author: SWYGERT, Chief Judge.

text:
    Olga HOCHFELDER, et al., Plaintiffs-Appellants, v. MIDWEST STOCK EXCHANGE, Defendant-Appellee. Leon S. MARTIN et al., Plaintiffs-Appellants, v. MIDWEST STOCK EXCHANGE, Defendant-Appellee.
    Nos. 72-1977, 72-1978.
    United States Court of Appeals, Seventh Circuit.
    Argued Sept. 18, 1973.
    Decided April 10, 1974.
    Certiorari Denied Oct. 15, 1974.
    See 95 S.Ct. 137.

      Willard L. King, Donald L. Vetter, Alex Elson, Willard J. Lassers, Chicago, 111., for plaintiffs-appellants.
    Milton H. Cohen, Chicago, 111., for defendant-appellee.
    Before SWYGERT, Chief Judge, CASTLE, Senior Circuit Judge, and SPRECHER, Circuit Judge.
   SWYGERT, Chief Judge.

This is an appeal by plaintiffs from a grant of summary judgment in favor of defendant, Midwest Stock Exchange. Plaintiffs are various individuals who were victimized by a securities fraud perpetrated by Leston B. Nay, President of First Securities Company of Chicago and owner of ninety-two percent of its stock. First Securities was registered with the Securities and Exchange Commission as a broker-dealer in securities and was a member of the Midwest Stock Exehange and the National Association of Securities Dealers, Inc. Each member organization in the Midwest Stock Exchange had a nominee or “member officer” who would represent the member organization for certain purposes, such as casting its vote in Midwest matters or trading on the Exchange floor. Nay was First Securities’ member officer or nominee in the Midwest Stock Exchange, a position which he applied for and was admitted to in 1945.

The facts surrounding Nay’s fraudulent scheme are set forth in detail in our opinion in Securities & Exch. Com’n v. First Securities Co. of Chicago, 463 F.2d 981 (7th Cir. 1972), and need only be briefly restated. Plaintiffs were brokerage clients of First Securities, buying and selling securities through First Securities in regular fashion. Each plaintiff received investment advice from Nay, and each knew Nay to be the president of First Securities. Nay induced the plaintiffs to place funds in an “escrow” account which Nay represented would pay interest to plaintiffs at a high rate of return (generally twelve percent per annum, but later reduced to nine percent). Nay’s fraudulent scheme came to light in 1968 as a result of a suicide note left by him describing First Securities as bankrupt due to his thefts and indicating that certain “escrow” accounts created by him were “spurious.” Plaintiffs were among the investors in these spurious escrow accounts.

Nay’s actions were violative of the federal securities laws and First Securities was derelict in fulfilling its duties pursuant to the Securities Exchange Act of 1934, 15 U.S.C. § 78a et seq. Securities & Exch. Com’n v. First Securities Co. of Chicago, 463 F.2d 981 (7th Cir. 1972). The thrust of plaintiffs’ present action, asserting violations of the Securities Exchange Act of 1934, is that Midwest was negligent in scrutinizing Nay’s application as a member officer and failed thereafter to adequately investigate his continued fitness as a member, and as a result of its action and inaction Midwest aided and abetted Nay’s violation of the 1934 Act.

In resolving whether summary judgment was correctly granted to Midwest we must first inquire whether there was a genuine issue of material fact as to the liability of Midwest. Butterman v. Walston & Co., 387 F.2d 822 (7th Cir. 1967). The district court found there to be none and, as our opinion will demonstrate, we agree. Since no material facts are in dispute we must then make inquiry whether, on the basis of the un-controverted facts, the district court correctly found as a matter of law that Midwest has incurred no liability under the Securities Exchange Act of 1934. The specific issues to be decided are: (1) whether Midwest fulfilled its duties as a national securities exchange under section 6 of the Securities Exchange Act of 1934; (2) whether Midwest aided and abetted by action or inaction any violation of Rule 10b-5 by Nay under the Securities Exchange Act of 1934; and (3) whether plaintiffs’ claims against Midwest are barred by the statute of limitations. The district court determined these issues favorably to Midwest and granted summary judgment. We affirm.

I

It is plaintiffs’ contention that Midwest inadequately scrutinized Nay’s application in 1945 for the position of member officer or nominee of First Securities and as a result Nay was improperly admitted to membership in Midwest. Also, plaintiffs assert that various events and alleged violations of Midwest rules were sufficient to put Midwest on notice that Nay was no longer fit for membership and that Midwest’s failure to inquire into these matters was a dereliction of duty. Plaintiffs claim that Midwest’s alleged negligence in admitting Nay to membership and allowing him to continue as a member in the Exchange was a violation by Midwest of section 6(a)(1) of the Securities Exchange Act of 1934.

Midwest is a national securities exchange registered with the Securities and Exchange Commission pursuant to section 6 of the 1934 Act and accordingly must fulfill the duties imposed under that section. Section 6(a)(1) provides that an exchange shall “enforce so far as is within its powers compliance by its members, with the provisions [of the 1934 Act and the rules and regulations thereunder].” Section 6(b) obligates the exchange to promulgate rules to “include provision for the expulsion, suspension, or disciplining of a member for conduct or proceeding inconsistent with just and equitable principles of trade,” the violation of any provision of or rule under the 1934 Act being deemed conduct inconsistent with such principles. It is these provisions that prescribe in rather broad language the duties of self-regulation incumbent on Midwest as a registered exchange. With respect to the section 6 duty of self-regulation there are two inquiries which generally must be made: (1) the scope of the duties owed; and (2) whether the duties owed run to the plaintiffs.

At the outset we need not reach the question of whether the duties owed run to the plaintiffs for, assuming arguendo they do, we find that the duties owed were adequately fulfilled. Although the section 6 duty of self-regulation is framed in broad language, “to enforce so far as is within its powers”, it is not a mandate of strict liability rendering the exchange a guarantor of all fraudulent schemes consummated by its members whether in listed or unlisted securities. To so read section 6 would tear at the very fabric of self-regulation, a burden which indeed no self-regulatory body could bear. The scope of the duty of self-regulation is not so far reaching. Rather, the scope must be delineated to include only those acts, events, schemes, or circumstances surrounding exchange members of which the exchange knows or has reasonable cause to know, or those events and circumstances which would reasonably put the exchange on notice, of a violation or suspected violation of a securities law, regulation or rule or, exchange rule. It is only in the face of these circumstances that a failure to proceed with the requisite due care and conduct would be a dereliction of the duty of self-regulation. Measuring the duty of self-regulation to the present action, we find that Midwest, on the basis of the uncontro-verted evidence in this ease, did not fail to exercise the requisite care and conduct in admitting Nay to membership and allowing him to maintain his membership.

Plaintiffs assert that Midwest failed to exercise due care in reviewing Nay’s application for membership in that: (1) Midwest did not discover Nay’s change of his first name from Ladislas to Lesion at the age of eighteen upon migration to the United States from Hungary; (2) Midwest did not investigate the circumstances surrounding the voluntary liquidation in 1942 of Webber, Dareh & Company for whom Nay had been an officer and director; (3) Midwest made no inquiry of Halsey, Stuart & Company where Nay had been employed for the period 1921 through 1933; and (4) Midwest made no investigation into the circumstances surrounding Nay’s prior two divorces. It is plaintiffs’ contention that Midwest failed to exercise the requisite care in scrutinizing Nay’s continued fitness to remain a member in view of alleged warnings of Nay’s dubious integrity and desperate financial condition, namely: (1) Nay’s insistence in 1949 on employing Joseph F. Hammel as a security salesman despite the fact that Midwest’s investigation of Hammel produced evidence that Hammel had falsified his employment application; (2) Nay’s request in 1959 of permission from Midwest to pledge his stock in First Securities for a personal loan; although Midwest denied Nay’s request, it did not inquire into the reasons for Nay’s request to pledge all his stock; (3) Midwest’s awareness of the fact that First Securities had experienced a net capital deficiency in late 1967 in violation of Midwest’s rules; (4) Nay’s borrowings from First Securities beginning in 1957; although Midwest approved of each borrowing, it did not investigate Nay’s financial situation; and (5) Midwest’s failure to request and examine copies of Nay’s federal income tax returns which it is claimed would have demonstrated Nay’s position of insolvency.

With respect to plaintiffs’ charge of failure to appropriately screen Nay’s application for membership, we find that the investigatory procedures employed by Midwest in 1944 were sufficient to satisfy the section 6 duty of self-regulation. Those procedures in-eluded among others letters of recommendation from banks and member organizations of Midwest; two sponsors of the applicant from member organizations appeared before the Admissions Committee of the Midwest Exchange to answer questions with respect to Nay’s application; Nay appeared before , the Admissions Committee and answered questions pertaining to his application; and a notice of Nay’s proposed admission to the Exchange was sent to all members of Midwest requesting them to inform the Admissions Committee of any reason known to them which would indicate that Nay was unfit for membership in the Exchange.

We fail to find merit in plaintiffs’ contention that Midwest should have investigated the circumstances surrounding Nay’s change of first name and his divorces. These matters had no relevancy. Although Midwest did not inquire of Nay’s one time employer, Halsey, Stuart & Company, and did not investigate further into the circumstances surrounding the voluntary liquidation of Webber, Darch & Company with whom Nay had been associated, in view of the admission procedures employed in 1945 it cannot be said that Midwest’s failure to look into or pursue further these matters demonstrated a failure to exercise due care in scrutinizing Nay’s application for membership.

Addressing ourselves to the issue of whether Midwest exercised due care in investigating Nay’s continued fitness for membership, plaintiffs contend that various events and circumstances taking place between 1949 through April, 1968 should have put Midwest on notice that Nay no longer possessed the requisite character and moral integrity required of an Exchange member. It is also contended that if Midwest had pursued these so-called warnings further, it would have discovered Nay’s involvement in the fraudulent escrow scheme.

