author: GIBSON, Circuit Judge.

text:
    CONTINENTAL CASUALTY COMPANY, a corporation, Appellee, v. EMPLOYERS COMMERCIAL UNION INSURANCE COMPANY, a corporation, Appellant, and Crane and Ordway Co., a corporation, Appellee.
    No. 72-1528.
    United States Court of Appeals, Eighth Circuit.
    Submitted Feb. 13, 1973.
    Decided March 20, 1973.
    Rehearing Denied May 11, 1973.

      Michael F. Pieplow, Sioux Falls, S. D., for appellant.
    Donald J. Porter, Pierre, S. D., for appellee.
    Before GIBSON and ROSS, Circuit Judges, and BENSON, District Judge.

       Judge Benson, Chief Judge of the District Court of North Dakota, sitting by designation.

   GIBSON, Circuit Judge.

The defendant Employers Commercial Union Insurance Company (Employers), appeals from an adverse declaratory judgment requiring it to defend, as an omnibus insured, the defendant in another law suit, Bruce Lyson v. Crane and Ordway Company, pending in the United States District Court for South Dakota. Plaintiff Continental Casualty Company (Continental), the liability carrier for Crane and Ordway (Crane), brought this declaratory action pursuant to 28 U.S.C. §§ 2201 and 2202. Jurisdiction is based on diversity of citizenship and the laws of South Dakota apply. We reverse and hold that Continental is the primary insurer of Crane and must defend the action brought by Lyson against Crane.

On August 4, 1967, Lyson, an employee of Grimshaw Drilling Company, drove a Grimshaw truck to Crane’s business premises in order to pick up pipe that Crane had sold to Grimshaw. While on Crane’s premises, Lyson, in loading a 21-foot long and four-inch diameter pipe onto the Grimshaw truck, was injured. He was assisted in the loading of the truck by a fellow employee and one of Crane’s employees. Lyson claimed and received workmen’s compensation in the sum of $10,405.75 from Employers Group of Insurance Companies, a wholly owned subsidiary of Employers and the workmen’s compensation carrier of Grimshaw. Defendant Employers had also issued a liability policy to Grimshaw. Lyson then began an action in the United States District Court for South Dakota against Crane, claiming that his injuries were caused by the negligence of its employee. Crane notified its liability insurance carrier, Continental, of Lyson’s suit, and Continental tendered the defense to Employers on the ground that Employers was the primary insurer under its liability policy issued to Grimshaw and should defend the Lyson suit. Employers refused the tender, and Continental brought this declaratory action to determine who is the primary insurer of Crane, and who, therefore, must defend the Lyson suit.

Before discussing the legal interpretation of the conflicting contentions of the insurance companies, we first express our strong disapproval of the litigation procedure employed by Continental and Employers. While these insurance companies are bickering over the legal obligations of liability and duty to defend (issues that too often come before this Court), Lyson remains uncompensated for any possible negligence by Crane’s employee. Lyson was injured on August 4, 1967, and sued Crane during May 1971. The declaratory action was heard on April 11, 1972, and judgment was rendered on June 22, 1972. The Lyson suit has been pending now for nearly two years. We see no reason why Lyson must wait for the determination of this law suit. Instead, Continental and Employers should have decided on one of them to defend the suit and then, after Lyson’s claim was litigated, take legal steps to determine which company was liable. There has been no contention that some other party, beside Continental or Employers, is ultimately liable in the Lyson suit. Such unreasonable delay oppressively prejudices the suit of the injured party and unfairly prolongs the payment of possible damages to him.

We now turn to the legal interpretation of the insurance contracts in this diversity case governed by South Dakota law. Attached to Employers’ liability policy with Grimshaw was an endorsement that contained the following exclusion:

“LIMITATION OF ADDITIONAL INTERESTS — LOADING AND UNLOADING
“It is agreed that the insurance for Bodily Injury Liability-Automobile . . . does not apply to injury . . . which arises out of the loading or unloading of an automobile, if the accident occurs on premises . . . owned, rented or controlled either by the person or by the employee of the person against whom claim is made or suit is brought for such injury. . . .”

The District Court stated that, if the endorsement was effective, coverage by Employers’ policy of Crane would be precluded. The parties do not contest this conclusion. The District Court, however, held that the endorsement was defective and invalid, since it violated S.D.C.L. § 58-11-2 (1967) in failing to name the parties, the subject of the insurance, and the time that the endorsement was to take effect. The questioned endorsement contained blank spaces, which were not completed, for the effective date of the endorsement, the policy number, and the parties to the contract. This endorsement was physically attached to the main policy along with 12 other endorsements that were properly completed and was the third in order of attachments to the policy.

S.D.C.L. §§ 58-10-2 and 58-11-2 were enacted for the benefit of the insured and in the interest of making insurance agreements more readily understood by the parties purchasing insurance. The main thrust of § 58-11-2 is to the policy itself, as obviously none of the riders or endorsements could contain all six items specified without being an entire insurance policy itself. Thus, for example, the risk insured against, the premiums, and the conditions pertaining to the insurance are not set forth in the riders. The crucial elements of the requirements, as to the riders, are the subject of the insurance or the rider (usually an exclusion of limitation to the main policy) and the number of the insurance policy. The inclusion of the number of the insurance policy on the rider makes certain that the parties intended that the rider be part of the entire policy. In this case, the insurance policy number was omitted on the rider, however we think under these particular facts that there is no question at all, as between the insurance company and the insured Grimshaw, that all of the 13 riders were attached to the policy at the time of issuance of the entire policy and that the policy with its 13 attached riders embodies the agreement of the parties. All riders were signed by the authorized agent at the time the policy was issued and were delivered as a unit. Thus, absent any detriment to the insured, the clerical error in failing to fill out the third rider in a list of 13 riders attached to the policy is not the type of violation sought to be reached by § 58-11-2.

Although we are faced with the plain wording of § 58-11-2, the view above on the incomplete but valid endorsement is buttressed by both the general common law and another South Dakota statute.

The general common law rule has been stated as follows:

“But at least as regards separate papers physically attached, the modern trend of authority is to the effect that complete absence or insufficiency of reference in the policy proper to the attached paper, or vice versa, whereby there can be no certainty that the parties intended the attached paper to become a part of the whole contract of insurance, precludes its inclusion or construction in connection therewith.” Annot., 128 A.L.R. 1034, 1042 (1940). Also, 43 Am.Jur.2d, Insurance § 283 (1969); 13 J. Appleman, Insurance Law & Practice § 7540 at 302 (1946).

At common law whether or not an incomplete endorsement is part of the policy presents a factual question that turns on the intention of the parties. The existence of certain facts leads to inferences that can be reasonably made to determine whether a rider was intended by the parties to be a part of the entire policy. For example, the extreme ease for non-inelusion of a rider would be complete absence of reference to the policy in an unsigned rider and the issuance of this lone rider after issuance of the entire policy. However, in this ease, the rider was signed, attached to the policy at the time of issuance of the entire policy, and was only one of 13 riders that was not properly completed. Such facts lead to the reasonable inference that the rider was intended by the parties to be part of the entire policy. Petrowski v. Hawkeye Security Ins. Co., 237 F.2d 609, 610 (7th Cir. 1956), cert. denied, 352 U.S. 972, 77 S.Ct. 364, 1 L.Ed.2d 325 (1957).

In addition, another South Dakota statute leads to the same conclusion. S.D.C.L. § 58-11-38 (1967) reads:

“58-11-38 . . . Any insurance policy, rider, or endorsement issued after June 30, 1966 and otherwise valid which contains any condition, omission or provision not in compliance with the requirements of this title, shall not be thereby rendered invalid but shall be construed and applied in accordance with such conditions and provisions as would have applied had such policy, rider, or endorsement been in full compliance with this title.”

The failure in this case to fill in the blank spaces on the questioned endorsement was a clerical error, which is an omission under § 58-11-38 that does not make the endorsement invalid.

