). Since the engine failed following 711 hours of use after it was overhauled, (Allison's Appendix, Exhibit 10, p. 1), plaintiff argues that the bearing did not adhere to its specifications.
Defendants respond to this argument in several ways. First, they assert that the life of the bearing was not a specification, but, rather, was simply a piece of technical information. Secondly, they contend that there is no evidence that the bearing failed before the 1870-hour mark, since there is no indication that the bearing was replaced at the time of the engine overhaul. (Certification of Kenneth H. Ryan, ¶ 4). Finally, they argue that, even if the bearing's B10 life of 1870 hours were a specification and the bearing failed in less than 1870 hours, such a failure would still be conforming, since it is within the statistical range of the data provided.
The court is not convinced that the life of the MPB bearing does not constitute a specification. The reason for the bearing change was to increase the service life of the bearing. (Allison's Appendix, Exhibit 5, p. 1). Therefore, it is logical that the increased life would become a specification. Nonetheless, plaintiff has provided no evidence that the bearing was ever changed, so it is entirely possible that it was in service for 2,664 hours. (Id., Exhibit 10, p. 2). Lastly, it cannot be disputed that, if the B10 life of 1870 hours was a specification, then the only way there could be nonconformity is for more than ten percent of the bearings to fail in less than 1870 hours. The data stating that there will be a failure rate of 10 percent makes it impossible for the single failure of any one bearing to constitute nonconformity.
Maguire's argument that defendants did not warn the United States about the dangers in the use of the bearing which were known to defendants but not to the government is also without merit. Defendants have submitted evidence that they informed the military of all known risks of the engine design, including the bearing. (Supplemental Certification of Robert L. Jones, ¶¶ 3, 10). Plaintiff has not proffered any evidence to refute this in any way.
The policies which supported the Boyle decision also support the government contractor defense in the instant action. If liability were imposed on Allison and MPB, then future defense contractors would build the cost of potential liability into the price of products supplied to the government. The military made a decision, after an extensive design process, to award Allison a contract to produce helicopter engines which utilized an MPB bearing with a certain statistical failure rate. It is not proper for this court to second-guess that *825 decision by permitting an action to continue against the equipment manufacturers which supplied conforming products.
The reasoning and holding of this decision apply equally to Allison and MPB. The fact that MPB was a subcontractor and dealt with Allison, rather than directly with the government, is not sufficient to defeat MPB's motion. The same policies which support the defense for Allison are applicable to MPB. The government contractor defense can apply to subcontractors, as well as general contractors. See Ramey v. Martin-Baker Aircraft Co., 656 F. Supp. 984 (D.Md.1987), aff'd, 874 F.2d 946 (4th Cir.1989).
This court finds that Maguire has not submitted any evidence which raises genuine issues of material fact. The assertions and arguments of counsel are not sufficient to defeat a motion for summary judgment. Pure Gold, Inc. v. Syntex (U.S.A.), Inc., 739 F.2d 624, 626-627 (Fed.Cir.1984). Based on the evidence before it, the court further finds that the government approved reasonably precise specifications for the Allison engine, including the MPB bearing; the equipment furnished by defendants conformed to those specifications; and defendants, via Allison, warned the government about any risks in the use of the product which were known to them, but not to the military. The defendants have met the criteria set forth in Boyle for the government contractor defense, and, therefore, the invocation of that defense is appropriate in this case.
Retroactive Application
Plaintiff also asserts that, if defendants are found to meet the Boyle criteria, that case should not be applied here retroactively. In Chevron Oil Co. v. Huson, 404 U.S. 97, 92 S. Ct. 349, 30 L. Ed. 2d 296 (1971), the Supreme Court set forth the three-part test to determine whether to limit a decision to prospective application only. The factors are that:
(1) The holding must establish a new principle of law, either by overruling clear past precedent on which litigants may have relied, or by deciding an issue of first impression whose resolution was not clearly foreshadowed;
(2) The merits and demerits in each case must be weighed by looking to the history of the rule in dispute, its purpose and effect, and whether retrospective operation will further or retard the rule's operation;
(3) Retrospective application must create the risk of producing substantially inequitable results.
Hill v. Equitable Trust Co., 851 F.2d 691, 696 (3d Cir.1988), cert. den. sub nom Data Controls North, Inc. v. Equitable Bank Nat'l Assoc., ___ U.S. ___, 109 S. Ct. 791, 102 L. Ed. 2d 782 (1989). The general rule, however, is that cases will be given retroactive application. Id. at 697-98.
The Boyle holding neither overruled clear past precedent nor "decided an issue of first impression whose resolution was not clearly foreshadowed." Id. at 696. As noted supra at page 824, the government contractor defense, as articulated by Boyle, was recognized in this circuit before that Supreme Court ruling. When Maguire filed this suit in 1987, it had been 2½ years since the court of appeals had adopted the government contractor defense in Koutsoubos, 755 F.2d 352. The district court recognized the defense in December 1982, 1½ years before plaintiff's accident. See Koutsoubos v. Boeing Vertol, 553 F. Supp. 340 (E.D.Pa.1982), aff'd, 755 F.2d 352, cert. denied, 474 U.S. 821, 106 S. Ct. 72, 88 L. Ed. 2d 59. This court cannot fathom how Maguire could reasonably have relied on any other rule.
The purposes of the Boyle rule would be advanced by applying the government contractor defense to the instant action. The same policies which were furthered by Boyle will be furthered here. See supra at 825.
Finally, the application of Boyle to this case will not produce substantially inequitable results. While the court acknowledges that the invocation of the defense will preclude a recovery by Maguire, it does not consider this substantially inequitable. The government contractor defense was the law of this circuit before *826 Boyle and before plaintiff filed this suit. Even if Boyle had never been decided, the result in this case would have been the same; therefore, the application of Boyle cannot be said to be inequitable.
Conclusion
For the foregoing reasons, Allison's motion for summary judgment and MPB's cross-motion for summary judgment are granted. No costs.
NOTES
[1] This provision states, in pertinent part, that government liability shall not attach to "[a]ny claim ... based upon the exercise or performance or the failure to exercise or perform a discretionary function or duty on the part of a federal agency or an employee of the Government, whether or not the discretion involved be abused." 28 U.S.C. § 2680(a).
[2] The court notes that Wilson was decided before Boyle. Wilson was decided according to Koutsoubos v. Boeing Vertol, Div. of Boeing Co., 755 F.2d 352 (3d Cir.), cert. denied, 474 U.S. 821, 106 S. Ct. 72, 88 L. Ed. 2d 59 (1985). Though Koutsoubos was also decided before Boyle, it utilized the same criteria as the Supreme Court in Boyle for the government contractor defense. Accordingly, Koutsoubos and its progeny are still instructive to this court.
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725 F. Supp. 383 (1989)
OCCIDENTAL FIRE & CASUALTY COMPANY OF NORTH CAROLINA, Plaintiff,
v.
CONTINENTAL ILLINOIS NATIONAL BANK AND TRUST COMPANY OF CHICAGO, Defendant.
No. 88 C 6264.
United States District Court, N.D. Illinois, E.D.
November 17, 1989.
Marvin Glassman, Rabens, Formusa & Glassman, Ltd. Chicago, Ill. and Peter M. *384 Foley, Leboeuf, Lamb, Lieby & Macrae, Raleigh, N.C., for plaintiff.
Francis J. Higgins and James L. Meador, Bell, Boyd & Lloyd, Chicago, Ill., for defendant.
FINDINGS OF FACT AND CONCLUSIONS OF LAW
BRIAN BARNETT DUFF, District Judge.
This suit came before this court for trial without a jury on September 7-8, 12, and 15, 1989. The court has heard the evidence and has considered the testimony, exhibits, memoranda of law, and arguments of counsel. Now fully advised in this matter, the full trial having been concluded, the court finds these facts:
1. Continental Illinois National Bank and Trust Company of Chicago is a national banking association with its principal place of business in Chicago, Illinois.
2. Occidental Fire & Casualty Company of North Carolina is a North Carolina corporation with its principal place of business in North Carolina. Occidental is engaged in the business of, among other things, writing surety bonds.
3. Occidental wrote 29 surety bonds for reclamation work on which Occidental was the obligor, the State of Kansas was the obligee, and Bill's Coal Company was the principal. The aggregate amount of these bonds was $4,239,816.
4. Occidental wrote these reclamation bonds at the request of Union Indemnity Insurance Company of New York. Union Indemnity could not issue the bonds because the State of Kansas had not licensed it as an insurer.
5. Union Indemnity reinsured the reclamation bonds 100%. Union Indemnity also wrote other bonds for Bill's Coal on which it was surety and in which Occidental had no interest.
6. In April and June 1984 Continental Illinois issued seven Irrevocable Standby Letters of Credit on the account of Bill's Coal Company. The aggregate face amount of these letters of credit was $2,069,000. According to Rodney Davis, an employee of Occidental, these letters were to approximate 45% of the amount of bonds issued by Occidental. The letters of credit defined the "beneficiary" of the letters of credit as:
UNION INDEMNITY INS. CO. OF N.Y. & OCCIDENTAL FIRE & CASUALTY CO. OF NORTH CAROLINA
AS THEIR RESPECTIVE INTERESTS MAY APPEAR
260 MADISON AVE., NEW YORK, N.Y. 10016
P.O. BOX 5946TA, DENVER COLO. 80217
7. The letters of credit required that, in the event of a draw, "you," the "beneficiary," must certify to the Bank that:
You, as surety have executed or have procured the execution of bond(s) or undertaking(s) at the request of Bill's Coal Company, Inc., and that you have incurred liability in an amount not less than the amount of the accompanying sight draft(s), or that as of the close of business in Chicago on the day which is ten (10) days prior to the expiry date of this Letter of Credit you have received neither an amendment renewing this Letter of Credit for an additional year nor an acceptable replacement thereof.
Any funds drawn under the Letter of Credit shall be held apart by you for the purpose of reimbursing any incurred liabilities of the aforementioned bond(s) or undertaking(s).
Should funds drawn not be used by you for the satisfaction of or reimbursement of any loss, cost, claim for expenses of any nature whatsoever, incurred by you, (including unpaid premiums) on any such bond(s) or undertaking(s) as aforesaid, such amounts shall be returned directly to [Continental Bank] ...
(Emphasis added.)
8. On October 29, 1984, at the request of Bill's Coal Company, Continental Illinois issued an amendment reducing the face amount of Letter of Credit No. 6328290 from $1,014,000 to $733,000. Bill's Coal asked for the reduction after the State of *385 Kansas released Occidental's bond No. 23252. Occidental was aware of the release of this bond. The bank's internal memorandum dated October 15, 1984 states that it had obtained the consent of the beneficiary to the amendment of Letter of Credit No. 6328290. It is undisputed that Union Indemnity gave its consent.
9. From September 1984 through March 1985, Rodney Davis was in charge of the National Risk Underwriting ("NRU") program through which Occidental wrote the Bill's Coal bonds. Mr. Davis did not consent to or authorize the consent to the reduction in Letter of Credit No. 6328290.
10. Cover X acted as a subagent to NRU in its bonding program. Antoinette Morabito was in charge of the collateral file at Cover X relating to the Bill's Coal bonds, which included matters relating to the disputed letters of credit. She does not recall a request for reduction in Letter of Credit No. 6328290 and her files show no evidence of either a request or a consent to reduce that letter. Her files did not contain all known materials relating to the Bill's Coal Bonds, however. It did not contain a response to a memorandum sent by Morabito to Eason, and it did not contain correspondence from Continental Illinois reflecting extensions of its letters of credit past March 31, 1986.
11. The first time that Occidental objected to the amendment of Letter of Credit No. 6328290, although it did not bring a claim of anticipatory repudiation, was in a complaint filed Feburary 19, 1987, in the U.S. District Court for the Eastern District of North Carolina. This was despite Occidental's knowing about the amendment allegedly for the first time in March 1986.
12. Bill's Coal Company became insolvent in 1985 and did not complete the reclamation work which it had promised to the State of Kansas.
13. The State of Kansas demanded that Occidental honor its obligations on its bonds. This demand resulted in an agreement between Occidental and the State of Kansas dated September 8, 1986. Bond No. 23252, which the State of Kansas released, was not one of the bonds which the agreement covered. Occidental has not lost any money on account of bond No. 23252.
14. Union Indemnity went into liquidation in 1985. The Superintendent of Insurance of the State of New York became Liquidator of Union Indemnity.
15. Occidental claims that it has incurred liability to the State of Kansas on the bonds in an amount exceeding the aggregate amount of the seven letters of credit.
16. The scheduled expiration time of the letters of credit, as extended by Continental Illinois, was 5:00 p.m. on March 31, 1987.
17. On February 6, 1987, Occidental attempted to draw unilaterally on the letters of credit. The sight drafts and certifications constituting the attempted draw did not include the signature or certifications of Union Indemnity or its Liquidator. The certificate and sight draft accompanying Letter of Credit No. 6328290 requested $733,000.
18. On February 11, 1987, Continental Illinois notified Occidental that it would not honor the attempted draw because the draft was drawn only by Occidental and not jointly with Union Indemnity.
19. In 1986 and to and including March 23, 1987 the Liquidator for Union Indemnity asserted rights and an interest in the letters of credit. During that period, the Liquidator demanded that Occidental return the letters of credit to the Liquidator, threatened legal action against Occidental if its demands were not met, and contended that it was entitled to use the proceeds of the letters of credit for any bonds written by Union Indemnity for Bill's Coal.
20. On March 25, 1987 Occidental and the Liquidator attempted a joint draw on the letters of credit, the proceeds of which they hoped to place in an escrow account until they resolved their differences over the application of the proceeds. Instead of using the underscored language quoted in Finding 7 above, however, the certifications accompanying the attempted draw stated:
*386 Further, any funds drawn under this letter of credit shall be held apart by us for the express purpose of reimbursing any incurred liabilities for any bonds or undertakings.
Should funds drawn not be used by us for the satisfaction of or reimbursement of any loss, cost, claim for expense of any nature whatsoever incurred by us, (including unpaid premiums), on any bond(s) or undertaking(s) such amounts shall be returned directly to [Continental Bank] ...
(Emphasis added.)
21. On March 23 and 24, 1987, the attorneys for Occidental and the Liquidator drafted the certifications accompanying the attempted draw of March 25, 1987. One of Occidental's attorneys, Peter Foley, knew from an earlier draw and his firm's internal research about the importance of having conforming language. Nevertheless, as the last Occidental attorney to review the certifications accompanying the March 25 draw, he knowingly or recklessly allowed inclusion of the nonconforming language.
22. On March 24, 1987, Foley brought the certificates and sight drafts which the companies had prepared and the Liquidator had signed from New York to North Carolina. James Eason, an officer of Occidental, reviewed the documents.
23. The documents were given to John Livers, President of Occidental, for his signature. Livers believed Foley and Eason had reviewed the documents for form and content. Livers briefly reviewed the defective certificates and signed them.
24. The March 25, 1987 certificate and sight draft for Letter of Credit No. 6328290 requested $733,000.
25. Rodney Davis accompanied the documents on a flight to Chicago from North Carolina. He personally delivered the documents to Continental Illinois at approximately 1:30 p.m. on Wednesday, March 25, 1987.
26. Samuel Perez, an officer in Continental Illinois' Letter of Credit Department, received the draw documents on the afternoon of March 25, 1987 and noticed the language discrepancies indicated in Finding 20 above.
27. By Thursday, March 26, 1987 Perez determined that the certifications were nonconforming because they did not contain the language required by the letters of credit. Perez discussed this discrepancy with his supervisor, Frank Mrazek. Continental Illinois did not notify Occidental or the Liquidator of the discrepancy on March 26, 1987.
28. Mrazek and Perez discussed the discrepancies in the certification language again on the morning of Friday, March 27, 1989. Mrazek and Perez met with Robert Shannon, an attorney for Continental Illinois, at approximately 2:00 p.m. that day to discuss the draws. After 4:00 p.m. CST and after the close of business in the Eastern Time Zone, Continental Illinois decided that it would not honor the draw of March 25, 1987 because of, among other reasons, the deviations from the terms of the letters of credit set forth in Finding 20 above. Continental Illinois made no attempt to contact Occidental or the Liquidator on March 27, 1987.
29. On the morning of the next banking day, Monday, March 30, 1987, Perez informed Occidental by telephone that Continental Illinois had refused to honor the draw. Perez stated the specific reasons for refusal, including the language deviations set forth in Finding 20 above. Perez attempted three times (11:10 a.m., 11:57 a.m., and 3:42 p.m., CST) on March 30, 1987 to reach the responsible persons at the Liquidator's office to inform them of the bank's dishonor, but they were unavailable on March 30, 1987.
30. Following Perez's telephone call to Occidental, Livers and/or Eason relayed the substance of the Perez conversation to Foley.
31. Later on that same day, Shannon had a telephone conversation with Foley. In that conversation, Shannon specifically told Foley that one reason for the dishonor of the March 25, 1987 attempted draw was the nonconforming language set forth in Finding 20 above.
*387 32. Following Foley's telephone conversation with Shannon, that same day Foley relayed to Eason and Livers the substance of his conversation, including the specific reasons for dishonor stated by Shannon.
33. On March 30, 1987, Continental Illinois sent to Occidental and the Liquidator, via Airborne Express Mail, written confirmations of Perez's telephonic notice of dishonor. These conformations noted the language discrepancies set forth in Finding 20 above. Occidental and the Liquidator received those written confirmations on March 31, 1987.
34. On March 30 and March 31, 1987, Occidental and the Liquidator had the means, had they chosen to use them, to resubmit certifications containing the language "aforementioned bond(s) or undertaking(s)" and "any such bond(s) or undertaking(s) as aforesaid," instead of "any bond(s) or undertaking(s)," prior to 5:00 p.m. CST on March 31, 1987. Those means included telex, electronic facsimile, and air travel.
35. On March 30, 1987, Occidental and the Liquidator did not attempt to resubmit certifications containing the language "aforementioned bond(s) or undertaking(s)" and "any such bond(s) or undertaking(s) as aforesaid," instead of "any bond(s) or undertaking(s)."
36. On March 31, 1987, Occidental and the Liquidator did not attempt to resubmit certifications containing the language "aforementioned bond(s) or undertaking(s)" and "any such bond(s) or undertaking(s) as aforesaid," instead of "any bond(s) or undertaking(s)."
37. The letters of credit expired by their terms at the end of business on March 31, 1987. The beneficiaries did not make a conforming draw before expiration.
38. In 1988 the Liquidator assigned to Occidental all of Union Indemnity's right, title and interest in the letters of credit.
CONCLUSIONS OF LAW
This court has jurisdiction over this matter pursuant to 28 U.S.C. § 1332 (1982), and venue is proper in this court. On June 23, 1989, this court entered summary judgment in favor of Continental Illinois and against Occidental on two issues: first, that Continental Illinois did not act wrongfully in dishonoring Occidental's unilateral draw of February 6, 1987; second, that the bank had good grounds for dishonoring the attempted joint draft of Occidental and the Liquidator of March 25, 1987. This left two issues for trial: did Continental Illinois give Occidental timely and proper notice of its reason for dishonoring the March 25, 1987 attempted draw, and did Occidental consent to amendment of Letter of Credit No. 6328290. See Occidental Fire & Cas. v. Continental Ill. Nat., 718 F. Supp. 1364 (N.D.Ill.1989).
As noted in this court's prior ruling, Continental Illinois had to give notice to Occidental no later than March 30, 1987, of its decision to dishonor the March 25, 1987 drafts. Notice under Article 8(c) of the International Chamber of Commerce's Uniform Customs and Practice for Documentary Credits (Rev. ed. 1974) (hereafter "UCP"), a document which governed the letters of credit at issue in this case, includes "stating the reasons therefor" and "must, without delay, be given by cable or other expeditious means...."
The court has found that Samuel Perez, an officer in Continental Illinois' Letter of Credit Department, gave notice of dishonor and the reasons for dishonor to Occidental by telephone on the morning of March 30, 1987. See Finding 29. Perez's testimony was credible in all respects, and the court gives it full weight. Occidental for its part does not dispute that telephonic communication is an expeditious means of communication under the UCP. The company does dispute, however, whether Continental Illinois had a duty to communicate its notice sooner. Occidental does not present any authority that the UCP's exhortation to avoid delay overcomes the statutory presumption of Ill.Rev.Stat. ch. 26, ¶ 5-112(1) (1987), that a bank which has acted within three business days has acted in a timely fashion. See William D. Hawkland and Tom L. Holland, 5 Uniform Commercial Code Series § 5-112:01 (Article 5) (1984) *388 (three days reasonable time under UCP). Nevertheless, based on the evidence presented, the court finds that Continental Illinois acted with reasonable speed in this case. The bank did not decide to dishonor the March 25 draw until late in the day on March 27, 1989. It notified Occidental early on the next business day. See Findings 28-29. The bank did not delay unduly in notifying Occidental of the nonconforming language of the March 25 drafts.[1]
Occidental argues that notwithstanding the bank's proper notice to Occidental on March 30, 1987, it failed to notify the Liquidator, and thus its notice was defective. Occidental argues that § 5-112 of the UCC implies that a bank which is presented with a draft must transmit its notice of dishonor to the presenter of the draft. Occidental submits that the presenters in this case were it and the Liquidator, as each signed the draft documents. The term "presenter" in § 5-112 has a specific meaning, however: it is "any person presenting a draft or demand for payment under a credit...." Ill.Rev.Stat. ch. 26 at ¶ 5-112(3). In this case, Occidental presented the draft, not the Liquidator. See Finding 25. The bank's notice to Occidental thus satisfied whatever requirements are implied within § 5-112 as to the proper recipients of notice.[2]
The court now turns to the issue of whether Continental Illinois properly amended Letter of Credit No. 6328290 in October 1984. In the court's prior ruling, the court suggested that if it were to rule that Continental Illinois gave proper notice to Occidental of its dishonor of the March 25, 1987 draw, this issue would be moot, as Occidental and the Liquidator never would have made a proper demand on the bank under either the original letter of credit or the amended version. See Occidental Fire, 718 F.Supp. at 1371. Occidental, however, directs the court to § 5-115(2) of the UCC, which states:
When an issuer wrongfully cancels or otherwise repudiates a credit before presentment of a draft or demand for payment drawn under it the beneficiary has the rights of a seller after anticipatory repudiation by the buyer under Section 2-610 [of the UCC] if he learns of the repudiation in time to reasonably avoid procurement of the required documents. Otherwise the beneficiary has an immediate right of action for wrongful dishonor.
Ill.Rev.Stat. ch. 26 at ¶ 5-115(2). Judge Hart observed in Atari, Inc. v. Harris Trust and Sav. Bank, 599 F. Supp. 592, 600-01 (N.D.Ill.1984), aff'd in part and rev'd in part without opinion, 785 F.2d 312 (7th Cir.1986), that Illinois' version of § 5-115(2) does not carry a requirement that the beneficiary demonstrate that it could present a conforming draw in order to bring an action for wrongful dishonor. Occidental did not present this authority to the court in contesting Continental Illinois' motion for summary judgment, but nevertheless Occidental is entitled to a determination of the merits of its claim for anticipatory repudiation.
As in any case for breach of contract under Illinois law, the plaintiff bears the burden of proving the breach. See Perlman v. Time, Inc., 133 Ill.App.3d 348, 353, 88 Ill. Dec. 524, 529, 478 N.E.2d 1132, 1136 (1985); Vandevier v. Mulay Plastics, Inc., 135 Ill.App.3d 787, 791, 90 Ill. Dec. 558, 561, 482 N.E.2d 377, 380 (1985). The court concludes that Occidental has not proven by a preponderance of the evidence that Continental Illinois reduced the face value of *389 Letter of Credit No. 6328290 without its consent. Those persons who worked for Occidental on the Bill's Coal account stated that they did not consent or could not recall giving such consent. Continental Illinois has no direct record of Occidental's consent, although a contemporaneous internal memorandum states that consent was obtained.
A reduction in the value of the letter of credit was, however, logical. The State of Kansas had released Occidental from its bond No. 23252, and Occidental was aware of the release. Even if Occidental did not give contemporaneous consent, its subsequent acts indicate that it consented to the reduction. The certificates and drafts accompanying the abortive February 1987 and March 1987 draws ask Continental Illinois to pay the reduced amount of the letter, $733,000 this despite Occidental's knowing about the amendment allegedly for the first time in March 1986. Only after Continental Illinois rejected the February 1987 draw did Occidental record its first objection to the amendment, and even then, Occidental did not see fit to claim anticipatory repudiation. See Findings 8-11, 13, 17, 24.[3]
Accordingly, the court enters judgment in favor of Continental Illinois and against Occidental on Count I of Occidental's complaint.
NOTES
[1] Occidental presented no evidence that it was impossible for it and the Liquidator to avoid the problem they faced with the impending expiration date by submitting a draw sooner. The problems which Occidental and the Liquidator faced in turning papers around in time to draw before expiry were of their own making. So too was their inclusion of nonconforming language.
[2] Even if the Liquidator deserved separate notice, the court determines that it received it. If the Liquidator could present its draft through Occidental, then it certainly could have received notice through Occidental. Section 5-112 directs the bank to look to the presenter; if Continental Illinois had to assume that Occidental was acting as a "presenter" on behalf of itself and the Liquidator, then it could presume properly that by notifying the joint presenter, Occidental, it had notified both parties.
[3] Even if Occidental had not consented, it has presented no evidence that it was harmed by the bank's breach. The State of Kansas had released the obligation which the reduced portion of the letter of credit collateralized. See Findings 8, 13.
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01-03-2023
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https://www.courtlistener.com/api/rest/v3/opinions/1408282/
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880 F. Supp. 1311 (1995)
In re TMJ IMPLANTS PRODUCTS LIABILITY LITIGATION.
This Document Relates To: All Actions.
No. 94-MD-1001.
United States District Court, D. Minnesota, Third Division.
March 31, 1995.
*1312 *1313 *1314 MEMORANDUM AND ORDER
MAGNUSON, Chief Judge.
I. INTRODUCTION
These matters, which are consolidated for pretrial purposes under 28 U.S.C. § 1407, are before the Court upon Defendants Corning, Incorporated and Dow Chemical Company's Motions for Summary Judgment. For the following reasons, the Court grants summary judgment in favor of these Defendants.
II. BACKGROUND
Plaintiffs in these cases seek recovery for injuries they allege were caused by temporomandibular joint (TMJ) implants, some of which were manufactured by Dow Corning Corporation (Dow Corning). Movants Dow Chemical Company (Dow Chemical) and Corning, Incorporated (Corning) each own 50 percent of the shares in Dow Corning, a Michigan corporation. They seek summary judgment on all claims against them.
Physicians recommended the TMJ implants as a means of alleviating pain and difficulties associated with improper functioning of Plaintiffs' temporomandibular joints. The implants received by Plaintiffs contained either silicone or Teflon®. These materials, the Plaintiffs allege, deteriorated following *1315 the implantation of the TMJ devices in Plaintiffs' jaws, causing a serious and painful auto-immune response. In many cases, the auto-immune reaction resulted in permanent destruction of bone and tissue within the jaw.
Those who allegedly marketed the implants to physicians and Plaintiffs included Vitek, Inc., which sold the implants containing Teflon®,[1] and Dow Corning and its subsidiary Dow Corning Wright, which sold implants containing silicone compounds. Plaintiffs do not assert that Dow Chemical or Corning ever sold TMJ implants. Nevertheless, several of the Complaints allege liability against Dow Chemical and Corning through both corporate control claims and direct liability. Plaintiffs argue that genuine issues of material fact exist as to whether Dow Chemical should be held liable under a variety of theories, including fraud, aiding and abetting tortious conduct, coconspiracy, concert of action, a trademark licensors theory, negligent performance of an undertaking, state consumer protection laws, and participation theory.
III. DISCUSSION
A transferee court has authority to enter dispositive orders terminating cases transferred under 28 U.S.C. § 1407. In re Donald J. Trump Casino Sec. Litig., 7 F.3d 357, 364-68 (3rd Cir.1993), cert. denied, ___ U.S. ___, 114 S. Ct. 1219, 127 L. Ed. 2d 565 (1994). In analyzing questions of federal law, the transferee court should give "close consideration" to the law of the transferor court, but should apply the law as it has been interpreted by the transferee circuit court. In re Korean Air Lines Disaster, 829 F.2d 1171, 1176 (D.C.Cir.1987). For issues governed by state law, the transferee court must apply the state law that would have been applied if the case had not been transferred. Id. at 1175 ("Our system contemplates differences between different states' laws; thus a multidistrict judge asked to apply divergent state positions on a point of law would face a coherent, if sometimes difficult, task."); see Van Dusen v. Barrack, 376 U.S. 612, 639, 84 S. Ct. 805, 821, 11 L. Ed. 2d 945 (1964).
Summary judgment is appropriate if there is no genuine issue of material fact and the moving party is entitled to judgment as a matter of law. Fed.R.Civ.P. 56(c); Celotex Corp. v. Catrett, 477 U.S. 317, 106 S. Ct. 2548, 91 L. Ed. 2d 265 (1986); Unigroup, Inc. v. O'Rourke Storage & Transfer Co., 980 F.2d 1217, 1219-20 (8th Cir.1992). The court determines materiality from the substantive law governing the claim. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S. Ct. 2505, 2510, 91 L. Ed. 2d 202 (1986). Disputes over facts that might affect the outcome of the lawsuit according to applicable substantive law are material. Id. A material fact dispute is "genuine" if the evidence is sufficient to allow a reasonable jury to return a verdict for the non-moving party. Id. at 248-49, 106 S.Ct. at 2510.
A. Corporate Control Claims
Several of the issues raised by Plaintiffs' corporate control claims were addressed by Chief Judge Pointer in In re Silicone Gel Breast Implants Products Liability Litigation, 837 F. Supp. 1128 (N.D.Ala.1993). Although some of the facts that are before this Court were not before Chief Judge Pointer at the time of that opinion, much of his legal analysis is applicable to the instant motions. For the reasons that Judge Pointer granted the motions before him and for the additional reasons referred to below, this Court holds that Dow Chemical and Corning are entitled to summary judgment on Plaintiffs' corporate control claims.
First, the Plaintiffs cannot, given the undisputed facts, "pierce the corporate veil" to reach Dow Chemical and Corning. Under Michigan law,[2] a corporation's separate identity *1316 will only be disregarded where the subsidiary has become "a mere instrumentality" of its parent or parents. Maki v. Copper Range Co., 121 Mich.App. 518, 328 N.W.2d 430, 433 (1982).
In this case, there are no facts that would demonstrate that Dow Corning is a "mere instrumentality" of either Dow Chemical or Corning. Dow Corning is a "Fortune 500" company, that is, one of the 500 largest corporations in the United States according to Fortune magazine. The undisputed evidence shows that Dow Corning and its parents have observed corporate formalities throughout Dow Corning's more than fifty years of existence, that Dow Corning has two billion dollars in assets, that it has an asset-to-debt ratio of almost two to one, and that it has paid regular dividends throughout most of its years. Given these facts, the Court holds as a matter of law that the Plaintiffs cannot pierce Dow Corning's corporate veil.
Second, Plaintiffs' "joint venture" claims are unsupported by the facts. They contend that Dow Chemical and Corning have fostered the public perception that Dow Corning is a joint venture of those two companies. In the alternative, they assert that Dow Corning actually is a joint venture of Dow Chemical and Corning. As Chief Judge Pointer noted in his opinion, Dow Corning is a "joint venture" of Dow Chemical and Corning in a non-legalistic use of the term. Most jurisdictions, however, will not find that a joint venture exists in the legal sense unless the parties involved have agreed to share both profits and losses. In re Silicone Gel Breast Implants Prods. Liab. Lit., 837 F. Supp. 1128, 1138-39 (N.D.Ala.1993). There is no evidence of such an agreement between Dow Chemical and Corning. They specifically elected to do business together via the corporate form, a method that is viewed as distinct from a joint venture. Id. at 1139. Based on these undisputed facts, the Court holds as a matter of law that Dow Chemical and Corning are entitled to summary judgment on all of Plaintiffs' joint venture claims as well as the other corporate control claims.
B. Direct Liability
In their opposition to Dow Chemical's and Corning's Motions for Summary Judgment, Plaintiffs rely primarily on several theories of direct liability. Having carefully reviewed the arguments and evidence submitted by the Plaintiffs in support of these theories, the Court concludes that no genuine issues of fact remain as to any of Plaintiffs' claims against Dow Chemical and Corning and that those Defendants are entitled to summary judgment for the reasons set forth below.[3]
1. Fraudulent Concealment and Misrepresentation
One of Plaintiffs' central claims against Dow Chemical is fraudulent concealment or misrepresentation.[4] Plaintiffs recognize that in order to prevail on this claim, they must establish the following elements:
(1) Deliberate concealment by the defendant of a material past or present fact, or silence in the face of a duty to speak; (2) That the defendant acted with scienter; (3) An intent to induce plaintiff's reliance upon the concealment; (4) Causation; and (5) Damages resulting from the concealment.
Nicolet, Inc. v. Nutt, 525 A.2d 146, 149 (Del. 1987). They also note that "[g]enerally, there is no duty to disclose a material fact or opinion unless a defendant had a duty to speak." Id. (Pltfs.Mem.Opp. at 16-17.)
*1317 According to Plaintiffs, Dow Chemical had a duty to reveal its knowledge regarding the dangers of using silicone within the human body. Dow Chemical responds that there is no evidence it misrepresented or concealed the dangerousness of silicone and that it had no duty to disclose the information it had regarding silicone. Dow Chemical also points out that there are hundreds of thousands of kinds of silicone compounds, commonly referred to as silicones, each with different characteristics. There is no evidence, it adds, that Dow Chemical even knew which particular silicones were used in TMJ implants manufactured by Dow Corning.
In asserting that Dow Chemical had a duty to disclose information regarding the toxicity of silicones, Plaintiffs first argue that Dow Chemical had a "duty to correct" information it had previously released regarding the safety of silicones for use in human implants. In 1948 and 1950, Dow Chemical scientists published two articles about the safety of silicones. (See Pltfs.Exhs. 54 & 56.) In these articles, the authors examined health and safety issues involved in the handling of silicone materials by workers. Plaintiffs contend that Dow Chemical should have published updates to these articles when later research revealed that some silicones were bioactive and inappropriate for certain medical uses.
Dow Chemical correctly points out that to adopt Plaintiffs' position would impose a heavy burden on scientists. Research that lays the basic groundwork in any scientific field is nearly always refined with time by subsequent discoveries. Many hypotheses are later determined to be inaccurate. This is the natural evolution of science. The law does not require a scientist who has published research to monitor all subsequent developments in the field and then to publish corrections when the conclusions from the original research prove to be wrong or incomplete.
Another flaw in Plaintiffs' "duty to correct" approach is that the 1948 and 1950 articles did not make any representations that silicones were safe or inert when used in medical implants. Those articles could not possibly have made any representation about the safety of silicones for use in TMJ implants, which had not even been invented at the time the articles were published.
Dow Chemical maintains that, in any event, it met any "duty to correct" because both Dow Chemical and Dow Corning made public all knowledge they had regarding bioactive silicones. It points out that when research revealed that Dow Corning 555 fluid and a compound called 2,6-cis posed certain health risks, Dow Chemical published its findings. (Dow Chemical's Reply Mem. at 46.) Plaintiffs have cited no facts that contradict Dow Chemical's assertions on this issue.
Plaintiffs cite § 551(2)(c) of the Restatement (Second) of Torts, which declares that one party to a business transaction is under a duty to disclose when "subsequently acquired information that he knows will make untrue or misleading a previous representation that when made was true or believed to be so." This provision does not apply to the circumstances before the Court in this motion. Section 551 "accords liability for nondisclosure only if the parties are engaged in a business transaction or stand in a fiduciary relationship." Chrysler Credit Corp. v. First Nat'l Bank & Trust Co., 746 F.2d 200, 207 (3rd Cir.1984). Dow Chemical was not involved in a business transaction with Plaintiffs, and it certainly did not have a fiduciary relationship with them.
In further support of their position that Dow Chemical had a duty to disclose, Plaintiffs offer the related argument that such a duty exists under the "superior knowledge" theory. (Pltfs.Mem.Opp. at 17.) This principle imposes a duty to speak when one party has superior knowledge to the other party. Courts have generally applied this rule, however, only when 1) parties enter into a contract or other transaction with each other; 2) one party has superior knowledge not readily available to the other; and 3) the party with superior knowledge is aware, but does not point out, that the other is acting in reliance on an erroneous belief with respect to facts relating to the transaction. Lorenz v. CSX Corp., 1 F.3d 1406, 1417 n. 7 (3rd Cir.1993); Aaron Ferer & Sons, Ltd. v. *1318 Chase Manhattan Bank, N.A., 731 F.2d 112, 123 (2d Cir.1984). The theory does not apply to persons not directly involved in the transaction. In this case Dow Chemical did not manufacture or sell TMJ implants or otherwise interact with Plaintiffs; therefore, it had no duty to relate its allegedly superior knowledge to Plaintiffs.
Although Plaintiffs assert that Dow Chemical deliberately concealed or misrepresented facts relating to the safety of silicones for medical implants, they simply have not submitted any evidence that would support this allegation. Because Plaintiffs cannot meet the first element of their fraud claims, that is, evidence of deliberate concealment by Dow Chemical or Corning of a material past or present fact or silence in the fact of a duty to speak, Dow Chemical is entitled to summary judgment on those claims.
Plaintiffs also fail to meet their burden with respect to the other elements of a fraud claim. They have not pointed to any facts that could lead a juror to find that Dow Chemical's alleged misrepresentations and omissions were made with the intent to convince Plaintiffs to purchase Dow Corning's TMJ implants. In order for misrepresentations or omissions to be fraudulent, they must be made with the intent to spur the other party to action. Piekarski v. Home Owners Sav. Bank, F.S.B., 956 F.2d 1484, 1493 (8th Cir.1992) (applying Minnesota law); Mills v. Damson Oil Corp., 931 F.2d 346, 349 (5th Cir.1991) (under Mississippi law, plaintiffs must show by clear and convincing evidence intent that falsity be acted on by victim); Abboud v. Michals, 241 Neb. 747, 491 N.W.2d 34, 41 (1992); Sevin v. Kelshaw, 417 Pa.Super. 1, 611 A.2d 1232, 1236 (1992); Hi-Way Motor Co. v. Int'l Harvester Co., 398 Mich. 330, 247 N.W.2d 813, 816 (1976); Gold v. Los Angeles Democratic League, 49 Cal. App. 3d 365, 122 Cal. Rptr. 732, 738 (1975). Plaintiffs have introduced no evidence that the alleged misrepresentations by Dow Chemical were made in an attempt to induce Plaintiffs to purchase TMJ implants. Mere bare bones allegations of a global plan to increase sales are insufficient.
Evidence is also absent on the element of reliance. There is no evidence that any of the Plaintiffs or their physicians relied on any statements or omissions by Dow Chemical. Where a plaintiff fails to introduce affirmative evidence of reliance, a motion for summary judgment is properly granted. Bormann v. Applied Vision Sys., Inc., 800 F. Supp. 800, 811-12 (D.Minn.1992); see also Wittekamp v. Gulf & Western Inc., 991 F.2d 1137, 1143 (3rd Cir.), cert. denied, ___ U.S. ___, 114 S. Ct. 309, 126 L. Ed. 2d 256 (1993) (judgment as a matter of law appropriate where no evidence of reliance); McMullen v. Joldersma, 174 Mich. App. 207, 435 N.W.2d 428, 431 (1988) (same); Little v. Gillette, 218 Neb. 271, 354 N.W.2d 147, 153 (1984) (directed verdict was proper where no evidence of reliance on statements). Because Plaintiffs have not shown evidence of reliance, Dow Chemical is also entitled to summary judgment on their claims of negligent misrepresentation. Piekarski v. Home Owners Sav. Bank, F.S.B., 956 F.2d 1484, 1495 n. 17 (8th Cir.1992) (failure to prove justifiable reliance fatal to claims of negligent and reckless misrepresentation).
Finally, Plaintiffs have not met their burden on the issue of proximate cause. "False representations must be the proximate cause of the damage before a party may recover." Luscher v. Empkey, 206 Neb. 572, 293 N.W.2d 866, 869 (1980). See also Piekarski, 956 F.2d at 1493. In summary, the movants are entitled to summary judgment on Plaintiffs fraudulent concealment and misrepresentation claims.
2. Aiding and Abetting Tortious Conduct
Relying on § 876(b) of the Restatement (Second) of Torts, Plaintiffs assert liability against Dow Chemical for aiding and abetting Dow Corning's alleged tortious conduct. Section 876(b) states that one person may be liable for the torts of another if the first person "knows that the other's conduct constitutes a breach of duty and gives substantial assistance or encouragement to the other so to conduct himself."
In Halberstam v. Welch, 705 F.2d 472, 477 (D.C.Cir.1983), the court set forth three elements for aiding-abetting liability:
*1319 (1) the party whom the defendant aids must perform a wrongful act that causes an injury; (2) the defendant must be generally aware of his role as part of an overall illegal or tortious activity at the time that he provides the assistance; (3) the defendant must knowingly and substantially assist the principal violation.
For the purposes of the instant motions only, the Court assumes that the Plaintiffs can meet the first element. The second and third elements "vary inversely relative to one another and where ... the evidence of substantial assistance is slim, the requirement of knowledge or scienter is enhanced accordingly." Metge v. Baehler, 762 F.2d 621, 624 (8th Cir.1985), cert. denied, 474 U.S. 1057, 106 S. Ct. 798, 88 L. Ed. 2d 774 (1986). A plaintiff seeking to demonstrate aiding-abetting liability must also show proximate cause, a "'substantial causal connection between the culpable conduct of the alleged aider and abettor and the harm to the plaintiff[,]' ... or a showing that `the encouragement or assistance is a substantial factor in causing the resulting tort[.]'" Metge, 762 F.2d at 624 (citations omitted).
Determining what constitutes "substantial assistance" can be a complicated endeavor. Halberstam noted that courts commonly employ five factors, which are referred to in § 876 of the Restatement. These are: "the nature of the act encouraged; the amount [and kind] of assistance given; the defendant's absence or presence at the time of the tort; his relation to the tortious actor; and the defendant's state of mind." Halberstam, 705 F.2d at 483-84 (brackets in original). Halberstam added a sixth factor, the "duration of the assistance provided." Id. at 484.
Applying these factors to the instant case, the Court begins by considering the nature of the act allegedly assisted and "what aid might matter." Id. at 484. By the time it began manufacturing TMJ implants, Dow Corning was a well-established company. Its researchers certainly interacted, on occasion, with scientists working for Dow Chemical. There is no evidence, however, that Dow Corning was "heavily dependent" upon Dow Chemical for any assistance regarding the manufacture of TMJ implants. Cf. id. at 488. Dow Corning was capable of designing, producing, and marketing the implants on its own, and the evidence suggests that Dow Corning did just that.
This leads to the second factor, the amount of assistance given by Dow Chemical to Dow Corning. Plaintiffs place much emphasis on the research assistance and facilities provided by Dow Chemical to Dow Corning. There is no evidence, however, that Dow Chemical provided any such cooperation with the goal of encouraging Dow Corning to produce TMJ implants or that such assistance was integral to Dow Corning's ability to produce the implants.
The third factor relates to the defendant's absence or presence at the time of the tort. This factor is somewhat complicated by the fact that the underlying tort allegedly committed by Dow Corning did not occur in a brief time period but instead over many years. During that time, certain facilities used by Dow Corning and Dow Chemical were located in close physical proximity. Dow Chemical denies, however, that it had any knowledge regarding the manufacture of the implants, and Plaintiffs have failed to produce evidence that controverts this denial. Thus, even though Dow Chemical's researchers may have shared laboratories or other facilities and equipment, nothing in the record indicates that Dow Chemical "witnessed" the tort allegedly committed by Dow Corning.
Considering the fourth factor, the Halberstam court observed that "the intimacy of the relationship between the wrongdoer and the defendant may also lead a court to be wary of inferring assistance warranting joint liability from supportive activities." 705 F.2d at 484. For example, when considering a wife's actions in watching her husband assault someone, a court should be careful "so as not to infuse the normal activities of a spouse with the aura of a concerted tort." Id. In the instant case, this Court must take the same cautious eye to the facts before it. Dow Chemical and Corning naturally wish to be supportive of their wholly owned subsidiary Dow Corning, just as a person wishes to support a spouse. This does not mean that such support should be cast as aiding and *1320 abetting the torts of the spouse or, in this case, the subsidiary. Unless the support amounts to substantial assistance, there is no basis on which to find aiding-abetting liability.
Fifth, Dow Chemical's "state of mind" is relevant to a determination of its liability as an aider-abettor. One of Plaintiffs' contentions is that the studies of biological activity of silicones undertaken by Dow Chemical amounted to substantial assistance. No evidence has been uncovered, however, that could show that those studies were done with knowledge of an alleged scheme to market the TMJ implants or with the intent of advancing the sale by Dow Corning of any hazardous products.
Another of Plaintiffs' arguments is that Dow Chemical knew Dow Corning was selling dangerous implants but that it did not take action to stop this behavior. "[I]n the absence of a duty to act or disclose, an aider-abettor case predicated on inaction of the secondary party must meet a high standard of intent." Metge v. Baehler, 762 F.2d 621, 625 (8th Cir.1985), cert. denied, 474 U.S. 1057, 106 S. Ct. 798, 88 L. Ed. 2d 774 (1986). As stated above, the facts submitted by Plaintiffs would not allow a reasonable juror to conclude that Dow Chemical had knowledge of the dangers posed by the implants or even what particular materials were used in their construction, much less that Dow Chemical was "one in spirit with the [alleged tortfeasor]." Halberstam, 705 F.2d at 484.
The sixth factor applied by the Halberstam court was the duration of the assistance provided. Although the relationship between Dow Chemical and Dow Corning is without doubt a long-standing one, there is no evidence that Dow Chemical engaged in any long-term interaction with Dow Corning concerning the TMJ implants.
The undisputed facts demonstrate that Dow Chemical did not knowingly provide substantial assistance to Dow Corning in the alleged commission of the underlying tort. Plaintiffs' aiding-abetting claims therefore fail as a matter of law.
3. Coconspiracy
Plaintiffs also maintain that a jury could find that Dow Chemical conspired with Dow Corning to conceal and misrepresent the biological hazards of implanted silicones. To survive a motion for summary judgment on a conspiracy claim, a plaintiff must allege specific facts that would tend "to show agreement and concerted action. Conclusory allegations are insufficient." Anderson v. Douglas County, 4 F.3d 574, 578 (8th Cir.1993), cert. denied, ___ U.S. ___, 114 S. Ct. 1059, 127 L. Ed. 2d 379 (1994). Unless there is "some mutual mental action coupled with an intent to commit the act which results in injury," there is no conspiracy. Dixon v. Reconciliation, Inc., 206 Neb. 45, 291 N.W.2d 230, 232 (1980). "Without the scienter, persons cannot conspire." Id.
None of the facts submitted by Plaintiffs could be viewed as tending to show an agreement between the movants and Dow Corning regarding TMJ implants. As the Court has stated above, there is no evidence that Dow Chemical had any knowledge about the risks involved in TMJ implants. Plaintiffs rely on the fact that Dow Chemical researched the biological hazards of silicones and provided that information to Dow Corning, yet there are no facts indicating that Dow Chemical knew which silicones were used in the implants, much less that Dow Chemical agreed with Dow Corning on any aspects of its TMJ implant business. As the Court has already detailed, there is no evidence that Dow Chemical concealed or misrepresented any knowledge it had regarding materials used in the implants received by Plaintiffs.
No genuine issues of material fact remain on Plaintiffs' civil conspiracy claims.[5] The Court grants the motions for summary judgment on those claims.
*1321 4. Trademark Licensors Theory
Another theory of liability proposed by Plaintiffs is based on the fact that Dow Corning sold its TMJ implants using trademarks owned by Dow Chemical and Corning. This Court rejected a similar argument with respect to Defendant E.I. du Pont de Nemours in a previous ruling. In re TMJ Implants Prods. Liab. Lit., 872 F. Supp. 1019, 1034 (D.Minn.1995). Plaintiffs' claims here are even weaker, for the implants sold by Dow Corning were marketed under the Silastic® brand name, which is owned by Dow Corning and not by the movants.
The parties do not dispute that the name "Dow Corning" is a combination of two trademarks owned by Dow Chemical and Corning. Those companies contractually reserved the right to maintain the reputation of their trademarks by inspecting products associated with their names to assure that those items are of high quality. This does not mean, however, that, if those companies fail to police their trademarks, the law then imposes upon them liability in tort for products that the companies neither manufactured nor sold. Without proof of a greater undertaking by the trademark owner, no duty to third parties arises out of the trademark licensing agreements.
Although Plaintiffs cite § 400 of the Restatement (Second) of Torts, that provision is inapplicable to the case before the Court. Section 400 sets forth the "apparent manufacturer doctrine." It provides, "One who puts out as his own product a chattel manufacturer by another is subject to the same liability as though he were its manufacturer." Restatement (Second) of Torts § 400.
Even if the Court assumes that this doctrine is a valid principle of law in the relevant states, a point which the movants contest, the apparent manufacturer doctrine does not apply when the defendants in question did not manufacture or otherwise participate in the chain of distribution of the product and the plaintiffs do not even contend that they believed that those defendants were in fact the manufacturers. See Affiliated FM Ins. Co. v. Trane Co., 831 F.2d 153, 155-56 (7th Cir.1987) (doctrine does not apply unless the defendant represented to public that product it was putting out was its own). Moreover, the apparent manufacturer doctrine does not apply here because the name "Dow Corning" is itself a trademark owned by Dow Corning, not by Dow Chemical or Corning. See Nelson v. Int'l Paint Co., 734 F.2d 1084, 1088 (5th Cir.1984) (where product does not bear defendant's name, § 400 does not apply).
Relying on Kasel v. Remington Arms Co., 24 Cal. App. 3d 711, 101 Cal. Rptr. 314 (1972); Torres v. Goodyear Tire & Rubber Co., 163 Ariz. 88, 786 P.2d 939 (1990), and § 402A of the Restatement (Second) of Torts, the Plaintiffs expostulate that Dow Chemical and Corning could be found liable under the "stream of commerce" or "enterprise theory." (Pltfs.Mem.Opp.Summ.J. at 25.) The cases cited by Plaintiffs recognize that the goal behind § 402A was "to place the risk of loss on those in the chain of distribution of defective, unreasonably dangerous goods." Torres, 163 Ariz. at 91, 786 P.2d at 942. As the Court has already noted, the undisputed facts in this case show that Dow Chemical and Corning were not involved in the chain of distribution of Plaintiffs' TMJ implants. Here again, even if the Court assumes that the principle of law relied on by Plaintiffs would apply in the relevant states, the undisputed facts demonstrate that liability would not attain under that theory in this case.
5. Negligent Performance of an Undertaking
Next, Plaintiffs advance the theory that Dow Chemical and Corning should be held liable under § 324A of the Restatement (Second) of Torts. That section provides as follows:
One who undertakes, gratuitously or for consideration, to render services to another which he should recognize as necessary for the protection of a third person or his things, is subject to liability to the third person for physical harm resulting from his failure to exercise reasonable care to protect his undertaking, if
(a) his failure to exercise reasonable care increases the risk of such harm, or
*1322 (b) he has undertaken to perform a duty owed by the other to the third person, or
(c) the harm is suffered because of reliance of the other or the third person upon the undertaking.
Restatement (Second) of Torts § 324A.
Plaintiffs argue that Dow Chemical undertook to render services to Plaintiffs when it entered into agreements with Dow Corning with respect to the use of Dow Chemical's trademarks. (Pltfs. Mem.Opp.Summ.J. at 28.) Plaintiffs cite no cases in which a trademark licensing agreement provided a basis for liability under § 324A, and the Court refuses to place this strained interpretation on the agreements in this case. In the trademark agreements, Dow Chemical undertook to do nothing more than protect its own intellectual property rights. It did not attempt to assure all purchasers of Dow Corning's products that those products would be free of all risk. Section 324A does not apply because it cannot be said that either Dow Chemical or Corning undertook "to render services to another" through its trademark agreements or through any other means.
6. Additional Claims
The Court holds that the additional claims of Plaintiffs not already discussed in detail likewise fail as a matter of law. Legally and factually, their claims against Dow Chemical and Corning that are based on state consumer protection laws and participation theory are unsupported. Plaintiffs have pointed to no acts by movants that would violate state consumer protection laws, and there is no evidence that Dow Chemical directly participated in the alleged tortious activities of Dow Corning.
Plaintiffs argue that Dow Chemical's relationship with Lepetit, a publicly-traded Italian company in which Dow Chemical owns a majority interest, raises a fact issue with respect to Dow Chemical's liability. Lepetit marketed implant materials, including those used in TMJ implants, in foreign countries, but never in the United States. As Dow Chemical correctly points out, these actions by a subsidiary provide no greater basis of liability than the actions of Dow Corning, which is also a subsidiary of Dow Chemical. Plaintiffs do not allege that any of their implants were purchased from Lepetit. Any interaction between Dow Chemical and Lepetit could not have proximately caused any injuries suffered by these Plaintiffs.
Plaintiffs also urge the Court to deny Dow Chemical's motion on the grounds that the General Counsel for Dow Chemical allegedly signed false affidavits in the breast implant litigation that is pending before Chief Judge Pointer, discovery for which has been heavily relied upon by the parties in the TMJ jaw implants litigation. (Pltfs.Supp'l Mem.Opp. at 2-6.) Although these allegations are troubling if they are true, they are not a sufficient reason to deny Dow Chemical's Motion for Summary Judgment. The resolution of the claims relating to those discovery abuses is properly left to Judge Pointer, who has taken under advisement a motion for sanctions based on those alleged acts.
IV. CONCLUSION
No genuine issues of material fact remain with respect to any of Plaintiffs' claims against Defendants Dow Chemical and Corning. Because those Defendants are entitled to judgment as a matter of law, the Court grants their motions pursuant to Rule 56 of the Federal Rules of Civil Procedure. The Court hereby directs the Clerk to enter judgment forthwith on all claims against Dow Chemical and Corning.
Accordingly, IT IS HEREBY ORDERED THAT:
1. Dow Chemical Company's Motion for Summary Judgment is GRANTED;
2. Corning, Incorporated's Motion for Summary Judgment is GRANTED;
3. All of Plaintiffs' claims against Defendants Dow Chemical Company and Corning, Incorporated are DISMISSED WITH PREJUDICE; and
4. The Clerk shall enter judgment with respect to Defendants Dow Chemical Company and Corning, Incorporated in all cases consolidated for pretrial purposes under the caption above, including "tag-along" cases transferred *1323 to this Court subsequent to or simultaneously with the filing of this Memorandum and Order.
NOTES
[1] For a more detailed discussion of the role of Vitek, Inc., see this Court's opinion reported at 872 F. Supp. 1019 (D.Minn.1995).
[2] Most, if not all, states would apply Michigan law to determine the extent to which the shareholders of a Michigan corporation could be held liable for the alleged torts of that corporation. See, e.g., Moran v. Harrison, 91 F.2d 310, 313 (D.C.Cir.), cert. denied, 302 U.S. 740, 58 S. Ct. 142, 82 L. Ed. 572 (1937); Paper Prods. Co. v. Doggrell, 195 Tenn. 581, 261 S.W.2d 127, 129 (1953); Morrow v. Vaughan-Bassett Furniture Co., 173 Va. 417, 4 S.E.2d 399, 401 (1939); Johansen v. St. Louis Union Trust Co., 345 Mo. 135, 131 S.W.2d 599, 603 (1939); Good v. Starker, 207 Wis. 567, 242 N.W. 204, 206 (1932); Woodward v. Sonnesyn, 162 Minn. 397, 203 N.W. 221, 222, cert. denied, 269 U.S. 567, 46 S. Ct. 25, 70 L. Ed. 415 (1925).
[3] This conclusion is reached regardless of which state's law is applied. Based on its review of the law, the Court is convinced that the fundamental flaws present in Plaintiffs claims would prevent recovery in every state.
[4] Plaintiffs do not appear to argue that Corning should be held liable for fraud/misrepresentation or under any other theory of direct liability, with the exception of the trademark licensors theory and the negligent performance of an undertaking. Although most of the Court's discussion of the assertions of direct liability focuses on Dow Chemical, the Court here wishes to clarify that no evidence has been brought forth by Plaintiffs that would raise genuine issues of material fact regarding Corning's liability under any theory.
[5] This analysis likewise precludes Plaintiffs' claims of concert of action. See Halberstam v. Welch, 705 F.2d 472, 477 (D.C.Cir.1983) (the two types of concert of action are conspiracy, "concerted action by agreement," and aiding-abetting, "concerted action by substantial assistance").
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880 F. Supp. 1446 (1995)
RESOLUTION TRUST CORPORATION, Plaintiff,
v.
Ernest M. FLEISCHER, et al., Defendants.
No. 93-2062-JWL.
United States District Court, D. Kansas.
March 17, 1995.
*1447 H. David Barr, Charles J. Williams, Gage & Tucker, Overland Park, KS, William L. Turner, Bernard J. Rhodes, R. Kent Sellers, Jeffrey M. Pfaff, Mike L. Racy, Jean Paul Bradshaw, II, Gage & Tucker, Kansas City, MO, Mira N. Marshall, Robert H. Plotkin, Resolution Trust Corp., Professional Liability Section, Washington, DC, Andrea J. Goetze, N.L.R.B., New Orleans, LA, for Resolution Trust Corp.
James Borthwick, Michael Thompson, Christopher A. Koster, Blackwell, Sanders, Matheny, Weary & Lombardi, Charles W. German, Brant M. Laue, Robert M. Thompson, *1448 Rouse, Hendricks, German, May & Shank, Brian C. Fries, Kenner & James, P.C., Kansas City, MO, for Ernest M. Fleischer, Mary Louise Greene, John A. Scowcroft.
Renana B. Abrams, Thomas H. Stahl, Jennifer P. Kyner, Armstrong, Teasdale, Schlafly & Davis, Kathleen A. Hardee, Gilliland & Hayes, P.A., Kansas City, MO, Robert P. Wray, Armstrong, Teasdale, Schlafly & Davis, Olathe, KS, for Duane H. Hall.
John R. Toland, Toland & Thompson, Iola, KS, James Borthwick, Michael Thompson, Blackwell, Sanders, Matheny, Weary & Lombardi, Charles W. German, Brant M. Laue, Robert M. Thompson, Rouse, Hendricks, German, May & Shank, Brian C. Fries, Kenner & James, P.C., Kansas City, MO, for Glenn O. McGuire, Harold Yokum.
Delton M. Gilliland, Coffman, Jones & Gilliland, Lyndon, KS, Charles W. German, Brant M. Laue, Robert M. Thompson, Rouse, Hendricks, German, May & Shank, Kansas City, MO, for Harry T. Coffman.
Richmond M. Enochs, Francis R. Peterson, Wallace, Saunders, Austin, Brown & Enochs, Chartered, Overland Park, KS, for Thomas R. Weigand.
Thomas R. Weigand, Ottawa, KS, pro se.
Thomas E. Gleason Jr., Thomas E. Gleason, Chartered, Ottawa, KS, Charles W. German, Brant M. Laue, Robert M. Thompson, Rouse, Hendricks, German, May & Shank, Kansas City, MO, for Lawrence H. Kramer.
John R. Toland, Toland & Thompson, Iola, KS, Charles W. German, Brant M. Laue, Robert M. Thompson, Rouse, Hendricks, German, May & Shank, Kansas City, MO, for Stanley Dreher, Jr.
Greer S. Lang, Leonard B. Rose, Rose, Brouillette & Shapiro, P.C., Charles W. German, Brant M. Laue, Robert M. Thompson, Rouse, Hendricks, German, May & Shank, Kansas City, MO, for Ted Greene, Jr.
Renana B. Abrams, Thomas H. Stahl, Jennifer P. Kyner, Armstrong, Teasdale, Schlafly & Davis, Kathleen A. Hardee, Gilliland & Hayes, P.A., Kansas City, MO, for Ronald L. Pfost.
James Borthwick, Michael Thompson, Christopher A. Koster, Blackwell, Sanders, Matheny, Weary & Lombardi, Brian C. Fries, Kenner & James, P.C., Kansas City, MO, for Barbara J. Fleischer, Boatmen's First Nat. Bank of Kansas City, Ernest W. Fleischer, Pamela Fleischer, Thomas G. Greene, Larry D. Greene, Gail L. Cluen, Douglas C. Greene, Judith Fleischer, Elizabeth Fredkin.
MEMORANDUM AND ORDER
LUNGSTRUM, District Judge.
I. INTRODUCTION
In Counts VII and VIII of its first amended complaint, plaintiff Resolution Trust Corporation ("RTC") alleges that various defendants breached certain fiduciary duties and were otherwise negligent in connection with the purchase by Franklin Savings Association ("FSA") of a $30,000,000 promissory note from L.F. Rothschild & Co., Inc. ("LFR"). Defendants Ernest M. Fleischer, Mary Louise Greene and John A. Scowcroft have moved for summary judgment (Doc. # 419) on the ground that plaintiff has suffered no injury, an essential element of its claims. For the reasons set forth fully below, the court finds that questions of material fact preclude a finding that the RTC suffered no actual injury as a matter of law. Defendants' motion for summary judgment is, therefore, denied.
II. FACTS
The factual background of this case has been developed in the court's previous opinions and to that extent shall not be repeated here. See, e.g., Resolution Trust Corp. v. Fleischer, 848 F. Supp. 917, 920 (D.Kan.1994); Resolution Trust Corp. v. Fleischer, 826 F. Supp. 1273, 1276 (D.Kan.1993). The following facts are those pertinent to the issues presently before the court and are either uncontroverted or are those facts considered in a light most favorable to the plaintiff for purposes of this motion.
FSA is a stock savings and loan association. Defendants Fleischer, Greene and Scowcroft were directors of FSA until February of 1990. At all times relevant to this motion, more than ninety percent of the outstanding *1449 stock of FSA was owned by Franklin Savings Corporation ("FSC"). FSC filed consolidated federal income tax returns for the Franklin Savings group of companies, which included FSA and various FSA subsidiaries, including Franklin Financial Services, Inc. ("FFS").
On February 22, 1988, FFS loaned $30,000,000 to LFR. In return, LFR issued a note to FFS in the same amount. The loan was made as the first step in the acquisition of LFR ("LFR transaction"). Following the closing of the acquisition of LFR on June 30, 1988, LFR became a member of the consolidated income tax group headed by FSC.
As a result of tremendous losses suffered by LFR during 1987, at the time FFS purchased LFR it possessed certain pre-acquisition net operating loss carryforwards which had a face amount of at least $59,000,000.[1] While defendants contend that these net operating loss carryforwards could be utilized to the benefit of the consolidated income tax group in various ways, it is plaintiff's position that Internal Revenue Service regulations permit their use only for the purpose of offsetting positive taxable income of LFR. Plaintiff contends that the net operating loss carryforwards could not be used to offset positive taxable income of FSA, FFS or any other non-LFR subsidiary.
Defendants contend that before the acquisition of LFR, the Franklin group's management determined that if LFR could be returned to profitability, its future income could be offset by the deductions available. Alternatively, new business operations could be placed in the LFR corporate entity and the profits from those operations offset by the deductions. After two years, LFR could be liquidated all the way upstream and its deductions could then offset otherwise taxable income produced by FSA. In addition, defendants contend that they knew and understood that if LFR was not made profitable immediately, any current losses generated by LFR could be utilized without the restrictions that applied to pre-acquisition loss carryforwards.
In addition to its pre-acquisition net operating loss carryforwards, in February of 1988, LFR possessed certain "built-in losses" which had a face amount of approximately $44,000,000. Defendants refer to these as "book reserves" and contend that the number was as high as $78,500,000.
The LFR transaction closed on June 30, 1988. Pursuant to a February 22, 1988 letter of intent and an April 12, 1988 merger agreement between FFS, L.F.R. Acquisition Company (a wholly owned subsidiary of FFS), L.F. Rothschild Holdings, Inc. ("LFR Holdings") and LFR, LFR Holdings was merged into L.F.R. Acquisition Company, Inc. L.F.R. Acquisition Company, Inc. then changed its name to LFR Holdings. As part of this transaction, FFS contributed the LFR $30,000,000 note to the capital of L.F.R. Acquisition Company, Inc. and the debt was cancelled. L.F.R. Acquisition Company, Inc. then issued $16 million in debentures to the old LFR stockholders, subject to adjustments in the amount due based on LFR's future performance. Because the debentures issued in the LFR transaction were reduced to zero from LFR's post-acquisition losses, the total initial investment in the LFR transaction was $30,000,000.
The RTC conservatorship was imposed on FSA in February of 1990. On January 4, 1991, LFR commenced a bankruptcy proceeding in the United States Bankruptcy Court for the Southern District of New York. FSA was not placed in receivership until July of 1992.
Following LFR's acquisition, it generated the following taxable losses ("post-acquisition losses"):
Year Ending Taxable Income (Loss)
June 30, 1989 ($102,008,369)
June 30, 1990 ( $17,656,386)
June 30, 1991 ( $7,417,728)
June 30, 1992 ( $3,377,544)
*1450 Defendants contend that the post-acquisition losses incurred in 1989, 1990 and 1991 and deducted on the Franklin group's federal and state income tax returns in each year respectively, if a 34% tax rate is applied, resulted in an anticipated tax savings of more than $34,000,000 to the Franklin group.
The pre-acquisition LFR tax attributes have not yet been used. According to the defendants, as of August of 1992, there was no need to use the pre-acquisition net operating loss carryforwards because LFR's postacquisition losses and the FSA losses recorded by the RTC after the February 1990 conservatorship exceeded otherwise taxable income. Nor were the "built-in losses" or "book reserves" used by the FSC consolidated income tax group, at least through June of 1993.
The RTC claims damages to FSA from the LFR transaction in the amount of approximately $40,300,000. In addition to the alleged loss on the $30,000,000 note, the RTC also claims a loss arising from a $5,000,000 loan by FFS to LFR in May of 1988 and from a $5,250,000 advance to the LFR bankruptcy estate. Defendants contend that neither the loan nor the advance is a proper element of the RTC's damages claim. They further assert that the total or overall tax savings to plaintiff as a result of the LFR transaction exceeds $43,300,000.
III. LEGAL STANDARDS
Summary judgment is appropriate if "there is no genuine issue as to any material fact and ... the moving party is entitled to a judgment as a matter of law." Fed.R.Civ.P. 56(c); Anthony v. United States, 987 F.2d 670, 672 (10th Cir.1993). The court views the evidence and draws any inferences in a light most favorable to the party opposing summary judgment, but that party must identify sufficient evidence which would require submission of the case to a jury. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 249-52, 106 S. Ct. 2505, 2510-12, 91 L. Ed. 2d 202 (1986); Hall v. Bellmon, 935 F.2d 1106, 1111 (10th Cir.1991). If the evidence is merely colorable, or is not significantly probative, summary judgment may be granted. Cone v. Longmont United Hosp. Ass'n, 14 F.3d 526, 533 (10th Cir.1994) (citing Anderson, 477 U.S. at 249-50, 106 S.Ct. at 2510-11). The relevant inquiry is "whether the evidence presents a sufficient disagreement to require submission to a jury or whether it is so one-sided that one party must prevail as a matter of law." Anderson, 477 U.S. at 251-52, 106 S.Ct. at 2511-12.
IV. DISCUSSION
A. Tax Attributes of the LFR Transaction
Defendants contend that summary judgment is appropriate because, under Kansas law, any actual damages claimed by the RTC in connection with the LFR transaction are properly offset by benefits to FSA, including tax benefits, attributable to the directors' challenged actions, and the result of the offset is that FSA suffered no injury from the LFR transaction. They claim that the LFR transaction was evaluated in part by the FSA board of directors as an acquisition of transferrable, pre-acquisition tax attributes that would reduce FSA's tax liability and, further, that FSA management knew and understood that post-acquisition losses incurred by LFR would be currently deductible and would also result in a different kind of income tax savings. These deductions, defendants claim, did in fact result in a net gain to FSA far in excess of the $30,000,000 loss suffered by its initial investment in LFR.[2]
The theory of offsetting benefits, or the "offsetting benefits rule," applies in Kansas[3] to determine actual damages in tort or breach of contract actions if the defendant has conferred a benefit on the plaintiff that offsets the plaintiff's loss or injury suffered. *1451 King Grain Co. v. Caldwell Mfg. Co., 820 F. Supp. 569, 573 (D.Kan.1993) (insurance proceeds received as a result of contract breach should reduce plaintiff's damages). When the rule applies, the defendant is permitted to introduce evidence that the plaintiff's alleged injury also resulted in a benefit to plaintiff and, if proved, the plaintiffs damages will be reduced by the amount of the benefit. Id. at 574. The Kansas Supreme Court has summarized the rule as follows:
Basically where the defendant's tortious misconduct or breach of contract causes damages, but also operates directly to confer some benefit upon the plaintiff, the plaintiff's claim for damages may be diminished by the amount of benefit received. [Citation omitted.] The offset theory can only be utilized when the benefits accruing to the plaintiff are sufficiently proximate to the contract to warrant reducing the plaintiff's damages and the failure to do so would permit the plaintiff to obtain unreasonable damages.
Wichita Federal Sav. & Loan Ass'n v. Black, 245 Kan. 523, 781 P.2d 707, 719 (1989) (citing Macon-Bibb County Water & Sewerage Auth. v. Tuttle/White Constr., Inc. 530 F. Supp. 1048, 1055 (M.D.Ga.1981)). While recognizing the viability of the rule where the defendant's conduct resulted in a direct and immediate savings to the plaintiff, such as in Macon-Bibb, no Kansas case has been cited to or located by this court which has discussed applying the concept to alleged benefits derived from tax treatment.