The first alleged warning of Nay’s dubious integrity occurred in 1949 when Nay asked Midwest to reconsider his request for permission to employ Joseph F. Hammel as a security salesman even though Midwest’s investigation of Ham-mel had uncovered evidence that Ham-mel had falsified his employment application. Although Nay offered to employ Hammel in a restrictive capacity, namely dealing exclusively in transactions in municipal bonds with institutional clients, Midwest adhered to its denial of permission.

Plaintiffs argue that Nay’s request of Midwest to reconsider Hammel’s employment in a restrictive capacity should have put Midwest on notice of Nay’s questionable integrity and suspect fitness for membership. We do not agree with this argument. Plaintiffs do not assert that Nay knew of Hammel’s false statements prior to Midwest’s investigation of Hammel nor do they contend that Nay’s actions amounted to a violation of Exchange rules. In viewing this matter in hindsight, plaintiffs have placed undue importance on it.

Plaintiffs claim that in 1959, ten years after the employment incident, Midwest received its second warning of Nay’s unfitness for membership, but failed to take appropriate action. Nay as ninety-two percent stock owner in First Securities requested permission from Midwest to pledge his stock holdings in First Securities for a personal loan he wished to obtain from a Chicago bank. Nay made his request pursuant to the Exchange rules. Although Midwest denied Nay permission to pledge his stock, plaintiffs maintain that the request should have put Midwest on notice that Nay was in serious financial straits and that, in any event, the request was of sufficient magnitude to put a burden of inquiry on Midwest to investigate Nay’s personal reasons for such a loan. We are not convinced that Nay’s request should have put Midwest on notice that Nay was in a financially desperate position. The request without additional facts was of a benign nature. Nor can we say that this request in conjunction with the employment incident ten years before was sufficient to put Midwest on notice of any wrongdoings or in any way reflected unfavorably on Nay’s fitness for membership. Plaintiffs assert that it was incumbent on Midwest to inquire into the reasons for the loan. Although we are cognizant of the magnitude of Nay’s request, we are not prepared to place a burden of inquiry on an exchange which would effectively require scrutiny and investigation into all the personal affairs and activities of member nominees or the personal, business, and financial affairs of those individuals closely associated with member organizations. In this same vein plaintiffs contend that as part of the duty of self-regulation it was incumbent on Midwest to obtain and examine copies of Nay’s federal income tax returns, which it is asserted would have uncovered Nay’s fraudulent escrow scheme. As is true of the contention that Midwest should have investigated the reasons for Nay’s personal loan, to require Midwest to inspect Nay’s personal tax returns would impose a burden on Midwest to investigate into events not related to matters reflected in a member organization’s books and records. Although Midwest used a protective system to assure responsibility and integrity in the handling of public customer business which focused primarily on the books and records reflecting the activities of member organizations, plaintiffs argue that the system was insufficient because it failed to go beyond the member organization and investigate personal books and records, if any, reflecting the personal activities and affairs of member nominees. This asserted burden of inquiry would be applicable not solely to those individuals similarly situated to Nay; rather, the burden of inquiry would likewise be applicable to everyone associated with any member organization who might possibly be engaged in a personal, remote, and carefully concealed fraudulent scheme. To place such a burden on Midwest to inquire into affairs unrelated to the activities of the Exchange would be tantamount to making the Exchange a guarantor of losses resulting from every fraudulent, personal scheme engaged in by indivi(?”~!s associated with member organizations. Indeed, the implementation of such a burden of inquiry might well be counter-productive in that it would dissipate resources which are limited and needed for the basic self-regulatory actions in scrutinizing matters pertaining to member organization activities and affairs.

Plaintiffs next contend that a series of loans made by First Securities to Nay from 1957 to 1968 should have put Midwest on notice of Nay’s precarious financial condition and asserted unfitness for Midwest membership. Nay borrowed money from First Securities during this eleven year span and pursuant to Exchange rules notified Midwest of the borrowings. The frequency of the borrowings and the total amount of the borrowings were not of such an unusual nature so as to put Midwest on notice of any wrongdoing by Nay. Nor can it be said that the combined events — the employment incident, the request to pledge stock, and the continuous borrowings— were sufficient to put Midwest on notice that Nay was no longer fit to continue as a member of the Midwest Stock Exchange.

The final event which plaintiffs assert reflected unfavorably on Nay’s integrity concerned the circumstances surrounding First Securities’ temporary net capital deficiency in October, 1967. In the course of its routine analysis of First Securities’ September 30, 1967 financial questionnaire, Midwest determined that First Securities was not in compliance with the net capital rules of the Exchange. Immediate action was taken and First Securities was advised on October 27 of the deficiency and requested to take appropriate steps to rectify the situation. First Securities was also warned that a failure to cure the situation within a reasonable time could lead to its suspension from the Exchange. On November 3 Nay informed the Exchange that First Securities had a net capital deficiency of $9,332 as of October 31, 1967. Nay also indicated that First Securities’ independent certified public accountant, Ernst & Ernst, was engaging in a surprise audit pursuant to Exchange rules of the financial period ending October 31, 1967 and that the net capital deficiency would be appropriately explained. Ten days later Nay notified Midwest that he had reduced his indebtedness to First Securities thereby restoring First Securities to full compliance with the Exchange’s net capital requirements as of October 31, 1967. On December 6, 1967 in response to an inquiry by Ernst & Ernst, Midwest indicated that the October 31, 1967 financial questionnaire prepared by Ernst & Ernst on the basis of its surprise audit need not reflect the temporary net capital deficiency since it had been corrected in early November by Nay’s reduction of his indebtedness to First Securities. On that same day Midwest advised Nay that First Securities’ November 30, 1967 financial questionnaire indicated a net capital excess of $22,000 and that therefore Nay would be granted permission to borrow $10,000 from First Securities.

Plaintiffs contend that Midwest encouraged Ernst & Ernst to make a material omission on the October 31, 1967 questionnaire which was to be submitted to Midwest and that Midwest sanctioned a mere token repayment of $10,000 since Nay was allowed to borrow $10,000 from First Securities in early December. Plaintiffs charge that these events were sufficient to place a duty on Midwest to investigate Nay and, presumably, his personal financial affairs and continued fitness for Midwest membership. Because of the nature of the financial questionnaire and the fact it was prepared for Midwest’s usage, we need not indulge in a technical analysis of whether it accurately depicted First Securities’ financial position as of October 31, 1967, nor are we convinced that Nay’s subsequent borrowing rendered the earlier repayment meaningless. Indeed, the evidence indicates that Midwest was alert in discovering the deficiency and took immediate steps to have it corrected. Viewing this event with all the other asserted warnings, we are not convinced that in toto they were sufficient to put Midwest on notice that further inquiry was warranted.

Having examined the asserted warnings and Midwest’s response thereto, we find that as a matter of law the warnings do not demonstrate a lack of due care in scrutinizing Nay’s continued fitness for membership in Midwest. Accordingly, we hold that Midwest satisfied its duty of self-regulation.

Moreover, even assuming that Midwest breached its duty of self-regulation in that the net capital deficiency discovered in October, 1967 was, either by itself or in combination with the prior events, sufficient to put Midwest on notice that Nay was engaging in fraudulent conduct and no longer qualified for membership in the Exchange, plaintiffs are confronted with yet another obstacle which they cannot overcome, namely, a lack of causal connection.

In Baird v. Franklin, 141 F.2d 238 (2d Cir. 1944), cert. denied, 323 U.S. 787, 65 S.Ct. 38, 89 L.Ed. 591 (1944), the Second Circuit, in fashioning a duty of self-regulation under section 6, held that an essential element of liability grounded on a section 6 violation was proof of a causal connection between an exchange’s breach of duty and the plaintiffs’ asserted losses; further, that the plaintiffs had the burden of proving causation. Recognizing that the defendant stock exchange had breached its duty of self-regulation the court went on to find that the plaintiffs had failed to prove causation:

We accede to the view that the Stock Exchange violated a duty when it failed to take disciplinary action against Richard Whitney on November 24, 1937, after there was reason to believe that the latter had converted the plaintiffs’ securities. But to justify a judgment in favor of either plaintiff, such a breach of duty must have resulted in damage that can be traced to the breach .... In the case of the Exchange there was no duty except to investigate the dealings and the financial conditions of the members and to suspend or expel members who it had reason to believe had been guilty of conduct inconsistent with just and equitable principles of trade. It appears from the record that by reason of unauthorized pledges the securities had all been converted prior to November 24, 1937, and were then in the possession of pledgee banks and so remained for some time thereafter, though at certain times all of them were returned to the pledgor and during the same day re-pledged to secure other loans. We can see no likelihood that the expulsion or suspension of Richard Whitney when his conversions came to the notice of the officers of the Exchange on November 24, 1937, would have in the least benefited the plaintiffs for the securities were then all converted and in the hands of pledgees. 141 F.2d at 239.

Assuming • Midwest’s failure to act in late 1967 amounted to a breach of duty, it would nevertheless appear to be of no consequence to plaintiffs’ losses. Plaintiffs had departed with their money many years prior to 1967. Some of the escrow transactions were entered into as early as 1942 with the bulk of the transactions being completed in the 1950’s and the last escrow transaction consummated in 1966. Plaintiffs admit that by 1967 Nay was hopelessly insolvent and apparently he possessed no substantial assets. Even if Midwest had satisfied its duty of self-regulation, assuming a derelection, it would have been of no avail to plaintiffs. At that time their losses could not have been avoided in whole or part. Accordingly, there is no proof available, to show a causal connection between plaintiffs’ losses and the asserted breach of duty in late 1967.

