text:
    UNITED STATES of America, Plaintiff-Appellee, v. Fred McCORD and Kerry Luzader, Defendants-Appellants.
    Nos. 73-1879, 73-1880.
    United States Court of Appeals, Seventh Circuit.
    Argued April 4, 1974.
    Decided Jan. 24, 1975.
    Rehearing and Rehearing En Banc
    Denied April 24, 1975.

      Brent A. Barnhart, Indianapolis, Ind., David J. Colman, Bloomington, Ind., for defendants-appellants.
    Stanley B. Miller, U. S. Atty., and Richard L. Darst, Asst. U. S. Atty., Indianapolis, Ind., for plaintiff-appellee.
    Before PELL and SPRECHER, Circuit Judges, and CAMPBELL, Senior District Judge.

       Senior Judge William J. Campbell of the Northern District of Illinois is sitting by designation.

   WILLIAM J. CAMPBELL, Senior District Judge.

Defendants McCord and Luzader were charged in a five count indictment with various offenses involving the unlawful distribution of cocaine. Count I of the indictment charged that, on or about August 27, 1972, McCord unlawfully distributed approximately 7.6 grams of cocaine in violation of 21 U.S.C. § 841(a)(1). McCord was also charged in Count IV of the indictment with the knowing and intentional use of a public telephone to facilitate the unlawful distribution of cocaine, in violation of 21 U.S.C. § 843(b). Counts II and III of the indictment charged that Luzader unlawfully distributed approximately 34 grams of cocaine on or about September 5, 1972, and that, on or about August 27, 1972, he knowingly and intentionally used a public telephone to facilitate the unlawful distribution of cocaine by defendant McCord. Count V of the indictment, charging conspiracy to unlawfully distribute cocaine, was dismissed on defendants’ motion pri- or to trial.

Following a jury trial, defendants were found guilty on all counts. We affirm.

The evidence disclosed that Agents Jovonovich and Standifer of the Federal Bureau of Narcotics and Dangerous Drugs, in cooperation with officials of the Anderson, Indiana Police Department arranged with a cooperating individual, William Paige, to surveil a planned purchase of cocaine at Paige’s home. Agent Standifer arrived at Paige’s home on August 27, 1972 to pose as the purchaser of the cocaine. In Standifer’s presence, Paige received a telephone call from an individual identifying himself as Luzader. The caller inquired as to how much cocaine Paige wanted to purchase. In response to Paige’s statement that he wanted one-fourth of an ounce, the caller stated that they “would be out”. Immediately thereafter, McCord called Paige and confirmed the planned transaction.

Within a short time, two persons arrived in an automobile at Paige’s home. Paige went outside and returned with a small clear bag containing what was later identified as 7.6 grams of cocaine. He explained to Standifer that the seller, who Paige identified at trial as McCord, would not meet with Standifer, but would sell to Paige. Standifer gave Paige $250.00 in marked currency and Paige again went outside to complete the transaction.

Officer Murphy of the Anderson Police Department, who had been surveilling the transaction with Agent Jovonovich, testified that during the transaction the dome light of the automobile was on long enough for him to make a positive identification of McCord. The license number of the automobile was later traced and was shown to be registered to McCord.

Subsequently, Paige arranged to make another purchase of cocaine and, after a discussion with Agent Standifer, Paige called Luzader’s telephone number. Luzader returned the call and Paige informed him that he was interested in purchasing one ounce of cocaine. On September 6, 1972, an individual driving a Volkswagen arrived at Paige’s home. Paige gave the occupant of the car $900.00 in return for one ounce of cocaine and, as the money was being counted, Agents Orville Kleppinger and Standifer observed the driver through binoculars from a second story window of Paige’s home. Both agents later identified the occupant of the ear as Luzader. The license number of the Volkswagen was later traced and found to be registered to Luzader.