The plaintiff relies on the general rule that tax benefits are not considered in mitigation of damages. Burdett v. Miller, 957 F.2d 1375, 1383 (7th Cir.1992); Fullmer v. Wohlfeiler & Beck, 905 F.2d 1394, 1402 (10th Cir.1990); Cereal Byproducts Co. v. Hall, 16 Ill.App.2d 79, 81-82, 147 N.E.2d 383, 384, aff'd, 15 Ill. 2d 313, 155 N.E.2d 14 (1958). Most courts addressing the issue of whether tax benefits should be considered in an award of damages, in various kinds of actions, have found that they should not. See DePalma v. Westland Software House, 225 Cal. App. 3d 1534, 1540, 276 Cal. Rptr. 214, 217 (1990). Courts have often found that whether a plaintiff has received a tax benefit on account of its loss is a matter that concerns only the plaintiff and the government or have viewed tax benefits as a collateral source not to be considered in the damage equation for tortious conduct. See, e.g., Cereal Byproducts Co., 16 Ill.App.2d at 81-82, 147 N.E.2d at 384; Coty v. Ramsey Assoc., Inc., 149 Vt. 451, 462-63, 546 A.2d 196, 204, cert. denied, 487 U.S. 1236, 108 S. Ct. 2903, 101 L. Ed. 2d 936 (1988); see also Western-Realco Ltd. Partnership 1983-A v. Harrison, 791 P.2d 1139, 1147 (Colo.Ct.App.1989); Rediker v. Chicago, R.I., & Pac. R. Co., 1 Kan. App. 2d 581, 588-89, 571 P.2d 70 (1977), cert. dismissed, 435 U.S. 982, 98 S. Ct. 1635, 56 L. Ed. 2d 76 (1978). Other courts have reasoned that the apparent benefit from certain tax consequences is rendered illusory by the "tax benefit rule" which, in very general terms, requires that recovery of an amount previously deducted be reported as income in the year received, Randall v. Loftsgaarden, 478 U.S. 647, 660, 667, 106 S. Ct. 3143, 3151, 3155, 92 L. Ed. 2d 525 (1986); Burgess v. Premier Corp., 727 F.2d 826 (9th Cir.1984); Danzig v. Jack Grynberg & Assocs., 161 Cal. App. 3d 1128, 1139, 208 Cal. Rptr. 336, 343 (1984), cert. denied, 474 U.S. 819, 106 S. Ct. 67, 88 L. Ed. 2d 55 (1985); cf. DePalma, 225 Cal.App.3d at 1541, 276 Cal.Rptr. at 218, or have reasoned that tax benefits are too speculative to be considered. See, e.g., Randall, 478 U.S. at 664-65, 106 S.Ct. at 3153-54; DePalma, 225 Cal.App.3d at 1544-45, 276 Cal.Rptr. at 220-21. Thus, in order to accept defendants' theory, the court would have to find that the circumstances of this case justify an exception to this general rule.
Defendants contend that the offsetting benefits theory supplies the appropriate exception because the FSA directors' approval of the acquisition of LFR by FFS conferred a direct benefit on FSA by enabling the Franklin group to include LFR in the consolidated tax return. LFR's losses were then an offset to otherwise taxable income generated for the group by FSA, for which FSA would have been liable under its tax agreements with FSC. The end result, defendants contend, was that FSA retained more profits than it otherwise would have without the FSA directors' action and to ignore that would permit the plaintiff to obtain unreasonable *1452 damages. Defendants' argument has considerable appeal.
In order to examine more closely the validity of defendants' contentions, it is helpful to separate the benefits allegedly received into two categories potential income tax deductions or savings from pre-acquisition losses sustained by LFR and deductions or savings derived from post-acquisition losses of LFR. While there is certain merit to the argument that potential tax benefits from the pre-acquisition losses suffered by LFR were sufficiently direct and immediate to the LFR transaction to offset the damages claimed by the RTC, the same cannot as easily be said of any benefits derived from LFR's post-acquisition losses which, even if anticipated, did not exist at the acquisition nor were they created by the acquisition. These latter benefits more clearly fall under the general rule's proscription of the consideration of tax consequences and are less directly related to the challenged conduct of the defendants in approving the LFR acquisition.
Defendants have produced evidence that they considered in advance the value of LFR's pre-acquisition losses for purposes of determining income tax liability for the Franklin group companies and anticipated the resulting tax benefits of acquiring such losses. There is evidence that the amount of loss incurred by LFR pre-acquisition was known to defendants and that they ascertained with some certainty the amount of the benefit to be realized. There is some evidence that, if used on the 1989 consolidated federal and state income tax returns, a deduction for pre-acquisition losses would have conferred an actual, present and specific benefit on FSA by reducing its taxable income. Thus, there is evidence that the value of the tax attributes of the preacquisition losses was closely tied to and inseparable from the decision to acquire LFR and that the transaction was capable of generating a direct benefit for the consolidated income tax group.
Under these circumstances, it is appropriate to offset the damages claimed as a result of the LFR transaction by the tax benefits received in order to arrive at an amount which most closely approximates the actual injury suffered. See Macon-Bibb, 530 F.Supp. at 1056 (purpose of compensatory damages is to compensate the plaintiff for injury actually sustained). If the defendants can show that the value of the LFR transaction to FSA was actually enhanced by income tax benefits which could immediately be realized, those benefits should not be ignored in calculating the damages FSA actually suffered from the conduct in issue. Minpeco, S.A. v. Conticommodity Servs., Inc., 676 F. Supp. 486, 488 (S.D.N.Y.1987) (where a plaintiff is both injured and enriched by defendant's wrongful conduct "[it] cannot choose to recover for [its] injuries yet retain [its] windfall."); Apex Oil Co. v. DiMauro, 744 F. Supp. 53, 55-6 (S.D.N.Y.1990) (same). Given that there is evidence that the LFR transaction was motivated by the directors' desire to shelter from tax liability certain income of FSA and specifically to realize certain tax benefits from the then existing losses of LFR, it is reasonable to offset the amount of injury plaintiff claims to have suffered by the anticipated and realized tax benefits of that investment. See Burdett, 957 F.2d at 1383 (court held it was unreasonable for plaintiff to claim as damages the anticipated and realized tax benefits of tax shelters and required that plaintiff's award be offset by the benefit realized).[4] To ignore tax benefits that the plaintiff bargained for and received as a result of the investment could permit the plaintiff to obtain unreasonable damages. See Macon-Bibb, 530 F.Supp. at 1055 (where offsetting benefits rule may be applicable, it should be applied *1453 only if the failure to do so would permit the plaintiff to obtain unreasonable damages).
Neither Kansas courts nor the Tenth Circuit has addressed this precise issue. This court recognizes that the existing authority leaves it unclear whether these courts would, in fact, consider tax savings from a tax shelter type investment an appropriate offset to damages claimed in a breach of fiduciary duty or negligence action under Kansas law. See Fullmer, 905 F.2d at 1402 (refusing to reduce plaintiffs' claimed damages by the amount of tax benefit, if any, received even though plaintiffs argued that the tax benefits were expected) (citing Cereal Byproducts Co., 16 Ill.App.2d at 81-82, 147 N.E.2d at 384 (refusing to reduce damages for accountants' negligence in not discovering embezzlement of plaintiff by amount of tax benefits plaintiff received by virtue of theft) and Randall, 478 U.S. at 660, 667, 106 S.Ct. at 3151, 3155 (refusing tax benefit offset in securities fraud case)); Anixter v. Home-Stake Prod. Co., 977 F.2d 1549, 1553-54 & n. 6 (10th Cir.1992) (defendants were not entitled to reduction of damages for securities fraud based on tax benefits which plaintiffs received from losses), cert. denied sub nom. Dennler v. Trippet, ___ U.S. ___, 113 S. Ct. 1841, 123 L. Ed. 2d 467 (1993); Cascade Energy & Metals Corp. v. Banks, 896 F.2d 1557, 1581 (10th Cir.1990) (recognizing split of authority regarding whether tax consequences may potentially be considered in computing damages in certain circumstances), cert. denied sub nom. Weston v. Banks, 498 U.S. 849, 111 S. Ct. 138, 112 L. Ed. 2d 105 (1990)); see also Wichita Federal, 245 Kan. 523, 781 P.2d at 707 (Kansas Supreme Court recognized the theory of offsetting benefits but was not asked to apply it to tax benefits).
On balance, this court concludes that if the Supreme Court of Kansas were presented with this question, it would permit the defendants to offer evidence of the tax consequences of the pre-acquisition losses in an attempt to offset the plaintiff's claimed damages here. This case does not present the classic "tax benefits" rule situation such as was dealt with in cases like Rediker, 1 Kan. App.2d at 588-89, 571 P.2d 70, and Fullmer, 905 F.2d at 1402. It is also different from Anixter, which declined to look at supposed tax benefits from intangible drilling expenses in a securities fraud case. 977 F.2d at 1553-54. None of the reported cases close the door on applying the offsetting benefits rule where, as here, anticipated tax benefits of the investment were directly created by the very conduct which is under attack as negligent or a breach of fiduciary duty. The very well reasoned, and relatively recent, opinion from the Seventh Circuit in Burdett shows why such evidence should be permitted, and this court believes that Kansas would follow that approach.
By contrast, the court finds that any tax benefits attributable to post-acquisition losses of LFR may not be used to offset any damages claimed by the RTC in connection with the LFR transaction. Those benefits cannot reasonably be considered sufficiently proximate to the decision to commit to the LFR transaction such that they may be used as an offset to any damage claim. See Wichita Federal, 245 Kan. 523, 781 P.2d at 707 (offset theory can only be utilized when the benefits accruing to the plaintiff are sufficiently proximate to the contract to warrant reducing the plaintiff's damages) (citing Macon-Bibb, 530 F.Supp. at 1055).
The defendants admit that it was their intention that LFR operations be returned to profitability. Thus, while it was believed that some losses would be suffered before LFR could be profitable, at the time of the decision to acquire LFR, the post-acquisition losses were not intended to be utilized as a tax shelter for FSA income in the same manner as the pre-acquisition losses. While potential tax benefits attributable to LFR's pre-acquisition losses could be identified with some measure of accuracy and their value reasonably estimated at the time the LFR transaction was complete, making their value more immediately and directly related to the intrinsic value of the LFR investment, any potential tax benefit from the post-acquisition losses was speculative at best. An attempt to quantify and rely on that potential at the time of the initial LFR investment became increasingly and hopelessly speculative with each future tax year contemplated. Cf. Randall, 478 U.S. at 665, 106 S.Ct. at 3154 *1454 (Supreme Court recognized "formidable difficulties in predicting the ultimate treatment of the investor's claimed tax benefits ... and that the burdens associated with reconstruction of the investor's tax history for purposes of calculating interest are substantial.")
The state of affairs as of 1992 is conclusive evidence that an attempt to determine the post-acquisition operating losses and any attendant tax benefits at the time of the LFR transaction was at best speculative. Contrary to what was anticipated, LFR did not return to profitability and continued to suffer losses through 1992. In light of the fact that LFR already possessed substantial pre-acquisition tax attributes that could offset taxable income of either LFR or the consolidated income tax group, it is far from clear that post-acquisition net operating losses, to the extent incurred, were either fully anticipated or desirable. Where doubts exist regarding the existence or effect of an alleged benefit, those doubts "should be resolved against the tortfeasor, and he should have no credit for remote and uncertain `benefits', especially if they are unwanted." Dan D. Dobbs, Law of Remedies § 3.6, at 182 (1973).
Moreover, the court has found that the RTC has no standing to sue a defendant on the basis that he or she acted negligently or breached a fiduciary duty with respect to his or her duties as a director of one of the subsidiary corporations. See Fleischer, 848 F.Supp. at 922-25. Rather, the RTC has standing to pursue its allegations that the FSA directors were negligent or breached a fiduciary duty in authorizing the acquisition and continued funding of LFR and other subsidiaries. Id. Any tax benefits arising from the net operating losses suffered after the acquisition of LFR are more closely related to the conduct of the directors managing LFR than the FSA directors' decision to acquire LFR. The many variables which made ascertainment, at the time of the decision to acquire LFR, of tax benefits from post-acquisition losses so doubtful and speculative as to remove them from the potential operation of the offsetting benefits rule also preclude finding a causal link between defendants' alleged wrongdoing and any eventual tax benefit from those post-acquisition losses.
Finally, the court must determine whether the record on this summary judgment motion establishes as a matter of law that the tax savings which the offsetting benefits rule would permit in evidence actually equal or exceed any alleged losses. The court finds that genuine issues of material fact remain, which precludes an entry of summary judgment in defendants' favor. Thus, their motion is denied.
B. $5,000,000 Loan
The damages claimed by the RTC includes an amount for an allegedly unpaid $5,000,000 loan FFS made to LFR in May of 1988. Defendants contend that the loan was repaid at the end of 1989 and as such is not a proper component of the damages calculation. The RTC contends that a year after the loan was made, FFS wrote off the entire $5,000,000 loan and converted the entire unpaid balance to equity in LFR Holdings. The RTC's expert witness has opined that neither the contemporaneous accounting records of FSC, FSA nor FFS show the $5,000,000 as repayment of the loan. The records of FSC and FSA both show a $5,000,000 capital contribution by FSC to FSA and the records of FFS show no payment being received from any source. He states that after examining these records, he is of the professional opinion that the entire $5,000,000 loan remains unpaid and is properly shown as an element of damages. The court finds that whether the loan was repaid is a fact question that is not capable of being resolved as a matter of law upon the papers submitted. Defendants' motion for summary judgment on this issue is therefore denied.
C. $5,250,000 Advancement
Defendants also contend that the RTC's $5,250,000 advancement to the LFR bankruptcy estate in June of 1992, twenty-eight months after the RTC conservatorship was imposed on FSA, is not a proper element of its damage claim. Defendants argue that, as a matter of law, the advance to the bankruptcy estate was not proximately caused by any act or omission of the FSA directors. The *1455 crux of defendants' argument is that it is the RTC, not the defendant directors, that made the decision to make a cash advance to the LFR bankruptcy estate. The first plan negotiated by defendant Fleischer would not have entailed a cash payment to the bankruptcy estate. Thus defendants argue it is the RTC's conduct in reevaluating the plan and its resulting decision to proceed with its own, different plan that caused the loss, not the defendant directors. They argue that the string of "but-fors" relied upon by plaintiff would stretch the concept of proximate cause beyond all legally acceptable bounds.
The court disagrees. The RTC has produced evidence to show that FSA would have had to contribute at least $30,000,000 in the form of irrevocable letters of credit as part of the LFR bankruptcy plan under the agreement negotiated by defendant Fleischer shortly before the imposition of a conservator. The court does not believe it stretches the concept of proximate cause beyond acceptable limits to permit the RTC to argue and to produce evidence at trial to show that the cash payment was required to be made in lieu of the $30,000,000 in irrevocable letters of credit and was a proximate result of defendants' negligence or fiduciary breach. In light of the many factual disputes surrounding the cash advancement, the issue of proximate cause is a matter for the jury. See Durflinger v. Artiles, 234 Kan. 484, 488, 673 P.2d 86 (1983) (causal connection between duty breached and injuries sustained is a question of fact); McDermott v. Midland Management, Inc., 997 F.2d 768, 771 (10th Cir.1993) (issues involving proximate cause and foreseeability are ordinarily questions of fact for the jury under Kansas law).[5] The court finds that genuine issues of material fact exist with respect to the advance to the LFR bankruptcy estate and, thus, defendants' motion for summary judgment as to it is denied.
V. CONCLUSION
The court finds that defendants have not met their burden to show that the RTC has suffered no injury or damage as a result of the directors' alleged negligence or breach of fiduciary duty as a matter of law. Genuine issues of material fact exist with respect to whether the RTC has suffered damages in connection with its claims in Counts VII and VIII of its first amended complaint.
IT IS THEREFORE ORDERED BY THE COURT that the motion of defendants Ernest M. Fleischer, Mary Louise Greene and John A. Scowcroft for summary judgment (Doc. # 419) is denied.
IT IS SO ORDERED.
NOTES
[1] The defendants contend this amount was much greater. They contend that LFR pre-acquisition net operating losses of $113,100,000, plus a capital loss of $5,700,000, could be fully utilized over a fifteen year carryforward period resulting in a total tax savings of $40,000,000. They further contend that LFR book reserves for potential future losses were $78,500,000 and that all but $1,000,000 would have been available for use by 1992, resulting in a tax savings of roughly $26,000,000.
[2] Plaintiff is not suing the FSA directors for any losses incurred in operating LFR. The court has already held regarding the "direct investment" issue that the RTC is seeking recovery only for money actually spent by FSA in connection with the LFR transaction and has no standing to sue derivatively for losses incurred by LFR. See Fleischer, 848 F.Supp. at 922-25.
[3] Plaintiff's claims are brought under Kansas law.
[4] In Burdett, the Seventh Circuit held that while the tax benefit of the loss of an investment due to a defendant's wrongful conduct, if any, is not subtracted from the damages incurred, the tax benefit of the tax shelter itself should be subtracted. Burdett, 957 F.2d at 1383-84; Pucci v. Litwin, No. 88-C-10923, 1993 WL 405448, at *2 (N.D.Ill. Oct. 4, 1993). Writing for the court, Judge Posner compared the claim for a loss, which did not account for the anticipated and realized tax benefits of a tax shelter, to that for a $100,000 loan, half of which was repaid. Burdett, 957 F.2d at 1383. He stated, "[t]he essential point is that with regard to benefits of whatever sort received, there is no injury, so no basis for a claim of damages." Id. That reasoning is persuasive here.
[5] There is also evidence that $2,000,000 of cash was advanced with the expectation that FSA would obtain in return at least a $2,000,000 distribution from the bankruptcy estate. The RTC claims that at the time the damage calculation was prepared, it showed as a credit a remaining value of $2,490,000 which included the anticipated $2,000,000 recovery from the LFR bankruptcy. There is evidence tending to show that the $2,000,000 advance did not increase the net amount of plaintiff's damages since the final $40,000,000 damage calculation included a credit for the anticipated recovery from the LFR bankruptcy. Genuine issues of material fact exist with respect to this issue as well.
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20 F. Supp. 799 (1937)
PATTERSON
v.
ANDERSON, Former Collector of Internal Revenue.
District Court, S. D. New York.
August 30, 1937.
*800 James S. Y. Ivins, of Washington, D. C., for plaintiff.
Lamar Hardy, U. S. Atty., of New York City (Leon E. Spencer, Asst. U. S. Atty. of New York City, James W. Morris, Asst. Atty. Gen. and Andrew D. Sharpe and Frank J. Ready, Sp. Assts. to Atty. Gen., of counsel), for defendant.
PATTERSON, District Judge.
The action is one at law to recover an alleged overpayment of income tax for 1919. A jury was waived.
The plaintiff filed his return for 1919 in due course, showing a tax liability of $76,352.89, which amount he paid. Later proceedings between the Commissioner and the plaintiff resulted in the finding of a deficiency of $95,115.52 by the Board of Tax Appeals, and the decision of the Board was affirmed by the Circuit Court of Appeals. The point then in controversy was whether the plaintiff was entitled to deduct a loss claimed by him in his return. The plaintiff paid the deficiency. He then filed claims for refund to recover part of the tax paid, alleging that four items originally reported by him as income were not in truth taxable income for 1919, and on denial of the claims for refund brought the present action to recover the tax. None of the four items had been involved in the proceeding before the Board of Tax Appeals.
The first item is the sum of $8,273.76 received by the plaintiff as royalty from Standard Tobacco Steamer Company. The contract under which the royalty was received was one made prior to March 1, 1913, for services rendered prior to that date, and it had a capital value on March *801 1, 1913, in excess of what the plaintiff had received under it. The amount so received by the plaintiff in 1919 was accordingly not taxable income. Platt v. Bowers, 13 F.(2d) 951 (D.C.N.Y.). The defendant concedes as much.
The second item is an amount of $18,745. The plaintiff owned stock in American Machine & Foundry Company. He received scrip dividend certificates of the face value of $18,745 on September 16, 1918, the scrip being payable one year later. He turned the scrip in on September 16, 1919, and received cash of $18,745, together with interest. The parties have stipulated that the scrip was worth face value when issued.
The income was received by the plaintiff in 1918, when he received the dividend in scrip. The fact that it was not until 1919 that the scrip was turned in and cash received makes no difference. The government's contention that there was a receipt of income in 1919 is in the teeth of its own regulation. By article 1544 of Regulations 45, applicable to the Revenue Act of 1918 (40 Stat. 1057), "scrip dividends are subject to tax in the year in which the warrants are issued." Similar provisions have appeared in all regulations down to the present day. This administrative interpretation consistently followed carries great weight, particularly when Congress, presumably with that interpretation in mind, has re-enacted the statute without change in the applicable sections. Zellerbach Paper Co. v. Helvering, 293 U.S. 172, 55 S. Ct. 127, 75 L. Ed. 264; Koshland v. Helvering, 298 U.S. 441, 56 S. Ct. 767, 80 L. Ed. 1268, 105 A.L.R. 756. The merits are with the plaintiff as to the $18,745 received as scrip dividend in 1918.
The third item in dispute is $125,322.57, received by the plaintiff in 1919 as insurance premiums. The facts are peculiar. The plaintiff, Harriss and Hawkins were stockholders in International Arms & Fuze Company. The plaintiff and Harriss each owned twelve twenty-fifths of the stock, Hawkins one twenty-fifth. The company had been engaged for some years in making explosives for war purposes, with a plant in New Jersey. The rates for fire insurance covering such a plant rose to high levels. In lieu of taking out insurance with fire insurance companies, an arrangement was made that the plaintiff and Harriss would write the fire insurance on the company's plant. On July 1, 1918, the plaintiff wrote a policy insuring the company against loss by fire in the amount of $3,500,000, to expire on June 30, 1919. The premium to be paid was fixed at $157,500, payable monthly. Harriss wrote a similar policy. In October, 1918, Hawkins wrote a policy for one-twelfth of this amount, receiving premiums at the same rate, although the policy in his case covered only ten months. The plaintiff received $78,749.99 in premiums from January 1, 1919, to June 30, 1919. Between July 1, 1919, and December 18, 1919, he received further sums totaling $46,572.58 as premiums, although no formal extension of the insurance to cover this period seems to have been made. The plaintiff included both amounts in his 1919 return as part of his income.
The plaintiff's argument is that the insurance policies were void, since the law of New Jersey forbade persons to make contracts of insurance unless authorized to do an insurance business, that the premiums were therefore received by the plaintiff without consideration, and that they must be treated as in reality liquidating dividends, it being the fact that the company in 1919 was preparing to wind up its business. This argument cannot be accepted. While the policy may have been uncollectible under New Jersey law and the plaintiff may have been earning money from a prohibited business, he nevertheless made earnings from it. Earnings from an unlawful business constitute taxable income. United States v. Sullivan, 274 U.S. 259, 47 S. Ct. 607, 71 L. Ed. 1037, 51 A.L.R. 1020. There is nothing to indicate that the arrangement was actually meant to be one for distribution of corporate assets under the guise of insurance premiums. The amounts received after expiration of the policy were likewise income, for the parties treated the insurance as still in force and must be taken as having assented to an extension of the policy. The amount received as insurance premiums by the plaintiff was properly included in his taxable income.
The fourth item is $70,800 received as commissions. International Arms & Fuze Company found it necessary to borrow money from banks. The banks required the personal indorsement of the plaintiff and Harriss on the company's notes. The company, by resolution of the board of directors at a meeting on January 3, 1918, agreed to pay the plaintiff *802 and Harriss a 10 per cent. commission for the personal indorsements. As loans supported by personal indorsement of the plaintiff and Harriss were effected, the company gave its notes for 5 per cent. of the loans to the plaintiff as his commission and gave like notes to Harriss, and this practice was followed as to renewal loans as well as to original loans. In due course the company paid to the plaintiff the notes it had given him as compensation for his indorsements. In 1919 the plaintiff received from the company $159,840, paid as commissions or compensation for indorsement on renewal loans. The plaintiff reported the entire sum as income for 1919. It was later shown that of the total figure $89,040 was in payment of notes issued by the company to the plaintiff in 1918 and included by him in his 1918 return, and the Commissioner eliminated this amount from the 1919 income. The plaintiff's present contention is that the remainder, $70,800, was not taxable income.
It is argued that the corporate resolution did not entitle the plaintiff to compensation for personal indorsements on renewal loans, and that consequently the payments received by the plaintiff must be regarded as liquidating dividends on his stock investment. But there is no reason for treating the payments in any other way than as the parties treated them at the time. The plaintiff's right to compensation for guaranteeing renewal loans was as valid as for his guaranty of original loans. There is no warrant for restricting the corporate resolution to transactions of the latter type. The sum of $70,800 was income to the plaintiff for 1919.
The defendant submits that the Commissioner erred in dropping $89,040 from the 1919 return, and that this amount should be included in the taxable income for 1919. The Commissioner did not err in treating this part of the commissions as income for 1918 instead of 1919. It was earned in 1918, and the plaintiff's receipt of notes for it amounted to the receipt of income.
There is one further point. At the opening of trial the defendant moved that the case be dismissed for lack of jurisdiction. The argument is that the prior proceeding before the Board of Tax Appeals settled once and for all the amount of the plaintiff's income tax for 1919. This point was raised prior to the trial by a motion to dismiss for lack of jurisdiction. Judge Goddard heard the motion and ruled against the defendant. His decision is the law of the case for the District Court and precludes any consideration of the point at the present stage. Commercial Union v. Anglo-South American Bank, 10 F.(2d) 937 (C.C.A.2).
Findings and conclusions in the plaintiff's favor on the first and second items and in the defendant's favor on the remaining items may be submitted.
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500 F. Supp. 984 (1980)
ORCHARD VIEW FARMS, INC., an Oregon Corporation, Plaintiff,
v.
MARTIN MARIETTA ALUMINUM, INC., a California Corporation, Defendant.
Civ. No. 71-222.
United States District Court, D. Oregon.
March 28, 1980.
*985 Tooze, Kerr, Marshall & Shenker, Arden E. Shenker, Wm. G. Sheridan, Jr., Roger K. Stroup, Portland, Or., for plaintiff.
Miller, Anderson, Nash, Yerke & Wiener, Clifford N. Carlsen, Jr., Douglas M. Ragen, Portland, Or., for defendant.
OPINION
BURNS, Chief Judge:
HISTORY OF THIS CASE
This diversity case is before the court on remand from the Ninth Circuit Court of Appeals for a retrial on the issue of punitive *986 damages. Orchard View Farms, Inc. v. Martin Marietta Aluminum, Inc., No. 73 3080 (9th Cir. June 23, 1975).
On March 31, 1971, Orchard View Farms, Inc. (Orchard View) filed this trespass action, seeking compensatory and punitive damages for injuries to its orchards between March 31, 1965 and the filing date. These injuries were alleged to have been caused by fluoride emitted from the aluminum reduction plant operated by Martin Marietta Aluminum, Inc. (the company or Martin Marietta). In April and May, 1973, the case was tried to a jury, which awarded Orchard View $103,655 compensatory damages and $250,000 punitive damages. The company appealed this judgment on numerous grounds.
The Ninth Circuit affirmed the award of compensatory damages but reversed and remanded the punitive damages award because in various rulings at the trial I erroneously admitted evidence of certain events that had occurred before the 1965-71 claim period, events which had been insufficiently linked by the evidence to the company's conduct and policies during the claim period.
Upon retrial, evidence was presented in various forms. Much testimony was presented through written witness statements. Additional testimony, both on direct and cross-examination, was offered live. Most of the evidence was submitted in October, 1977, but a defense witness and the plaintiff's responding rebuttal witness testified in 1978, and final arguments were heard in 1979. Both sides submitted pretrial and post-trial memoranda.
Both parties and their counsel are to be complimented for their cooperation with each other and with the court, their observance of the local procedural rules, and the quality of their work.
FACTUAL BACKGROUND
Martin Marietta Aluminum, Inc., is a California corporation that owns and operates aluminum reduction plants, including plants located in The Dalles, Oregon, and Goldendale, Washington. Harvey Aluminum, Inc. (Harvey) constructed the plant located at The Dalles, and owned and operated it when production began in 1958. In 1968 Martin Marietta Corporation purchased a controlling share of Harvey common stock. It voted its representatives into a majority of the Harvey directorship in 1969. In 1972, the name of Harvey Aluminum, Inc., was changed to Martin Marietta Aluminum, Inc. In 1974 Martin Marietta Aluminum, Inc., became a wholly-owned subsidiary of Martin Marietta Corporation.
Orchard View Farms, Inc., is an Oregon corporation. It operates three orchards with a combined total acreage of approximately five hundred acres. The orchards are located between 2.5 and 5 miles from the aluminum plant. Donald Bailey is the president and treasurer of Orchard View; he, his wife, and five of their children are the sole stockholders. Orchard View owns part of the land; the Baileys own the rest and lease it to Orchard View. The Bailey family operates the orchards.
This case is one of an ever-increasing number filed against Harvey, and later Martin Marietta, by orchardists who charged that fluorides emitted from the plant have damaged their crops. The first such suit, Renken v. Harvey Aluminum, Inc., 226 F. Supp. 169 (D.Or.1963), was filed in May, 1961. It was finally closed in 1966 when the court approved a consent decree providing for arbitration of the growers' claims and dismissal of the related actions filed in state court during the interim. Since February, 1977, thirteen actions have been filed in the United States District Court. These suits seek compensatory and punitive damages for injury allegedly inflicted by emissions from the plant during the years 1971 through 1977.
OPINION
I. OREGON LAW OF PUNITIVE DAMAGES.
II. SOCIETAL OBLIGATIONS OF BUSINESS ENTERPRISES.
III. EVALUATION OF THE DEFENDANT'S CONDUCT IN LIGHT OF
ITS SOCIETAL OBLIGATIONS.
A. Ascertaining the Harm from Plant Emissions.
1. The Company's Efforts.
a. Cherries.
b. Peaches.
c. Pines.
d. Other Vegetation.
*987
2. Efforts of Others.
a. Cherries.
1) Observation of Trees,
Leaves and Fruit.
2) Scientific Inquiry.
b. Peaches.
c. Pines.
d. Other Vegetation.
3. The Company's Response to Evidence of
Harm from the Plant's Emissions.
a. Cherries.
b. Peaches.
c. Pines.
d. Other Vegetation.
4. Conclusion.
B. Efficiently Controlling the Harmful Emissions.
1. Plant Siting.
2. Monitoring.
a. Emissions.
1) Frequency of Monitoring.
2) Accuracy of Monitoring.
a) Selection of Monitoring Location.
b) Duration of Tests.
c) Maintenance of Normal Operating
Conditions.
d) Sampling Technique.
3) Overall Evaluation.
b. Ambient Concentrations.
3. Controlling Emissions.
a. Fluoride Evolution at the Cell.
1) Operating Parameters.
2) Selection of Ore.
b. Primary Emission Control System.
1) Collection Efficiency.
a) Cell Hooding.
b) Operating Procedure.
2) Treatment Efficiency.
c. Secondary Emission Control System.
1) Collection Efficiency.
2) Treatment Efficiency.
d. Overall Performance.
4. Mitigation Measures.
a. Tall Stacks.
b. Application of Lime Spray.
5. Conclusion.
C. Arranging to Compensate for the Remaining Harm.
IV. AWARD OF PUNITIVE DAMAGES.
I. OREGON LAW OF PUNITIVE DAMAGES.
The Oregon Supreme Court has provided specific guidance on punitive damage liability in the context of industrial air pollution. In McElwain v. Georgia-Pacific Corporation, 245 Or. 247, 421 P.2d 957 (1966), the court stated:
Although this court has on occasion indulged in the dictum that punitive damages are not "favored in the law," it has, nevertheless, uniformly sanctioned the recovery of punitive damages whenever there was evidence of a wrongful act done intentionally, with knowledge that it would cause harm to a particular person or persons.... The intentional disregard of the interest of another is the equivalent of legal malice, and justifies punitive damages for trespass. Where there is proof of an intentional, unjustifiable infliction of harm with deliberate disregard of the social consequences, the question of award of punitive damages is for the jury. 245 Or. at 249, 421 P.2d at 958.
The court reversed the trial judge's withdrawal of the issue of punitive damage liability from the jury because the "defendant knew when it decided to construct its kraft mill in Toledo, that there was danger, if not a probability, that the mill would cause damage to adjoining property," 245 Or. at 250, 421 P.2d at 958, and because of "the substantial evidence from which the jury could have found that during the period involved in this action the defendant had not done everything reasonably possible to eliminate or minimize the damage to adjoining properties by its mill." 245 Or. at 252, 421 P.2d at 959.
In Davis v. Georgia-Pacific Corporation, 251 Or. 239, 445 P.2d 481 (1968), the court remanded a jury's award of punitive damages because the trial judge had refused to admit evidence pertaining to "the utility of defendant's operations and its efforts, as compared with others similarly engaged, to prevent damage to surrounding properties." 251 Or. at 245, 445 P.2d at 484.
In a more recent review of punitive damages liability in Oregon, the court in Harrell v. Travelers Indemnity Company, 279 Or. 199, 567 P.2d 1013 (1977), noted:
One whose business involves the operation of a plant which emits smoke, fumes or "particulates" may also have ... liability for punitive damages, even in the absence of any "wanton" or "fraudulent" conduct, upon the ground that he has "intentionally" permitted fumes, smoke or particles to be released and blown by the wind upon another's property, for the reason that "[t]he intentional disregard *988 of the interest of another is the legal equivalent of legal malice and justifies punitive damages for trespass." 279 Or. at 210-11, 567 P.2d at 1018, quoting McElwain, 245 Or. at 249, 421 P.2d at 958 (and adding an additional "legal" to the quotation).
Additional guidance, though of less precedential value, is provided by Reynolds Metals Company v. Lampert, 316 F.2d 272 (9th Cir. 1963). The District of Oregon trial judge had withdrawn the issue of punitive damages liability from the jury. The Ninth Circuit reversed and remanded.
Where there is evidence that the injury was done maliciously or wilfully and wantonly or committed with bad motive or recklessly so as to imply a disregard of social obligations, punitive damages are justified. Fisher v. Carlin, 219 Or. 159, 346 P.2d 641.
Here the record discloses that appellants had known for several years that fluorides from their plant were settling on appellees' land, with resultant damage to appellees' crops. It thus could have been found that their trespass was done knowingly and wilfully, that it was intentional and in wanton disregard of appellants' social obligations.
To justify an award of punitive damages, it is not necessary that the act have been done maliciously or with bad motive. Where it has become apparent, as it has here, that compensatory damages alone, while they might compensate the injured party, will not deter the actor from committing similar trespasses in the future, there is ample justification for an award of punitive damages.... Accordingly, the issue of punitive damages should have been submitted to the jury. 316 F.2d at 275.
Upon remand a second jury denied any award of punitive damages, and the plaintiff appealed. In Lampert v. Reynolds Metals Company, 372 F.2d 245 (9th Cir. 1967), the court noted that its earlier view of punitive damages had been confirmed in the interim by the Oregon Supreme Court's McElwain opinion. During the retrial, the District of Oregon judge hearing the case instructed the jury that, "with regard to punitive damages, it should weigh the apparent value to society of plaintiffs' farming activities." 372 F.2d at 247. The Ninth Circuit rejected this view, stating:
Without doubt, the operation of the Reynolds Metals Company at Troutdale has social value in that community. But in legal contemplation, the company has no obligation to provide that social value, and certainly no right to do so in disregard of its legal obligation not to cause trespass injuries upon the property of plaintiffs. We find no Oregon decision nor, indeed, any decision from any jurisdiction, which supports the weighing process sanctioned by the trial court. 372 F.2d at 248.
The decision was reversed and the cause remanded for a new trial.
This guidance provided by the Oregon Supreme Court and the Ninth Circuit Court of Appeals, though specific to the context of industrial air pollution, does not define with precision the circumstances justifying the imposition of punitive damage liability. A broad synthesis of these opinions provides the conclusion that punitive damage awards may be imposed for business activities, harmful to others, carried out in disregard of the corporation's societal obligations. In brief, the issue is whether the defendant has damaged the property of plaintiff by conduct evidencing an "I don't give a damn" attitude. For a case as complex as this, however, it is important to describe in some greater detail the societal obligations of business enterprises.
II. SOCIETAL OBLIGATIONS OF BUSINESS ENTERPRISES.
In essence, any business is socially obliged to carry on an enterprise that is a net benefit, or at least not a net loss, to society. The company's management recognized this obligation in a 1960 letter to the Wasco County Fruit and Produce League.
In closing I [Lawrence Harvey] would like to reemphasize our desire to foster the prosperity of the entire community.... *989 We are doing, and will continue to do so, the best scientific job of control that is possible under the circumstances. These are obligations which we consider part of our community responsibility. Ex. 305a at 2.
In a world where all costs of production were borne by the enterprise, determining whether a firm produced a net benefit, or at least not a net detriment, to society would be as simple as examining the company's balance sheet of income and expenses. In the real world the task is more complex, because enterprises can sometimes shift a portion of their costs of production onto others. In the case of an industrial plant emitting pollution, those harmed by the emissions are, in effect, involuntarily bearing some of the firm's production costs.
Our society has not demanded that such externalized costs of production be completely eliminated. Instead, we tolerate externalities such as pollution as long as the enterprise remains productive: that is, producing greater value than the total of its internalized and externalized costs of production. A business that does not achieve net productivity is harmful to society, detracting from the standard of living it is designed to enhance. Because firms can sometimes impose a portion of their production costs upon others, the mere fact that a company continues to operate at a profit is not in itself conclusive evidence that it produces a net benefit to society.
Our system of law attempts to ensure that businesses are, on balance, socially beneficial by requiring that each enterprise bear its total production costs, as accurately as those costs can be ascertained. A fundamental means to this end is the institution of tort liability, which requires that persons harmed by business or other activity be compensated by the perpetrator of the damage. In the context of pollution, however, the tort system does not always operate smoothly to impose liability for compensatory damages. Among the difficulties encountered are: (1) that the harm may be gradual or otherwise difficult to perceive; (2) that the cause of the harm may be difficult to trace to the pollution and from the pollution to its source; and (3) that the harm may be inflicted in small amounts upon a large number of people, none of whom individually suffer sufficient damage to warrant the time and expense of legal action and whose organization into a plaintiff class is hindered by what has come to be known as the tragedy of the commons.[1]
Because of these impediments to smooth operation of the tort system and to ensuring that each enterprise bears its own costs of production, the law imposes upon businesses a societal obligation not to obstruct legal procedures designed to provide compensation to persons harmed by externalized costs of production. Enterprises must cooperate with their neighbors in ascertaining the nature, severity and scope of the harm and in arranging to prevent the damage or to neutralize it through some form of compensation.
A breach of societal obligations justifies the imposition of punitive damages to deter uncooperative behavior that impedes the legal system from ensuring that enterprises produce a net benefit to society.
III. EVALUATION OF THE DEFENDANT'S CONDUCT IN LIGHT OF ITS SOCIETAL OBLIGATIONS.
Although the company did not fail to carry out its societal obligations in every respect, I have concluded that the overall conduct of the business with respect to ascertaining the harm from the plant's emissions, efficiently controlling the harmful *990 emissions and arranging to compensate for the remaining harm constitutes breach of societal responsibility sufficient to justify the imposition of punitive damages.
A. Ascertaining the Harm from Plant Emissions.
A business enterprise has a societal obligation to determine whether its emissions will result in harm to others. Because the damage from pollution can be difficult to perceive due to its subtle or incremental nature, and because it can be difficult to trace to its cause, the obligation of the enterprise extends not only to observation of property in the surrounding region but also to initiation and completion of unbiased scientific studies designed to detect the potential adverse effects of the substances emitted. I find that the company failed to fulfill this obligation before or during the 1965-71 claim period by taking less than full cognizance of the damage inflicted upon the orchards and by generally shirking its responsibility to undertake competent scientific inquiry into the adverse effects of its emissions.
1. The Company's Efforts.
The company did not maintain throughout the 1965-71 period a regular program of inspecting the nearby orchards to detect damage that might have been caused by fluoride emissions from the plant. Since late 1961 the company has maintained its own orchard in the vicinity, operated by Frederick Scholes, as a means of monitoring the effects of the plant's emissions upon fruit crops. Ex. 933 at 4. During the spring and summer of 1965 the neighboring orchards were inspected on several occasions by Scholes, Joseph Byrne (the company's environmental control officer) and two consultants hired by the company to evaluate orchard conditions, Michael Treshow and Earle Blodgett. Similar inspections were carried out in 1966 by these same persons accompanied by three additional hired consultants: O. C. Taylor, Leonard Weinstein and R. F. Brewer. Treshow and Blodgett continued their inspections during the spring and summer of 1967 and were joined in August 1967 by Nels Benson of Washington State University. Neither company personnel nor hired consultants inspected the orchards during the years 1968-70, after the arbitration committee established by the 1966 Renken consent decree began its scrutiny of the surrounding vegetation. Scholes and two hired consultants, Treshow and David MacLean, visited the orchards in August, 1971, some four months after the close of the plaintiff's March 31, 1965-71, claim period. Timothy Facteau of the Oregon State University Mid-Columbia Agricultural Experiment Station (MCAES) agreed that during these years the company did call in many recognized experts on the effects of fluoride exposure to fruit crops. TR 747.[2]
Neither before nor during the 1965-71 period did the company undertake or sponsor any scientific inquiry into the effects of fluoride upon vegetation. Ex. 339 at 178-80; TR 678-84, 873, 886. The company's sole contribution seems to have been the donation of a $12,000 automatic material sample analyzer to Oregon State University to expedite analysis of the Mid-Columbia Agricultural Experiment Station (MCAES) fluoride fumigation experiments with cherry tree limbs in 1966. Ex. 339 at 163; TR 127, 805.
a. Cherries.
In 1960 the company hired a consultant, Burton Richards, to inspect the orchards. Ex. 305a. Along with Scholes and Byrne, Richards in 1961 was shown stylar dimpled cherries in the orchards. TR 387-88 (Bailey).
During their 1965 inspections the company's orchard observers noticed damage of various sorts but did not attribute any of it to fluoride exposure. See Exs. 501a-d, *991 502a-c, 503a-e.[3] None of the inspectors in 1966 attributed the damage they observed, including cherry blossom petal browning and necrosis, to fluorides except for Brewer, who commented that a small amount of interveinal leaf chlorosis might have been associated with fluoride toxicity. Ex. 506c; see Exs. 501h, 502d, 503f-k, 505a-d, 507. Taylor reported that "no fluoride type symptoms were observed on foliage of sweet cherry in the 34 orchards inspected," though he did find some chlorosis, leaf bronzing and rolling in all of the orchards and petal necrosis in several. Ex. 505a, 505d at 2.
Treshow and Blodgett in 1967 again reported no fluoride-induced injury, although Treshow mentioned "marginal chlorosis and cupping which reminded somewhat of fluoride symptoms" before concluding that "fluorides were not involved." Ex. 5031; see Exs. 501e-g, 5031-n.
Byrne observed stylar dimple in the Hendricks orchard in 1969 but did not attribute this to fluoride exposure. TR 908-09.
The company did not conduct orchard inspections again until August, 1971, when Scholes, Treshow and MacLean did not report any observed fluoride injury to cherries. Exs. 502d, 503o, 504a. Scholes considered the cherry crop from the company's orchard to be "good" in 1970 and "satisfactory" in 1971. Ex. 933 at 17.
b. Peaches.
In 1965 the company's orchard inspection team found no significant fluoride-induced harm to peaches, Exs. 501a-d, 502a-c, 503a-e, although Scholes noted "several light cases" of soft suture in the Curtis orchard.[4] Ex. 502c.
In 1966 Taylor reported 3-4% soft suture in the Francois and Curtis orchards, where "the combined injuries from split pit and soft suture may have affected as much as 20% of the crop." Ex. 505d at 2. Other orchards showed less than 1% soft suture. Ex. 933 at 12 (Scholes). Taylor noted that soft suture was present only where the peach crops had earlier been reduced by the cold weather immediately following the blossoming period. Ex. 505d at 2. From the notes of the other company-hired observers, only Brewer also mentioned this soft suture.[5] Ex. 506d.
In 1967 Treshow noted one instance of soft suture at the Myers orchard and a trace of that type of injury in the Hazen and Curtis orchards. Ex. 503n; see Exs. 5031-m. Blodgett reported some soft suture in a sample of peaches provided by the plaintiff and well over 50% soft suture in the Fleck orchard. Benson considered 52 of 64 Fleck peaches to be stricken (81%); Blodgett stated that only about 40-42 had "really convincing symptoms" (63-66%). Ex. 501g at 1; see Ex. 342 at 60; TR 200, 379-80. He considered this high incidence of injury relatively insignificant because the orchard's crop was too light to justify harvesting anyway. He found a few soft sutured peaches in the Francois orchard and less than 5% soft suture at the Myers orchard. He summarized as follows:
... It would appear that, considering the orchards observed, there was no significant injury to peach fruit in The Dalles area from Fluorine this year except in the Fleck, Company and possibly the Bill Myers orchards. Ex. 501g at 3.
Blodgett also noted the presence of soft suture in peaches in the Mosier vicinity (approximately 12 miles northwest of the plant), "out of the contaminated area." Ex. 501g at 3.
*992 The August, 1971, reports of Scholes, Treshow and MacLean did not mention any injury to peaches. Exs. 502d, 503o, 504a. Scholes stated that since 1963 he had seen "only a few instances" of soft suture in The Dalles area. Ex. 933 at 4.
c. Pines.
There is no evidence that the company undertook systematic observation of pine trees in the area around the plant either before or during the 1965-71 claim period.
d. Other Vegetation.
Scholes mentioned that he might have observed apricot leaf necrosis "on a small basis" in the company's orchard during 1964-66. TR 689. Blodgett mentioned some insignificant prune leaf necrosis in 1965 he thought "not typical" of similar symptoms caused by fluoride. Ex. 501e at 2. In September, 1965, Treshow reported "trace amounts of fluoride-type necrosis ... on apricot foliage in the Folehn and Ericksen orchards." Ex. 503e at 1. In 1966 Taylor noted "very light fluoride-type necrosis at the tips of some [apricot] leaves" in the Ericksen orchard. Ex. 505d at 3. No other damage to vegetation attributed to fluoride was reported by the companyhired inspectors.
2. Efforts of Others.
a. Cherries.
1) Observation of Trees, Leaves and Fruit.
Walter Mellenthin, O. C. Compton and others at MCAES made surveys of the amount of fluorine in vegetation in The Dalles area within six miles of the plant site in 1953 and twice during each growing season from 1957 through 1967. See Exs. 119-24. The plant began operating on July 26, 1958, after the MCAES July, 1958, survey. These studies reported average fluorine contents of sweet cherry foliage and forage in parts per million as follows (figures in parentheses are average fluorine contents at sampling locations 1-2 miles from the plant):
No. of Average No. of Average
Sampling Fluorine Sampling Fluorine
Sampling Locations Content Sampling Locations Content
Period (ppm) Period (ppm)
--------- ---------- --------- ---------- ---------- ----------
1953 18 7.9 1963
1957 July 41 12.6 (19.6)
July 20 12.8 Sept. 41 21.6 (38.6)
Oct. 23 11.3 1964
1958 July 51 10.9 (17.5)
July 23 6.4 Sept 51 19.3 (34.9)
Oct 23 64.8 1965
1959 July 30 7.3 ( 9.6)
June 24 28.6 Sept 31 16.2 (29.3)
Aug 24 88.1 1966
1960 July 51 6.4 (11.0)
July 26 96.1 Sept 48 13.3 (26.6)
Sept 26 196 1967
1961 July 70 7.2 (11.4)
July 44 68.5 (105) Sept 67 17.6 (31.9)
Sept 44 79.4 (111)
1962
July 44 31.6 ( 63.5)
Oct 43 95.0 (176)
At least part of the dramatic decrease in leaf fluorine content between 1962 and 1963 may be attributed to the initiation in 1963 of the practice of washing the leaves prior to crushing and analysis, see Ex. 342 at 97-98, although the first mention of this procedure in the reports appears in association with the 1965-67 data. Ex. 124 at 2. Each of these surveys found that the fluorine content of cherry leaves generally increased with proximity to the plant.
None of these reports mentioned the observation of damage to cherry leaves or fruit from fluoride exposure. Nevertheless, Mellenthin testified that he first noticed scorching of cherry leaves and stylar dimpling of cherries in The Dalles area in 1959 and 1960. Ex. 342 at 20-21. In 1960 and 1961 he photographed scorched cherry leaves and dimpled cherries at the Hendricks, Myers and other orchards but did not know then what had caused these conditions. Ex. 342 at 40-47. U. S. Department of Agriculture inspector Warren Cyrus noticed stylar dimpling around 1960, a condition he had not seen during previous periods of cherry inspection in Medford, Milton-Freewater and Hood River. Ex. 330 at 2007. The cherries from The Dalles area were not dimpled every year but were so afflicted during about four of the six following years. Ex. 330 at 2008, 2022.
In August, 1960, the Wasco County Fruit and Produce League complained in a letter to the company that the plant's emissions were causing "severe damage to the fruit set, fruit, and foliage of our cherry trees." Ex. 305b at 1.
This year the general pattern of production showed that the farther away *993 from Harvey Aluminum plant our cherry orchards were located, the better was our production..... Most of the distant orchards had a good crop while those close in generally had less than half a crop. The district was short of a normal crop by several thousand tons with the resultant loss in value of approximately $1,000,000.
Some of the fruit from orchards near your plant which was picked up for canning, in a fully ripe condition, showed suspicious symptoms. This consists of a blossom end deformity and withering of the fruit. In addition to this, we are receiving a substantial amount of marginal leaf burn and a rolling and drying of the foliage. We feel this will have a definite adverse effect on our cherry crop the next year. Ex. 305b at 2.
The league in December, 1960, presented to the Oregon State Sanitary Authority in the presence of the company's legal counsel an analysis showing that the 1960 cherry crop was reduced to one-third of the 1958-59 amount at orchards experiencing a cherry leaf fluorine content of at least 60 ppm, while the crop remained at 102% of the 1958-59 amount at the orchards 4-6 miles from the plant experiencing a cherry leaf fluorine content less than 60 ppm. Exs. 170g-1, 170g-2; TR 403. In April, 1962, the league adopted a statement linking cherry fruit set with fluoride exposure. Ex. 170b-1.
Wasco County agricultural extension agent John Thienes did not notice any fluoride symptoms on cherries in his own orchard (about 4.5 miles from the plant) during the 1961-66 period but he did see cherry leaf burn prior to the "first major improvement" to the plant. TR 226; Ex. 345 at 32. He concluded that he has "over the years seen a definite pattern ... of crop reduction based on distance and direction from the [plant]." Ex. 345 at 33.
After conducting fluoride aqueous spray and fumigation experiments, Mellenthin concluded by 1965 that fluoride was the cause of the cherry leaf burn and stylar dimple he had noticed in the orchards. Ex. 342 at 54-55. In a 1966 deposition taken by attorneys for the company he noted that the stylar dimple he had observed in the orchards in 1962 could be associated with the dimpling of cherries resulting from the fluoride fumigation experiments. TR 121.
When the previous county extension agent, Elgar Nelson, in 1966 returned from 10 years abroad with the AID, he noticed stylar dimpling and a generally lighter crop of cherries compared to 1956. Ex. 344 at 12-14.
The expenses of the arbitration committee established under paragraph 6 of the 1966 Renken consent decree were shared equally between the company and the Renken plaintiffs. This committee visited the orchards in April, 1967, found cherry blossom petal necrosis in several areas, but stated:
... The consistent location of damage to petals of cherry blossoms on the trees and fruiting spurs at each of the three locations is not consistent with expected damage by an atmospheric pollutant but rather with damage mediated through an environmental phenomenon, such as low temperature or rapid temperature changes. Ex. 907.
Later that month one of the arbitrators, Taylor, reported:
... The symptom most commonly attributed to fluoride injury on cherry blossoms was a peripheral burning or necrosis of petals .... This symptom was observed throughout The Dalles cherry growing area, even in the most distant and remote orchard visited, one located on a ridge some six or more miles south of the aluminum plant.... Identical petal burn symptoms were prevalent on Royal Ann blossoms at the Oregon State University Station near Mosier [approximately 12 miles northeast of the plant]. Many environmental factors may contribute to the petal burn symptom but there is very strong evidence that cold temperatures, and not necessarily frost or freezing temperatures, are the primary causal agent. There was no evidence that exposure *994 to gaseous pollutants played any part in producing the petal burn.
. . . . . .
... No injury was observed on blossoms or leaves of sweet cherries and peaches in The Dalles area that was considered to be attributable to exposure to air pollutants and not to adverse climatic conditions. Ex. 908.
During the spring of 1968, orchardist Walter Ericksen recruited temporary county extension agent Robert Smith to assist him in gathering documentation of fluoride damage to cherry blossoms. They selected cherry tree limbs and photographed them each morning during the blossom period from March 30 through April 9. Ex. 226 at 6. They observed a petal browning effect within a day following the presence of smoke from the plant, an effect different from the petal browning caused by frost they observed at lower elevations. Petal browning from frost shows "a water-soaked effect," while browning observed after exposure to smoke from the plant shows a "cupping or crinkling on the edge of the petal [with] some browning ... in towards the center of the flower itself." Ex. 343 at 285-86 (Smith). Smith compiled his observations into a report, which noted that the temperature at the nearest weather station fell below freezing on March 30 and 31, just prior to his observation of abnormal petal browning on the mornings of March 31 and April 1. He did not believe that the blossoms had been injured by this frost, because no water-soaked petal browning was noticed and because the weather station recording the freezing temperatures was located about 400 feet below the trees under observation and had been deliberately placed in a "frost pocket" that was expected to experience the coldest temperatures in the orchards. Ex. 226 at 2-3; Ex. 338 at 514. Smith stated that he observed no other symptom of damage and that the browning of the petals "in itself would probably not be significant." Ex. 343 at 288.
In August 1968 the arbitration committee noticed cherry leaf necrosis in one orchard but attributed it to disease rather than to exposure to air pollutants. Ex. 909 at 3. In April, 1969, the committee visited several orchards and observed cherry blossom necrosis
... throughout the area, and this condition did not appear to be related to direction from the fluoride source or proximity to [the plant]. There was no evidence that this condition was associated with fluorides in the atmosphere. Ex. 508 at 1.
Nelson reported, however, that on the morning of April 21, 1969, cherry blossoms in the Hendricks' orchard began to brown rapidly after the nearby analyzer registered a sharp increase in the atmospheric concentration of gaseous fluoride. Ex. 344 at 30-31, 50-51. He distinguished this effect from the normal browning that overtakes cherry blossom petals within about two weeks of blooming by noting the rapidity of the browning and its association with a cupping of the petals, which ordinarily remain flat as they brown with maturity. Ex. 344 at 61. He also noted a scorching of the pistils and filaments, scorched cherry leaves and "burned matchsticks" (infertile cherry fruit with stems) elsewhere near the plant. Ex. 344 at 61, 75-76, 79-80.
Another inspection by the arbitration committee in late June, 1970, again found "no fluoride type symptoms." Ex. 510. Conversely, Mellenthin again observed and photographed stylar dimpling of cherries in the Cherry Heights area near the plant in 1970 and 1971. Ex. 342 at 72-74.
2) Scientific Inquiry.
In 1961 MCAES researchers selected 10 pairs of Royal Ann cherry trees in the Mosier area (about 12 miles northeast of the plant) and sprayed one of each pair with a 500 ppm ammonium fluoride solution seven times between April 7 and July 18. The leaf fluorine content in the sprayed trees increased to 119 ppm after six spray applications-more than 100 times the fluorine content of cherry leaves from the unsprayed trees; about equivalent to the average fluorine content of cherry leaves in The Dalles area tested by MCAES in August, *995 1959, July, 1960, and October, 1962; and about half of the fluorine content of cherry leaves in The Dalles area tested by MCAES in September, 1960. Ex. 121 at 5, Ex. 119 at 23; Ex. 120 at 11; Ex. 122 at 16. The MCAES researchers found "no visible leaf abnormalities" in the sprayed trees but noted that cherries from the sprayed trees showed "the presence of a slight depression near the tip" and contained 8.3 ppm fluorine in the tip half compared to 4.4 ppm fluorine in the tip half of cherries from the nonsprayed trees. Ex. 121 at 5; see Ex. 342 at 50-51.
In April, 1962, the Wasco County Fruit and Produce League issued a statement describing the conclusions of a presentation by Mellenthin of MCAES given at a horticultural meeting: A 50 ppm ammonium fluoride spray reduces cherry pollen viability and, when applied to female flower parts, reduces cherry fruit set by more than 50% and decreases individual cherry fruit weight.
In 1965 MCAES conducted fluoride fumigation experiments with cherry trees in Mosier and found that exposure to fluoride-containing gas during 12-15 hours beginning about 5:00 P.M. every day produced stylar dimple in cherry fruit. Ex. 342 at 54-57. Compton had at that time drawn no conclusions about the effect of fluoride exposure upon cherry fruit set. Ex. 342 at 58.
In the spring and summer of 1966 MCAES conducted additional fluoride fumigation experiments with cherry trees in Mosier. The trees were exposed to a concentration of 4 micrograms of hydrogen fluoride gas per cubic meter of air (4 mg/m3), which produced dimpled fruit. TR 128 (Mellenthin). The results of this work were presented at a "field day" session attended by representatives of the company, among others. TR 384. In a July, 1966 deposition Mellenthin testified in the presence of attorneys representing the company that the fluoride fumigation reduced cherry fruit set and size. TR 118-19. The possible deleterious effects of the limb cages used in the experiment were accounted for by "caging" several control limbs not exposed to fluoride gas inside the cages. Ex. 342 at 69. The researchers at MCAES could not promptly measure the concentration of fluoride inside the cages due to the lack of an analyzing device. Air samples were sent to Oregon State University for analysis but the results were delayed for months. Ex. 342 at 71-72; TR 128. Mellenthin did conclude, however, that caging could not produce the observed stylar dimpling. Ex. 342 at 80.
Dr. Timothy Facteau conducted cherry fruit set studies in 1967, 1969 and 1970. In 1970 he concluded that ambient atmospheric fluoride concentrations in The Dalles area resulting from the plant's emissions were capable of reducing cherry fruit set, and he so testified in a deposition taken in the presence of attorneys representing the company. TR 736-37. His 1969 fumigation experiment at 20 mg/m3 "effectively reduced [cherry fruit] set to nothing." TR 738. His 1970 deposition noted that fluoride exposure reduced cherry fruit set but included no conclusions about the ultimate effect upon cherry production. TR 739-40, 780. Mellenthin, however, concluded that a reduced fruit set "would generally reduce the crop." Ex. 342 at 26. In 1970 Facteau began to examine the effect of fluoride exposure on the cherry pollen tube. TR 740. It wasn't until 1977 that Facteau, based upon 1976 experimentation, tentatively identified a threshold exposure to hydrogen fluoride below which there is no adverse effect upon cherry fruit set: 5 mg/m3. Ex. 934 at 47. Five weeks later he stated to the contrary that he had not found a threshold level below which no fruit set reduction may be observed. TR 725.
... I'd have to go back to the original idea that any time we can decipher an elevated level of fluoride in our sampling stations during the blooming in The Dalles, I would have to give the opinion I think there is a probability there could be a reduction in set. TR 726.
Meanwhile, Curtis Mumford, an agricultural economist at Oregon State University, in February, 1970, issued the results of a *996 study of cherry crop yields in The Dalles from 1951-67 initiated in late 1967 at the behest of the Wasco County Fruit and Produce League and based upon confidential production data supplied by the League. See Ex. 938. The report stated that the average yield of sweet cherries after the plant began operating (1959-67) was 4.16% higher than the average yield before (1951-58). In addition, the data failed "to disclose any definite pattern in sector by sector changes as related to distance from the aluminum plant." Ex. 695 at 3. Mumford noted, however, that the study had not been controlled to account for changes in the varieties of sweet cherries cultivated, in the number and spacing of trees, and in various horticultural practices, including irrigation, fertilization, pollenization, spraying and management. Ex. 695 at 2.
... It is known that production technology has improved generally, and that yields of all types of crops have increased during the study period. Even though yields of sweet cherries increased slightly during the study period, it is possible that the increase would have been even greater in the absence of hydrogen fluoride in the environment; however, as indicated above, the data do not warrant conclusions concerning yields in the absence of hydrogen fluoride. Ex. 695 at 3.
Orchardist Ericksen testified that fruit production in The Dalles had been increased by irrigation, interplanting of additional trees or replanting orchards more densely, and the use of tractors, speed sprayers, fertilizer and aerial spraying for cherry fruit flies. Ex. 338 at 515-20. The combination of irrigation and denser spacing of trees "can increase up to double the production." Ex. 338 at 518. Considering the potential for increased cherry production offered by these horticultural innovations, the finding of Mumford's study that cherry crops increased by slightly more than 4% during the 8-year period following commencement of the plant's operations compared to the prior 8-year period is not strong evidence that the plant's emissions had no adverse effect upon cherry production in The Dalles.
b. Peaches.
The 1953-67 MCAES surveys reported average fluorine contents of peach foliage in parts per million as follows (figures in parentheses are average fluorine contents at sampling locations 0-1 mile from the plant):
No. of Average No. of Average
Sampling Fluorine Sampling Fluorine
Sampling Locations Content Sampling Locations Content
Period (ppm) Period (ppm)
-------- ----------- -------- ---------- ---------- ----------
1953 12 6.5 1963
1957 July 16 11.1
July 13 10.1 Sept 14 16.5
Oct 14 10.0 1964
1958 July 15 11.8 (119)
July 14 8.4 Sept 15 18.4 (291)
Oct 14 76.1 1965
1959 Sept 9 13.7
June 14 22.5 1966
Aug 14 70.0 July 17 8.7
1960 Sept 17 12.3
July 14 81.8
Sept 26 186
1961
July 18 60.8
Sept 18 68.8
1962
July 20 39.9
Oct 20 92.5
As noted earlier, at least part of the dramatic decrease in leaf fluorine content between 1962 and 1963 may be attributed to the practice initiated in 1963 of washing the leaves prior to crushing and analysis. See Ex. 342 at 97-98, Ex. 124 at 2. Each of these surveys found that the fluorine content of peach leaves generally increased with proximity to the plant.
The MCAES survey in 1959 found soft suture in peaches "not observed previously in this area." Ex. 119 at 1, 6. Bailey noted "a serious condition appearing in some of the peaches delivered at the Columbia Fruit Growers dock" in 1959. A representative from the plant observed this damage but could not identify the cause. TR 422. The U. S. Department of Agriculture inspector confirmed that peaches from The Dalles area began to show soft suture beginning in 1960. Ex. 330 at 2009. The Wasco County Fruit and Produce League requested the Department to inspect the peach orchards, and Inspector Cyrus found that the percentage of peaches with soft suture increased with proximity to the plant. Ex. 330 at 2012. Normally the percentage of peaches rejected by USDA inspectors as "culls" averages 6-7% and may range up to a maximum of 20%. After the appearance of soft suture in The Dalles, however, the inspectors began to reject 71-93% of the peaches as unmarketable. Ex. 330 at 2017-18.
*997 In August, 1960, the Wasco County Fruit and Produce League complained of damage to peaches in a letter to the company.
In 1959 our crops of apricots and peaches showed some signs of damage with which we were not familiar at the time, and we did not become too alarmed about the problem then. In our 1960 crop, we are suffering extreme damage in an area within four to five miles from your local plant, and our growers are greatly concerned.
. . . . .
... The peach damage consists of a premature ripening and blossom end breakdown of the fruit. The peaches affected are very irregular in shape and color in this blossom end area. This renders from eighty to one hundred per cent cullage in some cases close in to the aluminum plant....
The above described symptoms have been identified by experts in the field as fluoride injury. Ex. 305b at 1.
Of 100 Red Haven and Golden Jubilee peaches picked at random from each of six trees at the MCAES orchard at The Dalles, 73-95% showed soft suture. Ex. 120 at 5. The September, 1960 MCAES survey found soft suture in 0.8-33.3% of the Elberta peaches from various orchards inspected at the Columbia Fruit Packing House; Elberta peaches in the Myer orchards showed 77.6-98.6% soft suture. The J. H. Hale peaches inspected at the packing house showed 0-40% soft suture; 39.6-55.8% of Myer's J. H. Hales were afflicted. None of the 79 J. H. Hale peaches from the Troxel orchard in the Mosier area (about 12 miles northwest of the plant) showed soft suture. Ex. 120 at 19-20. MCAES reported that normal Elbertas from The Dalles area had an average fluorine content of 5.3 ppm on the suture side and 4.6 ppm on the dorsal side, while soft sutured Elbertas had 9.0 ppm on the suture side and 5.4 on the dorsal side-about a 70% greater concentration on the suture side and 17% more on the dorsal side than the normal Elbertas. Ex. 120 at 18. In September, 1961 MCAES found 2 36% soft suture in the Improved Elbertas in The Dalles area compared to 0% in the Mosier area and 2% in the Hood River area; 10-52% soft suture in The Dalles J. H. Hales compared to 0% in Mosier. Ex. 121 at 22. Orchardist Ericksen testified that Scholes visited his orchard that very month and conceded that his early ripening varieties of peaches were a total loss. Ex. 338 at 545-46.
In 1964 extension agent Thienes testified by means of affidavit in Renken before the Ninth Circuit Court of Appeals that the 1964 peach crop in Wasco County was "near normal" with good quality fruit and "soft suture being a very minor factor this year." Ex. 749.
A U. S. Department of Agriculture inspection of Improved Rochester peaches from the Ellett orchard on August 4, 1965, found that all the peaches showed "serious damage caused by dryness, cracking and/or breakdown on blossom end and premature ripening of lower suture area." Ex. 154t. An August, 1966 inspection of eight lots of peaches from The Dalles area revealed that 45-60% of the Elbertas suffered this same type of damage, as did 100% of the Improved Elbertas from the Francois orchard. Of the J. H. Hale peaches examined, only 9% showed this injury at the Fleck orchard and 36% at the Myers orchard, but similar damage appeared in 67-70% of the J. H. Hales at the Francois and Ellett orchards. Exs. 1541-s. Scholes and Byrne were present during these inspections. TR 375 (Bailey).
In April, 1967, Taylor, on behalf of the arbitration committee, reported the observation of no injury to blossoms or leaves of peach trees attributable to air pollution. Ex. 908 at 2. The arbitration committee visited the orchards in The Dalles area in August, 1968, accompanied by representatives of the company. The committee reported the observation of "split-pit ... but no typical suture-red-spot symptoms" in the Ellett orchards, split-pits and a "very light incidence" of suture-red-spot in the Fleck orchards, no suture-red-spot in the Hendricks orchard (but in half of the 10 peaches from his refrigerator), much splitpit *998 but no suture-red-spot in the Francois orchard, and no evidence of fluoride injury in the Curtis Brothers or Bailey orchards. Ex. 909.
In April, 1969, the committee noted severe winter injury to peaches in the Cherry Heights area but not in the Mill Creek area. Ex. 508 at 1. Former extension agent Nelson in August, 1969, observed and photographed "close to 100%" soft suture in the Ellett orchard in the Cherry Heights area. Ex. 344 at 98; see Ex. 344 at 85-102.
In June, 1970, Taylor reported on behalf of the arbitration committee that no "fluoride type symptoms" were observed in the Francois peach orchard. Ex. 510. Orchardist Myer in August or early September, 1970, photographed soft-sutured peaches he found lying on the ground in the company's orchard after some harvesting. Ex. 332a at 18-20. Myer believed that these were worthless peaches that had been thrown on the ground during picking, but Scholes stated that these were ripe peaches that had been detached by a squall wind before he had a chance to gather them up. TR 675. Finally, Mellenthin testified that he observed soft suture in peaches in The Dalles in 1970 and 1971. TR 124.
c. Pines.
The Stanford Research Institute's 1955 proposal to the company "for an investigation of potential air pollution conditions in the vicinity of your future aluminum reduction plant at The Dalles, Oregon," noted:
With some vegetation (such as gladioli and pine trees), a relatively low level of accumulation of fluorides causes injury to the plant material, and even death. Ex. 220d at 1.
In 1959 agricultural extension agent Thienes noticed damage to spruce that he attributed to fluoride exposure, and he showed this condition to a representative of the company. TR 196-97. Thienes also observed needle burn or "blight" in Ponderosa pine "from high level of fluoride ... locally associated with the areas immediately surrounding The Dalles." Ex. 345 at 24. Mellenthin observed "so-called die-back of the needles ... which we hadn't seen before." Ex. 342 at 15.
He and MCAES researchers in 1961 surveyed one-year-old pine tree needles at 13 sites from one to four miles from the plant and at one site in Hood River, 20 miles west of the plant. At each site 5-10 trees were examined, and from each tree 5-10 branches were cut off and the needles stripped, inspected for needle burn or scorch, chopped and analyzed for fluorine content. At the Hood River site they found needle fluorine contents of 6.5 and 19.3 ppm; at the locations around the plant, an average needle fluorine content of about 65 ppm. None of the Hood River needles suffered the scorch or "blight" previously "associated with abnormal concentrations of fluorine in the needles." Ex. 159 at 1, 6. In contrast, needles from The Dalles showed scorch averaging from 0.9% the length of the needles at the site 4 miles south of the plant to 67.6% the length of the needles at the site 1.2 miles northwest of the plant. The researchers specifically discounted any connection between this injury and insects or soil conditions. "There was no pathological, entomological, or soil condition that would account for the needle scorch found in the area." Ex. 159 at 5. Instead, they attributed the injury to exposure to fluorides.
... Generally, the greater amount of scorch was associated with higher fluorine content. The correlation coefficient between scorch and fluorine content was +.50 and was significant at the 5% probability level. Ex. 159 at 4.
The researchers also measured the sapwood resin pressure of the trees and found "an abnormal increase in the pressure of the water in the stem" of trees showing the most severe needle scorch. Ex. 159 at 4. They concluded that "[t]he severely affected trees may eventually die of starvation because of the greatly reduced leaf area." Ex. 159 at 5.
During a 1961 tour of the pine groves, Oregon state pollution control administrator Richard Hatchard saw "considerable damage to the needles, which presented a dying tree appearance." Ex. 346 at 8. In *999 July, 1965, the MCAES researchers found 24.1-104.4 ppm fluorine in one-year-old pine needles near The Dalles and scorch averaging 21.8-47.5% of their length. Needles taken from Hood River contained an average of 7.3 ppm fluorine and showed no scorch. Ex. 124 at 4-5, 23.