II

Plaintiffs contend that pursuant to section 6 of the Securities Exchange Act of 1934 Midwest had a duty to enforce Rule 27(c) of Article III of the Rules of Fair Practice of the National Association of Securities Dealers, Inc. In Securities & Exch. Com’n v. First Securities Co. of Chicago, 463 F.2d 981 (7th Cir. 1972), cert. denied, 409 U.S. 880, 93 S.Ct. 85, 34 L.Ed.2d 134 (1972), we held First Securities, a member of the N.A.S.D., liable for Nay’s fraud, due to its failure to enforce Rule 27, As a member of the N.A.S.D. it was incumvent on First Securities to enforce the N.A.S.D. rules. In this action plaintiffs request that we place a duty on Midwest as a national securities exchange to enforce the rules of another self-regulatory organization, namely, the N.A.S.D., a national securities association. Without facing the question whether even the N.A.S.D. as promulgator of Rule 27 could be liable because of its member’s noncompliance, plaintiffs would have us place an additional burden on Midwest to enforce the rules of another self-regulatory body. There is nothing in the 1934 Act which mandates this unique theory. Indeed, the imposition of such a burden of enforcement would be unduly onerous and result in a wasteful duplication of actions in that Midwest would be expected to enforce the rules of all self-regulatory organizations to which a member firm might belong. This would be contrary to the avowed intention of Congress and the ■ Securities and Exchange Commission that there be more coordination and less duplication of self-regulatory activities. We hold that Midwest was under no duty to enforce Rule 27(c) of the Rules of Fair Practice of the N.A.S.D.

Ill

Plaintiffs claim that in view of the alleged warnings of Nay’s desperate financial condition and dubious integrity, Midwest’s action or inaction amounted to aiding and abetting Nay’s violation of Rule 10b-5. The charge of aiding and abetting is grounded on two contentions: Midwest aided and abetted solely by inaction; Midwest’s affirmative action of issuing Nay a Midwest membership wall plaque was of itself or in combination with Midwest’s omission to act sufficient to make out a claim of aiding and abetting a Rule 10b-5 violation.

Confronting the charge of aiding and abetting solely by inaction we note that it is well established that one may aid and abet by inaction in combination with affirmative action. See Brennan v. Midwestern United Life Insurance Co., 417 F.2d 147 (7th Cir. 1969), cert. denied, 397 U.S. 989, 90 S.Ct. 1122, 25 L.Ed.2d 397 (1970); Buttrey v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 410 F.2d 135 (7th Cir. 1969), cert. denied, 396 U.S. 838, 90 S.Ct. 98, 24 L.Ed.2d 88 (1969). However, in those cases where we have stated that one may aid and abet solely by inaction, we reached a finding of liability on the basis of affirmative action in combination with inaction. See, e. g., Brennan v. Midwestern Life Ins. Co., 259 F.Supp. 673 (N.D.Ind.1966); Anderson v. Francis I. DuPont & Co., 291 F.Supp. 705 (D.Minn. 1968). Indeed, in the only case where it may fairly be stated that the court was faced with a claim of aiding and abetting solely by inaction, the Ninth Circuit declined to accept such a theory of Rule 10b-5 liability stating:

There is not a scrap of authority supporting this extraordinary theory of Rule 10b-5 liability, and we will not supply any in this case.
We find nothing in Rule 10b-5 that purports to impose liability on anyone whose conduct consists solely of inaction .... We perceive no reason, consonant with the congressional purpose in enacting the Securities and Exchange Act of 1934, thus to expand Rule 10b-5 liability (Cf. SEC v. Texas Gulf Sulphur Co., supra, 401 F.2d 833 at 866-868 (J. Friendly, concurring specially).) On the contrary, the exposure of independent accountants and others to such vistas of liability, limited only by the ingenuity of investors and their counsel, would lead to serious mischief. Wessel v. Buhler, 437 F.2d 279, 283 (9th Cir. 1971).

Keeping in mind the frequent admonition of the Supreme Court that courts must be alert to provide such remedies for securities frauds as to make effective the Securities Acts, SEC v. Capital Gains Bureau, 375 U.S. 180, 195, 84 S.Ct. 275, 11 L.Ed.2d 237 (1963); Tcherepnin v. Knight, 389 U.S. 332, 336, 88 S.Ct. 548, 19 L.Ed.2d 564 (1967); Mills v. Electric Auto-Lite Co., 396 U.S. 375, 386, 90 S.Ct. 616, 24 L.Ed.2d 593 (1970), we are not prepared to hold that a claim for aiding and abetting solely by inaction cannot be made under Rule 10b-5. In invoking such a rule, however, we would not go so far as to charge a party with aiding and abetting who somehow unwittingly facilitated the wrongful acts of another. Rather, to invoke such a rule investors must show that the party charged with aiding and abetting had knowledge of or, but for a breach of duty of inquiry, should have had knowledge of the fraud, and that possessing such knowledge the party failed to act due to an improper motive or breach of a duty of disclosure. Plaintiffs do not and could not contend that Midwest had actual knowledge of Nay’s fraudulent escrow scheme. And, as our analysis of Midwest’s section 6 duty of self-regulation demonstrates, Midwest adequately satisfied its duty of inquiry and had no reason to know of or suspect Nay’s fraudulent ese*?w scheme. Failing proof that Midwest knew or should have known of Nay’s fraud we need not further our inquiry into the other elements of a claim for aiding and abetting solely by inaction.

We then turn to plaintiffs’ contention that Midwest aided and abetted by affirmative action in that it negligently issued and allowed Nay to maintain a Midwest membership plaque which plaintiffs assert they relied on in making their investments in the spurious escrow account. Plaintiffs expend considerable efforts in arguing that the plaque was a representation or certification of Nay’s integrity in all financial matters and that plaintiffs reasonably relied on this representation in participating in the escrow scheme. We do not reach the question of the scope of Midwest’s representation through the medium of the plaque or the reasonableness of plaintiffs’ reliance thereon. Rather, we find that having fulfilled its section 6 duty of self-regulation, it cannot be said that Midwest was negligent in issuing and allowing Nay to maintain the plaque. Absent proof of negligence, we will not stand in willingness to impose a standard of strict liability on Midwest due to its issuance of the plaque. Accordingly, we hold plaintiffs’ charge of aiding and abetting through the affirmative action of issuing a plaque to be without merit.

IV

The district court held that the appropriate statute of limitations had run prior to the filing of this action in February, 1971. Plaintiffs contended that the equitable tolling doctrine prevented the statute from beginning to fun until Nay’s fraud was discovered in 1968 at the time of his suicide. If plaintiffs’ invocation of the equitable tolling doctrine had been allowed it is clear that their respective actions would have been timely filed. In rejecting plaintiffs’ contention, the district court held, “To toll the statute, the defendant must have actively concealed the cause of action, and Midwest clearly was not shown to have done this.” Hochfelder v. Midwest Stock Exchange, 350 F.Supp. 1122, 1125 (N.D.Ill.1972). The equitable tolling doctrine provides that where a fraud which is the foundation of the suit has actively been concealed or is of such a nature as to conceal itself, the statute of limitations is tolled until the plaintiff has obtained knowledge of the fraud or in the exercise of due care should have obtained knowledge of the fraud. Bailey v. Glover, 88 U.S. (21 Wall.) 342, 349, 22 L.Ed. 636 (1874); Holmberg v. Armbrecht, 327 U.S. 392, 396, 66 S.Ct. 582, 90 L.Ed. 743 (1945); Morgan v. Koch, 419 F.2d 993, 997 (7th Cir. 1969). The gravamen of plaintiffs’ action against Midwest is admittedly grounded in negligence, and is not grounded on any contention that Midwest is chargeable with affirmative acts of fraud or fraudulent concealment. However, we do not believe that the tolling doctrine should be so narrowly drawn that it does not encompass Midwest’s alleged acts of facilitation of the fraud.

It is charged that Midwest’s conduct amounted to negligence and that its negligence facilitated or provided the means for Nay’s fraud. Nay effectively concealed his fraud and as a result the alleged implementing negligence of Midwest was concealed and brought to the surface only when the facts surrounding Nay’s fraud were first discovered. If claims brought in the same posture as the instant action — asserting charges amounting to negligence but short of fraud — are to have any vitality, it cannot be contended that the tolling doctrine should not apply. Often the underlying fraud, carefully concealed in and of itself, would cloak the implementing actions of others. Accordingly, where the acts of a defendant facilitate the perpetration of a concealed fraud of another, the bar of the statute of limitations should not begin to run until a plaintiff obtains knowledge or through due diligence should have obtained knowledge of the underlying fraud. In view of our holding on the merits of plaintiffs’ claims, however, we need not otherwise further our inquiry with respect to the litigants’ contentions regarding the statute of limitations.

On the basis of the foregoing the judgments of the district court are affirmed.

      . The plaintiffs in appeal No. 72-1977, Olga Hochfelder, et al., filed an action on February 19, 1971 in district court against the Midwest Stock Exchange in the first count of the complaint, and against Ernst & Ernst, certified public accountants, in the second count. On May 18, 1971 a separate but identical complaint was filed by plaintiffs Leon S. Martin, et al., in appeal No. 72-1978. Midwest filed a motion for summary judgment applicable to both oases. By stipulation and subsequent order of the district court, the ruling in favor of Midwest in case No. 72-1977 was applied in case No. 72-1978. The appeals were consolidated by stipulation of the parties and our order of December 6, 1972.

      . In Baird v. Franklin, 141 F.2d 238 (2d Cir. 1944), cert. denied, 323 U.S. 737, 65 S.Ct. 38, 89 L.Ed. 591 (1944), a case of first impression, the Second Circuit held that the New York Stock Exchange had a duty “to investigate the dealings and the financial conditions of the members and to suspend or expel members who it had reason to believe had been guilty of conduct inconsistent with just and equitable principles of trade.” 141 F.2d at 239. The test of liability articulated by the Second Circuit was proof that the Exchange had “knowledge or reasonable cause to suspect that [the Exchange member] was guilty of conduct inconsistent with just and equitable principles of trade. ...” 141 F.2d at 243.
      We have previously addressed ourselves to the test of liability applicable in determining whether an exchange satisfied the duty of self-regulation. In Butterman v. Walston & Co., 387 F.2d 822 (7th Cir. 1967), rehearing denied (1968), cert. denied, 391 U.S. 913, 88 S.Ct. 1806, 20 L.Ed.2d 652 (1968), we -held the New York Stock Exchange not liable for a member firm’s violation of the Exchange rules where it could be found that the Exchange “had no knowledge, or reasonable way ' of gaining knowledge, of alleged violations,” and no duty to suspend or expel “until it had, or should have had, knowledge of violation or suspected violation.” 387 F.2d at 825.

