author: OAKES, Circuit Judge: FRANKEL, District Judge

text:
    John SCHLICK, Plaintiff-Appellant, v. PENN-DIXIE CEMENT CORPORAION et al., DefendantsAppellees.
    No. 1009, Docket 73-2677.
    United States Court of Appeals, Second Circuit.
    Argued Aug. 13, 1974.
    Decided Oct. 31, 1974.

      Jeffrey L. Zivyak and Ira W. Berman, New York City, for plaintiff-appellant.
    Marc P. Cherno, New York City (Joseph H. Einstein, Alan J. Russo, New York City, of counsel), for defendants-appellees.
    Amicus Brief filed by S. E. C. (Lawrence E. Nerheim, Gen. Counsel, Walter North, Associate Gen. Counsel, Frederic T. Spindel, Sp. Counsel, Frederick B. Wade, Atty., Securities and Exchange Commission, Washington, D. C.).
    Before OAKES, Circuit Judge, and FRANKEL and KELLEHER, District Judges.

       Of the Southern District of New York and the Central District of California, respectively, sitting by designation.

   OAKES, Circuit Judge:

This appeal is from a judgment dismissing a complaint for failure to state a claim upon which relief may be granted under Fed.R.Civ.P. 12(b)(6). The action is one for damages for alleged violations of the federal securities laws, brought by a minority shareholder of Continental Steel Corporation (Continental), an Indiana corporation listed on the New York Stock Exchange (NYSE). The alleged violations arose in connection with a merger of Continental into a wholly owned subsidiary of defendant Penn-Dixie Cement Corporation (Penn-Dixie), also listed on the NYSE.

The dismissed complaint alleges that between October, 1967, and October, 1969, Penn-Dixie acquired 1,111,514 shares or approximately 52.9 per cent of the outstanding common stock of Continental. Having thus acquired voting control over Continental, Penn-Dixie instituted management control over the corporation by placing six of its directors and officers on Continental’s nine member board of directors. Appellant claims that Penn-Dixie then exercised its control of Continental so as to defraud Continental shareholders.

Generally, Penn-Dixie is said to have manipulated and depressed the market value of Continental stock in relation to that of Penn-Dixie by utilizing Continental’s assets for the benefit of Penn-Dixie and to have caused Continental to enter into a merger agreement providing for an unfair exchange ratio based upon manipulated and artificial stock values of the merging parties. On March 14, 1973, the boards of directors of both companies unanimously approved an agreement of merger by which Continental shareholders would receive in exchange for each share of Continental one and one-half shares of Penn-Dixie common stock and a warrant to purchase an additional share of Penn-Dixie. In connection with the merger the complaint further alleges that Penn-Dixie issued a materially defective proxy statement which failed to disclose the manner in which Penn-Dixie had inflated the value of its shares at the expense of Continental. Damages claimed are in an indeterminate amount set at no less than $10 per Continental share, representing the difference in value between the value of the Continental shares in the actual merger and what they would have been worth but for the manipulations of Penn-Dixie.

On the basis of these general obligations, the complaint contains four claims of relief, in separate counts. The first alleges a violation of Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b) (1970), and Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.-10b-5 (1974); count two claims a violation of the proxy solicitation provision of Section 14(a) of the Securities Exchange Act of 1934, 15 U.S.C. § 78n(a) (1970), and Rule 14a-9 thereunder, 17 C.F.R. § 240.14a-9 (1974); the third and fourth counts of the complaint are common law counts based upon fraud and unfairness, each of which is pendent to the federal claims. Thus the whole complaint must fail unless one of the federal counts is viable. United Mine Workers v. Gibbs, 383 U.S. 715, 86 S.Ct. 1130,16 L.Ed.2d 218 (1966).

The district court found that the proxy count of the complaint was defective in that it failed to present “any allegation of injury which was caused by the proxy violations, aside from that claimed to flow from the unequal ratios.” Schlick v. Penn-Dixie Cement Corp., No. 73, Civ. 1467 (S.D.N.Y., decided Sept. 26, 1973). In effect, the district court seemed to be saying that the appellant failed to show that the appellees’ misstatements or omissions contributed to the kind of injury which the federal securities laws were intended to redress.

In reaching this conclusion, the district court relied heavily on the fact that the allegedly false and misleading proxy statement did not cause Continental minority stockholders any harm other than that caused by the unfair exchange ratio. They were not misled about their rights so as to have failed to take protective action in the form of seeking injunctive relief; rather, the court below continued, appellant chose to bring this action for damages before the merger was finalized. Nor did the complaint allege that other rights such as appraisal rights were lost as a result of appellees’ action. On such a showing, the district court regarded the appellant’s proxy claim as one based upon what was alleged merely to be an unfair merger. While conceding this might well state a cause of action under state law, Judge Metzner rejected the argument that a federal claim could be maintained.

The dismissal by the court below of appellant’s 10b-5 count was based first upon what the district court said was a concession by the appellant that if his “basic claim under'the proxy rules cannot be sustained, the 10b claim must also fall for want of the necessary causal connection” and secondly upon a determination that the count was defective because it contained “only eonclusory allegations without any specific allegations of fraud or deception as required to support a 10(b) claim.” Segal v. Gordon, 467 F.2d 602, 607 (2d Cir. 1972); O’Neill v. Maytag, 339 F.2d 764, 767-768 (2d Cir. 1964). We disagree with the district court on its dismissal as to each of the federal act claims and hence reverse, for reasons stated below.

I. THE RULE 10b-5 CLAIM.

A. The sufficiency of the complaint. We go first to the 10b-5 count of the complaint. That count does allege generally “the engagement in a course of business which operated as a fraud and deceit on the purchasers and holders of Continental stock.” If that were all that were alleged, it would fall within this court’s rule that “mere con-clusory allegations to the effect that defendant’s conduct was fraudulent or in violation of Rule 10b-5 are insufficient.” Segal v. Gordon, 467 F.2d at 607, quoting Shemtob v. Shearson, Hammill & Co., 448 F.2d 442, 444 (2d Cir. 1971), and O’Neill v. Maytag, supra. But here the complaint contains more than eonclusory allegations. Paragraph 15 specifically alleges that Continental bank accounts were utilized by Penn-Dixie as compensating balances for Penn-Dixie’s own borrowings and for Penn-Dixie’s benefit without compensation or benefit to Continental, thereby depriving Continental of its ability to use its own capital to expand its business and thereby obtaining a more favorable merger exchange ratio. The same paragraph specifically alleges that Continental funds were utilized by Penn-Dixie to engage in a real estate venture in Florida with a “special customer” of Penn-Dixie, for the benefit of Penn-Dixie and without compensation to Continental for the use of its funds. The complaint alleges the charging of excessive intercompany costs to Continental, thus reducing Continental’s income and increasing that of Penn-Dixie. It alleges an accounting change, valuing certain Continental inventories on a last-in, first-out basis rather than average cost as had been done prior to 1971, thereby incurring a $595,000 special income charge reducing Continental’s earnings for the year ending December 31, 1972, the year prior to merger. The complaint also alleges an over-inflation of Penn-Dixie assets by including in Penn-Dixie book value the sum of $21,-425,000 which was the excess of cost over related net assets attributed to Penn-Dixie’s purchase of the common stock of Continental. Finally, it alleges that the appellees caused the Continental pension fund to purchase common stock of Penn-Dixie on the market in order to create a higher price for the shares of Penn-Dixie, which higher price was utilized to obtain an exchange ratio more favorable to Penn-Dixie. While all of these allegations are stated on information and belief, and there are cases holding that allegations of fraud based on information and belief usually do not satisfy the degree of particularity required by Fed.R.Civ.P. 9(b), Lee v. Alabama, 364 F.2d 945 (5th Cir. 1966); Duane v. Altenburg, 297 F.2d 515, 518 (7th Cir. 1962), the particularity requirement may be satisfied if, as here, the allegations are accompanied by a statement of the facts upon which the belief is founded. Id.; 5 C. Wright & A. Miller, Federal Practice and Procedure: Civil § 1298, at 416 (1969). Wright and Miller point out that the rule relating to information and belief may be relaxed as to matters peculiarly within the opposing party’s knowledge, as where the complaining stockholders in a derivative suit have little information about the manner in which the corporation’s internal affairs are conducted and hence are rarely able to provide details as to the alleged fraud. Id. In any event, Rule 9 must be construed in conjunction with Rule 8, id.; Carroll v. First National Bank of Lincolnwood, 413 F.2d 353 (7th Cir. 1969), cert. denied, 396 U.S. 1003, 90 S.Ct. 552, 24 L.Ed.2d 494 (1970), and a complainant is not required to plead evidence. Brady v. Games, 76 U.S.App. D.C. 47, 128 F.2d 754, 755 (1942); Collins v. Rukin, 342 F.Supp. 1282, 1292 (D.Mass.1972). We consider Rule 9 sufficiently complied with here.

B. The nature of the fraud. It is well to put to rest, in the light of Judge Metzner’s holding, a slow-to-die contention advanced by appellees principally in oral argument but to some extent in their brief — a contention first authoritatively set forth in Birnbaum v. Newport Steel Corp., 193 F.2d 461 (2d Cir.), cert. denied, 343 U.S. 956, 72 S.Ct. 1051, 96 L.Ed. 1356 (1952), viz., that § 10(b) “was directed solely at that type of misrepresentation or fraudulent practice usually associated with the sale or purchase of securities rather than at fraudulent mismanagement of corporate affairs. . . .” Here, appellees tell us, all that appellant is complaining about is “corporate mismanagement,” and as such is in the wrong forum. As long ago as A. T. Brod & Co. v. Perlow, 375 F.2d 393, 397 (2d Cir. 1967), this Birnbaum proposition was no longer the law of this circuit as 10b-5 was there construed to include “all fraudulent schemes in connection with the purchase or sale of securities, whether . a garden type variety of fraud, or . . . a unique form of deception.” While Birnbaum was principally relied upon in O’Neill v. Maytag, supra, which in turn was relied upon by the court below in terms of stating the restrictive view, the authority of these cases (Birnbaum and O’Neill) was, as stated by District Judge Moye in First American Corp. v. Foster, 51 F.R.D. 248, 251 (N.D.Ga.1970), “seriously undercut” by Schoenbaum v. First-brook, 405 F.2d 215 (2d Cir. 1968), rev’g, 405 F.2d 200, cert. denied, 395 U.S. 906, 89 S.Ct. 1747, 23 L.Ed.2d 219 (1969). Thus Judge Feinberg could write in Pop-kin v. Bishop, 464 F.2d 714, 718 (2d Cir. 1972), that “assertions by a defendant that the misconduct complained of ‘really’ amounts to ‘just’ corporate mismanagement will not cut off a plaintiff’s federal remedy. Where Rule 10b-5 properly extends, it will be applied regardless of any cause of action that may exist under state law.” In any event, any lingering doubts as to the vitality of this Birnbaum proposition were firmly interred by the Supreme Court in Superintendent of Insurance v. Bankers Life & Casualty Co., 404 U.S. 6, 10-11 n. 7, 92 S.Ct. 165, 168, 30 L.Ed.2d 128 (1971), when the Court stated that it is not “sound to dismiss a complaint merely because the alleged scheme does not involve the type of fraud that is ‘usually associated with the sale or purchase of securities’ ” [quoting A. T. Brod & Co. v. Perlow, 375 F.2d at 397] and that

[t]he fact that the fraud was perpetrated by an officer of [the company] and his outside collaborators is irrelevant to our problem .
* * -X- * * *
We agree that Congress by § 10(b) did not seek to regulate transactions which constitute no more than internal corporate mismanagement. But we read § 10(b) to mean that Congress meant to bar deceptive devices and contrivances in the purchase or sale of securities whether conducted in the organized markets or face to face . . .