In August, 1968, the arbitration committee found heavy pine needle tip necrosis on the Hendricks property but did not attribute this affliction to fluoride exposure. Ex. 909 at 3.
d. Other Vegetation.
Extension agent Thienes in 1958 was alerted by orchardists to the browning of apricot leaves, which he attributed to fluoride exposure. Ex. 345 at 17, 31. In 1959 Mellenthin of MCAES observed and photographed apricot leaf scorch in the Bunn orchard. He did not then know the cause but later concluded it to have been fluoride. Ex. 342 at 38. Also in 1959 MCAES researchers noticed "a small amount of marginal burn characteristic of fluoride scorch on apricot leaves taken from [two stations within 4 miles of the Plant]" in June. In August they found leaf scorch in all apricot orchards at five other sampling stations, as well as prune leaf scorch. The scorched apricot leaves contained about 16% more fluorine than non-scorched leaves; the scorched prune leaves, about 37% more fluorine. Ex. 119 at 6.
In 1960 MCAES researchers reported a "marginal burn characteristic of fluoride scorch ... on apricot leaves taken from most of the stations" and on prune leaves at one location. Ex. 120 at 5. Again in 1961 and 1962 they noticed slight marginal necrosis "characteristic of fluoride injury" in some of the orchards. In 1962 injured leaves contained an average 35.4 ppm fluoride; non-injured leaves, 20.1 ppm fluoride. Ex. 121 at 4; Ex. 122 at 7.
3. The Company's Response to Evidence of Harm from the Plant's Emissions.
a. Cherries.
As noted previously, the Wasco County Fruit and Produce League complained of damage to cherries in a letter to the company in 1960. Since that time, company representatives, particularly Scholes and Byrne, were repeatedly alerted to the possibility of harm by the orchardists, the county extension agents, the federal fruit inspectors and the MCAES researchers. See Ex. 339 at 168; Ex. 343 at 293; TR 153-54, 197-98, 375, 385, 396-98, 419. Though this evidence was sufficient to convince the jury in this case in 1973 to award the plaintiff $88,135 for damage to cherry crops during the 1965-71 period (85% of the total compensatory damage judgment), it was not taken so seriously by the company. Scholes consistently reported to the company that the plant's emissions were causing no damage to cherry crops. Ex. 933 at 6. Byrne testified that he had never seen damage to cherry trees caused by fluoride emissions, even though Scholes had reported to him his observation of "snubbed-nose cherries" around the United States Steel plant in Utah. Ex. 935 at 2; Ex. 339 at 55; TR 865. Plant manager Taylor Gibson testified that "the most competent scientists available to us ... uniformly report that any unusual symptoms observed in the orchards are not caused by emissions from our plant." Ex. 931 at 4.
After Byrne was hired by the company in 1961 to evaluate the orchardists' claims that their crops were being damaged, he undertook no survey of the scientific literature on the subject of fluoride effects upon vegetation. Ex. 339 at 51. He discounted the applicability of the research with which he was familiar, concluding that the fluoride fumigation studies performed by Donald Adams and others at Washington State University prior to 1961 found cherry leaf necrosis only at very high concentrations of airborne fluoride. Ex. 339 at 55-58, 155. Instead, he concluded that the marginal chlorosis in cherry leaves in The Dalles was caused by a manganese deficiency. Ex. 339 at 155-56. Byrne was present at the 1963 and 1966 MCAES field days when the researchers discussed the results of their ammonium fluoride spray and hydrogen fluoride fumigation experiments. His evaluation *1000 of the experiments was that fluoride damages cherries only "at substantially high levels," Ex. 339 at 166, "in excess of those levels measured in the ambient air in The Dalles." Ex. 935 at 6. This appraisal was not entirely accurate. The 1961 MCAES 500 ppm ammonium fluoride spray experiment found stylar dimple corresponding to a cherry leaf fluorine content of 119 ppm-a level frequently exceeded in the area around the plant from its commencement of operations through 1962, if not later.[6] The 1966 MCAES hydrogen fluoride fumigation experiment found a reduction in cherry fruit set at an exposure level of 4 mg/m3 (approximately 4 parts per billion) -a concentration not infrequently experienced in The Dalles during bloom season in 1963. Ex. 122 at 10-11, 34. In contrast, the highest daily average concentration measured by MCAES during bloom season in 1964 was 2.5 mg/m3, Ex. 123 at 5; in 1965 was 3.31 mg/m3, in 1966 was 4.92 mg/m3 and in 1967 was 4.65 mg/m3. Ex. 124 at 5-6, 24-28. These daily average figures, of course, smooth over the peaks and troughs of actual atmospheric hydrogen fluoride concentrations during any particular day, and even Byrne eventually agreed that an ambient concentration of 4-5 mg/m 3 for a period of just 4 hours during bloom season could harm the cherry fruit set. TR 866. In my evaluation, this evidence, combined with the frequent complaints of the orchardists, renders disingenuous Byrne's claim to a well-founded and sincere belief that the plant's emissions never damaged cherry crops in The Dalles.
Instead of considering seriously the results of the MCAES research, Byrne concluded that the spray and fumigation studies were worthless. TR 416 (Bailey), 817, 874-75. Byrne visited the MCAES facilities only once during the 1967-71 period when Facteau was continuing this research; no other company representatives paid any visits. TR 775. The company's response to independent research into the effects of fluorides upon vegetation appeared to be somewhat hostile.[7] Spokesmen opposed a proposal before the state legislature for additional funds for MCAES research, instead proposing a "jointly-sponsored research project by the Company and by the growers." Ex. 339 at 163. Byrne met with the orchardists and MCAES researchers to propose a "comprehensive evaluation of The Dalles cherry growing area." TR 800. The orchardists rejected the proposal because they felt "there were too many strings attached." TR 802.
... [T]hey didn't want us [the company] in the program. They felt if the company had funds in the program, we would control it, and they didn't want any part of it. So that ended the cooperative aspect of the investigation. TR 802 (Byrne).
The company offered to fund a "reverse fumigation" experiment to compare the viability of fruit crops in The Dalles area with fruit trees shrouded by a material to filter out the fluorides in the surrounding air, but MCAES did not respond. TR 802-04. The company was admittedly capable of undertaking its own experimentation in the company-owned orchard. Byrne stated that he could have conducted a reverse fumigation study for the company but "really didn't know" why he never did. TR 874. When Facteau of MCAES concluded on the basis of a 1970 fruit set survey that fluoride from *1001 the plant was harming the cherry crop in The Dalles, the company hired a statistician to provide an alternative interpretation of the data. TR 819. Prior to March, 1972, the company began negotiations with the Boyce-Thompson Institute for replication of Facteau's research, yet Facteau was not invited to participate in this study and was not even aware of it until after its conclusion in 1976. TR 775a-76, 875-76.
The preponderance of the evidence shows that, before and during the 1965-71 period, the company was more concerned with denying its responsibility for damage to cherry crops than with accurately detecting any adverse effects from exposure to fluorides from the plant.
b. Peaches.
Scholes evaluated the damage to peaches from the plant's emissions as follows:
... I agree that prior to 1963 there was significant damage to peaches caused by emissions from the plant. Since 1963, I have seen only a few instances where peaches from The Dalles suffered soft suture. I believe that a lime spray will prevent soft suture. We have agreed to supply lime spray to growers who wish to use it. However, the incidence of soft suture has been so insignificant that I no longer feel that lime spray is necessary. Ex. 933 at 4.
Byrne agreed that "fluorides were involved to some extent" with soft suture in peaches. Ex. 339 at 8. "[T]o the extent that there is soft suture, it is probably caused by fluoride from the plant." Ex. 339 at 26. See Ex. 339 at 172. Byrne realized the connection between fluoride emissions and damage to peaches when he first began working for the company in The Dalles in 1961. Ex. 339 at 50. Though he was aware of the orchardists' continued complaints and the results of the 1965 and 1966 U. S. Department of Agriculture inspections and the 1967 inspections by its hired consultants Benson and Blodgett, Byrne concluded that fluoride injury to peaches "hasn't been a substantial problem since about 1963." Ex. 339 at 173; see Ex. 935a at 28. The credibility of this statement is somewhat strained by Byrne's admission that an atmospheric fluoride concentration of 1 part per billion (roughly 1 mg/m3) during the "particular time period when the peaches are particularly susceptible" would produce soft suture. Ex. 339 at 155.[8] The 1965-67 MCAES measurements, the 1967-71 arbitration committee measurements and the 1963-71 company measurements indicate that the 1 ppb level was frequently exceeded in the orchards around the plant during the 1965-71 claim period. Ex. 701a; Ex. 123 at 5; Ex. 124 at 24-28. Nevertheless, Byrne was willing to admit only, "Yes, there was a single peach in the period 1965 to 1971 that might have had soft suture.... There may have been, yes." Ex. 935a at 27-28.
As with cherries, I find the company's efforts to ascertain what harm the plant's emissions might be causing to peach crops in the vicinity to have been less than diligent and the company's reaction to evidence of harm produced by the efforts of others to have been obstructionist. The company's attempts to blame what reasonably appeared to be damage from fluoride upon plant diseases, weather conditions (including wind), soil conditions (including nutrient deficiencies), horticultural practices, insects, pesticides and a lack of water are not persuasive.
c. Pines.
Scholes agreed "that in the early years of the plant's operations, i. e., 1960-1963, there was damage to pine trees caused by hydrogen fluoride emissions from the plant." Ex. 933 at 3. Since then, the unhealthy condition of the trees, according to Scholes, is "the result of natural stresses, including lack of irrigation and scale." Byrne knew about the problem of pine blight around an aluminum reduction plant in Spokane County, Washington, prior to the beginning of *1002 his tenure with the company in 1961. Ex. 339 at 54. He agreed with Scholes that the plant's emissions have not harmed pine trees in The Dalles since 1963. Ex. 339 at 173. This conclusion is directly contradicted by the findings of the 1965 MCAES pine needle scorch survey described earlier, see Ex. 124 at 4-5, 23, and in my judgment does not constitute a well-founded and sincere evaluation of potential damage from the plant's emissions.
d. Other Vegetation.
The plaintiff did not seek compensation for damage to vegetation other than cherry, peach and pine trees, and I have found no mention in the record of any damage to such vegetation from the plant's emissions since 1966. I therefore do not base my conclusions regarding the social responsibility exhibited by the company upon evidence pertaining to other types of vegetation.
4. Conclusion.
In sum, I find that the company's failure to exercise sufficient diligence in obtaining information pertinent to damage to crops and trees that might have been caused by the plant's emissions and to evaluate objectively the relevant information compiled by others constitutes evidence that the company was not fulfilling its societal obligations during the 1965-71 claim period.
B. Efficiently Controlling the Harmful Emissions.
During the claim period the company had a societal obligation to adopt and maintain reasonable pollution control measures, at least those capable of reducing the harm at a cost less than the damage caused by the emissions. Failure to adhere to such a course would result in a net detriment to society. An efficient program of pollution control also requires at least occasional monitoring of emissions as a check on the effectiveness of the control strategy.
The plaintiffs contend that the company did not implement reasonably efficient and economical pollution control measures that could have reduced the fluoride emissions from the plant during the 1965-71 claim period. The company's response is that its control system during that period was among the best in any aluminum plant in the world. Simply being "among the best" does not necessarily discharge the company's societal obligations, because the performance of other plants might also evidence social disregard. Moreover, a company's obligation to restrict its emissions depends upon the damage they might cause; a greater degree of control is called for in a populated agricultural area than in more sparsely inhabited and cultivated surroundings. Because calculating the precise costs and benefits of various pollution control strategies is impossible, however, descriptions of the feasibility and effectiveness of systems employed in other plants are useful to indicate the degree of emission control the company might have reasonably been expected to achieve during the claim period.
Although the company's social obligation extends to the implementation of only those pollution control measures that efficiently reduce the damage to others, an award of punitive damages does not require the plaintiff to provide detailed analyses of alternative emission control strategies and their costs. Instead, the plaintiff need only show, by a preponderance of the evidence, the existence of pollution reduction measures that could have been adopted and reasonably might have been expected to efficiently decrease the plant's emissions. It then becomes the burden of the company, with its superior access to scientific, technological, engineering, economic and management expertise, to show, by a preponderance of the evidence, that the measures proposed by the plaintiff were not available before or during the claim period or would not have resulted in efficient emission control.
My examination of the evidence leads me to conclude that the company failed to implement reasonably efficient and economical pollution control measures that could have reduced the fluoride emissions from the plant during the 1965-71 claim period.
*1003 1. Plant Siting.
One means of avoiding harm to neighbors is to locate a plant likely to emit pollutants in a sparsely populated and cultivated area. Choosing a location without consideration of the surrounding land uses may result in the infliction of unnecessary damage upon neighbors during the entire operating lifetime of the plant even if otherwise efficient emission control techniques are implemented.
The company apparently made no environmental studies before its decision to locate the plant in The Dalles. Ex. 334 at 653; Ex. 336 at 75.
In October, 1955, the Stanford Research Institute submitted to the company a proposal for inspecting the surrounding agricultural areas both before and after commencement of plant operations and for conducting fumigation experiments upon the typical vegetation, but this proposal was not accepted by the company. See Exs. 220d and 220e. Nor did the company contact the county agricultural extension agents. Ex. 344 at 5; Ex. 345 at 46. Rene LeGault, the chief design engineer of the plant, has seen most of the aluminum reduction installations in the world yet hasn't visited any other such plant located in a rich fruit-growing region. Asked whether the surrounding land uses were an important siting consideration, he responded:
I don't think that the fume control systems that you are referring to were ever designed in view of fruit growing areas or agriculture areas in that extent. The design of the technology was to take care and recouperate [sic] the fluorine evolution from the cells ... for recycling purposes. Ex. 336 at 56.
He had "no knowledge of what would be emitted from that plant." Ex. 336 at 81. No one ever told him; he never asked. Ex. 336 at 82. In 1971 the Renken arbitrators stated that the plant "was inappropriately located." Arbitrators' Findings, Decision and Award 2 (1971).
The company's decision to locate the plant in a productive agricultural region did not in itself violate its societal obligations. One must not be blind, however, as to the choice of location when evaluating the responsibility of the company to society to avoid damage, if possible, to its neighbors. The amount of damage to others may well bear a rough relationship to the size of the expenditure needed to prevent or reduce it. Thus, the company's original decision to build the plant in The Dalles, while not a ground for recovery here, is nonetheless relevant to evaluation of its conduct during the 1965-71 claim period. Having located the plant near vulnerable or apparently vulnerable crops, the company was required to take damage to those crops into consideration when selecting and carrying out an emission control strategy.
2. Monitoring.
a. Emissions.
(1) Frequency of Monitoring.
The company conducted emissions testing in October and November of 1964 and in early 1965, then suspended any further testing until 1971, when it became required by state authorities. Ex. 339 at 134-35; Ex. 348 at 23; Ex. 935a at 32-33; TR 365-66, 668, 902-03.[9] Nor did any Oregon government agency test the plant's emissions during the 1965-71 claim period. TR 600-01, 623. Even after the state monitoring requirement went into effect, the company did not adopt any written testing schedule, Ex. 339 at 153, and did not report its emissions during periods when the secondary control system was inoperative. TR 669.
(2) Accuracy of Monitoring.
(a) Selection of Monitoring Location.
Byrne noted that releases from the secondary control system are emitted along almost a mile length of roofs at the plant and that the results of emission testing can *1004 be influenced by the location on the roof from which the sample is taken. Ex. 339 at 132-33. Consulting engineer Aaron Teller doubted the accuracy of 1971 test results submitted by the company to the Oregon Department of Environmental Quality (DEQ) because most of the data came from the secondary control system fans located near the sides of the emission outlet.
There is an obvious maldistribution of flow in the buildings, and from thermal lift it is easily inferred that the maximum concentrations in the emissions would be in the center of the building. [The outlets with the highest emissions] are not measured at all by [the company's] data submitted to [DEQ]. Ex. 303 at 2.
After the resumption of testing in 1971, the company routinely sampled only 10% of the primary control system towers and 5% of the secondary system exhaust fans. Ex. 339 at 151. Raymond Rooth, a designer of pollution control systems for aluminum plants for Norsk Viftefabrikk Co., characterized the aluminum industry's practice of sampling the emissions from just a few scrubbers and then calculating the overall release from the plant as "not good." TR 570. He questioned the accuracy of short-term emission tests dependent upon a few samples, the results of which can be influenced by selection of the scrubbers to be tested to eliminate those with plugged nozzles or screens. Ex. 932a at 157-58.
The most obvious deficiency in the company's selection of monitoring locations, however, was its failure ever to measure the amount of fluorides escaping through the doors and louvers in the cell buildings. Nor did the tests performed for EPA sample from these outlets for uncontrolled emissions. Ex. 1100 at 43.
(b) Duration of Tests.
Rooth stated that he did not "believe in any exact emission data representative for a specific smelter without doing a real long-time measurement." Ex. 932a at 162. As for the plant's November, 1964 test showing total fluoride emissions of 640 lb./day [approximately 2.5 lb./ton], Rooth found the result to be within the range he would have expected but noted that he had no great confidence in the plant's short-term measurements as an accurate indication of its long-term average emissions. Ex. 932a at 162-63. He expressed skepticism over the company's 1974 report to the Oregon DEQ that the plant was emitting only an average of .68 lb./ton.
... [A]ccording to my judgment there exists very few possibilities on a long-term range to judge how much emissions you have out of an aluminum smelter without having installed an amplifying monitoring system along the roof. According to my knowledge, Martin Marietta does not have such a recording system. TR 526.
(c) Maintenance of Normal Operating Conditions.
Rooth noted that the results of short-term emission tests can be influenced by avoiding testing when the plant's releases are enhanced by anode effects or "sick" pots. Ex. 932a at 159. During the tests conducted in 1964 and early 1965 Byrne did not necessarily check to ensure that the cell temperatures and bath ratios were maintained at normal operating parameters. Ex. 339 at 133-34. Consulting chemical engineer Joseph Schulein learned that the company had reported a result of 640 lb./day [about 2.5 lb./ton] for its November 11, 1964 test, about half the 1300 lb./day the company had stipulated to emitting as of 1963. Because he had received no indication that the plant had changed equipment or procedures, Schulein decided to investigate the matter by checking the plant's use of electric power during the time of the new emission tests and for the months immediately preceding and following. TR 326. When Schulein asked to see the power use records, company comptroller Fred Blatt asserted that no records were kept. *1005 Byrne attributed this recalcitrance to Blatt's "delusions of grandeur" in his self-appointed role as "superspy 007." TR 858-59. After later having obtained the records through the company's legal counsel, Schulein
... found that for the period during which the test was run from somewhere around 10 in the morning until noon, two-hour period, on the 11th of November, as shown on these charts, there were considerable periods when the voltage was so low it was off the charts ... and at other times for a period of a half an hour or so, the voltage was down considerably from its normal course .... [I]t was a condition that I did not find existing in this magnitude at any time anywhere near the period of time covered by these tests, and I looked backwards and forwards on the charts.
I concluded that it would be reasonable to believe that the effect of the reduction of voltage in current on the pot could cool the pots sufficiently to increase the crust on the top of the pot, thereby diverting a higher proportion of the total emissions into the primary system, that it would increase the viscosity of the bath because of the lower temperature, that it would reduce emanations due to the single fact of the current being reduced. I felt that these things combined could reasonably account for the reduction from an average of 1300 pounds to the 640 pounds found in the test.
... [T]he 1964 test ... was the last significant test done by Harvey Aluminum or Martin Marietta until practically the end of the period which I am addressing in my testimony [1965-71]....
... Those [power] records quickly and clearly demonstrated that the company was not operating its plant in a manner which would allow accurate testing or which would permit the company to replicate those results under any normal operating practices and procedures followed by the company. Ex. 348 at 32-35.
The plant's chief operator confirmed that the electric power to potlines 1 and 2 had been shut off at times during November 11, 1964, due to the testing of capacitors at the plant that had been planned a few days in advance. He received no notice that Byrne was going to have the emissions measured on that day. Ex. 337 at 1570-75. Schulein concluded that the emission control system at the plant could not have achieved the 640 lb./day result had the plant been operating at full power. Ex. 348 at 35.
In response to Schulein's accusation that the November 11, 1964, emission test had given artificially low results due to reduced power to the cells, Byrne stated that similar tests conducted by the company during October, 1964, and April, 1965, showed similar results at normal operating power levels. TR 838. The November 11 test result was 68% fluoride removal efficiency for the secondary control system; the October, 1964, result ostensibly was 57% but was flawed by the absence of secondary system input data. The April, 1965, result was also 57%. Ex. 339 at 140.
Byrne suggested that the tests conducted by the EPA contractor in late 1971 and in 1972 were an accurate reflection of the plant's emissions during the 1965-71 claim period, because the plant's operations and control system did not produce substantially different emissions levels in 1972 compared with 1965. TR 840. Even if this assumption were accurate, however, the tests conducted on behalf of EPA were not performed with standardization of bath ratios or pot temperatures. Ex. 1100 at 41-42. The consulting engineers' report states:
The process during testing from October 2, 1972, to October 5, 1972, was stable. Very little difference was noted in either stack velocity or stack temperature at the sampling sites.
. . . . .
Nothing unusual was done to the reaction cells during testing. All normal stud pulls and crust breaking were carried out. Ex. 778 at 34.
*1006 There is no indication in the report that bath ratios, pot temperature or amperages were checked.
(d) Sampling Technique.
Rooth stated that isokinetic sampling is necessary to ensure that the testing obtains a representative sample of particulates in the emission stream. Ex. 932a at 21. Isokinetic sampling for particulates was also recommended by Teller and Harold Zeh, former chief chemist at the Reynolds-Troutdale aluminum plant. Ex. 303 at 3; Ex. 1103 at 17-19, 21; ZTR 7. EPA tests were conducted isokinetically on emissions from the primary control system outlets but not isokinetically for the secondary control system outlets. "Isokinetic sampling would substantially reduce the impinger collection efficiency because of low gas velocities at the sampling location." Ex. 903 at 17.
The company's emission tests were not performed isokinetically. Ex. 1103 at 20; ZTR 9. The sampling probe after the wet electrostatic precipitator pulled in only about a third of the proper volume of air and only a third of the actual amount of escaping particulates. ZTR 11-13. Based upon the evidence presented, however, I am unable to estimate the magnitude of error introduced by the absence of this technique, nor can I conclude that this was a substantial flaw in the company's emission testing program.
Teller suggested that the 1971 results submitted by the company to the Oregon DEQ may have been compromised by the coolness of the filter used to trap fine particulate fluorides for measurement.
If the filter ... is not heated to a sufficiently high temperature (above 250°F) the relative quantities of gaseous and particulate [fluoride] can be significantly distorted, masking the gaseous effluent. This would be true for both the roof and skirt sampling system. Ex. 303 at 3.
In a paper presented at the 1973 AIME meeting, Rooth stated:
Under the prevailing conditions after a wet scrubber, especially when operating on gas from pots with prebaked anodes, we have experienced errors and discrepancies of the apparent HF-quantity in the absorption bottles ranging up to several hundred percent when using uncontrolled filter temperatures.... The filter temperature must be kept well under control by temperature measurement in the gas stream just after the filter. The increase in temperature should preferably be in the range of 0-30°C (0-54°F). Ex. 932a-2 at 332.
There is no indication that the company's tests were conducted with a sampling train that measured the temperature of the air stream just after the filter. The EPA tests used a thermometer after the filter but also after an intervening impinger. Ex. 905 at 47. There is no indication that any of the measurement techniques used at the plant included the regulation of filter temperature.
Like the absence of isokinetic sampling, the lack of filter temperature regulation may result in distorted readings of fluoride emissions, but the evidence presented does not justify a finding that this constituted a major source of error in the company's emission testing program.
(3) Overall Evaluation.
The company could certainly have improved the frequency with which it monitored its emissions and probably could have improved the accuracy of the results. The 1974 EPA report described a secondary emissions roof monitoring system then in use that drew continuous samples from multiple outlets and then performed isokinetic sampling on the aggregated stream of air, providing results "more representative than those from the single point sample." Ex. 903 at 18. A computerized continuous emission analyzing system was installed at the Reynolds-Hamburg prebake plant in 1974, the Årdal og Sunndal Verk Sunndalsra plant in 1976 and at plants operated by Alcoa and New Zealand Aluminum Smelters, Ltd. Ex. 932 Attachment A; TR 565-66. *1007 Teller in 1972 suggested the use of sonic orifices at each outlet to direct samples to a common heated manifold and then through the EPA sampling train. Ex. 303 at 3. Finally, the company could have sampled the emissions escaping from the cell building doors and louvers or could otherwise have calculated the amount.
In sum, the company made no vigorous effort to determine the amount of fluorides it was releasing during the 1965-71 claim period, essentially abandoning this method of checking the effectiveness of its pollution control strategy. While the lack of emission monitoring in itself does not constitute a breach of the company's societal obligations, it does show the company's lack of respect for public welfare, a tendency evidenced primarily by the deficient control of emissions from the plant, a subject of subsequent discussion.
b. Ambient Concentrations.
Monitoring of emissions is a direct method of determining the effectiveness of the plant's pollution control strategy. Monitoring of ambient pollutant concentrations in the surrounding orchards provides less direct evidence of emission restraint but more directly measures the impact of the plant's emissions upon its neighbors by accounting for meteorological factors that influence the distribution of pollutants in the atmosphere. Ambient air monitoring is no substitute for at least occasional direct sampling and analysis of plant emissions as a means of evaluating pollution control performance. Ambient monitoring is nevertheless useful as a more accurate indicator of the magnitude of the trespass suffered by the plant's neighbors.
The company monitored the concentration of hydrogen fluoride gas in its own orchard during each April from 1963 through 1971. In the years 1963-67 and 1969-70 most of the measurements found a concentration of 0.1-.9 parts per billion (ppb), roughly equivalent to 0.1-.9 mg/m3. In 1968 and 1971 the readings clustered in the range of less than 0.1 ppb. Ex. 701a, col. 1.
MCAES researchers monitored ambient atmospheric hydrogen fluoride concentrations in three orchards in the vicinity of the plant during the spring and summer of 1963 and reported daily concentrations as high as 12.9 mg/m3 (Gilbert orchard, March 28)-substantially higher than the maximum daily concentration of 3.3 ppb measured by the company in its orchard (April 2). MCAES found 15-day average concentrations as high as 5.7 mg/m3 (Gilbert orchard, March 28-April 11). Ex. 122 at 34-35.
In 1964 MCAES expanded its air sampling to nine orchards, reporting a high daily concentration of 2.5 mg/m3 (Meyers orchard, May 26) and a high weekly concentration of 0.6 mg/m3 (Kroon orchard, May 22-28). Ex. 123 at 4-5, 19. In contrast, the company reported a maximum daily concentration of only 1.2 ppb (Starlight orchard, April 7). Ex. 701a, col. 4.
In 1965 MCAES monitoring in 5 orchards showed maximum daily concentrations ranging from 1.16 mg/m3 (Gilbert orchard, April 9) to 3.31 mg/m3 (Hendricks orchard, April 18). Ex. 124 at 24. In contrast, the company reported a maximum of 1.2 ppb in its orchard on April 7. Ex. 701a, col. 4.
In 1966 MCAES monitored in 10 orchards and found maximum daily concentrations from 0.77 mg/m3 (Bailey orchard, April 5), to 4.92 mg/m3 (Kroon orchard, August 21). The Kroon orchard experienced an average concentration of 2.02 mg/m3 during the period from March 29 through April 7; the Meyers orchard experienced an average of 1.75 mg/m3 during that period. Ex. 124 at 26. In contrast, the company reported no concentrations in its orchard exceeding 1.0 ppb. Ex. 701a, col. 1.
In 1967 MCAES monitored 10 orchards and reported maximum daily concentrations ranging from 0.47 mg/m3 (Renken orchard, June) to 4.65 mg/m3 (Fleck orchard, April). The Fleck orchard experienced an average concentration of 2.23 mg/m3 during the *1008 April 1-7 period. Ex. 124 at 27. In contrast, the company reported no concentrations in its orchard exceeding 1.0 ppb. Ex. 701a, col. 1. The air monitoring committee established by paragraph 6 of the Renken consent decree, however, recorded 13 readings in excess of 1.0 ppb at its six sampling stations in the neighboring orchards. Ex. 701a, col. 2.
Similarly, in 1968 and 1969 the ¶ 6 committee recorded higher concentrations at its sampling stations than did the company in its orchard. See Ex. 701a. That the company found consistently lower levels of gaseous fluoride in its orchard than others found in other orchards in the vicinity should have alerted the company that the ambient concentrations in its orchard were not necessarily representative of those throughout the immediate area. I conclude that the company's monitoring program, limited to its own orchard until the ¶ 6 committee assumed responsibility in 1967, was too limited in scope to provide a reasonably accurate picture of the trespass of its fumes into the neighboring orchards. Its failure to undertake a more comprehensive effort has contributed to my conclusion that the company did not fulfill its societal obligations during the 1965-71 claim period.
3. Controlling Emissions.
The amount of fluoride the plant released into the atmosphere depended upon the amount of fluoride evolved at each cell and the efficiency of the primary and secondary emission collection and treatment systems.
The Martin Marietta plant uses vertical stud Soderberg (VSS) reduction cells. Other aluminum reduction plants elsewhere in the United States and the world employ this type of cell, or horizontal stud Soderberg (HSS) cells, or "prebake" cells, or some combination of these three basic types. A somewhat simplified description of the construction and operation of the VSS-type cell, illustrated by Figure 1, follows.
*1009 FIGURE 1
CELL
CROSS SECTION
The cathode is at the bottom of the cell. Above the cathode is the bath, a mixture of molten cryolite and various additives that dissolves the raw ingredients, alumina and fluoride. Centered above the bath is the anode, which is surrounded by a casing. "Studs" extend into the anode from above.
The anode covers only part of the bath. A "skirt" of metal attached to the anode casing extends out from the casing and down to cover part of the exposed bath, thus creating a space similar to a tunnel around the outside of the base of the anode, just above the bath. Under stable operating *1010 conditions, the part of the bath that is left exposed by the anode and skirt hardens to form a crust. Alumina is piled onto this crust so that it covers the crust from the edge of the reduction cell to the skirt, sealing off from the pot room air the tunnel created by the skirt and the bath.
During the aluminum reduction process, electrical current passes through the studs, the anode, the bath and the cathode. The current reacts with the bath, which contains the dissolved alumina and fluoride, causing aluminum to be formed. The aluminum settles to the bottom of the bath and is drawn off. Carbon dioxide, tars and fumes containing, among other things, gaseous fluoride and fluoride particles enter the tunnel created by the skirt and alumina and are drawn off at a low velocity into the primary emission control system.
Alumina must be added, or "fed," to the bath periodically. During feeding, the cell operator breaks the crust and sweeps the alumina that was sitting on top of it into the bath through the opening. More alumina is then placed on top of the crust. During the time that the crust is broken, the bath is exposed and fluoride-bearing fumes are released into the pot room. Fumes are also released into the pot room through any fissures in the crust and because of imbalances in cell operation that occur when there is insufficient or overabundant alumina in the bath.
When there is too little alumina in the bath, gas builds up at the working face of the anode, creating resistance to the passage of electricity. This gas buildup at the anode is called a "light" or "anode effect." This resistance and associated increased power consumption and increased temperature cause the cell to overheat, which can result in melting of the crust. Because it is easier for the gases to escape through this thinner, melted crust, a greater amount of fumes escapes the primary collection system and enters the pot room than during stable operating conditions.
The cell operator corrects an anode effect by breaking the crust, piercing the buildup with a lance and adding more alumina. More fumes escape into the pot room during this correction process than during normal feeding.
During an imbalance that is caused by too much alumina in the bath, the alumina that is not dissolved settles to the bottom of the cell, coating the cathode and creating resistance to the passage of current. The current then seeks to exit the cell through the side rather than the bottom. This overheats the bath, melts the crust and allows an increased amount of fumes to escape into the pot room.
a. Fluoride Evolution at the Cell.
(1) Operating Parameters.
Zeh suggested that the plant could have reduced the evolution of fluoride in its cells by increasing the bath ratio to 1.45-.50 and decreasing the amperage to 91-92,000 amperes. Ex. 1103 at 34. A bath ratio of 1.50 evolves 50% less fluoride than a ratio of 1.25. ZTR 18. The company did not experiment with higher bath ratios or lower cell temperatures that might have reduced fluoride evolution. Ex. 339 at 84-85. Lars Ryssdal, plant superintendent, 1964 70, and plant manager, 1970 72, defended the company's use of a bath ratio in the range of 1.25-.30 as permitting operation of the cells at lower temperatures despite the higher amperages (102,000-107,000 amperes) employed at the plant from 1965 through 1971. He stated that adjustment of the bath ratio, temperature and amperage would not have reduced fluoride evolution from the level experienced during that period. Ex. 930 at 8-12. When the plant's bath ratio temporarily increased to about 1.48 during 1970 due to a shortage of A1F3, the cell temperatures actually increased. Ex. 930 at 10. Nevertheless, Ryssdal did not deny that the cells could have been operated at an acceptable temperature by reducing the amperage while increasing the bath ratio, as suggested by Zeh, and he conceded that an increased bath ratio, from 1.25 to 1.40, along with reduced amperage would have reduced fluoride emissions from the cells and that the cells at the plant could have *1011 been operated at a 1.46 bath ratio at 92,000 amperes. Ex. 930a at 25; TR 460, 463.
Ryssdal also indicated, however, that this procedure would have had an adverse effect upon the plant's aluminum production and that the total amount of fluoride evolution per ton of aluminum produced would not necessarily have been decreased. TR 464, 466.
A reduction in the plant's productive capacity is no less a cost of pollution control than the capital and operating expenses of emission control devices. From the evidence presented I am unable to find that the company could efficiently have reduced its fluoride emissions by adopting the operating parameters suggested by Zeh, except perhaps during the spring fruit tree blossoming period when fluoride-caused damage was particularly acute. The evidence pertaining to the possibility of reducing fluoride evolution and emissions by adjusting the plant's bath ratio, amperage and cell temperature is insufficient to permit a conclusion that the company disregarded its societal obligations by failing to make such adjustments.
(2) Selection of Ore.
Byrne explained the increase in the plant's reported emissions from 640 lb./day in 1964 to 750 lb./day in 1972 by noting that the ore in use at the plant at times during 1971 and 1972 created problems in the operating parameters and resulted in increased emissions. The plaintiff later suggested that the company made no effort to control the selection or use of ore in order to control emissions. Plaintiff's Opening Post-Trial Memo 17. The evidence is insufficient to support a conclusion that selective use of various ores could have efficiently reduced the plant's harmful emissions.
b. Primary Emission Control System.
(1) Collection Efficiency.
The primary system collection efficiency is expressed as the percentage of fluorides emanating from the pots in gaseous or particulate form that are captured by the skirt system and directed to the primary system's emission treatment devices. Because the primary control system can remove fluoride very efficiently from this fluoride-saturated stream of air, the primary system collection efficiency is of prime importance to the overall level of fluoride emissions from the plant.
(a) Cell Hooding.
The plant was constructed in 1958 with a skirt system to collect fumes from the cells and direct them into the primary control system. Byrne estimated that the skirt system collected 70-85% of the fluoride emissions from the cells, although he had done no testing to confirm this estimate. Ex. 339 at 63-66. See Renken v. Harvey Aluminum, Inc., 226 F. Supp. 169, 171 (D.Or. 1963) (finding of 80% collection efficiency). The company did not attempt modifications to increase the efficiency of its primary emission collection system during the 1964-72 period. Ex. 339 at 125.
The plaintiff suggested that the plant could have employed a VSS cell hooding system similar to that installed in 1971 at the Pechiney-St. Jeanne VSS plant, which in 1976 reported 90% collection efficiency. Ex. 932 at 12; TR 473. According to Rooth, other attempts to hood VSS cells have "failed as the hood constructions have disturbed the heat balance of the pot to an unacceptable extent." Ex. 932 at 12. Although periodic crust-breaking operations require that this hood be lifted from the cell, this arrangement does capture fluoride emissions from crust fissures and from anode effects better than the skirt system at the plant. TR 475-76. LeGault testified in 1963 that VSS cells could be hooded except for the problem of heat and the necessity for working the pots. Ex. 336 at 113-14. In 1973 he stated that hooding a VSS cell was impossible. Ex. 336 at 121-22.
In his 1966 deposition, A. J. Rice, former Alcoa chief metallurgist, noted that both prebake cells and HSS cells have been hooded but that hooding of VSS cells was, in his opinion, impractical. Ex. 937 at 2664-72. His first objection was that the hood would *1012 have to be periodically removed in order to break the crust and add alumina to the bath. Ex. 937 at 2664-65. Thus, the hood would not be efficiently collecting cell emissions during this operation. The hood would, however, be in place over the cell at all other times and would collect emissions from crust fissures and anode effects that would otherwise escape into the potroom atmosphere. In addition, the hood would upset the heat balance within the cell. Ex. 937 at 2666-67. The Montacatini plant in Italy attempted to hood its VSS cells in the years following World War II, but the attempt apparently was abandoned. Ex. 937 at 2676-78.
Alcoa experimented with hooding non-Pechiney type VSS cells in 1954 and again in 1961. Alcoa sought a mechanical method for adding alumina to the cell bath, but such an operation was hampered by the hard crust that developed on the surface of the bath. Alcoa attempted to hood the cells in order to increase the temperature of the crust and thereby keep it thin enough to accept additional alumina from an automatic feeder without necessity for mechanical puncture of the crust. Alcoa did not attempt to design a hooding system for the primary purpose of increasing the collection of fumes from VSS cells. Nor had Rice attempted to adapt a prebake type hooding system for use with VSS cells. Ex. 937 at 2679-2688. Thus, his 1966 conclusion that a VSS cell hooding system would be "impractical" may be viewed with some skepticism, in light of the apparent success of the Pechiney-St. Jeanne system installed in 1971.
The plaintiff's contention that the plant could have more effectively controlled its emissions by operating with primary collection system hoods during the claim period is very difficult for me to evaluate. Although the first VSS plant to implement such a system was the Pechiney-St. Jeanne plant in 1971, at or near the end of the claim period in this case, that does not necessarily mean that the technology was unavailable or could not have been adapted from the prebake or HSS hoods that had functioned for decades.[10] Based upon the evidence presented, however, I can only conclude that the Pechiney VSS hooding system was highly innovative and that the company did not violate its societal obligations by failing to implement this technology prior to the end of the 1965-71 claim period.
(b) Operating Procedures.
Rooth stated that, "due to the crust breaking and expected irregularities of operation, the long-run collection efficiency as a monthly or yearly average is between 60 and 80 percent." Ex. 932 at 12. "Thirty percent [escaping] is quite representative." Ex. 932a at 179. Because Rooth had not visited the plant before 1973, however, he could not testify as to its collection efficiency during the 1965-71 period. Ex. 932a at 69-70.
Byrne stated that the plant experienced about one anode effect per day for every two cells, or about 150 anode effects per day in the plant's 300 total cells. Ex. 339 at 73. Ryssdal testified that in the "early days" the plant's cells experienced anode effects every day or even every shift but that the period between anode effects had been "stretched out to a week or at times even longer" in any particular cell by the institution of work schedule changes in September, 1962, January, 1965, and January, 1968. Ex. 930a at 20; Ex. 930 at 6. According to the company, the number of anode effects per cell per day decreased as follows:
*1013
1962 1.75 1966 .59 1969 .42
1963 1.14 1967 .56 1970 .32
1964 .78 1968 .55 1971 .42
1965 .66
Schulein suggested that better maintenance of the cells could reduce emissions into the potrooms. TR 309-11. Schulein visited the plant in 1965 and 1966 and prior to his testimony before the arbitrators in 1970 and 1971.[11] TR 341, 358. "[A]t the times I was there and observing the pots, I definitely noticed they should have had more manpower." TR 317. He observed no substantial change in cell maintenance by 1971. TR 359. Zeh also suggested that "real tight operating procedures" could have reduced fluoride emissions into the potrooms, but he admitted that he had not actually observed the plant's operating procedures during the 1965-71 period. Ex. 1103 at 34-35.
Rooth noted that the Japanese have claimed 90% collection efficiency for the Sumitomo system of VSS cell operating procedures. Ex. 932 at 12. Byrne placed the efficiency at 95%. Ex. 935a at 34. The Sumitomo procedures maintain better heat balance and cell stability by closely controlling the addition of alumina feed, which keeps the cathode clean and the side freeze from intruding under the anode and obstructing the passage of electric current. Ex. 930a at 30. After 1975 the company began to consider purchasing the Sumitomo know-how; an order was placed in March, 1977. Ex. 935 at 16. Ryssdal expects these procedures to be implemented at the plant by the end of 1979. Ex. 930 at 13-14.
Based upon the testimony of Schulein that his inspections of the potrooms during the 1965-71 period revealed inadequate cell maintenance and the fact that other plants have been able to increase their primary system collection efficiencies through careful operating procedures, I find that the company could efficiently and economically have increased the proportion of cell emissions captured and directed into the primary control system. I do not agree that the company had to wait until aluminum producers in Japan implemented these procedures and obtained 90% primary collection efficiency.
(2) Treatment Efficiency.
Having been captured by the skirt system, the pot emissions are directed to the primary treatment system, which may consist of cyclones, multicyclones, wet or dry scrubbers, wet or dry electrostatic precipitators, bag filters or other devices. The plant was constructed in 1958 with a primary treatment system consisting of a burner at each cell to combust carbon dioxide and tar emanating from the cell, a multicyclone centrifugal dust collector, a humidifier, a wet spray scrubber tower and three 40-horsepower fans to draw cell emissions through the system. The plant substituted three 60-horsepower fans in 1960, added a bubbler at the base of the scrubber tower in 1961 and a second burner at each cell in 1962. Ex. 780a.
The company tried out various additional primary emission control techniques between 1963 and 1970, including a Venturi scrubber, bag houses, a ping-pong ball scrubber, a ceilcote cross-flow scrubber and a Peterson separator, but found nothing practical or suitable. Ex. 935 at 13-14; TR 831-37. These devices were tested as prototypes in small installations, not by hooking up the entire plant. Ex. 339 at 96-97. LeGault was familiar with the Rheinfelden primary treatment system including electrostatic precipitation described at the 1962 AIME meeting which he attended. Ex. 336 at 71. In 1963 he testified to his knowledge of three aluminum plants that had installed such systems. Ex. 336 at 96, 112, 124. No such device was incorporated into the plant's primary system before or during the 1965-71 claim period.
The company completed installation of wet electrostatic precipitators in the primary control system in March, 1972, Ex. 780d, and began its practice of disengaging the spray scrubber tower except when the precipitators were being serviced. Ex. 911 at 11.
*1014 Rooth concluded in 1977 that the state of the art permitted 99 + % efficiency in removing total fluorides from the primary emission stream. Ex. 932 at 15. This same high level of removal was practical in 1967 and even earlier. Ex. 932a at 88.
If you go back to ... Figure A, you will see that some smelters have kept their primary systems unchanged since 1950..... [Scrubbing] out pot gas from a vertical stud Soderberg plant ... has been done with a very high degree of efficiency all the time. Ex. 932a at 88-89.
Rooth stated that the plant's wet electrostatic precipitation system effected a reduction in fluoride emissions, but he could not quantify the reduction. Ex. 932a at 57-58, 163-64. Electrostatic precipitators had previously been installed at the Hytte-Rheinfelden VSS plant in 1959, the Pechiney-Noguerre VSS plant in 1961, the Årdal og Sunndal Verk Årdal VSS plant in 1962 and Sunndalsøra VSS plant in 1969, and the Mosjøen Aluminiumswerk VSS plant in 1972. In 1963 Judge Kilkenny stated his belief in
... the feasibility of the introduction of electrostatic precipitators for the removal of the minute or small particulates which are not removed by the other processes.... The great weight of the evidence points to the conclusion that the installation of the cell hoods and the employment of electrostatic precipitators would greatly reduce, if not entirely eliminate, the escape of excessive material now damaging the orchards of the plaintiffs. Renken, 226 F.Supp. at 172.
The October 1955 Stanford Research Institute study proposal to the company noted:
... A number of methods may be employed to eliminate, or minimize the effects of, pollutants contained in pot gases collected by hoods. Among those are scrubbing with water, bag filtration, electrostatic precipitation, combustion (for the destruction of tar fog) and discharge from a tall stack. Ex. 220d at 2.
Zeh noted that electrostatic precipitators and bag houses (dry systems) have been available for 15-20 years but were not installed at the plant due to cost considerations. Ex. 1103 at 29-30; ZTR 21. Rooth noted that dry systems were installed at the Graenges-Sundsvall VSS plant in 1973 and the Årdal og Sunndal Verk-Årdal VSS plant in 1974. Ex. 932 at 20. Schulein suggested that the exhaust from the primary treatment system could have been run through the secondary system for an additional increment of emission reduction. TR 311-12. I need not consider this proposed stacking of primary and secondary systems, nor the dry systems suggested by Zeh. It is sufficient to establish a breach of societal obligations that the company failed to utilize a wet electrostatic precipitator during this period.
New EPA isokinetic tests of the primary system after installation of the wet precipitator in 1972 showed fluoride releases from the primary outlet ranging from .0006 lb./ton of aluminum produced (October 2-3) to .027 lb./ton (October 4-5). The six test sessions indicated an average primary system emission of .012-.016 lb./ton. The company's own 1972 tests showed a comparable average of .028 lb./ton. Ex. 904 at 11-13. Under the assumptions that the cells emanated 46 lb./ton, and that the skirt system collected 70% of these emissions, the primary treatment system would have been receiving fluoride at a rate of 32.3 lb./ton. EPA measured receipt of 36.43 lb./ton. Ex. 903 at 23. The average primary system outlet emission of about .014 lb./ton indicates that the system was achieving 99.95% removal efficiency. Elsewhere the company in 1975 reported an average primary system emission of .02 lb./ton and a primary system fluoride removal efficiency of 99.7% during March through December, 1972, after installation of the wet electrostatic precipitators. Ex. 310 at 12. The EPA itself calculated 99.30-99.97% removal efficiency. Ex. 903 at 23.
In sharp contrast, an EPA test conducted prior to the installation of the wet electrostatic precipitator revealed fluoride emissions from the primary outlet of 1.0-1.4 lb./ton, Ex. 903 at 29, a removal efficiency *1015 of only 96-97%. In addition, Byrne stipulated in 1971 that the plant's primary control system was achieving 99.75% efficiency in removing gaseous fluoride but only 85% efficiency in removing fluoride entrained on particles, Ex. 339 at 178, which may constitute 25% of total fluoride emanating from the cells. Ex. 932 at 9-10. If so, the primary outlet was releasing in gaseous form about 0.2% of total fluoride entering the primary system [75% × .25% = .1875%]; in particulate form about 3.75% of total fluoride entering the primary system [25% × 15% = 3.75%]. Thus, the overall treatment efficiency of the primary system in 1971 was, according to Byrne, about 96%-which corresponds very closely with the 96-97% figure calculated by the EPA.
In sum, the primary treatment system technology employed at the plant during the 1965-71 period removed about 96-97% of the fluoride emissions captured by the primary collection system, even though wet electrostatic precipitator technology had been employed in other VSS plants since 1959 and, when finally installed at the plant in 1972, achieved 99.3%-99.97% removal efficiency. Failure to implement this reasonably efficient and economic technology resulted in an unnecessary additional fluoride emission from the primary control system outlet of about 1 lb./ton and amounted, in my judgment, to a breach of the company's societal obligations.
c. Secondary Emission Control System.
(1) Collection Efficiency.
The 20-40% of emissions from the cells that are not captured by the skirt system and directed into the primary control system are released into the potrooms. Until 4-5 months prior to the end of the 1965-71 claim period the plant's secondary control system wet scrubbers, installed in 1963 and located in the roof of each building, would treat only those heated potroom pollutants that rose up to the roof by convection. The remaining emissions would escape the potrooms through louvers and doors in the walls of the buildings. The secondary system's collection efficiency expresses the percentage of the potroom pollutants that were actually treated by the system's wet scrubbers there; the remaining potroom contaminants escaped without treatment.
As of 1965 the plant had the only secondary emission control system in a VSS aluminum plant that did not employ forced draft fans to direct the emissions escaping from the skirts to the secondary system's scrubbers. Ex. 339 at 99-104; Ex. 932 at 20. The potrooms at the plant were ventilated by large louvers, and fluoride escaping from the skirts could also escape to the atmosphere through these openings in the buildings. Byrne stated his belief that fluorides actually "escaped into" the potrooms through these louvers due to the high concentration of fluoride in the plant's courtyards caused by the local settling of the cooled emissions from the primary control system stacks, although no tests were conducted to confirm this belief. Ex. 339 at 127-28. The plant's chief engineer George Youngmeister noted that the plant had forced-draft fans drawing air into the cell buildings through the floors but that this air, after becoming laden with emissions from the cells, could escape through the cell buildings' doors and louvers; the collection efficiency of the secondary system was basically dependent upon thermal convection. Ex. 334 at 663, 675. The fans feeding air in through the floors were removed or turned off when fans were added to the secondary control system itself. Ex. 334 at 676-78.
Teller visited the plant during the winter of 1964-65 and inspected the secondary emission control system. Ex. 335 at 11. The spray-screen system then in place was not "a highly efficient system, relative to other possible methods in 1963, for the recovery of hydrogen fluoride from a gas stream like [that emanating from the plant]." Ex. 335 at 14-15. Due to the absence of an induced air fan, not all of the fluoride emissions escaping the skirt collection system arrived at the spray-screen secondary system in the roof of each building. "[T]he inference I made from the data was that all the gas was not being treated at all times. In other words, a lot of the gas was *1016 going out the louvers." Ex. 335 at 19. He calculated that at times only a third of the fluoride emissions from the cells was reaching the roof secondary control system. Due to insufficient irrigation, the screens became plugged, "forcing more of the air out the sides [of the buildings] rather than through the [secondary] system." Ex. 335 at 22. Schulein concluded that the emission control system operated by the plant during the 1965-71 period "was far below the best available, in concept, to achieve the minimization of fluoride emissions." Ex. 348 at 22.
The collection efficiency of the plant's secondary system as of May, 1972, can be derived from data presented in the 1972 report of Valentine, Fisher & Tomlinson (Ex. 777) and volume 1 of the 1974 report of EPA (Ex. 903). The EPA contractor's testing of the plant's pollution control systems in May, 1972, found a secondary control system fluoride intake of 2.5-3.28 lb./ton; EPA later calculated the average secondary system fluoride intake at 2.85 lb./ton. Ex. 777 at 16; Ex. 903 at 23 (Plant D). Assuming that the cells emanated 46 lb./ton, Ex. 932a-1 at 19; Ex. 1102 at Table 1, and that the primary system collected 36.43 lb./ton, Ex. 903 at 23, the secondary system was collecting only 30% of the 9.57 lb./ton escaping into the potrooms.
The November, 1974, report on ventilation at the plant by Rooth's firm, Norsk Viftefabrikk, indicated that polluted air continued to leave the cell buildings through the upper part of the large doors, a situation that could have been corrected by reducing the side wall and door openings. Ex. 932a-5 at 5, 10. This contradicted the earlier conclusion of Byrne that fluoride "escaped into" the potrooms through these openings and the subsequent statement of Zeh that, during his visit to the plant in 1978, the flow of air was primarily from outside the buildings in through the open louvers. Ex. 1103 at 27. The Norsk Viftefabrikk report also noted that the clogging of the demisters prevented efficient suction of the potroom pollutants into the secondary scrubbing system. Ex. 932a-5 at 22. I find this November, 1974 report to be relevant to the pollution control efforts of the company during the 1965-71 claim period, because the company has not sought to introduce any evidence that its plant ventilation practices deteriorated from 1965 to 1974.
For the same reason I also find relevant this statement of Zeh after his 1978 visit to the plant:
Well, at The Dalles it seemed that the haze inside the potrooms sort of drifted and hung, like it wasn't being sucked out very forcibly. That was not the case at Goldendale. The draft was quite substantial, and there wasn't that hanging of the haze in the potroom.
. . . . .
Well, it made me wonder for a while whether the roof fans were even on. Later in the day we found out that they were on, but there still was not the movement of air in the potrooms at The Dalles as there was at Goldendale. Ex. 1103 at 28, 29.
See ZTR 20-21.
The percentage of potroom pollutants reaching the secondary scrubbers could have been increased by the efficient use of forced-draft fans to suck in the potroom air. The Pechiney-Noguerre VSS plant installed such a forced-draft system in 1959, as did the Hytte-Rheinfelden VSS plant in 1959, the Mosjøen Aluminiumswerk VSS plant in 1963, the Graenges-Sundsvall VSS plant in 1963, the Alnor-Karmøy (Norsk Hydro) VSS plant in 1967, and the company's plant in November, 1970, the system becoming operational in 1971. Ex. 932 at 20. The Reynolds-Troutdale prebake plant installed a roof spray control system in 1946 and in 1948 began converting to a 200-fan forced-draft roof system that became operational in 1950. TR 339, 364. Instead of utilizing this more effective forced-draft method, the company in 1963 installed a roof spray-screen system without fans.
In his August 4, 1966, deposition, Schulein suggested the installation of a forced-draft secondary system in a horizontal configuration, which is what the company implemented *1017 in 1970-71. TR 349-50. Schulein stated that the forced-draft secondary control system that the company began to install in 1970 was "old"; "the concept and the technology were known in 1965." Ex. 348 at 23. Byrne admitted that the 1970-71 system could have been implemented in 1961 or 1963. Ex. 339 at 142-49. By 1971 this scrubbing technique had been known for 20 years. TR 913. Youngmeister didn't know why the company hadn't installed the forced-draft tunnel control system earlier; the design was not "exotic." "We just didn't think of it." Ex. 334 at 672. He knew about every element in the system as early as 1959. Ex. 334 at 674. The system was not installed until 1971 because Byrne and others at the company believed that the fluoride pollution problem had been "solved" by the system implemented in 1963. Ex. 339 at 136; TR 860.
LeGault attributed the company's failure to install the 1970-71 system earlier to the "limitations of creativity of this domain." Ex. 336 at 93. "That knowledge was not available." Ex. 336 at 94.
Rooth stated his "opinion that the addition of fans in the potroom gas cleaning system would not have had a significant effect on the efficiency of emission control at The Dalles plant." Ex. 932 at 21. The meaning of Rooth's phrase "efficiency of emission control" was clarified during cross-examination.
A. Basically, the fans installed in scrubbing systems do not increase the scrubbing as such.
. . . . .
Q. You would concede, would you not, Mr. Rooth, that the installation of fans in a secondary control system that depends solely upon [convection] for sucking a fluid into the system would improve the chances of that system taking in as much as it could get?
A. That's right. You would secure the volume going through the scrubber by fans; that is right. TR 499, 523-24.
Rooth also agreed with the statement that the secondary system installed at the plant during 1970 "improved its pollution control system as to fluoride emissions" by providing easier access to the scrubbers by placing them in the courtyard and by "improv[ing] the possibility of keeping good control, better control of the scrubber technology compared to what you have it in the roof." Ex. 932a at 56-57. He agreed that "with such an improvement the actual emissions would be reduced," but he could not quantify the reduction. Ex. 932a at 57, 163-64.
I conclude that the system's record of collecting only about a third of the potroom emissions during Teller's visit immediately preceding the 1965-71 claim period and during the EPA contractor's 1972 tests could have been improved during the 1965-71 period by the installation of forced-draft fans, by regular maintenance to prevent clogging of the screens and by closing at least some of the cell building doors and louvers from which up to two-thirds of the potroom emissions were escaping untreated into the atmosphere. Because about 30% of the total fluoride emanating from the cells was released into the potrooms, even a small improvement in the efficiency of the secondary collection system could have substantially reduced fluoride emissions from the plant. For example, if the secondary control system had collected 60% of the potroom emissions instead of 33%, the magnitude of untreated emissions escaping from the plant would have been reduced from about 9.2 lb./ton [46 lb./ton × .30 to potroom air × .67 escaping untreated] to about 5.5 lb./ton [46 lb./ton × .30 to potroom air × .40 escaping untreated]. Failure to implement reasonably efficient and economic forced-draft fan technology until the very end of the 1965-71 claim period constituted a violation of the company's societal obligations.
(2) Treatment Efficiency.
During the 1965-71 period the plant's secondary control system consisted of water sprays and screens in the cell building roofs that had been installed in 1963. A problem with roof gutters was corrected by lining *1018 them with fiberglass in 1964. TR 828-30. This secondary control system was not utilized during the months November through February of each year from 1963 through 1970 because of concern that the scrubbing system would freeze during the cold weather. Ex. 339 at 126; Ex. 435 at 12; TR 860. The scrubbers initially removed about 67-70% of the fluorides entering the system. Renken, 226 F.Supp. at 171. The efficiency of this system declined after 1963 due to increased emission of smaller fluoride particles from the cells. When operational, the system's fluoride treatment efficiency varied from 21 to 68% during tests conducted by the company in 1964 and 1965, which included other readings of 28%, 33%, 42%, 54% and 57%. Ex. 339 at 137-41. As previously noted, the company did not test its emissions again until 1970. Following his visit to the plant in 1964-65, Teller concluded that the roof scrubbers were removing about 25-35%, sometimes even 50%, of the fluoride in the air passing through the system. Ex. 335 at 20-21. The efficiency of the system was diminished because it used only one-tenth the appropriate amount of water for the spray. Ex. 335 at 21-22. Rooth confirmed that such systems can be hampered by clogging of the water spray nozzles and the screens by tar and dust from the potroom air. Ex. 932 at 17.
Rooth explained that 75% of the fluoride escaping into the potrooms is in gaseous form, while the other 25% is fluoride entrained on particles, about half of which are coarse (2 microns diameter and larger) and the other half fine (smaller than 1 micron diameter). Ex. 932 at 9-10.
In low pressure wet [secondary] scrubbers the [gaseous] hydrogen fluoride will be cleaned out to a reasonable efficiency. Nearly all the coarse dust will be scrubbed out but almost all of the fine submicron dust will pass through because it is so fine....
As a monthly or yearly average, not more than 80% efficiency on total fluoride has been achieved. Despite regular maintenance, water failure or clogging may occur. Secondary scrubbers normally give 80% or below as efficiency on a long-run average.
... At 10 inches of water pressure loss, only approximately 20% of the fine particulate fluoride will be collected, and this scrubbing pressure will give a prohibitive energy consumption for the scrubber with the vast gas quantities in question. (At 10 inch water gauge approximately 1550 kWh/ton of aluminum.) Ex. 932 at 15-16.
The 80% of fine particulate fluoride remaining represents about 10% of the fluoride in the potroom air-the equivalent of about 3% of the total fluoride emanating from the pots, assuming a primary system collection efficiency of 70% [.30 (potroom emissions) × .25 (fluoride on particles) × .50 (submicron particles) × .80 (untreated by secondary scrubber) = .03 (3%)]. In other words, 3% of the fluorides generated in the plant would be emitted raw from the secondary system, even if the secondary system were to treat all of the pollutants in the potrooms and were to be maintained at 10 inches of water pressure loss.
Rooth concluded that present technology permits 80% removal of fluorides by a secondary scrubbing system in a VSS plant. Ex. 932a at 170. This degree of treatment efficiency has not increased appreciably since 1958, when the Mosjøen Aluminiumswerk plant was built incorporating a secondary scrubbing system. This plant has presumably been able to achieve about 80% total fluoride removal efficiency with its secondary system, as has the Pechiney-Noguerre plant since 1959, the Hytte-Rheinfelden plant since 1959, the Graenges-Sundsvall plant since 1963, the Alnor-Karmøy (Norsk Hydro) plant since 1967 and, theoretically, the company's plant since 1963. Ex. 932 at 20; Ex. 932a at 165-66, 172. A plant can achieve the 80% secondary system removal efficiency only if its system is properly maintained. Ex. 932a at 170.
Byrne stated after the fans had been instituted in 1970-71 that the plant's secondary scrubbing system removed fluoride gas with 88% efficiency and fluoride on *1019 particles with 65% efficiency. Ex. 339 at 178. He estimated the overall fluoride removal efficiency of the secondary system at 75%. Ex. 339 at 148. This corresponds roughly to the 72% efficiency reported by the company for 1972, Ex. 310 at 12, and represents a considerable improvement over the 1964-65 company findings of 21-68% efficiency and Teller's 1964-65 appraisal of 25-35% efficiency. The improvement achieved by the new secondary system was confirmed by EPA measurements taken in late 1971 and in 1972 showing emissions from the secondary system outlets ranging from .643 lb./ton to 2.93 lb./ton. The nine test sessions indicated an average secondary emission of .806-2.05 lb./ton, comparable to the company's own reported 1972 average test result of 1.37-.52 lb./ton, Ex. 904 at 14-18, but somewhat less than the 2.86 lb./ton reported elsewhere by the company for 1972. Ex. 310 at 12. It appears that the fluoride removal efficiency improved appreciably after installation of the tunnel system in 1970-71, despite Byrne's contention that the new system did not reduce the overall level of emissions from the plant. TR 831, 840. Byrne himself stated his familiarity with a paper by H. Schmitt[12] that described the Hytte-Rheinfelden plant's secondary treatment system consisting of roof-mounted sprays, screens and fans that achieved, according to Schmitt, 90% efficiency in absorbing gaseous fluorine. Ex. 339 at 123. Teller stated that a spray scrubber can achieve 99% efficiency in removing gaseous fluoride if operated with a sufficient flow of water through the sprays. Ex. 335 at 28.
I conclude that the company failed to fulfill its societal obligations when it delayed adopting the forced-draft fan, more efficient secondary control system until 1970-71. I need not consider the suggestion of Hatchard that the company could have achieved 95-99% fluoride removal efficiency in its secondary system as early as 1961 by utilizing electrostatic precipitators, bag houses and high-energy Venturi scrubbers therein. Ex. 346 at 11.
d. Overall Performance.
A comparison of the actual emission control system in operation at the plant during the 1965-71 period with an improved system that the company could have been operating during that period is presented in Figure 2. From the data presented in this lawsuit, my best estimate of the amount of fluoride that the plant was emitting per ton of aluminum production is about 12.5 lb. (Figure 2:A). Implementation of reasonably efficient and economic systems previously described in this opinion could have reduced those emissions to about 2.5 lb./ton (Figure 2:B)-an overall reduction in fluoride releases of 80%. A preponderance of the evidence indicates that the company could have adopted these systems before 1965, with the possible exception of the careful cell operating procedures required to achieve 90% primary system collection efficiency. The company in 1977 purchased the Sumitomo know-how, which may constitute a significant, non-obvious innovation in VSS cell operation technique beyond the imaginative capability that could reasonably have been expected from the company before or during the 1965-71 period. If careful cell operations short of the Sumitomo procedures could have increased primary collection efficiency to 80%, then the plant's fluoride emissions could have been decreased to about 5.1 lb./ton (Figure 2:C)-an overall reduction of 60%. And even if the possibility of reducing emissions through careful cell operating procedures is ignored, the company still could have decreased its fluoride releases to about 7.6 lb./ton (Figure 2:D)-an overall reduction of 40%.
This somewhat mechanical, mathematical approach to the company's emission control performance is supported by the less precisely expressed opinions of various witnesses.
*1020
Barney McPhillips, former chairman of the Oregon Environmental Quality Commission, stated that fluoride emissions from the plant could have been limited to 1 lb./ton but that, starting as of 1965, the company had not voluntarily minimized its emissions *1021 to the fullest possible extent. MTR at 10, 14-15. Richard Hatchard, chief of the state air pollution control office in the Oregon Board of Health and State Sanitary Authority during 1952-64, concluded that the damages incurred during the 1958-73 period were "unnecessary ... because adequate controls were not installed." Ex. 346 at 14. "I have every confidence that if they sought the services of an experienced design firm that a system could have been designed and installed in The Dalles in 1961...." TR 266. The emission control systems eventually installed at the plant subsequent to the 1965-71 claim period "were available for many years before the plant came into existence."
Although one or two or maybe three different vertical stud Soderberg plants in the United States didn't have some of these systems, still the technology was there on other plants and other industrial processes which required pollution control. The basic technology was available. Ex. 346 at 284.
Reid Iverson of EPA stated that as of 1972-73 the plant was "one of the better controlled in the United States" due to its combination of primary and secondary systems. Ex. 1100 at 26. Iverson's paper presented at the 1973 AIME Metallurgical Society meeting showed that the plant achieved the highest overall fluoride control efficiency of any plant listed, Ex. 1102 at Table 1, based upon EPA's 1972-73 emission testing. The company's plant was the only VSS plant listed. The EPA report itself confirmed that the plant had the most efficient primary system but indicated, however, that the plant's emissions from the secondary system exceeded those from the prebake plants. Ex. 904 at 8-9. And EPA did not "determine what percentage of potroom gases or emissions were not captured by either the primary or the secondary system." Ex. 1100 at 43. In other words, EPA did not measure the amount of fluoride escaping through the cell building doors and louvers. Finally, Iverson replied in the negative when asked whether an increase in plant fluoride emissions from 640 lb./day in 1964 to 750 lb./day in 1972 indicated that the plant had been utilizing the "best achievable technology." Ex. 1100 at 53.
Frederick Skirvin, supervisor of the Oregon Department of Environmental Quality's Air Quality Control Division, testified that during the 1967-71 period the company "was a leader in emissions control operations and technology," TR 619, though he had never visited the other VSS plants in Montana, Texas, Tennessee, British Columbia or Mexico, TR 620, nor did he appear particularly familiar with the relevant literature. TR 654-56.
The preponderance of the technical and evaluative testimony supports the conclusion that the company did not implement reasonably efficient and economical pollution control measures that could have substantially reduced the fluoride emissions from the plant during the 1965-71 period.
4. Mitigation Measures.
It is possible that the adverse effects of emissions from the plant might have been reduced by a strategy of mitigation, including the installation of tall stacks to propel the fluorides through the occasional atmospheric inversion layer and the spraying of susceptible fruit with a calcium chloride solution.
a. Tall Stacks.
The Stanford Research Institute 1955 proposal to the company "for an investigation of potential air pollution conditions in the vicinity of your future aluminum reduction plant at The Dalles" noted among the methods for minimizing the effects of pollutants "discharge from a tall stack." In fact, the proposal stated:
... If particulate fluorides and tar fog are present in [pot room] air to an excessive degree, the most feasible method of reducing their influence in the vicinity may be the installation of a tall or high-velocity stack for the discharge of ventilating air. Ex. 220d at 2.
Despite this early advice, LeGault stated that the company did not explore the technique *1022 of using tall stacks to prevent the fluoride emissions from reaching the nearby orchards. Ex. 336 at 126.
b. Application of Lime Spray.
In 1961 MCAES researchers applied to J. H. Hale peach trees at The Dalles Experiment Station a spray of calcium chloride (lime) concentrated at 2 lb. per 100 gallons. Trees not sprayed showed 26.8% soft suture, while those sprayed twice showed 23.3%, sprayed three times showed 5.2%, and sprayed four times showed 4.5%, even though the fluoride content of the peaches increased with the number of spray applications. Ex. 121 at 23. The report noted, however, that this additional measured fluoride content "may represent surface contamination and not absorption per se." Ex. 121 at 5. Three or four applications of the calcium chloride spray appeared to decrease the incidence of soft suture by a factor of about five in J. H. Hale peaches.
Bailey testified that the company's horticultural consultant Benson had reported no reduction in soft suture in peaches receiving the lime spray treatments. TR 380.
As recently as 1977 Scholes stated his belief that lime spray prevents soft suture but that it is no longer necessary in light of present insignificant incidence of soft suture. Ex. 933 at 4.
The 1966 Renken consent decree relieved the company of any obligation to compensate the orchardists for soft suture caused by fluoride emissions from the plant following the 1966 growing season
"... unless the orchard owner involved sprays his peach orchards with a calcium chloride or lime spray or other spray, as designated from time to time by [the company], in accordance with methods prescribed by [the company], for which spraying [the company] agrees to pay the reasonable cost.
In 1971 the claim arbitration panel made awards to the orchardists for damage to peaches even though they had not "always sprayed their peaches with calcium chloride as they had agreed to in the consent decree." Arbitrators' Findings, Decision and Award at 2.
The Oregon Supreme Court in Byers v. Santiam Ford, Inc., 281 Or. 411, 574 P.2d 1122 (1978), stated, "Whether the plaintiff has adopted a conciliatory attitude in resolving the controversy is not relevant in determining if defendant should pay punitive damages." 281 Or. at 417, 574 P.2d at 1125. Thus, the orchardists' failure always to spray their peaches does not excuse the conduct of the company in causing the injury to their peaches. Nevertheless, I find that the company's agreement to provide the orchardists with the calcium chloride spray and to pay the reasonable cost of its application to peach trees to have been constructive and in conformity with the company's societal obligations.
5. Conclusion.
The company did not fulfill its societal obligation to adopt and maintain reasonable, efficient pollution control measures. Having located the plant in a rich agricultural district, the company did not diligently monitor the plant's emissions nor the ambient concentrations of fluoride in the surrounding orchards. Nor did the company implement before or during the 1965-71 claim period efficient available methods for reducing the emissions. In particular, the company did not adopt cell operating procedures to minimize the escape of fumes from the primary collection system until several years after the end of the claim period, did not install wet electrostatic precipitators in the primary treatment system until 1972, and did not utilize a forced-draft secondary collection system until 1971. All of these measures could have been taken prior to the start of the claim period and would have substantially reduced the plant's emissions of fluoride, perhaps by as much as 80% and at least by 40%. In addition, use of tall or high-velocity stacks might have prevented the occasional concentration of emissions beneath the atmospheric inversion layer. The company's sponsorship of calcium chloride spraying of peach trees was laudable but not sufficient to overcome the preponderance of evidence showing that the company *1023 faltered in carrying out its social responsibility to control its harmful emissions.