An added factor in this analysis is that the requirements of § 58-11-2 are for the purpose of protecting the insured from any improper inclusion of policy provisions contained in endorsements of which he has no knowledge. Here, the insured (Grimshaw) is not contesting the validity of the endorsement, but rather another insurance company (Continental) who was not a party to the insurance contract. Further, Continental is attempting to shift its primary liability, for which it received premiums, to Grimshaw, who has no connection with the alleged tort feasor, and to make Grimshaw through Employers liable for the damage inflicted. Apropos are the words of Chief Judge Brown in American Fidelity & Cas. Co., Inc. v. Pennsylvania Threshermen & Farmers’ Mut. Cas. Ins. Co., 280 F.2d 453, 455 (5th Cir. 1960):

“This is another and undoubtedly not the last, of those cases of which we have many, in which one insurer having the good fortune to find some other insurer who has written a policy for someone else attempts to engraft itself upon the contract to which it was not a party in the hopes that what it bound itself to do, it need not perform. The result, if successful, is that its contractee, .the assured, must look elsewhere for the promised protection.”

In considering questions of primary coverage and potential overlapping coverage clauses, we think an incongruous result can be avoided by giving heed to the intention of the parties to the insurance contract and the coverage they intended to purchase. Judge Tate’s concurring opinion in State Farm Mutual Automobile Ins. Co. v. Travelers Ins. Co., 184 So.2d 750, 754 (La.App.1966), appropriately reads:

“. . . the respective policy coverages can be sensibly allocated in the light of the total policy insuring intent, as determined by the primary policy risks upon which each policy’s premiums were based and as determined by the primary function of each policy.”

These principles can be applied for each insurance policy involved in this case. The workmen’s compensation policy issued by Employers Group to Grimshaw was obviously issued to compensate employees of Grimshaw. Employers Group has properly fulfilled its insuring obligation by paying Lyson over $10,000 for the injuries suffered. Employers’ liability policy covered losses to nonemployees of Grimshaw occurring due to the negligence of Grimshaw or its employees. In addition, that policy generally did not insure against the risk of injuries occurring during the loading or unloading of the insured’s vehicle on the premises of another employer. Continental’s liability policy issued to Crane was intended to compensate for losses occurring to non-employees due to the negligence of Crane or its employees.

With these policies in force, we think that the sensible allocation of policy coverage and the intentions of all parties demand that Continental’s liability policy should cover Lyson’s alleged claim. To interpret these policies so as to require Grimshaw’s carrier to be liable for the negligence of a Crane employee defies common sense knowledge that one company would not pay for insurance to protect against the negligence of another company’s employee on the other company’s premises. Such an absurd result conflicts with the intention of businesses to insure against the risk of their own negligence and further increases the accelerating cost of insurance.

Therefore, the exclusion in Employers’ liability policy is valid and precludes coverage for liability due to the loading of the truck on Crane’s premises. Continental, as the primary insurer and liability carrier of Crane, must defend Lyson’s suit and be liable for any judgment within policy limits.

Judgment reversed.

      . The District Court decision is published. Continental Cas. Co. v. Employers Com’l Union Ins. Co., 344 F.Supp. 4 (D.S.D. 1972).

      . South Dakota Compiled Laws § 58-10-2 defines “Policy” as “the written contract of or written agreement for or effecting insurance, by whatever name called, and includes all clauses, riders, endorsements and papers which are a part thereof.” S.D.C.L. § 58-11-2 reads:
      “Contents of policy. — Every policy as defined by § 58-10-2 shall specify:
      “(1) The names of the parties to the contract;
      “(2) The subject of the insurance;
      “(3) The risks insured against;
      “(4) The time when the insurance takes effect and the duration thereof;
      “(5) The premium; and
      “(6) The conditions pertaining to the insurance.”

      . It is our duty to apply South Dakota law in interpreting these insurance contracts. McMichael v. American Insurance Co., 351 F.2d 665, 669 (8th Cir. 1965). Neither South Dakota courts nor federal courts interpreting South Dakota law have had the occasion to interpret this statute.

      . Cited with approval in Federal Insurance Company v. Prestemon, 278 Minn. 218, 153 N.W.2d 429 (1967) and State Farm Mutual Automobile Insurance Company v. American Casualty Company, 433 F.2d 1007, 1012 (8th Cir. 1970) (Gibson, J., dissenting).

      . Due to our decision on the validity of the “loading and unloading” exclusion, it is unnecessary for us to discuss the District Court’s holding and parties’ contentions concerning another exclusion and a “severability of interests” clause. We express no opinion on those issues.


source: Caselaw Access Project

author: IRVING R. KAUFMAN, Circuit Judge:

license: Public Domain

text:
    UNITED STATES of America, Appellee, v. Amadeo Augusto Luciano SANTELISES, Appellant.
    No. 686, Docket 72-2381.
    United States Court of Appeals, Second Circuit.
    Argued April 4, 1973.
    Decided April 12, 1973.

      Martin L. Rothstein, New York City (Austin T. Fragomen, New York City, of counsel), for appellant.
    Bart M. Schwartz, Asst. U. S. Atty. (Whitney North Seymour, U. S. Atty., S. D. N. Y., of counsel), for appellee.
    Before KAUFMAN, ANDERSON and OAKES, Circuit Judges.
   IRVING R. KAUFMAN, Circuit Judge:

On July 16, 1965, Amadeo Santelises, a citizen of the Dominican Republic residing in the United States, was charged in a twenty-seven count indictment with various offenses connected with the preparation and use of false immigration documents. On December 7 Santelises, appearing with counsel, pleaded guilty to counts 1-8 (charging violations of 18 U.S.C. § 1001, § 2 and § 3238), counts 18-19 (charging violations of 18 U.S.C. § 1546, § 2 and § 3238), and counts 21-24 (charging violations of 18 U.S.C. § 1015, § 2 and § 3238) of the indictment. The appellant was sentenced on January 28, 1966 to concurrent one-year terms of probation, and completed his sentence satisfactorily. No appeal was taken from the judgment of conviction.

On June 9, 1966, the Immigration and Naturalization Service of the Department of Justice instituted deportation proceedings against Santelises. On October 9, 1967, after a hearing at which appellant was represented by counsel, he was ordered deported pursuant to 8 U. S.C. § 1251(a)(5), which authorizes the deportation of any alien previously convicted of violating 18 U.S.C. § 1546, the statutory prohibition which made up counts 18-19 of the indictment to which Santelises had pleaded guilty.

On April 10, 1972, appellant brought the instant petition to set aside his plea of guilty to counts 18 and 19 of the 1965 indictment. He urges that both counts fail to allege violations of law under 18 U.S.C. §§ 1546 and 2. In addition, Santelises argues that his plea was not knowingly and voluntarily tendered because he was not informed that deportation was a collateral consequence of his conviction. Judge Tenney, ruling on Santelises’s petition in the district court, rejected both claims without holding a hearing. We affirm.

Appellant concedes that where, as here, the sufficiency of the indictment went unchallenged at the time of pleading, the indictment will be upheld “unless it is so defective that it does not, by any reasonable construction, charge an offense for which the defendant is convicted.” United States v. Trollinger, 415 F.2d 527, 528 (5 Cir. 1969). Although Santelises pressed this issue in his brief on appeal, he chose not to argue the matter before the court, indieating that he believed it to be a “technicality.”