      . Midwest’s rules provided that only corporations and partnerships could deal directly with the public. Accordingly, Midwest’s surveillance program was directed towards member organizations and not the personal books and records of officers or employees of member firms.
      The surveillance program imposed by Midwest was elaborate. Midwest’s own staff periodically conducted a “field examination” which consisted of an examination and inspection of the books and records of member organizations. This was supplemented by interviews with personnel of the member firm. The written field examination program was in compliance with S.E.C. suggestions.
      The Exchange rules required each member organization to submit to Midwest each year two audited financial questionnaires, one of which was to be certified by an independent public accountant selected and retained by the member organization. The audits were performed pursuant to S.E.C. Form X-17A-5, as amended from time to time by the S.E.C. In 1962 the annual certified audit was changed by Midwest to a surprise audit whereby the member organization would not know when the audit was scheduled to begin. The independent certified public accountant’s audit would be reviewed by Midwest to verify compliance with the applicable rules. In addition the audit was required to include a review of the member organization’s system of internal controls. Midwest would conduct its field examination at a time other than the fiscal period for which the surprise audit was made.

      . As of November 30, 1967 Nay had borrowed $74,500 from First Securities as compared to his share of the net worth in the corporation of approximately $120,000.

      . The “net capital rules” of the various exchanges and of the S.E.C. require that a broker-dealer’s “aggregate indebtedness” must never be more than a specified percentage of its net capital. The “net capital” reflects the liquidity of the broker-dealer and is a conservative figure which is in general substantially less than “net worth.” See, e. g., Report of the Special Study of Securities Markets of the Securities and Exchange Commission, H.R.Doc.No.95, 88th Cong., 1st Sess. (1963), pt. 1, ch. III, p. 407.

      . Rule 27 in pertinent part provides:
      (a) Each member [of the Association] shall establish, maintain and enforce written procedures which will enable it to supervise properly the activities of each registered representative and associated person to assure compliance with applicable securities laws, rules, regulations and statements of policy promulgated thereunder and with the rules of this Association. (b) Final responsibility for proper supervision shall rest with the member
      (c) Each member shall be responsible for keeping and preserving appropriate records for carrying out the member’s supervisory procedures. Each member shall review and endorse in writing, on an internal record, all transactions and all correspondence of its registered representatives pertaining to the solicitation or execution of any securities transaction.
      Nay had forbidden anyone other than himself to open mail addressed to him, and in his absence all such mail was allowed to accumulate on his desk, even if it was addressed to First Securities for his attention. This rule facilitated and fostered Nay’s perpetration of the escrow fraud. As a result, we held that First Securities’ enforcement of Nay’s practice regarding the opening of mail was sufficient on its face to constitute a violation of Rule 27. 463 F.2d at 988.

      . To impose such a wide-ranging duty of enforcement would be in direct opposition to the recommendation in the Report of the Special Study of Securities Markets of the Securities and Exchange Commission to improve efficiency and economy of the total regulatory effort by avoiding duplication :
      This report indicates various ways in which the quantity and quality of self-regulation and/or governmental regulation need strengthening. On the other hand, available mechanisms, budgets, and personnel of some agencies already seem overtaxed, and at the same time there appears to be considerable duplication of effort . . . . In the interests of the public, the regulatory agencies and the securities industry, further and continuing attention should be given to possibilities for coordinating efforts and allocating responsibilities in a more efficient and productive pattern . . . Report of the Special Study of Securities Markets of the Securities and Exchange Commission, H.R.Doc. No.95, 88th Cong., 1st Sess. (1963), pt. 4, ch. III, p. 738.
      Congress followed this approach to effective self-regulation through clear division of labor among self-regulatory bodies when it enacted the Securities Investor Protection Act of 1970, 15 U.S.C. § 78aaa et seq. In section 9(c), 15 U.S.C. § 78iii(c), Congress provided that where a member of the Securities Investor Protection Corporation, the S.I.P.C., whose membership includes nearly all broker-dealers, is a member of more than one self-regulatory organization, the S.I.P.C. shall designate one of such organizations to inspect or examine the S.I.P.C. member “for compliance with applicable financial responsibility rules.” The goal “that more coordination is needed for planning, for surveillance, and for elimination of duplication” was recently reaffirmed by the House Subcommittee on Commerce and Finance. Securities Industry Study of the Subcommittee on Commerce and Finance of the Committee on Interstate and Foreign Commerce, H.R. Rep.No.92-1519, 92nd Cong., 2d Sess. 115 (1972). The imposition of the burden of enforcement advocated by plaintiffs would indeed be a major obstacle to attaining the goal of coordination of efforts and elimination of duplicative waste.

      . The plaque contained the following language :
      MIDWEST STOCK EXCHANGE Organized 1882
      An Association for Brokers, Whose Object is to Establish and Conduct a Market for Listed Securities, where High Standards of Commercial Honor and Integrity are maintained and Just and Equitable Principles of Trade and Business prevail.
      LESTON B. NAY of First Securities Company of Chicago
      /s/ Carl E. Ogren /s/ James E. Day Secretary President

      (This Certificate is the Property of Midwest Stock Exchange).


source: Caselaw Access Project

author: KOELSCH, Circuit Judge:

license: Public Domain

text:
    Richard L. NELSON, Captain Green Post No. 20, American Legion, and Prosser Bowling, Inc., Plaintiffs-Appellants, v. BRUNSWICK CORPORATION, Defendant-Appellee. Gerald L. GALLIHER, Plaintiff-Appellant, v. BRUNSWICK CORPORATION, Defendant-Appellee.
    Nos. 71-2695 and 71-2696.
    United States Court of Appeals, Ninth Circuit.
    Aug. 8, 1974.

      James P. Connelly (argued), Winston, Cashatt, Repsold, McNichols, Connelly & Driscoll, Spokane, Wash., for plaintiffs-appellants.
    Dean W. Loney (argued), Loney, Westland & Raekes, Kennewick, Wash., for defendant-appellee.
    Before KOELSCH and TRASK, Circuit Judges, and JAMESON, District Judge.

       The Honorable William J. Jameson, United States District Judge for the District of Montana, sitting by designation.

   OPINION

KOELSCH, Circuit Judge:

The claims involved in these appeals are for personal injuries and property damage resulting from an explosion in a building in Prosser, Washington. Plaintiffs are Captain Green Post No. 20, American Legion, a corporation (Legion), owner of the building; Prosser Bowling, Inc. (Prosser), Legion’s lessee and the operator of a bowling alley in the building; Richard L. Nelson, manager of the bowling alley; and Gerald L. Galliher, an acquaintance of Nelson. Defendant is the Brunswick Corporation.

The accident occurred within a few hours after Brunswick, pursuant to an agreement with Prosser, had completed resanding and refihishing the bowling lanes and left the premises. Nelson, accompanied by Galliher, had entered the building. The air was heavily laden with fumes given off by the still-drying lacquer, and Nelson was about to show Galliher the wires for some electrical appliances which would have to be replaced before the lanes would be ready for use. As Nelson started to raise the wires, there was an arc, followed instantly by a violent explosion; the building was wrecked, and Nelson and Galliher suffered severe personal injuries. The claims were consolidated for trial, and trial was had to a jury which rendered verdicts against all plaintiffs. The matter is here on their several appeals from the ensuing judgments.

Legion, Prosser and Nelson have filed a joint brief. Galliher has filed a separate one. We will consider the appeals of Legion, Prosser and Nelson together and treat Galliher’s separately.

1. The Appeals of Legion, Prosser and Nelson

A. The warning contentions

Plaintiffs predicated recovery upon two separate theories — strict liability for a defective product and ordinary negligence. Strict liability was rested wholly upon Brunswick’s alleged failure to give adequate warning of the inherent dangers in the refinishing lacquer; this same failure was also charged as one of several acts of negligence. The trial court refused plaintiffs’ instructions concerning warning; the result was to eliminate from the jury’s consideration the strict liability - theory and that asserted act of negligence. We are clear these rulings were correct.

As indicated, plaintiffs did not contend that the lacquer was defective per se; rather they urged that it was made defective because not accompanied with an adequate warning to make it reasonably safe for the intended use. The Supreme Court of Washington has adopted the rule of § 402A of the Restatement of Torts, Second, which makes liable in damages “[o]ne who sells any product in a defective condition unreasonably dangerous to the user . ” for the injuries caused by such product. Ulmer v. Ford Motor Co., 75 Wash.2d 522, 452 P.2d 729 (1969). Although that Court has not had occasion to decide whether the rule includes properly manufactured products that are unaccompanied by an adequate warning,the developing national trend appears to favor this broad application, and we will assume that Washington is in accord. However, the defect which makes the product “unreasonably dangerous” and allows the imposition of liability without proof of fault must itself be the actual cause of injury. Cf. Davis v. Wyeth Laboratories, 399 F.2d 121, 131 and 131 n. 20 (9th Cir. 1968). See Frumer and Friedman, Products Liability § 11.04 [3], at 219. Thus, if despite a deficient warning the user is fully aware of the danger of which a reasonable warning should apprise him, then the deficiency is not a cause of the ensuing accident.