C. Arranging to Compensate for the Remaining Harm.
As the court in determining the propriety of a punitive damage award may consider evidence of harm by the defendant's conduct to persons other than the plaintiff, see Orchard View Farms, Inc. v. Martin Marietta Aluminum, Inc., No. 73-3080, slip op. at 1-2 (9th Cir. June 23, 1975), so should the court take note of the defendant's efforts to neutralize that harm by voluntary payment of compensation, even though this compensation did not extend to the damage for which the jury in this case made a compensatory award.
In 1961 the company agreed to compensate peach and apricot growers in the vicinity of the plant for soft suture damage to their peaches and for apricot leaf necrosis believed to inhibit tree growth. TR 795-800. According to Byrne, the company paid out about $100,000 in settlements during the 1961-66 period. TR 887, 889-90.
On November 3, 1966, the United States District Court entered a consent decree settling the claims of 15 orchardists filed against the company in federal court and providing for the dismissal of 17 other cases then pending in the Oregon state courts. The company agreed to
... pay each of the plaintiff peach orchard owners the then prevailing market price of his peach fruit which has been or is made unmarketable by soft suture caused by fluorides emitted from defendant's plant; provided, however, that the defendant will have no such obligation for any soft suture occurring in the future unless the orchard owner involved sprays his peach orchards with a calcium chloride or lime spray or other spray, as designated from time to time by defendant, in accordance with methods prescribed by defendant, for which spraying defendant agrees to pay the reasonable cost. Consent Decree ¶ 2.
For damage other than soft suture the company agreed to
... pay to the respective plaintiffs such amounts as may be necessary to compensate them for past or future economic damage (other than soft suture in peaches) in their respective orchards, caused by fluorides emitted from defendant's plant; subject, however, to the terms and conditions herein stated, including arbitration pursuant to paragraph 10. Consent Decree ¶ 3.
Paragraph 10 of the decree provided for a three-member claim arbitration panel, one member selected by the company, one by the orchardists and the third member by the other two, to settle claims according to Oregon statutory provisions governing arbitration.
On February 11, 1971, the claim arbitration panel awarded the 15 orchardist plaintiffs a total of $942,305 for damage to their crops and trees during the 1960-69 period. On February 19, 1972, the panel awarded $120,900 to five orchardists for damage during 1970 and 1971. The orchardists then terminated the arbitration agreement, and no further voluntary settlements have been reached.
The company's agreement to recognize that the plant's emissions were damaging the orchards and to compensate the orchardists for the damage under an arbitration arrangement is to be complimented, and future such agreements to be encouraged. Such conduct is strong evidence that the company was attempting to fulfill its societal obligations by accounting for the damage its operations were causing to its neighbors. Though laudable, this conduct does not entirely shield the company from punitive damages liability, for it came about after some eight years of the plant's operation and after the company was faced with numerous lawsuits claiming damages. As the Oregon Supreme Court noted in Byers v. Santiam Ford, Inc., 281 Or. 411, 574 P.2d 1122 (1978):
In the case here at issue the evidence of contrition and a conciliatory attitude of one of defendant's agents after the complaint was filed has scant relevance *1024 respecting the state of mind of other agents of defendant at the time the car was sold to plaintiff. Assuming the evidence established the good faith and good will of defendant's president toward plaintiff, such conduct came as response to the complaint, which prayed for substantial punitive damages. The evidence shows a desire to "buy peace" and minimize the risk of an award of punitive damages and not that defendant dealt in good faith with plaintiff in selling the car. 281 Or. at 417, 574 P.2d at 1125.
Unlike Byers, however, in this case the company's agreement to arbitrate and compensate came during the period for which punitive damages are sought, not entirely after the events giving rise to liability. The Renken consent decree was entered after the 1965 and 1966 growing seasons but before the 1967-71 seasons. Therefore, I consider the arbitration agreement relevant to the determination of punitive damages liability in this case.
If the company during the 1965-71 claim period had cooperated fully in ascertaining the harm from the plant's emissions and in effecting some combination of efficient emission control combined with compensation for the remaining harm, I would rule against the plaintiff's request for punitive damages. The company's participation in the arbitration system is certainly indicative of corporate social responsibility but is insufficient to overcome its failure in the other two respects.
IV. AWARD OF PUNITIVE DAMAGES.
I am satisfied by the evidence in this case that an award of punitive damages is appropriate for the earlier portion of the claim period. It is difficult to put a precise date on the watershed of the company's conduct showing a sufficient compliance with societal obligation so as to rule out punitive damages. In this regard, I rely heavily upon the testimony of Barney McPhillips[13], who may almost be regarded as the father of Oregon's pollution control progress. While his testimony was generalized, and did not contain any particular dates, nonetheless it furnishes more than adequate support for a finding that midway through the 1965-71 claim period a change occurred in both the attitude of the company and its efforts to carry out pollution control measures so as to behave like a good neighbor. One cannot look at a single event alone, since the attitude of society (both private and governmental) was in a state of substantial change. And as society's attitude changed, as was evidenced by the movement toward a more careful attention to the earth around us and the necessity of its preservation, so also did society's laws and regulations, and with that the response of its components-both of the antagonists here, aluminum company and orchardist. I conclude, therefore, that a punitive damage award is available for the claim years 1965 through 1968. If the claim years here were only 1969-71, I would not award punitive damages. By this time-the late 60s and early 70s-on the record in this case, it cannot be said that the company was in sufficient disregard of its societal obligations so as to be liable for punitive damages. And while, of course, the only period of time before me in this case is 1965-71, and the only orchards involved are the ones of this plaintiff, nonetheless it is difficult to see how any claim for punitive damages would succeed as to any period of time in and after about 1969, in view of *1025 all of the developments during the 1969-71 period and since that time. Indeed, though of course I need not and do not decide the question, it seems most unlikely that a punitive damage claim for any period of time after 1971 based on the record in this case would even go to a jury.
Because the company did not cooperate in ascertaining the nature, severity and scope of the harm inflicted upon the plaintiff by the plant's emissions or in arranging to prevent this damage or to neutralize it through voluntary compensation arrangements, the company is liable to the plaintiff for an award of punitive damages.
Previous judicial opinions provide little guidance as to the proper amount of such an award. Courts often state that such an award should be sufficient to deter continuation or repetition of the offending conduct. In this case the offending conduct was the company's refusal either to implement economically efficient emission control measures or voluntarily to compensate the plaintiff for the damage caused by the plant's emissions. Thus, punitive damages should be awarded in an amount that will deter this and other companies from attempting to impose a portion of their costs of production upon their neighbors by compelling those damaged by the emissions to resort to the uncertainties of the legal process in order to obtain compensation.
Under the circumstances here, I believe an appropriate and measured award for punitive damages is $200,000 for the claim period here through the year 1968, but none thereafter.
The foregoing constitutes findings of fact and conclusions of law, pursuant to Rule 52, Fed.R.Civ.P.
NOTES
[1] Organizing a plaintiff class is hindered by the fact that the benefit of a successful lawsuit against the polluter for compensation is not limited to the plaintiffs. Persons damaged by the pollution but not contributing to the legal action also benefit due to the collateral estoppel effects of the initial lawsuit in subsequent actions and because the first plaintiff or group of plaintiffs has already done the work of organizing some relevant evidence and locating experts willing to testify. Thus, each person damaged by the pollution has an economic incentive to let someone else bring the first lawsuit and then to take a "free ride" or at least a discount excursion to obtaining his own compensation.
[2] "TR" refers to the transcript of the 1977 retrial. "MTR" refers to the separately-numbered transcript of the testimony of Barney McPhillips presented later in 1977. "ZTR" refers to the separately-numbered transcript of the testimony of Harold Zeh presented in 1978.
[3] The company submitted as exhibits only those few pages of these reports (Exs. 501-07) containing remarks primarily applicable to the plaintiff's orchards.
[4] Information received by the company about fluoride injury to fruit in orchards other than the plaintiff's can nevertheless provide notice that the plant's emissions are causing harm that should be eliminated through pollution controls or be compensated for. See Orchard View Farms, Inc. v. Martin Marietta Aluminum, Inc., No. 73-3080, slip op. at 1-2 (9th Cir. June 23, 1975).
[5] The notes of Scholes, Treshow and Blodgett submitted as Exs. 502d, 501h and 503f-k do not cover the Francois and Curtis orchards.
[6] The 1961 study finding stylar dimple and a leaf fluorine content of 119 ppm in cherry trees sprayed with ammonium fluoride did not utilize the procedure of washing the leaves prior to crushing and analysis. Nor did the MCAES surveys of foliage fluorine contents in The Dalles area during the years 1953-62. As noted earlier, the MCAES researchers began to wash the leaves prior to crushing and analysis in 1963, so a direct comparison between cherry leaf fluorine levels associated with stylar dimple in the 1961 experiment and cherry leaf fluorine levels in the area around the plant after 1962 is not possible with the data at hand.
[7] Due to the sketchiness of the supporting evidence, this conclusion does not rely upon the alleged incidents of Byrne's interference with federal funding for additional MCAES studies or his alleged attempts to have extension agent Thienes fired and to have extension agent Smith's 1968 report on cherry blossom petal browning and cupping suppressed. See Ex. 339 at 169-70; TR 154-55, 205.
[8] In a later statement Byrne stated that he did not know the concentration of fluoride required to produce soft suture. Ex. 935a at 26. At the 1977 retrial, however, Byrne agreed that 1 mg/m3 would be sufficient to cause soft suture "under some conditions, maybe." TR 871.
[9] The company hired a consultant, Richard Hatchard, to test the efficiency of the primary treatment system in 1966. TR 366.
[10] No sound reason has been advanced by defendants why hoods, similar to those employed by Reynolds, should not be installed. While it is true that a substantial portion of the gasses and particulates escape at the time when the new aluminum ore is being introduced into the pot or the liquid metal is removed, I am convinced that such an escape could be prevented by a properly designed hood over the open area. I agree with the expert that, after the installation of the hood, the small amount of gasses which might escape on the introduction of ore or the removal of liquid metal would be inconsequential. Renken v. Harvey Aluminum, Inc., 226
F.Supp. 169, 171-72 (D.Or.1963).
[11] Prior to being reminded of the dates of his visits to the plant, Schulein erroneously testified that he had not been there during the 1965-71 period. See TR 317, 341.
[12] H. Schmitt, the Fluorine Problem in Aluminum Plants, in 2 Extractive Metallurgy of Aluminum 93-103 (1963).
[13] [A]fter the plant was purchased by Martin Marietta we seemed to get more cooperation than we did from the Harveys. MTR 19.
THE COURT: [W]ould you say that the attitude of the company, the policy of the company, could be described before 1968 as being not that of a good citizen and after 1968 that of a good citizen?
McPHILLIPS: Your Honor, I would say that there was a definite improvement. MTR 30.
THE COURT: But would it be fair to say that, that as of about that time, there seemed to be a better attitude on the part of the aluminum company?
McPHILLIPS: Yes. I would say so.
THE COURT: And you are talking now roughly of 1967, 1968?
McPHILLIPS: Probably in that area. MTR 31.
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252 F. Supp. 80 (1966)
TAMASHA TOWN AND COUNTRY CLUB, a California corporation, Plaintiff,
v.
McALESTER CONSTRUCTION FINANCE CORPORATION, a Delaware corporation, Construction Finance Corporation, a California corporation, et al., Defendants.
Civ. A. No. 65-760.
United States District Court S. D. California, Central Division.
March 8, 1966.
*81 *82 Hamilton & Mueller, Richard D. Hamilton, Santa Ana, Cal., for plaintiff.
Paul, Hastings, Janofsky & Walker, Los Angeles, Cal., for defendants.
IRVING HILL, District Judge.
Plaintiff corporation sues as a debtor in possession under Chapter XI of the Bankruptcy Act. Its Complaint seeks treble damages under California Civil *83 Code, § 1916-3, for payment of alleged usurious interest. There is no diversity. The Complaint cites, as the jurisdictional basis of the action, sections of the Bankruptcy Act involving both summary and plenary jurisdiction.[*] For the reasons stated below, the motion must be granted.
In order to understand the jurisdictional issues, it is necessary to state in some detail the history and background of the action, all of which appears from the documents and transcripts submitted to the Court in connection with the instant motion. None of the facts are disputed.
The unhappy relationship between Plaintiff and Defendant commenced on July 22, 1961, when they signed an agreement whereby Plaintiff was to obtain a construction loan from Defendant. The note was secured by real estate of Plaintiff. It was guaranteed by certain individual guarantors and additionally secured by other real estate belonging to them. Within a few days after the loan agreement was signed, Plaintiff filed a declaratory judgment action in the Superior Court of San Diego County seeking a determination that the transaction was not usurious. After trial of that action, judgment was rendered on August 8, 1961, declaring the transaction to be non-usurious and payments under the loan agreement were made.
About a year later, on July 31, 1962, Plaintiff filed a Chapter XI proceeding in Bankruptcy in this District. On August 6, 1962, upon application of Plaintiff, the Referee issued an Order to Show Cause temporarily enjoining Defendant from foreclosing on any of Plaintiff's property. On the date set for hearing, Defendant appeared in opposition and asked that the restraining order be dissolved. By an Order of September 26, 1962, the Referee denied the request for dissolution of the restraining order. A petition for review of the Referee's Order was filed on October 3, 1962. The petition for review was denied by minute order dated December 27, 1962. An appeal was noted to the Court of Appeals for the Ninth Circuit.
On August 14, 1962, while Plaintiff's Order to Show Cause of August 6, 1962, was pending before the Referee, Defendant McAlester began an action in the Superior Court of Orange County against the guarantors of the note. It sought foreclosure of the property of the guarantors which had been pledged as additional security. Almost two years later, on April 30, 1964, McAlester secured a judgment against the guarantors in the Orange County action.
On May 20, 1963, while the Orange County action was pending against the guarantors, Defendant McAlester filed an Order to Show Cause before the Referee in Plaintiff's bankruptcy proceeding. In it, Defendant again sought to vacate the injunction which prevented it from foreclosing on Plaintiff's real property. Defendant's Order to Show Cause also sought a ruling that Plaintiff be adjudicated a bankrupt, authority to reclaim certain chattels, and an order requiring Plaintiff to post a bond and furnish an audit. This Order to Show Cause of May 20, 1963, should be especially borne in mind. It is alleged to be the basis of jurisdiction in this case.
At about the same time, Defendant McAlester dropped its appeal from the Referee's Order of September 26, 1962, and the Order of the District Court dismissing the petition for review. In lieu of this appeal, McAlester apparently desired to make a frontal attack on the *84 Referee's restraining order by its Order to Show Cause of May 20, 1963.
At this point Plaintiff filed, on June 4, 1963, a document which it called a "Supplement" to its original application for an Order to Show Cause of August 6, 1962. Plaintiff's "Supplement" is in no sense an answer to Defendant's Order to Show Cause of May 20, 1963. The "Supplement" sought to continue in effect the injunction stemming from the Plaintiff's Order to Show Cause of August 6, 1962, until the Referee determined a claim of usury raised by Plaintiff and the amount payable by Plaintiff to Defendant.
A hearing was held before the Referee on June 7, 1963. An examination of the transcript of that hearing makes it plain first, that all parties and the Referee were proceeding on the original application of Plaintiff Tamasha as "supplemented", and on the issues framed therein; and second, that the matters raised by Defendant McAlester in its Order to Show Cause of May 20, 1963, were not heard or determined.
Following the hearing of June 7, 1963, the Referee filed a Memorandum Opinion on July 12, 1963, and a formal Order filed November 13, 1963. That Order recites that evidence was heard on the "Supplement to Application to Stay Enforcement of Lien" of Plaintiff. In it, the Referee fixed the amount owing by Plaintiff to Defendant (as requested by Plaintiff in its "Supplement") and ruled that Defendant McAlester could not foreclose on Plaintiff's property until some $31,000 additional principal was paid by it to Plaintiff. He also ruled that the original loan was usurious. He refused to be bound by the judgment in the San Diego County declaratory relief action, finding that it was collusive. The Referee determined that summary jurisdiction existed to try the usury issue.
After the June 1963 hearing on Plaintiff's Supplementary application, a hearing was brought on by the Referee's own motion on November 3, 1963, and the Referee on November 27, 1963, filed an Order continuing the debtor in possession, and reciting that Defendant McAlester's application "for adjudication of the debtor and other relief" in its Order to Show Cause of May 20, 1963, was denied.
McAlester on December 4, 1963, filed a petition for review of the Referee's earlier Order of November 13, 1963, stating inter alia that the Referee erred in concluding that he had summary jurisdiction, since McAlester had raised a timely objection thereto, and asserting that a plenary suit was required to try the issue of usury. On December 12, 1963, McAlester filed another petition for review of the Referee's later Order of November 27, 1963, continuing the debtor in possession. Both petitions for review were pending when the judgment against the guarantors on the note was rendered in the afore-mentioned Orange County Superior Court action on April 30, 1964. Both were still pending when the said judgment was satisfied by a written agreement of May 20, 1964.
On June 4, 1964, Judge Stephens entered an Order dismissing both said petitions for review on the stipulation of the parties, acting jointly, that the petitions for review and the Orders of the Referee involved in them, should be vacated as moot.
The instant action was filed May 20, 1965. In the Complaint, Plaintiff contends that it paid the funds used in satisfaction of the judgment against the guarantors and that its payment included payments of usurious interest, for which it now seeks treble damages.
There is also pending a standby State Court action in which the present issues can be determined if no federal jurisdiction is found.
An analysis of the jurisdictional problems here presented requires a definition and discussion of both summary and plenary jurisdiction as applied to bankruptcy matters, since both types of jurisdiction are claimed.
*85 All bankruptcy jurisdiction is statutory. The term "summary jurisdiction" refers to jurisdiction specifically granted in the Bankruptcy Act[1] which a bankruptcy court (acting almost invariably through the Referee in Bankruptcy) exercises by "summary" proceedings. These proceedings are based on the use of petitions and orders to show cause, rather than formal pleadings.[2]
Summary jurisdiction includes three different categories: (1) "proceedings in bankruptcy"; (2) "controversies arising in proceedings in bankruptcy"; and (3) "other controversies between the bankrupt and a third party" not falling within (1) or (2) supra, but to which there is consent to summary jurisdiction. (2 Collier On Bankruptcy ¶ 23.02, p. 438, et seq.) Category (1) above, "proceedings in bankruptcy", is a term of art referring to matters of the administration of the bankrupt's estate, including the allowance of claims and the reduction of the estate to money. There is no contention that this category is involved in the instant case. Category (2) above, "controversies arising in proceedings in bankruptcy", is likewise a term of art referring to disputes concerning the property of the bankrupt in the actual or constructive possession of the Court. Category (3) above, "consent", involves situations where a party, by his own acts, is deemed to consent to the summary procedures of the Bankruptcy Court, waiving his right to the action being tried in an independent plenary suit in a court of appropriate jurisdiction. Such consent may be express, implied in law from a failure to assert an objection to summary jurisdiction,[3] or implied in fact from the acts of the party alleged to have consented.[4]
In the instant case, Plaintiff claims that summary jurisdiction exists under Category (2) above, or by consent under Category (3), or both. As will be discussed infra, neither claim is well founded.
The term "plenary jurisdiction" refers to actions instituted in the District Court as contrasted with those instituted before the Referee in Bankruptcy. Plenary proceedings involve all of the normal attributes of court trial, including formal pleadings, cross-examination of witnesses and the right to jury trial.
The statute governing plenary jurisdiction is § 23(b) of the Bankruptcy Act, 11 U.S.C. § 46(b). That section specifically authorizes the filing of a narrow group of actions arising from bankruptcies in the District Court as plenary actions in bankruptcy, even though no diversity or other independent basis of federal jurisdiction exists. This narrow group consists of cases arising under §§ 60, 67 and 70 of the Bankruptcy Act relating to preference, avoidable liens and fraudulent transfers. Other cases, even though a receiver, trustee or debtor in possession is a party, may not be instituted in the Federal District Court in *86 the absence of an independent basis of federal jurisdiction, such as diversity, with one exception namely, "consent". As that term is used in § 23(b), such "consent" may be express or implied.
In the instant case, Plaintiff argues that, even if there is no summary jurisdiction, there is plenary jurisdiction based on consent. This contention also, as will be demonstrated infra, is without merit.
Plaintiff instituted this case by filing a complaint in the usual form directly in the District Court. That, coupled with a reading of the complaint, would impel one to the conclusion that a plenary action only was intended. However, since the complaint invokes both the summary jurisdiction sections of the Bankruptcy Act, and the section on plenary jurisdiction, on a motion to dismiss I must consider whether a basis for either summary or plenary jurisdiction exists.
Summary Jurisdiction
Plaintiff first contends that the action is cognizable because it involves a claim to property in the actual or constructive possession of the Court (Category (2) of summary jurisdiction, supra). Plaintiff argues that it is seeking to recover a "fund", i. e. the money it allegedly paid by way of interest. Plaintiff contends that this "fund" was the proceeds of its real estate which was in its possession at the time of filing the Chapter XI proceeding and thus was in the actual or constructive possession of the Court.
It is clear to me that Plaintiff's action is not one to recover anything, and that no "fund" exists which is sought to be recovered. This is a damage action to enforce a statutory penalty. The relief sought is akin to damages for tortious conduct. The action does not seek to recover any specific money or property in the hands of the Defendant.
It is well established that summary jurisdiction does not exist to enforce a chose in action against a debtor since such an action involves no property in the actual or constructive possession of the Bankruptcy Court.[5] It is likewise well settled that summary jurisdiction does not extend to actions where indemnification is sought rather than restitution.[6]
Plaintiff makes an alternative argument to justify summary jurisdiction, i. e., that even if no recovery of a "fund" is involved, there has been consent by Defendant (Category (3) above). Plaintiff does not argue, nor could it so argue, that Defendant has expressly consented to jurisdiction, or that it has consented by failure to object to jurisdiction. The record is clear that McAlester objected to the exercise of summary jurisdiction at the outset when Plaintiff first raised the issue of usury before the Referee in June, 1963, and has constantly objected to jurisdiction on that issue ever since. Plaintiff does claim that Defendant impliedly consented to summary jurisdiction by seeking in its Order to Show Cause of May 20, 1963, to have the Referee's earlier injunction against foreclosure on any of the Plaintiff's property dissolved, and by seeking the other relief sought therein. As will be remembered that order also asked authorization to reclaim certain of Plaintiff's chattels subject to a chattel mortgage, to have Plaintiff adjudicated a bankrupt, and to require Plaintiff to post a bond, to account and to appear for examination.
*87 I hold that none of these requests for relief amount to an invocation of the aid of the bankruptcy court which by implication would open the door to the issue Plaintiff now seeks to raise.
There are cases which enunciate a doctrine of consent implied in fact to summary jurisdiction by one seeking affirmative relief from the bankruptcy court. Plaintiff cites a number of them.[7]
All of these are cases in which the claimant filed a claim against the bankrupt which, if allowed, would result in the payment of money or the recovery of property from the estate. When that has occurred, these cases hold that the bankrupt may obtain affirmative relief against the claimant on a counterclaim. The claimant is held to have impliedly consented to a determination of the counterclaim by asserting his own claim.
The doctrine of consent implied in fact stems from no statutory language, but arises from general equitable considerations. Alexander v. Hillman, 296 U.S. 222, 56 S. Ct. 204, 80 L. Ed. 192 (1935) is often cited as the leading case on the subject of implied consent as discussed herein.
I believe that this doctrine is not applicable, either in law or policy, to the present case for several reasons.
In the first place, McAlester was asserting no claim of its own in the Bankruptcy Court. It was a secured creditor and there is no provision or requirement for the filing of claims by a secured creditor in Chapter XI proceedings. The purpose of such proceedings is to secure an arrangement of unsecured debts.
Secondly, McAlester's Order to Show Cause was, in my view, defensive in nature. Its request to have the injunction against foreclosure of the real estate dissolved, was surely defensive. Plaintiff, by filing its petition and securing its preliminary injunction, had inhibited McAlester from following the normal state court remedies of foreclosure. McAlester's request for delivery of the chattels which were also secured to it by chattel mortgage, was similarly defensive. McAlester sought their delivery for the obvious purpose of being able to foreclose on them. McAlester had no other alternative but to come into the Bankruptcy Court for this relief. It made no claim in the Bankruptcy Court, but sought merely the right to take action against its security in another forum, at which time Plaintiff would be free to protect its property by asserting any available defenses and counterclaims.
Plaintiff cites no case where a secured creditor, appearing in a Chapter XI proceeding, is held to have impliedly consented to trial of a damage counterclaim merely by seeking to have a prior order of the Referee vacated. There is case law to the contrary. The posture of this case is analogous to that in Henkin v. United States, 229 F.2d 895 (2nd Cir. 1956). There, the United States, which held a lien on property, cross-moved to have a stay contained in a prior order of the Referee vacated, so that it might proceed to foreclose on its lien. The Court rejected the appellant's argument that the government's cross-motion constituted a submission to summary jurisdiction by implied consent so as to allow the Bankruptcy Court to adjudicate the validity of the lien. The Court held that the efforts of the United States "were directed toward the vacation of the stay * * * rather than toward the attainment of affirmative relief." The Court said:
"The [bankruptcy] court having intervened to prevent the scheduled sale by the government, the government had no alternative but to become a *88 party to the proceedings. Consent to summary jurisdiction is thus lacking * * *." (229 F.2d 895 [at p. 897]). Cf. Glens Falls Insurance Co. v. Strom, 198 F. Supp. 450, 457 (S.D.Cal.1961).
The other basis of relief which McAlester sought in its Order to Show Cause, i. e. the adjudication of Plaintiff as a bankrupt and the incidental request for a bond, accounting and examination, were equally defensive. The obvious purpose of these requests was to have the Chapter XI proceedings terminated so as to accomplish a termination of the restraints on Plaintiff's collection of its debt by foreclosure of its security. This is a far cry from filing a claim as was done in the cases cited by Plaintiff. To extend the implied consent doctrine to this type of a situation would unduly penalize secured creditors who come to the Bankruptcy Court in a defensive posture seeking only the right to realize on their security in the ordinary fashion.
Even if McAlester's participation in the proceedings before the Referee can be construed as implied consent to something, that consent did not extend to the claim now urged in this action. The cases recognize limitations to the doctrine of implied consent. Our Circuit imposes the requirement that the debtor must assert counterclaims arising out of the same transaction. Peters v. Lines, 275 F.2d 919 (9th Cir. 1960). The other Circuits apparently employ the same limitation.[8]
It is quite apparent that the subject of the instant action constitutes a different transaction than was involved in McAlester's Order to Show Cause of May 20, 1963. The present claim for treble damages for interest paid, did not arise and could not have arisen until May 20, 1964, when the alleged interest was actually paid. No case has been cited to the Court holding that implied consent extends to rights which did not even exist when the jurisdiction of the Bankruptcy Court was allegedly invoked by one claiming against the bankrupt.
In this respect, the instant case is much like In re 671 Prospect Avenue Holding Corp., cited supra. There a bank sought in the Bankruptcy Court to establish the validity of liens which it asserted against real estate and chattels in the possession of the bankrupt. As here, it was attempting to get into a position where it could foreclose on both. The District Court, on a petition for review, held both liens valid. The decision was affirmed by the Circuit Court and the Trustee in Bankruptcy turned the chattels over to the bank, which thereupon sold them. On re-argument, the Circuit Court reversed its prior decision, holding that the alleged lien on the chattels was invalid. The Trustee thus had a claim for conversion of the chattels against the bank and sought to have it tried before the Referee in summary proceedings. The Trustee claimed that the bank's earlier application to the Bankruptcy Court constituted implied consent. The Circuit Court held there was no summary jurisdiction of the conversion claim which had arisen months after the bank's original application for relief, stating:
"It is urged that the bank's consent to summary procedure may be found in the prior litigation concerning its lien, but the contention is unsound. Though the invalidity of the bank's lien has been established, the bank's liability to pay damages for injury to, or conversion of, the chattels has never been adjudicated; and the issue of liability presents a controversy which the bank is entitled to have tried out in a plenary suit, if it so wishes." 118 F.2d at p. 455.
*89 There is still another reason for declining to apply the doctrine of implied consent on the facts here, i. e. that the proceedings on McAlester's Order to Show Cause had been terminated long before the instant claim arose. All of the purposes and policy behind the implied consent doctrine require that there be some type of a proceeding still pending in the Bankruptcy Court at the time the bankrupt's claim is asserted. Two policy considerations underlie the doctrine, (1) avoiding a multiplicity of litigation by obviating the need for contesting the same facts in two separate courts, and (2) permitting a casting of accounts between the bankrupt and the claimant.[9] When the claimant's original proceeding is over by the time the bankrupt's claim is asserted, neither of these purposes is served. As stated by Judge Learned Hand in Conway v. Union Bank of Switzerland, 204 F.2d 603 (2d Cir. 1953), the bankrupt's claim must be a counterclaim and "it does not matter whether the creditor's claim is valid; the only relevant inquiry is whether he is a claimant, when the counterclaim is filed." In Conway, supra, the Court held that implied consent ceased when the creditor's claims had been dismissed. (204 F.2d at pp. 607-608)
Similarly in the case at bar, all proceedings on McAlester's Order to Show Cause were terminated long ago.
They were terminated by the Referee's Order of November 13, 1963, and if not terminated by that Order, they were surely terminated by Judge Stephens' stipulated Order of June 4, 1964, vacating the Referee's Order of November 13, 1963, as moot. As in Conway, whatever consent there was had long since expired when the instant Complaint was filed.
Plenary Jurisdiction
Finding no basis for summary jurisdiction, I pass now to the claim that plenary jurisdiction exists. Under § 23 (b) of the Bankruptcy Act, since there is no diversity in the instant case and since the instant case does not arise under §§ 60, 67 or 70 of the Bankruptcy Act, there is no right to proceed in the Federal Court unless "consent of the Defendant" is found. As above stated, there is no factual basis for claiming that McAlester either expressly consented to the jurisdiction of this Court or impliedly consented thereto by failure to object. Plaintiff makes no such claim. Plaintiff does claim that consent to plenary jurisdiction exists by virtue of the proceedings before the Referee which have been hereinbefore discussed in detail. Without citing any authority, Plaintiff assumes that the cases finding consent to summary jurisdiction by acts of the claimant are ipso facto applicable to plenary jurisdiction.
Although no discussion of the problem has been found, I am convinced that these cases are not applicable to a plenary proceeding initiated in the District Court. As above noted, the policy underlying the doctrine of consent to summary jurisdiction by acts of the claimant, is avoiding multiplicity of actions and permitting the casting of accounts between the parties. Neither of these would be advanced by extending the doctrine of consent by acts of the claimant to a plenary proceeding.
But even assuming arguendo, that the doctrine of implied consent by acts of the claimant did apply to a plenary action, for the reasons above stated I hold that the facts involved here do not establish such consent.
To summarize, there is no basis for the exercise of either summary or plenary jurisdiction in this case. There is no reason why this controversy should not be heard and determined in the standby state court action. An Order dismissing the action will be filed this date.
NOTES
[*] This Opinion throughout will refer to "the Defendant", meaning McAlester Construction Finance Corporation. Another corporation (which is a subsidiary of, or affiliated with, McAlester) and some individuals (who are officers or agents of the corporations) are named as co-defendants. Their liability, if any, is derivative from McAlester. Thus, if the action must be dismissed as to McAlester, it must also be dismissed as to the others. They have also joined in the Motion to Dismiss.
[1] Since the instant case involves a Chapter XI proceeding, the jurisdictional section is § 311 of the Bankruptcy Act (11 U.S.C. § 711). In ordinary adjudicated bankruptcies, the jurisdictional section is § 2 of the Bankruptcy Act (11 U.S.C. § 11). On the summary jurisdiction problem, the parties have cited, and I cite herein, § 2 cases as equally applicable in the instant case. Though summary jurisdiction in Chapter XI may be somewhat broader than summary jurisdiction under § 2 (8 Collier On Bankruptcy ¶ 3.02, p. 176) the differences will not affect the present problem and the § 2 cases appear to be relevant authority here.
[2] Sometimes unsubstantial matters within summary jurisdiction are disposed of ex parte or on affidavits only with both sides present. But where the proceeding is substantial and of an adversary nature, issues must be framed and trial must be by examination and cross-examination of witnesses. In re Sugerman, Inc., 3 F.2d 436 (2nd Cir. 1924). In such matters the term "summary" is indeed a misnomer. See Editorial, "What's In A NameThe Unhappy Tag of Summary Jurisdiction", 39 Referees' Journal 67 (1965).
[3] See Bankruptcy Act § 2(a) (7), 11 U.S. C. § 11(a) (7).
[4] See 2 Collier, supra, ¶ 23.08(1), et seq.
[5] Kelley v. Gill, 245 U.S. 116, 38 S. Ct. 38, 62 L. Ed. 185 (1917); Matter of Roman, 23 F.2d 556 (2d Cir. 1928); In re Joslyn's Estate, 168 F.2d 803 (7th Cir. 1948); Matter of Rogers, 51 F. Supp. 930 (1942).
[6] Maggio v. Zeitz, 333 U.S. 56, 68 S. Ct. 401, 92 L. Ed. 476 (1948); See also, In re 671 Prospect Avenue Holding Corporation, 118 F.2d 453 (2d Cir. 1941), cert. denied Newfield v. East River Sav. Bank, 314 U.S. 642, 62 S. Ct. 83, 86 L. Ed. 515 (1941); In re Welded Construction, Inc., 339 F.2d 593 (6th Cir. 1964).
[7] In re Nathan, 98 F. Supp. 686 (S.D.Cal. 1951); Floro Realty & Investment Co. v. Steem Electric Corporation, 128 F.2d 338 (8th Cir. 1942); Florance v. Kresge, 93 F.2d 784 (4th Cir. 1938); Peters v. Lines, 275 F.2d 919 (9th Cir. 1960); affirming In re Snow Camp Logging Company, 168 F. Supp. 420 (N.D.Cal.1958); Inter-State National Bank of Kansas City v. Luther, 221 F.2d 382 (10th Cir. 1955).
[8] See cases cited in Katchen v. Landy, 86 S. Ct. 467, 471, 382 U.S. 323, 15 L. Ed. 2d 391 (1966). The Supreme Court has recently held that the same transaction requirement is not applicable where a preference is involved. Katchen v. Landy, supra. But there is no preference involved in the instant case.
[9] 4 Collier On Bankruptcy, ¶ 63.20[4], at pp. 808-809.
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781 F. Supp. 517 (1991)
Adib H. AQEEL, Plaintiff,
v.
Richard SEITER, et al., Defendants.
No. C2-87-839.
United States District Court, S.D. Ohio.
December 18, 1991.
Adib H. Aqeel, pro se.
Gary David Andorka, Ohio Atty. General's Office, for defendants.
OPINION AND ORDER
GEORGE C. SMITH, District Judge.
I.
This is a prisoner civil rights case which was filed by Adib Aqeel, and which relates to various events which occurred at the London Correctional Institution in 1986 and 1987. In an order filed on December 21, 1989, this court granted judgment on the pleadings to all defendants and dismissed the case with prejudice.
Aqeel appealed that disposition to the United States Court of Appeals for the Sixth Circuit. In an order which was issued as a mandate on February 6, 1991, this court's order of dismissal was affirmed in part and reversed in part. 922 F.2d 841. The only issue to be addressed by the court on remand was "a development of facts about security concerns upon which defendants' conduct [in ordering Aqeel to remove his tarboosh] may have been warranted." Consequently, upon receipt of the mandate, the court reopened discovery and set a date for filing summary judgment motions.
*518 Defendants conducted discovery, including taking Aqeel's deposition. On August 14, 1991, they moved for summary judgment, and have supported that motion with an affidavit from David Schwarz, the Administrator of Religious Services for the Ohio Department of Rehabilitation and Correction. Aqeel unsuccessfully sought a writ of mandamus which, if issued, would have precluded the court from considering this matter by way of summary judgment motion. In denying mandamus, the Court of Appeals noted that its prior order expressed concern only over the absence of facts supporting the defendant's position, and "did not specify a particular procedure or proceeding the district court had to follow on remand." Aqeel then opposed the summary judgment motion in a brief filed on September 25, 1991. That brief was supported by a number of evidentiary materials, including documents addressed to the question of whether wearing a tarboosh or headcovering is a fundamental tenet of the Islamic faith. The briefing on the summary judgment motion is now complete, and the matter is ripe for decision.
II.
In considering this motion, the Court is mindful that the standard for summary judgment "mirrors the standard for a directed verdict under [Rule 50(a)], which is that the trial judge must direct a verdict if, under the governing law, there can be but one reasonable conclusion as to the verdict." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 106 S. Ct. 2505, 91 L. Ed. 2d 202 (1986), citing, Brady v. Southern Ry. Co., 320 U.S. 476, 479-480, 64 S. Ct. 232, 234-35, 88 L. Ed. 239 (1943). Thus, the Supreme Court concluded in Anderson that a judge considering a motion for summary judgment must "ask himself not whether he thinks the evidence unmistakably favors one side or the other but whether a fair minded jury could return a verdict for the plaintiff on the evidence presented." 477 U.S. at 252, 106 S.Ct. at 2512.
Rule 56(c) of the Federal Rules of Civil Procedure provides in pertinent part:
The judgment sought shall be rendered forthwith 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.
In essence, the inquiry is whether the evidence presented a sufficient disagreement to require submission to a jury or whether it is so one-sided that one party must prevail as a matter of law. Anderson, 477 U.S. at 252, 106 S.Ct. at 2512.
Such an inquiry necessarily implicates the evidentiary standard of proof that would apply at the trial on the merits. As a result, the Court must view the evidence presented through the prism of the substantive evidentiary burden. Rule 56(e) therefore requires that the nonmoving party go beyond the pleadings and by their own affidavits, or by the depositions, answers to interrogatories, and admissions on file, designate specific facts showing that there is a genuine issue for trial. Celotex Corp. v. Catrett, 477 U.S. 317, 324, 106 S. Ct. 2548, 2553, 91 L. Ed. 2d 265 (1986). The plain language of Rule 56(c) mandates the entry of summary judgment, after adequate time for discovery and upon motion, against a party who fails to make a showing sufficient to establish an element essential to that party's case, and on which that party will bear the burden of proof at trial. Id. at 322, 106 S.Ct. at 2552.
In Banks v. Rockwell International N. Am. Aircraft Operations, 666 F. Supp. 1053 (S.D.Ohio 1987) (J. Graham), this district enunciated the importance of granting summary judgments in appropriate situations by stating that: "Although summary judgment should be cautiously invoked, it is an integral part of the Federal Rules which are designed to secure the just, speedy and inexpensive determination of every action." Citing, Celotex Corp. v. Catrett, 477 U.S. at 324, 106 S.Ct. at 2553 (quoting Fed.R.Civ.P. 1); Anderson, 477 U.S. at 252, 106 S.Ct. at 2512.
Thus, the mere existence of a scintilla of evidence in support of a plaintiff's claim is *519 insufficient there must be evidence upon which a jury could reasonably find for the plaintiff. Having discussed the Rule 56 standard of review, the Court now turns to the merits.
III.
Whether the material facts are disputed in this case depends upon the grounds on which the court relies in determining whether summary judgment is appropriate. There are two separate determinations to be made in evaluating an inmate's religious freedom claim. One has to do with the nature of conduct in question: is it something that is a practice or requirement of the particular religion, so that the performance of that act can reasonably be described as the "exercise" of that religion? Even if the inmate can prove that a particular act or observance is the exercise of a religion, however, prison authorities may still validate restrictions on grounds that they are reasonably related to legitimate penological objectives. In some cases, both of these matters will be at issue and will be of crucial importance. In other cases, such as this one, if the evidence concerning legitimate penological interests is sufficient to justify the restriction even if a religious observance is at issue, it is really unnecessary to decide whether the practice in question is part of the inmate's sincerely-held belief concerning the requirements of his religion.
In this case, the parties have differing views on whether adherents of the Islamic faith are required to wear headgear in public. Administrator Schwarz claims, based upon his consultation with several Imams (apparently prayer leaders), that the Muslim faith does not require that Muslims wear tarbooshes at all times. Aqeel, on the other hand, has supplied the court with writings which indicate that certain Muslim scholars disagree, and view going about in public without a head covering as the impermissible adoption of the "way of the graceless people and a repulsive custom." Thus, there is a dispute about this issue. However, the court need not resolve it, based upon its view, more fully expressed below, that Aqeel was properly directed to remove his tarboosh in the dining hall and that RIB proceedings even if his religion directs that he wear a tarboosh at all times.
The remainder of the facts in the case are not in dispute. Aqeel's complaint and his deposition reveal that he was disciplined on a number of occasions, and ultimately transferred to another institution, because he refused orders to remove his tarboosh in the dining hall and when appearing before the Rules Infraction Board. He was permitted to wear the tarboosh at other times in the institution, and the institution also allows Muslims to conduct religious services, to pray, to eat a pork-free diet, to celebrate Ramadan, and to have religious literature. It is also undisputed that the prison policy with respect to the removal of headgear in the dining hall and RIB proceedings was a policy of general application i.e., it was not limited to Muslims and although there may have been isolated instances where the policy was not strictly enforced, it was nonetheless content-neutral, and would have applied both to adherents of other religions and to persons who simply wished to wear hats. It is with those facts in mind that the instant motion will be decided.
IV.
As the court noted in its previous opinion, the proper legal standard to be applied to these facts is that set forth by the Supreme Court in Turner v. Safley, 482 U.S. 78, 107 S. Ct. 2254, 96 L. Ed. 2d 64 (1987). Recognizing the limited first amendment rights which prisoners enjoy, but concluding that such rights still exist within the prison context, the court directed lower courts to evaluate free exercise claims brought by prisoners in the following manner. If the prison has restricted an activity which is or may be essential to the practice of a particular religion, the court must determine whether the restriction bears a logical connection to a legitimate interest in security or some other legitimate penological interest. The court must also consider whether the inmate has been provided alternative means of exercising his right of freedom of religion, must consider *520 whether accommodating the practice would have a detrimental impact on other inmates, prison personnel, or the allocation of prison resources, and must consider whether there are ready and inexpensive alternatives to the challenged regulation or prohibition. The Sixth Circuit has made it clear that this test applies to religious freedom claims. Pollock v. Marshall, 845 F.2d 656 (6th Cir.), cert. denied 488 U.S. 987, 109 S. Ct. 239, 102 L. Ed. 2d 228 (1988).
In this case, the Schwarz affidavit asserts two penological justifications for the institution-wide restriction against wearing headgear either in the dining hall or at RIB proceedings. First, there is a sanitary goal served by removal of hats in the dining hall. Dirt, dust and grime may accumulate on headgear as well as coats and work boots. The removal of headgear is therefore designed to eliminate this sanitary concern. Further, it is a goal of any penal institution to rehabilitate inmates and prepare them for re-entry into society. Removal of a hat during dining, and in a courtroom proceeding, is designed to have the inmate show respect toward others and comport with the way that society ordinarily conducts itself. These, according to the Schwarz affidavit, are the legitimate penological interests furthered by the policy, and any other policy would cause disruption because other inmates would then desire to wear headgear during these times, and granting special privileges to Muslim inmates would create resentment.
Concerns very similar, if not identical, to these have been accepted by other courts which have dealt with the question of religious headgear in the prison setting. Most recently, the Seventh Circuit decided, in Young v. Lane, 922 F.2d 370 (1991), that a prison's refusal to allow Jewish inmates to wear yarmulkes other than in their cells and during religious services was not a violation of the Jewish inmates' right to the free exercise of their religion. The court noted that, in addition to security, governmental agencies such as prisons have "a strong interest in uniform dress regulations." Young, 922 F.2d at 375. Nonuniform dress regulations would create the risk of "undesirable consequences associated with perceived favoritism." Id. at 377. Citing to the Supreme Court's decision in Goldman v. Weinberger, 475 U.S. 503, 106 S. Ct. 1310, 89 L. Ed. 2d 478 (1986) which validated an Air Force regulation prohibiting the wearing of any religious headgear while in uniform, the court concluded that the military and the prisons had similar interests in uniformity and discipline, and that a prison could therefore prohibit the wearing of yarmulkes as long as the prisoners were given other means of exercising their religion.
The same result was reached in Standing Deer v. Carlson, 831 F.2d 1525 (9th Cir.1987), which involved a claim by native Americans that they were constitutionally permitted to wear a headband at all times, including in the dining hall. There, the prison expressed a similar concern that wearing headgear in the dining hall contributed to unsanitary conditions. Given the close quarters and large number of inmates in the dining hall, wearing unsanitary clothing could create discipline problems. Concluding that a uniform ban on headgear "is logically connected to legitimate penological interests" and that a selective ban could "generate resentment and unrest," the court upheld the ban. Standing Deer, 831 F.2d at 1528, 1529. Similar results were reached in Benjamin v. Coughlin, 708 F. Supp. 570 (S.D.N.Y.1989), aff'd 905 F.2d 571 (2d Cir), cert. denied ___ U.S. ___, 111 S. Ct. 372, 112 L. Ed. 2d 335 (1990), (involving Rastafarian "crowns"), and Israel v. Koehler, 1989 U.S. Dist. LEXIS 8243 (S.D.N.Y.1989) (involving "diadems" worn by members of the Hebrew Israelite religion).
The court has located one case which struck down a prison ban on wearing headcoverings, or kuffis, by Muslims in a prison setting. Lloyd-El v. Meyer, 1989 WL 88371, 1989 U.S. Dist. LEXIS 8954 (N.D.Ill. 1989). In that case, however, the prison banned the kuffis in all areas other than cells and authorized religious services, but permitted inmates to wear state-issued baseball caps or stocking caps throughout the prison. In that case, unlike this one, the restriction was specifically directed to *521 wearers of religious headgear, and nonreligious headgear was permitted in other places. By contrast, the policy enforced against Aqeel was applied to religious headgear and non-religious headgear alike.
It is clear that a uniform dress policy, which includes as some of its features removal of hats in a dining hall, and removal of headgear during courtroom-type proceedings, cannot co-exist with allowing inmates of particular faiths, whether they be Jews, Muslims, Rastafarians, or Christians, to wear their headgear at those times and in those places. It is equally clear that every court which has considered the question has viewed sanitation and orderliness as legitimate penological goals, and favoritism towards certain inmates, for whatever reason, to be a dangerous practice in the prison setting. Where, as here, it is undisputed that members of the Islamic faith are permitted to engage in other forms of worship, and to wear their headcoverings at most times during the day, a policy such as the one enforced by officials at the London Correctional Institution, and which resulted in Aqeel being ticketed on numerous occasions for refusing to obey orders, is constitutionally permissible. That being the case, disciplining Aqeel for refusing to obey orders to remove his tarboosh did not violate any of his constitutional rights.
The court does note that Aqeel has argued that what occurred in 1986 and 1987 was not the result of any "policy" but was rather simply a series of unconnected, discretionary acts performed by prison officials. He asserts that the policy described by the Schwarz' affidavit does not exist because he was allowed to wear work clothes and work boots in the dining hall, and because on at least one occasion he was not asked to remove his tarboosh during disciplinary proceedings. The fact that prison policies are not enforced 100% of the time is not, without more, evidence that the policies do not exist. It is apparent that Aqeel ran afoul of prison rules only in the dining hall and RIB settings. He has not submitted facts which would support the discriminatory application of the policy, or which would contradict in any substantial measure the Schwarz affidavit's assertion that such a policy existed. Under those circumstances, the court is satisfied that the actions of prison officials in this case comported with their duty to permit Aqeel to practice his religion in a manner consistent with his status as a state prisoner. Nothing more is required.
V.
Based upon the foregoing, the Court concludes that the orders directing Aqeel to remove his tarboosh, issued to him at the London Correctional Institution in 1986 and 1987, were constitutionally valid orders. Consequently, the defendants' motion for summary judgment is GRANTED. This action is DISMISSED WITH PREJUDICE. The Clerk is directed to enter judgment in favor of the defendants.
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701 F. Supp. 2d 605 (2010)
Lawrence HARDY, Ramone Cross, and Shawn Smith, individually and on behalf of all others similarly situated, Plaintiffs,
v.
Brian FISCHER, in his capacity as Commissioner of the New York State Department of Correctional Services (DOCS), and in his individual capacity; Anthony J. Annucci, in his capacity as Deputy Commissioner and Counsel for DOCS, and in his individual capacity; Lucien J. Leclaire, Jr., former Acting Commissioner of DOCS, in his individual capacity; Glenn S. Goord, former Commissioner of DOCS, in his individual capacity; and John/Jane Does 1-50 (DOCS Supervisory, Training, and Policy Personnel), Defendants.
Thomas Graham, Plaintiff,
v.
Brian Fischer, Commissioner of the New York State Department of Correctional Services (DOCS), in his individual capacity; Anthony J. Annucci, Deputy Commissioner and Counsel for DOCS, in his individual capacity; Lucien J. Leclaire, Jr., former Acting Commissioner of DOCS, in his individual capacity; Glenn S. Goord, former Commissioner of DOCS, in his individual capacity; and John/Jane Does 1-50 (DOCS Supervisory, Training, and Policy Personnel), in their individual capacities, Defendants.
Michael Coleman, Plaintiff,
v.
Brian Fischer, Commissioner of the New York State Department of Correctional Services (DOCS), in his individual capacity; Anthony J. Annucci, in Deputy Commissioner and Counsel for DOCS, in his individual capacity; Lucien J. Leclaire, Jr., former Acting Commissioner of DOCS, in his individual capacity; Glenn S. Goord, former Commissioner of DOCS, in his individual capacity; Edward Del Rio, Parole Revocation Specialist, in his individual capacity; John Zwaryczuk, Senior Parole Officer, in his individual capacity; Barbara Cudney, Institutional Parole Officer, in her individual capacity; Sharon Henry, Parole Officer, in her individual capacity; John Martinez, Parole Officer, in his individual capacity; and John/Jane Does 1-50 (DOCS and Division of Parole Supervisory, Training, and Policy Personnel), Defendants.
Nos. 08 Civ. 2460(SHS), 08 Civ. 9634(SHS), 07 Civ. 7790(SHS).
United States District Court, S.D. New York.
March 31, 2010.
*606 Aaron Jonathan Mysliwiec, Law Offices of Joshua Dratel, P.C., Elora Mukherjee, Matthew D. Brinckerhoff, Emery Celli Brinckerhoff & Abady, LLP, New York, NY, for Plaintiffs.
Michael J. Keane, Andrew Hodge Meier, Office of the Attorney General, New York, NY, for Defendants.
OPINION & ORDER
SIDNEY H. STEIN, District Judge.
Various plaintiffs have brought these three actions pursuant to 42 U.S.C. § 1983 challenging the imposition and enforcement of post-release supervision ("PRS") by the New York State Department of Correctional Services ("DOCS"). Specifically, plaintiffs contend that the imposition of PRS by anyone other than a judge violates the Due Process Clause of the Fourteenth Amendment by depriving plaintiffs of their constitutional right to be sentenced only by a judge. They assert that although this right was clearly established by the U.S. Supreme Court in 1936 in Hill v. United States ex rel. Wampler, 298 U.S. 460, 56 S. Ct. 760, 80 L. Ed. 1283 (1936), and by the U.S. Court of Appeals for the Second Circuit in 2006 in Earley v. Murray, 451 F.3d 71 (2d Cir.2006), DOCSnot a judgeimproperly continued to impose and enforce sentences of PRS on New York State criminal defendants *607 pursuant to N.Y. Penal Law § 70.45. That statute mandates the imposition of PRS for certain violent offenders sentenced to determinate sentences. Defendants have moved to dismiss each of the three complaints. Because each defendant is entitled to qualified immunity or another privilege with respect to the alleged violations of plaintiffs' constitutional rights, the motions to dismiss are granted.[1]
I. BACKGROUND
A. Factual Background
The following facts are taken from the complaint in each action and are presumed to be true for purposes of these motions.
1. Hardy v. Fischer
a. Lawrence Hardy
On October 2, 2002, a New York state court imposed a four year determinate sentence of incarceration on Lawrence Hardy. The state court judge did not impose a term of PRS as part of Hardy's sentence and his sentencing commitment sheet did not refer to PRS. (Hardy v. Fischer Am. Compl. ("Hardy Compl") ¶ 41-42.) The expiration date of Hardy's maximum determinate sentence was September 9, 2006, and he received a one-seventh reduction for good time, bringing his release date to February 10, 2006. DOCSnot the judgesubsequently imposed a five year term of PRS, to commence upon Hardy's release. (Id. ¶¶ 43-45.) On October 15, 2007, DOCS reincarcerated Hardy for alleged violations of PRS. (Id. ¶¶ 45-46.) Hardy was released on March 11, 2008, although he remains subject to the conditions of PRS imposed by DOCS, including travel restrictions. (Id. ¶¶ 47-48.)
b. Ramone Cross
On May 24, 2002, a judge sentenced Ramone Cross to a four year determinate sentence of incarceration and a one and one half year sentence of PRS. (Id. ¶ 51.) After receiving credit for time served while awaiting trial, Cross's determinate sentence expired on February 20, 2003, and his judicially imposed PRS expired on August 20, 2004. (Id. ¶¶ 52-53.) Nonetheless, at the time of Cross's release from prison, DOCS imposed a five-year term of PRS, which was to expire on February 20, 2008. (Id. ¶ 54.) In August 2007, Cross was arrested and charged with promoting prison contraband. He subsequently pleaded guilty to disorderly conduct and was sentenced to fifteen days in jail. After his release in August or September 2007, Cross was informed by his parole officer that this conviction also constituted a violation of the conditions of the PRS term that DOCS had imposed on him. (Id. ¶ 55-56.) An arrest warrant was issued for Cross, but it was stayed pending the motion for a preliminary injunction in this action. (Id. ¶¶ 57-58.)
c. Shawn Smith
In July 2000, Shawn Smith received a determinate sentence of seven years of incarceration after his conviction on two counts of burglary in the second degree and an indeterminate sentence of two to four years for two counts of burglary in the third degree, to run concurrently. (Id. ¶ 62.) Smith's maximum determinate sentence *608 expired on October 26, 2006 because of time served awaiting trial, and he was released on October 26, 2005 after a reduction for good conduct. (Id. ¶¶ 64-65.) Upon release, DOCS imposed five years of PRS, and, on January 16, 2007, reincarcerated Smith for allegedly violating the terms of his PRS by moving to a new home, missing a home visit with his parole officer, and skipping meetings of a drug program. (Id. ¶¶ 66-67.) While reimprisoned, Smith filed a petition for a writ of habeas corpus in state court. On December 21, 2007, the Bronx County Supreme Court granted Smith's petition, finding that DOCS's imposition of PRS was illegal. (Id. ¶¶ 68-69; see also Smith v. N.Y. State Div. of Parole, No. 75043-07 (Bronx Co. Sup.Ct. Dec. 21, 2007).) After eleven months in prison, Smith was released on December 24, 2007. (Hardy Compl. ¶ 70.)
Lawrence Hardy, Ramone Cross, and Shawn Smith bring claims for damages, injunctive relief, and declaratory judgment based on violation of their rights to due process. The Court denied their request for injunctive relief in an Order and Opinion dated March 31, 2010.
2. Graham v. Fischer
On May 2, 2001, Thomas Graham was sentenced in Kings County Supreme Court to a determinate term of five and one half years of incarceration for one count of burglary in the second degree. That sentence did not include a term of PRS. (Graham v. Fischer Compl. ("Graham Compl.") ¶¶ 19-20.) Graham was released on August 15, 2005, although his maximum determinate sentence expired on June 1, 2006. Upon Graham's release, DOCS imposed a five year term of PRS. (Id. ¶¶ 24-26.) At some point after October 2006, a warrant was issued for Graham's arrest based on alleged violations of PRS, including leaving a drug program, missing visits with a parole officer, and being charged with a misdemeanor. He was reincarcerated on August 1, 2007 and ultimately sentenced to an additional fifteen months of detention. (Id. ¶¶ 37-39.) On January 15, 2008, a state court granted Graham's motion brought pursuant to section 440.20 of the New York Criminal Procedure Law and "declared DOCS' imposition of PRS a nullity." (Id. ¶ 44; see also People v. Graham, No. 10195/00 (Kings Co. Sup.Ct. Jan. 15, 2008)). Graham was released on January 19, 2008. (Graham Compl. ¶ 45.) Graham now brings claims for damages and declaratory relief based on alleged violations of his Fourteenth Amendment right to due process and his Fourth Amendment right to be free from unreasonable search and seizure, as well as for conspiracy to violate section 1983.
3. Coleman v. Cudney
Michael Coleman received a four year determinate sentence of incarceration for first degree attempted assault and a concurrent two year determinate sentence for second degree assault in January 2002, neither of which included a term of PRS. (Coleman v. Fischer Am. Compl. ("Coleman Compl.") 26-27.) Coleman's maximum determinate sentence expired on February 20, 2006 but he was released on July 22, 2005, at which point DOCS imposed five years of PRS on him. (Id. 28-29.) Coleman was arrested and reincarcerated on June 14, 2006 for allegedly violating the terms of his PRS by traveling to New Jersey. (Id. 31-32.) He was released on June 19, 2007 after filing a habeas petition based on an alleged violation of his right to counsel at his parole revocation proceeding. Coleman subsequently initiated an Article 78 proceeding and, on March 14, 2008, the state court directed DOCS to excise and delete the term of PRS from his sentence. (Id. ¶¶ 33-37; see also Coleman v. N.Y. State Dep't of Corr. *609 Servs., No. 36119/2007, 19 Misc.3d 1104(A), 2008 WL 711730 (Kings Co. Sup.Ct. Mar. 14, 2008).) Coleman brings claims for damages and declaratory judgment based on defendants' alleged violation of his due process rights.
B. Legal History
On June 9, 2006, the Second Circuit applied the seventy year old Supreme Court decision in Hill v. United States ex rel. Wampler and held that DOCS's imposition of extra-judicial sentences of PRS violated federal law, entitling the petitioner to a writ of habeas corpus if the petition had been timely filed in the district court.[2]Earley, 451 F.3d at 76-77. Plaintiffs allege that DOCS nonetheless continued to impose and enforce PRS on them and on other similarly situated individuals despite the fact that a judge had never sentenced them to PRS. (Hardy Compl. ¶¶ 3, 36; Graham Compl. ¶ 7; Coleman Compl. ¶ 3.)
In April 2008, the New York Court of Appeals decided Garner v. New York State Department of Correctional Services, 10 N.Y.3d 358, 859 N.Y.S.2d 590, 889 N.E.2d 467 (2008) and People v. Sparber, 10 N.Y.3d 457, 859 N.Y.S.2d 582, 889 N.E.2d 459 (2008), which held, inter alia, that PRS imposed by anyone other than a judge violates New York state law. See Garner, 10 N.Y.3d at 362, 859 N.Y.S.2d 590, 889 N.E.2d 467 ("As we explained today in People v. Sparber ..., the combined command of CPL 380.20 and 380.40 is that the sentencing judgeand only the sentencing judgeis authorized to pronounce the PRS component of a defendant's sentence.").
The New York state legislature subsequently passed Corrections Law § 601-d "to provide a mechanism for courts to consider resentencing defendants serving determinate sentences without court-ordered postrelease supervision terms." People v. Williams, 14 N.Y.3d 198, 206, 899 N.Y.S.2d 76, 925 N.E.2d 878 (N.Y.2010). However, last month, the New York State Court of Appeals determined that "the Double Jeopardy Clause prohibits a court from resentencing the defendant to the mandatory term of PRS after the defendant has served the determinate term of imprisonment and has been released from confinement by DOCS." Id. at 217, 899 N.Y.S.2d 76, 925 N.E.2d 878 ("We ... conclude that, after release from prison, a legitimate expectation in the finality of a sentence arises and the Double Jeopardy Clause prevents reformation to attach a PRS component to the original completed sentence.").
C. The Pending Motions
Defendants have moved to dismiss the complaints pursuant to Federal Rule of Civil Procedure 12(b)(1), (b)(6), and (h)(3). They contend that Corrections Law § 601-d moots plaintiffs' claims and thus deprives the Court of subject matter jurisdiction; that they are entitled to qualified immunity because their allegedly unconstitutional acts did not violate any law that was clearly established at the time of the alleged violations; that plaintiffs' claims are barred by the statute of limitations; that the Supreme Court precedent of Heck v. Humphrey, 512 U.S. 477, 114 S. Ct. 2364, 129 L. Ed. 2d 383 (1994), precludes the relief plaintiffs seek; that plaintiffs have not alleged defendants' personal involvement in the alleged deprivation of their constitutional rights as required under 42 U.S.C. § 1983; that defendants were privileged in incarcerating plaintiffs for violation of *610 PRS; that the Court should abstain from determining the merits of these actions; and that the Eleventh Amendment bars plaintiffs' claims because they challenge state policy.
II. STANDARD OF REVIEW
For purposes of a motion to dismiss for failure to state a claim pursuant to Federal Rule of Civil Procedure 12(b)(6), a court assumes the truth of all facts asserted in the complaint and draws all reasonable inferences from those facts in favor of the plaintiff. See Global Network Commc'ns, Inc. v. City of New York, 458 F.3d 150, 154 (2d Cir.2006). To survive a motion to dismiss, "a complaint must contain sufficient factual matter, accepted as true, to `state a claim to relief that is plausible on its face.'" Ashcroft v. Iqbal, ___ U.S. ___, 129 S. Ct. 1937, 1949, 173 L. Ed. 2d 868 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570, 127 S. Ct. 1955, 167 L. Ed. 2d 929 (2007)). For a claim to be plausible, a complaint's "[f]actual allegations must be enough to raise a right to relief above the speculative level." Twombly, 550 U.S. at 555, 127 S. Ct. 1955. Thus, if a plaintiff "ha[s] not nudged [its] claims across the line from conceivable to plausible, [its] complaint must be dismissed." Id.
III. ANALYSIS
Defendants assert a broad array of various defenses to these actions. Because the Supreme Court has "`repeatedly ... stressed the importance of resolving immunity questions at the earliest possible stage in litigation,'" Pearson v. Callahan, ___ U.S. ___, 129 S. Ct. 808, 815, 172 L. Ed. 2d 565 (2009) (quoting Hunter v. Bryant, 502 U.S. 224, 227, 112 S. Ct. 534, 116 L. Ed. 2d 589 (1991)), and because defendants are correct that they are entitled to qualified immunity from being sued based on plaintiffs' claims or their actions were otherwise privileged, the Court begins with the qualified immunity inquiry.[3]
A. Qualified Immunity
The doctrine of qualified immunity protects government officials "`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.' "Id. (quoting Harlow v. Fitzgerald, 457 U.S. 800, 818, 102 S. Ct. 2727, 73 L. Ed. 2d 396 (1982)). To determine whether a right is "clearly established," courts in this Circuit assess whether: "(1) the law is defined with reasonable clarity, (2) the Supreme Court or the Second Circuit has recognized the right, and (3) a reasonable defendant would have understood from the existing law that his conduct was unlawful." Anderson v. Recore, 317 F.3d 194, 197 (2d Cir.2003) (internal quotations and citations omitted). Qualified immunity applies regardless of whether an official's error is "a mistake of law, a mistake of fact, or a mistake based on mixed questions of law and fact." Pearson, 129 S.Ct. at 815.
Plaintiffs in each of these actions have alleged deprivation of their rights as protected by the Due Process Clause of the Fourteenth Amendment, specifically the right to be free from an administrative agency adding to their judicially imposed sentences.[4] (See Hardy Compl. ¶¶ 73, 76; *611 Graham Compl. ¶¶ 48; Coleman Compl. ¶ 40; see also Earley, 451 F.3d at 76.) Thus, the relevant question is whether that right was clearly established at the time of the alleged violation, when DOCSrather than a judgeimposed PRS on each plaintiff[5] without direction to do so in each of their judicially imposed sentences.
Defendants contend that, at the time DOCS imposed PRS on the plaintiffs in each of these actions, courts had not clearly established that administrative imposition of PRS on a defendant whose judicially imposed sentence had not included PRS violated the defendant's due process rights. Defendants are correct, since DOCS imposed PRS on each plaintiff in these actions before the Second Circuit decided Earley on June 9, 2006.
Plaintiffs urge that the Supreme Court's decision seventy years earlier in Wampler was sufficient to establish this right. However, the Supreme Court in Wampler held that a clerk of court violated a defendant's constitutional rights by adding a provision to a sentence that a judge had not included at sentencing. 298 U.S. at 464-65, 56 S. Ct. 760. There, the clerk acted at the informal direction of the sentencing judge, whereas defendants in these actions imposed PRS on these plaintiffs pursuant to a state statute that required that their sentences include a mandatory period of PRS. Id. at 465, 56 S. Ct. 760; see also Scott, 2009 WL 928195, at *5 n. 2 (distinguishing Wampler on similar grounds); Rodriguez, 2010 WL 438421, at *6 (same).
Lending further support to this conclusion, New York state courts repeatedly upheld DOCS's administrative imposition of PRS on individuals when their sentencing courts failed to provide for PRS in the years leading up to the Second Circuit's decision in Earley.[6]See, e.g., Deal v. *612 Goord, 778 N.Y.S.2d 319, 320, 8 A.D.3d 769 (3d Dep't 2004) ("Inasmuch as petitioner was sentenced to a determinate sentence for his commission of a violent felony in 1999, a period of postrelease supervision [was] automatically included in his sentence by statute." (quotation and citation omitted)); People v. White, 744 N.Y.S.2d 924, 924-25, 296 A.D.2d 867 (4th Dep't 2002) ("Postrelease supervision is mandatory for determinate sentences and is automatically included in the sentence. Where, as here, the court fails to specify a period of postrelease supervision, the period `shall be five years.'" (quoting N.Y. Penal Law § 70.45)).
Furthermore, every court in this Circuit that subsequently has considered the argument that Wampler clearly established the right not to have PRS imposed by an administrative agency has rejected it. See, e.g., Scott v. Fischer, No. 07 Civ. 11303, 2009 WL 928195, at *5 n. 2 (S.D.N.Y. March 30, 2009); Rivers v. Fischer, No. 08 Civ. 8906, 2009 WL 3169966, at *4 (S.D.N.Y. Sept. 28, 2009); Rodriguez v. Fischer, No. 08 Civ. 4662, 2010 WL 438421, at *6 (E.D.N.Y. Feb. 3, 2010); Sinclair v. Goord, No. 07 Civ. 1317, 2009 U.S. Dist. Lexis 67901, at *13-*14 (N.D.N.Y. Mar. 10, 2009); but see Knowles v. Johnson, No. 08 Civ. 4741, 2010 WL 1050973, at *3 (S.D.N.Y. Mar. 23, 2010) (staying consideration of qualified immunity pending the Second Circuit's resolution of the then-pending appeals in Scott); Santiago v. Fischer, No. 09 Civ. 1383, 2009 WL 3852001, at * 5 (E.D.N.Y. Nov. 18, 2009) (rejecting defendants' assertion of qualified immunity for acts purportedly taken after the Second Circuit decided Earley without addressing Wampler).
Thus, this Court concludes that the right to be free from the administrative addition of PRS to plaintiffs' judicially imposed sentences was not clearly established prior to the Second Circuit's decision in Earley and defendants are accordingly entitled to qualified immunity.
B. Other Privilege
Coleman also brings due process claims against defendant parole officers Edward Del Rio, John Zwaryczuk, Barbara Cudney, Sharon Henry, and John Martinez for commencing and pursuing the violation of PRS proceedings against Coleman that led to his reincarceration on June 14, 2006, a mere five days after Earley was decided. (Coleman Compl. ¶¶ 14-18, 31-32.) However, the actions of those parole officers were privileged.
"[S]tate officials ... are entitled to rely on a presumptively valid state statute... until and unless [the statute is] declared unconstitutional." Vives v. City of New York, 405 F.3d 115, 117 (2d Cir.2005) (quoting Connecticut ex rel. Blumenthal v. Crotty, 346 F.3d 84, 102-03 (2d Cir.2003)). N.Y. Executive Law § 259-i(3)(a)(i) provides that
[i]f the parole officer ... shall have reasonable cause to believe that [a conditionally released person] has ... violated one or more conditions of his ... post-release supervision, such parole officer shall report such fact to a member of the board of parole, or to any officer of the division designated by the board, and thereupon a warrant may be issued for the retaking of such person and for his temporary detention in accordance with the rules of the board.
*613 Here, whether Coleman actually violated the conditions of his PRS is not at issue, and there is no claim that the parole officers did not have probable cause to institute PRS violation proceedings against Coleman, even if that PRS was wrongly-imposed. See Scott, 2009 WL 928195, at *5; see also Jenkins v. City of New York, 478 F.3d 76, 84 (2d Cir.2007).
The Second Circuit has long recognized that "[t]he existence of probable cause to arrest constitutes justification and is a complete defense to an action for false arrest, whether that action is brought under state law or under § 1983." Id. (quoting Weyant v. Okst, 101 F.3d 845, 852 (2d Cir.1996)). Accordingly, Coleman's claims against Del Rio, Zwaryczuk, Cudney, Henry, and Martinez for any actions taken to reincarcerate him within a few days after the Second Circuit decided Earley fail for the additional reason that these defendants had probable cause to arrest and detain Coleman for violating his PRS, thus precluding liability pursuant to section 1983.
C. Declaratory Relief
Plaintiffs all seek "[a] judgment declaring that defendants have committed the violations of law alleged in this action" in addition to their claims for damages and in the case of Hardy, Cross, and Smith injunctive relief. (Hardy Compl. at 15; Graham Compl. at 12; Coleman Compl. at 9.) District courts enjoy "substantial discretion in deciding whether to declare the rights of litigants." Wilton v. Seven Falls Co., 515 U.S. 277, 286, 115 S. Ct. 2137, 132 L. Ed. 2d 214 (1995); see also 28 U.S.C. § 2201(a).
In light of the Court's grant of qualified immunity to defendants from a suit for damages and the separate denial of plaintiffs' request for injunctive relief, no issues remain for adjudication, and thus the Court declines to exercise jurisdiction over the claims for declaratory relief. See Campbell v. Greisberger, 80 F.3d 703, 706 (2d Cir.1996), abrogated on other grounds by Exxon Mobil Corp. v. Saudi Basic Indus. Corp., 544 U.S. 280, 125 S. Ct. 1517, 161 L. Ed. 2d 454 (2005) (finding the district court justified in dismissing claims for declaratory relief when it had dismissed plaintiffs other claims); see also Preiser v. Newkirk, 422 U.S. 395, 402, 95 S. Ct. 2330, 45 L. Ed. 2d 272 (1975) ("[T]he question [in determining whether a request for declaratory relief had become moot] in each case is whether the facts alleged, under all the circumstances, show that there is a substantial controversy, between parties having adverse legal interests, of sufficient immediacy and reality to warrant the issuance of a declaratory judgment." (quotation and citation omitted, emphasis in original)).