The government’s final witness was Michael Hoppes. The defendants moved to prohibit any testimony by Hoppes which was not related to the transactions alleged in the indictment. The motion was denied and Hoppes was permitted to testify that, early in September of 1972, he had contacted Fred McCord to arrange a purchase of cocaine. McCord indicated that the cocaine would cost $900.00 per ounce. On September 8, 1972, Hoppes made arrangements by telephone to complete the transaction. He later approached Fred McCord in a supermarket parking lot in Anderson, Indiana, and was told by McCord that Luzader had the cocaine in a nearby filling station parking lot. Hoppes approached Luzader, who was seated in his car, and was given one ounce of cocaine. Subsequently, Hoppes unwittingly sold the cocaine to undercover Agent Standifer, and then paid McCord the $900.00 purchase price. »

On appeal, defendant McCord asserts five grounds for reversal:

(1) That the government failed to make good faith discovery disclosures, in violation of the district court’s pretrial order;
(2) That the trial court erred in overruling defendant’s motion to strike the testimony of Agent Standifer.
(3) That the court erred in admitting, over objection, the “other offenses”- testimony of Michael Hoppes.
(4) That the district court erred in overruling McCord’s motion for a severance at the conclusion of the government’s case-in-chief.
(5) That the court erred in giving certain jury instructions over defendants’ objection.

Of the foregoing, Luzader specifically asserts the third and fifth issues raised by defendant McCord. The remaining three issues are raised only by the latter defendant.

McCord argues that, after some difficulty in obtaining compliance by the government with pretrial discovery orders, the district judge directed the government to provide defense counsel with a complete and current version of the criminal record of the government’s principal witness, informant Paige. The court also ordered the government to make relevant members of the Anderson, Indiana Police Department available to the defense in order to fully define Paige’s working relationship with the police. During the trial, defendant’s cross examination of Paige established that the government’s report setting forth Paige’s prior criminal record, which had been tendered to the defense by the government, did not completely and accurately reflect the witnesses’ criminal record. Cross examination of Paige further established that Officer Murphy of the Anderson, Indiana Police Department had demonstrated, in his discussions with Paige, that Murphy possessed knowledge of certain criminal activities involving Paige, • beyond those which Murphy had disclosed to defense counsel after the officer had been made available to McCord’s attorneys for questioning pursuant to the district court’s aforementioned pretrial order. McCord argues that the government’s failure to make a good faith and thorough disclosure of Paige’s criminal background deprived the defendant of due process of law, particularly since much of the government’s case rested upon the testimony of this witness.

Once the aforementioned facts had been established through cross examination, a thorough examination of Paige was allowed by the district court regarding his prior criminal activities, including criminal misconduct for which he had not yet been charged. A review of the record indicates that the jury was thoroughly apprised of the full extent of Paige’s prior criminal activities, as well as his cooperation with the Anderson Police Department. In addition, Officer Murphy was called by the government as a rebuttal witness and testified that, at the time he spoke with defense attorneys, he had not remembered Paige’s involvement in uncharged illegal activities, and that he had not intentionally withheld that information.

The record before us does not demonstrate that the government intentionally misstated facts regarding Paige’s prior criminal record. Nor does the record show that Officer Murphy intentionally withheld such information. And, since the witness thoroughly and candidly answered questions during cross examination regarding his past criminal record, other criminal activities, and any promises made by the government to him in return for his cooperation, it seems clear that defendant was not prejudiced by the inaccurate and incomplete information which he had received in this regard prior to trial. If the government had intentionally failed to accurately disclose such relevant information after disclosure had been directed by the trial court, defendant’s failure to demonstrate prejudice would not necessarily be controlling, and reversal of the conviction might well be warranted. Moreover, where the government’s failure to satisfactorily comply with such an order is the product of negligence, rather than bad faith, reversal might nevertheless be required where prejudice is shown. Along these lines, Judge Stevens’ excellent opinion in United States v. Ott, 489 F.2d 872 (7th Cir. 1973) should be required reading. But here, McCord has demonstrated neither bad faith nor prejudice, thus distinguishing the facts of this case from those of Ott and requiring our rejection of McCord’s claim that he was denied due process of law.

McCord next contends that testimony of Agent Standifer should have been stricken by the trial court because the government failed to produce a transcript of Standifer’s testimony before the grand jury upon motion by McCord pursuant to 18 U.S.C. § 3500. In response to McCord’s motion, the government represented that the grand jury testimony of Agent Standifer had not been transcribed. As did the defendant in United States v. Aloisio, 440 F.2d 705 (7th Cir. 1971), McCord contends that the government should be required to preserve the testimony of grand jury witnesses “in order to implement the right of a defendant to access to a witness’ grand jury testimony on subjects about which he subsequently testifies at trial.” 440 F.2d at 708.