The record in this case establishes as a matter of law that Brunswick’s failure to warn was not the actual cause of the explosion. On cross-examination Nelson testified at length regarding his awareness of the danger and its magnitude ; he frankly admitted knowledge that the fumes given off by the drying lacquer were highly explosive and that they were readily susceptible of detonation by a spark or a lighted match. His testimony makes manifest the conclusion that he knew all that an adequate warning would tell him and that a cause of the explosion was not his lack of appreciation of the danger.

B. The prior explosions and fires

Plaintiffs assign as error the court’s ruling excluding from evidence proof that a number of explosions and fires had occurred elsewhere during other Brunswick resurfacing operations. Such evidence was, of course, irrelevant and therefore inadmissible to show that Brunswick was negligent in the performance of this particular work. However, in Washington (Turner v. Tacoma, 72 Wash.2d 1029, 435 P.2d 927 (1967)), as elsewhere, such proof is sometimes admitted to show a defendant had notice of the danger and to demonstrate the magnitude of the danger, the latter fact being helpful in gauging the amount of care to be exercised in the circumstances. McCormick, Evidence 473 (2d ed. 1972); Frumer and Friedman, supra, § 12.01 [2] at 232; Prosser, The Law of Torts 673 (4th ed. 1971). But whether to admit such evidence is a matter generally for the trial court to decide, keeping in mind the collateral nature of the proof, the danger that it may afford a basis for improper infer-enees, the likelihood that it may cause confusion or operate to unfairly prejudice the party against whom it is directed and that it may be cumulative, etc. McCormick, supra, at 473. Here the probative value of the proposed proof was slight. It related to a limited issue which Brunswick had in large part conceded, and it was cumulative to testimony actually adduced. We cannot conclude that the trial court erred in rejecting it.

C. The disregard of Prosser’s corporate entity

The court by one of its instructions directed the jury to apply Brunswick’s defense of Nelson’s contributory negligence not only to Prosser but also to Legion. This was error. And because the jury may have found both Brunswick and Nelson guilty of negligence which was a proximate cause of the accident, the error was prejudicial to Legion and requires a reversal of that judgment.

In J. I. Case Credit Corp. v. Stark, 64 Wash.2d 470, 392 P.2d 215 (1964), the Supreme Court of Washington reiterated the holding in earlier decisions that a court may not “pierce the corporate veil” to declare two corporations identical in responsibility unless the record establishes not only “such a commingling of property rights or interests as to render it apparent that they are intended to function as one,” but also, that, “to regard them as separate would aid the consummation of a fraud or wrong upon others.” 392 P.2d at 218. We entertain grave doubt that the proof concerning the property interests and affairs of Prosser showed a sufficient commingling to meet the identity of interest requirement. However, that problem aside, we nevertheless are clear that the injustice requirement is not met: to regard Prosser and Legion as separate would not “aid in the consummation of a fraud or wrong upon” Brunswick. We accept Brunswick’s proposition that a “fraud or wrong upon others” is simply the violation of a legal duty owed the party seeking to have the intervening corporation disregarded (see Horowitz, Disregarding the Entity of Private Corporations, 14 Wash.L.Rev. 285, 294 (1940) and that all that need appear to trigger the doctrine of disregard is the existence of a duty and its avoidance. However, the duty hurdle is insurmountable. Prosser, not Legion, was Nelson’s employer, and Legion neither supervised nor otherwise directed or controlled Nelson’s activities. Thus Nelson’s negligence, if such there was, could not be imputed to Legion.

2. The Appeal of Galliher

The errors assigned by Galliher are, for the most part, the same as' those commonly assigned by Legion, Prosser and Nelson. None of them has merit, as we have stated above. Of the remainder, only the one that relates to the giving of an instruction on the doctrine of voluntary assumption is properly before us; and we will limit our review to it.

Following the entry of judgment and while Galliher’s appeal was pending, the Supreme Court of Washington abolished the use of the doctrine of assumed risk as a defense when the defense of contributory negligence can be raised. Lyons v. Redding Construction Co., 83 Wash.2d 86, 515 P.2d 821 (1973). We are required, in exercising our appellate jurisdiction over this diversity case, to apply the law as presently defined by the highest court of Washington, despite the fact that the law was altered after the judgment below was entered. Vandenbark v. Owens-Illinois Glass Co., 311 U.S. 538, 61 S.Ct. 347, 85 L.Ed. 327 (1941); Alameda County v. United States, 124 F.2d 611 (1941). See 1A J. Moore, Federal Practice If 0.307 [3], at 3317 (2d ed. 1961). We are compelled to hold the giving of the instruction error. And because the jury may have concluded that Galliher assumed the risk of injury by entering the fume-filled building and based its adverse verdict upon that finding, the error was prejudicial, and the judgment in his case must be reversed.

Moreover, Lyons aside, the instruction, although a correct statement of law, was abstract, and its giving constituted reversible error. Albin v. The National Bank of Commerce of Seattle, 60 Wash.2d 745, 375 P.2d 487 (1962).

In most if not all cases in which the defense of assumption of risk is applied, the injured plaintiff will not know until after he has been injured the precise path of events by which a known risk is increased to a certain injury. “Thus, saying that one ‘fully appreciated a risk’ makes sense only in relative terms; it is a way of saying that his understanding of the probability of harm was at least as good as would be achieved from some point of view chosen as a standard for judgment.” Keeton, Assumption of Risk in Products Liability Cases, 22 La.L. Rev. 122, 125 (1961). The problem is to decide whether to select appreciation of the greater or lesser risk faced by Gal-liher as the “standard for judgment.”

Washington cases, and the policy behind the assumption of risk defense, require that the particularized risk created by the live wires be used as the focal point for testing the legal sufficiency of Galliher’s knowledge.

Washington law interpreting assumption of risk distinguished between the generalized risk of undertaking an activity and additional extraordinary risk, requiring that before an assumption instruction be given some evidence indicate that the plaintiff was aware of the “extraordinary” risk. In Hogenson v. Service Armament Co., 77 Wash.2d 209, 461 P.2d 311, 315 (1969), the court held that a plaintiff whose eye was injured by defective ammunition bought from defendant had not assumed the risk of being injured by the ammunition simply because he was aware of the risk of firing antique rifles. The court stated:

“In the instant case the plaintiff may well be held to have been aware of a generalized hazard involved in firing old guns. There was no evidence indicating that he was aware of the further specific hazard of firing cartridges of the age and condition involved. Had he been aware of this risk he may well have reevaluated his decision to engage in target practicing on the day in question When there was no evidence introduced that the plaintiff was aware of the factors leading to the ‘extraordinary risk,’ a volenti instruction would be singularly inappropriate.” 461 P. 2d at 315.

And in Regan v. Seattle, 76 Wash.2d 501, 458 P.2d 12 (1969), the court held that a go-cart driver, even though aware of the risk of injury from racing, did not assume the risk of an accident created by water on the track, which defendant had negligently failed to remove, unless plaintiff had knowledge of the extraordinary risk. (See also Fred Harvey Corp. v. Mateas, 170 F.2d 612 (9th Cir. 1948); and generally, Prosser, supra, at 447-449.)

The additional risk created by the energized electric wires was an “extraordinary risk” as that term is used in Regan and Hogenson. The court in Hogenson suggests one factor to be considered in determining whether the risk is extraordinary — whether the additional risk is sufficiently distinct from the risk of which the plaintiff is aware to cause his reconsideration of entry into the dangerous activity. The presence of the live, bare wires substantially altered the risk of entering the building by creating an unpereeived potential source of ignition.

Moreover, as in Regan and Hogenson, while the generalized risk which the plaintiff appreciated and voluntarily confronted was not attributable to the fault of Brunswick, the latter’s negligence created an additional hidden risk which altered the perceived risk, and hence was “extraordinary.” Galliher’s case, it must be remembered, did not go to the jury on a products liability theory —Brunswick was not chargeable with creating the risk of a fume-filled building. Rather, Brunswick was allegedly negligent in inadvertently turning on the power to the wires. Thus, while Galliher’s injury foreseeably occurred, as did those in Regan and Hogenson, from the risk which made the known activity dangerous — go-carts crash, old guns misfire, and fume-filled buildings explode — nevertheless assumption of the risk is inapplicable because Brunswick’s negligence created a hidden danger which increased the probability that the known risk would result in injury.

Requiring proof that Galliher knew of the “extraordinary” risk accords with the policy of the doctrine. Indeed, allowing the defense without proof of knowledge of the additional risk created by Brunswick’s negligence is inconsistent with the rationale for allowing assumption of risk to operate as a defense beyond the scope of contributory negligence.

In the ordinary situation in which assumption of risk is applied, the plaintiff sees a dangerous situation created by defendant’s negligence and, knowing the risk, undertakes to confront it. If he is injured, and the decision to confront the danger was unreasonable (as Galliher’s decision to enter the building may have been), then the plaintiff will be precluded from recovery by his contributory negligence. However, even if the decision was reasonable, he is still held to have assumed the risk of his injury. Whether the result is explained in terms of extinguishment of the defendant’s duty of care to the particular plaintiff, or in terms of a break in the chain of proximate causation, see Walsh v. West Coast Coal Mines, 31 Wash.2d 396, 197 P.2d 233 (1948), the rationale is essentially that when the plaintiff knows and appreciates the danger, he is in a position as good as the defendant’s to avoid his injury. If the plaintiff reasonably wishes to risk injury in order to derive some sufficiently important benefit, the law assigns him, rather than the defendant, the costs if he does not make it unscathed. The rule is justified because it reduces accidents — by refusing to transfer the costs of the accident from the faultless plaintiff to the negligent defendant, the law creates an incentive for the plaintiff to avoid even reasonable risks.