404 U.S. at 10-12, 92 S.Ct. at 168-169. It can thus truthfully be said as Professor Bromberg points out that “[a]ft-er Supt. of Insurance, then, Birnbaum survives significantly only for the buyer-seller requirement, which has been much reduced by other decisions.” 1 Brom-berg § 4.7 (522), at 84.32.

We come then to the causation question, that is, whether the scheme which appellant alleges took place brought about the injury in fact. As we have said, it is difficult to tell whether Judge Metz-ner felt that this element of causation was lacking in view of his finding that the proxy violations in question — the misrepresentations and omissions of the ap-pellees — did not cause a federally remediable injury to the appellant. Having thus disposed of the proxy count, Judge Metzner seemingly regarded the 10b-5 claim to be based on precisely the same operative facts, and for that reason dismissed it as well “for want of the necessary causal connection.” We disagree with these conclusions.

This is not a case where the 10b-5 claim is based solely upon material omissions or misstatements in the proxy materials. Were it so, coneededly there would have to be a showing of both loss causation — that the misrepresentations or omissions caused the economic harm — and transaction causation —that the violations in question caused the appellant to engage in the transaction in question. The former is demonstrated rather easily by proof of some form of economic damage, here the unfair exchange ratio, which arguably would have been fairer had the basis for valuation been disclosed. Transaction causation requires substantially more. In a misrepresentation case, to show transaction causation a plaintiff must demonstrate that he relied on the misrepresentations in question when he entered into the transaction which caused him harm. 2 Bromberg § 8.6, at 209-11. In an omission or nondisclosure case based upon Rule 10b-5, a plaintiff need not show reliance in order to show transaction causation but must still show that the facts in question were material “in the sense that a reasonable investigator might have considered them important” in making his investment decisions. Affiliated Ute Citizens v. United States, 406 U.S. 128, 153-154, 92 S.Ct. 1456, 1472, 31 L.Ed.2d 741 (1972). See Shapiro v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 495 F.2d 228, 240 (2d Cir. 1974).

Under the 10b-5 count, proof of transaction causation is unnecessary by virtue of the allegations as to the effectuation of a scheme to defraud which includes market manipulation and a merger on preferential terms, of which the proxy omissions and misrepresentations are only one aspect. Thus appellant need only show loss causation with respect to his claim for relief under 10b-5; Judge Metzner found and we agree that this has been shown. Here the complaint clearly alleges that, as a result of the merger, appellant was forced to sell his Continental shares to Penn-Dixie on the basis of an exchange ratio that reflected adversely the manipulated market value of Continental stock, and that he sustained injury accordingly.

It is not seriously argued that there is a failure to state a claim for relief-because there was no “connection” under Rule 10b-5 between the misconduct and the security transaction here involved. Nor could there be, particularly in view of the specific allegation that defendants caused the Continental pension fund to purchase the common stock of Penn-Dixie in the market in order to create a higher price for Penn-Dixie shares and thus obtain a more favorable exchange ratio. In any event, Superintendent of Insurance v. Bankers Life & Casualty Co., supra, and our own Drachman v. Harvey, 453 F.2d 736 (2d Cir. 1972) (en banc), rev’g, 453 F.2d 722 (2d Cir. 1971), make it clear that the violations here alleged had a connection with the sale of Continental shares and purchase of Penn-Dixie shares effectuated by the merger. See also Vine v. Beneficial Finance Co., 374 F.2d 627, 635 (2d Cir.), cert. denied, 389 U.S. 970, 88 S.Ct. 463, 19 L.Ed.2d 460 (1967).

Thus, the complaint completes the showing necessary to state a claim under Rule 10b-5. It alleges a specific scheme to defraud (a scheme which includes the proxy solicitation as a part, but which included substantial collateral conduct as well); the fraud was accomplished in connection with a securities transaction; the appellant was a seller in that transaction; and as a result of the sale, appellant alleges a loss was sustained.

II. THE 14a-9 CLAIM.

As to count two of the complaint based upon alleged proxy violations, as we have said, quite plainly appellant has alleged loss causation or economic loss in that there was an unequal, unfair and disadvantageous merger ratio, undisclosed in the proxy materials, by which he obtained fewer Penn-Dixie shares and warrants than he would have had the appellees’ manipulative scheme been revealed. It is axiomatic that fewer shares are worth less on the open market than more shares, and while it is true that “damages should be recoverable only to the extent that they can be shown,” Mills v. Electric Auto-Lite Co., 396 U.S. 375, 389, 90 S.Ct. 616, 624, 24 L.Ed.2d 593 (1970), the complaint alleges that appellant was the holder of 2,000 shares of Continental. Depending upon what the evidence shows in terms of damages, he might well have received in excess of the 3,000 shares of Penn-Dixie which he did in fact obtain had a fair exchange ratio been adopted. Therefore, we must immediately confront the issue whether the proxy violations themselves caused the transaction in question, the exchange. Both types of causation must be shown in order to state a Section 14(a) claim: transaction causation to show a violation of the law from which an appellant may recover, and loss causation to show damages.

The premise underlying the strict view of transaction causation is that Penn-Dixie would have voted to proceed with the merger in any event, irrespective of any misstatements or omissions in the proxy. Even by dissenting to the merger minority stockholders of Continental could not have secured a higher price for their stock than the merger terms offered since under Indiana law, stockholders in a company listed on the NYSE have no appraisal rights. Burns, Ind. Stat.Ann. Title 23, art. I, ch. 5, § 7 (1972). The argument is in short that minority stockholders’ votes must be viewed as meaningless since the insiders with a conflict of interest had enough votes to approve the transaction in any event.

This court has said, however, in affirming the second Laurenzano ease, in which Judge Dooling found on the merits against the plaintiff that “[minority shareholder] approval was not meaningless; minority shareholder approval has value whether or not it is strictly essential to the power to act.” Laurenzano v. Einbender, 448 F.2d 1, 5 (2d Cir. 1971). See also Lewis v. Bogin, 337 F.Supp. 331, 337 (S.D.N.Y.1972). As the Seventh Circuit said in Swanson v. American Consumer Industries, Inc., 415 F.2d 1326 (7th Cir. 1969) (Swanson I), “[t]he power to effect a given result certainly does not negative all possibility of injury resulting from the fraudulent or manipulative use of that power.” Id. at 1331-1332. While one need not go so far perhaps as Judge Sprecher, dissenting and concurring in Swanson v. American Consumer Industries, Inc., 475 F.2d 516, 522 (7th Cir. 1973) {Swanson II), by saying that causation should be conclusively established by the mere solicitation of votes, in a very real sense the shareholders were deceived by the action of those making the corporate decision to merge. Cf. Crane Co. v. Westinghouse Air Brake Co., 419 F.2d 787, 797 (2nd Cir. 1969), cert. denied, 400 U.S. 822, 91 S.Ct. 41, 27 L.Ed.2d 50 (1970). See also Vine v. Beneficial Finance Co., 374 F.2d at 635.

We have previously said that a controlling shareholder’s “ability to push through the merger — with or without any other shareholder’s vote — cannot by itself defeat a claim for federal injunctive relief.” Popkin v. Bishop, 464 F.2d at 718 (emphasis added) (but denying injunction since full disclosure was made). Again, as was recognized in Heyman v. Heyman, 356 F.Supp. 958, 967-968 (S.D.N.Y.1973), minority shareholders may “have recourse to measures other than the casting of proxies” to oppose those who have “the naked strength to consummate a fraudulent transaction.” At least they are in a better position to protect their interests if they have full disclosure of the facts. Cf. Chris-Craft Industries, Inc. v. Piper Aircraft Corp., 480 F.2d 341, 375 (2d Cir.), cert. denied, 414 U.S. 910, 94 S.Ct. 231, 38 L.Ed.2d 148 (1973); Gerstle v. Gamble-Skogmo, Inc., 478 F.2d 1281, 1302-1303 (2d Cir. 1973).

In the end we must remember the “broad remedial purposes” of the Securities Act. J. I. Case Co. v. Borak, 377 U.S. 426, 431, 84 S.Ct. 1555, 12 L.Ed.2d 423 (1964); SEC v. Capital Gains Research Bureau, Inc., 375 U.S. 180, 195, 84 S.Ct. 275, 11 L.Ed.2d 237 (1963). Indeed, Mills itself, while leaving the question open, as we have pointed out, by holding that there was a sufficient causal relationship in a proxy case by proof that the proxy solicitation itself rather than the particular defect in the solicitation materials was an essential link in the accomplishment of the transaction, 396 U.S. at 385, 90 S.Ct. 616, lends some support to a more moderate view of transaction causation. Causality, we think, is sufficiently pleaded; the proof may, of course, be something else.

Causation is a concept stemming from the law of torts, but we are here talking about the statutory purpose of the proxy rules, a purpose which, as Mills itself pointed out, arises from Congressional belief in “fair corporate suffrage” to obtain which “explanation to the stockholder of the real nature of the questions for which authority to cast his vote is sought.” Congressional concern was specifically with conflict of interest transactions. Stock Exchange Practices, S. Rep.No.1455, 73d Cong., 2d Sess., 74-76 (1934). See also S.Rep.No.792, 73d Cong., 2d Sess., 12 (1934). Indeed, the addition in 1964 of Securities Exchange Act § 14(c), 15 U.S.C. § 78n(c) (1970), which operates when shareholder action is taken but proxies are not solicited, applies to the very situation when typically no minority votes are needed. That section requires dissemination to shareholders of “information substantially equivalent to the information which would be required to be transmitted if a solicitation were made . . . .” Id. There has to be at least as strong a policy for accurate and complete information to the holder, such as the appellant here, whose vote is solicited but not needed. See Bromberg § 4.7(556), at 86.23 (1973). As Judge Fulham wrote in Weiss v. Sunasco Inc., 316 F.Supp. 1197, 1205 (E.D. Pa.1970), a post -Mills decision, “As I understand Mills, the proper test is whether the proxy solicitation is ‘an essential link in the accomplishment of the transaction’ giving rise to the litigation, irrespective of the fact that other possibilities were available to management.” The equities call for protection of the minority shareholder when he is the most helpless, as when neither disinterested director nor disinterested shareholder voting exists as a safeguard. To require strict causation would “sanction all manner of fraud and overreaching in the fortuitous circumstance that a controlling shareholder exists.” Swanson v. American Consumer Industries, Inc., 415 F.2d at 1331.