Rule 6(d) of the Federal Rules of Criminal Procedure presently permits, but does not require, the stenographic transcription of grand jury testimony. Although some district courts (e. g.; the Northern District of Illinois) have adopted local rules requiring that grand jury testimony be transcribed, the Federal Rules do not presently demand that this procedure be followed. As this court stated in Aloisio, supra:

“This approach, though justifiably criticized on several grounds, has nevertheless been uniformly observed by other Circuits. . . . While we agree that the preservation of grand jury testimony is the wise practice, we are ^presently unwilling to bind the various district courts of this Circuit to such a practice. Rather, we will rely upon the individual district courts to exercise their local rule-making powers in this area pending any amendment to Rule 6(e) of the Federal Rules of Criminal Procedure”. 440 F.2d at 708.

Defendant’s contention that his conviction should be reversed on this ground is, therefore, rejected.

McCord further contends that the denial of his motion for severance, made at the close of the government’s case-in-chief pursuant to Rule 14 of the Federal Rules of Criminal Procedure, constituted reversible error. He argues that it was manifestly unjust to compel him to stand trial as Luzader’s co-defendant because of the extensive evidence introduced solely against Luzader concerning the September 6 transaction.

The disposition of a Rule 14 motion claiming prejudicial joinder of offenses or of defendants is a matter soundly within the discretion of the trial judge. Accordingly, the denial of such a motion is subject to reversal on appeal “only if abuse of discretion is shown”. United States v. Pacente, 503 F.2d 543 (7th Cir. 1974). Under the circumstances of the instant case, the denial of defendant McCord’s motion was well within the district judge’s discretion. Each of the defendants participated to some extent in the August 27 transaction which formed the basis for three of the four counts. Further, the August 27 and September 6 transactions, as well as the transaction involving Michael Hoppes (discussed infra), were executed in a markedly similar manner. In addition, the district judge had earlier cautioned the jury to consider evidence regarding the September 6 transaction only as it applied to Luzader. Under these circumstances, the denial of McCord’s motion was not error.

Both defendants complain that it was improper to permit Michael Hoppes to testify regarding his purchase of one ounce of cocaine from McCord and Luzader in early September, 1972, arguing that the admission of evidence of criminal conduct other than that alleged in the indictment constituted prejudicial error. At trial, the government offered several arguments to justify the admission of Hoppes’ testimony, one of which was that this evidence could be offered in anticipation of an entrapment defense to show defendants’ predisposition to commit the offenses with which they were charged.

The record indicates that although the defendants had considered the possibility of arguing entrapment, no positive effort was made to rely upon this defense prior to the close of the government’s case-in-chief, either during defendant’s opening arguments or through cross examination of government witnesses. Since the rule in this Circuit requires the defendant to admit involvement in the acts alleged in the indictment in order to raise entrapment as a defense, United States v. Roviaro, 379 F.2d at 911, 914 (7th Cir. 1967), evidence of other criminal conduct to show predisposition should not be admitted until the defense concedes involvement in the acts alleged, or at least demonstrates clearly that the entrapment defense will ultimately be raised. No such clear indication was made in the instant case prior to Hoppes’ testimony and, as will be discussed, infra, defendants ultimately asserted without equivocation that they would not argue entrapment.

Hoppes testimony, however, was admissible to show modus operandi, since the Hoppes transaction, occurring close in time to those alleged in the indictment, bore a remarkably strong resemblance to the pattern of conduct with which defendants were charged. United States v. Hampton, 457 F.2d 299, 302 (7th Cir. 1972). The type of narcotics sold to Hoppes, cocaine, was the same as that sold on occasions alleged in the indictment. It was sold from an automobile for $900.00 per ounce after the transaction had been arranged by telephone. Finally, the Hoppes transaction occurred within a week to ten days of the offenses charged in the indictment. As this Court stated in United States v. Jones, 438 F.2d 461, 466, wherein the admission of such evidence was upheld,

“[t]he June 5th sale of cocaine was a similar offense, proximate in time, involved the same three individuals and an almost identical modus operandi was employed. It bore a singular strong resemblance to the pattern of the offense charged. And, it was so related to and connected with the crime charged that the proof of the one tended to corroborate the proof of the other.”