The policy of assigning the cost of a risk-encountering enterprise to one who chooses to embark on it conflicts with the general tort policy of fault liability, which seeks to compensate those injured through the fault of others. See Mansfield, Informed Choice in the Law of Torts, 22 La.L.Rev. 17, 23-25 (1961). We think that when, as here, the defendant’s negligence has increased the risk which plaintiff can observe, the policy behind assumption of risk becomes inapplicable and the doctrine must yield. The hidden risk necessarily causes the plaintiff to underestimate the cost of proceeding, thereby biasing his decisions towards activity with a greater potential for accidents than he would consciously undertake. On the other hand, the defendant retains a superior capacity to avoid the accident because he is ehargea-ble with knowledge of the additional risk. The assumption of risk defense, rather than providing an additional incentive to the plaintiff to avoid the risk, increases the chances for accidents by removing the defendant’s incentive to avoid adding hidden to apparent risks, and correcting or warning of those created. As a result, the accident-reducing function of the defense is not served by its availability in this situation, and the defendant should be relegated to his defense of contributory negligence.

We conclude that both under Washington law and general tort principles the defense of assumption of risk is properly limited to those situations in which the plaintiff “in fact understood the risk to himself and his property as well as the defendant should have understood it.” Keeton, supra, at 125. To repeat: As Galliher did not know that the wires were charged, and Brunswick allegedly should have, the instruction should not have been given.

In summary, the judgments against Prosser and Nelson are affirmed; those against Legion and Galliher are reversed. The latter two causes are remanded with instructions to grant a new trial. No costs allowed in No. 71-2695. Costs to appellant in No. 71-2696.

      . Plaintiffs invoked the diversity jurisdiction of the district court (28 U.S.C. § 1332 (a) (1)). Washington law applies.

      . In Washington a manufacturer can be liable under the common law for a negligent failure to give an adequate warning of danger. E. g., Callahan v. Keystone Fireworks Mfg., 72 Wash.2d 823, 435 P.2d 626 (1967). And a Washington safety statute imposes a duty upon a manufacturer that containers of explosive substances be suitably labelled. See Panther Oil & Grease Mfg. Co. v. Segerstrom, 224 F.2d 216 (9th Cir. 1955).

      . Another was Brunswick’s resetting of an electrical circuit breaker; Nelson testified he had tripped the circuit breaker prior to Brunswick’s entry upon the premises in order to deactivate the electrical system and permit him to remove some electrical fixtures which would otherwise interfere with the resurfacing work.

      . See Jackson v. Coast Paint & Lacquer Co., 499 F.2d 809 (9th Cir., 1974); Davis v. Wyeth Laboratories, 399 F.2d 122 (9th Cir. 1968); Sills v. Massey-Ferguson, Inc., 296 F.Supp. 776 (N.D.Ind.1969); Casetta v. United States Rubber Co., 260 Cal.App.2d 792, 67 Cal.Rptr. 645 (1968); Crane v. Sears Roebuck & Co., 218 Cal.2d 855, 32 Cal.Rptr. 754 (1963); Frumer & Friedman, Products Liability § 16A [4] [e], at 3-324 et seq., 1973 Supp. at 74; Prosser, The Law of Torts 660 (4th ed. 1971); Wade, Strict Liability of Manufacturers, 19 Sw.L.J. 5, 17 (1965).

      . At least one intermediate appellate court of that State has intimated approval. Simmons v. Koeteeuw, 5 Wash.App. 572, 489 P.2d 364 (1971).

      . The situation is analogous to other strict liability doctrines, such as liablity for injury caused by an ultra-hazardous activity. If the injury is not caused by that aspect of the activity which makes it ultra-hazardous, the injured person is relegated to any recovery he can obtain based upon proof of fault.

      . We assume inadequacy for illustrative purposes only and intimate no view as to the fact. Because the adequacy of a warning requires a weighing of the gravity of the peril and the probability of its occurrence, the question is usually one to be answered by the fact finder. However, in this case we are at or very near the point where reasonable men could not doubt that Brunswick’s warnings were adequate. For example, Brunswick employed a device,. in its written safety check list which it gave Nelson, to insure that the warning would be brought to his attention before the work was commenced and that due precautions would be taken. And the containers themselves carried printed warnings. However, because there was evidence that Brunswick’s employees may have contradicted some of the items in the list, thereby diluting the force of the warning, we prefer to rest our disposition on the lack of causation.

      . This same lack of causation applies equally to a claim based upon negligence and supports the court’s ruling eliminating from the jury’s consideration Brunswick’s failure to warn as an act of negligence.

      . In Sommer v. Yakima Motor Coach Co., 174 Wash. 638, 26 P.2d 92, 98 (1933), it was said that:
      “Two corporations may not only transact business with each other, but they may perfect such arrangements, if fairly done, as will work to their mutual advantage. The mere fact of intimacy and harmony of relationship between them, or the ownership by one of a controlling interest in the other, does not of itself destroy their separate identities, nor does it merge them into a single entity. They are not to be adjudged as one, in legal effect, unless their property rights and interests are so closely commingled and related as to render it apparent that they are intended to function as one, and to regard them as separate would aid the consummation of a fraud or wrong upon others. This is the declared doctrine obtaining in this state.”

      . The question of whether to disregard a corporate entity under Washington law is one for the court to decide. Sommer v. Yakima Motor Coach Co., 174 Wash. 638, 26 P.2d 92 (1933).

      . The evidence was to the effect that Legion liad constructed the building to serve as a clubroom and meeting facility and to house a twelve-lane bowling alley. During construction the committee of Legion members (Legion Lanes) which was to manage the howling alley learned that the Bowling Proprietors Assn, of America would not franchise an alley operated by a nonprofit association. To obtain the desired sanction, Prosser was incorporated. Its stock was entirely held by members of Legion Lanes. At the time of the explosion, Prosser had continuously managed and operated the bowling alley for more than ten years and had leased that portion of the building from Legion. Responsibility for the day-to-day operations of the alley was vested in Prosser’s president. Prosser maintained checking accounts and did business in its own name. Brunswick contracted with Prosser both for the original purchase of the bowling alley equipment and for the resurfacing operation. Legion had no part in hiring and discharging Prosser employees. Nelson was hired by Prosser’s president and paid by Prosser. Legion did not participate in the management of the bowling alley or in the supervision of Prosser employees. Operating decisions were made entirely by Prosser without consulting Legion. For example, when deciding whether to have the lanes resurfaced, Nelson consulted Prosser’s president, and together they decided to incur the expense. Legion took no part in the decision, and nowhere in the record does it appear that Legion was aware that the lanes were being resurfaced.

      . At the time the Vandenbark rule was adopted, it was undoubtedly thought to be a necessary extension of the Court’s interpretation of the Rules of Decision Act in Erie R. Co. v. Tompkins, 304 U.S. 64, 58 S.Ct. 817, 82 L.Ed. 1188 (1938). The rule has been criticized, nee Moore, nupra, at 3317, we think perhaps justly, because it can lead to a difference in the result obtained in a federal and state court. In a state which engages in prospective overruling, the federal appellate court’s application of the new rule will lead to a different result than would have resulted in a case pending in the state appellate courts if the new rule were not applied retroactively. The Vandenbarlc decision does not on its face seem to contemplate an independent determination of whether the state will apply a change in its rules of decision retroactively in ascertaining the law of a state; we apply Vandenbarlc as a “hard-and-fast” rule here. However, we do not think any difference would result from a more flexible approach, as our analysis of the Washington decisions indicates that Washington would probably apply this decision retroactively. In particular, in deciding to overrule a decision prospectively only, the Washington courts have stressed the importance of reliance interests founded on the law to be overruled. See State ex rel. Washington State Finance Committee v. Martin, 62 Wash.2d 645, 384 P.2d 833 (1963). There was no such reliance here on the availability of the assumption of risk defense. Cf. Baffin Land Corp. v. Monticello Motor Inn, Inc., 70 Wash.2d 893, 425 P.2d 623 (1967); Pacific States Cut Stone Company v. Goble, 70 Wash.2d 907, 425 P.2d 631 (1967).

      . Substantial evidence was adduced to show that when Galliher entered the building he was aware that the fumes were potentially explosive. However, there is no proof tending to show that he knew of the additional risk created by the presence of electrical current in the bare wires.


author: NEILL, District Judge:

text:
    A. J. INDUSTRIES, INC., a Delaware corporation, Petitioner, v. UNITED STATES DISTRICT COURT FOR the CENTRAL DISTRICT OF CALIFORNIA, Respondent.
    No. 73-3584.
    United States Court of Appeals, Ninth Circuit.
    Sept. 12, 1974.

      Jeffrey D. Jennings (argued), Bodkin, Breslin & Luddy, Los Angeles, Cal., for petitioner.
    R. Clark Wadlow (argued), Washington, D.C., for real party in interest.
    Before CARTER and TRASK, Circuit Judges, and NEILL, District Judge.

       Honorable Marshall A. Neill, United States District Judge, Eastern District of Washington, sitting by designation.

   OPINION

NEILL, District Judge:

Petitioner filed this petition for a Writ of Mandamus or Prohibition requesting this Court to direct respondent to vacate its order transferring petitioner’s suit against Chesapeake Industries, Inc. to the District of Delaware. In support of the petition it is contended Delaware is not a district where the action “might have been brought” under 28 U.S.C. § 1404(a). Further, that even if an ability to raise the subject matter of the lawsuit by counterclaim in the transferee district is generally sufficient to satisfy the statute, transfer would be improper in this instance as A.J. could only have made such a counterclaim in Delaware with leave of the court. Further, petitioner asserts that respondent should not have considered the pendency of the Delaware action in deciding the transfer motion. The final contention is a claim that respondent abused its discretion in granting the motion to transfer.

In August, 1971, petitioner and Chesapeake Industries, Inc. entered into an agreement for the sale by petitioner to Chesapeake of the shares of Jessup Door Company, a wholly-owned subsidiary of petitioner. Chesapeake gave petitioner a promissory note for the purchase price. Apparently Chesapeake encountered financial difficulties and in March, 1973, petitioner and Chesapeake allegedly entered into a merger agreement. In May, 1973, A.J. filed an action in the Central District of California for a declaratory judgment that it had properly terminated the merger agreement. The action was dismissed on July 31, 1973.