IV. CONCLUSION
The imposition by DOCS of PRS on plaintiffs did not violate "`clearly established... constitutional rights of which a reasonable person would have known,' "Pearson, 129 S.Ct. at 815 (quoting Harlow, 457 U.S. at 818, 102 S. Ct. 2727), at the time DOCS imposed that PRS between February 2003 and the Second Circuit decision in Earley v. Murray, 451 F.3d 71. Defendants are thus entitled to qualified immunity for their roles in imposing PRS on these plaintiffs. Similarly, to the extent that Coleman brings claims against defendant parole officers Del Rio, Zwaryczuk, Cudney, Henry, and Martinez for actions taken immediately after the Second Circuit decided Earley, those actions were privileged. The Court has denied plaintiffs' claims for injunctive relief in a separate Order and Opinion dated today and has declined to exercise jurisdiction over the claims for declaratory relief. Accordingly, defendants' motions to dismiss the complaint *614 in each of these three actions are granted.
SO ORDERED.
NOTES
[1] The plaintiffs in the Hardy action bring suit against Brian Fischer and Anthony Annucci in their official, as well as individual, capacities. However, New York State and its agents and officers acting in their official capacities are not "persons" pursuant to 42 U.S.C. § 1983. Will v. Michigan Dep't of State Police, 491 U.S. 58, 71, 109 S. Ct. 2304, 105 L. Ed. 2d 45 (1989). Accordingly, the Court dismisses the claims against Fischer and Annucci in their official capacities and addresses the remaining claims only insofar as they are alleged against defendants in their individual capacities.
[2] The Earley decision did not address the propriety of whether New York state could move in state court to modify Earley's sentence to include a term of PRS. See Earley, 451 F.3d at 77 n. 2.
[3] While a motion to dismiss pursuant to Rule 12(b)(6) often is not the appropriate stage in which to raise an affirmative defense, the Second Circuit has written that it "see[s] no reason why even a traditional qualified immunity defense may not be asserted on a Rule 12(b)(6) motion as long as the defense is based on facts appearing on the face of the complaint," as they are here. McKenna v. Wright, 386 F.3d 432, 436 (2d Cir.2004).
[4] Each plaintiff also alleges that defendants conspired to violate section 1983 by depriving them of these same due process rights. Because the Court finds that defendants are all entitled to qualified immunity or another privilege that overcomes the individual section 1983 claims, the claims for conspiracy also fail. See Singer v. Fulton County Sheriff, 63 F.3d 110, 119 (2d Cir.1995). Graham also alleges that defendants' imposition of PRS without court order also subjected him to an unreasonable search and seizure in violation of the Fourth Amendment. (Graham Compl. ¶ 54.) Even assuming, arguendo, that Graham's Fourth Amendment claim alleges the violation of a constitutional right, the acts allegedadministrative imposition of PRS by DOCSare the same pre-Earley acts addressed by all plaintiffs' Fourteenth Amendment claims. As set forth below, there was no clearly established right to be free from purely administrative imposition of PRS at this time. Accordingly, the same qualified immunity analysis applies to Graham's Fourth Amendment claim as to those brought for alleged violations of plaintiffs' due process rights.
[5] Although the Hardy v. Fischer action is putatively a class action, no class has been certified. In order for the Hardy complaint to survive this motion to dismiss, the allegations of at least one named plaintiff must state a claim for relief. See Comer v. Cisneros, 37 F.3d 775, 798 (2d Cir.1994); see also Fed. R.Civ.P. 23(a)(3); Sinclair v. Goord, No. 07 Civ. 1317, 2009 U.S. Dist. Lexis 67901, at *23 (N.D.N.Y. Mar. 10, 2009) (denying motion for certification of a class of individuals on whom DOCS imposed PRS after denying the named plaintiff's claims).
[6] Defendants correctly note that several New York state courts continued to uphold administrative imposition of PRS in the wake of Earley, until the state Court of Appeals decided Garner and Sparber on April 29, 2008. See, e.g., People v. Collado, 849 N.Y.S.2d 558, 559, 47 A.D.3d 547 (1st Dep't 2008); People v. Lingle, 825 N.Y.S.2d 12, 34 A.D.3d 287 (1st Dept.2006); Matter of Garner v. N.Y. State Dept. of Correctional Servs., 831 N.Y.S.2d 923, 39 A.D.3d 1019, (3rd Dept.2007), rev'd 10 N.Y.3d 358, 859 N.Y.S.2d 590, 889 N.E.2d 467 (2008). Because DOCS imposed PRS on each plaintiff in these actions prior to the Second Circuit decision in Earley, the Court need not determine at this time whether the right to have PRS imposed by a judge was clearly established for purposes of defendants' qualified immunity after Earley but prior to Garner and Sparber.
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https://www.courtlistener.com/api/rest/v3/opinions/2541699/
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703 F. Supp. 2d 630 (2009)
Doris EVERITT, Executrix of The Estate of Robert M. Everitt, Sr., Deceased, et al., Plaintiff
v.
PNEUMO ABEX, LLC, Defendant.
Civil Action No. 3:06CV231TSL-JCS.
United States District Court, S.D. Mississippi, Jackson Division.
December 10, 2009.
*631 William B. Kirksey, Kirksey & Associates, Stephen Lee Shackelford, Tom B. Scott, III, Scott & Scott, Jackson, MS, Gerald Moses Abdalla, Jr., Stephen L. Shackelford, Attorney at Law, Flowood, MS, Jeffrey A. Varas, Varas & Morgan, Hazlehurst, MS, for Plaintiffs.
Monte L. Barton, Jr., Copeland, Cook, Taylor & Bush, Ridgeland, MS, for Defendant.
MEMORANDUM OPINION AND ORDER
TOM S. LEE, District Judge.
This cause is before the court on the motion of defendant Pneumo Abex, LLC for summary judgment pursuant to Rule 56 of the Federal Rules of Civil Procedure, and on the motion of plaintiffs Doris Everitt, Executrix of the Estate of Robert M. Everitt, Sr., deceased, et al., for summary judgment on the questions of contract validity and breach thereof. These motions have been fully briefed by the parties and the court, having considered the memoranda of authorities, together with attachments, submitted by the parties, concludes that defendant's motion should be granted and plaintiffs' motion denied.
In February 2000, plaintiffs herein, numbering somewhere between 1300 and 1400, filed a lawsuit in the Circuit Court of Jefferson County against Pneumo and other asbestos manufacturers, distributors or sellers seeking recovery under various theories for injuries alleged to have resulted from plaintiffs' exposure to the defendants' *632 asbestos-containing products, that case being styled Hilary Anderson, et al. v. The FlintKote Co., et al., Cause No.2000-22. In this cause, plaintiffs allege that on July 6, 2001, they entered into a settlement agreement with Pneumo and its co-defendants in the Anderson case, Ferodo America, Inc. f/k/a Nuturn Corporation, Gasket Holdings, Inc. f/k/a Flexitallic, Inc., and Wagner Electric Corporation n/k/a Federal Mogul, Inc., pursuant to which an agreed order of dismissal with prejudice was entered in the Anderson case on September 21, 2001. Plaintiffs herein allege that Pneumo has breached the settlement agreement, and plaintiffs have thus brought this action demanding specific performance of the settlement agreement or damages for its breach.
The putative settlement agreement, set forth in a July 1, 2001 letter to plaintiffs' counsel from counsel for the four Anderson defendants, purported to "confirm settlement of approximately 1400 plaintiffs' claims" and to define the terms of the parties' agreement. The agreement established a schedule of amounts payable to each plaintiff by reference to the nature of his or her injury, i.e., a "disease matrix," as follows:
$ 1,050.00 for each asbestotic with a cancer waiver;
$ 3,750.00 for each other cancer;
$ 7,500.00 for each lung cancer; and
$15,000.00 for each mesothelioma.
According to the agreement, these sums were to be paid by defendants to counsel for plaintiffs, as trustee for their clients, according to a schedule providing for six quarterly payments of $200,000 commencing November 1, 2001, with the "Remainder" to be paid on or commencing May 1, 2003. The "Remainder," which was to be determined on May 1, 2003, was defined as "the remaining sum to be paid to plaintiffs whose claims qualify for payment under the terms of this settlement agreement." According to the agreement, if the amount of qualifying claims that had not been paid by May 1, 2003 was below $200,000, then those claims would be paid on May 1, 2003. If the amount of qualifying claims not paid by May 1, 2003 exceeded $200,000, then defendants would continue to pay $200,000 every three months until all qualifying claims were paid in full.
The agreement recited that "no amount will be paid until plaintiffs have submitted the settlement documents referred to below," and reiterated this requirement, stating, "Prior to payment of any funds by Defendants to an individual plaintiff, that plaintiff will submit a release ..., certification of a medical doctor evidencing an asbestos-related disease, and where appropriate, documentation relating to estate papers and death certificates." Finally, the agreement recited:
Plaintiffs' counsel have reviewed the provisions of this agreement and have concluded that this agreement is in the best interest of their clients. Accordingly, plaintiffs' counsel agree that they shall (subject to the exercise of their independent professional judgment as to the circumstances of individual clients) strongly recommend this agreement to the plaintiffs covered hereby. Plaintiffs' counsel believe that virtually all of their clients will accept this recommendation. However, it is acknowledged that one or more plaintiffs may elect not to accept this settlement. In that event, it is agreed that the dismissal with prejudice as to any such plaintiff not accepting this settlement shall be vacated, and the amount of the settlement will be reduced by the corresponding settlement amount for each rejecting plaintiff.
Shortly before the Anderson defendants' first $200,000 payment was due under the agreement, three of those defendants, Federal Mogul, Inc., Ferodo America f/k/a *633 Nuturn Corporation and Gasket Holdings, Inc. f/k/a Flexitallic, Inc., filed for Chapter 11 bankruptcy protection.[1] And, while not a debtor itself, Pneumo nevertheless sought to intervene in the bankruptcy proceeding through an adversary proceeding for injunctive relief. Broadly speaking, Pneumo took the position that through a series of agreements with Federal Mogul's predecessors, it was entitled to indemnity from Federal Mogul for its liability to asbestos plaintiffs, including the Anderson plaintiffs, and that this right to indemnity created an identity of interest with the debtors which entitled Pneumo to the protection of the bankruptcy automatic stay and to have the plaintiffs' claims for payment resolved through the Federal Mogul bankruptcy. In a ruling on February 2006, the bankruptcy court denied Pneumo's request for injunctive relief and thus rejected its efforts to be included in the Federal Mogul bankruptcy. In the meantime, during the over four years that passed in the interim, Pneumo made no payments into the Anderson settlement fund, as required by the settlement agreement with plaintiffs, nor did any plaintiff submit a claim for settlement monies under the agreement. However, in March and April of 2006, after the bankruptcy court had rejected Pneumo's efforts to secure protection in the Federal Mogul bankruptcy, fifty-seven of the Anderson plaintiffs submitted to Pneumo claims for payment under the settlement agreement. Pneumo promptly rejected all these claims, taking the position the claims had not been timely filed in accordance with the terms of the agreement. Plaintiffs thus filed the present action demanding specific performance of the settlement agreement or damages for breach of contract.
Pneumo has now moved for summary judgment on plaintiffs' claims, and plaintiffs have themselves filed a cross-motion for partial summary judgment on the questions of contract validity and breach of contract. For the reasons that follow, the court concludes that plaintiffs' claims are time-barred in part, and otherwise without merit. Accordingly, Pneumo is entitled to summary judgment.
With reference to plaintiffs' claims for breach of contract and specific performance, Pneumo first argues that these claims fail because there was no contract for it to breach. Pneumo argues that the putative contract on which plaintiffs' complaint is based was no contract at all, but rather what it terms an "administrative agreement" by which Pneumo and its codefendants merely extended an offer of settlement to the Anderson plaintiffs. Pneumo contends that since no plaintiff ever accepted the offer by submitting a qualifying, i.e., timely, claim for settlement proceeds, then no contract was ever formed so that necessarily, there could have been no breach of contract.
Having reviewed the agreement, the court concludes there is no question but that Pneumo and its codefendants entered into a settlement agreement with plaintiffs, through plaintiffs' counsel, by which Pneumo and its codefendants purportedly agreed to pay a sum certain to each plaintiff who filed qualifying settlement documents. The agreement also purported to obligate Pneumo and its codefendants to pay prescribed amounts into a settlement fund according to an established schedule, which obligation was not conditioned on any plaintiff's having first made a qualifying claim for settlement funds. In the *634 court's opinion, therefore, Pneumo is not entitled to summary judgment on the basis of its argument that there was never a settlement agreement.
As part of the settlement agreement with the Anderson plaintiffs, Pneumo and its codefendants expressly agreed that from November 1, 2001 through February 1, 2003, they would pay $200,000 every three months into a trust fund established by plaintiffs' counsel to fund the settlement agreement. Then, on May 1, 2003, the parties would determine how much remained to be paid by reference to the number of qualifying claims that were outstanding as of that date. In its motion, Pneumo submits that to the extent plaintiffs may be claiming that Pneumo breached the settlement agreement by failing to make payments provided for in the agreement, it is entitled to summary judgment for two reasons. First, it contends that any claim that it failed to make the first six $200,000 payments is barred by the three-year statute of limitations of Mississippi Code Annotated § 15-1-49, since plaintiffs' complaint was filed more than three years after these payments were due. See Freeman v. Truitt, 238 Miss. 623, 119 So. 2d 765, 771 (1960) (stating that "where a debt is payable in installments the general rule is that the statute of limitations begins to run as to each installment from the time when it falls due; and the creditor can recover only those installments falling due within the statutory period before the beginning of the action. The bar of the statute applies to installments which were due and unpaid for more than the statutory period."); see also Kersey v. Fernald, 911 So. 2d 994 (Miss.Ct.App.2005) (quoting Freeman).
Pneumo acknowledges that plaintiffs' complaint was filed within three years of the date on which the "remainder" payment was purportedly due under the contract;[2] but it contends the claim for breach of contract for failure to pay the "remainder" on May 1, 2003, while not time-barred, nonetheless fails, because under the agreement, payment was due on or after that date only for the amount of qualifying claims that remained unpaid as of May 1, 2003, and since no qualifying claims had been submitted as of that date, then no monies were due any plaintiff and therefore, no breach occurred. Pneumo finally argues that it is entitled to summary judgment on plaintiffs' claim for breach of contract premised on Pneumo's rejection of the claims submitted in the spring of 2006, because the requirement of timely submission of releases and medical certifications was a condition precedent to payment to any individual plaintiff, and since no plaintiff made a timely submission of the required settlement documents, then Pneumo's duty to pay claims under the agreement never arose. See Turnbough v. Steere Broadcasting Corp., 681 So. 2d 1325, 1327 (Miss.1996) (defining condition precedent as "a condition which must be fulfilled before the duty to perform an existing contract arises") (quoting Mid-Continent Telephone Corp. v. Home Telephone Co., 319 F. Supp. 1176 (N.D.Miss.1970)). In the court's opinion, Pneumo's position as to all these points is well taken.
As appears from their complaint, plaintiffs' claim for breach of contract is based on the fact that their claims for payment under the settlement agreement, which they (or some of them) submitted in early 2006, were rejected by Pneumo as not having been timely made. These plaintiffs insist that their claims were timely under the terms of the agreement, and that Pneumo's refusal to honor their claims was *635 a breach of the settlement agreement. In this vein, plaintiffs first argue their claims were timely because the settlement agreement imposed no specific deadline for making claims, or, as plaintiffs phrase it, the agreement "contained no temporal schedule for or limitation on submission by claimants of information and documents required for payment." This is patently incorrect.
Under the express terms of the agreement, no funds were payable to any individual plaintiff until such plaintiff submitted the required settlement documents, including a medical certification and a release. Although the agreement did not expressly establish a deadline for submission of the required documentation, there is no question but that it did so implicitly, by establishing May 1, 2003 as the date on which the parties would determine "the remaining sum to be paid to plaintiffs whose claims qualify for payment." Necessarily, to "qualify for payment," and hence to be considered timely, a plaintiff's settlement documents were required to be submitted on or before May 1, 2003, since that was the date for finally determining the total amount payable by defendants to satisfy all qualifying claims. The court recognizes, of course, that the agreement contemplated that payments under the agreement could extend beyond May 1, 2003 (in the event unpaid qualifying claims as of that date exceeded $200,000); but the manifest intention, and only reasonable interpretation of the agreement, was to require that all claims for payment thereunder be submitted no later than May 1, 2003.[3] This was not done.[4]
Plaintiffs argue, alternatively, that even if the agreement established May 1, 2003 as the deadline for submitting claims, performance under the agreement by all parties was temporarily suspended due to the Federal Mogul bankruptcy.[5] Plaintiffs *636 point out that once the Federal Mogul bankruptcy was filed, they were left holding a pre-petition settlement agreement as to which three of the four obligors were in bankruptcy, and the fourth, Pneumo, was seeking to intervene in the Federal Mogul bankruptcy to have the claims of asbestos plaintiffs against it resolved through the Federal Mogul bankruptcy proceeding. Plaintiffs note that the automatic stay provisions of 11 U.S.C. § 362(a) clearly protected the three debtors from any judicial action to enforce the settlement agreement. They submit that the bankruptcy also suspended any duty on the part of the debtors to perform under the agreement, so that consequently, there was no breach of the settlement agreement by the debtors and hence no basis upon which plaintiffs could have sought redress against the debtors.
Plaintiffs further argue that although Pneumo was a non-debtor, they reasonably concluded that Pneumo, because of its identity with the debtors arising from certain indemnity obligations, was entitled to the protection of the automatic stay and that Pneumo's obligations under the settlement agreement, like those of the debtors, were also suspended during the pendency of the Federal Mogul bankruptcy. They contend that their own performance, in turn, was suspended due to the bankruptcy, relying on the principle that,
where one party having the right to demand performance stands ready and willing to carry out an executory contract but the other party cannot perform due to a temporary impossibility, the passing of the designated date for performance does not result in voiding the contract. Rather, the event simply extends the time of performance appropriately until the impossibility ceases.
In re Estate of Pickett, 879 So. 2d 467, 471 (Miss.Ct.App.2004). In the court's opinion, this principle has no applicability to plaintiffs herein.
In the Pickett case, on which plaintiffs rely, Nell Pickett contracted to sell certain property to Bruce Kirkland, with the closing to occur on December 15, 1999. However, Mrs. Pickett died before the scheduled closing date. Mrs. Pickett's will, dated March 26, 1999, devised the same property to the Van Ettens. After Mrs. Pickett's estate was finally opened, Kirkland petitioned the chancellor to enforce Mrs. Pickett's contract to sell him the property, but the Van Ettens opposed Kirkland's efforts, arguing that since the closing date had passed, the contract had expired and was no longer valid. Kirkland prevailed before the chancellor, and on appeal, since Mrs. Pickett's death and some initial problems with opening an estate, made it impossible to close on the sale by the date set forth in her contract with Kirkland.
In this case, plaintiffs argue that the filing of Federal Mogul's bankruptcy petition before any performance was due by Pneumo or its co-obligors under the settlement agreement was the legal equivalent of Nell Pickett's death: "an intervening and disabling event rendering performance by the designated date temporarily impossible and extending the time of performance appropriately until the impossibility ceased." The court is unpersuaded. While plaintiffs' position might be meritorious as applied to Ferodo America, Inc. f/k/a Nuturn Corporation, Gasket Holdings, Inc. f/k/a Flexitallic, Inc., and Federal Mogul Products, Inc., see 30 Samuel Williston, A Treatise on the Law of Contracts § 77:40 (4th ed.2004) ("In effect, the automatic stay makes it legally impossible for a debtor to fully satisfy creditor demands."), it has no merit as applied to Pneumo.
*637 Plaintiffs' argument on this point is premised on the automatic stay provision of 11 U.S.C. § 362(a)(1), which automatically stays all proceedings against the debtor upon the filing of the bankruptcy petition:
(a) Except as provided in subsection (b) of this section, a petition filed under section 301, 302, or 303 of this title, or an application filed under section 5(a)(3) of the Securities Investor Protection Act of 1970 (15 U.S.C. 78eee(a)(3)), 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.
11 U.S.C. § 362(a)(1). Plaintiffs apparently take the position that although the bankruptcy court ultimately rejected Pneumo's efforts to secure the protection of the automatic stay and to have the asbestos damage claims against it resolved through the Federal Mogul bankruptcy, until that ruling by the bankruptcy court, they, like Pneumo, reasonably believed Pneumo was covered by the automatic stay and that they could not, therefore, pursue their claims under the settlement agreement. Similarly, they suggest that because of the bankruptcy, they reasonably concluded that the performance of all parties under the settlement agreement was suspended. They maintain that only when the bankruptcy court finally rejected Pneumo's position in February 2006 did it become clear that Pneumo was ineligible for any relief under federal bankruptcy law, and that they acted timely by then "continu[ing] the process of submitting their claims pursuant to the Settlement Agreement." Plaintiffs insist on these facts that Pneumo breached the contract when it rejected these claims on the basis that "the time to submit releases had expired."
"The purposes of the bankruptcy stay under 11 U.S.C. § 362 `are to protect the debtor's assets, provide temporary relief from creditors, and further equity of distribution among the creditors by forestalling a race to the courthouse.'" Reliant Energy Servs., Inc. v. Enron Canada Corp., 349 F.3d 816, 825 (5th Cir.2003) (quoting GATX Aircraft Corp. v. M/V Courtney Leigh, 768 F.2d 711, 716 (5th Cir.1985)). While all courts recognize that the automatic stay of § 362, by its terms, "applies only to the debtor, not to co-debtors under Chapter 7 or Chapter 11 of the Bankruptcy Code nor to co-tortfeasors," see id. (quoting GATX Aircraft, 768 F.2d at 716), most also recognize that there are "rare" or "unusual" circumstances in which it can be used to stay actions against non-debtors, see id. ("[s]ection 362 is rarely, however, a valid basis on which to stay actions against non-debtors") (quoting Arnold v. Garlock, Inc., 278 F.3d 426, 436 (5th Cir.2001)). The Fifth Circuit has identified only one such circumstance, holding that "a bankruptcy court may invoke § 362 to stay proceedings against nonbankrupt co-defendants where `there is such identity between the debtor and the third-party defendant that the debtor may be said to be the real party defendant and that a judgment against the third-party defendant will in effect be a judgment or finding against the debtor.'" id. (quoting A.H. Robins Co. v. Piccinin, 788 F.2d 994, 999 (4th Cir.1986)). Significantly, however, most courts have recognized that the automatic stay provided by section 362 "does not apply automatically to stay actions against non-debtors." In re Bidermann Indus. U.S.A., Inc., 200 B.R. 779, 782 (Bkrtcy.S.D.N.Y.1996). Instead, "[t]he debtor must obtain a stay order from the *638 bankruptcy court, and until it does, the action against the non-debtor may proceed." Id. (emphasis added). Thus, in In re All Seasons Resorts, Inc., 79 B.R. 901, 903-904 (Bkrtcy.C.D.Cal.1987), the court explained that while the bankruptcy court, acting pursuant to § 105(a), may extend the automatic stay under § 362 to stay and enjoin proceedings or acts against non-debtors where such actions would interfere with, deplete or adversely affect property of the debtor's estate, to achieve this result, a debtor must proceed through § 105(a). "In other words, the extension of § 362 does not occur automatically ... but requires the filing of an appropriate adversary proceeding under § 105 and § 362 to achieve the desired result."[6]Id. See also DAB Three, LLC v. LandAmerica Financial Group, Inc., No. CV065004236S, 2009 WL 1312752, 5 (Conn.Super. Apr. 15, 2009) ("[A] suit against a codefendant is not automatically stayed by the debtor's bankruptcy filing ...").
Here, Pneumo sought an order from the Federal Mogul bankruptcy court granting it the protection of the automatic stay, but its efforts were rejected. And regardless of what Pneumo or plaintiffs may have believed regarding Pneumo's entitlement to such protection, the fact is, there was never a time when the automatic stay applied to Pneumo. As the cited cases make clear, while the automatic stay did apply automatically to the debtors immediately upon the filing of the bankruptcy petition, it did not apply "automatically" to Pneumo, and in fact, based on the bankruptcy court's ruling, it never applied to Pneumo. The bankruptcy, then, cannot legitimately be claimed as "an intervening and disabling event" which rendered performance by plaintiffs or by Pneumo impossible for any period of time. Under the terms of the agreement, plaintiffs had until May 1, 2003 to submit their settlement documents to Pneumo, which they failed to do. Summary judgment will therefore be granted on plaintiffs' claim for breach of contract premised on Pneumo's rejection of their claims.[7]
Citing the principle that the statute of limitations is equitably tolled when one party knew or had reason to know that its conduct would induce another not to file his complaint sooner, see PMZ Oil Co. v. Lucroy, 449 So. 2d 201, 206 (Miss.1984) (citing this principle), plaintiffs argue, alternatively, that Pneumo is equitably estopped from asserting the statute of limitations as a bar to their claims herein, reasoning that "[i]f Pneumo had actual, constructive or imputed knowledge of the Federal Mogul bankruptcy one month before its performance under the Settlement Agreement was to commence, it must be equitably estopped from asserting the statute of limitations in defense of this action." Plaintiffs' argument on this point would fail if for no other reason than plaintiffs have offered no evidence to support this claim. Moreover, plaintiffs do not explain how knowledge by Pneumo that Federal Mogul would be filing bankruptcy would bear on the statute of limitations, or more pertinently, their decision whether (or when) to file suit. Plaintiffs were themselves aware *639 of the Federal Mogul bankruptcy within a few months of entering the settlement agreement, and were not induced by Pneumo's actions into postponing filing their lawsuit. They made the decision how (and when) to proceed with full knowledge of the pertinent facts, and have asserted no valid basis for relief from that decision.
For all of the foregoing reasons, plaintiffs contract-based claims will be dismissed. In addition to those claims, plaintiffs have undertaken to assert a cause of action for fraud based on their allegation that at the time they entered the settlement agreement, Pneumo knew that Federal Mogul and its affiliates were on the verge of bankruptcy, and yet it concealed this information from plaintiffs, thereby inducing plaintiffs to enter into the settlement agreement without all material information. Pneumo has moved for summary judgment on the basis that this claim is barred by the applicable three-year statute of limitations under Mississippi Code Annotated § 15-1-49, and for lack of evidence from plaintiffs to substantiate their allegations. Pneumo's motion is well taken as to these claims and will be granted.
Based on the foregoing, it is ordered that Pneumo's motion for summary judgment is granted, and plaintiffs' motion for summary judgment is denied.
A separate judgment will be entered in accordance with Rule 58 of the Federal Rules of Civil Procedure.
NOTES
[1] The bankruptcy petition was filed by Federal Mogul Global, Inc. Included within the bankruptcy were 156 of its affiliates, including Federal Mogul Products, Inc., successor to Wagner Electric Corporation, Ferodo America f/k/a Nuturn Corporation and Gasket Holdings, Inc. f/k/a Flexitallic, Inc.
[2] The "remainder" payment was due May 1, 2003; plaintiffs' complaint was filed April 25, 2006.
[3] In a related vein, plaintiffs argue that the inclusion of a "cancer waiver" in the agreement clearly reflects the parties' intention that no time limit was imposed for submission of required documents by any claimant. The settlement agreement provided for payments of $1,050.00 to each asbestotic with a cancer waiver. According to plaintiffs, the "cancer waiver" allowed a claimant compensated as an asbestotic who was later diagnosed with a cancer to make a later claim under the agreement for payment commensurate with his or her cancer diagnosis. Plaintiffs reason that this left the agreement essentially open-ended, at least as to the asbestosis plaintiffs. However, it is clear from the terms of the agreement that the "cancer waiver" and whatever rights it created applied only to those asbestosis plaintiffs who timely accepted the original settlement offer.
[4] In their response to Pneumo's motion, plaintiffs characterize the settlement agreement as "expressly permitt[ing] individual claimants to opt out of it or to submit documents required for payment of their claims," and they state, "Of course, the `opt-out' provisions contained in the Settlement Agreement are the means by which individual claimants can overcome the presumption that they are bound by it...." In fact, however, the settlement agreement contains no opt-out provision, and instead provides only that no funds will be distributed to any claimant until that claimant shall first have submitted the required settlement documents. The means by which a plaintiff could reject the agreement was by not timely accepting it.
[5] It is likely because of their position on this issue that plaintiffs appear to have sued, not for Pneumo's failure to make the contractual payments into the settlement fund, but rather for Pneumo's rejection of their claims in 2006. Perhaps plaintiffs recognize that in light of their own failure to submit claims for payment in accordance with the clear terms of the agreement, i.e., on or before May 1, 2003, they would be hard-pressed to contend that Pneumo breached the agreement by failing to make the agreed-upon payments into the settlement fund. In an abundance of caution, however, and since plaintiffs' position is not entirely clear, the court will address both scenarios.
[6] See 11 U.S.C. § 105(a) ("The court may issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of this title.").
[7] To the extent that plaintiffs may have claimed that Pneumo breached the settlement agreement by failing to pay into the settlement fund, the court finds merit in Pneumo's position that any claim for nonpayment of the first six installments is time-barred, see supra p. 634, and a claim that it breached its obligation to pay the "remainder" is barred, since there were no qualifying claims pending for payment as of May 1, 2003 and there was therefore no remaining sum due from Pneumo under the agreement, see supra p. 634.
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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/1397947/
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932 F.Supp. 582 (1996)
UNITED STATES of America,
v.
Felix BERKOVICH, Defendant.
No. 96 Cr. 221 (JGK).
United States District Court, S.D. New York.
July 16, 1996.
*583 James J. Benjamin, Jr., Assistant United States Attorney, Southern District of New York, New York City, for the Government.
Leonard Joy, The Legal Aid Society, New York City, for the Defendant.
OPINION AND ORDER
KOELTL, District Judge:
The defendant Felix Berkovich has been indicted for an alleged violation of 18 U.S.C. § 1341. The indictment charges that Mr. Berkovich caused a fraudulent request to withdraw funds from a mutual fund account to be sent and delivered by United Parcel Service. Mr. Berkovich now moves pursuant to Fed.R.Crim.P. 12(b)(3) to suppress statements he made during questioning conducted by agents of the Federal Bureau of Investigation (FBI) on November 29 and 30, 1995. The Court conducted an evidentiary hearing on the defendant's motion on July 1, 1996.
Mr. Berkovich presents three arguments in support of his motion to suppress. First, he contends the FBI agents interrogated him even though he requested to speak to a lawyer before signing a waiver of rights form. Second, the defendant argues that his confession was involuntary because it was the product of coercion. Third, the defendant claims that the statements he made on November 30, 1995 should be suppressed under 18 U.S.C. § 3501(c) because they were obtained more than six hours after he was arrested. For the reasons that follow, the defendant's motion to suppress is denied.
I.
After considering all of the evidence, including Mr. Berkovich's affidavit and Special Agent Steven Garfinkel's testimony at the suppression hearing, the Court makes the following findings of fact. On Wednesday, November 29, 1995, FBI agents arrested Mr. Berkovich in a room at the Vista Hotel in New York City. (Transcript of July 1, 1996 hearing ("Tr.") at 5, 7.) The FBI had been investigating Mr. Berkovich for a few months, and through its investigation knew that Mr. Berkovich and an FBI confidential informant ("CI") would be meeting in a room at the Vista Hotel that day. (Tr. at 6.) The FBI occupied an adjoining room and monitored and recorded the meeting between the CI and Mr. Berkovich. (Tr. at 6.) The FBI observed the CI give Mr. Berkovich certain funds and saw Mr. Berkovich complete some paperwork for another stock redemption. (Tr. at 7.) At this point, which was approximately *584 3 p.m., the FBI agents came through the door connecting the two adjoining hotel rooms and placed Mr. Berkovich under arrest. (Tr. at 7.) The FBI made it appear that the CI was also under arrest, and brought the CI into another room. (Tr. at 7.)
After the arrest, Special Agents Garfinkel, Barry Braun, and William Belke remained in the room with Mr. Berkovich. (Tr. at 10.) The agents searched Mr. Berkovich and then placed him in handcuffs, with his hands behind his back. (Tr. at 7-8.) At this point Special Agent Garfinkel went into the adjoining hotel room for about five minutes to instruct other FBI agents about what to do with the CI. (Tr. at 10.) No interrogation occurred while Special Agent Garfinkel was out of the room. When Special Agent Garfinkel returned to the room where the arrests were made, Mr. Berkovich was seated in a chair. (Tr. at 13.) Special Agent Garfinkel sat on the bed across from Mr. Berkovich. (Tr. at 13.) Special Agent Garfinkel then told Mr. Berkovich not to talk but to listen. (Tr. at 13.) Special Agent Garfinkel advised Mr. Berkovich of the evidence the FBI had against him, using "colorful language" to get his point across, and explained that Mr. Berkovich might want to cooperate with authorities. (Tr. at 13, 16.) Mr. Berkovich was then taken into the adjoining room where he was shown the monitoring equipment in there. (Tr. at 14.) Once Mr. Berkovich was brought back into the room where he was arrested, one of his hands was handcuffed to a chair. (Tr. at 14.)
Special Agent Garfinkel then made additional comments concerning the benefits of cooperation. (Tr. at 14-15.) Special Agent Garfinkel said that this was the best time for Berkovich to cooperate, that once his arrest became public the benefit of his cooperation would be greatly reduced, and that if he cooperated he would be eligible for a 5K1 letter from the Government, which could mean a downward departure under the Sentencing Guidelines. (Tr. at 14-15, 33-34.) Special Agent Garfinkel did not tell Mr. Berkovich that he would have to plead guilty to every federal crime he spoke about to get a 5K1 letter. (Tr. at 34.) Special Agent Garfinkel also told Mr. Berkovich that if he did not wish to cooperate, he would be taken to jail and presented before a magistrate the following day. Special Agent Garfinkel testified that he did not believe that it would be possible to present Mr. Berkovich before a magistrate that day because Mr. Berkovich had been arrested late in the day. (Tr. at 49-50.) Special Agent Garfinkel told the defendant that if he cooperated, it would be possible to waive his appearance in front of a magistrate and permit him to go home that night. (Tr. at 15.) Special Agent Garfinkel made no threats or promises to Mr. Berkovich. (Tr. at 15-16.) In addition, it is not disputed that Mr. Berkovich knows English and that he understood what the FBI agents told him. (Tr. at 10.)
After telling Mr. Berkovich about the benefits of cooperation, Special Agent Garfinkel read Mr. Berkovich his Miranda rights, which were detailed on FBI form FD-395 (Gov't Exh. 1), wrote in the place, date, and time (New York, 11/29/95, 3:15 p.m.) at the top of the form, and then gave Mr. Berkovich the form to read for himself. (Tr. at 16-17, 40-41.) Mr. Berkovich then inquired about the quality of court-appointed lawyers. (Tr. at 18, 45.) Special Agent Garfinkel told Mr. Berkovich that court-appointed lawyers were generally very good. (Tr. at 18.) Special Agent Garfinkel testified that Mr. Berkovich then stated, "I guess you guys got me," and signed the form around 3:20 p.m. (Tr. at 18-19.) Special Agent Garfinkel then signed the form as a witness, as did Special Agent Belke. (Tr. at 19.) Although there is a space on the form to indicate at what time the form was signed, this space was left blank. (Tr. at 41-42; Gov't Exh. 1.) Special Agent Garfinkel testified credibly that he did not realize that he had left this space blank until he was making copies of the form for this case. (Tr. at 42.) Special Agent Garfinkel testified that the interrogation of Mr. Berkovich commenced after Mr. Berkovich signed the form. (Tr. at 20.)
Mr. Berkovich claims that he told the FBI agents that he needed a lawyer before he signed any papers and that he refused to sign the form. (Berkovich Aff. ¶ 7.) Mr. Berkovich contends that the FBI ignored *585 these statements and began interrogating him. He claims that he did not sign the formal waiver of his Miranda rights until 9 p.m., when the agents allegedly told him he could go home only if he signed the form. (Berkovich Aff. ¶ 7.) Special Agent Garfinkel denies that Mr. Berkovich stated that he needed to speak to a lawyer before he signed the form, and testified that Mr. Berkovich only asked about the quality of court-appointed counsel. (Tr. at 18-20.) Having assessed Special Agent Garfinkel's credibility, I find his testimony to be candid and truthful. Special Agent Garfinkel credibly testified that he would have made a note on the form if Mr. Berkovich had refused to sign it. (Tr. at 37.) I find Special Agent Garfinkel's testimony that Mr. Berkovich signed the form at 3:20 p.m. without asking to speak to a lawyer before he did so to be more credible than Mr. Berkovich's testimony that he refused to sign the form and only signed it after questioning ceased at 9 p.m.
The parties agree that the FBI agents questioned Mr. Berkovich for two or three hours at the hotel. (Tr. at 20-22.) While at the hotel, Mr. Berkovich was offered the opportunity to use the rest room and to have something to eat and drink. (Tr. at 20.) Although the video equipment used to monitor the conversation between the CI and Mr. Berkovich was available, the FBI agents made no effort to tape the interrogation. (Tr. at 52-53.) Around 5 or 6 p.m., the agents drove Mr. Berkovich to the FBI office at 26 Federal Plaza, where they continued to interrogate him until 9 p.m. (Tr. at 22.) During the interrogation, the agents would say such things as "beep; wrong answer; try again" when Mr. Berkovich said things that the agents believed were not true. (Tr. at 54-55.) Special Agent Garfinkel testified that during the interrogation at the FBI office Mr. Berkovich was permitted to use the rest room and was given soda and nuts. (Tr. at 22-23.) Mr. Berkovich was not handcuffed at the FBI office, and at no time during the questioning did he request an attorney. (Tr. at 25.)
At 9 p.m. Mr. Berkovich signed a form waiving his right to be brought promptly before a court. (Tr. at 23-24; Gov't Exh. 2.) Special Agent Garfinkel read the form to Mr. Berkovich and then had him read it. (Tr. at 24.) The form provided as follows:
I understand that I have a right to be brought before a court as soon as possible so that the charges can be explained to me, so that I may consult with a lawyer, and so that bail may be set. I also know that if I cannot afford a lawyer, the court will appoint one at Government expense.
I would like to cooperate with the Government and would prefer that my arrest not be made known at the present time. I would therefore request that I not be arraigned now. I understand, however, that no other promises have been made to me, and that charges may be brought against me in the future.
(Gov't Exh. 2.) After Mr. Berkovich signed this form, Special Agent Garfinkel signed it as a witness. (Gov't Exh. 2; Tr. at 24.) The agents then told Mr. Berkovich that he should come back to the FBI office at noon the following day with his passport and that he should bring any other evidence he might have that might help in his cooperation. (Tr. at 24-25.)
Mr. Berkovich returned to the FBI office the next day, at which time he was questioned for about one hour. (Tr. at 25-27.) Mr. Berkovich was not handcuffed during this interrogation. (Tr. at 26.) The agents did not read Mr. Berkovich his Miranda rights on this day, and Mr. Berkovich did not ask for an attorney on this day. (Tr. at 26-27.) Special Agent Garfinkel credibly testified that the Government sought Mr. Berkovich's cooperation in order to identify possible co-defendants, and that the agents did not realize that there were no co-defendants until they had completed questioning Mr. Berkovich for the hour on the second day. (Tr. at 47, 55-60.)
Mr. Berkovich was first presented before a magistrate judge on Friday, December 1, 1995. (Tr. at 25.)
II.
Mr. Berkovich first contends that statements he made on November 29 and 30, 1995 should be suppressed because the FBI *586 agents interrogated him after he requested an attorney. Because the Court credits Special Agent Garfinkel's testimony that Mr. Berkovich did not in fact request an attorney, this first argument must fail.
Miranda v. Arizona, 384 U.S. 436, 86 S.Ct. 1602, 16 L.Ed.2d 694 (1966), requires that an individual who is in custody must be advised of certain rights, including the right to have an attorney present during questioning, before he is interrogated by government agents. Law enforcement officers must immediately cease questioning a suspect who has clearly asserted his right to have counsel present during custodial interrogation. Davis v. United States, 512 U.S. 452, ___- ___, 114 S.Ct. 2350, 2354-55, 129 L.Ed.2d 362 (1994); Edwards v. Arizona, 451 U.S. 477, 101 S.Ct. 1880, 68 L.Ed.2d 378 (1981); Diaz v. Senkowski, 76 F.3d 61, 64 (2d Cir. 1996). To cut off questioning after being advised of his rights, the defendant must "articulate his desire to have counsel present sufficiently clearly that a reasonable police officer in the circumstances would understand the statement to be a request for an attorney." Davis, 512 U.S. at ___, 114 S.Ct. at 2355; see also Diaz, 76 F.3d at 64-65. An ambiguous or equivocal reference to an attorney that would cause a reasonable officer only to suspect that the defendant might be invoking the right to counsel does not require the cessation of questioning. Davis, 512 U.S. at ___, 114 S.Ct. at 2355; Diaz, 76 F.3d at 64. "If the suspect's statement is not an unambiguous or unequivocal request for counsel, the officers have no obligation to stop questioning him." Davis, 512 U.S. at ___, 114 S.Ct. at 2356.
Here, the Court credits the testimony of Special Agent Garfinkel that Mr. Berkovich asked only about the quality of appointed lawyers and then signed the waiver-of-rights form at 3:20 p.m., before the FBI agents began questioning him. Mr. Berkovich's inquiry concerning the quality of appointed counsel was not an unambiguous request for counsel that a reasonable police officer would understand as such, as Davis requires. Indeed, Mr. Berkovich's inquiry is much more ambiguous than the statement made by the defendant in Davis, "Maybe I should talk to a lawyer," which was held to be too ambiguous to require the cessation of questioning. Davis, 512 U.S. at ___, 114 S.Ct. at 2353. Accordingly, the defendant's motion to suppress his confession on the grounds that the FBI agents questioned him after he requested counsel is denied.[1]
III.
Mr. Berkovich also moves to suppress statements he made to FBI agents on November 29 and 30, 1995 on the grounds that these statements were not made voluntarily.
To assess whether an individual voluntarily made statements to the Government, the Court must consider the totality of the circumstances. Diaz, 76 F.3d at 65; United States v. Ruggles, 70 F.3d 262, 264-65 (2d Cir.1995); cert. denied, ___ U.S. ___, 116 S.Ct. 1284, 134 L.Ed.2d 229 (1996); United States v. Bye, 919 F.2d 6, 9 (2d Cir.1990); United States v. Alvarado, 882 F.2d 645, 649 (2d Cir.1989), cert. denied, 493 U.S. 1071, 110 S.Ct. 1114, 107 L.Ed.2d 1021 (1990). A number of factors are relevant in this inquiry, including the characteristics of the accused, the conditions of interrogation, and the conduct of law enforcement officials. Diaz, 76 F.3d at 65; Ruggles, 70 F.3d at 265; United States v. Anderson, 929 F.2d 96, 99 (2d Cir. 1991) (citing Schneckloth v. Bustamonte, 412 U.S. 218, 226, 93 S.Ct. 2041, 2047, 36 L.Ed.2d 854 (1973)).
Here, Mr. Berkovich claims that the conduct of the FBI agents overwhelmed his free will. Mr. Berkovich claims that the agents said they would "help him and even possibly release him" if he cooperated, but would take him to jail if he did not, that the agents gave him only a very short time to decide whether he wished to cooperate, and *587 the agents confronted him with the evidence against him before reading him his rights.
The Government has proved by a preponderance of the evidence that Mr. Berkovich knowingly and voluntarily waived his Miranda rights and freely made statements to the FBI agents. See Colorado v. Connelly, 479 U.S. 157, 167-69, 107 S.Ct. 515, 521-23, 93 L.Ed.2d 473 (1986) (government must prove waiver of Miranda rights by preponderance of the evidence); Anderson, 929 F.2d at 99 (same). There is no evidence that Mr. Berkovich is of below-average intelligence. During the interrogation he was offered food and access to the bathroom. The physical conditions of the interrogation the hotel room and the FBI office are not such as to overbear the defendant's will. There are no allegations of any physical mistreatment. See Diaz, 76 F.3d at 65 (such circumstances indicate that confession was voluntarily given).
Furthermore, there is no evidence that law enforcement officials acted inappropriately during the interrogation of the defendant. As the Court of Appeals for the Second Circuit has stated repeatedly, "the mere mention of the possible sentence facing a defendant and the benefits to be derived from cooperation [does not] convert[] an otherwise proper encounter between the police and the accused into a coercive and overbearing experience." Bye, 919 F.2d at 9-10. Law enforcement agents may tell the defendant about the evidence against him as well as the reasons why he should cooperate. Ruggles, 70 F.3d at 265; Bye, 919 F.2d at 9-10; United States v. Major, 912 F.Supp. 90, 96-97 (S.D.N.Y.1996) (Cedarbaum, J.). "`[A] confession is not involuntary merely because the suspect was promised leniency if he cooperated with law enforcement officials.'" Bye, 919 F.2d at 9 (quoting United States v. Guarno, 819 F.2d 28 (2d Cir.1987)); see also Ruggles, 70 F.3d at 265 (quoting Bye); Alvarado, 882 F.2d at 650.
There is no evidence that the FBI agents made any misstatements to Mr. Berkovich "based on unfulfillable or other improper promises [that] might perhaps overbear a defendant's will." Ruggles, 70 F.3d at 265. This is not a case like Anderson where agents repeatedly made false and misleading statements to the defendant. Anderson, 929 F.2d at 100. Although the FBI agent's statements to Berkovich concerning the evidence the Government had against him and the benefits of cooperation "may have presented [the defendant] with a difficult and unpleasant decision," they did not render Mr. Berkovich's confession involuntary. See Major, 912 F.Supp. at 95 (finding not coercive statements by law enforcement agent to suspect informing him of evidence against him and stating that it would be in his best interest to cooperate); see also Ruggles, 70 F.3d at 264-65.
After considering the totality of the circumstances, the Court finds that the Government has demonstrated that Mr. Berkovich's statements to the FBI on November 29 and 30, 1995 were made knowingly and voluntarily and were not the product of coercion. Moreover, the Court finds that the defendant knowingly and voluntarily waived his Miranda rights.
IV.
Finally, the defendant argues that statements that he made on November 30, 1995 should be suppressed under 18 U.S.C. § 3501(c) because they were made more than six hours after he was arrested.[2]
It is uncontested that when the FBI agents questioned Mr. Berkovich on November 30, 1995, more than six hours had elapsed since he had been arrested, and the defendant had not yet appeared before a magistrate or any judicial official. Rule 5(a) of the Federal Rules of Criminal Procedure ("F.R.C.P.") provides that
... an officer making an arrest under a warrant issued upon a complaint or any person making an arrest without a warrant shall take the arrested person without unnecessary *588 delay before the nearest available federal magistrate judge or, if a federal magistrate judge is not reasonably available, before a state or local judicial officer authorized by 18 U.S.C. § 3041.
The parties agree that under 18 U.S.C. § 3501(c), it is within the district court's discretion to suppress a confession if that confession is made during interrogation conducted more than six hours after the defendant was arrested, and the delay in bringing the defendant before a magistrate or other judicial officer beyond this six-hour period is unreasonable under the circumstances. See United States v. Fullwood, 86 F.3d 27, 31 (2d Cir.1996); United States v. Perez, 733 F.2d 1026, 1030 (2d Cir.1984); see also United States v. Colon, 835 F.2d 27, 30 (2d Cir.), cert. denied, 485 U.S. 980, 108 S.Ct. 1279, 99 L.Ed.2d 490 (1988).
Here, the Court declines to suppress statements made on November 30, 1995 because the Government has proved by a preponderance of the evidence that the defendant knowingly and voluntarily waived his right to a prompt presentment. See Connelly, 479 U.S. at 168-69, 107 S.Ct. at 522-23 (discussing government's burden of proof in suppression motions); see also Gov't Exh. 2 (Waiver of Arraignment). Special Agent Garfinkel testified that he read the Waiver of Arraignment form to Mr. Berkovich and that Mr. Berkovich read the form before signing it. This occurred after Mr. Berkovich had already been informed of his Miranda rights and had knowingly and voluntarily waived them, and after he had attempted to cooperate with the Government by providing information for six hours. A defendant may waive his right to be presented promptly. See United States v. Markoneti, No. CR 92-0169, 1993 WL 180355, at *2 (E.D.N.Y. May 25, 1993), aff'd, 52 F.3d 312 (1995); United States v. Pham, 815 F.Supp. 1325, 1331 (N.D.Cal.1993). Like the defendant in Markoneti, Mr. Berkovich agreed to waive his right to a speedy presentment in an attempt to obtain the benefits of cooperating with the Government. See Markoneti, 1993 WL 180355, at *2.
The defendant's argument that the waiver form was deceptive is without merit. The defendant first claims that the waiver form contains a "definite implication that cooperation is out if the defendant goes to court to have a lawyer appointed." Def.'s Supp.Mem. at 3. Although Special Agent Garfinkel testified at trial that cooperation prior to arraignment is often more helpful, nothing in the arraignment waiver form indicates that the defendant would not be able to cooperate with the Government after he appears before a magistrate judge. The defendant also claims that the waiver form falsely implies that there are no charges against him even though a complaint had already been filed against him. The defendant points to the fact that the waiver form states that the undersigned understands "that charges may be brought against [him] in the future." This statement does not, however, suggest that no charges are currently pending against the undersigned. Indeed, the form suggests just the opposite because it states "... [the undersigned] ha[s] a right to be brought before a court as soon as possible so that the charges can be explained to [him]...."
Given the totality of the circumstances, including the fact that the defendant's confession on November 30, 1995 was voluntary, that the agent orally explained to the defendant that he had a right to a prompt presentment, that the defendant signed a written waiver of this right, and that there were no circumstances indicating that this waiver was coerced, the Court finds that the defendant knowingly and voluntarily waived his right to a prompt presentment.
In addition, the parties agree that the question of whether to suppress a statement given after a delay of more than six hours between arrest and presentment is in the discretion of the Court. See United States v. Perez, 733 F.2d at 1035. In this case, as in Markoneti, the delay was not unreasonable. The defendant was cooperating with the Government, and the Government attempted to determine whether there were any potential co-defendants, a possibility that was eliminated only after the questioning on November 30, 1995. As Judge Weinstein found in Markoneti, "[t]he agents were properly concerned that a public record *589 of defendant's arrest would inhibit his ability to cooperate effectively. Voluntary delays in arraignment are not unusual or undesirable where a person who is believed to be engaged in criminal activity volunteers to assist the government in catching other criminals." 1993 WL 180355, at *2. Accordingly, the Court declines to exercise its discretion to suppress the defendant's statements made on November 30, 1995.
CONCLUSION
For the foregoing reasons, the defendant's motion to suppress is DENIED.
SO ORDERED.
NOTES
[1] The defendant relies on United States v. Quiroz, 13 F.3d 505 (2d Cir.1993). Quiroz does not support the defendant's position, however, given the factual findings the Court has made. In Quiroz, the defendant refused to sign the waiver form without consulting counsel. That was considered to be a sufficient request for counsel to require that questioning cease. In this case, the Court finds that the defendant did not ask to speak to counsel before signing the form.
[2] The defendant does not contend that the delay in his presentment is grounds for the suppression of the November 29, 1995 statements. These statements were made within six hours of his arrest, and when the defendant was sent home at 9 p.m. it was not reasonably possible to bring him before a magistrate judge.
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01-03-2023
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193 P.3d 599 (2008)
2008-NMCA-135
Jason ADAMS, Plaintiff-Appellant,
v.
Wesley C. KEY, Defendant-Appellee.
No. 27,930.
Court of Appeals of New Mexico.
August 19, 2008.
*600 Klipstine & Hongmann, L.L.C., James W. Klipstine, Jr., Hobbs, NM, for Appellant.
Henninghausen & Olsen, L.L.P., A.J. Olsen, Kenneth B. Wilson, Jennings & Jones, L.C., A.D. Dirk Jones, Roswell, NM, for Appellee.
OPINION
VIGIL, Judge.
{1} Plaintiff (Adams) appeals from the district court order dismissing Adams' suit against Defendant (Key) with prejudice. The district court determined that the issues raised in this case by Adams' complaint (the Adams complaint), should have been raised in prior litigation brought by Key against Adams (the Key complaint) as compulsory counterclaims under Rule 1-013 NMRA. We affirm.
FACTS AND PROCEDURAL BACKGROUND
I. The Key Complaint
{2} In January 2006, Key and his wife filed the Key complaint against Adams in the Chaves County District Court seeking a declaratory *601 judgment to determine the ownership of livestock located on the Gramma Valley Ranch. The Key complaint was verified under oath by Key and his wife.
{3} The verified complaint states that in October 2002, Key leased the Gramma Valley Ranch from his father for the purpose of conducting a cattle ranching operation. In January 2003, Key obtained financing from Production Credit Association of Southern New Mexico (PCA) to purchase cattle to stock the ranch and granted PCA a security interest in the cattle. The total purchase price for the cattle Key bought to stock the ranch was approximately $260,000, and the cattle were branded on the right shoulder with the Key brand that Key had registered with the New Mexico Livestock Board. The following month, in February 2003, Key and Adams entered into an agreement (the Agreement) which was attached as an exhibit to the complaint. The Agreement is handwritten and in its entirety states:
Received from Jason Adams [$6700] cash monies to be used for operation of Gramma Valley Ranch in 2003 (Feed Cost). Cost of operation of Ranch is to be split equal between Jason Adams & Collins Key. Profits if any to be split equal between Jason Adams & Collins Key.
The complaint adds:
It was further anticipated between the parties that the parties would equally contribute the labor and financial resources necessary to operate the Gramma Valley Ranch in accordance with generally accepted ranching practices and that there would be no distributions between the parties for at least five (5) years.
The complaint alleges that Key and his wife used the proceeds from the sale of the 2003 and 2004 calf crop to pay the annual installment owed to PCA and for other operational expenses associated with the Gramma Valley Ranch, including the annual lease payment.
{4} In 2005, according to the Key complaint, without Key's approval or consent, Adams branded a portion of the calf crop (approximately 165 head) on the left jaw with the Adams brand that Adams had registered with the New Mexico Livestock Board. These cattle were subsequently rebranded with the Key brand, and the remaining 2005 calf crop (approximately fifty head) remained unbranded. Further, according to the Key complaint, in late spring of 2005, Adams purchased ten head of Corriente cattle (the Corriente cattle), placed them at the ranch, and, without Key's knowledge or consent, branded them with the Key brand. The Corriente cattle were purchased for $6000, with Adams contributing $4500 and Key contributing $1500. According to the Key complaint, Adams advised employees at the New Mexico Livestock Board that Adams "is the owner of all or a portion of the cattle" situated at the ranch. "[A]s a result of the actions taken by... Adams," the Key complaint asserted that the "New Mexico Livestock Board is unwilling to issue a permit authorizing the transport of that portion of the 2005 calf crop which [Key] desire[s] to sell."
{5} The Key complaint alleged that Adams "claims some right, title or interest in and to the cattle situated on the Gramma Valley Ranch, or some portion thereof" and that "[t]here now exists a dispute between [Key] and Adams as to the ownership of the cattle located at the Gramma Valley Ranch."
{6} Adams was properly served, but he failed to enter an appearance, file an answer, or otherwise respond to the Key complaint. Consequently, a default judgment was entered against Adams by the district court in March 2006. The judgment establishes (1) that Key and his wife are "the owners of an undivided one-fourth interest in and to the Corriente Cattle and their offspring, subject only to a purchase money security interest in favor of [PCA]"; (2) that Key and his wife "are the owners of all other cattle presently located at the Gramma Valley Ranch, subject only to a purchase money security interest in favor of [PCA]"; and (3) that "Adams has no ownership interest in any cattle located at the Gramma Valley Ranch, other than an undivided [three-fourths] ownership interest in the Corriente Cattle and the offspring of the Corriente Cattle."
II. The Adams Complaint
{7} In December 2006, Adams filed the Adams complaint against Key in the Chaves *602 County District Court. The Adams complaint alleged that in 2003, Adams and Key "entered into a Partnership agreement to manage and operate a ranch known as the Gramma Valley Ranch." The "partnership agreement" referred to is the same handwritten Agreement that was the subject of the Key complaint, and a copy was attached to the complaint as Exhibit A.
{8} The Adams complaint asserts that "[t]he partners operated the Gramma Valley Ranch, buying and selling cattle as a partnership for the mutual benefit of the partners." The complaint further asserts that "[Adams] contributed money as well as goods and services to the ranching endeavor for the benefit of the partnership." Adams asks that "the partnership" be dissolved and the assets distributed; that Key account to the partnership for any property, profit, or benefit accruing to the partnership; that Key pay damages for breach of fiduciary duty to Adams for converting partnership assets and opportunities to his own use and benefit; and that Key compensate Adams and pay punitive damages for willful, intentional, and bad faith breach of the partnership agreement.
III. The Motion for Summary Judgment
{9} Key filed a motion for summary judgment in the Adams case. He attached a copy of the Key complaint which included the handwritten Agreement and a copy of the default judgment entered against Adams in the Key case. Key stated as an undisputed material fact that "[Adams] did not assert a counter claim in [the Key case] alleging a partnership or a right to an accounting or damages." Key asserted he was entitled to summary judgment because "[i]n this case the doctrine of res judicata which includes [R]ule 1-013, mandates that all claims which were, or should have been litigated previously are barred."
{10} Adams admitted that he did not assert a counterclaim to the Key complaint, stating that "the only relief sought in [the Key complaint] was a declaration of ownership of cattle not addressing the material issues raised by this claim." Adams asserted that "the issues of accounting, dissolution of partnership, breach of fiduciary duty and breach of contract," the "existence of a partnership," and the extent and nature of the partnership were not decided in the prior action and therefore remain material issues of fact, precluding summary judgment. Adams claimed that his "action to dissolve a partnership after accounting and for damages for breach of contract and breach of fiduciary duty was not a compulsory counterclaim to a prior action by [Key] to declare ownership to one group of cattle."
{11} Key replied that the Adams complaint is barred because it arises out of the same transaction or occurrence as the Key complaint and therefore constitutes a compulsory counterclaim under Rule 1-013(A). After a hearing, the district court granted Key's motion for summary judgment and dismissed the Adams complaint with prejudice. Adams appeals.
DISCUSSION
{12} "Summary judgment is appropriate where there are no genuine issues of material fact and the movant is entitled to judgment as a matter of law." Self v. United Parcel Serv., Inc., 1998-NMSC-046, ¶ 6, 126 N.M. 396, 970 P.2d 582. "We review these legal questions de novo." Id. "Similarly, we review de novo the district court's determination of whether our compulsory counterclaim rule, Rule 1-013(A), or res judicata bars a party's claims." Computer One, Inc. v. Grisham & Lawless P.A., 2008-NMSC-038, ¶ 11, 144 N.M. 424, 188 P.3d 1175.
{13} Adams contends that there exist material issues of fact concerning the nature and scope of the partnership agreement between Adams and Key that preclude summary judgment. Adams asserts that the Key case did nothing but resolve the ownership of a group of cattle and that "[n]o issue was raised concerning the on-going nature of the relationship nor other property or assets the partnership owned." Adams acknowledges that both suits have the same origin, "the relationship of the parties," but asserts they "were clearly not of a common subject matter." Adams quotes paragraphs from the Key complaint, which Adams contends demonstrates that the relationship of the parties was a partnership with assets other than the cattle and a sharing of profits over and above *603 ownership of the cattle at issue in the Key complaint. Adams contends that additional facts exist to establish the existence of a partnership and that Adams is due an accounting and distribution of assets.
{14} Key contends that Adams improperly argues that general principles of res judicata do not bar his claims and that Adams ignores the issue on appeal, which is whether the allegations contained in the Adams complaint must have been brought as compulsory counterclaims to the Key complaint under Rule 1-013(A). Key also argues that there is a logical relationship between the two actions because the Agreement is the "common origin" for both cases, and the operation of the ranch is the "common subject matter." Key further contends that New Mexico public policy favors an end to litigation and that the principles of judicial economy forbid the piecemeal splitting of actions and defenses that Adams is attempting in this case. See Slide-A-Ride of Las Cruces, Inc. v. Citizens Bank of Las Cruces, 105 N.M. 433, 435, 733 P.2d 1316, 1318 (1987) (recognizing that "[t]he purpose of Rule 1-013 is to prevent multiplicity of actions and to achieve resolution in a single lawsuit of all disputes arising out of common matters" and that "Rule 1-013 is particularly directed against one who failed to assert a counterclaim in one action and then instituted a second action in which that counterclaim became the basis of the complaint" (internal quotation marks and citation omitted)).
{15} We agree with Key that the issue before us is not whether the Adams complaint is barred by general principles of res judicata. The question before us is whether the Adams complaint sets forth compulsory counterclaims that should have been made in response to the Key complaint. If the Adams complaint sets forth compulsory counterclaims that should have been made in response to the Key complaint, those claims are barred by Rule 1-013(A) irrespective of res judicata principles. The failure of a party to raise a compulsory counterclaim in a prior suit is fatal to bringing that claim in a subsequent suit. See Slide-A-Ride of Las Cruces, Inc., 105 N.M. at 436, 733 P.2d at 1319 (stating that compulsory counterclaims that were not asserted and litigated in a prior action were deemed abandoned and could not be asserted in a later action). We therefore proceed to determine whether Rule 1-013 applies.
{16} Rule 1-013(A) provides:
A pleading shall state as a counterclaim any claim which at the time of serving the pleading the pleader has against any opposing party, if it arises out of the transaction or occurrence that is the subject matter of the opposing party's claim and does not require for its adjudication the presence of third parties of whom the court cannot acquire jurisdiction.
(Emphasis added.)
{17} Rule 1-013(A) is triggered by its "opposing party" provision. Computer One, Inc., 2008-NMSC-038, ¶ 18, 144 N.M. 424, 188 P.3d 1175 (stating that there must be parties that are "opposing" for a claim to be compulsory). Quoting Bennett v. Kisluk, 112 N.M. 221, 224, 814 P.2d 89, 92 (1991), the Computer One, Inc. Court described an "opposing party" as follows: "An `opposing party' must be one who asserts a claim against the prospective counterclaimant in the first instance. In other words, it is the adversarial nature of the relationship between the parties from the beginning that ... trigger[s] the compulsory counterclaim rule and its attendant res judicata effect." 2008-NMSC-038, ¶ 18, 144 N.M. 424, 188 P.3d 1175 (alterations in original) (internal quotation marks and citation omitted). Opposing-party status "fairly alerts litigants that all claims and counterclaims `aris[ing] out of the transaction or occurrence' must be brought at one time under penalty of waiver." Id. ¶ 24 (alteration in original).
{18} The second requirement of Rule 1-013(A) is that the claim "arises out of the transaction or occurrence that is the subject matter of the opposing party's claim." Rule 1-013(A).
{19} We apply the "logical relationship" test to determine whether the claims of a second lawsuit arise out of the transaction or occurrence that is the subject matter of the first lawsuit. Heffern v. First Interstate Bank, 99 N.M. 531, 534, 660 P.2d 621, 624 *604 (Ct.App.1983); see also Slide-A-Ride of Las Cruces, Inc., 105 N.M. at 435-36, 733 P.2d at 1318-19 ("In New Mexico, a transaction or occurrence is the same if a `logical relationship' exists between the opposing parties' claims.") A logical relationship will be found if both the claim and the counterclaim have a "common origin" and "common subject matter." Brunacini v. Kavanagh, 117 N.M. 122, 126, 869 P.2d 821, 825 (Ct.App.1993). For example, in Brunacini, we stated:
In the present case the claim for malpractice and the claim for legal fees have a common origin (the opinion letter) and a common subject matter (the performance of legal services). The two claims are logically related, and, absent some other consideration, the claim for legal malpractice was a compulsory counterclaim to the [l]aw [f]irm's claim for legal fees.
Id.
{20} The holding in Brunacini was reaffirmed in Computer One, Inc., 2008-NMSC-038, ¶ 26, 144 N.M. 424, 188 P.3d 1175 (stating based on Brunacini that "if the [law firm] had wanted to file a separate suit for breach of contract against [the law firm's client] for its attorney fees, then [the client] would have had to press its legal malpractice allegations simultaneously as a compulsory counterclaim"). The Brunacini holding, that tort claims for legal malpractice are compulsory counterclaims to a breach of contract claim, makes it clear that the logical-relationship test does not rest on the substantive law that governs the different claims, but rather on whether the claims arise out of the same transaction or series of transactions. See also Heffern, 99 N.M. at 532, 534, 660 P.2d at 622, 624 (holding that a logical relationship existed between a bank's foreclosure action and the borrower's tort claims for conversion, wrongful hiring, unconscionable trade practices, and intentional misconduct).
{21} In the case before us, the "opposing-party" requirements are satisfied. The Key complaint sued Adams pursuant to a dispute between the parties. The Adams complaint sued Key pursuant to a dispute between the parties. Thus, the parties' relationship is adversarial in nature and creates "opposing parties" within the meaning of Rule 1-013(A).
{22} Second, the claims asserted in the two actions are "logically related" because they have a common origin (the Agreement) and a common subject matter (the operation of the ranch). Moreover, as discussed in Computer One, Inc., the allegations in the Key complaint, including the attachment of the Agreement as an exhibit thereto, "fairly alerted" Adams to the adversarial nature of Key's claims under the Agreement and concerning the operation of the ranch. 2008-NMSC-038, ¶ 24, 144 N.M. 424, 188 P.3d 1175. The allegations and conduct set forth in the Key complaint are contrary to a legal conclusion that Key and Adams operated the ranch in a partnership as partners. See Armstrong v. Reynolds, 102 N.M. 261, 262, 694 P.2d 517, 518 (1985) (stating that the pattern of conduct "indicates that a partnership relationship never existed" because "[n]one of the factors which would suffice to show the creation of a partnership relationship [was] present"). Stated another way, the Key complaint "fairly alerted" Adams to Key's assertion that, despite the "split equal" language of the Agreement, Key considered the ranch to be his operation and not a partnership. As such, any and all claims Adams had arising out of the parties' disputes under the Agreement and which were related to the operation of the ranch were Rule 1-013(A) compulsory counterclaims to the Key complaint that had to be asserted in the Key suit "under penalty of waiver." See Computer One, Inc., 2008-NMSC-038, ¶ 24, 144 N.M. 424, 188 P.3d 1175. This included any and all claims that the parties' relationship constituted a partnership, that Key breached a fiduciary duty to Adams, and that Adams had a right to an accounting and for damages.
{23} The Rule 1-013(A) "penalty of waiver" applies even though Adams filed no pleadings in the Key case and it ended in a default judgment against Adams. Heffern, 99 N.M. at 533, 660 P.2d at 623; Bentz v. Peterson, 107 N.M. 597, 601, 762 P.2d 259, 263 (Ct.App.1988). Furthermore, because Rule 1-013(A) is applicable and "fatal" to all compulsory counterclaims, Adams has forever *605 waived his right to adjudicate all of the claims set forth in the Adams complaint. Computer One, Inc., 2008-NMSC-038, ¶ 23, 144 N.M. 424, 188 P.3d 1175 (stating that "a party's failure to raise compulsory counterclaims will be fatal to its subsequent lawsuit"); see also Heffern, 99 N.M. at 533, 660 P.2d at 623 (stating that "[u]nder [Rule 1-013(A)] failure to plead a compulsory counterclaim bars a later action on that claim").
{24} It is undisputed that Adams did not assert that a partnership existed or that an accounting and damages were due as counterclaims to the Key complaint. As a matter of law, Rule 1-013(A) required Adams to do so, and, therefore, Key was entitled to summary judgment against Adams.
CONCLUSION
{25} The district court's order dismissing the Adams complaint with prejudice is affirmed.
{26} IT IS SO ORDERED.
WE CONCUR: JONATHAN B. SUTIN, Chief Judge and RODERICK T. KENNEDY, Judge.
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200 F.Supp. 167 (1961)
AIR CONDITIONING COMPANY OF HAWAII, Plaintiff,
v.
RICHARDS CONSTRUCTION COMPANY-KANEOHE BAY PROJECT, Barry J. Richards Co., Bayrich, Inc., Bayrich Inc. of California, Barry J. Richards, Inc., Richards Construction Company, Massachusetts Bonding and Insurance Company, Barry J. Richards, and Gertrude Richards, Defendants.
Civ. No. 1924.
United States District Court D. Hawaii. Second Division.
November 28, 1961.
*168 Smith, Wild, Beebe & Cades (Gilbert E. Cox and James S. Campbell), Honolulu, Hawaii, for plaintiff.
A. William Barlow, Honolulu, Hawaii, for defendants.
PENCE, Chief Judge.
On December 4, 1957, invitations for bids for the construction of six hundred fifty (650) housing units at the United States Marine Corps Air Station at Kaneohe Bay, Oahu, T. H., for the Department of the Navy, Housing Contract No. NBy (CH)-12526 were sent to interested contractors. The bids, ultimately, were to be opened at 11:00 a. m. on Friday, January 31, 1958, at the District Public Works office at Pearl Harbor, Oahu.
Among the interested contractors was the defendant, Richards Construction Company[1], and in the "Builders Report of Hawaii" of January 20, 1958, appeared a half-page advertisement of the defendant requesting sub bids for the project. This advertisement showed the address of the Richards Construction Company to be 4811 Whitsett Avenue, North Hollywood, California, and also announced that the company's representative would be at the Surfrider Hotel on January 28, 29, 30 and 31. This advertisement was seen by Allen Arasato, foreman of the sheet metal department of the plaintiff.
On January 30, 1958, the plaintiff filed a bid on Section 6 of the Housing Project Specifications: sheet metal work, at the figure of $48,733.00, with the General Contractors Association of Hawaii, and either on that day or on the morning of Friday, January 31, the same bid was telephoned to the defendant, Barry J. Richards, who was the general manager of all of the defendants' interests (except Massachusetts Bonding and Insurance Company), at the Surfrider Hotel by Arasato.