Accordingly, evidence of the Hoppes transaction was properly admitted.

Finally, both defendants assert that Instructions No. 20 and No. 25 should not have been given by the trial court. Instruction No. 20 advised the jury regarding the manner and extent to which evidence of the Hoppes transaction may be considered. Essentially, the jurors were instructed that evidence of the Hoppes transaction could not be considered until the jury had determined beyond a reasonable doubt that defendants had performed the acts alleged in the indictment. The Instruction further advised the jury that, if and when such a determination were made, evidence of the Hoppes transaction could then be considered as indicative of “an independent voluntary disposition” to commit the acts charged, or to “determine the state of mind or intent with which” the defendants performed the acts charged.

We have reviewed Instruction No. 20 in its entirety, and find it neither an incorrect statement of law nor confusing. Accordingly, we reject defendants’ contention with respect to the giving of this instruction.

Instruction No. 25 advised the jury regarding the law of entrapment. As defendant McCord concedes, the Instruction is a proper statement of the law. The issue raised by the defendants concerns whether the instruction should have been given, over defendants’ objection, where defendants clearly indicated that they did not intend to argue entrapment.

Since, as we have indicated, the mere anticipation that an entrapment defense might be asserted was not a sufficient basis for the admission of evidence regarding the Hoppes transaction, it follows that Hoppes’ testimony did not warrant the giving of an ’ instruction on entrapment. Under these circumstances, it would have been a better practice to sustain defendants’ objection to the giving of the instruction. We note, however, that the instruction given by the court did not advise the jury that the defendants admitted the acts alleged in the indictment, nor did it assert that the defendants were relying upon entrapment as their defense. The instruction merely informed the jury that, even if the government proved the conduct alleged in the indictment, defendants could nevertheless be acquitted if the jury should find that the defendants “had no previous intent or purpose to commit any offense of the character here charged, and did so only because [they were] induced or persuaded by some law enforcement officer, . . . ”. Under these .circumstances, any error in the giving of Instruction No. 25 must be considered harmless.

For the foregoing reasons, the judgment of the district court is affirmed.

Affirmed.


source: Caselaw Access Project

author: PER CURIAM.

license: Public Domain

text:
    Carl CIVELLA, Appellant, v. UNITED STATES of America, Appellee.
    No. 74-1770.
    United States Court of Appeals, Eighth Circuit.
    Submitted Jan. 6, 1975.
    Decided Jan. 28, 1975.

      Anthony J. Romano, Kansas City, Mo., for appellant.
    J. Whitfield Moody, 1st Asst. U. S. Atty., Kansas City, Mo., for appellee.
    Before GIBSON, Chief Judge, and HEANEY, and ROSS, Circuit Judges.
   PER CURIAM.

Carl Civella appeals the District Court’s refusal to vacate a 1939 narcotics conviction upon Civella’s petition for writ of error coram nobis. Although several grounds were asserted in the petition to justify relief, the evidence presented at the hearing below concentrated upon Civella’s claim that he was not represented by counsel and had not intelligently waived counsel. The District Court’s finding that Civella was represented by counsel is the only ground of error asserted upon this appeal.

Civella was arrested September 5, 1939, on a charge of transporting narcotics and released on bond September 8, 1939. The grand jury returned a three-count indictment November 4, 1939, and on November 16th Civella waived formal arraignment and pled not guilty to all counts. On November 27th he entered a plea of guilty to Count 2 of the indictment and Counts 1 a,nd 3 were nolle prossed on that date. At the same time he was sentenced to a year and a day in prison and served over nine months before release. The clerk’s hand-written entries on the Criminal Docket Sheet do not indicate that Civella was represented by counsel at any of the critical stages of the proceedings.

Civella relies upon our decision in Losieau v. Sigler, 406 F.2d 795 (8th Cir. 1969), wherein we stated:

[Wjhere the record is silent as to whether an accused was furnished counsel at a critical stage and where the accused introduces evidence tending to show that he was not in fact so represented, the burden then shifts to the state to prove, by a fair preponderance of the evidence, that the accused was represented.