On May 18, 1973, Johnson et al. v. A. J. Industries, Inc. (hereinafter referred to as “the Delaware action”) was filed in the District of Delaware. That action was brought by Chesapeake and its Chairman of the Board on behalf of Chesapeake and its stockholders. Petitioner herein, defendant in the Delaware action, answered the complaint on September 5, 1973. Petitioner also filed a counterclaim which did not include the subject matter of the California action. Reply to the counterclaim was filed on September 24, 1973.

The action from which this petition arises, A.J. Industries, Inc. v. Chesapeake Industries, Inc. (the “California action”) was filed on September 13, 1973 in the United States District Court for the Central District of California. This action alleges defaults under a note and breach of the merger agreement and sought rescission of the Jessup sale agreement and restitution of the Jessup stock.

On December 3, 1973 the District Court granted Chesapeake’s motion to transfer and on December 13 refused to certify the order for interlocutory appeal. On December 18, 1973 a stay of transfer was refused. Finally, on December 21, 1973 this petition was filed and a stay of transfer was ordered by a judge of this court.

Although Chesapeake does not contest the point, it should be noted that we have previously held that mandamus is appropriate to review the question of whether a transferee district was one where an action “might have been brought”. Shapiro v. Bonanza Hotel Co., 185 F.2d 777 (9th Cir. 1950). In Kasey v. Molybdenum Corp. of America, 408 F.2d 16 (9th Cir. 1969), we held mandamus will lie to review the question of whether a trial court abused its discretion under 28 U.S.C. § 1404(a). See also Northern Acceptance Trust 1065 v. Gray, 423 F.2d 653 (9th Cir. 1970). As for the contention that respondent considered improper factors in making the statutory determination, we merely hold that mandamus is an appropriate remedy when such a contention is closely intertwined with other contentions reviewable on a petition for a Writ of Mandamus. See generally, § 9 of anno, at 2 A.L.R. Fed. 573.

Petitioner’s first contention is that under the Supreme Court’s construction of 28 U.S.C. § 1404(a) in Hoffman v. Blaski, 363 U.S. 335, 80 S.Ct. 1084, 4 L.Ed.2d 1254 (1960) the District Court lacked the power to transfer this case to the District of Delaware. Chesapeake asserts that Hoffman should not be given a liberal interpretation and the ability to raise the subject matter of the California suit by way of counterclaim in the Delaware action is sufficient to meet the requirements of the statute.

In Hoffman v. Blaski, supra, the Supreme Court held that an action must have been capable of having been brought in the transferee district by the plaintiff independently of the wishes of the defendant. The Court further held that the posture of the case at the time of filing in the transferor district is determinative of whether the action was one which “might have been brought” in the proposed transferee district.

The parties are in agreement that petitioner could not have brought the California action in Delaware as Chesapeake was not amenable to process in that jurisdiction. See Shapiro v. Bonanza Hotel Co., supra, and Foster-Milburn Co. v. Knight, 181 F.2d 949 (2d Cir. 1950). Nevertheless, Chesapeake contends the action is transferable as it was instituted less than one week after petitioner herein filed its answer in the Delaware case and could, therefore, have raised the subject matter of the California action by way of counterclaim in the Delaware action.

To decide this question it is necessary to examine the statute and Hoffman in light of the policy considerations behind each.

The statute was apparently designed as an attempt to statutorily embody and modify the doctrine of forum non conveniens. See Kaufman, Observations on Transfer Under Section 1404(a) of the New Judicial Code, 10 F.R.D. 595, for an early analysis of the statute. The statute allows a transfer “for the convenience of parties and witnesses” to any other district or division “where it might have been brought”. The transfer must also be “in the interests of justice”. The statute has been the subject of much litigation and several respected sources have called for its revision. See Wright, Law of Federal Courts, 2d Ed. (1970), § 44 at 170; 7 A.L.R. Fed. 20. Most of the criticisms are directed at the “where it might have been brought” phrase which many consider to be unnecessary in view of the broad scope of in personam jurisdiction and the requirement that a transfer must be “for the convenience of parties and witnesses and “in the interests of justice”.

The utility of the statute was reduced by the holding in Hoffman v. Blaski, supra, that the action to be transferred must have been capable of having been brought independently of the wishes of the defendant. One of the major considerations in Hoffman was the fear that were the statute to be less rigidly construed, a defendant could take an unwilling plaintiff to a distant forum with which he was unfamiliar. This reasoning was forcefully attacked by Justice Frankfurter in his dissent in Sullivan v. Behimer, 363 U.S. 351, 80 S.Ct. 1084 (1960), a companion case to Hoffman. Justice Frankfurter demonstrated that this fear was largely unfounded because of the statutory requirements that a transfer be “in the interests of justice” and “for the convenience of parties and witnesses”.

The contention that the right to raise the subject matter of the suit by way of counterclaim in the transferee district meets the statutory requirement is one of first impression in the Courts of Appeals. Several District Courts have considered this problem, but only two have reached a decision on this point. In Foster-Wheeler Corp. v. Aqua-Chem Corp., D.C., 277 F.Supp. 382 (1967) a transfer was denied where the plaintiff in the transferor district was not a party to the action in the transferee district, although it was linked to the defendant in that district by a chain of indemnity agreements. A more recent case, Leesona Corp. v. Duplan Corp., D. C., 317 F.Supp. 290 (1970), allowed a transfer in a situation similar to the one at issue. The District Court took note of Foster-Wheeler but found that such a result was required by neither Hoffman nor the statute.

We believe the better course of action is to hold that the ability to raise the subject matter of a suit in the transferor district by counterclaim in the transferee district will, as a general proposition, satisfy the “where it might have been brought” requirement of 28 U.S.C. § 1404(a). Hoffman v. Blaski, supra, has been subject to well-founded criticism and there appears to be no reason to extend it unnecessarily. A plaintiff is amply protected by the statutory requirements that a transfer be for the convenience of the parties and in the interest of justice. An additional protection is that the determination of transferability must still be made as of the time of filing of the action in the transferor district. Hoffman v. Blaski, supra. This requirement obviates the possibility of a defendant subsequently filing suit in another district and then requesting a transfer to that district. Finally, this result is not inconsistent with many of the policy considerations behind Hoffman. The raising of an issue by counterclaim of course requires that a plaintiff already be present in the transferee district. This minimizes the possibility that a plaintiff will unwillingly be sent to a district with which he is unfamiliar.

Petitioner next contends that Hoffman still requires the granting of the Writ as it could not have raised the subject matter of the California action by counterclaim without leave of the Court. This is alleged to contravene the requirement of Hoffman v. Blaski, supra, that a plaintiff must be able to raise the subject matter independently of the wishes of the defendant.

The basis for petitioner’s argument is that it answered the Delaware action several days before it filed the California action; and the addition of a counterclaim not filed with an Answer is governed by Rule 13(f) of the Federal Rules of Civil Procedure requiring leave of court to file an omitted counterclaim. Conversely, Chesapeake contends that Rule 15(a) gives petitioner an unqualified right to amend his pleadings in the Delaware action at the time of the filing of the California action.

There is little authority on the question of whether Rule 13(f) exclusively governs the addition of counterclaims or whether Rule 15(a) is also applicable. In Stoner v. Terranella, 372 F.2d 89, 91 (6th Cir. 1967) the Sixth Circuit held that leave to add omitted counterclaims was governed exclusively by Rule 13(f). Several lower courts have also considered this problem and have followed the Stoner result. Butler v. Poffinberger, 49 F.R.D. 8, 10 (D.C.W.Va.1968), Exchange National Bank of Chicago v. Abramson, 45 F.R.D. 97 (D.C.Minn. 1968), Goldlawr, Inc. v. Shubert, 268 F.Supp. 965, 971 (E.D.Penn.1967).

There are several potential resolutions of the conflict between Rules 13(f) and 15(a). We could follow the last cited cases and hold that only Rule 13(f) applies. However in those cases the courts were not faced with the question of whether a counterclaim could have been added as a matter of right before a responsive pleading had been filed. In each of those cases the responsive pleading had been filed and the parties were seeking to come under the portion of the rule that requires leave of the court. Where a responsive pleading had not yet been filed we see no reason why Rule 15(a) should not apply with Rule 13(f) coming into force after the filing of the responsive pleading. This result, proposed by Professors Wright & Miller at 159, § 1430 of 6 Federal Practice and Procedure (1971), reconciles the conflict and is consistent with the reasoning of the above cases that Rule 13(f) establishes the standards for discretionary amendment of counterclaims.

Thus, even if Hoffman v. Blaski, supra, required petitioner to have an absolute right to raise the subject matter of the transferred suit by counterclaim to an action in the transferee forum, transfer would be proper in this instance. The best route to this result is the holding that an absolute right to raise the matter by counterclaim is unnecessary. Although we could base our decision on our opinion that petitioner had a right under Rule 15(a) to raise the subject matter by counterclaim, we choose not to do so as it has several undesirable ramifications. Were we to establish such a rule, a court would be required to examine the status of the pleadings, the local rules of the proposed transferee district, and the law of the proposed transferee circuit as to whether Rule 13(f) or 15(a) applies. This result is most undesirable as only the Sixth Circuit has attempted to reconcile the two rules. Thus a District Court would have to guess as to the law of another Circuit and the lawsuit could be unduly delayed if the transferee Circuit disagreed with the construction made by the transferor court. Until the conflicting interpretations were resolved by the Supreme Court the statute could be converted into a vehicle for additionally delaying lawsuits. As this result is neither necessary nor desirable we choose to base our holding on our interpretation that a plaintiff need not have an absolute right to raise the subject matter of a transferred suit by way of counterclaim in an action in the transferee forum before a suit may be transferred.