The defendant[2], as a general contractor, had already secured bids from mainland United States contractors on this same item one for $173,395.00 and another for $83,277.00. The defendant had been prepared to use an $83,000.00 figure for the sheet metal work prior to receiving Arasato's call. Relying on Arasato's call and a reconfirming call in which Richards advised Arasato that he was using the plaintiff's figure as lowest on the sheet metal work, Richards adjusted his figures for the sheet metal work to $48,733.00 and on Friday, January 31, 1958, defendant Richards Construction Company by Barry J. Richards, general partner, submitted a bid *169 of $8,794,085.00 for the entire project. When the bids were opened at 11:00 a. m. on that day, the defendant was the low bidder. The Saturday morning, February 1, 1958, Honolulu Advertiser carried the bid story.
The plaintiff was not open for business on Saturday, February 1, but on Sunday, Arasato, knowing that the defendant was the low bidder and having been advised that defendant was using plaintiff's figure, rechecked the figures of the plaintiff's bid and discovered that plaintiff's employee, Albert Sakuda, the actual estimator, had mistakenly used labor and material costs on fabricating galvanized sheet metal whereas the job Specifications called for zinc alloy metal. Arasato immediately determined that the cost of zinc alloy was about twice that of galvanized sheet metal.
On Monday morning, February 3, 1958, Arasato notified J. Q. Quealy, Jr., general manager of the plaintiff corporation, of the mistake. Although the exact difference in cost was not at that time available, it was known to be considerable. Quealy immediately notified Arasato to contact the low bidder. Arasato was unable to contact Richards at the Surfrider Hotel, but made no attempt to contact defendant in California. Richards had returned to California and did not come back to Hawaii until March 3, when Richards found a memorandum that he should call Arasato at the plaintiff company. He called and, about March 6, Arasato, for the first time, saw Richards at the Surfrider Hotel to tell him that the plaintiff had made a mistake and "would like to withdraw their figures." The defendant "blew up." The next day the defendant saw Quealy at the plaintiff's office and Quealy advised him that the plaintiff was not going to do the job at the bid price.
On March 11, the defendant wrote the plaintiff formally accepting its confirmed offer of January 30, 1958 to do the sheet metal work for $48,733.00. The plaintiff under date of March 25 wrote the defendant construction company that it did not consider itself under any contractual obligation to go through with its offer and claimed that its offer had been withdrawn.
About a week later, Richards came back and discussed the possibility of using copper in place of zinc alloy. Whether this possible use of copper was initiated by the defendant or by the Navy itself is not clear. In any event, figures for copper were secured in March of 1958. On July 14, 1958, Richards wrote to the District Public Works Office Fourteenth Naval District, proposing changing all zinc flashings to 16 oz. copper and indicated that there would be an increase in cost. The plaintiff's estimated price for using copper was $96,000.00.
There was some confusion as to when Richards again contacted the plaintiff requesting the plaintiff to work out a bid on the sheet metal work using zinc alloy. It may have been shortly before or after July 10, 1958, but in any event Richards came to the plaintiff in the summer of 1958 and said that he had endeavored to get prices from other contractors on sheet metal work using zinc alloy and that the Navy had refused to use copper and that he wanted the best possible figure from the plaintiff on a zinc alloy basis. The plaintiff gave to the defendant an offer to do the sheet metal work for $68,761.00. After some hard bargaining, the plaintiff reduced its figure to $62,000.00, and, under date of September 28, 1958, the plaintiff and the defendant entered into a formal written contract whereby the plaintiff agreed to do the sheet metal work on the project for $62,000.00.
As the work progressed, the defendant paid the plaintiff a total of $50,582.70. Then, when the plaintiff had completed its work, satisfactorily, the defendant company refused to pay any more. In addition to that, the plaintiff had performed extra work to the reasonable value of $302.01. This also the defendant refused to pay for. Suit was brought by the plaintiff for the above sums. The defendant counterclaimed alleging that the only contract price was *170 $48,733.00, and that therefore the defendant had over-paid the plaintiff in the sum of $1,849.00.
Both the plaintiff and the defendant companies have as their managers men who are ruthless in the pursuit of profit and neither Mr. Richards nor Mr. Quealy, Jr., impressed the Court with the accuracy of their respective statements. As the Court advised counsel in Chambers shortly after the trial had started, it clearly appeared to the Court that Barry Richards was parsimonious with the truth. Later, it was equally clear to the Court that the observation of the late Dr. Sigmund Freud that "a person forgets what he wants to forget" might well be applied to the testimony of Quealy and certain other employees of the plaintiff. Defendant Barry Richards obviously is a tough and rough, smart, sharp general contractor who feels that the contracting business is one in which no holds are barred. Although the attitude of Quealy, Jr. was externally much more suave, the Court was convinced that he too held the same general attitude toward the contracting business as does the more outspoken Mr. Richards. The Court was at all times faced with the task of sifting fact from fiction as well as forgetfulness that was tantamount to fiction.
The first legal problem which the Court had to determine was whether or not a contract had been entered into between the plaintiff and the defendant at the $48,733.00 figure submitted by the plaintiff.
There was testimony from Mr. Richards that he had twice checked with Arasato as to the accuracy of the plaintiff's figures and that, after he was notified that his construction company was low bidder, he had on that same afternoon of Friday, January 31, contacted Arasato and in effect accepted plaintiff's bid. This "acceptance" is not supported by the Richards Construction Company letter of March 11, 1958 (Ex. 8) to the plaintiff and the Court therefore does not believe that plaintiff's bid was accepted on January 31, 1958.
The plaintiff's contention is that, even though it filed its bid with the General Contractors Association and telephoned its bid to the defendant, it had no enforceable contract with the defendant company; that its bid amounted to a revocable offer; and that the plaintiff communicated its revocation to the defendant before the defendant accepted it.
Admittedly, the filing of the bid was not an option supported by a consideration nor on the state of the record would there appear to be a bilateral contract binding the defendant to use the plaintiff's bid. On the other hand, plaintiff's bid nowhere stated either expressly or impliedly that it was revocable at the pleasure of the plaintiff before acceptance. Ex. J, "Important Principles of the Bidding Procedure of the General Contractors Association of Hawaii", showed the basis upon which the bid was filed, viz., that after the bid deadline the bidding procedure rules of the Association forbid a change in bidding figures and if a bid contains an error it must be withdrawn before the general bid opening. As the principles of the Association state: "* * * The salvation of each member's business and the industry lies in abiding by the Bidding Procedure and playing the game in an honest way. * * *" The plaintiff's bid (Ex. 2) filed with the General Contractors Association of Hawaii had no limitation as to how long it would remain open. The space provided for fixing such a limitation was left blank. The plaintiff's bid constituted a promise on its part to do all of the sheet metal work according to the specifications. The plaintiff certainly had reason to expect that, if its bid was lowest, that bid would be used by the defendant. Plaintiff's bid was intended to induce action of a definite and substantial character on the part of the promisee, Richards Construction Company, and it did. The Court is fully satisfied that Richards Construction Company advised plaintiff that it was going to use the plaintiff's figure in its *171 bid on the sheet metal work, and that the defendant did so use it.
Section 45 of the Restatement of the Law of Contracts provides:
"If an offer for a unilateral contract is made, and part of the consideration requested in the offer is given or tendered by the offeree in the response thereto, the offeror is bound by a contract, the duty of immediate performance of which is conditional on the full consideration of being given or tendered within the time stated in the offer, or, if no time is stated therein, within a reasonable time."
And Comment b. on that section states that:
"* * * The main offer includes as a subsidiary promise, necessarily implied, that if part of the requested performance is given, the offeror will not revoke his offer, and that if tender is made it will be accepted. Part performance or tender may thus furnish consideration for the subsidiary promise. Moreover, merely acting in justifiable reliance on an offer may in some cases serve as sufficient reason for making a promise binding (see § 90)."
The subsidiary promise serves to prevent the injustice which would result if the offer could be revoked after the offeree had acted in reliance thereon to its detriment and this foreseeable prejudicial change in position implies a subsidiary promise not to revoke an offer for a bilateral contract.
Section 90 of the Restatement of the Law of Contracts states:
"A promise which the promisor should reasonably expect to induce action or forbearance of a definite and substantial character on the part of the promisee and which does induce such action or forbearance is binding if injustice can be avoided only by enforcement of the promise."
This Court is of the opinion therefore that the plaintiff in making its bid of January 30, 1958 made a promise which it should have reasonably expected would induce the defendant to submit a bid based thereon to the Government, that such a promise did induce this action, and that an injustice would have been avoided only by enforcement of the promise. (See Drennan v. Star Paving Company, 51 Cal.2d 409, 333 P. 2d 757.)
Although there was some evidence that the defendant thought that the plaintiff's bid was too low and hence inferentially there was knowledge that the plaintiff had made a mistake in its bid, the Court does not believe that the defendant did have any knowledge, prior to March 6, 1958, that the plaintiff had made a mistake in its bid. There was a variance of $90,000.00 between two mainland bidders on the same sheet metal work and the difference between plaintiff's bid and the next above it was but $34,000.00. Also, the plaintiff's bid was $32,000.00 above the architect's estimate on the sheet metal work. Although the Court is satisfied that later Richards told Quealy that he had been carrying a $62,000.00 figure on the sheet metal work, the Court was convinced that this was but a part of the several and mutual misrepresentations made by Richards and Quealy, Jr. to each other in the course of bargaining over the price for which the plaintiff ultimately agreed to perform the work. Neither the plaintiff nor the defendant exhibited very clean hands to the Court in their entire series of transactions. Both the plaintiff and the defendant were out to make as much profit as possible out of each other without regard to business ethics and "good faith".
The Court finds therefore that an enforceable contract was entered into by the defendant with the plaintiff not necessarily on March 11 when the defendant wrote his letter of acceptance but certainly by March 6 on the very date when Arasato first told the defendant at the Surfrider Hotel that "my man *172 made a mistake and we would like to withdraw our figures." It was clear to the Court and the Court so finds that upon that occasion Richards by his words and actions clearly indicated that he had relied upon the plaintiff's bid of $48,733.00, had used it in making his own bid as general contractor, and, by his words and actions with Arasato on that day and with Quealy on the following day, clearly indicated that he accepted plaintiff's bid.
Immediately thereafter circumstances took place which are a little unclear to the Court. Although Richards testified that the idea of using copper originated with him, nevertheless his letter of July 14 to the District Public Works Office, Fourteenth Naval District (Ex. O) leads to the inference that the Naval District itself had requested Richards to evaluate a change of all zinc flashings to 16 oz. copper. The Court is satisfied from plaintiff's Exs. 21 and 22, viz., radiograms, that as early as March 12, 1958 Richards was calling upon the plaintiff for a modification of the contract by way of substituting copper for zinc.
In August or September 1958, the problem confronting the plaintiff and defendant was crystalized. The defendant had to go ahead with his general contract. The plaintiff was refusing to perform on his $48,733.00 bid and contract. The defendant had tried to secure bids elsewhere but the lowest figure he could get was that of the Oahu Plumbing for $79,889.00.
The defendant went back to the plaintiff and asked the plaintiff to rebid the job using zinc. Thereupon, the plaintiff tossed the purely "guesstimated" bid of $68,761.00 to the defendant. The defendant, feeling that he was "dealing with a chiseller", represented that he had a mainland bid of $62,000.00 and that he had allocated that figure for the sheet metal work and was willing to pay plaintiff that much for the work if plaintiff would do it, and the plaintiff, with a great show of being fair and honorable, advised the defendant that, "because he felt a moral obligation to do so", he would reduce the bid by the margin of his profit ten per cent and do the job "at cost" for $62,000.00. In these respects the statements of neither the plaintiff nor the defendant were in the slightest degree true. It was in this frame of mind, and with the firm intention on the part of the defendant not to pay any more than he would be forced to because of work completion and by a court, that the plaintiff and the defendant entered into the contract of September 29, 1958 (Ex. 3) whereby the defendant agreed to pay the plaintiff $62,000.00 for doing the same job which the plaintiff had previously promised to do for $48,733.00.
It is argued by the defendant that there was no consideration for this "contract of September 29, 1958" and therefore it was unenforceable.
This Court, having found that a contract between the plaintiff and the defendant was entered into in March 1958, and that the plaintiff refused to perform as promised, is of the opinion that if thereafter the defendant had awarded the contract for the sheet metal work to any person other than the plaintiff he could then have taken legal action against the plaintiff for all of his costs in excess of the plaintiff's original bid. The defendant had these rights, but he did not choose to enforce them. Instead, in the face of the plaintiff's refusal to perform as promised, the defendant went back to the plaintiff and as he said:
"I did my best to compromise the figure down to whatever possible figure I could get them (plaintiff) to perform * * *."
"I would be glad to bring it (the sheet metal work) down to 48,000, 49,000 or 50,000 because of the amount of exposure I had. I was interested in getting the lowest possible bid I could with the amount of exposure I had * * *."
"I have no intention of paying him (plaintiff) over that amount ($48,733.00) or any reasonable amount over that that we might *173 have to pay to keep him on the job * * *."
"It's good business practice to get anything down to the lowest price * * *."
Thus it was clear that the defendant entered into the formal contract of September 29, 1958, not for the purpose of mitigating damages for the plaintiff, but rather for the purpose and consideration of limiting his own company's exposure.
As is set forth in the Restatement of the Law of Contracts, § 406, Comment a., "* * * Where, however, there is a bilateral contract, and each party is still subject to some duty thereunder, the agreement of each party to surrender his rights under the contract affords sufficient consideration to the other for his corresponding agreement * * *." and Comment b., "* * * if either party even wrongfully expresses a wish or intention to abandon performance of the contract, and the other party fails to object, there may be * * * circumstances justifying the inference that he assents * * *." It has been stated many times "the right to contract includes the right to modify, change or abrogate a pre-existing contract and the mutual promises of the parties are sufficient to support the new agreement." (Cases on all fours with the present problem of refusing to perform a pre-existing contract at any agreed price but subsequently performance at a new and higher agreed price are Bishop v. Busse, 69 Ill. 403; Cooke v. Murphy, 70 Ill. 96 (both decided by the same Judge). The same rule of law was applied in Grant Marble Co. v. Abbot, 142 Wis. 279, 124 N.W. 264. The same principle was applied in Evans v. Oregon & W. R. Co., 58 Wash. 429, 108 P. 1095. It was also more recently followed in United States for Use of Sparling Steel Co. v. Slater (D.C.Alaska), 111 F.Supp. 418. As was said in Savage Arms Corp. v. United States, 266 U.S. 217, 220, 45 S.Ct. 30, 31, 69 L.Ed. 253, "the parties to a contract may release themselves, in whole or in part, from its obligations, so far as they remain executory, by mutual agreement without fresh consideration. The release of one is sufficient consideration for the release of the other." This rule was applied in Borin Corp. v. Comm'r of Internal Revenue (6th Cir.), 117 F.2d 917, 920.)
The Court finds that there was adequate consideration on both sides to support the formal contract of September 28, 1958 modifying the informal contract of March 1958. The plaintiff could not be compelled to do the sheet metal work (he was only liable for any damages suffered by the defendant). There had already been moves toward modifying the informal contract of March 1958 by substitution of copper and Richards himself stated that in entering into the formal contract of September 28, 1958 he was compromising his dispute with the plaintiff solely for the defendant's benefit. The Court finds therefore that the terms of that September contract were binding on both parties thereafter. The plaintiff having fully performed that contract is entitled to be paid in accordance with its tenor.
Let Judgment be entered for the plaintiff against the defendants in the sum of $11,417.00, this being the remaining amount due under the contract, together with interest at the rate of six per cent per annum from July 25, 1960, that being the date on which the defendant was billed for same.
In addition thereto, the Court finds that extras to the value of $302.01 were performed by the plaintiff at defendant's request and that the plaintiff has not been paid for the same. Let Judgment be entered in favor of the plaintiff against the defendants in the additional sum of $302.01 on account of the extras, together with interest at the rate of six per cent per annum from August 20, 1960, that being the date on which the defendant was billed for the same.
Defendants shall take nothing by their counterclaim.
Costs will be allowed the plaintiff.
NOTES
[1] The defendant Richards Construction Company-Kaneohe Bay Project is a general partnership consisting of the following defendants: (1) Bayrich, Inc., (2) Bayrich Inc. of California, (3) Barry J. Richards, Inc., (4) Barry J. Richards Co., and (5) Richards Construction Company, a limited partnership. This limited partnership is in turn made up as follows: (a) Barry J. Richards, an individual and a general partner, (b) Barry J. Richards, Trustee of the Barry J. Richards Trust for Susan Beth Richards, a limited partner, and (c) Gertrude Richards, Trustee of the Gertrude Richards Trust for Susan Beth Richards, a limited partner. The Massachusetts Bonding and Insurance Company was the surety on the bond on the general contract, said bond being issued for the protection of all persons supplying labor and materials used in the prosecution of the work on the contract. The Richards Construction Company by and through its general partner, defendant Barry J. Richards caused to be formed defendant Richards Construction Company-Kaneohe Bay Project, a partnership, which partnership by and through all of its general partners undertook the performance of said building contract.
[2] Because of the complex make-up of the various "Richards" partnerships, corporations, etc., the term "defendant", as used throughout this decision, usually but not necessarily refers to the Richards Construction Company and on occasion to Barry J. Richards himself, inasmuch as he apparently was the sole manager of all of the "Richards" operations.
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626 F.Supp. 1271 (1986)
INTERNATIONAL ORGANIZATION OF MASTERS, MATES & PILOTS, PACIFIC MARITIME REGION, a labor organization, Plaintiff,
v.
Eleanor ANDREWS, Commissioner of Administration of the State of Alaska; Richard J. Knapp, Commissioner of the Department of Transportation and Public Facilities of the State of Alaska; Martin Nusbaum, Director of Administrative Support of the Division of Marine Highway Systems of the State of Alaska; and John Doe officers Two through Ten, officers of the State of Alaska, Defendants.
Kurt K. PETRICH, Robert W. Seidman, John W.S. Lam, William P. Turner, Sandra Jenson, Grant R. Webber, Ronald P. Tyrell, Mike McRoberts, David Roberts, Robert E. Smith, Frank R. Ewing, Pierre L. Rutledge, Lawrence E. Markham, Arlene G. Sheets, Paul K. Judd, David Lisle, Patrick Kangas, William Petrich, Clement Wischinski, Donald E. Besse, David Kutz, Robert Chamberlain, Victor Freise, Wallace Blackwell, Billie Alsup, Jr., Charles H. Knight, Plaintiffs,
v.
Eleanor ANDREWS, Commissioner of Administration of the State of Alaska; Richard J. Knapp, Commissioner of the Department of Transportation and Public Facilities of the State of Alaska; Martin Nusbaum, Director of Administrative Support of the Division of Marine Highway Systems of the State of Alaska; and John Doe officers Two through Ten, officers of the State of Alaska, Defendants.
No. A82-465 CIV.
United States District Court, D. Alaska.
January 30, 1986.
*1272 *1273 Richard S. Oettinger, Seattle, Wash., and James B. Bradley, Juneau, Alaska, for plaintiff IOMMP.
Kelby D. Fletcher, Peterson, Bracelin & Young, Seattle, Wash., for individual plaintiffs.
Laura L. Davis, Asst. Atty. Gen., Juneau, Alaska, for defendants.
OPINION
FITZGERALD, Chief Judge.
The Alaska Marine Highway System (AMHS) is owned and operated by the State of Alaska through its Department of Transportation and Public Facilities, and operates ferries transporting passengers, mail, and personal and commercial motor vehicles between Seattle and Alaska, as well as between various Alaskan ports. In 1977, the Alaska Legislature amended the Alaska Public Employment Relations Act, AS 23.40.210 (1985), and provided for cost-of-living wage differentials between AMHS's Alaska-resident and nonresident employees. The International Organization of Masters, Mates, and Pilots, Pacific Maritime Region (IOMMP), which is the collective bargaining representative for sixty-five to seventy AMHS licensed deck officers, and twenty-six other AMHS employees belonging to the Inland Boatman's Union (IBU) brought these actions to challenge the constitutionality of the wage differentials.[1] They claim that the differentials violate the federal constitution's commerce clause, U.S. Const. art. I, § 8, cl. 3, equal protection clause, U.S. Const. amend. XIV, § 1, and privileges and immunities clause, U.S. Const. art. IV, § 2, cl. 1, and that they operate to deprive the plaintiffs of the "right to travel" guaranteed by the fourteenth amendment.[2]
*1274 The plaintiffs seek declaratory and injunctive relief, as well as money damages.[3] The defendants, Alaska state officials who administer AMHS, maintain that AS 23.40.210 is constitutionally sound. The parties have both moved for summary judgment. I grant the defendants' motion for summary judgment.
FACTUAL BACKGROUND
Alaska began to operate AMHS in 1962. At present, AMHS is the only public surface transportation system connecting the various communities in southeast Alaska, as well as many communities in southwest Alaska. Since most of these communities are inaccessible by road, AMHS provides the primary means of supplying their residents with food and other essential commodities. The annual operating expenses of AMHS substantially exceed the annual revenues it generates; as a result, each year during its budget process, the State allocates funds out of its general revenues to cover the difference. See AS 37.07 (1985) (Executive Budget Act).
When Alaska established AMHS in 1962, it based the wage schedule for AMHS employees on prevailing wages for comparable work in California, Oregon, and Washington, and added 25% to offset what was then assumed to be the higher cost of living in Alaska. A 1980 comparative-wage study revealed that IOMMP members working on AMHS earned between 35 and 40% more than their fellow union members working on the Washington state ferry system. The record suggests that at least part of this disparity in wage levels was attributable to the significantly more demanding job requirements and work shifts on AMHS compared with the Washington system.
According to statistics in the record supplied by federal agencies, the cost of living in Anchorage in 1980 for a typical family of four was at least 22.5% higher than that in Seattle. See U.S. Department of Labor, Bureau of Labor Statistics, "Autumn, 1980 Urban Family Budgets and Comparative Indexes for Selected Urban Areas" (1981).[4] The cost of living in Juneau during 1980 was approximately the same as that in Anchorage. See U.S. Office of Personnel Management, Cost of Living Allowance Program, "Cost of Living Surveys for Juneau and Anchorage, 1980" (1981). Alaska has prepared studies concerning the relative cost of living in cities throughout the state, and these indicate that the cost of living in both Juneau and Ketchikan is substantially the same as that in Anchorage, while the cost of living in other southeastern cities such as Petersburg, Sitka, and Haines is slightly higher. See State of Alaska Department of Administration, Division of Personnel, "Election District Pay Differentials" (1970); see also AS 39.27.020 (1985) (establishing "pay step differentials" for unrepresented state employees "by election district and in other states": employees residing in Juneau, Ketchikan, Petersburg, and Sitka are paid on the same *1275 scale as those in Anchorage, while those living in Haines are paid one step higher).
The plaintiffs have not offered any evidence that the cost of living in Anchorage and southeastern Alaska is less than 22.5% higher than that in Seattle. Nor have they offered any evidence that the cost of living in other parts of Washington state or other places where AMHS employees reside is higher than that in Seattle. Thus, the evidence in the record indicates that the cost of living in Anchorage and southeastern Alaska is at least 22.5% higher than that in Seattle and the other areas where AMHS's nonresident employees reside.
The plaintiffs have offered evidence that the Consumer Price Index, which measures the rate the cost of living has increased in various cities since 1967, was greater for the Seattle-Everett area in 1979 than for Anchorage. See U.S. Department of Labor, "Consumer Price Index for Urban Consumers" (1979 and 1983 editions). Moreover, they have shown that between 1979 and 1983, the Consumer Price Index increased 35% more in Seattle-Everett than in Anchorage. Nevertheless, even with this faster growth in Seattle's cost of living in recent years, nothing in the record indicates that the difference in the cost of living between Anchorage and Seattle has ever fallen below 22.5%.
Both state and federal employees in Alaska have long received wage adjustments to compensate them for the relatively high cost of living in the state. As of 1981, federal employees in Alaska received a cost-of-living allowance that ranged from a minimum of 10% of their base salaries (for those without commissary privileges) or 17.5% (for those without such privileges) to a maximum of 25% of their base salaries, depending upon the employee's duty station. The State has adjusted the wages paid to its unrepresented nonmaritime employees since 1966, depending upon the cost of living in each employee's election district. AS 39.27.020 provides that such employees residing outside the state be paid six steps currently about 22.5% less than those employees living in Anchorage, Juneau, or Ketchikan. See AS 39.27.020. In 1972, with the passage of the Alaska Public Employment Relations Act, AS 23.40.070-23.40.260, the State initiated collective bargaining with its nonmaritime, union employees; since then, Alaska has negotiated cost-of-living wage adjustments in all its collective bargaining agreements with nonmaritime unions. By 1977, the only collective bargaining agreements for Alaska state employees that did not contain cost-of-living adjustments in the pay plan were those negotiated with the three maritime unions working on AMHS.[5]
In 1977, the Alaska legislature amended AS 23.40.210. Although the 1977 amendment required that all state collective bargaining agreements include cost-of-living wage differentials, it was clearly targeted at the three AMHS unions, since their bargaining agreements were the only ones involving state employees that did not already include cost-of-living adjustments. As amended, AS 23.40.210 provides that:
Upon the completion of negotiations between [a labor] organization and a public employer, if a settlement is reached, the employer shall reduce it to writing in the form of an agreement.... The agreement shall include a pay plan designed to provide for a cost of living differential between the salaries paid employees residing in the State and employees residing outside the State. The plan shall provide that the salaries paid, as of August 26, 1977, to employees residing outside the State shall remain unchanged until the difference between those salaries and the salaries paid employees residing in the State reflects the difference between the cost of living in Alaska and living in Seattle, Washington....
AS 23.40.210 (emphasis added). The Alaska House Finance Committee's "letter of intent" concerning the 1977 amendment confirms that its primary purpose was to *1276 introduce cost-of-living wage differentials for AMHS employees:
It is the intent of the House Finance Committee in passing the 1977 amendment to provide for a cost-of-living pay differential between Alaska Marine Highway employees who live in Alaska and those who live outside the state. The purpose of the bill is to encourage employees of the Marine Highway System to live in Alaska. It is not intended to mandate a pay raise or benefits increase for resident Ferry system employees. Rather, the differential should be implemented over a period of time through the collective bargaining process. For example, if the cost of living in Ketchikan is 15% higher than in Seattle, and a 6% increase were negotiated, the 6% raise and subsequent raises should apply only to Alaska residents until the cost-of-living differential is established. ...
1977 State of Alaska House Journal 461.
As the amendment's legislative history indicates, the main reason for introducing cost-of-living differentials was to "encourage [AMHS] employees ... to live in Alaska." According to the defendants, prior to the passage of the 1977 amendment, AMHS employees who remained or became Alaska residents were making a conscious and substantial sacrifice, given how much greater purchasing power their wages would have if they moved to Washington or other states.
State officials testified in affidavits that there are advantages to having Alaska residents employed on AMHS. They assert that crew members from southeast Alaska are acutely aware of the importance of ferry service in supplying necessities to their communities, and therefore may be more committed than other employees to providing high-quality, dependable service, and less likely to endorse strikes that interrupt service. They also maintain that since AMHS employees represent Alaska to nonresident visitors and tourists, it is desirable from a public relations and tourism standpoint that at least some of these employees be Alaska residents with a demonstrated commitment to the state. The defendants contend that since there is a value to having at least some Alaska residents as AMHS employees, the State should be permitted to alleviate conditions that discourage AMHS employees from remaining or becoming Alaska residents. They maintain that AS 23.40.210's cost-of-living differentials enable Alaska to compete on an even footing with Washington and other states to be the residence-state of AMHS employees.
As the legislative history also indicates, AS 23.40.210's cost-of-living wage differentials were intended to be phased in over time as new collective bargaining agreements were negotiated: the salaries of AMHS's nonresident employees were not to be immediately or drastically reduced, or those of resident employees immediately raised. Alaska attempted to implement the cost-of-living differentials for the first time in its 1979 negotiations with AMHS unions, and began to incorporate the differentials in its 1980 labor agreements.
All base wage increases that the State has granted since July, 1979 have been limited exclusively to resident employees, although all employees have received some indirect increases in compensation and benefits. Thus, while nonresident employees' base wages have remained the same since 1979, the base wages of IOMMP's Alaska-resident members have increased 11 to 13%, those of IBU's resident members have increased 18 to 25%, and those of MEBA's resident members have increased 22.5%. The IOMMP's labor agreements since 1979 have all included a provision that if AS 23.40.210 is found unconstitutional, nonresident union members will receive the back wages and wage increases they would have received had they been Alaska residents.
The plaintiffs contend that AS 23.40.210's cost-of-living wage differentials are unfair and unconstitutional.[6] They maintain *1277 that the existence of these differentials has operated to coerce many AMHS nonresident employees to move to Alaska, noting that when the IOMMP filed suit in 1980, 34 of its 65 members working on AMHS were nonresidents (32 from Washington, mostly from around Seattle, and 1 each from California and Wisconsin), but that by 1983, only 24 of 69 IOMMP members working on AMHS were nonresidents.[7] Moreover, the plaintiffs have introduced evidence that at least some Alaska-resident employees of AMHS want to emigrate from the state, but feel compelled to remain because of the cost-of-living differentials.
The plaintiffs note that although AMHS's nonresident employees' wages have been "frozen" since 1979, the Consumer Price Index indicates that the cost of living in Seattle has grown faster since 1979 than that of Anchorage. They contend that the cost-of-living adjustment provided by AS 23.40.210 is not precisely enough tailored: it differentiates simply between the class of all Alaska residents, whose wage levels are uniformly based on the cost of living in Anchorage, and the class of all nonresidents, whose wages are based on the cost of living in Seattle, and it does not take into account differences in the cost of living either within Alaska or throughout the rest of the United States. The plaintiffs maintain that there is no evidence indicating that nonresident employees are harmful to AMHS or less qualified as a group than resident employees. They also note that both the IOMMP and the IBU already have clauses in their labor agreements providing for preferential hiring of Alaska residents, and they contend that these hiring preferences alone are sufficient to guarantee that Alaska residents will be well-represented on AMHS, without the added "preference" of cost-of-living differentials.
ANALYSIS
The plaintiffs contend that by "freezing" the wages of AMHS's nonresident employees and authorizing wage increases only to AMHS's Alaska-resident employees, AS 23.40.210 violates the federal constitution's commerce clause, equal protection clause, and privileges and immunities clause, and violates AMHS employees' "right to travel" under the fourteenth amendment. I do not agree. I therefore grant the defendants' motion for summary judgment.
A. COMMERCE CLAUSE CLAIMS
The plaintiffs contend that AS 23.40.210's imposition of cost-of-living wage differentials violates the commerce clause. However, when a state acts in a proprietary capacity as a "market participant," rather than as a "market regulator," it is not subject to the limitations of the commerce clause, even if it uses its position "`to favor its own citizens over others.'" White v. Massachusetts Council of Construction Employers, Inc., 460 U.S. 204, 206-08, 103 S.Ct. 1042, 1044-45, 75 L.Ed.2d 1 (1983) (quoting Hughes v. Alexandria Scrap Corp., 426 U.S. 794, 810, 96 S.Ct. 2488, 2498, 49 L.Ed.2d 220 (1976)); accord South-Central Timber Development, Inc. v. Wunnicke, 467 U.S. 82, 104 S.Ct. 2237, 2243, 81 L.Ed.2d 71 (1984); Reeves, Inc. v. Stake, 447 U.S. 429, 436-40, 100 S.Ct. 2271, 2277-79, 65 L.Ed.2d 244 (1980); Western Oil and Gas Association v. Cory, 726 F.2d 1340, 1342-43 (9th Cir.1984), aff'd by equally divided court sub nom. Cory v. Western Oil and Gas Association, ___ U.S. ___, 105 S.Ct. 1859, 85 L.Ed.2d 61 (1985); see United Building and Construction *1278 Trades Council v. Mayor and Council of Camden (hereinafter "Camden"), 465 U.S. 208, 213, 220, 104 S.Ct. 1020, 1024, 1028, 79 L.Ed.2d 249 (1984).
In operating AMHS, a state-owned business, and determining the wages to pay AMHS's employees, Alaska has acted as a "market participant," not as a "market regulator." See, e.g., White, 460 U.S. at 214-15, 103 S.Ct. at 1048 (city acted as market participant when it contracted with firms for construction of public projects); Reeves, 447 U.S. at 440, 100 S.Ct. at 2279 (state acted as market participant when it sold cement produced at state-operated plant only to its own residents); Hughes, 426 U.S. at 809-10, 96 S.Ct. at 2497-98 (state operated as market participant in paying bounties for recycling of abandoned automobiles). The only market directly affected by Alaska's payment of cost-of-living adjustments to AMHS's resident employees is the labor market for the maritime transportation industry, in which Alaska is clearly a participant. The record does not indicate that AS 23.40.210 has caused "a substantial regulatory effect outside of that particular market." South-Central Timber, 104 S.Ct. at 2245-46 (emphasis added). Therefore, the plaintiffs' claims based upon the commerce clause must fail, regardless of any impact AS 23.40.210's wage differentials may have upon AMHS's nonresident employees. See White, 460 U.S. at 210, 103 S.Ct. at 1046.
B. "RIGHT TO TRAVEL" CLAIMS
The plaintiffs contend, based upon the Supreme Court's decisions in Shapiro v. Thompson, 394 U.S. 618, 89 S.Ct. 1322, 22 L.Ed.2d 600 (1969), Dunn v. Blumstein, 405 U.S. 330, 92 S.Ct. 995, 31 L.Ed.2d 274 (1972), and Memorial Hospital v. Maricopa County, 415 U.S. 250, 94 S.Ct. 1076, 39 L.Ed.2d 306 (1974), that by imposing wage differentials according to AMHS employees' states of residence, AS 23.40.210 infringes upon their "right to travel" guaranteed by the fourteenth amendment. The plaintiffs maintain that like the state statutes containing residence requirements that the Supreme Court invalidated in Shapiro, Dunn, and Memorial Hospital, AS 23.40.210 penalizes their exercise of the "right to travel," and must therefore be reviewed under a strict scrutiny standard. I disagree. I conclude that AS 23.40.210's wage differentials do not penalize interstate travel, and thus do not require strict scrutiny review.
First, the wage differentials do not penalize AMHS employees who migrate to Alaska. Unlike the statutes invalidated in Shapiro, Dunn, and Memorial Hospital, AS 23.40.210 does not contain a durational residence requirement: it does not condition receipt of a state benefit upon a minimum period of residence within the state. See Memorial Hospital, 415 U.S. at 251, 94 S.Ct. at 1078 (imposing one-year county residence requirement); Dunn, 405 U.S. at 334, 92 S.Ct. at 999 (one-year state residence and three-month county residence requirements); Shapiro, 394 U.S. at 622, 89 S.Ct. at 1324-25 (one-year state residence requirement). AMHS employees qualify for the cost-of-living adjustment at the moment they become bona fide residents of Alaska. See AS 23.40.210; see also Martinez v. Bynum, 461 U.S. 321, 325-29, 103 S.Ct. 1838, 1841-43, 75 L.Ed.2d 879 (1983).
The Supreme Court and other courts have distinguished between statutes like AS 23.40.210, which require only that individuals demonstrate bona fide, continuing residence in a state to qualify for benefits, and statutes like those in Shapiro, Dunn, and Memorial Hospital, which imposed durational residence requirements. Most, if not all, courts have concluded that statutes without a durational residence requirement do not "penalize" exercise of the "right to travel." See Martinez, 461 U.S. at 325-29, 103 S.Ct. at 1841-43; McCarthy v. Philadelphia Civil Service Commission, 424 U.S. 645, 646-47, 96 S.Ct. 1154, 1155, 47 L.Ed.2d 366 (1976) (per curiam); Benson v. Arizona State Board of Dental Examiners, 673 F.2d 272, 277 (9th Cir.1982); Hawaii Boating Association v. Water Transportation Facilities Division, 651 F.2d 661, 664 (9th Cir.1981); Fisher v. Reiser, *1279 610 F.2d 629, 635 (9th Cir.1979), cert. denied, 447 U.S. 930, 100 S.Ct. 3029, 64 L.Ed.2d 1124 (1980). Since AS 23.40.210 does not require that AMHS employees reside in Alaska for any set period before becoming eligible for the cost-of-living adjustment, I conclude that it imposes no "penalty" upon AMHS employees who migrate to Alaska.[8] If anything, the statute facilitates migration by these individuals to Alaska, because it removes the disincentive to migration resulting from Alaska's relatively high cost of living.
Second, AS 23.40.210's wage differentials do not penalize AMHS employees who emigrate from Alaska to other states. The Ninth Circuit has indicated that in actions alleging denial of individuals' "right to travel," "`the "penalty" [on interstate travel] required to invoke strict scrutiny [must] involve[] a genuinely significant deprivation, such as a denial of the basic "necessities of life" ... or the denial of a "fundamental political right."'" Hawaii Boating Association, 651 F.2d at 665 (citation omitted and emphasis in original); Fisher, 610 F.2d at 635-36. Unlike the statutes in Shapiro, Dunn, and Memorial Hospital, AS 23.40.210 does not deny necessities of life or fundamental political rights to nonresidents or any other group. See Memorial Hospital, 415 U.S. at 258-62, 94 S.Ct. at 1082-84 (withholding public medical assistance payments); Dunn, 405 U.S. at 336-42, 92 S.Ct. at 999-1003 (restricting right to vote); Shapiro, 394 U.S. at 622, 633-38, 89 S.Ct. at 1324-25, 1330-33 (withholding public assistance); see also Hawaii Boating Association, 651 F.2d at 664-65; Fisher, 635-36. It does not deprive AMHS's nonresident employees of their jobs or prevent them from earning salaries that compare favorably with those for similar employment in their own states; in fact the only state "benefit" it withholds from nonresidents is the cost-of-living wage adjustment.[9] According to the statistical comparisons in the record, this wage adjustment does not constitute a benefit at all, because it merely "equalizes" the purchasing power of AMHS employees residing in Alaska with that of AMHS employees residing outside the state.[10] I conclude that Alaska's failure to provide this wage adjustment to AMHS's nonresident employees does not constitute "a genuinely significant deprivation," Hawaii Boating Association, 651 F.2d at 665, and therefore does not penalize AMHS employees who choose to emigrate from Alaska to other states.
I note in passing that only in limited circumstances, if at all, can a "right to travel" challenge be maintained by former residents of a state who maintain that the state must continue to provide them with benefits as if they were still residents. See Califano v. Torres, 435 U.S. 1, 4-5, 98 S.Ct. 906, 908, 55 L.Ed.2d 65 (1978); Fisher, 610 F.2d at 634-35; cf. Alaska Pacific *1280 Assurance Co., 687 P.2d at 269-74. States are entitled to provide direct benefits to their citizens in order to "make residence within [their] boundaries more attractive." Zobel v. Williams, 457 U.S. 55, 67, 102 S.Ct. 2309, 2316, 72 L.Ed.2d 672 (1982) (Brennan, J., concurring). Bestowing such benefits on state residents, as AS 23.40.210 is alleged to do, does not violate their "right to travel" merely because it makes the prospect of remaining in the state more attractive or eliminates disincentives to moving away. See Califano, 435 U.S. at 4, 98 S.Ct. at 908; Fisher, 610 F.2d at 634.
Because I conclude that the wage adjustments provided in AS 23.40.210 do not penalize AMHS employees for migrating to or emigrating from Alaska, I conclude that the statute does not infringe upon the "right to travel." Therefore, AS 23.40.210 need not be reviewed under the strict scrutiny standard.
C. EQUAL PROTECTION CLAIMS
The plaintiffs also contend that the wage differentials imposed by AS 23.40.210 violate the equal protection clause of the fourteenth amendment. I do not agree. Since AS 23.40.210 differentiates between the wages paid to state residents and nonresidents working on AMHS, it must satisfy the requirements of the equal protection clause. See Hooper v. Bernalillo County Assessor, ___ U.S. ___, 105 S.Ct. 2862, 2866, 86 L.Ed.2d 487 (1985). However, because AS 23.40.210 does not penalize the "right to travel," burden any other fundamental right, or discriminate against a suspect class, it is reviewed under the "rational basis" standard, and will be invalidated "only if no grounds can reasonably be conceived to justify it." Benson, 673 F.2d at 278; Hawaii Boating Association, 651 F.2d at 666; see Hooper, 105 S.Ct. at 2866; Williams v. Vermont, ___ U.S. ___, 105 S.Ct. 2465, 2472, 86 L.Ed.2d 11 (1985); Metropolitan Life Insurance Co. v. Ward, ___ U.S. ___, 105 S.Ct. 1676, 1683, 84 L.Ed.2d 751 (1985); Fisher, 610 F.2d at 636; see also Baldwin v. Montana Fish and Game Commission, 436 U.S. 371, 388-91, 98 S.Ct. 1852, 1862-64, 56 L.Ed.2d 354 (1978). I conclude that the Alaska legislature "could have reasonably concluded that the [wage differentials] would promote a legitimate state purpose," Williams, 105 S.Ct. at 2472; Metropolitan Life, 105 S.Ct. at 1683, and therefore reject the plaintiffs' equal protection challenge.
As noted above, the wage differentials imposed by AS 23.40.210 are designed to eliminate the economic disincentive to AMHS employees residing in Alaska that results from the state's high cost of living, and thus to ensure that at least some AMHS employees will be Alaska residents. The State maintains that Alaska residents employed on AMHS will represent the state to nonresident tourists and visitors travelling on AMHS, and will thereby enhance the travel experiences of these passengers and perform a valuable public relations service for the state. To the extent that these Alaskan employees reside in the communities served by AMHS, they will also be acutely aware of the local conditions and needs of these communities and may help to sensitize other members of the crew. Moreover, it is desirable from Alaska's perspective that a state-subsidized business like AMHS employ at least some state residents. I therefore find Alaska's purpose in adopting AS 23.40.210's wage differentials to be a legitimate one. See generally Hooper, 105 S.Ct. at 2866-68; Williams, 105 S.Ct. at 2472; Metropolitan Life, 105 S.Ct. at 1683; Zobel, 457 U.S. at 65, 102 S.Ct. at 2315.
The precise level of the wage differentials is roughly equivalent to the difference between the cost of living in the main Alaskan cities where AMHS employees reside (Anchorage, Juneau and Ketchikan) and that of the Seattle metropolitan area, where a majority of the nonresident AMHS employees in the IOMMP and the IBU reside. The wage differentials thus serve to equalize the purchasing power of most of AMHS's Alaska-resident employees with that of most of its nonresident employees. I therefore conclude that AS 23.40.210's wage differentials rationally further Alaska's *1281 legitimate purpose in adopting them. See generally Hooper, 105 S.Ct. at 2866-69; Williams, 105 S.Ct. at 2472; Metropolitan Life, 105 S.Ct. at 1683; Zobel, 457 U.S. at 61-64, 102 S.Ct. at 2313-15.
The plaintiffs contend that the wage differentials adopted by Alaska do not accurately reflect the differences in cost of living actually experienced by AMHS's Alaska-resident and nonresident employees. They note that many resident employees live in parts of Alaska with costs of living significantly different from that in Anchorage, upon which their wage levels are based under AS 23.40.210, and that many nonresident employees reside in cities with costs of living significantly different from that in Seattle, upon which their wage levels are based. The plaintiffs further note that since 1980, when the cost-of-living statistics relied upon by the State were compiled and when AMHS's nonresident employees' wages were first "frozen," Seattle's cost of living has increased more rapidly than Anchorage's. As a result, the plaintiffs maintain that the wage differentials adopted by Alaska under AS 23.40.210 are not tailored precisely enough to reflect economic reality, and therefore are not rational and violate the equal protection clause.
However, there is no requirement under "rational basis" analysis that state laws which do not impinge upon any fundamental interests must "`be drawn so as to fit with [absolute] precision the legislative purposes animating [them],'" Baldwin, 436 U.S. at 390, 98 S.Ct. at 1863-64 (quoting Hughes, 426 U.S. at 813, 96 S.Ct. at 2499), or that the state must "justify to the penny any [wage] differential it imposes." Id. at 391, 98 S.Ct. at 1864; accord Hawaii Boating Association, 651 F.2d at 666; Fisher, 610 F.2d at 636-37. As long as the economic means employed by the legislature were "not unreasonably related" to the purposes they were designed to serve, the fact that the legislature "`might have furthered its underlying purpose more artfully, more directly, or more completely, does not warrant a conclusion that the method it chose is unconstitutional.'" Baldwin, 436 U.S. at 390, 98 S.Ct. at 1863-64 (quoting Hughes, 426 U.S. at 813, 96 S.Ct. at 2499).
On the basis of the record in this case, I conclude that the wage differentials adopted by Alaska under AS 23.40.210 are "not unreasonably related" to the Alaska legislature's purpose of eliminating disincentives that will discourage AMHS employees from remaining or becoming Alaska residents. Cf. Alaska Pacific Assurance Co., 687 P.2d at 274 (invalidating, under state equal protection clause, Alaska statute that reduced benefits for workers' compensation recipients who migrated from Alaska, where reductions in benefits were based on the average weekly wage levels of their new states, rather than the differences in the cost of living between their new states and Alaska, but noting that "[i]f there were a way to equalize the buying power of benefit dollars in each state [the court] would have difficulty in concluding that [nonresident] recipients would ... suffer any penalty despite a reduction in actual dollars paid [them]") (emphasis added). The legislature has identified Alaska's relatively high cost of living as a leading disincentive to maintaining Alaska residency, and AS 23.40.210 represents a direct attempt to eliminate that disincentive.
Alaska has not been excessive in basing its wage differentials upon the relative costs of living in Anchorage and Seattle: as noted above, the record indicates that almost all Alaska-resident employees of AMHS reside in Anchorage or other cities with an almost identical cost of living, and that a majority of the nonresident employees of AMHS in the IOMMP and the IBU reside in the Seattle area. The plaintiffs have not demonstrated that the cost of living in other cities outside of Alaska where they reside is significantly higher than in Seattle, or that any of them resides in a part of Alaska significantly more expensive than Anchorage. Moreover, although the plaintiffs point out that Seattle's cost of living has risen throughout *1282 the period that their wage levels have been frozen, they have not demonstrated that Anchorage's cost of living is less than 22.5% higher than that of Seattle, or that "freezing" their wages has made their jobs on AMHS less economically desirable than most jobs they could obtain in other states. As a result, they have failed to demonstrate that AS 23.40.210's wage differentials do more than compensate for Alaska's high cost of living, or that the statute's effect is to drive them out of their AMHS positions.
Because I conclude that the existence and amount of the wage differentials imposed under AS 23.40.210 reasonably further a legitimate state purpose, I reject the plaintiffs' equal protection challenge.
D. "PRIVILEGES AND IMMUNITIES" CLAIMS
Finally, the nonresident plaintiffs contend that AS 23.40.210's wage differentials violate the privileges and immunities clause.[11] I do not agree. For a statute to violate the privileges and immunities clause, it must deny nonresidents equal treatment with respect to a right or privilege "`fundamental' to the promotion of interstate harmony." Supreme Court v. Piper, ___ U.S. ___, 105 S.Ct. 1272, 1276, 84 L.Ed.2d 205 (1985); Camden, 465 U.S. at 218, 104 S.Ct. at 1027; Baldwin, 436 U.S. at 383, 98 S.Ct. at 1860. Moreover, even if it burdens such a right, a statute will not violate the clause if "(i) there is a substantial reason for the difference in treatment [it requires]; and (ii) the discrimination practiced against nonresidents bears a substantial relationship to the State's objective."[12]Piper, 105 S.Ct. at 1279; Camden, 465 U.S. at 222, 104 S.Ct. at 1029.
I conclude that the interest "burdened" by AS 23.40.210's wage differentials is not "fundamental" in nature. Furthermore, I conclude that even if this interest were fundamental for purposes of privileges and immunities analysis, Alaska has a substantial interest in eliminating disincentives that discourage AMHS employees from residing in the state, and its wage differentials bear a "substantial relationship" to its objective of eliminating, or at least minimizing, these disincentives.
I find that the interest asserted by the nonresident plaintiffs in this action to receive a wage adjustment based upon Alaska's cost of living, even though they continue to reside outside the state is not a "fundamental" privilege or immunity protected by the privileges and immunities *1283 clause. The Supreme Court has held that the clause applies "`[o]nly with respect to those "privileges" and "immunities" bearing on the vitality of the nation as a single entity.'" Piper, 105 S.Ct. at 1276 (quoting Baldwin, 436 U.S. at 383, 98 S.Ct. at 1060). Although the Court has indicated that "the pursuit of a common calling is one of the most fundamental of th[e] privileges protected by the Clause," Camden, 465 U.S. at 219, 104 S.Ct. at 1028; accord Piper, 105 S.Ct. at 1276, 1277 n. 9, AS 23.40.210 does not deprive the nonresident plaintiffs of the right to seek employment as ferry employees. It therefore differs from statutes that have been held to infringe upon "fundamental" rights under the privileges and immunities clause by preventing nonresidents from pursuing their livelihoods or economic opportunities in a given state. See, e.g., Piper, 105 S.Ct. at 1276-77 (total exclusion of nonresidents from admission to state bar); Camden, 465 U.S. at 219-22, 104 S.Ct. at 1028-29 (city ordinance requiring that 40% of employees of contractors and subcontractors working on city construction projects be city residents); Hicklin v. Orbeck, 437 U.S. 518, 520, 524, 98 S.Ct. 2482, 2487, 57 L.Ed.2d 397 (1978) ("Alaska Hire" statute requiring all state oil and gas leases, easements, and contractual agreements to contain a provision "requiring the employment of qualified Alaska residents" in preference to nonresidents); Toomer v. Witsell, 334 U.S. 385, 389, 396, 68 S.Ct. 1156, 1159, 1162, 92 L.Ed. 1460 (1948) (state statute requiring nonresident shrimp fishermen to pay a license fee of $2,500 per boat and resident shrimp fishermen to pay a license fee of $25 per boat); Ward v. Maryland, 79 U.S. (12 Wall.) 418, 424-26, 20 L.Ed. 449 (1871) (state statute requiring resident traders to pay $12 to $150 for a license to do business, and nonresident traders to pay $300); Silver v. Garcia, 760 F.2d 33, 36-37 (1st Cir.1985) (Puerto Rican statute requiring applicants for insurance consultants' licenses to reside in Puerto Rico one year prior to application); Robison, 713 P.2d 259, at 265 (Alaska local hire statute requiring that work on public construction projects in the state be performed by at least 90% Alaska residents); see also Alerding v. Ohio High School Athletic Association, 779 F.2d 315, 316-19 (6th Cir.1985); Hawaii Boating Association, 651 F.2d at 666-67.
Unlike these other statutes, AS 23.40.210 does not explicitly exclude nonresidents from jobs on AMHS, cf. Piper, 105 S.Ct. at 1276-77; Hicklin, 437 U.S. at 520, 524, 98 S.Ct. at 2484, 2487; Silver, 760 F.2d at 36-37, does not limit the number or set of positions available to them, cf. Camden, 465 U.S. at 219-22, 104 S.Ct. at 1028-29; Robison, 713 P.2d 259, at 265 and does not establish higher barriers for them to satisfy than residents seeking AMHS employment, which may operate to exclude them from practicing their profession altogether. Cf. Toomer, 334 U.S. at 389, 396, 68 S.Ct. at 1159, 1162; Ward, 79 U.S. (12 Wall.) at 424-26. The statute differentiates between AMHS's resident and nonresident employees only by providing a cost-of-living wage adjustment to the resident employees.
Therefore, although the privilege at issue in this action is related to the "fundamental" privilege of pursuing employment and economic opportunities in Alaska, it is significantly narrower and must be examined separately. See Sestric v. Clark, 765 F.2d 655, 664 (7th Cir.1985) (rejecting privileges and immunities challenge to state requirement that nonresident attorneys seeking admission to state bar must pass bar exam, although nonresident attorneys moving to state could be admitted by motion, and concluding that "privilege" to be evaluated under privileges and immunities clause is not the general privilege to practice law, but merely the privilege to practice law without taking state bar exam); see also Alerding, 779 F.2d at 316-18 (rejecting privileges and immunities challenge to state bylaw barring nonresident students from participating in state interscholastic sports, and indicating that privilege at issue was right to participate in interscholastic sports, not general right to obtain an education). Moreover, the fact that Alaska owns and is subsidizing AMHS must be *1284 considered in determining whether the privilege at issue is "fundamental" under the privileges and immunities clause. See Camden, 465 U.S. at 221, 104 S.Ct. at 1029.
In light of these considerations, I conclude that the right to receive cost-of-living wage adjustments while working on AMHS is not a fundamental privilege "`bearing on the vitality of the nation as a single entity,'" Piper, 105 S.Ct. at 1276 (quoting Baldwin, 436 U.S. at 383, 98 S.Ct. at 1860), or necessary to preserve the "national economic union." Id.; see Baldwin, 436 U.S. at 388, 98 S.Ct. at 1862-63 (upholding significantly higher Montana license fees for elk hunting by nonresidents than by residents on ground that "[e]quality in access to Montana elk is not basic to the maintenance or well-being of the Union"); Alerding, 779 F.2d at 316-19 (right to participate in interscholastic sports not "fundamental" under privileges and immunities clause); Sestric, 765 F.2d at 661, 664 (privilege of practicing law without taking bar exam not fundamental); Hawaii Boating Association, 651 F.2d at 666 ("right of access, at equal rates, to mooring privileges at a recreational boat harbor is not `fundamental'"); see also Camden, 465 U.S. at 218-22, 104 S.Ct. at 1027-29. Therefore, I reject the plaintiffs' challenge to AS 23.40.210 under the privileges and immunities clause.
But even if the privilege at issue were fundamental, AS 23.40.210's wage differentials would nevertheless satisfy the requirements of the privileges and immunities clause. Alaska has demonstrated a "substantial reason" for treating AMHS's resident and nonresident employees differently: its desire to eliminate economic disincentives that discourage AMHS employees from residing in Alaska, so that at least some AMHS employees will remain or become Alaska residents. See Piper, 105 S.Ct. at 1279; Camden, 465 U.S. at 222, 104 S.Ct. at 1029-30. As noted above, given that Alaska subsidizes AMHS's operations, it is reasonable for the State to establish a wage structure that does not make it economically disadvantageous for AMHS employees to reside in Alaska. See generally Camden, 465 U.S. at 223, 104 S.Ct. at 1030. Moreover, the presence of at least some Alaska residents working on AMHS, where they will represent the state to nonresident tourists and visitors, is desirable from a public relations perspective and may enhance the experiences of those travelling on AMHS. Finally, the fact that some AMHS employees reside in the Alaskan communities served by AMHS may make them more attuned to local conditions, needs, customs, and political situations, and thus may help them to provide better service to these communities, to ease any tensions that develop between these communities and AMHS, and to adjust if emergencies arise while AMHS vessels are passing through these communities.[13]
*1285 Moreover, the cost-of-living wage differentials implemented by Alaska under AS 23.40.210 "bear[] a substantial relationship to the State's objective." Piper, 105 S.Ct. at 1279; Camden, 465 U.S. at 222, 104 S.Ct. at 1029. By their very nature, the wage differentials eliminate the economic disincentives to residing in Alaska that result from its high cost of living, without offering AMHS employees a bonus or windfall for choosing to reside in Alaska or penalizing those who choose to live in other states. Cf. Alaska Pacific Assurance Co., 687 P.2d at 274 (because differentials paid by State of Alaska were based on average wage levels, rather than cost of living, the benefits of those migrating from Alaska dropped 42% more than the reduction they actually experienced in the cost of living). It is difficult to imagine a "less restrictive means" by which Alaska could attain its objective. Piper, 105 S.Ct. at 1279; Sestric, 765 F.2d at 664. The plaintiffs contend that the use of hiring preferences for Alaska residents would be sufficient alone to ensure that a reasonable number of AMHS employees will reside in the state. However, hiring preferences do not address the crucial concern identified by Alaska in AS 23.40.210: that a uniform wage structure on AMHS creates disincentives to AMHS employees residing in Alaska, and may well lead Alaska-resident employees, once they have obtained jobs through hiring preferences, to migrate from Alaska to locations where their salaries will have greater purchasing power. Thus, the use of wage differentials appears to be the least restrictive means of meeting the State's concerns.
Furthermore, the Supreme Court has indicated that "`States [must be given] considerable leeway [under the privileges and immunities clause] in analyzing local evils and in prescribing appropriate cures,'" particularly when they are "merely setting conditions on the expenditure of funds [they] control." Camden, 465 U.S. at 222-23, 104 S.Ct. at 1029-30 (quoting Toomer, 334 U.S. at 396, 68 S.Ct. at 1162). I conclude that Alaska has demonstrated a substantial reason for establishing cost-of-living wage differentials on AMHS and has demonstrated that these bear a substantial relationship to its objective. Thus, even if the privileges at issue in this case were "fundamental" for privileges and immunities purposes, AS 23.40.210 would not violate the privileges and immunities clause.
CONCLUSION
Because I conclude that AS 23.40.210's cost-of-living wage differentials do not violate the commerce clause, the "right to travel," the equal protection clause, or the privileges and immunities clause, I grant the defendants' motion for summary judgment.
NOTES
[1] The individual plaintiffs originally challenged the constitutionality of Alaska's "Change Port" statute, AS 19.65.010, as well as the cost-of-living differentials provided under AS 23.40.210. AS 19.65.010 provided that: "No employee of the Alaska marine highway system may be relieved at a duty station or port which is outside the state." The nonresident plaintiffs claimed that by prohibiting them from beginning and concluding their shifts in Seattle, AS 19.65.010 impermissibly burdened their right to work on AMHS. However, the Alaska legislature repealed the statute in 1982. See 1982 Alaska Sess.Laws, ch. 59 § 52. Therefore, I need not determine the validity of the "Change Port" statute. See generally District No. 1, Pacific Coast District, M.E.B.A. v. Alaska, 682 F.2d 797 (9th Cir.1982).
[2] The plaintiffs have elected to challenge the cost-of-living differentials in this action exclusively under the federal constitution, and not under the Alaska state constitution. Had the plaintiffs chosen to raise a state constitutional challenge, I would have been required to consider different factors in my analysis and conceivably could have reached a different result, see Alaska Pacific Assurance Co. v. Brown, 687 P.2d 264, 269-74 (Alaska 1984); Note, Alaska Pacific Assurance Co. v. Brown: The Right to Travel and the Constitutionality of Continuous Residency Requirements, 2 Alaska Law Review 339 (1985); see also Robison v. Francis, 713 P.2d 259, at 272 (Alaska 1986) (Burke, J., concurring) ("The fact that ... a statute [may] satisfy the requirement[s] of the United States Constitution does not mean that the same statute will pass muster under ... the Alaska Constitution."), but I express no opinion on such a challenge at this time.
[3] Because I conclude that the plaintiffs' claims do not succeed on the merits, I need not decide to what extent this court could award money damages to the plaintiffs in their actions against state officials.
[4] The statistical studies in the record provided by the Bureau of Labor Statistics compare the cost of living in Anchorage and Seattle for four-person families living on relatively "lower," "moderate," and relatively "higher" budgets. The statistics indicate that in 1980, the cost of living was about 50% higher in Anchorage for families on relatively "lower" budgets, about 35% higher for families on "moderate" budgets, and about 23 to 24% higher for families on relatively "higher" budgets. See U.S. Department of Labor, Bureau of Labor Statistics, "Autumn, 1980 Urban Family Budgets and Comparative Indexes for Selected Urban Areas" (1981).
[5] The three maritime unions whose members work on AMHS are the IOMMP, the IBU, and District No. 1, Pacific Coast District, M.E.B.A. (MEBA).
[6] Since the plaintiffs have challenged AS 23.40.210's wage differentials only insofar as they apply to the three unions with members working on AMHS, rather than all Alaska public employee unions, and since, as noted above, AS 23.40.210's wage differentials were targeted specifically at the three AMHS unions, I have considered the constitutional validity of the wage differentials only as applied to the three AMHS unions. My ruling on their constitutionality is therefore limited to the facts and circumstances of the present case.
[7] The record indicates that the majority of the 26 individual IBU plaintiffs are nonresidents, and that the majority of those are from the Seattle area. There is nothing in the record concerning fluctuation of these figures during the pendency of this litigation.
[8] I note in passing that even if there were a durational aspect to AS 23.40.210, the fact that it does not result in a "significant deprivation" to nonresidents, see infra, provides an independent basis for concluding that it does not penalize AMHS employees migrating to Alaska. See Hawaii Boating Association, 651 F.2d at 665; Fisher, 610 F.2d at 635-36; see also Sosna v. Iowa, 419 U.S. 393, 406-09, 95 S.Ct. 553, 561-62, 42 L.Ed.2d 532 (1975).
[9] The plaintiffs maintain that the benefit at stake in this action is their right to employment in their chosen profession, which constitutes a fundamental right. However, the plaintiffs have not been deprived of their jobs with AMHS, nor is there anything in the record to indicate that they will be. Therefore, the only "benefit" that Alaska has denied to the plaintiffs is the right to receive the cost-of-living wage adjustment regardless of where they reside.
[10] In Fisher v. Reiser, 610 F.2d 629 (9th Cir. 1979), cert. denied, 447 U.S. 930, 100 S.Ct. 3029, 64 L.Ed.2d 1124 (1980), the Ninth Circuit rejected a "right to travel" challenge to a Nevada statute that granted cost-of-living increases to workers' compensation beneficiaries residing in the state, but did not grant those benefits to nonresident beneficiaries. Unlike AS 23.40.210, the cost-of-living adjustments provided in the Nevada statute were designed to offset inflation, not the higher cost of living in Nevada relative to other states. The Nevada statute therefore appears to have granted a more one-sided benefit to state residents than AS 23.40.210, which was designed merely to achieve parity between the purchasing power of AMHS employees residing in Alaska and those residing in other states.
[11] Only nonresidents are entitled to challenge a state's laws based upon the privileges and immunities clause. The Slaughterhouse Cases, 83 U.S. (16 Wall.) 36, 77, 21 L.Ed. 394 (1873); accord Camden, 465 U.S. at 217, 104 S.Ct. at 1027; Goldfarb v. Supreme Court, 766 F.2d 859, 864-65 (4th Cir.1985); Hawaii Boating Association, 651 F.2d at 666.
[12] In its decision in Piper, the Supreme Court conspicuously omitted any mention of the requirement, cited in many of its prior cases, that "[a]s part of any justification offered [under the privileges and immunities clause], nonresidents must somehow be shown to `constitute a peculiar source of the evil at which the statute is aimed.'" Camden, 465 U.S. at 222, 104 S.Ct. at 1029 (quoting Toomer v. Witsell, 334 U.S. 385, 396, 68 S.Ct. 1156, 1162, 92 L.Ed.2d 1460 (1948)). Although some courts have applied the "peculiar source of the evil" test even after Piper, see Robison, 713 P.2d 259 at 264, I interpret the Piper decision as reformulating, albeit slightly, the analysis to be applied in privileges and immunities cases.
I note further that the "peculiar source of the evil" test seems especially inappropriate in a case such as the present one, where a state is merely attempting to achieve parity between its own citizens and those of other states. The "evils" that AS 23.40.210 is intended to address are Alaska's high cost of living and the resulting tendency of AMHS employees to migrate from Alaska or to remain as residents of other states. These "evils" seem systemic and largely unattributable to individual persons. To the extent that I am required to apply the "peculiar source of the evil" test in this case, however, I conclude that if nonresidents working for AMHS are paid at the same wage levels as Alaska-resident employees, they will help to deter other AMHS employees from remaining in or moving to Alaska. In this respect, nonresident AMHS employees constitute a "peculiar source of the evil[s]" at which AS 23.40.210 is directed. See generally Camden, 465 U.S. at 222, 104 S.Ct. at 1029.
[13] These reasons for seeking at least some Alaska-resident employees on AMHS are far more compelling than the justifications advanced unsuccessfully by the State of New Hampshire in Piper for totally excluding nonresidents from its state bar. Most of the qualities that New Hampshire asserted were essential to practice law in its state (i.e., familiarity with local rules and procedures, sense of ethics and concern about professional reputation, and willingness to perform pro bono and volunteer work) bore no necessary correlation to the individual attorney's state of residence, but instead merely reflected the individual attorney's diligence, professional standards, integrity and public-spiritedness. See Piper, 105 S.Ct. at 1279-80. As a result, the Supreme Court rejected the State's proferred justifications for its residence classification. See id. at 1280.
In contrast, many of the reasons offered by Alaska for eliminating practical disincentives to Alaska residency for AMHS employees (i.e., ability to represent the state, awareness of local needs and customs, and acceptance in the local communities) involve qualities that correlate to place of residence. Therefore, the State's desire to have these qualities represented among AMHS's employees provides it with a "substantial reason" for employing cost-of-living differentials.
However, I reject the State's claim that Alaska residents are also more desirable employees for AMHS because their sensitivity to the needs of the communities served by AMHS makes them less likely to engage in strikes and work stoppages. I question whether local residents are any less likely to strike than any other group, see id. at 1279-80, and also question whether the State's desire to hire employees who may be unwilling to strike is a permissible basis for it to discriminate in the wage levels it pays its employees.
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166 F.Supp. 544 (1958)
UNITED STATES of America, Plaintiff,
v.
Jane R. RINGLER, Executrix of the Last Will and Testament of Harold J. Ringler, Deceased, et al., Defendants.
Civ. A. 30887.
United States District Court N. D. Ohio, E. D.
July 9, 1958.
Sumnar Canary, U. S. Atty., Russell E. Ake, Asst. U. S. Atty., Cleveland, Ohio, for plaintiff.
Claude P. Herman and Frank E. Steel, Akron, Ohio, for defendant.
McNAMEE, District Judge.
The sole question presented is whether a mortgage from Oak Leaf Trailer Park, Inc. to Claud P. Herman and Stephen Wozniak to secure the payment of legal services which the mortgagees promised to perform is entitled to priority of payment over a tax lien of the United States against the property of Oak Leaf Trailer Park, Inc. The mortgage was executed on June 16, 1953 and filed for record with the Recorder of Summit County, Ohio on June 18, 1953. The tax lien of the Government against Oak Leaf Trailer Park, Inc., as transferee, was delivered to the Collector on August 3, 1953 and filed for record with the Recorder of Summit County, Ohio on August 5, 1953. The Firestone Bank of Akron, Ohio holds a mortgage on the same property dated March 28, 1950 securing the payment of a note for $10,000. No question is raised as to the priority of the mortgage of the Firestone Bank.
The facts essential to an understanding of the decision reached herein are:
For many years during his lifetime Harold J. Ringler, deceased, was engaged in the real estate business in Summit County, Ohio. In the year 1950 he was the owner of several parcels of real estate and of a substantial number of mortgages on properties sold to others. Ringler had failed to pay the full amount of his annual income taxes for the years 1939 to 1950. In the latter year he engaged Stephen Wozniak as his counsel, and Wozniak continued to serve as such until the summer of 1953, during which time the Government was investigating the civil and possible criminal tax liabilities of Ringler. Wozniak received about $5,000 from Ringler as payment in full for services rendered during the above period. Wozniak also received advice from his office associate, Herman, in connection with the matters about which Ringler consulted Wozniak. On August 1, 1952 Oak Leaf Trailer Park, Inc. was organized and immediately thereafter *545 the property described in the mortgage here in question was transferred by Ringler and his wife, Jane R. Ringler, to Oak Leaf Trailer Park, Inc. without any consideration except the issuance of stock in the corporation to the grantees. The property transferred to Oak Leaf Trailer Park, Inc. was the most valuable parcel of real estate owned by Ringler. Part of this property was used as a trailer park. Several apartment buildings were located thereon and a tavern was operated on the premises by Ringler, who was the owner of a D-5 liquor permit issued by the Department of Liquor Control of the state of Ohio. On March 4, 1953 Oak Leaf Trailer Park, Inc. transferred to The Home Sales & Building Company, another Ringler corporation, a portion of the property conveyed by Ringler to Oak Leaf Trailer Park, Inc. On June 2, 1953 jeopardy assessments were made by the Commissioner of Internal Revenue against Ringler and his wife, and the notice of tax liens was filed with the Recorder of Summit County, Ohio on August 27, 1953. On June 16, 1953 Ringler engaged the services of both Wozniak and Herman to represent him and Mrs. Ringler in opposing the tax claims of the Government. On the same date Ringler caused to be executed and delivered to Wozniak and Herman a mortgage of Oak Leaf Trailer Park, Inc. securing payment of a demand note of $20,000. As shown by oral testimony, the mortgage was given to secure the payment of the reasonable value of legal services to be rendered by Wozniak and Herman. These services were to be rendered in behalf of Harold J. Ringler, Jane R. Ringler, Oak Leaf Trailer Park, Inc. and Virginia Ellison, the latter two being transferees of Ringler. As stated above, the mortgage was filed for record with the Recorder of Summit County on June 18, 1953 and the transferee tax lien against Oak Leaf Trailer Park, Inc. was filed for record with the Recorder on August 5, 1953. In the fall of 1953 Herman and Wozniak filed several petitions in the Tax Court of the United States in behalf of Mr. and Mrs. Ringler, Virginia Ellison and Oak Leaf Trailer Park, Inc. Before the tax cases came on for trial the Government, on March 8, 1954, filed this action to foreclose the tax liens against the Ringlers and their transferees and for the appointment of a receiver. A receiver was appointed by this Court on April 1, 1954. About two weeks after the appointment of the receiver Wozniak died, and Mary Wozniak was appointed Administratrix of his estate and substituted as a party in this action. About three months after the appointment of the receiver Harold J. Ringler died, and Mrs. Jane R. Ringler was appointed Executrix of his estate and made a party to this action. After Wozniak's death Herman continued to represent the Ringler interests. He represented them in a two day trial in the Tax Court, following which he prepared and submitted extensive briefs to that court. Herman also appeared at several of the hearings in this Court in connection with the receivership proceedings and also at the final hearing of this case and at the hearings on the various applications by the receiver to sell properties. There is no claim by the Government that the legal services rendered by Herman and Wozniak were unnecessary or that they were not rendered in good faith. It appears that on and after June 16, 1953 Wozniak, during his lifetime, and Herman at all times after said date, relied upon the mortgage as security for the payment of the reasonable value of legal services rendered by them. After the property of Oak Leaf Trailer Park, Inc. was sold, and upon inquiry by the Court at a special hearing, Herman stated that the reasonable value of the services rendered by himself and Wozniak in connection with the tax liability of the Ringler interests, including services rendered in connection with this case, was about $10,000. He stated that the reasonable value of the services rendered between June 16, 1953 and August 5, 1953 was $1,600. The Tax Court determined the tax liability of Jane R. Ringler, Executrix of the estate of Harold J. Ringler, deceased, for the years 1942 to 1947, inclusive, plus penalties *546 and interest for those years and for the year 1939 to be $207,069.66; that Jane R. Ringler, Executrix of the estate of Harold J. Ringler, deceased, and Jane R. Ringler, individually, were jointly and severally liable for income taxes, penalties and interest for the year 1950 in the amount of $22,714.66 and that Jane R. Ringler, Executrix of the estate of Harold J. Ringler, deceased, was liable for income taxes, penalties and interest for the years 1948 and 1949 in the sum of $20,095.59. The Tax Court also determined that Oak Leaf Trailer Park, Inc., transferee, was liable to the extent of $56,100 plus interest from August 1, 1952. No appeal was taken from the findings of the Tax Court, which were incorporated in and made a part of the final decree of this Court. At the time of the transfer of the real estate from Harold J. Ringler and Jane R. Ringler to Oak Leaf Trailer Park, Inc. the transferors were either insolvent or were rendered insolvent as a result of said transfers. Oak Leaf Trailer Park, Inc. was insolvent or became insolvent by its transfers of real estate to The Home Sales & Building Company. The property described in the mortgage to Wozniak and Herman has been sold for an amount insufficient to pay the liens and the amount realized by the Receiver from all sources, including the unpaid balances due on mortgages delivered to the Director of Internal Revenue, is insufficient to pay the tax liabilities of Jane R. Ringler, Executrix, Jane R. Ringler, individually, and of Oak Leaf Trailer Park, Inc.