406 F.2d at 803.

Civella testified that at no time during the proceedings was he represented by counsel, that in fact he could not have afforded counsel at that time. He argues that because the clerk’s handwritten entries on the Criminal Docket Sheet do not recite the presence of counsel, we are confronted with a silent record and that since the Government did not establish that he was represented by counsel, he is entitled to relief. Before we could reach this argument, however, we would have to find that Judge Collinson’s determination that the record is not “silent” is clearly erroneous. The court’s finding is based in part upon documenta-, ry evidence appearing in the record and we are unable to say that it is clearly erroneous.

The District Court in finding that Civella was represented by counsel at the time of the guilty plea and sentencing relied upon the original typewritten minutes of the court for November 16th and 27th which recite that on both dates defendant appeared “in proper person with counsel.” In addition, the original judgment and committment dated November 27, 1939, filed that same date and signed by the district judge and United States Attorney recites that defendant appeared with counsel. In light of this contemporaneous evidence appearing in the record, we cannot disagree with the District Court’s conclusion that the record is not silent.

Since the record in this case cannot be considered silent, the petitioner has the burden of impeaching the record. Losieau v. Sigler, supra 406 F.2d at 801. While reference to only the clerk’s handwritten entries on the docket sheet does not reveal the presence of counsel, the ambiguity created thereby is dissipated by reference to the other contemporaneous official records which reveal the presence of counsel. The District Court was presented with a situation where. the evidence is conflicting. While we might have resolved the issue differently than the trial court, we are not a court of original jurisdiction and do not try appeals de novo. We are not at liberty to substitute our judgment on factual situations for that of the trial judge, nor are we able to say on the record that the factual findings of the trial judge are clearly erroneous. Lindsay v. McDonnell Douglas Aircraft Corp., 485 F.2d 1288 (8th Cir. 1973).

The District Court’s finding that Civella failed to sustain his burden to establish a lack of representation .by counsel is supported by the record. Judgment affirmed.

      . The Honorable William R. Collinson, United States District Judge for the Eastern and Western Districts of Missouri.


author: KELLEHER, District Judge:

text:
    Albert E. ANDREWS, III, Appellant, v. Lt. General William KNOWLTON, etc., et al., Appellees. William H. WHITE et al., Appellants, v. Lt. General William KNOWLTON, etc., et al., Appellees.
    Nos. 939, 940, 1187, Dockets 73-1866, 74-1074 and 74-1782.
    United States Court of Appeals, Second Circuit.
    Argued Aug. 12, 1974.
    Decided Jan. 16, 1975.

      Paul J. Curran, U. S. Atty., New York City (William Roche Bronner, Gerald A. Rosenberg, Asst. U. S. Attys., of counsel), for appellees.
    Wood & Floge, Langhorne, Pa. (Joseph M. Grines, Langhorne, Pa., of counsel), for appellant White, and others.
    Thai & Youtt, New York City (Harry E. Youtt, New York City, of counsel), for appellant Andrews.
    Before OAKES, Circuit Judge, and FRANKEL and KELLEHER, District Judges.

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

   KELLEHER, District Judge:

These are two consolidated appeals from separate orders of the United States District Court for the Southern District of New York dismissing each of the complaints after rejecting claimed denials of due process. White v. Knowlton, 361 F.Supp. 445 (S.D.N.Y.1973); Andrews v. Knowlton, 367 F.Supp. 1263 (S.D.N.Y.1973). We affirm.

In two separate actions arising out of different circumstances, appellants, who but for this appeal have been or will be separated from the United States Military Academy at West Point, New York, sought in the District Court for the Southern District of New York declaratory and injunctive relief against appellees, the Superintendent and Commandant of the Academy, and the Secretary of the Army, staying and setting aside their separation from the Academy for violation of the Cadet Honor Code.

Each appellant complains that the Cadet Honor Committee proceedings and subsequent hearings before the Board of Officers which resulted in separation from the Academy were so lacking in procedural safeguards as to constitute a deprivation of their constitutional rights. Each appellant here was first adjudged by the Cadet Honor Committee to be “guilty” of an Honor Code violation and was later found in proceedings before a Board of Officers to have violated the Honor Code. Each appellant was then separated from the Academy.