It is true that appellant brought his action for damages before the merger when indeed he could have sued to enjoin. The argument is made that by failing to seek an injunction the appellant is precluded from recovery. We disagree. Appellant may well have felt that in the end an injunction would cost everyone more money and create greater problems for all. Or he might have been required to post a bond for damages and been unable to pay the premium.

The court below said that “the deficiency of the instant complaint stems from the absence of any allegation of injury which was caused by the proxy violations, aside from that claimed to flow from the unequal ratio” (emphasis added). Of course, there was injury flowing from the unequal ratio in terms of a lesser value of stock received by the minority Continental shareholders in the merger. Again, if it is reliance to which Judge Metzner was referring, the analogous 10b-5 cases of Superintendent of Insurance v. Bankers Life & Casualty Co., supra, and Affiliated Ute Citizens v. United States, supra, put this defense aside. To hold otherwise would make the proxy requirements a farce. Affiliated Ute holds that reliance is satisfied by a material omission when there is a duty to disclose.

The minority shareholders, aside, there are two other purposes served by the disclosure requirements which make a strict causation rule— whether under a 10(b) or a 14(a) claim —antithetical to it:

1. By disclosure the market will be informed, so as to permit well-based decisions about buying, selling and holding the securities involved in the transaction. See generally SEC v. Texas Gulf Sulphur Co., 401 F.2d 833 (2d Cir. 1968) (en banc), cert. denied, 394 U.S. 976, 89 S.Ct. 1454, 22 L.Ed.2d 756 (1969). Thus, had there been full disclosure here, the merger ratio would have been unfair on its face and the shares of Penn-Dixie in the open market would have sold for less.

2. By virtue of the disclosure either modification or reconsideration of the terms of the merger by those in control might be effectuated. We cannot assume that even a rapacious controlling management would necessarily want to hang its dirty linen out on the line and thereby expose itself to suit or Securities Commission or other action — in terms of reputation and future takeovers. See Swanson I, 415 F.2d at 1332; Rosenblatt v. Northwest Airlines, Inc., 435 F.2d 1121, 1124 (2d Cir. 1970); Laurenzano v. Einbender, 264 F.Supp. at 361.

In short, we refuse to adopt the narrow view of causation for which the appellees argue. Instead in the light of the Mills footnote, Affiliated Ute, supra, the Seventh Circuit’s Swanson I and Swanson II, and the other cases in our own circuit above referred to, we are of the view that sufficient causation is alleged so that the complaint must not be dismissed. None of what we say, of course, goes to the merits of the case; that must await trial on the facts.

Judgment dismissing the complaint is hereby reversed and remanded.

FRANKEL, District Judge

(concurring) :

I concur in the result and in most of the court’s opinion. With all deference, however, I am unable to join completely in the opinion because of those portions which employ the concepts of “loss causation” and “transaction causation.” While these terms have had some scholarly currency, as the majority shows, and while they may prove eventually to be useful, I am not convinced at this time that the Circuit ought to be committed to their employment or to their still uncertain implications.

The appeal before us arises on a bare pleading. The terminological questions explored by the majority have not been briefed or argued. It does not appear that the issues as the parties presented them require such exploration.

I am not prepared to find these labels either useful or harmful. I conclude only that, being unnecessary, they ought not to enter into an opinion on the limited questions before the court.

      . Jurisdiction is based upon Section 27 of the Securities Exchange Act of 1934, 15 U. S.C. § 78aa (1970), which gives to the district courts jurisdiction over actions brought to enforce any liability or duty under the act irrespective of the amount in controversy or tlie citizenship of the parties.

      . Appellant Sclilick sues for himself individually and on behalf of all purchasers of Continental similarly situated. Appellees include Penn-Dixie and several officers and directors of both Penn-Dixie and Continental.

      . Since under Indiana law, a majority vote of the outstanding shares of a corporation is sufficient to secure shareholder approval of a merger, Burns, Ind.Stat.Ann. Title 23, art. I, ch. 5, § 2(b) (1972), and since Penn-Dixie possessed that majority, the merger was consummated on May 11, 1973, while this suit was pending.

      . This exchange ratio was “arrived at by considering, among other factors, the earnings prospects, book values, and the market prices of the common stock of both companies” (Joint Proxy Statement at 3). Each warrant entitles the holder to purchase one share of Penn-Dixie common stock for $8 per share through May 1, 1978, and for $11 per share thereafter until an expiration date of May 1, 1983.

      . It is unclear whether the district court reached the issue of causation in dismissing the case. One reading of the opinion would suggest that the district court felt that the element of causation was lacking in the appellant’s proxy count. Another reading would indicate that the claim was dismissed because the only kind of injury which appellant claimed was economic injury based on the unfair merger ratio, and that the district court perceived this kind of injury to be a matter for the state courts, beyond the reach of the federal securities laws.

      . Under Indiana law minority stockholders are not entitled to the appraisal rights generally otherwise afforded, since here the company’s shares are traded on the NYSE. Burns, Tnd.Stat.Ann. Title 23, art. I, cli. 5, § 7 (1972). The rationale of this statutory exception may well be that appraisal rights are not necessary where the shares of dissenting shareholders can be readily sold at a fair market price. But here, if the appellant’s allegations are true, the purpose of the appraisal statute was thwarted as the market price of Continental shares had been manipulated so as not to reflect their true value.

      . In so holding, the district judge indicated that he did not have to choose between the two competing lines of cases within this circuit on the question whether causation can be shown where the management controls enough votes to approve a transaction without the assent of the minority. This question was specifically left open by the Supreme Court in Mills v. Electric Auto-Lite Co., 396 U.S. 375, 385 n. 7, 90 S.Ct. 616, 24 L.Ed.2d 593 (1970). It has been answered affirmatively by some district courts, headed by Laurenzano v. Einbender, 264 F.Supp. 356 (E.D.N.Y.1966), and its progeny Heyman v. Heyman, 356 F.Supp. 958, 967-968 (S.D.N.Y.1973) and Weber v. Bartle, 272 F. Supp. 201 (S.D.N.Y.1967). Other district courts have, however, found causation lacking in such a factual setting. See Barnett v. Anaconda Co., 238 F.Supp. 766 (S.D.N.Y. 1965), and the cases following its line of reasoning: Hanover v. Zapata Corp., CCH Fed.Sec.L.Rep. ¶ 93,904 at 93,626 (S.D.N.Y. 1973); Weiss v. Sunasco, Inc., 295 F.Supp. 824 (S.D.N.Y.1969); Adair v. Schneider, 293 F.Supp. 393 (S.D.N.Y.1968); Robbins v. Banner Industries, Inc., 285 F.Supp. 758 (S.D.N.Y.1966); Hoover v. Allen, 241 F.Supp. 213 (S.D.N.Y.1965).

      . Segal v. Gordon, supra, rests on the language of Fed.R.Civ.P. 9(b) that “[i)n all averments of fraud . . . the circumstances constituting fraud . . . shall be stated with particularity.” It is arguable, of course, that 9(b) relates only to common law fraud and in no way to SEC Rule 10b-5. The SEC Rule does refer to common law fraud in connection with the purchase or sale of a security in subsection 2, hut it also illegalizes, in subsection 1, employing “any device, scheme, or artifice to defraud” and, in subsection 3, engaging “in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person.” See 3 A. Bromberg, Securities Law: Fraud § 11.8, at 264 (1973) (hereinafter Bromberg).

      . The complaint alleges that if this $21,425,-000 had been excluded, the actual book value of Penn-Dixie would have been approximately $16 per share, rather than, the $23.12 as stated in the proxy materials,

      . To the extent that Segal v. Gordon, 467 F.2d 602 (2d Cir. 1972), and O’Neill v. Maytag, 339 F.2d 764 (2d Cir. 1964), rely upon Birnbaum for the enunciation of their specificity requirements, Superintendent of Insurance v. Bankers Life & Casualty Co., 404 U.S. 6, 92 S.Ct. 165, 30 L.Ed.2d 128 (1971), leaves them without applicability to the case at hand. See also Jannes v. Microwave Communication, Inc., 461 F.2d 525, 528-530 (7th Cir. 1972).

      . In terms of transaction causation, other methods of conceptualizing the same issue include the doctrines of reliance, materiality and the buyer-seller requirement. See 1 Bromberg § 4.7 (551), at 86; Shapiro v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 495 F.2d 228, 238-240 (2d Cir. 1974). See generally Note, Causation and Liability in Private Actions for Proxy Violations, 80 Yale L.J. 107, 123-24 (1970).

      . See 1 Bromberg § 4.7 (558-59), at 86.25, 86.32 (1973).

      . This is the question, as said, left undecided in Mills v. Electric Auto-Lite Co., 396 U.S. at 385 n. 7, 90 S.Ct. at 622, “whether causation could be .shown where the management controls a sufficient number of shares to approve the transaction without any votes from the minority.” It is not insignificant to note that the Court went on to say,
      Even in that situation, if the management finds it necessary for legal or practical reasons to solicit proxies from minority shareholders, at least one court has held that the proxy solicitation might be sufficiently related to the merger to satisfy the causation requirement. Id. Without putting too much emphasis upon citations by the Supreme Court in footnotes, the Court then cited the first Laurenzano decision, Laurenzano v. Einbender, 264 F.Supp. 356, 360-362 (1965), and cited the strict view of causation taken in Barnett v. Anaconda Co., 238 F.Supp. 766, 771 (S.D.N.Y.1965), as a “But see.”

      . Mills v. Electric Auto-Lite Co., 396 U.S. at 377, 90 S.Ct. 616; J. I. Case Co. v. Borak, 377 U.S. 426, 431, 84 S.Ct. 1555, 12 L.Ed.2d 423 (1964). But see Note, Private Actions for Proxy Violations, 80 Yale L.J. 107, 124 n. 80 (1970).