Section 1546 provides, inter alia, that whoever

utters, uses, attempts to use, possesses, obtains, accepts or receives any [immigrant or nonimmigrant] visa, permit or document [required for entry] , knowing it to be forged, counterfeited, altered or falsely made, or to have been procured by means of any false claim or statement, or to have been otherwise procured by fraud or unlawfully obtained . . . ,

shall be guilty of an offense against the United States. 18 U.S.C. § 2 provides that whoever aids or abets in the commission of a crime is punishable as a principal. Count 18 of the indictment to which Santelises pleaded guilty charged that the appellant “knowingly did obtain, accept, receive and cause to be obtained, accepted and received, an immigrant visa for Fabia Gomez deFelix, knowing the same to have been procured by fraud. . . . ” More specifically, Count 18 accused Santelises of submitting and causing to be submitted both a letter falsely indicating that the applicant for entry had waiting employment in the United States, and a false affidavit of support stating that the signer had a bank account in a New York City bank. Count 19 essentially tracked count 18, charging similar violations in connection with the contemplated entry into the United States of one Fredesvinda Feliz.

We are unable to detect even a “technical” error in the indictment. Accordingly, we reject this claim as frivolous.

Somewhat more substantial is the argument that appellant’s plea was involuntary because he was not aware that a conviction pursuant to section 1546 would subject him to deportation proceedings. Although that portion of Rule 11, F.R.Crim.P., which requires the court to inform a defendant of the consequences of a plea of guilty had not been enacted at the time of Santelises’s conviction, appellant argues that his lack of awareness as to so significant a sanction as deportation requires us to vacate his plea under due process standards. We disagree. We need not intimate how we might decide this case were the mandate of Rule 11 applicable to these proceedings. It is sufficient to state at this time that the mere failure of a district judge to warn a defendant of the possibility of deportation as a consequence of his plea does not, without more, amount to a violation of constitutional due process, thereby rendering the plea invalid.

In United States v. Parrino, 212 F.2d 919 (2 Cir.) cert. denied, 348 U.S. 840, 75 S.Ct. 46, 99 L.Ed. 663 (1954), this Court was unable to find “manifest injustice”, see Rule 32(d) F.R.Crim.P., in a case involving a defendant who, having pleaded guilty to a kidnapping offense, proceeded to serve a two-year jail sentence and, upon release, found himself the subject of deportation proceedings based on his prior conviction. Unlike the instant case, Parrino was affirmatively misled by his counsel, a former Commissioner of the Immigration Service, who advised his client that a plea of guilty would not subject him to deportation: Judge Frank, concluding that counsel’s performance was grossly inadequate, dissented for that reason. Although Professor Moore indicates his approval of Judge Frank’s opinion, 8A Moore, Federal Practice, ¶ 32.07 [3] [b], p. 106, it is clear that Santelises does not allege that he was affirmatively misled by counsel, and he has not made out any claim of ineffective assistance of counsel. In addition, nothing in Judge Frank’s opinion in Parrino supports the view that the court is constitutionally required to inform a defendant that he may be subject to deportation as a consequence of his plea.

Moreover, we should emphasize that deportation under section 1546 is not “automatic”. Although 8 U.S.C. § 1251(a)(5) does allow deportation of any alien who has violated sec. 1546, without proof that the crime is one of moral turpitude, deportation results, however, only upon “order of the Attorney General” who retains discretion whether or not to institute such proceedings. Deportation, then, serious sanction though it may be, is not such an absolute consequence of conviction that we are mandated to read into traditional notions of due process a requirement that a district judge must warn each defendant of the possibility of deportation before accepting his plea. We have been referred to no eases, nor have we found any, indicating that this or any other court has seen fit to take such a giant step and we believe that this trend should be noted and followed by us.

We emphasize, finally, that cases arising after the enactment of the 1966 amendments to Rule 11, F.R.Crim.P., may bring different considerations to bear upon this problem but we neither address nor decide those questions.

Affirmed.

      . The district judge concluded that jurisdiction existed under 28 U.S.C. 1651(a), the “all writs” statute, and treated the petition as a request for a writ of error coram ñoñis.

      . Rule 11 provides, in part, that a judge may not accept a plea of guilty “without first addressing the defendant personally and determining that the plea is made voluntarily with understanding of the nature of the charge and the consequences of the plea." The italicized words were added to the Rule and became effective on July 1, 1966. The amendments have not been given retroactive effect, McCarthy v. United States, 394 U.S. 459, 89 S.Ct. 1166, 22 L.Ed.2d 418 (1969).

      . Santelises’s failure to submit an affidavit of counsel, corroborating his allegation that he was unaware that deportation was a possible consequence of the guilty plea, independently justifies the decision to dismiss below, see Grant v. United States, 451 F.2d 931 (2 Cir. 1971); cf. United States v. Wisniewski, 2 Cir. 1973, 478 F.2d 274, 284 (1973). Santelises contends, however, that certain conduct on the part of the district judge affirmatively misled him as to the consequences of his plea and that inasmuch as evidence of the court’s error appears in the record an affidavit of counsel was unnecessary in this case.
      We find the argument fanciful. The court questioned Santelises concerning his understanding of the charges against him, whether he was indeed guilty of the crime to which he was pleading, whether threats or promises were made in connection with the plea, and whether any representation as to sentence had been made to him. The following colloquy then took place:
      Court: You recognize that all that remains to be done is for the Court to accept your plea of guilty on each count and to pass sentence on you?
      Defendant: Yes sir.
      Court: Which could include a jail sentence?
      Defendant: Yes.
      Santelises argues that when Judge Tenney, in accepting the plea, stated that “all that remains to be done” is for the court to pass sentence, he implied that Santelises could not be deported. Although the argument is imaginative, to say the least, we remain unpersuaded.

      . Indeed, Bye v. United States, 435 F.2d 177 (2 Cir. 1970), although concluding that a defendant must be informed, pursuant to Rule 11, if he will be ineligible for parole, reaffirmed the view that' a defendant need not be advised of “every conceivable collateral effect” of his plea, citing Parrino. See Bye v. United States, 435 F.2d at 179-180. United States v. Sambro, 454 F.2d 918 (D.C.Cir. 1971) rehearing en banc denied, id. at 924, followed our own Parrino case in refusing to allow a defendant who was unaware that a plea of guilty would subject him to deportation, to withdraw his plea even prior to sentencing. But see opinion of Bazelon, Chief Judge, dissenting from the denial of a rehearing en bane, id. at 924.

      . Since the evidence justified the court in concluding that the defendant testified falsely, and the 2O-to-30-year sentence is less than the 30-year permissible maximum, review of'the record and the presentence report supports the conclusion that such sentence does not constitute cruel and unusual punishment. See Government of the Virgin Islands v. Venzen, 424 F.2d 521, 523 (3d Cir. 1970). Defendant may apply for reduction of sentence upon remand of the case to the district court. See F.R.Crim.P. 35.


author: ROSENN, Circuit Judge. MARIS, Circuit Judge

text:
    GOVERNMENT OF the VIRGIN ISLANDS v. Felix Carrion HERNANDEZ, and Iris Lopez Hernandez, Appellants.
    Nos. 72-1453, 72-1454.
    United States Court of Appeals, Third Circuit.
    Argued Feb. 1, 1973.
    Decided April 3, 1973.
    Arnold M. Selke, Charlotte Amalie, St. Thomas, V. I., Stanley M. Poplow, Philadelphia, for appellants.
    Frederick G. Watts, Fred M. Acuff, Appellate Section, Crim. Div., Washington, D. C., for appellee.
    Before MARIS, ROSENN, and HUNTER, Circuit Judges.
   OPINION OF THE COURT

ROSENN, Circuit Judge.

Husband and wife, Felix and Iris Hernandez, were tried to a jury in a joint trial in the District Court for the District of the Virgin Islands and convicted for possession of heroin with intent to manufacture or distribute it, in violation of 19 V.I.C. § 604(a)(1). They appeal from their judgments of conviction, in which Felix Hernandez was sentenced to fifteen years incarceration and his wife to ten to fifteen years.