I

The facts in the Andrews case are simple and undisputed. While on a weekend pass, Cadet Andrews was observed on West Point grounds out of uniform in an unauthorized vehicle in which alcohol was found. The Military Police apprehended him and turned him over to the Tactical Officer on duty. In accordance with standard procedures, the cadet was required to submit a written explanation of the circumstances surrounding his reported rules infraction. Andrews’ first report was incomplete, but ultimately he gave a statement which alleged, inter alia, that he had been present on Academy grounds with the vehicle for fifteen to twenty minutes. This statement contradicted a previously-submitted report of the military police which placed the vehicle on campus and under observation for over two hours. The case initially involved only the possibility of Andrews receiving demerits for his conduct, but because of the discrepancy between the times in the two reports, the matter was referred to the Cadet Honor Committee. In substance his case as brought before that committee involved an allegation of lying.

The facts in the White case are equally simple and uncontroverted. On April 5 and 6, 1973, the Department of Physics at the Academy administered four examinations. The same true-false and multiple choice questions were asked in two separate sections at different times. Because the Department was concerned about cheating, the order in which the questions were asked in the later examinations was scrambled. Each of the appellants took his examination at one of the later hours, and each paper showed what was felt to be an unreasonably high number of answers which, although inaccurate in the examination taken, correlated to approved solutions in the earlier examination. Cadet White and his co-appellants’ cases were referred to the Cadet Honor Committee on the ground that they and others had obtained and utilized lists of approved answers. In substance the case against White and his co-appellants involved cheating.

Article 16 of the Regulations for the United States Military Academy, promulgated by the Secretary of the Army, governs the separation of cadets. Section 16.04 deals specifically with separations for Honor Code violations and provides:

“a. A cadet who violates the Cadet Honor Code will be separated from the Academy. A cadet who is alleged to have violated the Honor Code may, at the discretion of the Superintendent, allowed to resign, be tried by court-martial, or be brought before a board of senior officers convened by the Superintendent to investigate the matter, and to make findings. In the event of trial, the action taken will be in accordance with the provisions of the Uniform Code of Military Justice, and applicable regulations.
“b. If the cadet appears before a board of officers, the board will make findings with respect to all alleged violations of the Cadet Honor Code by the cadet concerned, and will submit a report of its proceedings and findings to the Superintendent. A copy of the report will be furnished to the respondent, who may submit a written statement to the Superintendent.
“c. The Superintendent may seek the advice of any member of his staff or the Academic Board. He will review the report of proceedings; give full consideration to any statement submitted by the respondent; and approve or disapprove, in whole or in part, the findings of the board of officers. If he approves a finding of a violation of the Cadet Honor Code, he will submit his recommendation and all pertinent documents to Headquarters, Department of the Army, for final action. In such cases, and in cases of cadets who are allowed to resign, the Superintendent will also recommend either discharge from the service or transfer to an appropriate status in a Regular or Reserve component. If discharge is recommended, the type discharge will be specified.”

While nothing in Section 16.04 above indicates that the C.adet Honor Committee plays any part in the process of separation for Honor Code violations, it appears that the Academy has developed the practice of referring all alleged violations to the Honor Committee. This procedure, as now outlined in a memo from the Commandant entitled “USCC Processing of Cadet Honor Cases” and distributed throughout the Academy command on November 29, 1972, specifically requires that apparent violations discovered by officers be first referred to the Cadet Honor Committee.

The Cadet Honor Committee is a student organization of the United States Corps of Cadets made up of 44 elected members. According to the Corps of Cadets’ publication, The Cadet Honor Code and Systems, the Honor Committee is directly charged with the supervision and administration of' the Honor Code and the Honor System, and “acting for the Corps, investigates and determines whether or not the alleged offender has actually transgressed the Honor Code.”

The Cadet Honor Code in force at the United States Military Academy consists of a single maxim: “A cadet does not lie, cheat or steal or tolerate those who do.”