      . In this regard it might well be observed that since the merger ratio here was based upon such factors as market price and recent earnings (Joint Proxy Statement at 3) and since it is alleged that those prices and earnings were manipulated by the appellees, the omissions in the proxy statement stand as a definite causal link in the transaction in question. But for the omissions and misstatements, the merger terms may have been so obviously unfair that the appellees would not have attempted the transaction on those terms.


source: Caselaw Access Project

author: PER CURIAM.

license: Public Domain

text:
    UNITED STATES of America, Appellee, v. Harry F. LARSON, M. D., Appellant.
    No. 73-3109.
    United States Court of Appeals, Ninth Circuit.
    May 22, 1974.
    As Amended Nov. 21, 1974.

      Warren A. Sinsheimer, III, San Luis Obispo, Cal., for appellant.
    William S. Hawes, Asst. U. S. Atty., Los Angeles, Cal., for appellee.
   OPINION

Before BARNES and ELY, Circuit Judges, and EAST, District Judge.

PER CURIAM.

Dr. Harry F. Larson, an M.D. licensed to practice medicine in California, was convicted of nine substantive counts of distributing a controlled substance in violation of 21 U.S.C. § 841(a)(1) *and of conspiracy to violate 21 U.S.C. § 841 (a)(1) as proscribed by 21 U.S.C. § 846.

I. Sufficiency of the Evidence

Dr. Larson’s principal argument on appeal questions the sufficiency of the evidence. He urges that because of the absence of expert medical testimony the government failed to carry its burden of proof that the prescriptions written by Dr. Larson were issued without a legitimate medical purpose, and not in the usual course of his professional practice.

The' regulation (21 C.F.R. § 806.04 (a)) issued pursuant to 21 U.S.C. § 829(a) and (b) exempts medical practitioners from the prohibitions of 21 U.S.C. § 841(a)(1) by allowing a practitioner to issue a prescription “for a legitimate medical purpose,” and “in the usual course of his professional practice.” On appeal we must review all the evidence and all the reasonable inferences that are to be drawn therefrom, in a light most favorable to the Government. Glasser v. United States, 315 U.S. 60, 80, 62 S.Ct. 457, 86 L.Ed. 680 (1942); United States v. Amaro, 422 F.2d 1078, 1081 (9th Cir. 1970).

Dr. Larson made a motion for judgment of acquittal at the end of the government’s case in chief, but failed to renew the motion at the end of all the evidence. Such an unrenewed motion is waived and any error in the denial of the motion is waived by the introduction of the accused’s evidence. Benchwick v. United States, 297 F.2d 330 (9th Cir. 1961). Appellant now urges us to consider his insufficiency argument in light of the “plain error” rule. Rule 52(b) F.R.Crim.P.; See Reisman v. United States, 409 F.2d 789 (9th Cir. 1969). In the absence of “plain error” appellant can not now challenge the denial of the motion for acquittal. United States v. Lewis, 426 F.2d 266 (9th Cir. 1970). The “plain error” of Rule 52(b) is invoked only in exceptional situations, “ . . . situations wherein it appears to be necessary in order to prevent miscarriage of justice or to preserve the integrity and reputation of the judicial process.” Marshall v. United States, 409 F.2d 925, 927 (9th Cir. 1969). In reviewing the record we do not find that such an exceptional situation existed here requiring us to find the denial of the motion of acquittal represented “plain error” by the trial judge.

Appellant argues that the government was required to present expert testimony to carry its burden of proof. We do not find that expert testimony was required under the facts of this case.

In United States v. Bartee, 479 F.2d 484 (10th Cir. 1973), which also concerned the prosecution of a doctor for illegally dispensing controlled substances, the expert testimony was contradictory, but the court to some degree minimized the expert testimony by stating:

“Expert testimony from medical practitioners is of course admissible as bearing on the issue as to whether a doctor in prescribing a controlled substance is acting for a legitimate medical purpose and the expert testimony in the instant case was to some degree, at least, in conflict. However, the jury is not bound by such expert testimony and may of course consider all of the facts and circumstances surrounding the prescribing as related by lay witnesses. In this connection, we regard certain of the utterances attributed to Dr. Bartee by Baker and Coller to be particularly damning and the overall facts and circumstances of the case are such as in our view permit the inference that Dr. Bartee in thus prescribing was not acting for a legitimate medical purpose and such was not within the usual course of l his professional practice.” Id. at 488-489 (Emphasis added.)

In Bartee, the evidence against the Doctor was deemed sufficient to sustain the conviction. The court found the following evidence significant: the inordinately large quantities of controlled substances, the spreading out of prescriptions in place of one, the use of street slang terms such as “reds”, and the “most damning evidentiary matter was the testimony by agent Coller that Dr. Bartee said that he had to be careful since the BNDD (Bureau of Narcotics and Dangerous Drugs) checked the drugstores for prescriptions issued. .” Id. at 489. Dr. Bartee suggested that the prescriptions be taken to different drugstores and not filled at the same one. The court felt that the evidence was such to permit the jury’s determination that the doctor was not acting for a legitimate medical purpose, and was not acting in the usual course of his professional practice.

Many of the factors considered significant in Bartee are present here. (1) Larson did prescribe and/or distribute inordinate quantities to the individuals named in the various counts. (2) He wrote more than one prescription on occasions in order to “spread” them out. (3) He charged a flat rate cash fee for each prescription. (4) Dr. Larson cautioned the witness Butler about having the prescription filled at the same pharmacy because each prescription was for a thirty day supply and he was supplying Butler with prescriptions more frequently than that. (R.T. 398). (5) Dr. Larson also used the street parlance for sec-onal: “reds”; and for methamphetamine: “speed”. (R.T. 392).

Finally, some of the utterances that agents Dalton and Keszler, witness Butler, and the massage parlor witnesses testified that Dr. Larson had made, in view of the previously listed facts and circumstances, support the jury’s determination that Dr. Larson was not acting for a legitimate medical purpose or in the usual course of his professional practice. Although Dr. Larson sometimes required a physical examination, certain of Dr. Larson’s comments negate any significance such examinations would have with regard to legitimate medical purposes.

In United States v. Badia, 490 F.2d 296 (1st Cir. 1973), the conviction of a physician was affirmed where the principal government witness at trial was a federal agent who testified on three occasions he called on the appellant at his office and was either directly sold controlled substances from appellant’s stock or sold prescriptions for controlled substances which he then had filled at various pharmacies. The court felt that the jury obviously believed the agent’s testimony and its conclusions that deliveries had occurred which were not within the usual course of appellant’s medical practice were warranted. The court concluded:

“Appellant’s conduct bore no more resemblance to professional medical practice than the conduct of any street-corner ‘pusher’.” Id. at 299.

From our reading of the record, Dr. Larson’s activities here delineated were not so dissimilar to those of the doctor in Badia to escape being characterized in a somewhat similar fashion.

Even if we were to require expert testimony, which we do not, the evidence (including testimony of the government’s rebuttal witness, Dr. Ungerleider (R.T. 1026-1045)), still remains sufficient. Dr. Ungerleider’s testimony reveals that Dr. Larson’s prescribing of Schedule II and III controlled substances was not for legitimate medical purposes.

Appellant claims that Dr. Ungerleider’s testimony only goes to the question of whether the prescribing and dispensing involved in the case was for a legitimate medical purpose and argues that the government offered no evidence that in any way tends to show that the dispensing was in other than the usual course of Dr. Larson's professional practice. We disagree.

The standard for judging what is in the usual course of a physician’s professional practice was announced recently in United States v. Collier, 478 F.2d 268 (5th Cir. 1973).

“It is apparent that a licensed practitioner is not immune from the act solely due to his status, White v. United States, 399 F.2d 813 (8 Cir. 1968), but rather, because he is expected to prescribe or dispense drugs within the bounds of his professional practice of medicine. A physician is restricted to dispensing or prescribing drugs in the bona fide treatment of a patient’s disease, including a dispensing of a moderate amount of drugs to a known addict in a good-faith attempt to treat the addiction or to relieve conditions or suffering incident to addiction. (citations omitted). However, under the guise of treatment a physician cannot sell drugs to a dealer nor distribute drugs intended to cater to cravings of an addict, (citations omitted). Congress did not intend for doctors to become drug pushers, (citations omitted).
“In making a medical judgment concerning the right treatment for an individual patient, physicians require a certain latitude of available options. Doe v. Bolton, 410 U.S. 179, 93 S.Ct. 739, 747, 35 L.Ed.2d 201 (1973). Hence, ‘[w]hat constitute bona fide medical practice must be determined upon consideration of evidence and attending circumstances. Linder v. United States, supra, 268 U.S. [5] at 18, 45 S.Ct. [446] at 449, [69 L.Ed. 819].” Id. at 271, 272.

Considering the evidence presented at trial in a light most favorable to the government, we cannot conclude that Dr. Larson was prescribing drugs in the bona fide treatment of a patient, or within the usual course of his professional practice. The evidence, even in the absence of expert testimony, was sufficient to support the jury’s determinations.

II. Motion for Severance

Appellant alleges that the trial court abused its discretion in denying appellant’s motion to sever the conspiracy count (Count I), and the substantive counts connected with it (Counts XI, XII, and XIII), from the remaining counts.

Such a denial will not be reversed absent a clear showing of abuse of discretion and resulting prejudice. United States v. Berlin, 472 F.2d 13, 15 (9th Cir. 1973); United States v. Cozzetti, 441 F.2d 344, 349 (9th Cir. 1971). The burden is on the moving party to make a strong showing of prejudice. United States v. Patterson, 455 F.2d 264, 266 (9th Cir. 1972). United States v. Cozzetti, supra, at 349.

The evidence offered by Dr. Larson was an affidavit (R.T. 25-26) and points and authorities (C.T. 27 and 28) in support of the motion. A severance was denied on the government’s representation that there would not be offered in the Government’s case, in chief, expert testimony. (R.T. 33-34) There was none.

The number of counts does not compel the conclusion that the jury was confused. The jury, aided by careful instruction by the court on relating evidence to specific counts and the elements involved in the proof of each count, was able to discriminate between the counts. This was indicated by the jury verdict of not guilty on Count V. (C.T. 40). On the record we do not think that any “strong showing of prejudice” was shown such as to require severance as a matter of law. See United States v. Patterson, supra.

III. Trial Judge’s Participation

It is appellant’s contention that the trial judge took over from the prosecution and in a probing adversary cross-examination of the defendant took over the task of obtaining a conviction of the defendant, thus denying him a fair trial. We have carefully reviewed the transcript of the trial judge’s questioning (R.T. 986-1021) and although we recognize that the trial judge took an active role in the line of questioning, we do not find an abuse of discretion.