The entire case against appellants consisted of testimony about, and display to the jury of, a number of items seized by the Narcotics Strike Force in a search of the Hernandez home on November 11, 1971. Heroin seized included 2.08 grams of white powder (35.1% pure) found in one of the wife’s housedresses, seven or eight small decks of heroin (8% pure) found scattered around the bathroom, and 32.75 grams (37.1% pure) found floating in the cistern connected with the house. The officers also seized from a dresser drawer in the master bedroom 29.67 grams of a white powder proven to be 6.6% pure methadone. Also found in or on top of the dresser were two spoons —one coated with heroin — some air mail envelopes, a book from which paper had been cut, and numerous small slips of paper.

The Government contended that the quantity of heroin combined with the paraphernalia, such as spoons and paper slips, demonstrated an intent of the appellants to distribute the heroin. Although it did not offer scientific evidence that the seized paper slips were made of the same paper as that in which the decks of seized heroin were wrapped, the Government urged that the papers were of the type used to package heroin. Its expert testified that the heroin found in the cistern could be divisible into 2,000 decks, saleable at $5 each. The only other incriminating evidence was one officer’s testimony that he saw Iris Hernandez through a window pouring some white powder into the sink and toilet after officers knocked at her front door.

Appellants raise numerous grounds for reversal of their convictions, the more substantial of which are the assertions that (1) the jury instructions were in plain error because they included an Allen Charge; (2) they were deprived of their right to effective assistance of counsel by being represented by the same attorney; and (3) Iris Hernandez’s admission of ownership of a housedress should have been excluded from the evidence because it was made during custodial interrogation absent any Miranda warning. We reverse the convictions.

The fairness of appellants’ trial was jeopardized by the inclusion in the jury instructions of a form of the Allen Charge, urging a minority of the jury to give special consideration to the views of the majority in order to avoid a hung jury. The judge instructed in his charge in chief:

If there is disagreement as to the innocence or guilt of both defendants, or either one of them, those in the minority should be willing to reexamine and reevaluate their ideas and exchange their views with the thoughts of those Jurors who constitute the majority.
The same can be said for a disagreement as to whether either one or both of them are guilty of the lesser included offense or guilty of the offense charged in the information. If there is disagreement as to which one it is, again, those in the minority ought to be willing to reexamine and reevaluate their concepts and their ideas with those in the majority to the end that unanimity might be obtained and a verdict returned.

The Allen Charge, originally approved in Allen v. United States, 164 U.S. 492, 17 S.Ct. 154, 41 L.Ed. 528 (1896), has created considerable judicial tribulation over the years. In light of the constitutional principle that the judge may not “coerce” the jury in its determination of guilt or innocence, courts have had to determine from time to time whether variations of the Allen Charge, given in many different circumstances, have injected coercion into the fact-finding process. Recognizing the inherent potential of the charge to coerce and the inscrutable problem of determining in each case whether such coercion actually existed, we prospectively banned the use of the Allen Charge in this circuit in United States v. Fioravanti, 412 F.2d 407 (3d Cir.), cert. denied sub nom. Panaccione v. United States, 396 U.S. 837, 90 S.Ct. 97, 24 L.Ed.2d 88 (1969), as part of our supervisory authority over the district courts. The District of Columbia and Seventh Circuits have done likewise. United States v. Thomas, 144 U.S.App.D.C. 44, 449 F.2d 1177 (1971); United States v. Brown, 411 F.2d 930 (7th Cir. 1969), cert. denied, 396 U.S. 1017, 90 S.Ct. 578, 24 L.Ed.2d 508 (1970).

One of the coercive elements of the Allen Charge in the form often given is its admonition to the minority jurors to give deference to the views of the majority. United States v. Johnson, 139 U.S.App.D.C. 193, 432 F.2d 626, 633 (1970). The instruction given in the present case includes that element. The minority was told to “reexamine and reevaluate their concepts and their ideas with those in the majority to the end that unanimity might be obtained and a verdict returned.” Our prospective ruling in Fioravanti was aimed, among other things, at eliminating such a coercive influence from charges used in the Circuit. 412 F.2d at 416-417.

In order to prevent any confusion among the district courts, we explicitly warned in Fioravanti:

Hereafter, in this circuit, trial judges are not to give instructions either in the main body of the charge or in the form of a supplement that direct a juror to distrust his own judgment if he finds a large majority of the jurors taking a view different from his. Such an instruction will be deemed error, normally reversible error. Conceivably, in very extraordinary circumstances the error may be found so inconsequential as to avoid the necessity of reversal on appeal. But hereafter this court will not let a verdict stand which may have been influenced by an Allen Charge.

412 F.2d at 420. Finding no such “extraordinary circumstances” in the present case, although no objection was made to the charge at trial, we find plain error and reverse the convictions on this ground. We reiterate our suggestion in Fioravanti, 412 F.2d at 420 n. 32, that trial judges restrict their jury instructions on the deliberative process to the charge suggested by Mathes and Devitt, “Federal Jury Practice and Instructions,” 1965, § 79.01.

Since we must reverse the convictions, we need not consider all of the alleged errors asserted. Some comment, however, should be addressed to the issue raised concerning the right to the effective assistance of counsel because the appellants must be awarded a new trial. They were represented by the same retained counsel throughout the trial. Although they never requested separate counsel; they now allege they were prejudiced by the joint representation at trial. Prior to trial, a motion for severance had been made and denied. At the time, the prosecutor had requested the court to consider the possibility that joint representation would be prejudicial to the appellants if severance were not granted. Appellants, however, were never apprised by the court of the dangers of joint representation, nor was their counsel asked about possible conflicts of interest in such representation.

The Supreme Court has held that the sixth amendment right to fair and effective assistance of counsel can be abridged when several defendants are represented by one counsel. Glasser v. United States, 315 U.S. 60, 62 S.Ct. 457, 86 L.Ed. 680 (1942). Although recognizing that this constitutional right could be waived, the Court said any waiver must be made knowingly and intelligently. 315 U.S. at 70-71, 62 S.Ct. 457. Drawing on Glasser’s imposition on the trial judge of a duty to preserve a defendant’s right to effective assistance of counsel, the District of Columbia Circuit has required trial judges to ascertain from defendants whether their choice of joint counsel is an informed decision. Campbell v. United States, 122 U.S.App.D.C. 143, 352 F.2d 359 (1965). We have never gone so far as to impose this affirmative obligation on the trial judge. United States v. Rispo, 470 F.2d 1099, 1102 (3d Cir. 1973). We have, however, refused to find a waiver of this right in the face of a silent record on the issue, noting that Glasser required “the trial judge ... to ‘indulge every reasonable presumption against the waiver.’ ” Government of the Virgin Islands v. John, 447 F.2d 69, 74-75 (3d Cir. 1971). In the present case, we are again faced with a silent record. Despite the prosecutor’s expression of concern, the trial judge did not apprise appellants of the perils of joint representation. Nor does the record indicate that defense counsel explained the dangers to the clients.

We recommend, that on the retrial of this case, the trial judge warn each defendant of the possible dangers of joint representation. In order to have convicted both husband and wife, the jury had to infer intent to distribute on the part of each. None of the seized evidence pointed specifically at the husband; the only evidence pointing specifically at his wife was the discovery of a small quantity of heroin in her house-dress and the testimony that she had been seen pouring white powder into the sink and toilet when officers arrived to search. The evidence which may have been crucial to indicate more than mere possession, i. e., an intent to distribute, was the large quantity of heroin found in the cistern. Neither appellant was shown to have been aware of this contraband.

We recently reversed a conviction for heroin acquisition where “the evidence provided no more than an occasion to speculate whether he [appellant], or his brother, or both of them knew of the hidden heroin and exercised control over it.” United States v. Bonham, 477 F.2d 1137 (3d Cir. 1973). The evidence in Bonham showed only that heroin was seized from a hidden recess behind a door frame in a bedroom shared by appellant and his brother. Although we did not reverse on the grounds that joint representation of appellant and his brother at trial denied appellant effective assistance of counsel, we noted that counsel was inhibited in exculpating appellant because to do so would have inculpated his brother.