Relying on former Section 3672 of the Internal Revenue Act of 1939 (now Section 6323, 26 U.S.C.A.) the mortgagees contend that the tax lien of the Government against Oak Leaf Trailer Park, Inc. is invalid as against their prior recorded mortgage. Former Section 3672 provides that the tax lien of the Government shall not be valid against mortgagees, pledgees or judgment creditors until notice thereof has been filed in the office provided by the law of the state for such filing. The mortgage was filed for record more than a month and a half prior to the recordation of the tax lien of the United States. However, the Government contends that at the time the tax lien was recorded the mortgage lien was inchoate and imperfect and thus not entitled to priority. In Spokane County v. United States, 279 U.S. 80, 49 S.Ct. 321, 73 L.Ed. 621, in a proceeding involving the priority of debts to the United States owed by an insolvent debtor, the Supreme Court "launched the doctrine of the inchoate and general lien." Yale Law Journal, Vol. 63, p. 911 (1954). The doctrine was applied and extended in subsequent cases where the priority of the unsecured claims of the United States was at issue under Title 31 U.S.C.A. § 191. People of State of New York v. Maclay, 288 U.S. 290, 53 S.Ct. 323, 77 L.Ed. 754; United States v. Waddill, Holland & Flinn, Inc., 323 U.S. 353, 357, 65 S.Ct. 304, 89 L.Ed. 294; People v. State of Ill. ex rel. Gordon v. Campbell, 329 U.S. 362, 67 S.Ct. 340, 91 L.Ed. 348. In the last cited case the Supreme Court defined the elements of a "choate lien" as follows:
"The long established rule requires that the lien must be definite, and not merely ascertainable in the future by taking further steps, in at least three respects as of the crucial time. These are: (1) the identity of the lienor, United States v. Knott, 298 U.S. 544, 549-551, 56 S.Ct. 903, 80 L.Ed. 1321; (2) the amount of the lien, United States v. Waddill, Holland & Flinn, 323 U.S. 353, at pages 357-358, 65 S.Ct. 304, at page 307, 89 L.Ed. 294; and (3) the property to which it attaches, United States v. Waddill, Holland & Flinn, supra; United States v. State of Texas, supra [314 U.S. 480, 62 S.Ct. 350, 86 L.Ed. 356]; People of State of New York v. Maclay, supra. It is not enough that the lienor has power to bring these elements, or any of them, down from broad generality to the earth of specific identity."
*547 See also United States v. City of New Britain, Conn., 347 U.S. 81, at page 86, 74 S.Ct. 367, at page 370, 98 L.Ed. 520. In United States v. Security Trust & Savings Bank of San Diego, 340 U.S. 47, 71 S.Ct. 111, 113, 95 L.Ed. 53, the Supreme Court first applied the doctrine of the inchoate lien in a case involving the relative priority of a tax lien of the United States and an attachment lien filed in California where the federal tax lien was recorded subsequent to the date of the attachment but prior to the date the attaching creditor obtained judgment. In that case the court said:
"The effect of a lien in relation to a provision of federal law for the collection of debts owing the United States is always a federal question."
and held that the tax lien of the United States was superior to the inchoate attachment lien of the judgment creditor. The same question was presented in United States v. Acri, 348 U.S. 211, 75 S.Ct. 239, 99 L.Ed. 264. There the question was the relative priority as between a tax lien of the United States and an attachment lien under the laws of the state of Ohio. As in Security Trust & Savings Bank of San Diego, supra, the tax lien was filed for record subsequent to the attachment but prior to the date the attaching creditor obtained judgment. Even though the Supreme Court of Ohio had designated an attachment lien "an execution in advance" [Rempe & Son v. Ravens, 68 Ohio St. 113, 67 N.E. 282, 286] and the Ohio courts had treated attachments as perfected liens, the United States Supreme Court held that for federal tax purposes an attachment lien in Ohio is an inchoate lien [348 U.S. 211, 75 S.Ct. 241] "because at the time the attachment issued the fact and the amount of the lien were contingent upon the outcome of the suit for damages." In United States v. City of New Britain, Conn., 347 U.S. 81, 74 S.Ct. 367, 98 L.Ed. 520, it was held that the priority of each statutory lien there involved depended upon the time it attached to the property in question and became choate. In United States v. Gilbert Associates, Inc., 345 U.S. 361, 73 S.Ct. 701, 703, 97 L.Ed. 1071, the court rejected the determination of the New Hampshire state court that the assessment of the state tax in question was "in the nature of a judgment," and held the so-called judgment lien to be inchoate.
The Supreme Court has not yet passed upon the question involving the relative priority of a tax lien and a mortgage under Section 3672 where the tax lien was filed subsequent to the recording of a mortgage given to secure future advances. But the court's uniform policy of applying the doctrine of "the inchoate lien" in cases involving the relative priority of United States tax liens and judgment liens under Section 3672 seems clearly to forecast a similarly strict application of the doctrine in future cases involving the relative priority of United States tax liens and mortgages. It is safe to assume that in such a case the three-fold test of choateness as laid down in People of State of Ill. ex rel. Gordon v. Campbell, supra, and reiterated in United States v. City of New Britain, Conn., supra, will be applied to determine whether a prior recorded mortgage is a perfected lien entitled to priority. Proceeding on such assumption, it appears that here there is identity of lienors and identity of the property to which the mortgage lien attached, but on August 5, 1953, when the tax lien was recorded, the total amount secured by the mortgage was not known or ascertainable. Except as to the value of the services rendered between June 18, 1953 and August 5, 1953 the amount secured by the mortgage was contingent upon events occurring after August 5, 1953, and as to the value of services rendered subsequent to that date the mortgage was inchoate. While the authorities are divided on the question, there is abundant authority in support of the view that a mortgage to secure future advances which the mortgagee is obligated to make takes priority over a subsequent lien recorded before the future advances were made. 36 Am.J. *548 807, § 232 et seq.; 138 A.L.R. 580. Ohio is in accord with this view where the amount of future advances is definite and expressed in the mortgage instrument. Kuhn v. Southern Ohio Loan & Trust Co., 101 Ohio St. 34, 126 N.E. 820. However, whenever a question involving the relative priority of United States tax liens and other liens arises, courts are required to apply the test of choateness to the competing liens. Applying that test here, it must be held that as to the indefinite future advances (in the form of legal services) which were to be made after August 5, 1953, the mortgage lien is subordinate to the tax lien of the United States. The lien of the mortgage securing the value of services rendered between June 18, 1953 and August 5, 1953 stands on a different footing. As shown by the record, on August 5, 1953, legal services of the value of $1,600 had been rendered by the mortgagees in reliance upon the security of the mortgage. To that extent, therefore, the mortgage lien was not inchoate or imperfect. I am of the opinion that as to the amount of the mortgage lien securing such indebtedness the rule of first in timefirst in right, applies. While the authorities are in conflict on the question whether a mortgage to secure future advances takes priority over a subsequent lien recorded before any of the advances are made, it is a rule of almost universal acceptance that such a mortgage has priority over subsequent liens to the extent of the advances made before the subsequent liens attach. 27 O.J. 175; 10 R.C.L. 429. The application of that principle here in favor of the priority of the mortgage lien to the extent of $1,600 results in no retroactive displacement of the tax lien of the United States which did not become valid and effective against the mortgage until August 5, 1953. It does not appear that the Government is opposed to such treatment of the mortgage lien. In its brief the Government suggests that if the mortgagees rendered legal services between the date of the recording of the mortgage and the date when the tax lien was filed for record, they probably would be entitled to a prior lien to the extent of the value of the services rendered during such a period.
Accordingly it is held that the mortgage to Wozniak and Herman is prior to the tax lien of the United States to the extent of $1,600, but, as to the balance claimed to be secured by the mortgage, the Government's lien has priority.
The liens hereinabove referred to have been transferred to the fund realized from the proceeds of the sale of the Oak Leaf Trailer Park property.
An order of distribution may be made in accordance with the foregoing.
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707 F.Supp. 225 (1989)
PRECISION PIPING & INSTRUMENTS, INC., Plaintiff,
v.
E.I. duPONT DE NEMOURS & COMPANY; Borg-Warner Chemicals, Inc.; Murray's Sheet Metal Company, Inc.; Jack Murray; Monroe Zickerman; William Gray; Specialty Piping Corporation; Mike Romine; Nitro Industrial Coverings, Inc.; John Martin; Rose Stemple; Parkersburg-Marietta Contractors Association; and Numerous John Does, Defendants.
Civ. A. No. A:87-0191.
United States District Court, S.D. West Virginia, Parkersburg Division.
February 27, 1989.
*226 James M. Sturgeon, Jr., David K. Schwirian, Pauley, Curry, Sturgeon & Vanderford, Charleston, W. Va., Edward A. Matto, Bricker & Eckler, Columbus, Ohio, for plaintiff.
Gordon H. Copland, Irene M. Keeley, Steptoe & Johnson, Clarksburg, W. Va., Judson W. Calkins, E.I. duPont De Nemours & Co., Legal Dept., Wilmington, Del., for duPont and Gray.
Nicholas L. DiVita, Bowles, McDavid, Graff & Love, Charleston, W. Va., for Zickerman and Borg-Warner.
Robert T. Dunlevey, Gary W. Auman, Dunlevey, Mahan & Furry, Dayton, Ohio, Robert Full, Goodwin & Goodwin, Parkersburg, W. Va., for Romine, Murray, Specialty Piping, Stemple, Murray's Sheet Metal, Nitro Indus., Martin and Parkersburg-Marietta Contractors.
MEMORANDUM OPINION AND ORDER
HADEN, Chief Judge.
This matter is currently before the Court on the Defendants' joint motion for summary judgment. The issues raised therein have been fully briefed.
I. Background
This is an anti-trust action, prosecuted pursuant to Section 4 of the Clayton Act, 15 U.S.C. § 15, for violations of Sections 1 and 2 of the Sherman Act, 15 U.S.C. §§ 1 and 2 and their state law counterparts, W.Va.Code, §§ 47-18-3 and 4,[1] respectively. The Plaintiff has also stated a cause of action for intentional interference with business and contractual relationships. Finally, the Plaintiff has asserted a claim for punitive damages. All the Defendants seek summary judgment as to each of these claims.
The Plaintiff Precision Piping Industries, Inc. (Precision Piping) is a mechanical contractor engaged in the pipefitting business. Prior to the commencement of this action, Precision Piping performed the majority of its work for the Defendants E.I. duPont De Nemours and Company (duPont) and Borg-Warner Chemicals, Inc. (Borg-Warner). Dana Beall is the President and sole shareholder of Precision Piping, and Bill Hale is its Field Superintendent and chief administrative officer.
The Defendant Parkersburg-Marietta Contractors Association (PMCA) is a trade association composed of construction contractors, (designated as "regular" members) and the users of construction services, (designated as "subscriber" members) located or operating in the Parkersburg, West Virginia Marietta, Ohio, trade area. Subscriber members are not entitled to attend the monthly meetings of the PMCA, nor are they permitted to vote. The Defendant Rose Stemple is the Executive Director of the PMCA, but has no voting rights. The Defendant John Martin is the President of the PMCA and also serves as *227 the representative of the Defendant Nitro Industrial Coverings, Inc. (NICO) to the PMCA.
The Defendants duPont and Borg-Warner are subscriber members of the PMCA. Both operate chemical plants in the Parkersburg area and are the largest users of pipefitting services in that area. The Defendant William Gray is a field manager at duPont and is its representative to the PMCA. The Defendant Monroe Zicherman is a construction manager at Borg-Warner and is its representative to the PMCA.
The Defendants Murray Sheet Metal Company, Inc., Specialty Piping Corporation, and NICO are regular members of the PMCA and are engaged in providing a variety of contracting services. Their representatives to the PMCA are the Defendants, Jack Murray, President and principal shareholder of Murray Sheet Metal, Mike Romine, President and principal shareholder of Specialty Piping, and John Martin, President of NICO.
The Defendants which are PMCA regular members and Precision Piping have in common their use of union pipefitters. On May 31, 1986, the collective bargaining agreement between the contractors and Local 565 of the Plumbers and Pipefitters Union (Local 565) expired. In order to retain certain benefits under the National Maintenance Agreement,[2] the regular members assigned their bargaining rights to the PMCA.[3] Rose Stemple, as Executive Director of the PMCA, represented the employers in the negotiations with Local 565.
Negotiations between PMCA and the Union began in June of 1986. Four months later, in October, a new agreement had not been consummated. On approximately October 15, 1986, Hale telephoned Stemple and notified her of Precision Piping's intention to negotiate a separate contract with the local. In November Precision Piping negotiated a separate agreement, which was approved by the Union.
On December 4, 1986, at a regular meeting of the PMCA, Precision Piping's action was discussed. Pursuant to the PMCA by-laws, the members in attendance decided to give notice to Precision Piping that they would be taking a vote on the issue of its expulsion from the PMCA. At the next regularly scheduled meeting on February 5, 1987, by secret ballot, the PMCA membership voted to expel Precision Piping from the association. Precision Piping sent no representative to that meeting, but did send a letter which was read to those in attendance. Additionally, the termination issue was discussed prior to the vote.
In December, 1986, duPont, after learning of the Plaintiff's independent negotiations with the Union, decided not to use Precision Piping's services any longer. In January, 1987, Borg-Warner suspended Precision Piping for a period of ninety days, although it allowed the Plaintiff to complete work in progress.[4]
Subsequent to the action taken by the PMCA through its members and that taken by duPont and Borg-Warner, Precision Piping brought this action. In its complaint, it alleged that the Defendants' conduct constituted a conspiracy in restraint of trade and resulted in monopolization, an attempt to monopolize, or a conspiracy to monopolize trade or commerce,[5] in violation of state and federal anti-trust laws. The Plaintiff has also alleged that the Defendants' *228 conduct impermissibly interfered with its business and contractual relations and that the conduct was reckless, outrageous and malicious so as to entitle the Plaintiff to an award of punitive damages.
II. Summary Judgment Standards
Much of the parties' briefing has been devoted to a discussion of applicable summary judgment law and the respective burdens it places on the moving and opposing parties. As pointed out by the Defendants, summary judgment practice has been liberalized recently by the United States Supreme Court's rulings in three cases. Matsushita Electric Industrial Co. v. Zenith Radio Corp., 475 U.S. 574, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986); Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986); and Celotex Corp. v. Catrett, 477 U.S. 317, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). These cases, in accordance with the plain language of Rule 56, Federal Rules of Civil Procedure, make it clear that once the moving party has properly informed the Court that there are no genuine issues of material fact, Celotex, 477 U.S. at 323, 106 S.Ct. at 2553, the burden shifts to the nonmoving party to direct the Court's attention to specific facts establishing a genuine issue for trial. Rule 56(e). The movant's burden is slight in relation to that of the opponent. In this case, finding that the Defendants have met their burden, these principles dictate that, in order to survive the motion for summary judgment, the Plaintiff must show that it has developed sufficient evidence of each of the elements of its claims to raise a jury question.
Matsushita, the first of the recent summary judgment cases to be decided, is especially illuminating on this point in that it set forth summary judgment standards to be applied in an antitrust case. Of particular significance is the Court's pronouncement that "anti-trust law limits the range of permissible inferences from ambiguous evidence."[6] 475 U.S. at 588, 106 S.Ct. at 1357. The Court continued, "conduct as consistent with permissible competition as with illegal conspiracy does not, standing alone, support an inference of anti-trust conspiracy." Id. (citing Monsanto Co. v. Spray-Rite Service Corp., 465 U.S. 752, 764, 104 S.Ct. 1464, 1470, 79 L.Ed.2d 775 (1984) and First National Bank of Arizona v. Cities Service Co., 391 U.S. 253, 280, 88 S.Ct. 1575, 1588, 20 L.Ed.2d 569 (1968)). Restated, a nonmoving plaintiff "must show that the inference of conspiracy is reasonable in light of the competing inferences of independent action or collusive action that could not have harmed [the plaintiff]." Id.
This standard dictates that the trial court must initially assess the weight of the evidence relevant to the existence of a conspiracy. It has been argued that the Court's function in this regard interferes with that of the finder of fact. Id. at 600-01, 106 S.Ct. at 1363-64 (White, J., dissenting). However, Matsuhita adds nothing to the Court's obligation to ascertain that evidence of sufficient quantity and quality has been presented from which reasonable minds could reach differing conclusions. Indeed, the Court's inquiry at the summary judgment stage is no different than that which it must make at the directed verdict stage. See Anderson, 477 U.S. at 249-52, 106 S.Ct. at 2510-12.
In summary, the recent developments in summary judgment law are important for their clarification of what is required of a nonmoving party in order to withstand a motion for summary judgment. The Court does note, however, given the inherent difficulty in proving conspiracy, that whether the Plaintiff in this case has met this burden should be considered carefully in light of a plaintiff's need to rely heavily on circumstantial evidence.
With all of this in mind, the Court now turns to the merits of the Plaintiff's claims.
III. Conspiracy
A necessary element of both the Section 1 and Section 2 claims is the existence of a conspiracy, in restraint of and to *229 monopolize trade, respectively.[7] The essence of a conspiracy is an agreement between two or more persons to accomplish an unlawful purpose. Mere similarity of conduct by various persons and the fact that they have associated with each other and have assembled together and discussed common aims and interests is not necessarily sufficient to prove a conspiracy. On the other hand, however, there need not be evidence of an express or formal agreement or that the alleged conspirators stated directly among themselves the object of the conspiracy, the details thereof, or the means by which such purpose was to be accomplished. There must be, however, sufficient evidence presented at the summary judgment stage from which the jury could reasonably infer that the alleged members of the conspiracy came to a mutual understanding, either positively or tacitly, to try to accomplish a common and unlawful plan.
In anti-trust terms, the Plaintiff must present evidence indicating concerted action or consciously parallel behavior on the part of the Defendants. Independent or unilateral action by individual Defendants will not support a Sherman Act conspiracy claim. Terry's Floor Fashions, Inc. v. Burlington Industries, Inc., 763 F.2d 604 (4th Cir.1985).
In the instant case, it is not disputed that each of the Defendants have taken similar action by refusing to deal with the Plaintiff. Furthermore, there is ample evidence that each Defendant was motivated, at least in part, by the perception that the Plaintiff had undermined the collective bargaining process with Local 565. In addition there is evidence in this case of communications among the Defendants. Hale has testified[8] that Stemple threatened Precision Piping with adverse action if it negotiated on its own and that she advised Gray of duPont regarding Precision Piping's intention to negotiate a separate contract. He further testified that Gray similarly threatened Precision Piping. There is also evidence that at a meeting among Stemple, Martin, Gray and another duPont employee, Precision Piping's intention to negotiate on its own was discussed. Hale's testimony also indicates that Stemple communicated with Borg-Warner employees that Precision Piping had negotiated its own contract with the Union and attempted to convince Borg-Warner to join a boycott against the Plaintiff. Finally, although each PMCA member has sworn that it acted independently in voting to expel Precision Piping from the association, the expulsion vote was scheduled in advance at the December meeting and there was some discussion of Precision Piping's conduct at both the December and February meetings.
The Court believes that the character and combination of the evidence presented by the Plaintiff thus far is sufficient to present a jury question regarding the existence of a conspiracy. In other words, the Plaintiff has met its burden of establishing evidence tending to exclude the possibility that the Defendants acted independently. Monsanto, 465 U.S. at 768, 104 S.Ct. at 1473.
In so ruling, the Court does not address the question which arises with respect to the capacity in which the individual Defendants acted. It will be for the jury to decide whether the Defendants' alleged conduct subjects them individually or the organizations they represent to liability, if at all.
*230 IV. Section One
A necessary element of a Section 1 claim is that the conduct complained of resulted in a restraint of or that it had anti-competitive effect on trade. Independent proof of anti-competitive effect is unnecessary in the case of a per se violation of Section 1 of the Sherman Act. The Court does not believe, however, that this case is susceptible to a per se approach because the practice complained of is not such that it would always result in an anti-competitive effect. Northwest Stationers, Inc. v. Pacific Stationery & Printing Co., 472 U.S. 284, 289-90, 105 S.Ct. 2613, 2616-17, 86 L.Ed.2d 202 (1985). Particularly, the Court notes that Defendants' argument that refusal to deal with the Plaintiff has the potentially pro-competitive effect of maintaining low construction prices. Accordingly, the Court determines that the existence of a relevant market is an essential element of the Plaintiff's Section 1 claim, under the rule of reason approach, by which Section 1 is interpreted to prohibit only unreasonable restraints of trade.
With respect to this element, it is necessary that the Plaintiff define relevant geographic and product markets.[9] Proof of relevant market provides a point of reference for determining anti-competitive effect as that term relates to a Section 1 claim. Jayco Systems, Inc. v. Savin Business Machines Corp., 777 F.2d 306, 319 (5th Cir.1985), cert. denied, 479 U.S. 816, 107 S.Ct. 73, 93 L.Ed.2d 30 (1986).
The Plaintiff has responded to the Defendants' contention that it has failed to define a relevant market by suggesting a product market consisting of local pipefitting and maintenance contract services and a geographic market ranging from the local Borg-Warner and duPont plants to all plants in the Mid-Ohio Valley which use such services. The Court believes that the jury might reasonably find the identified product market to be an appropriate one under the facts in this case. Furthermore, the Plaintiff's identification of a range of geographic markets is sufficient to place that question before the jury, in that it could reasonably find, within that range, "`an area in which the Defendants operate and which the Plaintiff can reasonably turn to for supplies.'" RCM Supply Co. v. Hunter Douglas, Inc., 686 F.2d 1074, 1077 (4th Cir.1982) (quoting the District Court's charge to the jury) (emphasis omitted).
In addition to proving conspiracy and relevant market, the Plaintiff also bears the burden of presenting evidence on the remaining elements of this claim, namely, that the Defendants' alleged conduct unreasonably restrained, or had an anti-competitive effect upon, trade, and that the Plaintiff was injured thereby. In other words, the Plaintiff "must show harm to competition in general, as well as its own injury as a competitor." L.A. Draper & Son v. Wheelabrator-Frye, Inc., 735 F.2d 414, 421 (11th Cir.1984).
Evidence that the Plaintiff's two largest sources of business were eliminated, among other things, would be sufficient to support a finding of injury to the Plaintiff. Because a finding of anti-competitive effect is largely dependent upon the jury's determination with respect to relevant market, the Court also reserves this question for the jury.
V. Section Two
Having presented evidence regarding the conspiracy element of its Section 2 claim, the Plaintiff now must make a sufficient showing as to the remaining elements, including an overt act in furtherance of the conspiracy and the Defendants' specific intent to monopolize.
The Plaintiff identifies as an overt act of the conspiracy to monopolize the boycott of Precision Piping. Evidence of such conduct on the part of the Defendants would be sufficient to support a jury's finding that it was done in furtherance of the *231 conspiracy. Likewise, the specific intent necessary to establish a conspiracy claim under Section 2 may be inferred from evidence which would also support a finding of anti-competitive effect under Section 1. See, e.g., William Inglis & Sons Baking Co. v. ITT Continental Baking Co., 668 F.2d 1014, 1027-28 (9th Cir.1981), cert. denied, 459 U.S. 825, 103 S.Ct. 57, 74 L.Ed.2d 61 (1982).
VI. Tortious Interference and Punitive Damages
In order to establish a prima facie case of tortious interference with prospective contractual relationships, the Plaintiff must show:
"(1) existence of a contractual or business relationship or expectancy;
(2) an intentional act of interference by a party outside that relationship or expectancy;
(3) proof that the interference caused the harm sustained; and
(4) damages."
Torbett v. Wheeling Dollar Savings & Trust Co., syl. pt. 2, ___ W.Va. ___, 314 S.E.2d 166 (1983).
While the Court believes that the record is not as clear as it could be as to the particular evidence with which the Plaintiff intends to prove its claim of tortious interference, the Court notes generally that the evidence upon which the Plaintiff will rely to prove its anti-trust claims could form the basis of its tortious interference claim. Accordingly, the Court will permit the Plaintiff to proceed on this claim, keeping in mind certain guiding principles.
First, the Plaintiff must prove each and every element of this cause of action, as set forth in Torbett. Speculation as to the existence of a contractual or business relationship or expectancy is insufficient to establish that element. Second, the act of interference must be that of a third party to the contractual or business relationship. In other words, as the Defendants correctly point out, an employee of a particular Defendant cannot, as a matter of law, be held liable for tortiously interfering with the relationship between the Plaintiff and that Defendant.
As to the Plaintiff's claim for punitive damages, the Court notes first that if it prevails on any of its anti-trust claims, it is entitled to the recovery of treble damages. 15 U.S.C. § 15 and W.Va.Code, § 47-18-9. Punitive damages, therefore, are recoverable, if at all, for the conduct alleged by the Plaintiff's tortious interference claim. Furthermore, an award of punitive damages is appropriate only in a case involving extreme conduct which might be described as malicious, wanton, willful or reckless. Cook v. Heck's, ___ W.Va. ___, 342 S.E.2d 453 (1986).
Consistent with its opinion that the same evidence presented by the Plaintiff on its anti-trust claims might also form the basis of its tortious interference claim, the Court is further of the opinion that if such evidence proves insufficient to support the anti-trust claims and a statutory award of treble damages, then the Plaintiff should not be entitled to recover punitive damages on its tortious interference claim. Stated differently, the Court concludes that if the evidence presented in this case will not support the anti-trust claims, then it is insufficient as a matter of law to establish the extreme degree of conduct necessary to support an award of punitive damages.
VII. Conclusion
Based on the foregoing, the Court denies the Defendants' motion for summary judgment on the Plaintiff's anti-trust and tort claimsCounts One through Five of the complaint and grants the motion with respect to the Plaintiff's claim for punitive damages Count Six.
NOTES
[1] Because the state anti-trust law is to be construed and applied consistent with federal law, W.Va.Code, § 47-18-16, the Court will address directly only the federal claims. Rulings on the federal claims will be equally applicable to the corresponding state law claims.
Section 47-18-3(a) of the West Virginia Code provides as follows:
"Every contract, combination in the form of trust or otherwise, or conspiracy and restraint of trade or commerce in this State shall be unlawful."
Section 47-18-4 of the West Virginia Code provides as follows:
"The establishment, maintenance or use of a monopoly or an attempt to establish a monopoly of trade or commerce, any part of which is within this State, by any persons for the purpose of excluding competition or controlling, fixing or maintaining prices is unlawful."
[2] The National Maintenance Agreement is a special agreement whereby, even in the event of a local strike, union members may continue to provide maintenance services at 90% of their ordinary hourly rate, but only if the employer does not engage directly in contract negotiations.
[3] There is a dispute between the Defendants and the Plaintiff as to whether the assignment was valid for the duration of the negotiations or only for a ninety-day period. This dispute, however, is not material to the issues presented here.
[4] Although Borg-Warner claims that Precision Piping was merely suspended from the plant for ninety days and that Precision Piping may return at any time, it has not done so. However, the duration of the suspension by Borg-Warner is not directly relevant to the issues presented by the instant motion.
[5] The summary judgment briefing indicates to the Court that the only Section 2 claim being pursued by the Plaintiff is conspiracy to monopolize.
[6] Although the Court was referring specifically to a Section 1 case, the inferences referred to related to proof of the existence of a conspiracy. This statement, therefore, is also applicable to a Section 2 conspiracy claim.
[7] Section 1 of the Sherman Act provides in pertinent part as follows:
"Every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several States ... is declared to be illegal[.]"
15 U.S.C. § 1.
Section 2 provides in pertinent part as follows:
"Every person who shall monopolize, or attempt to monopolize, or combine or conspire with any other person or persons, to monopolize any part of the trade or commerce among the several States, ... shall be ... guilty of a [violation of federal anti-trust laws]."
[8] At this point, the Court presumes the admissibility of Hale's testimony regarding the statements of others. The Plaintiff has addressed this question in its response to the instant motion, and the Defendants, in their reply, have not taken issue with the Plaintiff's position that such testimony would be admissible.
[9] Although relevant market is a necessary element to a monopolization claim under Section 2, it does not appear to be essential to a Section 2 conspiracy to monopolize claim, cf. Continental Ore Co. v. Union Carbide Carbon Corp., 370 U.S. 690, 709-10, 82 S.Ct. 1404, 1415-16, 8 L.Ed. 2d 777 (1962); although relevant market may provide a point of reference in considering the issue of intent to monopolize.
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586 F.3d 1108 (2009)
Patrick O. OJO, Attorney, on behalf of himself and all others similarly situated, Plaintiff-Appellant,
v.
FARMERS GROUP, INC.; Fire Underwriters Association; Fire Insurance Exchange; Farmers Underwriters Association; Farmers Insurance Exchange, Defendants-Appellees.
No. 06-55522.
United States Court of Appeals, Ninth Circuit.
October 26, 2009.
James A. Francis, Esquire, Francis & Mailman, Philadelphia, PA, Andrew S. Friedman, Bonnett Fairbourn Friedman & Balint PC, Phoenix, AZ, Barrett Stephen Litt, Esquire, Litt, Estuar, Harrison & Kitson, LLP, Los Angeles, CA, J. Andrew Meyer, Esquire, James Hoyer Newcomer & Smiljanich, Tampa, FL, John J. Stoia, Jr., Esquire, Coughlin Stoia Geller Rudman & Robbins, LLP, San Diego, CA, Sanford Svetcov, Coughlin Stoia Geller Rudman & Robbins, LLP, San Francisco, CA, for Plaintiff-Appellant.
Harriet S. Posner, Skadden, Arps, Slate, Meagher & Flom LLP, Los Angeles, CA, Andrew L. Sandler, Esquire, Skadden Arps Slate Meagher & Flom, LLP, Washington, DC, for Defendants-Appellees.
ORDER
KOZINSKI, Chief Judge:
Upon the vote of a majority of nonrecused active judges, it is ordered that this case be reheard en banc pursuant to Circuit Rule 35-3. The three-judge panel opinion shall not be cited as precedent by or to any court of the Ninth Circuit.
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151 F. Supp. 17 (1957)
Jan DANISCH, Antoni Danisch, Julia Danisch, Anna Schwientek, Gertrud Wojtcyzk, Emma Schweda, Sofia Janta, Jadwiga Salawa, Maria Stancyzk, Luiza Lesch and Gertrude Urganek, Plaintiffs,
v.
The GUARDIAN LIFE INSURANCE COMPANY OF AMERICA, Defendant.
United States District Court S. D. New York.
March 13, 1957.
Supplemental Opinion April 18, 1957.
*18 Wolf, Popper, Ross, Wolf & Jones, New York City, for plaintiffs.
Walters & Donovan, New York City, for defendant.
EDELSTEIN, District Judge.
In an action on certain policies of insurance and supplementary contracts issued by the defendant on the life of a decedent who died in the United States, the plaintiff beneficiaries move for summary judgment. The defendant has filed a motion labeled as a cross-motion for summary judgment. The defendant has admitted the issuance of the policies and supplementary contracts; it has admitted the death of the insured and that it was notified and received proof of his death from beneficiaries residing in the United States; and it has further admitted non-payment to the plaintiffs in this action. Thus, the policies of insurance themselves are not in dispute nor is the liability of the defendant to the named plaintiffs.
But the defendant does resist payment to these beneficiaries, who are residents and citizens of the Polish People's Republic. It denies the authority of the plaintiffs' attorneys to institute this action on their behalf, on the ground that no faith or credence can be given to such an authorization as free and voluntary when it originates in a Communist police state. And in any event, it is alleged, there is not a reasonable assurance or likelihood that the plaintiffs would actually receive or have the benefit or use or control of the insurance proceeds *19 if the money were to be transmitted to them or to persons purporting to represent them. Accordingly, the defendant urges as an alternative to dismissal that, pursuant to sections 474 and 978 of the New York Civil Practice Act, it be authorized to deposit the funds in court for the benefit of the persons entitled to them, until such time as they can be assured of actual receipt or beneficial use of the money.
Both of these issues are raised by the defendant in what purports to be a cross-motion for summary judgment. But a summary judgment, under Rule 56, Fed.Rules Civ.Proc. 28 U.S.C.A., deals with the merits and results in a judgment in bar. See 6 Moore's Federal Practice (2nd ed.) par. 56.03, page 2025. The defendant does not seek a judgment in bar, but a judgment in abatement, without prejudice, on the ground that the court has no jurisdiction to proceed because the plaintiffs have, in fact, commenced no action against the defendant. Accordingly, the motion will be treated as a motion to dismiss under Rule 12, and inasmuch as a threshhold issue of jurisdiction is presented, it must be considered first.
It has long been well settled that an appearance by a practicing attorney creates a presumption that he has authority to act and the law casts the burden of proving the contrary upon the one asserting it. Osborn v. President, etc., Bank of United States, 9 Wheat. 738, 829, 830, 6 L. Ed. 204; Hill v. Mendenhall, 21 Wall. 453, 454, 22 L. Ed. 616; Paradise v. Vogtlandische Maschinen-Fabrik, 3 Cir., 99 F.2d 53, 55; Booth v. Fletcher, 69 App.D.C. 351, 101 F.2d 676, 683; In re Gasser, 8 Cir., 104 F.2d 537, 538; In re Pearl Coal Co., 3 Cir., 115 F.2d 158, 159; Bowles v. American Brewery, 4 Cir., 146 F.2d 842, 847. In its attempt to meet that burden of proof, the defendant sets forth that counsel acting for plaintiffs have no direct authority from them. That point is conceded, inasmuch as counsel are proceeding under the authority of the Polish Consul in Chicago and his successor, to whom plaintiffs have purported to give powers of attorney.[1] It is argued, however, that the powers of attorney ought not to be given recognition or effect. For, it is asserted, following the death of the insured, the defendant forwarded to his beneficiaries in Poland its printed form of "Claimant's Statement". These statements were never returned to the defendant. Instead, the defendant received communications from the then Consul of the Polish People's Republic in Chicago forwarding the powers of attorney and the protocol or transcript of the court proceedings in Poland following which they were executed by the plaintiffs. From this it is argued that the primary moving force behind this action and the real plaintiff is the Communist government of Poland, not the named beneficiaries, and the powers of attorney must have been obtained from the plaintiffs by a police state mass court proceeding, to which they were summoned.
The defendant's conclusion proceeds from an evaluation of conditions prevailing under a government in a Communist country, an evaluation of which this court requires no persuasion. But valid as it may be, the evaluation falls short of providing evidence on the specific *20 problem in issue, and only surmise and suspicion remain. I can merely repeat Judge Dimock's words in deciding a previous motion in this case, D.C., 18 F.R. D. 77, 79: "At this time * * * I have nothing but defendant's suspicion and surmise in support of such a conclusion [that the powers of attorney were not voluntarily executed]. The Polish People's Republic is a nation which is recognized by and has diplomatic relations with the United States. I cannot question the validity of these documents on the present state of the record." Nor is that result altered by the existence of the Treasury Regulations[2] pursuant to which United States Government funds will not be paid to persons residing in specified foreign countries, because of a lack of reasonable assurance that the payees will actually receive such funds or be able to negotiate checks or warrants for full value.
The Polish People's Republic is one of the specified countries[3] and an amendment[4] to the regulation provides that powers of attorney for the receipt or collection of such funds will not be recognized. The refusal of the United States Government to recognize powers of attorney from payees of government funds resident in Poland is merely in furtherance of the policy not to transmit such funds to Poland, for the reasons stated. The policy might be contravened by the recognition of even voluntarily given, valid powers of attorney. Thus the regulation itself is not authority for the invalidity of powers of attorney given by residents of the Polish People's Republic. The defendant has failed to meet the burden of proving the lack of authorization of plaintiffs' counsel. Accordingly, the motion to dismiss must be denied.
With the jurisdictional issue decided in favor of the plaintiffs, they are entitled to summary judgment, for there is no defense on the merits. The only question remaining is whether that judgment should be conditioned by the application of sections 474 and 978 of the New York Civil Practice Act. There is no provision in the Federal Rules of Civil Procedure covering the situation, but by Rule 83, the District Court may from time to time make and amend rules governing its practice not inconsistent with the federal rules. By Civil Rule 13 of this court, provision is made for the discretionary application of the procedure prevailing in the Supreme Court of the State of New York, in a situation not covered by the provisions of any statute of the United States or of the Federal Rules of Civil Procedure, where there are no parallels or analogies furnished by such statutes and rules, and in default of a procedure previously prevailing in courts of equity of the United States. See United States v. Certain Land, etc., D.C., 71 F. Supp. 363, 364. This situation would seem to be one where the New York procedure might appropriately be applied.
But the plaintiffs argue that to apply it, by ordering the proceeds of the judgment to be deposited in court for the benefit of the plaintiffs, to be paid out on the special order of the court when they subsequently are able to show that they will have the benefit or use or control of the money, would be in violation of the Constitution of the United States. Specifically, it is contended that such statutes so applied would impair the obligation of contracts, in violation of Section 10 of Article 1;[5]*21 would contravene the provision of Section 1 of the Fourteenth Amendment, that no state shall deprive any person of property without due process of law; and would violate the provision of Section 1 of the Fourteenth Amendment, that no state shall deny to any person within its jurisdiction the equal protection of the laws.
It is, of course, an axiom of constitutional law that a substantial impairment of a means of enforcement is an impairment of the contract obligation. Sturges v. Crowninshield, 4 Wheat. 122, 4 L. Ed. 529; McCracken v. Hayward, 2 How. 608, 11 L. Ed. 397; White v. Hart, 13 Wall. 646, 20 L. Ed. 685; Edwards v. Kearzey, 96 U.S. 595, 24 L. Ed. 793; Bronson v. Kinzie, 1 How. 311, 11 L. Ed. 143; Penniman's Case, 103 U.S. 714, 720, 26 L. Ed. 602. The plaintiffs cite Sliosberg v. New York Life Ins. Co., 244 N.Y. 482, 155 N.E. 749, 751, as authority directly controlling the case at bar. An action had been brought in 1925, prior to United States recognition of the U. S. S. R., to recover on an insurance policy "expressed to be payable in Russian roubles" and "expressed * * * to be performed in whole or in part within the territorial confines of the former Russian Empire * * *". An application was made, pursuant to section 169-a of the Civil Practice Act (a section added by Chapter 232 of the Laws of 1926), to stay the action until the expiration of 30 days next following the recognition de jure of a government of Russia by a government of the United States. The New York Court of Appeals held the statute to be unconstitutional as depriving parties entitled to sue on a contract of a remedy for an indefinite period, that is, until the happening of an event which might never happen.
But the Sliosberg case is, I feel, inapposite. Assuming that a deposit of the proceeds of the insurance policies in court should be ordered, there would nevertheless be no denial of a remedy. Judgment, on the contrary, would have been granted the plaintiffs. Nor would there even be a denial or a postponement of the right of plaintiffs to possession of the property. For the court would be acting on a determination that they would not in any event have the "benefit or use or control of such money", and that there were "other special circumstances [making] it appear desirable that such payment * * * should be withheld * * *", relating to the possibilities of the effectuation of the judgment for the benefit of the plaintiffs. Cases more closely analogous than the Sliosberg case are those involving the distribution of estates. Cf., for example, In re Braier's Estate, 305 N.Y. 148, on page 158, 111 N.E.2d 424, at page 428, and cases cited; In re Weidberg's Estate, 172 Misc. 524, 15 N.Y.S.2d 252. True, these cases are distinguishable on the ground that they involve decedents' estates, over which the state may exercise the power of controlling distribution, *22 rather than contracts, over which the state's power is limited by the United States Constitution. Nevertheless, the conclusion stated is equally applicable, that the procedure of section 269 of the Surrogate's Court Act (analogous to the procedure of sections 474 and 978 of the Civil Practice Act here involved), "far from constituting an impairment of [plaintiffs' legal] rights, was designed as and in fact is, a potent protector thereof." Matter of Weidberg's Estate, supra, 172 Misc. at page 531, 15 N.Y. S.2d at page 259; In re Braier's Estate, 305 N.Y. at page 158, 111 N.E.2d at page 428. The plaintiffs would have title to the funds; they would be set aside for their benefit and account, and be theirs for the asking when reasonable assurance could be given that they would receive the benefit or use or control of the money, and would, in short, enjoy the possession to which they are concededly entitled. Therefore, I cannot conclude that applying the challenged sections would have the effect of impairing the obligations of contracts. Similarly, inasmuch as there would be no impairment of rights at all, there would be no denial of due process or of equal protection of the laws.
But the exercise of the court's discretion to order the deposit of the proceeds of the insurance policies in court, subject to its further order, depends upon the court's conclusion that the plaintiffs would not have the benefit or use or control of the money, or that there are other special circumstances making it appear desirable that payment should be withheld. The defendant's argument is, essentially, that the court may take judicial notice of the existence in Poland of a Communist government employing police state tactics, precluding the realization of any rights by Polish citizens without special leave from the authorities, and that the right to receive dollar exchange in the Polish People's Republic is precisely the kind of a right which would be preempted and confiscated by the government. In substantiation of this position, affidavits are submitted citing foreign exchange decrees of the Polish government. It is further argued, with supporting affidavits, that even if the plaintiffs were to receive the funds, they would be able to realize only a very small portion of them because of the confiscatory rates of exchange maintained by the Polish government between their currency and the dollar. And finally, the defendant cites the Treasury regulation specifying the Polish People's Republic as one of the countries the residents of which may not be sent United States government funds, because of a lack of reasonable assurance that the payees will actually receive such funds or be able to negotiate checks or warrants for full value.
The general conditions prevailing in a Communist country are indeed of such common knowledge as to require no proof of their fundamental antithesis to the public policy prevailing in our own country. Yet in the absence of proof, it is inadvisable for a court to hold, on the basis of judicial notice alone, that the general conditions negate the specific likelihood that these plaintiffs would receive the proceeds of a judgment. There can, of course, be judicial knowledge of specific circumstances sufficient to justify a decision, see In re Weidberg's Estate, supra; but as distasteful as the court considers the general conditions in Poland to be, he has no judicial knowledge to justify the specific conclusion that these plaintiffs would not receive payment. However, the void of judicial knowledge may be filled by the Treasury Regulation precluding the payment of United States government funds to persons residing in the Polish People's Republic, because of a finding of a lack of reasonable assurance that the payees will actually receive such funds or be able to negotiate checks or warrants for full value. This "authoritative conclusion reached by the Treasury Department" was relied upon for decision in In re Braier's Estate, supra, 305 N.Y. at page 157, 111 N.E.2d at page 428. But in that case there was no denial that conditions in the foreign *23 country (Hungary) negated the likelihood that the legatee would receive her bequest, and no hearing was sought on the issue. Here, denial is made, supported by affidavits, and a hearing is demanded, although in a roundabout manner; for it is claimed in answer to defendant's cross-motion for summary judgment that a genuine issue of material fact is presented, requiring a trial. The defendant's cross-motion, as indicated, cannot be treated as one for summary judgment, and therefore the raising of an issue of material fact for trial may be treated as a demand for a hearing on the issue of the "defense" that there is not a reasonable assurance that the plaintiffs would actually receive or have the benefit or use or control of the insurance proceeds, if the funds were to be transmitted to them.
Accordingly, the plaintiffs' motion for summary judgment will be granted, but entry of judgment will be held in abeyance for ten days from the date of this memorandum, during which time plaintiffs may apply for a hearing. Failing such an application, the defendant's motion pursuant to sections 474 and 978 of the Civil Practice Act will be granted, appending to the judgment an order requiring the deposit of the proceeds of the judgment in court.
Supplemental Memorandum
On a motion for reargument, the plaintiffs point out that the opinion omitted mention of the submission, after the argument and while the original motion was under advisement, of new powers of attorney properly authenticated which had been forwarded directly to plaintiffs' counsel by one of the plaintiffs in Poland. These powers were executed by all the plaintiffs except Jan Danisch, Antoni Danisch and Maria Stancyzk. For these three, the original powers remained unrevoked, while the new powers revoked the original powers granted to the Polish Consul.
This memorandum is issued to supply the omission. However, the problem presented and the analysis of the court are in no way altered or affected, and the motion for reargument is denied.
NOTES
[1] Counsel for plaintiffs produced three documents purporting to be powers of attorney. One dated May 12, 1953 and another dated May 30, 1953 name the Polish Consul in Chicago, Illinois, or his substitute, attorney for plaintiffs to collect the insurance proceeds that are the subject of this action. Both of these powers bear signatures purporting to be those of the plaintiffs, affixed as a part of a court proceeding in which they were summoned to appear, and "Authenticated" by the American Vice-Consul in Warsaw. The third document, dated April 6, 1955 and executed and acknowledged on that day by the Chief of the Consular Division of the Embassy of the Polish People's Republic, Washington, D. C., purports to be a ratification by that official as successor to the Polish Consul in Chicago, of the authority of the plaintiffs' counsel to institute and prosecute the present action. The summons is dated September 3, 1954.
[2] Adopted under the authority of Public Law No. 828, approved October 9, 1940, 31 U.S.C.A. § 123 et seq. See section 211.3(a) of Department Circular No. 655, dated March 19, 1941, 31 C.F.R. (1949 ed.) 211.3(a); 6 F.R. 1534.
[3] Amendment of February 19, 1951, 16 F.R. 1818, and amendment of April 17, 1951, 16 F.R. 3479, amending 31 C.F.R. (1949 ed.) 211.3(a).
[4] Amendment of September 24, 1951, 16 F.R. 10017, amending 31 C.F.R. (1949 ed.) 211.3.
[5] Defendant argues that all the contracts involved in the case were issued subsequent to the effective date (June 2, 1939) of the challenged sections of the Civil Practice Act. One of the policies and two of the supplemental contracts in suit do bear subsequent dates. However, they were issued in accordance with settlement options contained in policies antedating the enactment of the legislation. They were, accordingly, not new contracts, for their terms were fixed when the original policies were made; they were issued not as the result of any new negotiation or agreement, but in discharge of pre-existing obligations. Aetna Life Ins. Co. v. Dunken, 266 U.S. 389, 45 S. Ct. 129, 69 L. Ed. 342. That the insured was required to present new evidence of insurability did not alter the pre-existing obligations to insure subject to such new evidence, nor did it convert the discharge of those obligations into new contracts.
The remaining policy in suit was made after the effective date of the legislation claimed to impair the obligation of the contract. But it was a North Dakota contract, not subject to the New York law when issued. It is argued that inasmuch as the challenged sections did not operate on the contract until suit was brought in New York, they violate the contract clause of the Constitution. In Home Ins. Co. v. Dick, 281 U.S. 397, 50 S. Ct. 338, 74 L. Ed. 926, the Supreme Court left open the issue of whether the guaranty of the contract clause relates to the date of a statute's effect on contracts or to the date of its enactment.
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562 F. Supp. 1259 (1983)
Ralph J. MILLER, M.D.,
v.
INDIANA HOSPITAL, a corporation; Henry F. Hild; Donald F. Smith; William R. McMillen; John S. Simpson; Thomas S. Barbor; Samuel W. Jack, Jr.; Mrs. C. Fred Hildebrand; Mrs. Wanda M. Weyandt; Harry C. McCreary; C. Wilmer Johnston; George M. Evans; Donald S. Brody; Roger J. Reschini; Joseph Kovalchick; William G. Evans, M.D.; Melvin C. Williams, M.D.; Robert G. Goldstrohm, M.D.; David C. Hughes, M.D.; Ralph F. Waldo, M.D.; Herbert L. Hanna, M.D.; Richard N. Freda, M.D.; Frank Weiner, M.D.; Henry Mitchell, M.D.; Ralph R. Brown, M.D.; H. Arnold Muller, M.D.
Civ. A. No. 81-1091.
United States District Court, W.D. Pennsylvania.
April 27, 1983.
*1260 *1261 *1262 *1263 *1264 *1265 Ralph H. Smith, III, Pittsburgh, Pa., for plaintiff.
Larry A. Silverman, Pittsburgh, Pa., for all defendants except Muller.
Alton P. Arnold, Jr., Deputy Atty. Gen., Pittsburgh, Pa., for Com. of Pa.
OPINION
MANSMANN, District Judge.
This matter is before the Court on a Motion for Judgment on the Pleadings[1] filed by Defendant Indiana Hospital and certain Defendant physicians and administrators[2]*1266 at Indiana Hospital ("Hospital Defendants"). Also before the Court is a Motion to Dismiss filed by the Secretary of the Pennsylvania Department of Health, Dr. H. Arnold Muller ("Dr. Muller").[3] Plaintiff Dr. Ralph J. Miller brought this action as a result of Indiana Hospital's refusal to accept or consider his application for medical staff privileges. For the reasons set forth below, we are granting Defendants' Motions in part and are reserving judgment on the remainder.
THE STANDARDS APPLICABLE TO DEFENDANTS' MOTIONS
A Motion to Dismiss filed pursuant to Fed.R.Civ.P. 12(b)[4] and a Motion for Judgment on the Pleadings filed pursuant to Fed.R.Civ.P. 12(c)[5] may, to a certain extent, be used interchangeably as pretrial challenges to an opponent's claim. McIntosh v. Garofalo, 367 F. Supp. 501, 503 (W.D. Pa.1973). See also C. Wright & A. Miller, 5 Federal Practice and Procedure § 1369, at 698 (1969).[6]
Theoretically, a Rule 12(b) motion focuses on the defects in Plaintiff's claim for relief and does not seek to determine the merits of the dispute.[7]Id. A Rule 12(c) motion, on the other hand, does seek to determine the substantive merits of the controversy. Id. As a practical matter, however, many of the same standards are applicable to both types of motions.
Both a Rule 12(b) motion and a 12(c) motion may be used to assert lack of subject matter jurisdiction or to assert the failure of Plaintiff to state a claim upon which relief can be granted. Fed.R.Civ.P. 12(b)(1) and (6); 12(h)(2) and (3).[8]See also Cardio-Medical Assoc. v. Crozer-Chester Medical Center, 536 F. Supp. 1065 (E.D.Pa. 1982); C. Wright and A. Miller, supra at 688. The same standards will apply to the resolution of each of these challenges regardless of which type of motion is used. See Tomarkin v. Ward, 534 F. Supp. 1224, 1228 n. 1 (S.D.N.Y.1982); Warner Co. v. Brann & Stuart Co., 198 F. Supp. 634 (E.D. Pa.1961). See also C. Wright and A. Miller, supra at 688.
*1267 Dismissal on jurisdictional grounds and for failure to state a claim are analytically distinct, implicating different legal principles and different burdens of proof. Johnsrud v. Carter, 620 F.2d 29, 32 (3d Cir.1980). The former involves the right to be heard in court while the latter is a disposition of the case on the merits. Id. at 33.
Motions which challenge subject matter jurisdiction may simply attack the facial sufficiency of the Complaint or they may attack the factual existence of subject matter jurisdiction.[9]Mortensen v. First Federal Sav. and Loan Ass'n, 549 F.2d 884, 891 (3d Cir.1977). In a facial attack, the Court must take the allegations of the Complaint as true.[10]Id. Where, however, the Motion creates a factual issue regarding subject matter jurisdiction, "`no presumptive truthfulness attaches to Plaintiff's allegations and the existence of disputed material facts will not preclude the trial court from evaluating for itself the merits of the jurisdictional claims. Moreover, the Plaintiff will have the burden of proof that jurisdiction does in fact exist.'"[11]Enka B.V. of Arnhem, Holland v. E.I. DuPont Nemours & Co., 519 F. Supp. 356, 359 (D.Del.1981), quoting Mortensen, supra at 891.
Where a motion asserts the failure of Plaintiff to state a claim, the burden is on the moving party. See Johnsrud v. Carter, supra at 33. The Plaintiff is afforded the safeguard of having all of his allegations taken as true and all inferences which are favorable to him will be drawn. Society Hill Civic Ass'n v. Harris, 632 F.2d 1045, 1054 (3d Cir.1980); Bryson v. Brand Insulations, Inc., 621 F.2d 556, 559 (3d Cir.1980); Mortensen, supra at 891. If the court considers matters outside of the pleadings, the motion is transformed into a Rule 56 Motion for Summary Judgment. See Fed.R. Civ.P. 12(b) and 12(c).[12]
Specifically with regard to a Rule 12(c) motion, we note the following:
Under the orthodox rule, a motion for judgment on the pleadings must be sustained by the undisputed facts appearing in all the pleadings, supplemented by any facts of which the court will take judicial notice. For the purposes of the motion, all well-pleaded material allegations of the opposing party's pleading are to be taken as true, and all allegations of the moving party which have been denied are taken as false. Conclusions of law are not deemed admitted. Judgment on the pleadings may be granted only if, on the *1268 facts as so admitted, the moving party is clearly entitled to judgment.
536 F.Supp. at 1070, quoting 2A Moore's Federal Practice ¶ 12.15, at 2343-44 (1981) (footnotes omitted).
As a general rule, courts do not favor the summary disposition of cases on their merits. Indeed, the United States Supreme Court has stated that "a complaint should not be dismissed ... 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, 45-46, 78 S. Ct. 99, 102, 2 L. Ed. 2d 80 (1957). Nevertheless, in an appropriate case, an early disposition may save the parties needless and often considerable time and expense which otherwise would be incurred during discovery and trial. At minimum, a partial disposition of the case at any early stage will refine the issues which remain for later resolution.
FACTUAL BACKGROUND
With the above standards in mind, the facts may be summarized as follows:
Plaintiff is a physician and surgeon duly licensed by the Commonwealth of Pennsylvania. He is a Board-certified urologist.[13] Plaintiff was a member of Indiana Hospital's medical staff for approximately 19 years. He remains a resident of Indiana County, Pennsylvania.
Defendant Indiana Hospital is a general hospital and a non-profit corporation. It is located in Indiana County, Pennsylvania and is the only general hospital in that county.[14]
The 24 individual Hospital Defendants are or were administrators or physicians at the Hospital. Twenty of these Defendants are or were members of the Hospital's Governing Board or the Executive Committee of the medical staff during the events in question. One of these Defendants, William R. McMillen, is or was a Commissioner of Indiana County as well.
Defendant Dr. Muller is the Secretary of the Pennsylvania Department of Health with offices in Harrisburg, Pennsylvania.
Plaintiff was first granted staff privileges at Indiana Hospital in 1958. Every subsequent year he applied for and was granted staff privileges for a period of one year.[15]
In 1974 and 1975, Plaintiff became active in the design and creation of the Medical Center.[16] Further, Plaintiff openly criticized certain conditions at the Hospital.[17] Those conditions allegedly went unremedied.
According to Plaintiff, the Hospital and certain individual Hospital Defendants objected strenuously to the creation of the Medical Center and to Plaintiff's criticism of Hospital conditions.[18]
*1269 In February 1977, a patient who had been under Plaintiff's care died at the Hospital.[19] One of the members of the medical staff's Executive Committee, who is a Defendant here, sent a report to the president of the medical staff stating that Plaintiff had rendered unacceptable care to the deceased patient. He later sent another letter to the Executive Committee, citing additional instances of inadequate care rendered by Plaintiff and requesting that Plaintiff's staff privileges be suspended. The Executive Committee held an informal meeting which Plaintiff attended. Plaintiff, however, refused to discuss the allegations against him and abruptly left the meeting.
In March 1977, the Executive Committee notified Plaintiff in writing that it intended to recommend to the Hospital's Board of Directors that Plaintiff's active staff privileges be revoked. The Executive Committee, through its hearing committee, held a hearing at which Plaintiff was represented by counsel and had the opportunity to present and cross-examine witnesses. The hearing committee recommended the revocation of Plaintiff's staff privileges. The Executive Committee adopted the recommendation and Plaintiff appealed to the Hospital's Board of Directors. After another adversary hearing, a committee of four directors affirmed the Executive Committee's decision and the full Board adopted their recommendation.
In October 1977, Plaintiff obtained a preliminary injunction ex parte from the Court of Common Pleas of Indiana County, preventing the revocation of his privileges. This injunction was dissolved in February 1978 and a request for a permanent injunction was denied in June 1978.
Plaintiff appealed the denial of his request to the Superior Court of Pennsylvania. In April 1980, that court affirmed the lower court's decree, finding that the charges against Plaintiff were supported by "sufficient evidence." The Superior Court further determined that Plaintiff was dismissed in a "fair and impartial manner" which was in accordance with the Hospital's bylaws. In October 1980, Plaintiff's Petition for Allowance of Appeal to the Pennsylvania Supreme Court was denied.
During the state court proceedings, Plaintiff continued to exercise his medical staff privileges. In September 1977, however, he submitted his application for 1978 staff privileges which the Hospital[20] refused to consider.[21]
In December 1978, Plaintiff applied for medical staff privileges for the year 1979. The Hospital refused to process the application.
In October 1980, Plaintiff requested, and was denied, the application forms from the Hospital in order to apply for 1981 staff privileges.
In December 1980, Plaintiff petitioned the Pennsylvania Department of Health for an order directing Indiana Hospital to supply him with an application for medical staff privileges as well as an order directing Indiana Hospital and its officers to process the application.
Plaintiff's petition was treated by the Department of Health as a formal complaint. A copy of the petition was sent to Indiana Hospital for a response.
The president of the Hospital sent a letter to Plaintiff advising him that the Hospital would not accept an application for 1981 staff privileges from him based upon the *1270 outcome of the state litigation. A copy was sent to the Department of Health.
Subsequently, the Hospital's counsel sent a copy of the bylaws to the Department of Health and reiterated the Hospital's position that it was not required to provide Plaintiff with an application.
By letter dated December 31, 1980, the Department of Health notified Plaintiff of its determination to take no further action on the matter. Specifically, the Department stated that neither its regulations nor the Hospital's bylaws required the Hospital to provide him with an application. It also noted that the Department of Health does not enforce federal regulations "for those hospitals accredited by the Joint Commission on Accreditation of Hospitals."
Plaintiff apparently took issue with the fact that the letter from the Hospital's attorney was sent to the Department of Health without a copy also being sent to him. He sent a letter dated January 5, 1981 to the Secretary of the Department of Health concerning the matter and also requested that the Department withdraw its determination with regard to his petition.
By letter dated January 21, 1981, the Department notified Plaintiff that upon reviewing his original petition as well as its regulations and the Hospital's bylaws, it remained its determination that the Hospital had no obligation to furnish him with an application for staff privileges. Again, the Department of Health decided that it would take no action on the matter.
THE COMPLAINT
Plaintiff filed the present action on July 2, 1981 pursuant to the Fifth and Fourteenth Amendments to the United States Constitution (Count I); the civil rights statutes, 42 U.S.C. §§ 1983 and 1985 (Count I); the federal antitrust laws (Count II) as well as the state antitrust laws (Count III). Plaintiff predicates jurisdiction upon 28 U.S.C. §§ 1331 and 1343 for his federal claims.[22] Plaintiff's state claims are based upon the doctrines of ancillary and pendent jurisdiction.[23]
We have carefully reviewed the Complaint and have found many difficulties attendant thereto.
The Complaint, primarily in Count I, is unclear as to other claims possibly being asserted by Plaintiff. For example, in paragraph 17 of the Complaint, Plaintiff alleges interference with prospective advantage (para. 17(f)), intentional affliction of mental distress (para. 17(g)), defamation (para. 17(h)) and invasion of privacy (para. 17(h)). The pleadings and briefs do not disclose whether or not these allegations are considered separate legal claims. If Plaintiff wishes to retain these allegations as viable legal claims,[24] he must amend his Complaint, setting each claim out as a separate count and setting forth the allegations *1271 in support thereof with some degree of specificity.[25]
Plaintiff also alleges interference with contractual relations in the same count. The inclusion of this allegation is puzzling. If Plaintiff is referring to the revocation of his staff privileges, the allegation does not belong in this Complaint. Our understanding of Plaintiff's case, based upon our reading of the entire Complaint and the representations of Plaintiff's counsel at oral argument, is that he is contesting the refusal to accept or process his application. Any attempt to relitigate the revocation of staff privileges is barred by the doctrine of res judicata. See discussion infra. Thus, Plaintiff may include in this Complaint only those claims which pertain to the refusal to accept or process his application.[26]
In paragraph 20 of the Complaint, Plaintiff alleges that the Hospital's bylaws have been amended to grant every applicant for admission or renewal of admission "both a fair trial and due process of law procedure before making a determination to grant or refuse the same." In paragraph 25 of the Complaint, Plaintiff alleges a violation of a Pennsylvania statute, 2 Pa.C.S.A. § 504.[27] In paragraph 26 of the Complaint, Plaintiff alleges a violation of regulations promulgated by the U.S. Department of Health and Human Services, 42 C.F.R. §§ 405.1020 et seq.
It is not clear whether Plaintiff intends any of these allegations to be separate claims in his suit. If he does intend these allegations to be separate claims, the claims must be set out in separate counts of the Complaint with specific supporting allegations set forth therein. With respect to the bylaws and the federal regulations, Plaintiff must state the precise section or sections which he alleges to have been violated and must explain the manner in which the violation has occurred. A copy of the bylaws should also be appended to the Complaint.
Plaintiff further alleges that Defendants have violated the rules and regulations of the Joint Commission on Accreditation of Hospitals ("JCAH") (para. 34). Our instructions with regard to Plaintiff's other allegations apply equally well here. Even more importantly, however, Plaintiff must first show the basis for this Court's jurisdiction over these rules. In other words, Plaintiff must state whether jurisdiction for this claim is predicated upon federal question jurisdiction[28] or upon pendent jurisdiction and must allege facts to support the alleged jurisdiction.[29]
Count II of the Complaint is drawn more precisely than count I. Nevertheless, count II is unclear in several respects. Specifically, it is difficult to discern which Defendants are included in count II.
It appears that Dr. Muller was not made part of count II. Indeed, we question whether the Secretary of the Pennsylvania Department of Health could be made part of the federal antitrust count in light of the antitrust exemption for state agencies and state officials in certain circumstances. See *1272 Parker v. Brown, 317 U.S. 341, 63 S. Ct. 307, 87 L. Ed. 315 (1943).[30] Furthermore, we question whether Dr. Muller's activities have a substantial effect on interstate commerce as required by the Sherman Act. See McLain v. Real Estate Bd. of New Orleans, Inc., 444 U.S. 232, 100 S. Ct. 502, 62 L. Ed. 2d 441 (1980). Certainly, no facts to establish this prerequisite have been alleged.[31]
Regardless, Plaintiff should amend his Complaint to clarify which Defendants are the subject of count II[32] and which are not.[33]
Plaintiff's allegations as to a conspiracy to monopolize are also unclear. In paragraph 45, Plaintiff refers to a conspiracy "to further a monopoly of hospital facilities (emphasis added)." In paragraph 48, Plaintiff alleges a conspiracy "to monopolize the field of hospital related services (emphasis added)." Plaintiff should clarify which monopoly he is alleging or whether he is alleging both.[34]
Finally, Plaintiff must amend paragraph 42 of his Complaint. Plaintiff alleges violations of §§ 1 and 2 of the Sherman Act and seeks relief pursuant to §§ 4, 15, 16 and 26 of the Clayton Act. Section 15 of the Clayton Act, 15 U.S.C. § 25, however, only applies to suits by the federal government. Therefore, that provision is not applicable to the instant case. Furthermore, it is not clear how § 26 of the Clayton Act, 15 U.S.C. § 27 ("Effect of Partial Invalidity") provides a basis for relief. We expect that an amendment will cure any such problems with this paragraph of the Complaint.
RES JUDICATA
The Hospital Defendants rely heavily upon the doctrines of res judicata and collateral estoppel as "threshold" defenses to Plaintiff's action.[35] Collateral estoppel will be discussed infra with respect to the issue of "state" or "government" action. As regards res judicata, the Hospital Defendants contend that the judgment of the Pennsylvania Superior Court precludes the Plaintiff from pursuing the instant action in this Court.
Plaintiff responds that Defendants did not affirmatively plead res judicata and therefore waived this defense. Plaintiff further alleges that res judicata may not be applied here because the facts giving rise to this action differ from those which gave rise to the state court litigation.
Federal courts must give res judicata or "preclusive" effect to state court judgments whenever the courts of that state would do so. Allen v. McCurry, 449 U.S. 90, 96, 101 S. Ct. 411, 415, 66 L. Ed. 2d 308 (1980); New Jersey-Philadelphia Presbytery v. New Jersey Bd. of Higher Educ., 654 F.2d 868, 876 (3d Cir.1981).
Indeed, Congress has expressly commanded that "(t)he ... judicial proceedings (of any court of any ... State) ... shall have the same full faith and credit in every court within the United States ... as they have by law or usage in the courts of such State *1273 ... from which they are taken." 28 U.S.C. § 1738.[36]
Res judicata, although an affirmative defense,[37] may be pleaded in an answer or raised in a Motion to Dismiss. Mack v. Municipality of Penn Hills, 547 F. Supp. 863, 867 n. 9 (W.D.Pa.1982). See also Williams v. Murdoch, 330 F.2d 745, 749 (3d Cir.1964).
Under Pennsylvania law, for res judicata to apply, it is necessary that "between the previous action and the present action there (is) an identity in the thing sued on, identity of the cause of action, identity of the persons and parties to the action, and identity of the quality or capacity of the parties suing or sued." Davis v. United States Steel Supply, 688 F.2d 166, 170-171 (3d Cir.1982), quoting Duquesne Slag Products Co. v. Lench, 490 Pa. 102, 105, 415 A.2d 53, 55 (1980).
Res judicata does not require identity between specific legal theories or claims. Rather, application of the doctrine is generally "thought to turn on the essential similarity of the underlying events giving rise to the various legal claims." Davis v. United States Steel Supply, supra at 171.[38]
In the case at bar, the Hospital Defendants did not expressly state in their Answer that they were raising "res judicata" as a defense. Nevertheless, the state court litigation was mentioned at several places in their Answer. Indeed, their "Second Defense" was specifically limited to a discussion of the state court litigation. Further, Defendants amended their Motion for Judgment on the Pleadings to specifically aver the defense of res judicata. Moreover, Plaintiff had ample opportunity to respond to the res judicata defense as shown by the discussion on the subject in his brief and at oral argument.
Therefore, we do not believe that Defendants have waived this defense.
We are troubled, however, by the factual differences between the litigation in this Court and that in the state court.
The state court proceedings involved the revocation of existing staff privileges in 1977. The instant case involves the refusal to process, or even accept, Plaintiff's applications for new staff privileges for 1978, 1979, 1980 and 1981.
Plaintiff alleges in the present case that he has a right to receive an application and to have his applications considered; he alleges that the refusal of the Hospital Defendants to do either is wrongful. In the state court proceedings, Plaintiff alleged that the revocation of his staff privileges was conducted in a wrongful manner. Thus, the acts complained of are distinguishable. See Williamson v. Columbia Gas & Electric Corp., supra at 470.
Further, the Hospital Defendants agree that medical staff privileges at Indiana Hospital "are granted for an annual period beginning January 1 of each year." Hospital Defendants' Answer, para. 4. This fact serves to further distinguish the revocation of existing staff privileges from the consideration of an application for new staff privileges.
Moreover, the relief sought by Plaintiff in the two proceedings differs, at least in part. In the instant case, Plaintiff seeks, inter alia, money damages[39] from the Hospital Defendants for their refusal to accept or process his applications for 1978, 1979, 1980 and 1981 staff privileges. In the state court litigation, Plaintiff sought only injunctive relief. Miller v. Indiana Hospital, 277 Pa. Super. 370, 419 A.2d 1191 (1980). See also Williamson v. Columbia Gas & Electric Co., supra at 470.
*1274 In light of the standard applicable to a Motion for Judgment on the Pleadings,[40] we feel that any doubts on the issue of res judicata should be resolved in favor of the non-moving party. Since we have sufficient doubts as to the applicability of the defense, particularly where there are discernible differences between the facts underlying the state court litigation and those giving rise to the instant case, this issue shall be resolved in favor of Plaintiff.[41]
Thus, the doctrine of res judicata does not bar the instant action.
We turn now to Defendants' contentions with respect to each of Plaintiff's major claims. We will consider the challenges to each claim separately and will resolve them accordingly.