A trial judge walks a delicate tightrope upon questioning a witness, especially when that witness is the defendant in the case.

“ ‘A trial judge is more than a moderator or umpire.’ His responsibility is to preside in the manner and with the demeanor to provide a fair trial to all parties and his discretion in the performance of this duty and management is wide. Robinson v. United States, 401 F.2d 248 (9th Cir. 1968), citing Smith v. United States, 305 F.2d 197 (9th Cir. 1962).” United States v. Aguiar, 472 F.2d 553, 555 (9th Cir. 1972).

One of the functions of the trial judge is “. . . to develop facts.” United States v. Sidman, 470 F.2d 1158, 1163 (9th Cir. 1972). From our review of the trial court’s questioning of Dr. Larson, it is apparent that the court was attempting to develop facts that were not elicited from Dr. Larson in his prior testimony during the trial.

The court was careful to explain in instructing the jury later, that:

“It is proper to add the caution that . no Comment or question of the Court or ruling of the Court upon any matter of evidence is to suggest or convey in any manner what verdict I think you should find. What the verdict on the facts shall be is the sole and exclusive responsibility of the jury.” (Yol. VIII, R.T. 50).

As was said by this Court in a recent opinion — (United States v. Elvira Hinton, No. 73-3206 (9th Circuit, April 24, 1974)), “While the trial judge was vigorous and forthright in his questioning of the witness, we are not persuaded that his conduct significantly prejudiced the right of the appellant-defendant to a fair trial. United States v. Allen, 431 F.2d 712 (9th Cir. 1970).”

With respect to the trial judge’s questioning, we agree with the statement in Aguiar:

“While hindsight and prudence may dictate a less active role the record taken in its entirety shows no prejudice. . . .” 472 F.2d at 555.

Finally, in appellant’s reply brief (p. 6), he advances the argument that the sentence imposed exceeds the statutory maximum because desoxyn, a tablet form of methamphetamine, alleged to be a Schedule II controlled substance is in actuality a Schedule III controlled substance. Appellant is mistaken. Methamphetamine, in all its forms was moved from Schedule III to Schedule II of the controlled substances list effective July 7, 1971. See 36 Fed.Reg. 12734 (1971); 21 C.F.R. § 308.12(d). This fact was stipulated to at the time of oral argument.

A stipulation was likewise filed by the parties hereto that the sentence imposed at time of trial was excessive.

Appellant’s conviction is affirmed, but his sentence is set aside and the matter is remanded to the District Court for resentencing the defendant.

       Honorable William 6. East, Senior Judge of the District of Oregon, sitting by designation.

      . 21 U.S.C. § 841(a)(1) provides in pertinent part:
      “(a) Except as authorized by this sub-ehapter, it shall be unlawful for any person knowingly or intentionally—
      “(1) to manufacture, distribute or dispense ... a controlled substance.”

      . The regulation provides in pertinent part:
      “(a) A prescription for a controlled substance to be effective must be issued for a legitimate medical purpose by an individual practitioner acting in the usual course of his professional practice.”

      . This included questioning concerning the transaction with Brad Butler (R.T. 986-993) ; questions concerning fees charged for prescriptions (R.T. 994r-998) ; inquiry into the medical reasons for prescribing Empirin Codeine ff 4 (R.T. 1001-1003) ; further inquiry into the significance of obtaining a prior medical history with reference to drug ingestion. (R.T. 1003-1010) ; questions about Terri Griffin’s thyroid problem (R.T. 1011-1015) ; questions about Virginia Brayton’s visit which were not previously asked (R.T. 1018-1019).

      . It is stipulated by and between appellant and appellee, through respective counsel:
      1. That the sentence of ten years imposed on each of Counts Two, Three, Four, Six and Seven and the sentence of ten years imposed upon Counts Eight, Ten, Eleven, Twelve and Thirteen to run consecutive to the sentence imposed as to Counts One, Two, Three, Four, Six and Seven are excessive inasmuch as Counts Two, Three, Four, Six, Seven, Eight, Ten, Eleven, Twelve and Thirteen allege the distribution of Schedule II and III nonnarcotic controlled substances. Pursuant to Title 21, United States Code, Section 841(b) (1)(B), the maximum sentence for distribution of Schedule II and III non-narcotic drug controlled substances is five years imprisonment and/or a $15,000 fine.”


author: SWYGERT, Chief Judge.

text:
    UNITED STATES of America ex rel. John B. ADAMS, Petitioner-Appellant, v. Peter BENSINGER, Director, Department of Corrections, and John Twomey, Warden, Respondents-Appellees.
    No. 73-1531.
    United States Court of Appeals, Seventh Circuit.
    Argued April 11, 1974.
    Decided Dec. 10, 1974.
    Certiorari Denied April 14, 1975.
    See 95 S.Ct. 1589.

      Ivan E. Bodensteiner, Max G. Mess-man (Law Student), Valparaiso, Ind., for petitioner-appellant.
    William J. Scott, Atty. Gen., Steven J. Rosenberg, Asst. Atty. Gen., Chicago, 111., for respondents-appellees.
    Before SWYGERT, Chief Judge and FAIRCHILD and SPRECHER, Circuit Judges.
   SWYGERT, Chief Judge.

This appeal represents what we hope will be the last major step in a seven year legal battle to have the federal courts consider the merits of petitioner John B. Adams’ claim for habeas corpus relief.

In 1963 petitioner, with two co-defendants, was convicted of murder in an Illinois court and sentenced to a prison term of thirty-five to seventy years. On direct appeal to the Illinois Supreme Court his conviction was affirmed. People v. Henderson, 37 Ill.2d 489, 229 N.E.2d 519 (1967). Petitioner then filed a habeas corpus petition in the United States District Court for the Northern District of Illinois, alleging that an involuntary confession had been used against him. On January 11, 1968 this petition was dismissed for failure to exhaust state remedies. On appeal to this court the order of dismissal was vacated and the cause was remanded to the district court for review of all documents before the Illinois Supreme Court to determine whether the voluntariness issue had been squarely presented to and considered by that court. Adams v. Pate, 418 F.2d 815 (7th Cir. 1969). On remand, the district court again dismissed for failure to exhaust state remedies. That order was affirmed by this court with the suggestion that petitioner had state remedies available under the Illinois Post-Conviction Hearing Act. Pursuant to this suggestion, a petition for state post-conviction relief was filed before the original trial judge in 1970. An evidentiary hearing was held on the issue of the involuntariness of the confession, but on March 19, 1971 the trial judge, without making a finding on the ultimate question of the voluntariness of the confession, denied petitioner any relief apparently on the basis of res judicata and waiver. On September 20, 1972 the Illinois Supreme Court affirmed on the ground that “inasmuch as the issue of the voluntariness of his confession was decided adversely to petitioner on direct appeal, reconsideration of the issue is barred by res judicata.” People v. Adams, 52 Ill.2d 224, 225, 287 N.E.2d 695, 696 (1972).

Petitioner then filed the federal ha-beas corpus petition that is the subject of this appeal. Again the issue raised was the use of a confession that was allegedly involuntary in view of the totality of the circumstances. The district court dismissed the petition without a hearing on the basis that the petitioner had waived this claim by not raising it in the state courts. The court added that even if the issue were before it, the confession would be deemed voluntary.

I

Our initial question is whether for purposes of federal habeas corpus relief the petitioner has waived the claim of an involuntary confession by failing to raise the contention in terms of the “totality of the circumstances.” We do not think that there has been such a waiver.

The test to be applied is whether there was a deliberate tactical decision to forego this claim. Fay v. Noia, 372 U.S. 391, 83 S.Ct. 822, 9 L.Ed.2d 837 (1963) . It appears to us that the issue was at least implicity brought before the state courts and that there is no basis for concluding that the failure to pursue the matter more forcefully in the state courts was an attempt to derive a tactical advantage. Prior to trial a motion to suppress the confession was made and considered. The state courts both at the trial and appellate level were put on notice that the admissibility of this confession was being challenged on due process grounds. Moreover, this objection was made at the earliest desirable point. Admittedly, the arguments concerning the inadmissibility of the confession were directed mainly at the failure to give the type of warnings later required by Miranda v. Arizona, 384 U.S. 436, 86 S.Ct. 1602, 16 L.Ed.2d 694 (1966) and Escobedo v. Illinois, 378 U.S. 478, 84 S.Ct. 1758, 12 L.Ed.2d 977 (1964) . Still, as respondents point out, almost all the evidence upon which petitioner now relies was introduced at the original suppression hearing. These factual elements were put before the judge in the context of an attack upon the admissibility of the confession and the court had the opportunity to determine that the confession was involuntary in view of all the circumstances. Nor is it certain that this issue was not presented on direct appeal, even though the briefs were directed at the Miranda question. The Illinois Supreme Court apparently believed that it had considered the issue, since it later ruled that the post-conviction petition was barred by res judicata rather than by the doctrine of waiver which also bars relief under the Illinois Post-Conviction Hearing Act. See United States ex rel. Williams v. Brantley, 502 F.2d 1383 (7th Cir. 1974).

This is not simply a case in which there was a failure to raise a certain argument or object to particular evidence in order to further an intended strategic maneuver. The filing of the motion to suppress is conclusive proof that there was no desire to allow the introduction of the confession. We do not find persuasive the fact that at trial Adams denied ever making the confession. The question before us is a legal one concerning the constitutionality of the confession. That question could have been presented to a court without infringing on the ability to deny the fact that the confession was ever given. Indeed, despite this denial a constitutional attack on the confession was entertained on direct appeal.

We are presented with an important claim that does “call into question the accuracy of the fact-finding process.” There was no tactical reason to avoid raising the contention in the state courts. Notice of objection to the confession was given at the appropriate time. The highest court in Illinois has indicated that the issue was in fact considered. There has been no deliberate by-pass of state remedies and petitioner is entitled to have a federal court finally consider the merits of this alleged constitutional deprivation.

II

We have determined that the ultimate question of the voluntariness of this confession is also before us. The district court did address the merits. An evidentiary hearing is unnecessary since there was one in state court on the post-conviction petition and the adequacy of that hearing is not being challenged. Further, the habeas corpus petition itself requests relief on the basis of the state record alone. Petitioner’s counsel has conceded that there is no additional evidence to be submitted. Accordingly, we have requested and received supplemental briefs discussing this question.