Bonham, and earlier cases such as Delgado v. United States, 327 F.2d 641 (9th Cir. 1964), and United States v. Holland, 144 U.S.App.D.C. 225, 445 F.2d 701 (1971), recognize that there is always a close question of sufficiency of evidence when two persons are jointly charged with possession of narcotics when the only proof is that the narcotics were found in the zone of control of both persons. The problem is exacerbated in the present case where an intent to distribute is charged on the basis of narcotics found within the zone of control of both appellants.

When both defendants are represented by the same counsel, counsel may understandably be inhibited in his efforts to demonstrate that one or the other defendant was the guilty party. Although we need not decide on this appeal whether counsel for the Hernandezes faced such a conflict of interest as to deprive either appellant of his or her right to effective assistance of counsel, see United States v. Rispo, 460 F.2d 965 (3d Cir. 1973), Walker v. United States, 422 F.2d 374 (3d Cir. 1970), we believe the dangers inherent in joint representation are serious enough here to make it highly desirable that they be apprised of them. If such dangers are communicated to the appellants, difficult questions of whether a conflict of interest arose because of joint representation can be avoided. Appellants will intelligently be given the choice of whether to reject joint representation or to waive their right to the unfettered representation made possible by separate counsel.

The judgments of the district court will be reversed.

MARIS, Circuit Judge

(dissenting).

I do not think that the charge of the court in this case, to which significantly no objection was made at trial, was given under circumstances similar to those in United States v. Fioravanti, 3 Cir. 1969, 412 F.2d 407, nor do I believe that the rule of that case should be extended to cover the situation disclosed by this record. In my view the court did not commit reversible error in failing to apprise the defendants, who were represented by retained counsel, of their right to separate representation. Nor do I think that the court erred in receiving in evidence the wife-defendant's admission of ownership of the housedress found in the search of their home since the officers’ request to her to remain seated on the living room couch during the search, where she was seated when she made the admission, did not in my view, constitute an arrest which would bring into play the rule of the Miranda case.

      . Although not per se banning use of the Alien Charge, the First Circuit has banned any use of the charge which speaks to the minority, but not the majority. United States v. Flannery, 451 F. 2d 880, 883 (1st Cir. 1971).

      . As we note, at page 793 infra, the evidence pointing to an intent to distribute heroin by each defendant here was not overwhelming. Although each defendant was charged with only one count, the jury deliberations lasted two hours and twenty-three minutes.

      . This charge is now incorporated in the second edition of Mathes and Devitt. See Devitt and Blackmar, “Federal Jury Practice and Instructions,” 1970, § 17.05.


author: FRIENDLY, Chief Judge:

text:
    Herman L. ZELLER, Plaintiff-Appellant, v. BOGUE ELECTRIC MANUFACTURING CORPORATION et al., Defendants-Appellees.
    No. 445, Docket 72-2004.
    United States Court of Appeals, Second Circuit.
    Argued Feb. 13, 1973.
    Decided March 22, 1973.

      Lawrence M. Powers, New York City (Powers & Gross and Steven E. Gross, New York City, of counsel), for plaintiff-appellant.
    Alexander Stone, New York City (Becker, Ross & Stone, James J. Ross, and William C. Kratenstein, New York City, of counsel), for defendants-appellees Bogue Electric Mfg. Corp., Edw. P. Schinman, Robert S. Herwig, Wm. S. Guttenberg and Murray Reiffin.
    Richard G. McGahren, New York City, for defendant-appellee Irwin Small Co.
    Barry Kessler, New York City, for defendant-appellee Belco Pollution Control Corp.
    Before FRIENDLY, Chief Judge, OAKES, Circuit Judge, and DAVIS, Judge.

       Of the United States Court of Claims, sitting by designation.

   FRIENDLY, Chief Judge:

Appellant Zeller, a stockholder of Belco Pollution Control Corporation (Belco), a Delaware corporation having its principal offices in New Jersey, brought this derivative action in the District Court for the Southern District of New York against Bogue Electric Manufacturing Corporation (Bogue), a New Jersey corporation, four individuals who were directors of both Belco and.Bogue, and Belco’s accountants. Federal jurisdiction was predicated on § 27 of the Securities Exchange Act of 1934, § 22 of the Securities Act of 1933, and pendent jurisdiction.

The principal allegations of the complaint were as follows: In 1968 Bogue caused Belco to be incorporated and later that year to make a public offering of 200,000 of its 810,000 common shares, with 600,000 unregistered shares being retained by Bogue, which exercised effective control over Belco. During 1969 Bogue suffered from accelerating operating losses and a deteriorating working capital position. In contrast, Belco, as a result of receiving approximately $1,000,000 from the public offering and operating earnings, was accumulating cash which was necessary for its growing business. During 1970 the four individual defendants caused Belco to make a series of open-account loans to Bogue for which “no interest was required to be paid.” At the year end the loans totaled $202,130, and by June 30, 1971 they had increased to $315,310. On July Y, 1971, the open account indebtedness was replaced by a demand interest bearing promissory note, collateralized by 150,000 shares of Belco stock owned by Bogue and to be held by a trustee. Subsequent disclosure of the loan by Belco to Bogue was claimed to have aborted a further public offering of Belco shares which would have yielded Belco at least $800,000. The conduct of Bogue and the individual defendants was alleged to have violated § 10(b) and Rule 10b-5 of the Securities Exchange Act, § 17(a) of the Securities Act, and the securities laws of New York and New Jersey, where the improper acts were claimed to have been done. The complaint sought judgment for the amount of all loans by Belco to Bogue with interest at the legal rate of 7}4% and the proceeds of the aborted underwriting, various forms of injunctive relief, and orders awarding attorneys’ fees, costs and such other relief as would be just and proper.

After answer, plaintiff moved for summary judgment. Defendants countered with a motion and supporting papers which asked that the complaint be dismissed for want of subject matter jurisdiction, that they be granted summary judgment, or that, in any event, plaintiff’s motion for summary judgment be denied.

Plaintiff’s moving affidavit added several new matters of importance: Belco’s own corporate resolutions recited that the advances had been made “for the corporate purposes of Bogue.” Belco itself had suffered losses in 1969 and 1970, with a net decrease of working capital of $629,828 in the latter year, and thus was in no position to loan substantial sums to its parent. Plaintiff alleged that during 1970 “some of the most successful corporations in America were paying 10% to 12% per annum to borrow money from banks and other sources of financing because of ‘tight money’ conditions,” were often required to give sweeteners in the form of options, warrants, or other securities, and were required to keep compensating balances of as much as 20% of the sums borrowed, thus making the effective rate for low risk borrowers as high as 15% per annum. For the first nine months of 1971 Belco had earned 40% on its invested capital. Also, after the action had been brought, Bogue had sold its interest in Belco to Foster-Wheeler Corporation.

Defendants’ affidavits supplied more details: Bogue had sold its 600,000 Belco shares to Foster-Wheeler for $1,650,000. Upon the closing on May 1, 1972, the amount owing from Bogue to Belco with 8% interest from the date of each advance was paid, and the 150,000 Belco shares that had collateralized Bogue’s promissory notes were included in the transfer to Foster-Wheeler. It was alleged that the loans to Bogue were in Belco’s best interest and that Belco had derived other benefits from its association with Bogue which must be taken into account in any determination whether Belco had been wronged and, if so, how much.

The district judge, 346 F.Supp. 651, granted defendants’ motion for summary judgment and dismissed the complaint. He did this on the basis of the provision in § 28(a) of the Securities Exchange Act which entitles a plaintiff to recover only “actual damages on account of the act complained of” and his conclusion that, under the “federal” rule whereby a defrauded buyer is entitled only to the difference between the amount parted with and the amount received, see Smith v. Bolles, 132 U.S. 125, 10 S.Ct. 39, 33 L.Ed. 279 (1889); Levine v. Seilon, Inc., 439 F.2d 328, 334 (2 Cir. 1971), rather than the “benefit of the bargain” rule applied in such actions by many states, see Prosser, Torts § 110, at 734 (4th ed. 1971), repayment of the loan with interest had eliminated any compensable loss. From this ruling plaintiff appeals.