The ability to raise the subject matter of the transferred suit by counterclaim in a pending action in the transferee forum is significant because it insures that a plaintiff will not be transferred to a forum where it has not already appeared and is not already engaged in litigation with the defendant. Whether or not the subject matter could in fact have been raised by counterclaim is relatively unimportant as it affords no additional protection for a plaintiff and does not reflect the realities of the litigation as there will be two suits pending in the transferee forum unless consolidation is ordered. The statute does not require that a plaintiff have an absolute right to originate an action in the transferee forum and we hold that it is sufficient if the subject matter of the transferred suit could have been raised by counterclaim with leave of the court. To be sure, this represents a very narrow reading of the Hoffman v. Blaski, supra, requirement that an action may only be transferred to a district where a plaintiff had a right to bring an action. We believe that experience and criticism of this requirement by respected sources such as the American Law Institute and Professor Wright demonstrate that it is unwise to read Hoffman as requiring that in every case a plaintiff must have had an absolute right to raise the subject matter of the transferred suit by counterclaim in an action in the transferee forum. Furthermore, such a rule prevents the occurrence of the situation where a defendant could deliberately omit a counterclaim from an answer and thereby prevent a transfer to that forum.

Petitioner further contends that the District Court considered an improper factor in reaching its decision to transfer the action. It is claimed that the possibility of consolidating the transferred action with the Delaware action was a factor in the court’s decision, whereas, in fact, the two actions could not be consolidated.

Under Rule 42(a) of the Federal Rules of Civil Procedure consolidation is discretionary. The feasibility of consolidation is a significant factor in a transfer decision, Van Dusen v. Barrack, 376 U.S. 612, 84 S.Ct. 805, 11 L.Ed.2d 945 (1964), although even the pendency of an action in another district is important because of the positive effects it might have in possible consolidation of discovery and convenience to witnesses and parties. Schneider v. Sears, 265 F. Supp. 257 (1967), Rodgers v. Northwest Airlines, Inc., 202 F.Supp. 309 (1962). To hold that the pendency of an action between the parties in another district could not be considered unless the action could be consolidated would unnecessarily limit the factors that should be considered in making a transfer determination and would require a good deal of speculation by the transferor court as to whether or not consolidation would be possible. We refuse to so hold and reject this assignment of error.

The final contention is that the District Court abused its discretion in granting the transfer motion. Petitioner contends the failure to issue an opinion, written or oral, stating the reasons for transfer, combined with other factors demonstrates an abuse of discretion.

If it appears from a well-reasoned discussion that the District Court considered the appropriate factors under the transfer statute a written opinion is not necessary. Kasey v. Molybdenum Corp. of America, supra. Even an oral opinion is unnecessary if the record as a whole demonstrates that the factors were considered. Westinghouse Electric Corp., v. Weigel, 426 F.2d 1356 (9th Cir. 1970). Furthermore, as petitioner did not question in the District Court the failure to issue an opinion, the failure will not be reviewed as an alleged error but only as a factor indicating an abuse of discretion. Westinghouse Electric Corp. v. Weigel, supra.

While an opinion stating the reasons for the resolution of such an important motion is highly desirable, we cannot find that the District Court abused its discretion by failing to state its reasons. The briefs and transcript of hearing indicate that all the issues were presented to the District Court and that the Court took ample time to consider them. Thus, there was no abuse of discretion.

It appearing that the Petition for a Writ of Mandamus or Prohibition should be denied, it is ordered that the Petition is dismissed and the stay of Transfer dissolved.

      . Study of the Division of Jurisdiction between State and Federal Courts (1969).

      . Law of Federal Courts, 2d Ed., 1970, § 44.


author: EAST, Senior District Judge:

text:
    Andre J. THERIAULT et al., Plaintiffs-Appellees, v. UNITED STATES of America, Defendant-Appellant (two cases).
    Nos. 72-2647, 72-2969.
    United States Court of Appeals, Ninth Circuit.
    Sept. 10, 1974.

      James Stotter, II (argued) Los Ange-les, Cal., for defendant-appellant.
    Thomas H. Lambert (argued), Los Angeles, Cal., for plaintiffs-appellees.
    Before CARTER and GOODWIN, Circuit Judges, and EAST, Senior District Judge.

       Honorable William Gr. East, Senior United States District Judge for the District of Oregon, sitting by designation.

   OPINION

EAST, Senior District Judge:

The appellees are the widow and children of a civilian employee of the United States Air Force who was lost in an Air Force air crash. They administratively requested and were refused inspection of Air Force agency records concerning the air crash and thereupon instituted these 5 U.S.C. § 522 proceedings (Freedom of Information Act). They allege on information and belief “that they may have a valid cause of action for wrongful death against [others] but they are unable to determine the facts and circumstances surrounding the crash and the history of the aircraft prior to the crash in order to thus fully ascertain their rights and remedies” and pray for the relief provided in the Act. Appellees moved under Rule 34, Federal Rules of Civil Procedure, for an order requiring the appellant to produce certain specified documents and on September 11, 1972, the District Court granted the motion and ordered (September order) the appellant to produce the documents “for inspection and copying by” the ap-pellees.

The appellant moved for a reconsideration of the September order asserting for the first time executive privilege, and on October 20, 1972, the District Court entered its order (October order) denying the motion.

The appellant separately appeals from the September and October orders. The two separate appeals have been consolidated. We vacate the orders and remand the cause to the District Court.

Rule 34 orders to produce ordinarily and when appropriately utilized in a given action are interlocutory and non-appealable under 28 U.S.C. § 1291, except as provided in 28 U.S.C. § 1292(b): Paramount Film Distributing Corp. v. Civic Center Theatre, 333 F.2d 358, 361-362 (CA10 1964). However, the September order to produce as utilized in this action is in and of itself the end result of the action. The practical effect of the full force of that order is a granting of the full, complete and final relief available to a complainant under the Act. Accordingly, we conclude that the September order is a “final decision^] of the District Court[s]” within the range of § 1291 and therefore appeal-able. “We know, of course, that § 1291 does not limit appellate review to ‘those final judgments which terminate an action . . .,' Cohen v. Beneficial Loan Corp., 337 U.S. 541, 545 [69 S.Ct. 1221, 1225, 93 L.Ed. 1528] (1949), but rather that the requirement of finality is to be given a ‘practical rather than a technical construction.’ Id., [337 U.S.] at 546 [69 S.Ct. 1221, 1226, 93 L.Ed. 528].” Eisen v. Carlisle & Jacquelin, et al., 417 U.S. 156, at page 170, 94 S.Ct. 2140, at page 2149, 40 L.Ed.2d 732 (5/28/74). The practical test is generally whether holding the District Court’s decision as "not final” but merely interlocutory, and therefore unappealable, would render a party powerless to avert the mischief of an unlawful order. See, e. g., Overby v. United States Fidelity & Guaranty Co., 224 F.2d 158, 162 (CA5 1955); Perlman v. United States, 247 U.S. 7, 38 S.Ct. 417, 62 L.Ed. 950 (1918); Cobbledick v. United States, 309 U.S. 323, 60 S.Ct. 540, 84 L.Ed. 783 (1940); Gillespie v. United States Steel Corp., 379 U.S. 148, 85 S.Ct. 308, 13 L.Ed.2d 199 (1964).

The Act grants subject matter jurisdiction to and empowers the District Court “to enjoin the agency from withholding agency records and to order the production of any agency records improperly withheld from the complainant. In such a case the court shall determine the matter de novo and the burden is on the agency to sustain its action.”- It is manifest from the face of the September order that it disobeys the mandate of the Act which requires the injunctive relief from a withholding of a given record under the claim of exemption to be predicated upon the District Court’s finding of fact and conclusion of law as to the merits following a full “de novo” hearing.. The appellant’s claim of exemption has not been adjudicated as specified in the Act “and the rights [of the government to exemption] conferred by the statute, if it is applicable, will have been lost, probably irreparably,” Cohen, supra, 337 U.S. at 546, 69 S.Ct. at 1225, should the September order be permitted to be enforced. Accordingly, the September order cannot stand as the ultimate grant of the relief sought under the Act and must be vacated.

Since the cause must be remanded to the District Court for further proceedings, it is appropriate to state that the general rule under the Act is to allow disclosure, unless the agency involved carries the burden of showing the records in question specifically fall within the protection of one or more of the nine several specified exemptions in the Act. Furthermore, the respective exemptions are to be construed narrowly. Kreindler v. Department of Navy, 363 F.Supp. 611, 613, S.D.N.Y. (1973), and Robertson v. Butterfield, 498 F.2d 1031 (CA D.C.1974).

We realize that a given agency might fail to show a specific exemption protecting a given record and yet in good faith claim that dire adverse potentialities will occur and result from a disclosure of a given record. See Rose v. Department of Air Force, 495 F.2d 261 (CA2 1974).

The main spring of the proceedings under the Act is a judicious weighing of the complainant’s need for and entitlement to production as against the government’s or another’s right to protection. We accept as a guideline for such a judicious weighing the teachings of General Services Administration v. Benson, 415 F.2d 878, 880 (CA9 1969): “In exercising the equity jurisdiction conferred by the Freedom of Information Act, the court must weigh the effects of disclosure and nondisclosure, according to traditional equity principles, and determine the best course to follow in the given circumstances. The effect on the public is the primary consideration.”

In meeting its obligation under the foregoing guideline, the District Court can utilize its power of subpoena or appropriate discovery orders in order to produce an adequate record on which to base its ultimate decisions. Should the court become convinced that resolution of the government’s claim of exemption requires the court actually to examine the documents sought, it may direct that these documents be produced for an in camera inspection. See Rose, supra; Kreindler, supra.

The September and October orders, and each of them, are vacated and the cause remanded to the District Court for further proceedings consistent with the foregoing.

Orders vacated and remanded.