The facts relevant to this inquiry are as follows. The police, without a warrant, took the petitioner from his bed at about 1:00 a. m. on December 28, 1962 and placed him under arrest. He was then taken to a police station where, for at least some period of time, he was locked to a radiator. Several police officers questioned petitioner for the admitted purpose of getting a confession, if possible. However, petitioner was never informed of his right to remain silent or his right to have a lawyer present. At approximately 2:30 a. m. an assistant state’s attorney arrived at the police station with a court reporter. The assistant state’s attorney questioned Adams and his two co-defendants who had also been arrested. He then proceeded to take recorded statements from each of them in the form of questions and answers. Petitioner’s statement was the last to be taken and commenced at 5:10 a. m. A joint statement was also given beginning at 6:05 a. m. The assistant state’s attorney had not informed petitioner of his right to remain silent and his right to the assistance of counsel, although petitioner had stated that he could neither read nor write English and had only a third grade education.

At about 7:00 a. m. petitioner was transferred to the police department central detention facility. At about 1:00 p. m. he was transferred to the Criminal Courts Building and taken to the library where, at about 2:30 p. m., in the presence of a police officer and an assistant state’s attorney, he initialed and signed the confession after it was read aloud to him. Petitioner was finally taken before a judge on December 29, 1962.

It was later established that the petitioner had no prior police record. At the post-conviction petition hearing considerable evidence concerning the petitioner’s mental capacity was introduced. Petitioner’s intelligence quotient was found to be in the range of 56 to 62, indicating a person who is “mentally defective.” A trained behavioral scientist explained that one who is “mentally defective” would have defective comprehension of oral or written directions or communications, especially when under tension or in strained surroundings. Adams’ ability to depend on his memory was also impaired. A clinical psychologist described petitioner as a “very naive, simple man, who could very well, very easily be influenced, who is quite unsophisticated and not aware of relationships in the world.” He further testified that petitioner was “very cooperative but very docile.”

The test to be applied in cases such as this in which Miranda is not applicable is based on those “standards of voluntariness which had begun to evolve long prior to our decisions in Miranda and Escobedo . . . .” Davis v. North Carolina, 384 U.S. 737, 740, 86 S.Ct. 1761, 16 L.Ed.2d 895 (1966). The Supreme Court has recently summarized these standards in Schneckloth v. Bustamonte, 412 U.S. 218, 226, 93 S.Ct. 2041, 2047, 36 L.Ed.2d 854 (1973):

In determining whether a defendant’s will was overborne in a particular case, the Court has assessed the totality of all the surrounding circumstances — both the characteristics of the accused and the details of the interrogation. Some of the factors taken into account have included the youth of the accused, e. g., Haley v. Ohio, 332 U.S. 596, [68 S.Ct. 302, 92 L.Ed. 224]; his lack of education, e. g., Payne v. Arkansas, 356 U.S. 560, [78 S.Ct. 844, 2 L.Ed.2d 975] ; or his low intelligence, e. g., Fikes v. Alabama, 352 U.S. 191, [77 S.Ct. 281, 1 L.Ed.2d 246]; the lack of any advice to the accused of his constitutional rights, e. g., Davis v. North Carolina, 384 U.S. 737, [86 S.Ct. 1761, 16 L.Ed. 2d 895]; the length of detention, e. g., Chambers v. Florida, supra, [309 U.S. 227, 60 S.Ct. 472, 84 L.Ed. 716] ; the repeated and prolonged nature of the questioning, e. g., Ashcraft v. Tennessee, 322 U.S. 143, [64 S.Ct. 921, 88 L.Ed. 1192]; and the use of physical punishment such as the deprivation of food or sleep, e. g., Reck v. Pate, 367 U.S. 433, [81 S.Ct. 1541, 6 L.Ed.2d 948]. In all of these cases, the Court determined the factual circumstances surrounding the confession, assessed the psychological impact on the accused, and evaluated the legal significance of how the accused reacted. Culombe v. Connecticut, supra, [367 U.S. 568] at 603, [81 S.Ct. 1860.] at 1879, 6 L.Ed.2d 1037]. (footnote omitted)

Thus, we must look to the merits of each individual factor, but ultimately the decision as to voluntariness should be based on an evaluation of the totality of all the circumstances.

We believe there are three elements which call into question the voluntary nature of this confession. The first is the undisputed fact that petitioner was never informed that he had a right to remain silent and a right to the assistance of counsel. The assistant state’s attorney failed to inform him of these rights although he was aware of how little education the petitioner had and how unlikely it was that he knew of these rights. This failure to inform petitioner of these rights is an important element in our equation regardless of the inapplicability of Miranda, since the fact “that a defendant was not advised of his right to remain silent or his right respecting counsel at the outset of interrogation, as is now required by Miranda, is a significant factor in considering the voluntariness of statements later made.” Davis v. North Carolina, 384 U.S. 737, 740, 86 S.Ct. 1761, 1764, 16 L.Ed.2d 895 (1966). The weight to be accorded this fact is particularly great in light of petitioner’s lack of previous contact with the police.

The second factor concerns the timing of the interrogation. Petitioner was apparently awakened by the police. The questioning occurred during the middle of the night and petitioner most certainly suffered from lack of sleep. The clear purpose of this questioning was to get a confession if at all possible. The voluntary character of this desired confession is lessened by the hour of the day during which it was given.

The final and most substantial consideration involves the nature of petitioner himself. A significant doubt is cast over the confession of a man of such low intellect and limited education. While petitioner was capable of giving a voluntary confession, the expert testimony of his inability to understand communications and his docile nature necessitate a skepticism concerning the voluntariness of his confession.

The district judge, however, greatly discounted this psychological testimony because his reading of petitioner’s testimony at trial and at various hearings indicated that Adams’ answers were “always responsive and lucid,” even under cross-examination. We agree that it is proper to consider such testimony and our own reading of petitioner’s answers has convinced us that there is some merit to this conclusion. But what the court below has failed to take into account is the fact that at the time of this testimony petitioner was represented by counsel who undoubtedly prepared him. The clinical psychologist testified that Adams’ apparent recognition in court of the function of a warrant was not conclusive, since he could have been prompted to give an answer without real understanding. The undisputed results of objective intelligence tests are of overriding significance. Our concern is with petitioner’s abilities during a period in which he had not received the assistance of counsel and had no one to advise him. We believe the expert psychological testimony is helpful in this regard.

Indeed, the facts of this case are strikingly similar in this aspect to those in United States v. Hull, 441 F.2d 308 (7th Cir. 1971), where we relied heavily on the defendant’s limited mental capabilities in determining that his confession was involuntary. Hull was described as follows:

J. L. Hull is a 34 year old Negro who is mentally defective. His full-scale I.Q. is 54, and he has the mental age of an eight or nine year old child. He completed the third grade in school and is illiterate. Psychiatric experts termed him passive and easily led by a more dominant personality. Hull can follow instructions if they are repeated or paraphrased for him several times; otherwise he has a tendency to lose his attention and comprehension.

Based on that description we found that Hull “was ill-equipped to combat ‘the diverse pressures which sap or sustain his powers of resistance and self-control’.” The same must also have been true of Adams.

Viewing all these factors together has led us to conclude that petitioner’s confession was involuntary. Respondents address each consideration separately and argue that each is not necessarily sufficient in and of itself to support this conclusion. Our task is to consider the combination of all these elements. Even if we were to accept the proposition that no one factor is conclusive, we still must look to the totality. What we find is a confession given in the middle of the night by a tired, inex-perieneed, uneducated, docile, mentally defective man who was never even informed that he did not have to talk and that he was entitled to the aid of an attorney. Such a confession is not “the product of a rational intellect and a free will.” Blackburn v. Alabama, 361 U.S. 199, 208, 80 S.Ct. 274, 281, 4 L.Ed.2d 242 (1960).

The judgment of the district court is reversed and this cause is remanded to the district court with direction that the writ issue unless the petitioner is given a new trial within 120 days of the date of the mandate of this court.

      . For this court’s present view of when relief must be sought under the Illinois PostOonviction Hearing Act before a federal habeas corpus petition will be entertained see United States ex rel. Williams v. Brantley, 502 F.2d 1383 (7th Cir. 1974).

      . See Henry v. Mississippi, 379 U.S. 443, 85 S.Ct. 564, 13 L.Ed.2d 408 (1965).

      . United States ex rel. Allum v. Twomey, 484 F.2d 740, 746 (7th Cir. 1973).

      . While this evidence was based on tests and examinations given petitioner when he entered prison in 1964, we see no reason to question that the conclusions adequately portray petitioner’s mental capacity when he gave the alleged involuntary confession.

      . 441 F.24 at 309.

      . 441 F.2d at 312.


author: PER CURIAM:

text:
    George BIDERMAN et al., Plaintiffs-Appellants, v. Rogers C. B. MORTON, Secretary of Interior, et al., Defendants-Appellees, Constitutional Rights Committee of Kismet, Intervenor-Appellee-Cross-Appellant.
    Nos. 292 and 479, Dockets 74-2016 and 74-2096.
    United States Court of Appeals, Second Circuit.
    Argued Oct. 17, 1974.
    Decided Nov. 7, 1974.

      Donald J. Cohn, New York City (Thomas H. Jackson, New York City, of counsel), for plaintiffs-appellants.
    Harold J. Friedman, Asst. U. S. Atty. (David G. Trager, U. S. Atty., for the Eastern District of New York, Raymond J. Dearie, Asst. U. S. Atty., of counsel), for Federal defendants-appellees.
    C. Francis Giaecone, Lake Ronkonko-ma, N. Y., for defendants-appellees Bar-raud, Romeo and Carnes.
    Francis G. Caldeira, Town Atty., Islip, N. Y. (Edward S. Raskin, Asst. Town Atty.), for defendants-appellees Coha-lan, Cruz and Schermerhorn.
    Robert M. Calica, Mineóla, N. Y. (English, Cianciulli, Reisman & Peirez, Mineóla, N. Y., on the brief), for inter-venor-appellee-cross-appellant.
    Before FEINBERG, MULLIGAN and DANAHER , Circuit Judges.

       Senior Circuit Judge of the District of Columbia Circuit, sitting by designation.

   PER CURIAM:

This is an appeal from an order of Hon. John F. Dooling, Jr., United States District Judge for the Eastern District of New York, denying a motion by the plaintiffs for a preliminary injunction pending the completion and implementation of an Environmental Impact Statement (EIS) pursuant to the National Environmental Policy Act, 42 U.S.C. § 4321 et seq. The relief sought would enjoin the federal defendants from approving, issuing, granting or authorizing motor vehicle permits except to provide for essential services and for the health and safety of the residents of and visitors to the Fire Island National Seashore; and from allowing motor vehicles to be operated on the Seashore except for these purposes. The plaintiffs as property owners and as representatives of property owner organizations within the Fire Island National Seashore commenced this action on August 9, 1972. On August 22, 1973, a motion for preliminary injunctive relief was made. On September 18, 1973, Judge Dooling denied the motion in part with respect to items not in issue before us. (This denial was affirmed here. Bider-man v. Morton, 497 F.2d 1141 (2d Cir. 1974)). The motor vehicle permit question was held in abeyance since the National Park Service (NPS) had planned to issue interim motor vehicle regulations. Rather than approach the environmental problems involved in a piecemeal fashion, the NPS deferred action until a Master Plan and EIS for the National Seashore have been prepared.