I. THE CONSTITUTIONAL CLAIMS
Defendants have moved to dismiss Plaintiff's civil rights claims set forth in count I of his Complaint. To the extent that Plaintiff's civil rights claims are predicated upon the Fifth and Fourteenth Amendments to the U.S. Constitution, we address them here.[42]
It is not clear that the Fourteenth Amendment authorizes a direct cause of action for damages. See Gagliardi v. Flint, 564 F.2d 112, 117-26 (3d Cir.1977) (Gibbons, J., concurring) (there is such a cause of action), cert. denied, 438 U.S. 904, 98 S. Ct. 3122, 57 L. Ed. 2d 1147 (1978). But see Mahone v. Waddle, 564 F.2d 1018, 1052-61 (3d Cir.1977) (Garth, J., dissenting in part and concurring in part) (there is no such cause of action), cert. denied, 438 U.S. 904, 98 S. Ct. 3122, 57 L. Ed. 2d 1147 (1978). Regardless, we need not decide that question because Plaintiff has alleged a claim under 42 U.S.C. § 1983.
Section 1983 provides a cause of action for violations of federal rights by local government bodies and state officials. Thus, § 1983 essentially subsumes claims under the Fourteenth Amendment. Since Plaintiff has "an effective and substantial federal statutory remedy" under § 1983, it is unnecessary to imply a remedy directly under the Fourteenth Amendment on his behalf. See Rogin v. Bensalem Township, 616 F.2d 680, 685-87 (3d Cir.1980), cert. denied, 450 U.S. 1029, 101 S. Ct. 1737, 68 L. Ed. 2d 223 (1981).
It is well established that an action for damages can be maintained directly under the Fifth Amendment.[43]Davis v. Passman, 442 U.S. 228, 99 S. Ct. 2264, 60 L. Ed. 2d 846 (1979).
*1275 It is axiomatic that the strictures of the Fifth Amendment apply only to the actions of the federal government and not to those of private persons. Public Utilities Comm'n v. Pollak, 343 U.S. 451, 461, 72 S. Ct. 813, 820, 96 L. Ed. 1068 (1952). As well, the Fourteenth Amendment due process clause applies to the actions of the states. Moose Lodge No. 107 v. Irvis, 407 U.S. 163, 172-73, 92 S. Ct. 1965, 1971, 32 L. Ed. 2d 627 (1973).
The standards used to determine whether conduct is federal action subject to the Fifth Amendment are identical to those used to determine whether conduct is state action subject to the Fourteenth Amendment. Warren v. Government Nat'l Mortgage Ass'n, 611 F.2d 1229, 1232 (8th Cir.1980), cert. denied, 449 U.S. 847, 101 S. Ct. 133, 66 L. Ed. 2d 57 (1980). While, however, the tests[44] are the same, the actual facts pertinent to each are different. For example, extensive government funding is a factor which is pertinent to both a Fifth Amendment and a Fourteenth Amendment claim. Funding by the federal government, however, is only relevant to a claim under the Fifth Amendment.[45] Funding by the state government is only pertinent to a claim under the Fourteenth Amendment or § 1983. See generally Fischer v. Driscoll, 546 F. Supp. 861, 866-67 (E.D.Pa.1981).
Thus, for purposes of Plaintiff's Fifth Amendment claim, we shall examine the facts allegedly showing that the Defendants' conduct is that of the federal government in light of the tests articulated by the Supreme Court.[46] These tests were summarized in a recent Opinion of this Court, Nguyen v. United States Catholic Conference, 548 F. Supp. 1333 (W.D.Pa. 1982):
A. THE "SYMBIOTIC RELATIONSHIP" TEST
Under the "symbiotic relationship" test articulated by the Court in Burton v. Wilmington Parking Authority, 365 U.S. 715, 81 S. Ct. 856, 6 L. Ed. 2d 45 (1961), government action may be found where "(t)he (government) has so far insinuated itself into a position of interdependence with ... (the Defendants) that it must be recognized as a joint participant in the challenged activity ...". Id. at 725, 81 S.Ct. at 862.[47]
Cases decided by the United States Court of Appeals for the Third Circuit have emphasized that under Burton, a "symbiotic relationship" may be established by showing the government's extensive involvement and interdependence with the private party. See, e.g., Hollenbaugh v. Carnegie Free Library, 545 F.2d 382, 385 *1276 (3d Cir.1976), cert. denied, 439 U.S. 1052, 99 S. Ct. 734, 58 L. Ed. 2d 713 (1978). The dispositive factor in Burton with respect to the government action issue was the "extent and nature of the overall relationship between the (government) and the private enterprise." Braden v. University of Pittsburgh, 552 F.2d 948, 957 (3d Cir.1977). The establishment of an "inextricably-linked relationship[48] renders the government a joint participant in the challenged activity, obviating the need for the Plaintiff to show state involvement in the specific action being challenged.[49]Hollenbaugh v. Carnegie Free Library, supra at 385.
The facts presented before us do not establish federal action under the Burton test.
There is no allegation that any employee or officer of Indiana Hospital is appointed by the federal government. Cf. Hollenbaugh v. Carnegie Free Library, supra at 385 (A majority of the Defendants' trustees were appointable by government bodies). There is also no evidence that Indiana Hospital is located in a building or buildings owned by the federal government.[50]See Moose Lodge No. 107 v. Irvis, 407 U.S. 163, 175, 92 S. Ct. 1965, 1972, 32 L. Ed. 2d 627 (1972). Burton v. Wilmington Parking Authority, supra 365 U.S. at 723-724, 81 S.Ct. at 861.
Plaintiff alleges that Indiana Hospital is subject to federal regulation. Specifically, certain regulations promulgated by the U.S. Department of Health and Human Services apply to the Hospital by virtue of its receipt of federal funds. Compl. para. 21(g), 26 and 28. We do not believe that this allegation, even if proven, indicates that Indiana Hospital is subject to pervasive federal regulation.[51]
Plaintiff alleges that Indiana Hospital has received federal funds under the Hill-Burton Act. The receipt of Hill-Burton funds is government involvement on a general level rather than the extensive interdependence required under the "symbiotic relationship" test for a finding of government action. See Cardio-Medical Assoc. v. Crozer-Chester Medical Center, 536 F. Supp. 1065, 1092 (E.D.Pa.1982).[52]
Plaintiff alleges that Indiana Hospital receives Medicare and Medicaid funds from the federal government. The Medicare funds constitute 35% of the Hospital's annual income (Compl. para. 21(d)) and the Medicaid funds represent 6.5% of its annual income (Compl. para. 21(e)). Clearly it cannot be said that the Hospital derives most of its revenue from the federal government. Cf. Chalfant v. Wilmington Institute, supra at 745 (Defendant derived over 90 percent of its revenues from the government). Moreover, "`receipt of money from the (government) is not, without a good deal more, enough to make the recipient an agency or instrumentality of the (g)overnment.'"[53]Hollenbaugh v. Carnegie Free *1277 Library, supra at 385, quoting Grossner v. Trustees of Columbia Univ., 287 F. Supp. 535, 547-548 (S.D.N.Y.1968).
Finally, Plaintiff alleges that Indiana Hospital is subject to the standards of the Professional Standards Review Organization, "a judicially determined agency of the United States." Compl. para. 21(x).[54] Plaintiff also alleges that the Hospital participates in Champus, a federally-funded program for members of the armed services. Compl. para. 21(bb). Plaintiff further alleges that the Hospital is exempt from paying federal income tax.[55] None of these allegations, either alone or in conjunction with Plaintiff's other allegations, are sufficient to show the extensive interdependence and involvement with the federal government required under the Burton test.
Thus, given the allegations before us, we cannot find that a "symbiotic relationship" exists between the Hospital Defendants[56] and the government such as existed in Burton.[57]
B. THE "NEXUS" TEST
Under the "nexus" test established by the Court in Jackson v. Metropolitan Edison Co., supra, government action may be found if "there is a sufficiently close nexus between the (government) and the challenged action of the regulated entity so that the action of the latter may be fairly treated as that of the (government) itself." Id. 419 U.S. at 351, 95 S.Ct. at 453.[58]
Under Jackson, the Plaintiff must show that the government is so involved in the specific act at issue that it has effectively placed its imprimatur on that act or put its weight behind it. See Jackson v. Metropolitan Edison Co., supra 419 U.S. at 357, 95 S.Ct. at 456; Fitzgerald v. Mountain Laurel Racing, Inc., supra, at 597. The government's mere acquiescence or approval of the private action does not convert the act into that of the government. See Blum v. Yaretsky, ___ U.S. ___, 102 S. Ct. 2777, 2785, 73 L. Ed. 2d 534 (1982). See also Flagg Bros. v. Brooks, 436 U.S. 149, 164, 98 S. Ct. 1729, 1737, 56 L. Ed. 2d 185 (1978); Jackson v. Metropolitan Edison Co., supra 419 U.S. at 357, 95 S.Ct. at 456.
Thus, the government can be held responsible for the private act only when it has compelled the act by law[59] or when it has "provided such significant encouragement, either overt or covert, that the choice must in law be deemed to be that of the (government)." Blum v. Yaretsky, supra, ___ U.S. at ___, 102 S.Ct. at 2785.
We can perceive no basis in the case at bar for finding a nexus between the federal government and the failure to accept or process Plaintiff's applications for medical staff privileges. Specifically, the *1278 pleadings are devoid of allegations to support an inference that the federal government compelled or provided significant encouragement to Indiana Hospital's actions.[60]
Thus, we can find no federal government action under the Jackson "nexus" test.
C. THE "PUBLIC FUNCTION" TEST
Finally, under the "public function" test discussed by the Court in the recent case of Rendell-Baker v. Kohn, ___ U.S. ___, 102 S. Ct. 2764, 73 L. Ed. 2d 418 (1982) and also in the earlier case of Jackson v. Metropolitan Edison Co., supra, government action may be present where the function performed by the private entity is "`traditionally the exclusive prerogative of the State.'" Rendell-Baker v. Kohn, supra, ___ U.S. at ___, 102 S.Ct. at 2773, quoting Jackson v. Metropolitan Edison Co., supra 419 U.S. at 353, 95 S.Ct. at 455.
The performance of a function which serves the public or which is "affected with a public interest" does not suffice under this test. Rendell-Baker v. Kohn, supra, ___ U.S. at ___, 102 S.Ct. at 2771; Jackson v. Metropolitan Edison Co., supra 419 U.S. at 353-54, 95 S.Ct. at 455. Rather, the activity must be one which is traditionally associated with sovereignty. Id. 419 U.S. at 353, 95 S.Ct. at 454.
Plaintiff has offered no facts which would establish the existence of federal action under the public function test. Thus, there are no facts to support the proposition that the provision of hospital or medical services has traditionally been within the exclusive province of the federal government.
That Defendants' services may further government policies does nothing more than clothe their activities "with a public use." See Jackson v. Metropolitan Edison Co., supra at 353-54, 95 S.Ct. at 455. Hence, Defendants' activities are not the exercise of powers which have traditionally been exercised exclusively by the government. Cf. Evans v. Newton, 382 U.S. 296, 86 S. Ct. 486, 15 L. Ed. 2d 573 (1966) (Control and maintenance of a public park).
Plaintiff has failed to establish a "federal action" under any of the tests discussed above. Consequently, Plaintiff is unable to prove that Defendants have violated rights secured by the Fifth Amendment.
II. CLAIM UNDER 42 U.S.C. § 1983
Defendants contend that Plaintiff's allegations cannot establish that Defendants' conduct was action under the color of state law within the meaning of 42 U.S.C. § 1983.[61]
Plaintiff asserts that the Defendants did act under color of state law within the meaning of § 1983.[62]
*1279 We do not reach the issue of whether the Hospital's activities constitute "state" action for purpose of § 1983 and the Fourteenth Amendment[63] because that issue has already been decided by the Pennsylvania Superior Court.[64]
Both the Hospital Defendants and Dr. Muller, as a threshold matter, assert the defense of collateral estoppel with respect to this issue.[65] We agree that the doctrine of collateral estoppel is applicable here but only with respect to the issue of whether the Hospital's activities, absent any conspiratorial conduct on the part of a state actor, constitute state action.
The purpose of collateral estoppel is to prevent the waste of judicial and individual resources, minimize the occurrence of inconsistent decisions and encourage reliance upon judicial decisions. See Allen v. McCurry, 449 U.S. 90, 94, 101 S. Ct. 411, 414, 66 L. Ed. 2d 308 (1980). Under this doctrine, a court's decision on an issue of fact or of law which is necessary to its judgment is conclusive with respect to that issue in subsequent suits based upon a different cause of action involving a party to the first case. Montana v. United States, 440 U.S. 147, 153, 99 S. Ct. 970, 973, 59 L. Ed. 2d 210 (1979).
The federal courts have consistently applied collateral estoppel to issues decided by state courts. Kremer v. Chemical Construction Corp., 456 U.S. 461, 102 S. Ct. 1883, 72 L. Ed. 2d 262 (1982). Further, it is now firmly established that the doctrine of collateral estoppel is applicable to § 1983 actions. See Allen v. McCurry, supra (where the Supreme Court held that the doctrine of collateral estoppel could be applied in a § 1983 action in federal court with regard to issues decided in a state criminal proceeding).
Thus, the doctrine of collateral estoppel will apply when (1) the issue decided in the prior litigation is identical to the issue here, (2) the prior litigation resulted in a final judgment on the merits, (3) the party against whom the estoppel is asserted is a party, or in privity with a party, to the prior proceeding, and (4) the opportunity to present the claim in the prior proceeding was full and fair. Scooper Dooper, Inc. v. Kraftco Corp., 494 F.2d 840, 844 (3d Cir. 1974).
In this case, the question of whether state action exists with respect to Indiana Hospital[66] is identical to the issue decided in the state court proceeding. The state court litigation resulted in a final decision on the merits. The Plaintiff here was a party to the prior litigation. Further, there is absolutely no indication that Plaintiff was denied a full and fair opportunity procedurally or substantively to present his case before the Pennsylvania courts.[67]See id. at 845.
*1280 We decline to apply collateral estoppel to the alleged conspiracy between Dr. Muller of the Pennsylvania Department of Health and the Hospital Defendants because that issue was not present before the Pennsylvania courts.[68]
Plaintiff contends that the facts he alleges support a finding that a conspiracy existed between Dr. Muller and the Hospital Defendants so that we may conclude that all Defendants acted under color of state law.[69] We disagree.
A conspiracy between a private party and a state official to effect a prohibited act may constitute action under color of state law for purposes of § 1983. Adickes v. Kress & Co., 398 U.S. 144, 152, 90 S. Ct. 1598, 1605, 26 L. Ed. 2d 142 (1970). Mere acquiescence in a private action, however, does not convert the action into that of the state. Flagg Bros., Inc. v. Brooks, 436 U.S. 149, 164-66, 98 S. Ct. 1729, 1737-38, 56 L. Ed. 2d 185 (1978).
We believe that the Plaintiff in this case, like those in Flagg Bros., is not complaining "that the State has acted, but that it has refused to act (emphasis in original)." Id. at 166, 98 S.Ct. at 1738. Such a contention does not provide a basis for finding action under color of state law for purposes of § 1983.
In the instant case, the Pennsylvania Department of Health did not become involved until after the Hospital Defendants had already taken their disputed action. Specifically, Plaintiff requested and was denied application forms from the Hospital in October of 1980. The earliest date of involvement by the Department was December of 1980. Thus, the Department could not have conspired with the Hospital Defendants at the time of the conduct in question. Any alleged conspiracy could only have arisen after the Hospital had refused to provide Plaintiff with the application forms.
Further, the Department of Health only became involved at Plaintiff's request. The Department's involvement was not at its own initiative or at the Hospital's request. This is a factor which would tend to negate any alleged concerted action between the Hospital Defendants and the Department of Health.
Most importantly, the Department of Health simply refused to take any action in the matter. It would not order the Hospital to provide Plaintiff with an application. It is the Department's refusal to take any action which Plaintiff actually contests.
Thus, it cannot be said here that the Commonwealth of Pennsylvania compelled a specific act by a private party or "commanded a particular result." Adickes v. Kress & Co., supra 398 U.S. at 170, 90 S.Ct. at 1615; Peterson v. Greenville, 373 U.S. 244, 248, 83 S. Ct. 1119, 1121, 10 L. Ed. 2d 323 (1963). Certainly, there is no allegation that the Department of Health ordered the Hospital to withhold an application from Plaintiff. See Jackson v. Metropolitan Edison Co., 419 U.S. 345, 357, 95 S. Ct. 449, 456, 42 L. Ed. 2d 477 (1974).
*1281 The state's inaction in this case cannot be characterized as "coercion" or even "significant encouragement." See Blum v. Yaretsky, ___ U.S. ___, 102 S. Ct. 2777, 2785, 73 L. Ed. 2d 534 (1982). At best, it is mere acquiescence in the Hospital's decision. See id.
Therefore, the facts as alleged by Plaintiff, even if fully proven, do not provide a basis for holding the Commonwealth of Pennsylvania responsible for the Hospital's act and do not enable us to find that the Hospital's conduct was action under color of state law for purposes of § 1983.
Accordingly, Defendants' Motions with respect to Plaintiff's claim under § 1983 must be granted.
III. CLAIM UNDER 42 U.S.C. § 1985
The Hospital Defendants and Dr. Muller contend that Plaintiff has failed to state a claim under 42 U.S.C. § 1985 because he has not alleged any facts showing the existence of class-based animus.
Plaintiff responds that an "animus" test is not required by the terms of either § 1985(2) or (3). He also asserts that class-based animus need not be shown where state action is involved.
Section 1985 contains three major subsections, each providing for the redress of somewhat different wrongs. Plaintiff does not make clear under which subsection(s) he is proceeding. His Complaint alleges a violation of § 1985 without identifying a particular subsection or subsections. His brief primarily discusses § 1985(3) although a fleeting reference is also made to § 1985(2).
Clearly, § 1985(1)[70] is inapplicable to the instant case. That subsection only protects federal officers. Canlis v. San Joaquin Sheriff's Posse Comitatus, 641 F.2d 711, 717-718 (9th Cir.), cert. denied, 454 U.S. 967, 102 S. Ct. 510, 70 L. Ed. 2d 383 (1981); McIntosh v. Garofalo, 367 F. Supp. 501, 505 n. 1 (W.D.Pa.1973). Specifically, it proscribes conspiracies which interfere with the performance of official duties by federal officers. Kush v. Rutledge, ___ U.S. ___, ___, 103 S. Ct. 1483, 1487, 75 L. Ed. 2d 413 (1983). This subsection does not apply to private individuals or even to non-federal officials. Canlis, supra.
Further, Plaintiff does not state a claim under § 1985(2).[71] Section 1985(2) subdivides into two parts that which precedes the semicolon and that which follows it. Brawer v. Horowitz, 535 F.2d 830, 840 (3d Cir.1976); Hahn v. Sargent, 523 F.2d 461, 469 (1st Cir.1975), cert. denied, 425 U.S. 904, 96 S. Ct. 1495, 47 L. Ed. 2d 754 (1976).
*1282 The first part of § 1985(2) addresses conspiracies to intimidate or retaliate against parties, jurors or witnesses in federal court proceedings. Id. See also Kush v. Rutledge, supra. Plaintiff does not allege that Defendants conspired to interfere with a federal court proceeding. See Hahn v. Sargent, supra, at 469.
The second part of § 1985(2) parallels the first part of § 1985(3) inasmuch as both are directed towards "equal protection of the laws." Id. A requisite element to a cause of action under the first part of § 1985(3) is a showing of "class-based, invidiously discriminatory animus." Griffin v. Breckenridge, 403 U.S. 88, 102, 91 S. Ct. 1790, 1798, 29 L. Ed. 2d 338 (1971). See also Kush v. Rutledge, supra. The U.S. Court of Appeals for the Third Circuit has applied this requirement to the second portion of § 1985(2) as well. Brawer v. Horowitz, supra at 840. See also Kush v. Rutledge, supra; Hahn v. Sargent, supra at 469. For reasons discussed in connection with § 1985(3) (see below), Plaintiff's allegations will not support an inference that class-based animus exists here. Therefore, Plaintiff fails to state a claim under the second part of § 1985(2).
Section 1985(3)[72] was previously thought to apply only to actions taken under color of state law. See Collins v. Hardyman, 341 U.S. 651, 655, 71 S. Ct. 937, 938, 95 L. Ed. 1253 (1951). In the landmark case of Griffin v. Breckenridge, supra, the Supreme Court held that § 1985(3) provides a cause of action for damages caused by purely private conspiracies. Id. See also Kush v. Rutledge, supra; Great Am. Fed. Sav. & Loan Ass'n v. Novotny, 442 U.S. 366, 371-72, 99 S. Ct. 2345, 2348-49, 60 L. Ed. 2d 957 (1979). The Court, however, in order to avoid constitutional difficulties which would have arisen had § 1985(3) been interpreted as a general federal tort law, concluded that the language of the provision which requires an intent "to deprive of equal protection, or equal privileges and immunities, means that there must be some racial, or perhaps otherwise class-based, invidiously discriminatory animus behind the conspirators' action (emphasis in original)." Griffin v. Breckenridge, supra 403 U.S. at 102, 91 S.Ct. at 1798. The Court was quite clear that this invidiously discriminatory motivation is a required element of a cause of action under § 1985(3).[73]
The U.S. Supreme Court recently clarified in Kush v. Rutledge, supra, that the requirement of class-based animus applies only to the first part of § 1985(3). The second part of § 1985(3) proscribes conspiracies that interfere with federal elections. Plaintiff does not allege that Defendants conspired to interfere with a federal election.
Given the above cases, Plaintiff's contentions that class-based animus is not required under the second part of § 1985(2) *1283 or under the first part of § 1985(3), or, alternatively, need not be shown in this particular case, are without merit.
Moreover, even a most liberal reading of the Complaint in this case will not support an inference of class-based animus.
In paragraph 39 of his Complaint, Plaintiff alleges that he "is a member of the class of persons that the Acts of Congress intends to protect" without identifying that class.[74] Plaintiff does not allege that he was discriminated against because of his race or even because of his sex. See Three Rivers Cablevision v. City of Pittsburgh, 502 F. Supp. 1118, 1133 (W.D.Pa.1980). Plaintiff does allege, in paragraph 35, that "(p)hysicians similarly qualified and situated as is plaintiff have been granted renewal of medical staff privileges at the defendant Hospital in the years 1978 through 1981 and they thereby have an opportunity superior to the plaintiff's for the practice of their profession." Perhaps, based upon this language, Plaintiff purports to belong to a class of physicians.
Animus against physicians is not based upon "immutable characteristics" for which the members of the class have no responsibility. See Carchman v. Korman Corp., 594 F.2d 354, 356 (3d Cir.), cert. denied, 444 U.S. 898, 100 S. Ct. 205, 62 L. Ed. 2d 133 (1979). Nor are physicians a group which otherwise requires and warrants special federal assistance in protecting their civil rights. See Canlis v. San Joaquin Sheriff's Posse Comitatus, supra at 720.
Hence, we cannot find that Plaintiff is a member of a class protected under the first portion of § 1985(3).[75]See Feldman v. Jackson Memorial Hospital, 509 F. Supp. 815, 823-24 (S.D.Fla.1981) (Podiatrists are not members of a class protected under § 1985(3)). See also Jackson v. Norton-Children's Hospital, Inc., 487 F.2d 502, 503 (6th Cir.1973), cert. denied, 416 U.S. 1000, 94 S. Ct. 2413, 40 L. Ed. 2d 776 (1974), rehearing denied, 417 U.S. 978, 94 S. Ct. 3189, 41 L. Ed. 2d 1149 (1974) (No class-based animus in a suit by a discharged physician against a hospital); Ward v. St. Anthony Hospital, 476 F.2d 671, 676 (10th Cir.1973) (No class-based animus in a physician's suit against a hospital).
Since Plaintiff's allegations will not support an inference that Defendants' actions were motivated by class-based animus, Defendants' Motions with respect to Plaintiff's § 1985 claim must be granted.
IV. CLAIM UNDER THE FEDERAL ANTITRUST LAWS
The Hospital Defendants[76] contend that this Court lacks subject matter jurisdiction over the federal antitrust claim because Plaintiff does not adequately allege the requisite effects on interstate commerce. Specifically, according to the Hospital Defendants, Plaintiff's allegations fail to show that Defendants' allegedly illegal activities have a substantial and adverse effect on Plaintiff's activities in interstate commerce. Defendants maintain that the focus of the jurisdictional inquiry is upon the Plaintiff's activities.
Plaintiff responds that the relevant inquiry for purposes of federal antitrust jurisdiction focuses upon Defendants' activities. Plaintiff contends in this regard that the jurisdictional requirements are satisfied in this case because the activities of the Hospital Defendants are in interstate commerce or have a substantial effect on interstate commerce.
*1284 One of the prerequisites to a cause of action under the Sherman Act[77] "is the existence of a demonstrable nexus between the defendants' activity and interstate commerce." McLain v. Real Estate Bd. of New Orleans, 444 U.S. 232, 246, 100 S. Ct. 502, 511, 62 L. Ed. 2d 441 (1980). It is unnecessary for the activity to be in the flow of interstate commerce.[78] Rather, it is well established that the Sherman Act also extends to activities which, though local in nature, have a substantial effect on interstate commerce. Id. at 241-42, 100 S.Ct. at 509; Hospital Bldg. Co. v. Rex Hospital Trustees, 425 U.S. 738, 743, 96 S. Ct. 1848, 1851, 48 L. Ed. 2d 338 (1976); Gulf Oil Corp. v. Copp Paving Co., 419 U.S. 186, 194-95, 95 S. Ct. 392, 398, 42 L. Ed. 2d 378 (1974).
The United States Supreme Court discussed the "effect on commerce" test or theory in McLain, supra. In that case, the Court stated:
To establish the jurisdictional element of a Sherman Act violation it would be sufficient for petitioners to demonstrate a substantial effect on interstate commerce generated by respondents' brokerage activity. Petitioners need not make the more particularized showing of an effect on interstate commerce caused by the alleged conspiracy to fix commission rates, or by those other aspects of respondents' activity that are alleged to be unlawful. The validity of this approach is confirmed by an examination of the case law. If establishing jurisdiction required a showing that the unlawful conduct itself had an effect on interstate commerce, jurisdiction would be defeated by a demonstration that the alleged restraint failed to have its intended anticompetitive effect. This is not the rule of our cases. See American Tobacco Co. v. United States, 328 U.S. 781, 811 [66 S. Ct. 1125, 1139, 90 L. Ed. 1575] (1946); United States v. Socony-Vacuum Oil Co., 310 U.S. 150, 225, n. 59 [60 S. Ct. 811, 846 n. 59, 84 L. Ed. 1129] (1940). A violation may still be found in such circumstances because in a civil action under the Sherman Act, liability may be established by proof of either an unlawful purpose or an anticompetitive effect. United States v. United Gypsum Co., 438 U.S. 422, 436, n. 13 [98 S. Ct. 2864, 2873, n. 13, 57 L. Ed. 2d 854] (1978); United States v. Container Corp., 393 U.S. 333, 337 [89 S. Ct. 510, 512, 21 L. Ed. 2d 526] (1969); United States v. National Assn. of Real Estate Boards, 339 U.S. 485, 489 [70 S. Ct. 711, 714, 94 L. Ed. 1007] (1950); United States v. Socony-Vacuum Oil Co., supra, [310 U.S.] at 224-225, n. 59 [60 S.Ct. at 845-46, n. 59] (emphasis in original).
444 U.S. at 242-43, 100 S.Ct. at 509.[79]
Subsequent lower court opinions have disagreed over the meaning of the crucial language in McLain. Some courts have held that McLain simply emphasizes that a Plaintiff does not have to prove that the Defendant's allegedly unlawful activities actually affected interstate commerce; Plaintiff must still show, however, that Defendant's allegedly unlawful conduct probably has a substantial effect on interstate commerce. See, e.g., Cordova v. Simonpietri Ins. Agency Inc. v. Chase Manhattan Bank, 649 F.2d 36, 44-45 (1st Cir.1981); Pao v. Holy Redeemer Hosp., 547 F. Supp. 484 *1285 (E.D.Pa.1982). Other courts, however, have found that the language in McLain permits a Plaintiff to satisfy the jurisdictional requirement if it can be shown that the Defendant's general business activities, as opposed to, or independent of, the allegedly illegal conduct, substantially affect interstate commerce. See, e.g., Turf Paradise, Inc. v. Arizona Downs, 670 F.2d 813, 818-19 (9th Cir.), cert. denied, 456 U.S. 1011, 102 S. Ct. 2308, 73 L. Ed. 2d 1308 (1982); Robinson v. Magovern, 521 F. Supp. 842, 876-77 (W.D.Pa.1981), aff'd mem., 688 F.2d 824 (3d Cir.), cert. denied, ___ U.S. ___, 103 S. Ct. 302, 74 L. Ed. 2d 283 (1982).[80]
We think it quite clear that the Court in McLain focused upon the Defendants' general business activities for its jurisdictional inquiry rather than the specific conduct alleged to be unlawful. Accord, Western Waste Service v. Universal Waste Control, 616 F.2d 1094, 1096-97 (9th Cir.), cert. denied, 449 U.S. 869, 101 S. Ct. 205, 66 L. Ed. 2d 88 (1980); Crane v. Intermountain Health Care, Inc., 637 F.2d 715, 727-28 (10th Cir.1981) (Holloway, J., concurring and dissenting); McElhinney v. Medical Protective Co., 549 F. Supp. 121, 127-28 (E.D.Ky.1982); Feldman v. Jackson Memorial Hosp., 509 F. Supp. 815, 820-21 (S.D.Fla. 1981). But cf. Crane v. Intermountain Health Care, Inc., supra at 719-27 (en banc) (Plaintiff must allege a nexus between interstate commerce and the challenged activity); Cardio-Medical Assoc. v. Crozer-Chester Medical Center, 536 F. Supp. 1065 (E.D.Pa.1982) (The focus is on the effect of Plaintiff's activities on interstate commerce). We do not believe that the Court's pronouncements in McLain should be interpreted otherwise, notwithstanding the possible expansion of Sherman Act jurisdiction as it had existed under prior cases.[81]
In light of the above, the threshold issue under Plaintiff's federal antitrust claim is whether the Hospital Defendants' activities have a substantial effect on interstate commerce.[82]
Plaintiff's factual allegations as to interstate commerce are set forth in paragraph 43 of his Complaint. That paragraph states in pertinent part:
Both the plaintiff physician and the defendant Hospital ... treat patients who are citizens of various states. Their medical supplies are purchased and delivered to them from states outside of Pennsylvania. A large part of their income is derived from sources outside of Pennsylvania, namely, federal Medicare and Medicaid. The defendant Hospital also receives federal grants-in-aid.
We have no specific information before us concerning the Hospital's out-of-state patients and medical supplies. For example, we do not know how many or what percentage of Defendants' patients are out-of-state residents or domiciliaries. We believe that such information is highly pertinent to our determination of the jurisdictional issue. We will therefore require information which is more detailed and specific before we make our determination.
Plaintiff does elaborate on the other items included in paragraph 43. In paragraph 21 of his Complaint, he alleges that 35% of the Hospital's annual income is from Medicare funds, applicable to 44.62% of its inpatient load. Compl. para. 21(d). Medicaid funds allegedly represent 6.5% of the Hospital's annual income. Compl. para. 21(e). The Hospital has also received federal grants-in-aid totalling $2,200,000.00. *1286 Compl. para. 21(f).[83] These facts alone, however, are insufficient to show that the Defendants' activities have a substantial impact on interstate commerce.
Furthermore, the allegations set forth in paragraph 44 of the Complaint[84] are wholly insufficient, either alone or in conjunction with Plaintiff's other allegations, to sustain Sherman Act jurisdiction.
We may well have Sherman Act jurisdiction in light of the Supreme Court's decision in McLain. Since further facts of greater specificity are needed, we will require the parties to submit affidavits on this issue. Since Plaintiff may lack knowledge as to some of the jurisdictional facts, he shall be given the opportunity to conduct discovery on this issue.[85]
CLAIM UNDER THE STATE ANTITRUST LAWS
There is no need to address the substance of Plaintiff's state antitrust claim at this juncture. This claim remains in the Complaint unless or until the federal claims are entirely resolved prior to trial. In the event the federal claims are dismissed prior to trial, the state antitrust claim, as well as any other claims predicated upon pendent jurisdiction, may also be dismissed. See Tully v. Mott Supermarkets, Inc., 540 F.2d 187, 196 (3d Cir.1976).
NOTES
[1] The Motion for Judgment on the Pleadings has been amended once.
[2] These individual Defendants are listed in the case caption. It is unnecessary to repeat their names here.
[3] Plaintiff originally included the Commonwealth of Pennsylvania and the Pennsylvania Department of Health as Defendants in this action. Plaintiff subsequently amended his Complaint, with leave of Court, withdrawing the claims against the Commonwealth and the Department of Health as well as the claim for money damages against Dr. Muller. Plaintiff, however, continues to pursue his claim for injunctive relief against Dr. Muller. Therefore, the Motion to Dismiss originally filed by all three "Commonwealth" Defendants remains viable as to Dr. Muller.
[4] Fed.R.Civ.P. 12(b) states in pertinent part:
Every defense, in law or in fact, to a claim for relief in any pleading, whether a claim, counterclaim, cross-claim, or third-party claim, shall be asserted in the responsive pleading thereto if one is required, except that the following defenses may at the option of the pleader be made by motion: (1) lack of jurisdiction over the subject matter, (2) lack of jurisdiction over the person, (3) improper venue, (4) insufficiency of process, (5) insufficiency of service of process, (6) failure to state a claim upon which relief can be granted, (7) failure to join a party under Rule 19. A motion making any of these defenses shall be made before pleading if a further pleading is permitted.
[5] Fed.R.Civ.P. 12(c) states in pertinent part:
After the pleadings are closed but within such time as not to delay the trial, any party may move for judgment on the pleadings.
[6] As a matter of procedure, a Rule 12(b) motion is filed as a response to a claim before pleading, if further pleading is permitted. Fed. R.Civ.P. 12(b). A Rule 12(c) motion may be filed only after the pleadings are closed. Fed. R.Civ.P. 12(c); C. Wright & A. Miller, supra at 698.
[7] We question the theory that a Rule 12(b) motion is not directed to the merits of a dispute. It appears as though most courts treat at least a Rule 12(b)(6) motion as one which addresses or resolves the merits of an action.
[8] Fed.R.Civ.P. 12(h) states in pertinent part:
(2) A defense of failure to state a claim upon which relief can be granted ... may be made ... by motion for judgment on the pleadings ...
(3) Whenever it appears by suggestion of the parties or otherwise that the court lacks jurisdiction of the subject matter, the court shall dismiss the action.
[9] We set forth the standard applicable to a jurisdictional challenge since the Hospital Defendants have controverted subject matter jurisdiction under the federal antitrust laws. The other assertions made by Defendants raise the question of whether Plaintiff has stated a claim rather than the question of subject matter jurisdiction.
[10] Note, however, that the Plaintiff carries throughout the litigation the burden of showing that he is properly in court. McNutt v. General Motors Acceptance Corp., 298 U.S. 178, 189, 56 S. Ct. 780, 785, 80 L. Ed. 1135 (1936).
[11] If the Plaintiff's allegations of jurisdictional facts are challenged in any appropriate manner, he must support them by competent proof. Id. The trial court may inquire, by affidavits or otherwise, into the facts as they exist. Wetmore v. Rymer, 169 U.S. 115, 120-121, 18 S. Ct. 293, 295, 42 L. Ed. 682 (1898). "As there is no statutory direction for procedure upon an issue of jurisdiction, the mode of its determination is left to the trial court." Gibbs v. Buck, 307 U.S. 66, 71-72, 59 S. Ct. 725, 729, 83 L. Ed. 1111 (1939).
[12] Rule 12(b) states in pertinent part:
If, on a motion asserting the defense numbered (6) to dismiss for failure of the pleading to state a claim upon which relief can be granted, matters outside the pleading are presented to and not excluded by the court, the motion shall be treated as one for summary judgment and disposed of as provided in Rule 56, and all parties shall be given reasonable opportunity to present all material made pertinent to such a motion by Rule 56.
Rule 12(c) states in pertinent part:
If, on a motion for judgment on the pleadings, matters outside the pleadings are presented to and not excluded by the court, the motion shall be treated as one for summary judgment and disposed of as provided in Rule 56, and all parties shall be given reasonable opportunity to present all material made pertinent to such a motion by Rule 56.
[13] The Complaint does not indicate whether Plaintiff continues to practice his specialty or even whether Plaintiff continues to practice medicine. Plaintiff's counsel indicated at oral argument that Plaintiff has been totally foreclosed from practicing urological surgery which, according to Plaintiff's counsel, is Plaintiff's "sub-specialty." Counsel for the Hospital Defendants suggested at oral argument that Plaintiff continues to practice his specialty of urology. Again, the pleadings provide little, if any, information concerning Plaintiff's current practice or occupation.
[14] Plaintiff has alleged that a medical center also exists in Indiana County but has provided little information concerning the nature and scope of its services. The Complaint does suggest that the Indiana County Medical Center ("Medical Center") provides outpatient care (Compl. para. 15) and at oral argument, Plaintiff's counsel mentioned that the Medical Center, or the idea behind the Medical Center, was to serve those who do not require hospitalization.
[15] Staff privileges at Indiana Hospital are granted for an annual period beginning January 1 of each year.
[16] The Medical Center was built in 1975.
[17] Plaintiff does not specify a date or time period for this occurrence.
[18] Plaintiff implies, without saying, that it was his participation in the creation of the Medical Center as well as his criticism of Hospital conditions which triggered the events that followed.
[19] This information as well as that which immediately follows is set forth in Miller v. Indiana Hospital, 277 Pa. Super. 370, 419 A.2d 1191 (1980), of which we may take judicial notice. See Lamar v. Micou, 114 U.S. 218, 223, 5 S. Ct. 857, 859, 29 L. Ed. 94 (1885); Saffold v. McGraw-Edison Co., 566 F.2d 621, 623 (8th Cir.1977); Meyer v. Lavelle, 389 F. Supp. 972, 975 (E.D.Pa.1975).
[20] Specifically, Plaintiff alleges that the Defendant Hospital and its president, the Executive Committee and the members of the Governing Board refused to process his application.
[21] The Hospital Defendants allege that consideration of the application was suspended pending resolution of the state court litigation. It appears from the Complaint that Plaintiff therefore exercised his staff privileges through at least a portion of 1978.
[22] 28 U.S.C. § 1331 states:
The district courts shall have original jurisdiction of all civil actions arising under the Constitution, laws, or treaties of the United States.
28 U.S.C. § 1343 states in pertinent part:
(a) The district courts shall have original jurisdiction of any civil action authorized by law to be commenced by any person:
(1) To recover damages for injury to his person or property, or because of the deprivation of any right or privilege of a citizen of the United States, by any act done in furtherance of any conspiracy mentioned in section 1985 of Title 42;
(2) To recover damages from any person who fails to prevent or to aid in preventing any wrongs mentioned in section 1985 of Title 42 which he had knowledge were about to occur and power to prevent;
(3) To redress the deprivation, under color of any State law, statute, ordinance, regulation, custom or usage, of any right, privilege or immunity secured by the Constitution of the United States or by any Act of Congress providing for equal rights of citizens or of all persons within the jurisdiction of the United States;
(4) To recover damages or to secure equitable or other relief under any Act of Congress providing for the protection of civil rights, including the right to vote.
[23] See United Mine Workers v. Gibbs, 383 U.S. 715, 725, 86 S. Ct. 1130, 1138, 16 L. Ed. 2d 218 (1966); Rogers v. Aetna Cas. and Sur. Co., 601 F.2d 840, 843 n. 4 (5th Cir.1979).
[24] Presumably, such claims are based, or would be based, upon pendent jurisdiction.
[25] We require Plaintiff to amend his Complaint if he wishes to pursue these claims, not only for this Court's elucidation but also to put Defendants on fair notice as to the claims and allegations against them.
[26] We also note in this regard that in order for this Court to exercise pendent jurisdiction, all of Plaintiff's state and federal claims "must derive from a common nucleus of operative fact" such that Plaintiff "would ordinarily be expected to try them all in one judicial proceeding." 383 U.S. at 725, 86 S.Ct. at 1138.
[27] 2 Pa.C.S.A. § 504 states:
No adjudication of a Commonwealth agency shall be valid as to any party unless he shall have been afforded reasonable notice of a hearing and an opportunity to be heard. All testimony shall be stenographically recorded and a full and complete record shall be kept of the proceedings.
[28] 28 U.S.C. § 1331.
[29] For example, if predicating jurisdiction upon 28 U.S.C. § 1331, Plaintiff must demonstrate that the JCAH's rules and regulations were formulated pursuant to a specific grant of federal statutory authority and promulgated in accordance with the procedural requirements of the Administrative Procedure Act ("APA"), 5 U.S.C. §§ 551-53 (1976). See Chasse v. Chasen, 595 F.2d 59, 61 (1st Cir.1979).
[30] See also Bates v. State Bar of Arizona, 433 U.S. 350, 97 S. Ct. 2691, 53 L. Ed. 2d 810 (1977); Cantor v. Detroit Edison Co., 428 U.S. 579, 96 S. Ct. 3110, 49 L. Ed. 2d 1141 (1976); Goldfarb v. Virginia State Bar, 421 U.S. 773, 95 S. Ct. 2004, 44 L. Ed. 2d 572 (1975).
[31] We also note that Plaintiff's two amendments to his Complaint do not mention the federal antitrust laws with respect to Dr. Muller. Indeed, the second amendment to the Complaint only mentions 42 U.S.C. § 1983 when referring to Dr. Muller.
[32] Further, in count II, Plaintiff mentions "unnamed co-conspirators (para. 45)." Plaintiff must name alleged co-conspirators if he knows their identities. If he does not know their identities but has reason to believe such persons exist, Plaintiff should expressly so state.
[33] Parts of count I are inflicted with the same problem. In this regard, many of the possible "pendent" legal claims do not seem to pertain to Dr. Muller. If Plaintiff wishes to retain any of these claims, he must clarify which Defendants are included in each claim.
[34] We question whether Plaintiff even has standing to challenge a conspiracy to monopolize hospital facilities.
[35] Dr. Muller also alleges the defense of collateral estoppel in his Motion to Dismiss. He does not, however, allege res judicata.
[36] This statute has existed virtually unchanged since 1790. 449 U.S. at 96 n. 8, 101 S.Ct. at 416 n. 8.
[37] See Fed.R.Civ.P. 8(c).
[38] For example, a court may inquire into whether the acts complained of and the demand for recovery are the same. See Williamson v. Columbia Gas & Electric Corp., 186 F.2d 464, 470 (3d Cir.1950).
[39] Plaintiff seeks treble damages under his federal antitrust count as well as damages under his civil rights count.
[40] See discussion infra.
[41] We also note that it is not at all clear that the federal antitrust allegations could have been raised, or at least sustained, in the case before the Pennsylvania Superior Court. See Donegal Steel Foundry Co. v. Accurate Products Co., 516 F.2d 583, 587 (3d Cir.1975); 18 C. Wright & A. Miller, Federal Practice and Procedure § 4406, at 45 (1981).
[42] It is not clear to us that Plaintiff intended to assert claims directly under the Fifth and Fourteenth Amendments. The parties' briefs and oral argument focus upon the civil rights statutes. Nonetheless, since Plaintiff did mention the Fifth and Fourteenth Amendments in count I (paragraphs 7 and 36) of his Complaint and since Defendants did move to dismiss count I, we will discuss the "constitutional claims." Plaintiff's claims based upon the civil rights statutes, 42 U.S.C. §§ 1983 and 1985, are discussed in separate sections of this Opinion.
We note further that Dr. Muller, the Secretary of the Pennsylvania Department of Health, does not appear to be part of the Fifth Amendment claim, assuming that such a claim exists. Indeed, we doubt that Dr. Muller could be made part of a Fifth Amendment claim since it is unlikely that his actions could be considered those of the federal government. Therefore, we will discuss the Fifth Amendment claim only with reference to the Hospital Defendants.
[43] The Fifth Amendment provides in pertinent part: "No person shall be ... deprived of life, liberty, or property, without due process of law...".
Although the Fifth Amendment contains no equal protection clause, the United States Supreme Court has held that "the Fifth Amendment's Due Process Clause prohibits the Federal Government from engaging in discrimination that is `so unjustifiable as to be violative of due process.'" Rostker v. Goldberg, 453 U.S. 57, 89 n. 6, 101 S. Ct. 2646, 2664 n. 6, 69 L. Ed. 2d 478 (1981) (Marshall, J., dissenting opinion), quoting Schlesinger v. Ballard, 419 U.S. 498, 500 n. 3, 95 S. Ct. 572, 574 n. 3, 42 L. Ed. 2d 610 (1975).
[44] The tests developed by the U.S. Supreme Court which may be used to determine the existence of "government" action, be it state or federal, are the "symbiotic relationship" test, the "nexus" test and the "public function" test. Nguyen v. United States Catholic Conference, 548 F. Supp. 1333 (W.D.Pa.1982).
[45] There may be an exception, however, where the state is responsible for allocating or disbursing the federal monies.
[46] In the instant case, the Pennsylvania Superior Court found that Indiana Hospital's conduct was not state action for purposes of the Fourteenth Amendment. See Miller v. Indiana Hosp., 277 Pa. Super. 370, 419 A.2d 1191 (1980). Such a finding has preclusive effect with respect to that specific issue in the action before this Court under the doctrine of collateral estoppel. See Allen v. McCurry, 449 U.S. 90, 101 S. Ct. 411, 66 L. Ed. 2d 308 (1980). In other words, its preclusive effect is only relevant to a Fourteenth Amendment or a § 1983 claim.
[47] In Burton v. Wilmington Parking Authority, supra, a restaurant located in a publicly-owned parking facility refused service to a black. The Court found sufficient state action so as to invoke the Fourteenth Amendment where the land and building housing the restaurant were publicly-owned, rent from the restaurant contributed to the support of the garage while most of the remaining maintenance costs were financed by the public, the building was devoted to a public use and most importantly, the particular relationship between the restaurant and the garage conferred mutual benefit on both. Id. 365 U.S. at 723-724, 81 S.Ct. at 860-61. Thus, the State effectively not only made itself a party to the restaurant's discriminatory act, but "elected to place its power, property and prestige behind the admitted discrimination." Id. at 725, 81 S.Ct. at 862.
[48] Braden v. University of Pittsburgh, supra at 958.
[49] The "nexus" test set forth in Jackson v. Metropolitan Edison Co., 419 U.S. 345, 95 S. Ct. 449, 42 L. Ed. 2d 477 (1974), should be applied only if the requisite state involvement and interdependence is not found under the Burton test. Chalfant v. Wilmington Institute, 574 F.2d 739, 745-746 (3d Cir.1978).
[50] The fact that the Hospital has received construction grants from the federal government (Compl. para. 21(f)) does not make its buildings publicly-owned.
[51] Moreover, heavy governmental regulation, standing alone, does not give rise to a Burton "symbiotic relationship" so as to warrant a finding of government action. See Fitzgerald v. Mountain Laurel Racing, Inc., 607 F.2d 589, 594-96 (3d Cir.1979), cert. denied, 446 U.S. 956, 100 S. Ct. 2927, 64 L. Ed. 2d 814 (1980). Most courts have found that hospitals subject to extensive state or federal regulations do not, as a result, act under color of state law for purposes of § 1983. See Cardio-Medical Assoc. v. Crozer-Chester Medical Center, supra at 1093 and the cases cited therein.
[52] Most courts have held that a hospital's receipt of Hill-Burton funds does not convert all of its acts into actions taken under color of state law for purposes of § 1983. See Cardio-Medical Assoc. v. Crozer-Chester Medical Center, supra at 1092 and the cases cited therein.
[53] Most courts have held that a hospital's receipt of Medicare and Medicaid funds does not convert all of its acts into actions taken under color of state law. Id. at 1094 and the cases cited therein.
[54] Plaintiff does not describe this alleged federal "agency" with any detail nor does Plaintiff state whether this agency's standards are federal rules and regulations formulated pursuant to a specific grant of federal statutory authority and promulgated in accordance with the APA. See n. 29 infra.
[55] Most courts have held that a hospital's tax exempt status does not convert its actions into actions taken under color of state law for purposes of 42 U.S.C. § 1983.
[56] Plaintiff alleges no facts directly connecting the individual Hospital Defendants with the federal government. We presume he intends to rely, for the individual Defendants, on the allegations already discussed.
[57] Plaintiff's allegation of the Hospital's monopolistic status in Indiana County is not relevant to the question of federal action. See Compl. para. 21(b). Even if it were relevant, such status does not transform the Hospital's actions into those of the federal government.
[58] A close nexus between the government and the challenged private action may be sufficient to warrant a finding of federal action even if a Burton "symbiotic relationship" is absent. See Fitzgerald v. Mountain Laurel Racing, Inc., supra at 596-597.
[59] Flagg Bros. v. Brooks, supra 436 U.S. at 164, 98 S.Ct. at 1737. See also Adickes v. S.H. Kress & Co., 398 U.S. 144, 170, 90 S. Ct. 1598, 1615, 26 L. Ed. 2d 142 (1970). The Court in Adickes noted that "`(w)hen the State has commanded a particular result, it has saved to itself the power to determine that result and thereby to a significant extent has become involved in it.'" Id., quoting Peterson v. City of Greenville, 373 U.S. 244, 248, 83 S. Ct. 1119, 1121, 10 L. Ed. 2d 323 (1963).
[60] The relevant federal regulations do not dictate the Hospital's decision to refuse to process any particular physician's application.
We note further that there are no allegations connecting the federal government with the action of any individual Hospital Defendant.
[61] Dr. Muller contends that Plaintiff has failed to state a claim under § 1983. The Hospital Defendants contend in their Motion that this Court lacks subject matter jurisdiction under § 1983. The substance of their contentions are the same, namely, that they did not act under color of state law. We note, however, that this issue is relevant to the question of whether Plaintiff has stated a claim rather than the threshold question of subject matter jurisdiction. See Nguyen v. United States Catholic Conference, supra at 1339-40 (the question of federal action is not relevant to the issue of subject matter jurisdiction). Under the pertinent case law, it is clear that we have subject matter jurisdiction. See Duke Power Co. v. Carolina Env. Study Group, 438 U.S. 59, 70, 98 S. Ct. 2620, 2628, 57 L. Ed. 2d 595 (1978); Bell v. Hood, 327 U.S. 678, 681-82, 66 S. Ct. 773, 776, 90 L. Ed. 939 (1946); Griffith v. Bell-Whitley Community Action Agency, 614 F.2d 1102, 1107 (6th Cir.), cert. denied, 447 U.S. 928, 100 S. Ct. 3025, 65 L. Ed. 2d 1122 (1980).
[62] Section 1983 states:
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 or other person within the jurisdiction thereof to the deprivation of any rights, privileges, or immunities secured by the Constitution and laws, shall be liable to the party injured in an action at law, suit in equity, or other proper proceeding for redress. For the purposes of this section, any Act of Congress applicable exclusively to the District of Columbia shall be considered to be a statute of the District of Columbia.
42 U.S.C. § 1983.
[63] See Rendell-Baker v. Kohn, ___ U.S. ___, 102 S. Ct. 2764, 73 L. Ed. 2d 418 (1982) and Lugar v. Edmondson Oil Co., ___ U.S. ___, 102 S. Ct. 2744, 73 L. Ed. 2d 482 (1982), quoting United States v. Price, 383 U.S. 787, 794 n. 7, 86 S. Ct. 1152, 1157 n. 7, 16 L. Ed. 2d 267 (1966) ("In cases under § 1983, under color of law has consistently been treated as the same thing as the `state action' required under the Fourteenth Amendment.") We note, however, that under Lugar, all conduct that satisfies the state action requirement of the Fourteenth Amendment satisfies the § 1983 requirement of action under color of state law but the converse is not necessarily true. The courts which have decided medical staff privilege cases similar to the one at bar have consistently, in that context, equated "action under color of state law" with "state action." See, e.g., Cardio-Medical Assoc. v. Crozer-Chester Medical Center, supra at 1087-97 and the cases cited therein.
[64] See n. 46 infra.
[65] The Hospital Defendants asserted this defense in their Answer (para. 20) to Plaintiff's Complaint. Dr. Muller raised this defense in his Motion to Dismiss (para. 5(a)).
[66] We are referring here to the Hospital's general activities rather than any particular action performed in concert with a "state actor."
[67] Thus, Plaintiff had a full and fair opportunity in the state courts to make the same allegations he makes here on the state action issue, and to present evidence thereon. Moreover, we note that the possibility of error in the state court's decision does not preclude the application of collateral estoppel as long as the party against whom it is asserted had a full and fair opportunity to present his or her claim.
[68] The state court litigation terminated before the Pennsylvania Department of Health ever became involved in this matter in December 1980. Based upon the relevant dates and Plaintiff's own allegations, the alleged conspiracy could only exist, if at all, with respect to Plaintiff's application for 1981 staff privileges and not with regard to any prior applications.
[69] In his brief, Plaintiff contends that a conspiracy also exists between the private Hospital Defendants and William McMillen and that this conspiracy is sufficient for action taken under color of state law for purposes of § 1983. Plaintiff's contention is without merit. William McMillen, a member of the Hospital's governing Board is or was an Indiana County Commissioner. Mr. McMillen cannot fairly be said to be a state "actor" for purposes of Plaintiff's alleged wrong. Thus, Mr. McMillen is not a state official. See Lugar v. Edmondson Oil Co., supra. Further, his actions as a member of the Hospital's Governing Board were not made for the purpose of executing government policy or in the performance of his official county duties. See Monell v. New York City Dept. of Social Services, 436 U.S. 658, 694, 98 S. Ct. 2018, 2037, 56 L. Ed. 2d 611 (1978).
[70] Section 1985(1) states:
If two or more persons in any State or Territory conspire to prevent, by force, intimidation, or threat, any person from accepting or holding any office, trust or place of confidence under the United States, or from discharging any duties thereof; or to induce by like means any officer of the United States to leave any State, district, or place, where his duties as an officer are required to be performed, or to injure him in his person or property on account of his lawful discharge of the duties of his office, or while engaged in the lawful discharge thereof, or to injure his property so as to molest, interrupt, hinder, or impede him in the discharge of his official duties.... (the party so injured or deprived may have an action for ... damages ...). 42 U.S.C. § 1985(1).
[71] Section 1985(2) states:
If two or more persons in any State or Territory conspire to deter, by force, intimidation, or threat, any party or witness in any court of the United States from attending such court, or from testifying to any matter pending therein, freely, fully, and truthfully, or to injure such party or witness in his person or property on account of his having so attended or testified, or to influence the verdict, presentment, or indictment of any grand or petit juror in any such court, or to injure such juror in his person or property on account of any verdict; presentment, or indictment lawfully assented to by him, or of his being or having been such juror; or if two or more persons conspire for the purpose of impeding, hindering, obstructing, or defeating, in any manner, the due course of justice in any State or Territory, with intent to deny to any citizen the equal protection of the laws, or to injure him or his property for lawfully enforcing, or attempting to enforce, the right of any person, or class of persons, to the equal protection of the laws ... (the party so injured or deprived may have an action for ... damages ...).
42 U.S.C. § 1985(2).
[72] Section 1985(3) states:
If two or more persons in any State or Territory conspire or go in disguise on the highway or on the premises of another, for the purpose of depriving, either directly or indirectly, any person or class of persons of the equal protection of the laws, or of equal privileges and immunities under the laws; or for the purpose of preventing or hindering the constituted authorities of any State or Territory from giving or securing to all persons within such State or Territory the equal protection of the laws; or if two or more persons conspire to prevent by force, intimidation, or threat, any citizen who is lawfully entitled to vote, from giving his support or advocacy in a legal manner, toward or in favor of the election of any lawfully qualified person as an elector for President or Vice President, or as a Member of Congress of the United States; or to injure any citizen in person or property on account of such support or advocacy; in any case of conspiracy set forth in this section, if one or more persons engaged therein do, or cause to be done, any act in furtherance of the object of such conspiracy, whereby another is injured in his person or his property, or deprived of having and exercising any right or privilege of a citizen of the United States, the party so injured or deprived may have an action for the recovery of damages occasioned by such injury or deprivation, against any one or more of the conspirators.
42 U.S.C. § 1985(3).
[73] The "intent" which § 1985(3) requires is not scienter or willfulness but rather is an invidiously discriminatory motivation. Id. at 102 n. 10, 91 S.Ct. at 1798 n. 10.
[74] We note in this regard that a bald assertion such as this may not meet the factual specificity required of civil rights claims in this Circuit. See United States v. City of Philadelphia, 644 F.2d 187, 204-05 (3d Cir.1980); Rotolo v. Borough of Charleroi, 532 F.2d 920, 922-23 (3d Cir.1976).
[75] Nor is Plaintiff a member of a class protected under the second portion of § 1985(2).
[76] Defendant Dr. Muller also moves to dismiss the antitrust counts of the Complaint. As discussed earlier, however, it appears from the Complaint and the amendments thereto that Plaintiff did not include Dr. Muller in the antitrust counts. Therefore, we will address the antitrust allegations only with respect to the Hospital Defendants.
[77] Section one of the Sherman Act prohibits every contract, combination or conspiracy "in restraint of trade or commerce among the several States" and section two of the Sherman Act prohibits monopolizing "any part of the trade or commerce among the several States." 15 U.S.C. §§ 1 and 2.
[78] For an activity to be in the flow of interstate commerce, it must be an integral and inseparable part of an interstate transaction or program. Goldfarb v. Virginia State Bar, 421 U.S. 773, 784-85, 95 S. Ct. 2004, 2011-12, 44 L. Ed. 2d 572 (1975); United States v. Frankfort Distilleries, 324 U.S. 293, 297, 65 S. Ct. 661, 663, 89 L. Ed. 951 (1945). Plaintiff's allegations do not permit an inference that Defendants' activities are an integral and inseparable part of an interstate transaction or program. On the contrary, the pleadings indicate that the activities of the Hospital Defendants are local in nature. Therefore, jurisdiction in this case will be analyzed under the "effect on commerce" theory. 444 U.S. at 242, 100 S.Ct. at 509.
[79] We quote the Court's exact words at length because of the confusion and disagreement they have created among the lower courts.
[80] But see Pontius v. Children's Hosp., 552 F. Supp. 1352, 1361 (W.D.Pa.1982).
[81] Where the Court's words are clear, we feel compelled to follow their plain meaning.
[82] The cases involving medical staff privileges have not distinguished between individual and collective impact on interstate commerce. In other words, the cases have not required a Plaintiff to show that the activities of each individual hospital Defendant have a substantial effect on interstate commerce. See, e.g., McElhinney v. Medical Protective Co., supra at 128. Since the cases thus far have not made a distinction among hospital Defendants for purposes of jurisdiction and since a requirement of individual impact would impose a substantial burden on a physician-Plaintiff, we will not impose such a requirement in this case.
[83] In paragraph 21(i), Plaintiff alleges that the Hospital has received, as of June 30, 1980, $2,507,857.65 from "public subscriptions." Plaintiff does not state the nature or source of these "public subscriptions." Therefore, we have no indication as to whether this allegation should be considered a fact in support of Sherman Act jurisdiction. If it is a supporting fact, Plaintiff should so indicate.
[84] Paragraph 44 states in pertinent part:
The Hospital is a link in a chain of health care facilities that binds all fifty states, the District of Columbia and territories of the United States, and its relationship with the other health care facilities transcends state lines in that the Federal government acting through the state, District and territorial governments as agents, regulates and controls all facets of operation in such a manner that the operation of any one link has a substantial effect upon all others and thus a substantial effect upon interstate commerce. Inasmuch as the medical staff members, individually and jointly, are essential to the operation of a health care facility they have a substantial effect upon interstate commerce.
[85] Defendants' allegation that Plaintiff has failed to state a claim under the federal antitrust laws will not be addressed at this time. In the event Plaintiff does establish Sherman Act jurisdiction, Defendants will be allowed to renew any other objections to the federal antitrust claim in an appropriate manner.
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562 F. Supp. 289 (1983)
MOYGLARE STUD FARM, LTD., Plaintiff,
v.
DUE PROCESS STABLE, INC. and Robert E. Brennan, Defendants.
No. 82 Civ. 8472 (WCC).
United States District Court, S.D. New York.
April 13, 1983.
*290 Sullivan & Cromwell, New York City, for plaintiff; Richard H. Klapper, New York City, of counsel.
Schwarzfeld, Arnoff & Shores, New York City, for defendants; Norman B. Arnoff, New York City, Robinson, Wayne, Levin, Riccio & LaSala, Newark, N.J., of counsel.
OPINION AND ORDER
CONNER, District Judge.
In this diversity action, plaintiff Moyglare Stud Farm, Ltd. ("Moyglare") seeks a declaratory judgment pursuant to 28 U.S.C. § 2201 that defendants' revocation of a contract of sale is invalid. The case is currently before the Court on defendants' motion to dismiss or transfer the action on the ground of improper venue, Rule 12(b)(3), F.R.Civ.P. or, alternatively, for the convenience of the parties and witnesses pursuant to 28 U.S.C. § 1404(a). For the reasons stated below, the motion is denied in all respects.
Background
In the spring of 1981, Moyglare, an Irish corporation engaged in the business of breeding thoroughbred race horses, agreed to sell one of its horses to defendant Due Process Stable, Inc. ("Due Process"), a New Jersey corporation. The agreement called for Due Process to pay $1 million for the horse, Lobsang II, with $250,000 to be paid on delivery and $750,000 plus interest to be paid in three annual installments due on May 1 in each of the years 1982, 1983 and 1984. Defendant Robert E. Brennan ("Brennan"), Due Process's principal,[1] signed the sale documents in his New York office on April 28, after which the documents were forwarded to Moyglare for execution in Ireland.
According to the complaint, Lobsang II was delivered to Due Process on April 30, 1981[2] and the first payment of $250,000 was made shortly thereafter. Nearly eighteen months later, however, on October 12, 1982, Brennan sent Moyglare a letter revoking its acceptance of Lobsang II on the ground that Due Process had recently discovered facts that caused it to believe that the horse had a serious, albeit concealed, leg injury prior to the sale. That letter, attached *291 as Exhibit D to the complaint, is written on Due Process stationery which lists Brennan's New York office as its address. Moyglare asserts, without contradiction, that Brennan mailed the revocation from New York City. On December 20, 1982, Moyglare filed the instant action seeking a determination that the revocation of acceptance was ineffective and improper.
Discussion
Section 1391(a) of Title 28 U.S.C. states that a diversity action may be brought in the judicial district where all the plaintiffs or all the defendants reside or in which the claim arose. Prior to 1966, that section provided only for venue in the district where all the plaintiffs or all defendants resided. The statute was amended in 1966, however, to add the clause "or in which the claim arose" in order to create additional venue possibilities and further the convenience of the parties. See Gardner Engineering Corp. v. Page Engineering Co., 484 F.2d 27, 33 (8th Cir.1973). Since neither Moyglare nor defendants are residents of this district, the question whether venue is proper here turns upon a determination of where plaintiff's claim arose.[3]
Preliminarily, it should be noted that the issue of where a claim arises for purposes of venue under Section 1391 should be determined as a matter of federal, rather than state, law. See Leroy v. Great Western United Corp., 443 U.S. 173, 183 n. 15, 99 S. Ct. 2710, 2716 n. 15, 61 L. Ed. 2d 464 (1979) (venue under § 1391(b)); Lieb v. American Pacific International Inc., 489 F. Supp. 690 (E.D.Pa.1980). Although some federal courts have regarded venue in a diversity case as a substantive right which is to be decided by state law, see, e.g., Wahl v. Foreman, 398 F. Supp. 526, 529 (S.D.N.Y. 1975), the Supreme Court in Leroy noted that venue under Section 1391 is a federal question whose answer depends on federal law. Leroy, supra, 443 U.S. at 183 n. 15, 99 S.Ct. at 2716 n. 15, citing 1 J. Moore, Federal Practice ¶ 0.142[5-.2] (1979); Wright, Miller & Cooper, § 3803. See also Coface v. Optique Du Monde, Ltd., 521 F. Supp. 500, 505 (S.D.N.Y.1980).
The task of determining where the claim arose has not always been a simple one. Cf. Leroy, supra, 443 U.S. at 185, 99 S.Ct. at 2717 (noting the "occasionally fictive assumption" that claims arise in one place only). Since the 1966 amendments to Section 1391, federal courts have struggled to apply this rather imprecise standard in cases involving acts in many districts. See Lieb, supra, 489 F.Supp. at 695-96; Philadelphia Housing Authority v. American Radiator & Standard Sanitary Corp., 291 F. Supp. 252, 260 (E.D.Pa.1968). Indeed, as this Court noted in a case involving venue under Section 1391(b),[4] the phrase is susceptible of at least three interpretations: (1) where the largest part of the claim arose; (2) where a substantial part of the claim arose; or (3) where any part of the claim arose. Honda Associates, Inc. v. Nozawa Trading, Inc., 374 F. Supp. 886, 890 (S.D.N. Y.1974). In Honda, this Court ruled that Section 1391(b) does not support a right to bring suit where any part of the claim, however small, arose. Id. at 892.[5] Thus, in determining the proper district for purposes of venue, the Court will examine the weight of the defendant's contacts regarding the claim in the various districts concerned. See Coface, supra, 521 F.Supp. at 505; Lieb, supra, 489 F.Supp. at 695.
*292 Defendants argue that Moyglare's claim arose in either Ireland or New Jersey rather than in New York because (1) Moyglare executed the sale documents in Ireland; (2) Due Process sent the notice of revocation to Ireland; (3) the bill of sale stated that the agreement would be governed by New Jersey law; (4) title to Lobsang II passed when the horse was delivered to Due Process in New Jersey; and (5) Moyglare acknowledged receipt of the first payment in a letter sent to Due Process in New Jersey. On the other hand, plaintiff points out that (1) Brennan signed the sale documentation on behalf of Due Process in New York; (2) defendants inspected the horse in New York before agreeing to the purchase; and, most importantly, (3) Brennan mailed the notice of revocation from his New York office. This last point is significant because under New Jersey law, which applies in this case pursuant to the contract, a revocation of goods becomes legally effective when the buyer properly dispatches notice of the revocation, rather than when the Seller receives that notice. See N.J.S.A. 12A:2-608(2), 1-201(26). Thus, under New Jersey law, the determinative event is Brennan's mailing of the notice, not Moyglare's receipt of the notice in Ireland, as defendants erroneously suggest. See commentary to § 1-201(26) at p. 43 (word "notifies" used when essential fact is dispatch of notice rather than receipt).
Clearly, this is not a case in which the contacts between the claim and this district are insignificant or miniscule. Cf. Honda, supra, 374 F.Supp. at 888 (venue improper in New York on trademark infringement claim where premised on fact that defendant sent about 20 mail order catalogs into state and received three orders totalling $37 from in-state residents). Rather, the actions taken by defendants here go to the heart of Moyglare's claim concerning the revocation, and accordingly the Court finds venue to be proper in this district. As stated above, defendants signed the contract here and ultimately withdrew their acceptance of the horse here, the specific act giving rise to plaintiff's cause of action. While the fact that the revocation was made in New York alone might not suffice to convince the Court that the claim arose in this district, see Gardner, supra, 484 F.2d at 33 (claim for anticipatory repudiation did not arise at place of repudiation where that site bore no other relation to contract), this case involves more than that narrow basis for venue. Cf. id. (venue at place of repudiation would unfairly favor repudiating party). Nor is the Court persuaded that the weight of the contacts with the District of New Jersey so far exceeds that of events occurring here that plaintiff's choice of venue should be overridden. Although the Court is aware that the New Jersey choice of law clause deserves significant weight in determining where a claim arose, see Lieb, supra, 489 F.Supp. at 696, that factor cannot be dispositive where, as here, certain of the sale discussions, the signing of the contract by defendants and the revocation of the horse all took place in this district. Accordingly, defendants' motion to dismiss or transfer on the basis of improper venue is denied.
The Court also denies defendants' motion to transfer the case to the District of New Jersey pursuant to 28 U.S.C. § 1404(a) for the convenience of the parties and witnesses and in the interests of justice. A plaintiff's choice of forum is entitled to some weight, see A. Olinick & Sons v. Dempster Brothers, Inc., 365 F.2d 439 (2d Cir.1966). A request to transfer strikes an extremely hollow note in this case since the proposed transferee courthouse in Newark is located less than 20 miles from this courthouse. Travel convenience is, in this instance, a minimal consideration. Moreover, Moyglare has identified seven witnesses it expects to call at trial, all of whom live or work in New York while defendants have only made generalized assertions concerning out-of-state witnesses. There is no contention that, given the 100-mile bubble of Rule 45(e), F.R.Civ.P., this Court's ability to compel the presence of any necessary witness is any less than that possessed by the district court in Newark. Finally, the Court cannot overlook the fact that defendant Brennan actually works less than a *293 10-minute walk from this courthouse. This is simply not a case in which the burden on defendants and third-party witnesses requires the Court to relocate the litigation. Accordingly, the case will proceed in this district.
Conclusion
Defendants' motion to dismiss or transfer is denied. The parties are directed to appear for a pretrial conference on Friday, June 10, 1983 at 10:00 A.M. in Room 608 of the U.S. Courthouse.
SO ORDERED.
NOTES
[1] Brennan is the chief executive officer and controlling shareholder of First Jersey Securities Inc., a securities firm with executive offices at 50 Broadway, New York, New York.
[2] According to unsworn assertions in Moyglare's brief, Lobsang II was driven to the Due Process stables in New Jersey but was immediately returned to New York for training.
[3] The Court cannot agree with defendants' contention that the Court should not reach the issue of where the claim arose if all the defendants live in the same district. Either of these alternative bases of venue is sufficient.
[4] Section 1391(b) sets forth the venue requirements for cases based on federal question jurisdiction. It states that
[a] civil action wherein jurisdiction is not founded solely on diversity of citizenship may be brought only in the judicial district where all defendants reside, or in which the claim arose, except as otherwise provided by law.
[5] Because Honda involved only insignificant contacts in this forum, the Court did not consider the validity of the other two interpretations. 374 F.Supp. at 892.
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