I.

Defendants urge that, whether or not we agree with the court’s holding that Belco could not establish any damages, the complaint should have been dismissed because it did not allege fraud in connection with the purchase .or sale of a “security.” In analyzing this argument it will be convenient to treat the ease in the first instance as if Bogue had issued demand notes collateralized with Belco stock from the outset and then consider whether a different result is required because until July 1, 1971, Bogue’s indebtedness was evidenced only on open account.

The Securities Act of 1933 and the Securities Exchange Act of 1934 differ in their method of handling short-term commercial paper. Under the 1933 Act, while § 2(1) provides that any note is a “security,” § 3(a)(3) exempts from the registration and prospectus requirements “[a]ny note, draft, bill of exchange, or banker’s acceptance which arises out of a current transaction or the proceeds of which have been or are to be used for current transactions, and which has a maturity ^at the time of issuance of not exceeding nine months, exclusive of days of grace, or any renewal thereof the maturity of which is likewise limited.” However, § 17, the general anti-fraud provision, provides in subsection (e) that the exemptions of § 3 shall be inapplicable. Instead of following this model in the Securities Exchange Act, Congress defined “security,” § 3(a) (10), to include “any note” but inserted in the same clause that this would not include “any note, draft, bill of exchange, or banker’s acceptance which has a maturity at the time of issuance of not exceeding nine months, exclusive of days of grace, or any renewal thereof the maturity of which is likewise limited.” If the letter of the 1934 Act is followed, paper falling within this proviso is thus excluded from all provisions of the 1934 Act, including those dealing with fraud.

A short answer to the question whether Bogue’s demand note came within the exclusion of § 3(a) (10) could be that it makes no difference, since the only consequence of an affirmative answer would be predication of liability on § 17(a) of the 1933 Act, if that section created a private right of action. See SEC v. Texas Gulf Sulphur Co., 401 F. 2d 833, 867-868 (2 Cir. 1968) (Friendly, J., concurring), cert. denied, 394 U.S. 976, 89 S.Ct. 1454, 22 L.Ed.2d 756 (1969); 3 Loss, Securities Regulation 1785-86 (2d ed. 1961) and 6 Loss, Securities Regulation 3912-15 (Supp.1969). Be that as it may, we believe Bogue’s note is not within the exclusion of § 3(a) (10) of the Securities Exchange Act.

Here again there is a short way to answer the question should we wish to take it. The SEC has made clear its view that the nine-month standard of § 3(a)(3) of the 1933 Act is not met by obligations payable on demand. Securities Act Rel. No. 4412 (1961), 26 Fed. Reg. 9158, 9159 (1961). Presumably it would take the same view with respect to the exclusion in § 3(a) (10) of the 1934 Act. Whatever the proper answer to this question in general, we would have little doubt of the validity of such a position in a case like this where the maker of the note could prevent any demand by the holder and the note was outstanding for ten months.

We think it preferable, however, to rest our decision on the basis that even if demand paper could ever qualify for the § 3(a) (10) exclusion — which we do not decide, see ALI, Federal Securities Code, Tent. Draft No. 1 § 216A and comment on pp. 71-72 (April 1972)— Bogue’s note would not. The SEC has taken the position with respect to the exemptive provision of § 3(a)(3) of the Securities Act, Securities Act Rel. No. 4412, supra, 26 Fed.Reg. at 9159, that:

The legislative history of the Act makes clear that section 3(a)(3) applies only to prime quality negotiable commercial paper of a type not ordinarily purchased by the general public, that is, paper used to facilitate well recognized types' of current operational business requirements and of a type eligible for discounting by Federal Reserve banks.

We have no doubt that the Commission would take the same view with respect to the exclusion in § 3(a) (10) of the Securities Exchange Act. See 2 Loss, Securities Regulation 796 (2d ed. 1961). Such a ruling, by an agency charged with the administration of a statute, while not conclusive, is entitled to substantial weight. Skidmore v. Swift & Co., 323 U.S. 134, 140, 65 S.Ct. 161, 89 L.Ed. 124 (1944). We thus agree with the decision of the Seventh Circuit in Sanders v. John Nuveen & Co., Inc., 463 F.2d 1075, cert. denied, 409 U.S. 1009, 93 S.Ct. 443, 34 L.Ed.2d 302 (1972), that the mere fact that a note has a maturity of less than nine months does not take the case out of Rule 10b-5, unless the note fits the general notion of “commercial paper” reflected in the SEC Release. See also Anderson v. Francis I. duPont & Co., 291 F.Supp. 705 (D.Minn.1968) (short-term notes); cf. United States v. Hill, 298 F.Supp. 1221, 1226-1227 (D.Conn.1969) (high risk 6-month notes held not exempt from the registration requirements of the Securities Act of 1933); Bromberg, Securities Law: Fraud SEC Rule 10b-5 § 4.6(317) (1969). We see nothing in SEC v. Fifth Avenue Coach Lines, Inc., 435 F.2d 510, 517 (2 Cir. 1970), which would lead to a contrary conclusion, though the district court opinion contains dicta with which we would not agree, see 289 F. Supp. 3, 38 (S.D.N.Y.1968).

It does not follow, however, that every transaction within the introductory clause of § 10, which involves promissory notes, whether of less or more than nine months maturity, is within Rule 10b-5. The Act is for the protection of investors, and its provisions must be read accordingly. See Movielab, Inc. v. Berkey Photo, Inc., 452 F.2d 662 (2 Cir. 1971). But we see no reason to doubt that Belco stood in the position of an investor, although perhaps an involuntary one, with respect to Bogue. We thus hold that, if at the outset the transaction had taken the form of Belco’s buying Bogue’s demand note, Rule 10b-5 would apply.

However, we are unable to find anything in the definition of security in the Securities Exchange Act that would cover an advance on open account. In this respect the omission, in the 1934 definition, of the words “evidence of indebtedness” contained in the definition in § 2(1) of the 1933 Act would seem to have a significance which, for good reason, the Supreme Court found lacking on the facts before it in Tcherepnin v. Knight, 389 U.S. 332, 344, 88 S.Ct. 548, 19 L.Ed.2d 564 (1967). Arguably this would mean that damages must be limited to those accruing after July 1, 1971. However, such a conclusion would fail to take suitable account of plaintiff’s claim that Bogue’s use of its control over Belco to compel a loan which was in Bogue’s interest but not in Beleo’s violated applicable state law. If the issuanee of the note created a claim under Rule 10b-5, any damages suffered earlier can be awarded in the exercise of pendent jurisdiction.

II.

Analysis of plaintiff’s claims reveals five different bases for his contention that payment of the note with 8% interest may not have adequately compensated Belco:

1) Belco could have obtained more than 8% interest, at least from a borrower in what is alleged to have been the precarious financial condition of Bogue, during the period of tight money conditions that prevailed during part or all of the time when Bogue’s debt was outstanding ;
2) Bogue would have had to pay more than 8% to obtain funds during part or all of the period;
3) The loan enabled Bogue to profit by selling the 150,000 Belco shares pledged as collateral for $412,500 (a quarter of the total price paid by Foster-Wheeler), since otherwise Bogue would have been obliged to sell these shares 10 months earlier under distress circumstances and before Belco had experienced a highly profitable period;
4) The intercompany loan deprived Belco of the benefits of a new underwriting in late 1971 from which it would have realized at least $800,000, see fn.2, supra; and
5) Belco could have earned more than 8% by using the loaned funds in its own business.