Plaintiffs thereupon sought and received a four-day evidentiary hearing in June and July, 1974 on the motor vehicle issues. Intervenor, the Constitutional Rights Committee of Kismet, which is an appellee-eross-appellant here, claiming that the existing motor vehicle regulations are in fact onerous and impose restraints on their constitutional due process and equal protection rights, also participated in the hearings. The Committee sought preliminary injunctive relief against the federal defendants’ enforcement of the regulations with respect to Committee members and the defendants’ refusal to issue permits based upon grounds not set forth in the regulations. In addition to several experts, numerous residents and municipal officials testified at the hearing.

On July 19, 1974, Judge Dooling filed a comprehensive 25-page memorandum and order which denied injunctive relief to the plaintiffs as well as to the inter-venor. It is beyond cavil that the determination of a trial court denying injunc-tive relief pendente lite will not be set aside by an appellate court unless an abuse of discretion or clear mistake of law has been established. 414 Theater Corp. v. Murphy, 499 F.2d 1155, 1159 (2d Cir. 1974); Exxon Corp. v. City of New York, 480 F.2d 460, 464 (2d Cir. 1973). We find none here and affirm substantially on the grounds set forth in the opinion below.

While the issues raised below are broad in scope, with respect to the plaintiffs’ claims Judge Dooling found in essence that there was a failure to establish that the incremental environmental effect of continuing to issue private vehicle permits over the environmental effect of the use of the Island for vacation habitation and for indispensable vehicular traffic, had any significant dimensions. He noted that present federal and municipal regulations and guidelines indicated a sympathetic concern for the ecological problems facing the Island, together with a consciousness that some measure of motor vehicle usage is in any event inevitable. He flatly found that “[m]otor vehicle traffic is not, as plaintiffs assert . . . , destroying the Seashore. That is not, on the evidence, the fact.” He also found that plaintiffs’ “meagre” hard core data did not support the assertion that there has been a great and accelerating growth in motor vehicle traffic; such “is not found to be the fact.” With respect to the intervenor, the court found that there was no “unavoidable hardship” involving the residents of Kismet and insufficient evidence of prescriptive rights to traverse certain areas by automobile.

We find nothing in the record to substantiate the claim of either appellants or the cross-appellant that these findings are clearly erroneous. Of substantial significance here is the representation by NPS officials that, on or about January 1, 1975, a Master Plan and EIS for the entire Seashore will be issued which will include proposed motor vehicle regulations in the context of the overall ecological system and which will provide ample opportunity for public comment and the expression of the conflicting views revealed below. In view of these circumstances, we believe it particularly inappropriate to interfere with the discretion of the trial court and to impose interim motor vehicle regulations in the face of overall planning by responsible federal agencies. This is especially true when the summer season has passed and the Fire Island community is spared the onslaught of the vacationers from the Metropolis and environs. We believe, however, that it is in the interest of the public and the parties involved here in particular that NPS adhere to its announced target date, January 1, 1975, for the completion of the Plan and EIS.

Affirmed.


author: ALDRICH, Senior Circuit Judge.

text:
    Frederick J. LUDLUM, Petitioner-Appellant, v. Stanley RESOR, Secretary of the Army, and Robert A. Pearson, Acting Post Commander, United States Army Training Center, Fort Devens, Massachusetts, Respondents-Appellees.
    No. 74-1275.
    United States Court of Appeals, First Circuit.
    Argued Nov. 5, 1974.
    Decided Nov. 27, 1974.

      M. Warren Browne, New York City, for petitioner-appellant.
    Marshall D. Stein, Asst. U. S. Atty., with whom James N. Gabriel, U. S. Atty., was on brief, for respondents-ap-pellees.
    Before COFFIN, Chief Judge, ALD-RICH and CAMPBELL, Circuit Judges.
   ALDRICH, Senior Circuit Judge.

This is an appeal from a dismissal of a petition for habeas corpus.

In November, 1968 petitioner was inducted into the Army and in February, 1969 he submitted an application for discharge as a conscientious objector. This application was rejected. A few days later petitioner went AWOL, returning only in May, 1971. Court martial proceedings were then instituted, but prior to the hearing petitioner, in accordance with approved Army practice, submitted an application for a “discharge for the good of the service” in lieu of trial. AR 635-200 (October 7, 1969). This application was accepted, the court martial proceeding was dismissed and petitioner received an undesirable discharge. Meanwhile, while his application was pending, petitioner filed the present habeas corpus petition.

Omitting a number of interim district court proceedings, the matter presently before us relates to the court’s dismissal order of July 26, following an order entered on June 10, 1974. The government had moved to dismiss on the ground that petitioner had not exercised available administrative remedies, so that the court was without jurisdiction. The basis of the motion was petitioner’s failure to apply to the Army Board for Correction of Military Records (ABCMR), 10 U.S.C. § 1552. The government amended its motion to concede the jurisdiction of the court but requested that petitioner nonetheless should be ordered to apply to the ABCMR prior to judicial consideration. The court granted the amended motion on June 10, stating that it had been given reason by the government to believe that if prompt application were made, the ABCMR could and would make a decision within 90 days. The court’s order contained a provision that if petitioner did not make such application within 30 days the ha-beas corpus proceeding would be dismissed. Petitioner declined to make the application, and on July 26 the proceedings were dismissed.

It is clear that there was no jurisdictional defect as alleged in the original motion in the light of United States Department of Justice Memo #652, October 23, 1969, the material portion of which is as follows:

“2. Exhaustion of Military Administrative Remedies. The decision of the Military will be deemed ripe for a judicial review upon the final action of the Adjutant General of the Army. Application to the Army Board for the Correction of Military Records will remain an available procedure but will not be insisted upon by the government as a precondition to judicial review.”

Because of the subsequent issuance of this Memorandum the government stipulated to a remand of the 9th Circuit decision in Craycroft v. Ferrall, 9 Cir., 1969, 408 F.2d 587, which had dismissed a habeas petition because of failure to apply to the ABCMR. See Parisi v. Davidson, 1972, 405 U.S. 34, 38, n. 3, 92 S. Ct. 815, 31 L.Ed.2d 17. The government takes the position, however, that the district court could retain jurisdiction, and require such exhaustion as a matter of discretion.

We think the district court action was within the meaning of Memorandum 652, and we hold that, in the appropriate situation, a district court may require a petitioner to take this step. In so doing we recognize the desirability of allowing an agency to police itself, both from the standpoint of the agency, and from the standpoint of unnecessary burdens upon the courts. See McGee v. United States, 1971, 402 U.S. 479, 483, 91 S.Ct. 1565, 29 L.Ed.2d 47; United States v. Sweet, 1 Cir., 1974, 499 F.2d 259. This discretion, however, is not to be lightly exercised, and there should be a substantial burden on the government. In the present case the district court was given reason to believe that a decision could be expected from the ABCMR even more expeditiously than from the court itself. Not essential, but also of some moment in its consideration, the court was given some reason to believe that a decision by the Army in petitioner’s favor was a likely possibility.

We understand the desire of individuals who are dissatisfied with administrative rulings to move into another forum. In the broader aspect, however, it must be obvious that too many unnecessary applications for judicial relief may result in prompt relief for no one. In the present case three district judges have been obliged to give consideration to petitioner, and there have been 36 filings or actions requiring docket entries. Almost all of this activity occurred after petitioner’s actual discharge from the Army, so that the only question involved was the correction of his record. From the standpoint of the public, this was clearly not a fair apportionment of judicial time.

The question remains as to our disposition. We approve of the action below. At the same time we do not believe that petitioner should be deprived of making application to the ABCMR merely because he declined to meet the time schedule set by the district court. If he does make application, and this application is rejected, he doubtless will seek judicial review. If we apply our own precepts, to require that he then institute an entirely new action would mean considerable wasted effort and a burden on the court. We think a simpler result would be to reverse the court’s order of July 26 dismissing the petition, and to remand for the entry of an order similar to the order of June 10, giving petitioner 30 more days to make his application to the ABCMR while the court retains jurisdiction. The order should likewise provide that if after 90 days from the filing of such an application the ABCMR takes no action, or takes unfavorable action, the district court will proceed to the merits.

      . It may be noted that the 90 days from June 10 expired before petitioner had even filed his brief in this court.

      . Petitioner contends that Parisi forbids the action ultimately taken here by the district court. This is a misreading. Parisi did not involve the ABCMR, which had already ruled against Parisi. What the Parisi court held was that the district court could not properly wait until a pending court martial proceeding was disposed of, but it did so on tlie express ground that petitioner’s conscientious objector claim would not be passed upon by the court martial, so that there was nothing for the district court to wait for.


author: PHILLIPS, Chief Judge. McCREE, Circuit Judge

text:
    Cheryl and James PAULSEN et al., Plaintiffs-Appellees, v. COACHLIGHT APARTMENTS CO. et al., Defendants-Appellants. Cheryl and James PAULSEN et al., Plaintiffs-Appellees, v. SECRETARY OF HOUSING AND URBAN DEVELOPMENT and Alfred Raven, Director, Grand Rapids Insuring Office, Department of Housing and Urban Development Federal Housing Administration, Defendants-Appellants.
    Nos. 73-1595, 73-1596.
    United States Court of Appeals, Sixth Circuit.
    Nov. 22, 1974.
    John Milanowski, U. S. Atty., Grand Rapids, Mich., Kathryn H. Baldwin, Ronald R. Glancz, Irving Jaffe, Dept, of Justice, Civil Div., Washington, D. C., for defendants-appellants Secretary of Housing and Urban Development, and others.
    R. Bruce Carruthers, Doyle, Smith, Whitmer & Carruthers, Lansing, Mich., for defendants-appellants Coachlight Apartments Co., and others.
    Robertamarie Kiley, Lansing, Mich., Carl H. Kaplan, Executive Director, Greater Lansing Legal Aid, Lansing, Mich., Richard Reed, Robert L. Reed, Alan W. Houseman, Michigan Legal Services Assistance Program, Detroit, Mich., for plaintiffs-appellees.
    Before PHILLIPS, Chief Judge, McCREE, Circuit Judge, and ROSENSTEIN, Senior Customs Judge.

       Honorable Samuel M. Rosenstein, Senior Judge, United States Customs Court, sitting by designation.

   PHILLIPS, Chief Judge.

This appeal presents the question of whether, and to what extent, tenants in lower income housing subsidized and insured under the provisions of § 236 of the National Housing Act, as amended, 12 U.S.C. § 1715z-l, are entitled to a hearing before the Federal Housing Administration (FHA) approves their landlord’s application for an increase in rent.

The appellants seek reversal of an order of the District Court granting the appellee class’s motion for partial summary judgment on the questions of the presence of jurisdiction, class action status and due process deprivations.

We vacate and remand.

I.

The appellees are tenants in Pine-brook Manor Apartments, an apartment complex comprised of 136 rental units located in Lansing, Michigan. Pine-brook Manor receives FHA subsidy payments pursuant to § 236. In order to receive these payments, the landlord, Coachlight Apartments Co. (Coach-light), agreed to abide by certain statutory and regulatory requirements, including the requirement that all proposed rent increases be approved by the FHA.

In August 1972, Coachlight, a limited dividend partnership registered under the laws of Michigan, acting through its apartment manager, requested FHA approval for a proposed rent increase. Supporting documents indicating the increased costs of operation were submitted shortly thereafter to the FHA. Without any input from the tenants at Pinebrook Manor, the FHA in late September 1972 approved a new rental schedule, comprising a 7.2 per cent overall increase. The increases took effect on November 1, 1972, as the tenants' annual leases began to expire.

The appellees thereafter instituted this action seeking, inter alia, (1) to compel the governmental appellants to rescind their approval of the rent increases, (2) to .declare that the appellants unconstitutionally failed to accord the appellees certain due process rights prior to the rent increases, and (3) to obtain damages from the private appellants to the extent of the increased rent collected. The suit was sustained as a class action. On the appellees’ motion for partial summary judgment, the District Court concluded that the tenants were entitled to the following five elements of procedural due process:

(1) notice that the landlord has filed an application for rent increases,
(2) an opportunity to examine any materials submitted by the landlord in support of his application,
(3) a reasonable opportunity to make written objections to the landlord’s application,
(4) an opportunity to make an informal oral presentation [to the FHA inspector who is required under FHA regulations to make an on-site inspection whenever a rent increase is requested] of any objection to the landlord’s application,
(5) a concise statement of the FHA action taken on the application and the reasons for that action.

The opinion and order of the District Court, dated March 8, 1973, concludes with the following language:

“This court, after careful consideration of the facts in this case, holds that this opinion does not require an immediate refund of the increases which have been collected to date. However, the increase may not be collected after this date and if the FHA should determine, after reconsidering the application in accordance with this opinion, that the increase was improper, then the landlord would be re- ' quired to refund the amount of the increase already collected.”

II.

The District Court held that the fifth amendment requires that the tenants be accorded an opportunity for a due process hearing before their rents could be increased. We disagree with the fifth amendment holding, concurring in the results reached by four circuits that have held to the contrary. People’s Rights Organization v. Bethlehem Associates, 487 F.2d 1395 (3d Cir.), aff’g 356 F.Supp. 407 (E.D.Pa.1973); Langevin v. Chenango Court, Inc., 447 F.2d 296 (2d Cir. 1971) ; McKinney v. Washington, 143 U.S.App.D.C. 4, 442 F.2d 726 (1970); Hahn v. Gottlieb, 430 F.2d 1243 (1st Cir. 1970). See Geneva Towers Tenants Organization v. Federated Mortgage Investors, 504 F.2d 483, 493 (9th Cir. 1974) (Hufstedler, J., dissenting).

In Marshall v. Lynn, 497 F.2d 643, 647 (D.C.Cir. 1973), cert. denied,-U.S. -, 95 S.Ct. 235, 41 L.Ed.2d 186 (1974), the Court of Appeals for the District of Columbia Circuit held that “tenants in housing financed with Federal subsidy in the form of below-market interest rate loans have a statutory right to be heard before their rents are increased.”

In response to the decision in Marshall, new interim HUD regulations were published in 39 Fed.Reg. 32736 (1974), providing the following procedures for tenant participation in the rental approval process (§ 401.1-4):

(1) Notification to the tenants of intent to request approval of an increase in the maximum permissible rents;

(2) An opportunity for tenants to make written comments to the mortgagor and to HUD on the proposed increase ; and

(3) Notification to the tenants of the reasons for approval or disapproval after HUD has considered all the submitted material.

These regulations, which are an exercise of the rule-making power conferred upon HUD by Congress, embody the statutory right found to exist in Marshall v. Lynn, supra. HUD construed Marshall to require the procedures set forth in the foregoing regulations with respect to tenants in the situation presented in the case at bar. We agree with this conclusion.

The decision of the District Court is vacated. The case is remanded for further proceedings not inconsistent with this opinion.

No costs are taxed. Each party will pay his own costs on this appeal.

McCREE, Circuit Judge

(concurring separately).

I concur in the result of the majority opinion for the reasons set forth in Judge Hufstedler’s dissenting opinion in Geneva Towers Tenants Organization v. Federated Mortgage Investors, 504 F.2d 483 (9th Cir. 1974). I make this separate statement in order to make explicit why I would reverse the judgment of the district court.

      . There are two distinct groups of defendants-appellants : (1) the Secretary of Housing and Urban Development and the Director of the Grand Rapids Insuring Office, Federal Housing Administration (the governmental appellants), and (2) Coachlight Apartments Co., the owner of the apartment complex, and Republic Management Corporation, the manager of the complex (the private appellants).

      . Neither set of appellants on appeal challenges the District Court’s determinations that jurisdiction over the governmental appellants existed under 28 U.S.C. § 1361 and that joinder of the private appellants was necessary to effectuate any remedy granted, Fed.R.Civ.P. 19(a), or that this suit was properly maintained as a class action under Fed.R.Civ.P. 23.

      . The majority opinion in the Geneva Towers case held that the tenants are entitled to a limited hearing under the due process clause of the fifth amendment, affirming two district court opinions to that effect: Keller v. Kate Maremount Foundation, 365 F.Supp. 798 (N.D.Cal.1972) ; Geneva Towers Tenants Organization v. Federated Mortgage Investors, No. C-70 104 SAW (N.D.Cal., Jan. 3, 1972).


text:
    August Paul ROSSI, Plaintiff-Appellant, v. TRANS WORLD AIRLINES, INC., Defendant-Appellee.
    No. 73-1458.
    United States Court of Appeals, Ninth Circuit.
    Nov. 27, 1974.
    Victor I. Reichman (argued), Nor-walk, Cal., for plaintiff-appellant.
    Gordon E. Krischer (argued), of O’Melveny & Myers, Los Angeles, Cal., for defendant-appellee.

      Before TRASK, CHOY and GOODWIN, Circuit Judges.
   OPINION

PER CURIAM:

Rossi, a flight engineer employed by TWA, enrolled in the company’s First Officer Training Program. Because his progress in the program was unsatisfactory, he was dismissed from the program and discharged as flight engineer. The Pilots’ System Board of Adjustment, an arbitration board established by the collective bargaining agreement pursuant to the mandate of the Railroad Labor Act as applied to air carriers, 45 U.S.C. § 184, sustained his dismissal.

Rossi sought reinstatement in district court, claiming that failure to complete the training program bore no rational relationship to his ability to continue serving as flight engineer. The court refused to review the Board’s award and granted TWA summary judgment. Ros-si appeals. We affirm.

Awards of the National Railroad Adjustment Board (NRAB) enjoy the same finality as awards of arbitration panels. Gunther v. San Diego & A.E.R. Co., 382 U.S. 257, 263, 86 S.Ct. 368, 15 L.Ed.2d 308 (1965); Barrett v. Manufacturers R. Co., 453 F.2d 1305, 1307 (8th Cir. 1972). Therefore, whether awards of airline adjustment boards established pursuant to 45 U.S.C. § 184 should be treated like those of private arbitration boards rather than like those of the NRAB is irrelevant in the context of this dispute. Courts will not review the merits of arbitration awards so long as the award is based properly on the applicable collective bargaining agreement. United Steelworkers of America v. Enterprise Wheel & Car Corp., 363 U.S. 593, 596-597, 80 S.Ct. 1358, 4 L.Ed.2d 1424 (1960). An arbitrator is not confined to the express terms of the contract, however. Where the contract is not explicit, he may apply the “common law of the shop.” Anaconda Co. v. Great Falls Mill & Smeltermen’s Union No. 16, 402 F.2d 749, 752 (9th Cir. 1968).

When the Pilots’ Adjustment Board decided that Rossi’s discharge was justified, it decided his case on its merits, not on a procedural technicality. Therefore, so long as that decision was based on TWA’s collective bargaining agreement, it is not subject to our review Rossi argues that the Board had no reasonable basis to decide that his dismissal as flight engineer was justified simply because he failed to achieve promotion to first officer. The arbitration board, drawn from the industry, was better able to make that determination than is this court. The Board may have found that the company’s policy of dismissing employees who failed in programs leading to promotion was so well-known and accepted by both union and management as to be part of the “common law” of the TWA agreement. In any event, we cannot require an arbitration board to spell out for our benefit the logical process by which it makes its decision. Enterprise Wheel, 363 U.S. at 598, 80 S.Ct. 1358, 4 L.Ed.2d 1424. We find no indication in the record that the Board ignored the terms of the collective bargaining agreement — as derived both from its express provisions and from the customary practices of the industry — and dispensed its “own brand of industrial justice.” Id. at 597, 80 S. Ct. 1358, 4 L.Ed.2d 1424.

The court correctly granted summary judgment. Following TWA’s motion, supported by affidavits, Rossi failed to support by affidavits any factual allegation necessitating a trial. His affidavit alleging fraud and corruption by the Board in arriving at its decision contained only inadmissible hearsay and was properly disregarded by the trial court. Fed.R.Civ.P. 56(e).

Affirmed.

      . See Devita v. Burlington Northern, Inc., 494 F.2d 347, 348 (9th Cir. 1974) ; Holly Sugar Corp. v. Distillery, Rectifying, Wine & Allied Workers Int’l Union, AFL-CIO, 412 F.2d 899, 903 (9th Cir. 1969) ; San Francisco-Oakland Newspaper Guild v. Tribune Publishing Co., 407 F.2d 1327 (9th Cir. 1969) ; Anaconda Co. v. Great Falls Mill & Smeltermen’s Union No. 16, 402 F.2d 749, 752 (9th Cir. 1968).

      . The Railway Labor Act provides three statutory bases for judicial reversal of NRAB arbitration awards, none of which permits reexamination of the merits: failure to comply with the Act, lack of jurisdiction, and fraud or corruption by a member of the Board. 45 U.S.C. § 153 (First) (p), (q).