The parties have argued the case as presenting the question whether the principle of Janigan v. Taylor, 344 F.2d 781, 786-787 (1 Cir.), cert. denied, 382 U.S. 879, 86 S.Ct. 163, 15 L.Ed.2d 120 (1965); Myzel v. Fields, 386 F.2d 718, 748-749 (8 Cir. 1967), cert. denied, 390 U.S. 951, 88 S.Ct. 1043, 19 L.Ed.2d 1143 (1968); and now Affiliated Ute Citizens v. United States, 406 U.S. 128, 154-155, 92 S.Ct. 1456, 31 L.Ed.2d 741 (1972), whereby, in addition to the usual measure of damages, defrauders will be forced to disgorge windfall profits, applies when the defrauded party is a buyer as well as when he is a seller. Although most of plaintiff’s theories do not involve that issue and the ones that do may fail on different grounds, we think it desirable to state our views since the question is fairly raised.

We do not consider the cited cases, or our own decision in Levine v. Seilon, Inc., supra, 439 F.2d at 334, as having established any such bright line between defrauded sellers and defrauded buyers as defendants urge. The actual holdings in Janigan and Ute were that defrauded sellers were entitled not only to the difference between the value of what they sold and what they got but also any additional profits realized by the defrauding buyer. The Supreme Court in Ute did not discuss the problem with respect to the defrauded buyer. As indicated above, the thrust of Chief Judge Aldrich’s dictum with respect to defrauded buyers in Janigan and of what we said on the same subject in Levine was to repudiate the “benefit of the bargain” rule in cases arising under the Securities Exchange Act. See also Estate Counseling Service, Inc. v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 303 F.2d 527, 533 (10 Cir. 1962). Such repudiation does not necessarily call for a rule that, if a fraudulent seller can be shown to have made a windfall profit, principles of the law of restitution do not require that he be made to disgorge it. See 6 Loss, Securities Regulation 3923 (Supp.1969). The reason why the remedy has been applied for the benefit of defrauded sellers but not of buyers is not any decisive legal difference but the difficulty generally confronting the defrauded buyer in showing that the fraudulent seller has in fact reaped such a profit.

Plaintiff’s first theory of damages does not present the problem just discussed. This claim is, in essence, that the 8% note and the preceding open account debt were not worth what Beleo paid for them. We cannot agree with the district court that damage to a subsidiary from forcing it to loan money to a parent necessarily is fully compensated by the parent’s paying off the note, even with a fairly liberal rate of interest, if the subsidiary was in a position to lend money at a higher rate. If Bogue had had outstanding 8% debentures which were selling say at 80, it would be hard to deny that Beleo was damaged if Bogue forced it to purchase at 100 such bonds, whether held in Bogue’s treasury or an additional issue, even though they were paid at maturity. Yet this hypothetical does not differ essentially from what plaintiff asserts .to have been the situation here. To be sure, the fact that Bogue would have had to pay more than 8% interest to others, if it be a fact, does not alone demonstrate that Beleo suffered a loss by loaning at that rate; plaintiff will also have to show that Beleo could have made loans at a higher rate. This would require proof that it, a new company engaged in the business of pollution control, could have found borrowers and that it had funds to loan —an assertion rather contrary to plaintiff’s fifth theory, namely, that Bogue forced Beleo to loan moneys needed to develop its own business.

Plaintiff’s second theory of damages, that Bogue owes Beleo the difference between the 8% interest it paid Beleo and what Bogue would have had to pay in an arm’s length transaction, while not precisely a “disgorging” theory, bears some resemblance to it in that it looks to the seller’s gain rather than the buyer’s loss. While we see no objection to this in principle, Beleo would not have been harmed unless it had funds to lend and could have found a borrower willing to pay more than 8%. In practical effect the second theory is thus the mirror image of the first.

The third theory does sound in terms of disgorging a profit. For the reasons indicated we see no sound basis for precluding plaintiff from endeavoring to establish this. But the obstacles in his way are formidable. He will have to demonstrate not only that Belco was harmed, as he must under the first or second theory, but also that Bogue required the loan to keep alive; that it had no other means of doing so except by selling — -not pledging- — some of its Belco shares; and that an earlier sale would have resulted in a lower price for the stock.

Plaintiff’s fourth and fifth theories do not involve application of Janigan and Ute to a defrauded buyer but another question of equal importance. This is whether § 28 of the Securities Exchange Act (or, for the period prior to July 1, 1971, applicable state law) permits the recovery of consequential damages for fraud. General principles of tort law allow such damages in such actions, see Restatement of Torts 2d, Tent. Draft No. 11, § 549(1)(b) and comment d. (1965); McCormick, Damages § 122, at 459-60 (1935); Prosser, Torts, supra, § 110, at 735 and eases there cited. We perceive no sound reason for refusing to apply this principle under the Securities Exchange Act. However, we do not wish to arouse unfounded expectations in Zeller or in other potential 10b-5 plaintiffs. A plaintiff seeking consequential damages for fraud, at common law or under federal securities legislation, must establish the causal nexus with a good deal of certainty. Since consequential damages are an addition to or in lieu of what would ordinarily constitute a fair recovery, there is no room here for applying the liberal principles of Eastman Kodak Co. v. Southern Photo Materials Co., 273 U.S. 359, 379, 47 S.Ct. 400, 71 L.Ed. 684 (1927); Story Parchment Co. v. Paterson Parchment Paper Co., 282 U.S. 555, 563, 51 S.Ct. 248, 75 L.Ed. 544 (1931); and Bigelow v. RKO Radio Pictures, Inc., 327 U.S. 251, 264, 66 S. Ct. 574, 90 L.Ed. 652 (1946), where some liberality is required to enable an injured plaintiff to recover anything. Thus, taking the claim about the aborted underwriting, plaintiff will not carry his burden merely by showing that the loan to Bogue was a factor of concern to the proposed underwriter. He must also show that Bogue was unwilling to meet the underwriter’s conditions concerning intercompany borrowings; that but for this the underwriter would have gone forward; that the underwriting would have been accomplished; and that Belco could have used the proceeds in a manner that would have increased per share earnings. And once all this has been demonstrated, Belco should only be permitted to recover as consequential damages what it lost by not being able to make the -public offering as originally scheduled; once the loan was repaid, the shares which were to have been offered could presumably have been sold to the public. Similarly, with respect to plaintiff’s fifth theory of damages, it would not suffice to show that Belco lost the use of the funds loaned to Bogue; plaintiff must demonstrate that but for defendants’ fraud, Belco would have chosen to invest the monies in its own operations; and that Belco could have used the funds more profitably in its own business. While we thus do not take a very bright view of plaintiff’s prospects on his fourth and fifth theories, the judge should have allowed him to" try.

III.

Plaintiff’s request that we enter summary judgment on the issue of liability is completely without merit; defendants have asserted numerous defenses to the claim that Bogue misused Beleo, which raise triable issues of fact. Equally baseless is plaintiff’s request for an immediate award of attorneys’ fees on the ground that it was the institution of this action that caused the note to be paid. So far as we can see, what caused the payment was Bogue’s sale of its Beleo stock to Foster-Wheeler, which provided both the need and the means.

The order granting summary judgment to the defendants and dismissing the complaint is reversed and the cause remanded for further proceedings consistent with this opinion.

      . A copy of the promissory note, annexed as an exhibit to ' plaintiff’s affidavit in support of his summary judgment motion, reveals that the rate of interest was 8%.

      . In August 1971, the underwriter proposed an offering of 150,000 units of Belco securities, each unit being composed of two shares of Belco common stock and one warrant exercisable into Belco common stock. Belco" and Bogue were each to sell 75,000 units, and the unit price was not to exceed $11. The body of the complaint contains-a claim that the proceeds of the offering would have been $1,650,-000, yielding Belco at least $800,000, but the ad damnum speaks in terms of $1,500,-000 “which would have been the proceeds of the proposed offering.” Additional correspondence annexed as exhibits to appellant’s affidavit in support of his motion for summary judgment indicate that modifications in the number of units to be sold in the proposed offering were considered.

      . Plaintiff is not, of course, limited to the ad damnum stated in the complaint. See, e. g., United States ex rel. Bergen Point Iron Works v. Maryland Casualty Co., 384 F.2d 303 (2 Cir. 1967); Kahan v. Rosenstiel, 424 F.2d 161, 174 (3 Cir.), cert. denied, 398 U.S. 950, 90 S.Ct. 1870, 26 L.Ed.2d 290 (1970). See generally 6 Moore, Federal Practice ¶ 54.62 (2d ed. 1972).

      . Both the complaint and the moving affidavit contain many allegations of alleged falsities and nondisclosures in Belco’s reports to the SEC and to stockholders. The pertinence of all this in a derivative stockholder’s action on behalf of Belco escapes us, unless the plaintiff is attempting to provide thereby proof of an intent to defraud.

      . Defendants also disputed plaintiff’s claim that interest had not been accrued on the open-account advance; - they claimed this had been charged on Bogue’s books at the rate of 8%.

      . In explaining the House bill’s § 3(3) exemption, which was ultimately enacted into law without amendment, the House Committee report states that “ [paragraph (3) exempts short-term paper of the type available for discount at a Federal Reserve bank and of a type which rarely is bought by private investors.” H.R.Rep. No. 85, 73d Cong., 1st Sess. 15 (1933). Since this statement was quoted and relied upon by the SEC in its release, Professor Loss’ criticism of the Commission’s reliance on S.Rep. No. 47, 73d Cong., 1st Sess. 3-4 (1933), for failing to mention that the Senate bill, the focus of the report, had provided in § 2(a) that the paper must not be “offered or intended to be offered for sale to the public,” see 4 Loss, Securities Regulation 2590 (Supp. 1969), though technically correct, does not seem to undermine the validity of the SEC’s position.

      . The Senate Report on the Securities Exchange Act stated that the definition of security was intended to be substantially the same as that contained in the Securities Act, S.Rep. No. 792, 73d Cong., 2d Sess. 14 (1934), quoted in Tcherepnin v. Knight, 389 U.S. 332, 342, 88 S.Ct. 548, 19 L.Ed.2d 564 (1967).

      . Appellee has not argued and, in the light of Superintendent of Insurance v. Bankers Life & Casualty Co., 404 U.S. 6, 92 S.Ct. 165, 30 L.Ed.2d 128 (1971), could not successfully argue that, if the note was a security, Rule 10b-5 was inapplicable because the ease simply raised an issue of a controlling corporation’s taking advantage of a controlled subsidiary. See also Schoenbaum v. Firstbrook, 405 F.2d 215, 219-220 (2 Cir. 1968) (en banc), cert. denied, 395 U.S. 906, 89 S.Ct. 1747, 23 L.Ed.2d 219 (1969), and Drachman v. Harvey, 453 F.2d 722, 736 (2 Cir. 1972) (en banc), where, however, the transactions were in securities of the controlled corporation.

      . Myzel went beyond this and permitted, under the special circumstances of that case, an award for “ ‘the subsequent increases in the value of the stock over . . . a reasonable period,’ ” 386 F.2d at 745, apparently whether the buyer resold or not. We take no position on that question here.

      . There may be an additional reason for the distinction. Restitution seems to be based not only on a feeling that the party who has acted wrongfully should not be permitted to benefit from his conduct but also that the injured party should be given the benefits of a transaction he would otherwise have been in a position to enter into. The latter consideration is snore likely to be present in a securities fraud case where the defrauded party is a seller and the defrauding buyer has subsequently sold the fraudulently acquired securities at a profit, since the higher market price would have been as much of an inducement to the defrauded party to sell the securities as it was to the defrauder. When the defrauded party is a buyer, and the defrauding seller uses the proceeds of a sale to enter into a second profitable transaction, it is far more difficult to say as a general proposition that, if the fraud had not occurred, the defrauded party would also have done this. Nevertheless, absent unusual circumstances, when a buyer has been induced to surrender consideration because of the fraudulent conduct of a seller, it seems appropriate to require the seller to disgorge any profits he would not otherwise have been in a position to realize if these can be traced with sufficient certainty. Compare Restatement of Restitution § 150 (1937), with id, §202.

      . We would see nothing wrong in a principle varying the required degree of certainty somewhat inversely with the depth of the fraud.

      . This is not so self-evident as plaintiff assumes on the basis of Belco’s profitable 1971 operations. An affidavit of William S. Guttenberg, president of Bogue and former treasurer of Belco, asserted that, in a new scientific equipment'manufacturing business like Belco’s, “[m]erely putting more capital into such a business will not cause it to grow faster, any more than stuffing more food into a baby will accelerate its growth. The very opposite may happen in both cases.” ,


author: PER CURIAM:

text:
    UNITED STATES of America, Plaintiff-Appellee, v. Milton James TAULBEE and Laura Arleen Taulbee, Witnesses, Defendants-Appellants.
    Nos. 73-1277, 73-1278.
    United States Court of Appeals, Ninth Circuit.
    March 13, 1973.

      David S. Maguire, of Eustice, Feeley & Maguire, Los Altos, Cal., for defendants-appellants.
    A. William Olson, Asst. Atty. Gen., Robert L. Keueh, William M. Piatt, Attys., Internal Security' Div., Dept, of Justice, Washington, D. C., James L. Browning, Jr., U.S. Atty., David P. Bancroft, Asst. U.S. Atty., San Francisco, Cal., for plaintiff-appellee.
   MEMORANDUM ORDER

Before CHAMBERS, WRIGHT and TRASK, Circuit Judges.

PER CURIAM:

These witnesses were held in contempt for refusal to testify before a federal grand jury in the Northern District of California. They had previously been granted immunity under 18 U.S.C. §§ 6002 et seq.

The Taulbees complain that they were denied adequate notice of both the contempt and immunity hearings. The Taulbees first refused to testify on January 23, 1973. They were informed at that time by the government’s attorney that_ immunity would be sought. On January 30, they refused to answer the same questions. Later on January 30 the government applied to the district court for a grant of immunity under 18 U.S.C. §§ 6002 et seq. The court granted immunity on the same day. The witnesses persisted in their refusal to testify. On January 30, 1973, the court ordered the Taulbees to show cause why they should not be held in contempt. The show cause hearing was set for and held on January 31.

Under Rule 6(d) F.R.Civ.P. the district court had discretion to shorten time. Here there is no abuse of that discretion. See United States v. Fitch, 472 F.2d 548 (9th Cir. 1973).

The Taulbees claim the marital privilege against testifying, relying on United States v. Weinberg, 439 F.2d 743 (9th Cir. 1971). The questions asked of the Taulbees did not intrude on privileged territory. The government attorney specifically instructed each witness to exclude information from their answers that might in any way relate to the other spouse.

Relying on Bursey v. United States, 466 F.2d 1059 (9th Cir. 1972), the Taulbees claim that some of the questions were an infringement on their First Amendment rights. The claim is not amplified, and we can see no such infringement.

The Taulbees claim a right to see their prior statements to F.B.I. agents made during the course of an investigation. They have no right to such statements not transcribed and given under oath. See Fitch, supra, at note 4.

The government denied wiretapping both the witnesses and their attorney. This was sufficient here. The government attorney also swore that he knew the sources on which all his questions were based, and he denied that any of the questions were based on state or other wiretaps. This solved all wiretap problems in the absence of a further showing by the Taulbees.

Other questions hinted at by the Taulbees are of no merit. The grant of immunity was a full and adequate substitute for the Fifth Amendment privilege. Kastigar v. United States, 406 U. S. 441, 92 S.Ct. 1653, 32 L.Ed.2d 212 (1972). There is no apparent defect in the justice department’s authorization of the immunity request.

The contempt orders are affirmed.