When a case is referred to the Cadet Honor Committee, there is first a preliminary subcommittee investigation, and then twelve members are designated by the chairman to sit and hear the evidence. After all the witnesses have testified and the evidence has been presented, a secret vote is held to determine guilt or innocence. The vote must be unanimous, and if there is one “not guilty” vote, the proceedings end and the case is closed. During proceedings before the Honor Committee, an accused cadet is allowed to testify and to present witnesses on his own behalf. It should be noted that a cadet is not guaranteed any minimal time in which to prepare a case brought before the Honor Committee. In the cases now before us, the time between oral notice of a proceeding by the Honor Committee and the actual hearing ranged from three hours to several days. A cadet is not given formal written notice of the charges against him, and he has no right to know the identity of or cross-examine the witnesses against him. And, while it appears that there are provisions for “open hearings” before the Cadet Honor Committee none was allowed in any of the cases now before us.

The cadet publication (printed by the Academy) referred to above further explains that “[i]f there be a finding of guilty, the Commandant reviews the case with his advisors and with the Chairman of the Honor Committee. He then interviews the accused after advising him of his rights, reminds him of the findings and recommendations of the Committee, and, in effect, extends him the option of resigning or having his case considered by a Board of Officers. The accused is urged to confer with his parents and, if he desires, to seek legal advice before he makes his decision.”

In all of the cases encompassed by the present appeals, the Cadet Honor Committee found a violation of the Honor Code which was adopted by the Commandant, whereupon appellants were administratively segregated from the Corps and placed in “Boarders Ward.” The purpose of Boarders Ward is to quarter those cadets who are undergoing separation actions. Permitted to attend classes, the cadet is sequestered in Boarders Ward until final disposition of his case.

In the cases now before us after being given the option to resign or have a Board of Officers’ hearing, each appellant chose to appear before a Board of Officers. Each Board of Officers was composed of five officers from the Academy staff summoned to hear one case. The proceedings were conducted pursuant to Army Regulation 15-6, Procedures for Investigating Officers Conducting Investigations, which provides in part that after a full hearing, the Board will, based on a standard of “substantial evidence,” decide a case by a majority vote. The Boards in the White case found each appellant guilty of violating the Honor Code by cheating. The Board in the Andrews case found Andrews guilty of violating the Honor Code by lying.

It now appears that after each appellant was adjudged guilty by a Board of Officers, each exhausted his administrative remedies, the proceedings having been reviewed successively by the West Point Staff Judge Advocate, the Superintendent of the Academy, and the Secretary of the Army, acting through one of his staff members.

II

Three common issues are raised by each appellant: (1) whether the proceedings before the Cadet Honor Committee comported with the procedural safeguards required by the Due Process Clause of the Fifth Amendment; (2) whether the procedures and the standard of proof utilized in the Board of Officers’ hearings under Army Regulation 15-6 comported with the procedural due process guarantees of the Fifth Amendment; and (3) whether the sole penalty of expulsion of each appellant constitutes a violation of constitutional rights.

Andrews raises two additional issues unique to his case: (1) whether the requirement that he submit a written statement which was later used against him in the administrative hearings violated his Fifth Amendment, privilege against compulsory self-incrimination; and (2) whether he was erroneously foreclosed by the dismissal of the complaint before discovery from factually establishing the impact of the finding of guilty by the Cadet Honor Committee upon the members of the Board of Officers.

In summary, the basic question before this Court is whether the procedures followed by the United States Military Academy at West Point, New York, in the separation of appellants for Honor Code violations were constitutionally sufficient.

Ill

The power of the District Court to review procedures used at our service academies in the separation or dismissal of cadets and midshipmen is clear. Wasson v. Trowbridge, 382 F.2d 807 (2d Cir. 1967); Hagopian v. Knowlton, 470 F.2d 201 (2d Cir. 1972). Since Wasson, supra, it has been understood that the service academies are subject to the Fifth Amendment and that cadets and midshipmen must be accorded due process before separation.

This Court noted in Hagopian v. Knowlton, supra, “[i]n approaching the question of what process is due before governmental action adversely affecting private interests may properly be taken, it must be recognized that due process is not a rigid formula or simple rule of thumb to be applied undeviatingly to any given set of facts. On the contrary, it is a flexible concept which depends upon the balancing of various factors, including the nature of the private right or interest that is threatened, the extent to which the proceeding is adversarial in character, the severity and consequences of any action that might be taken, the burden that would be imposed by requiring use of all or part of the full panoply of trial-type procedures, and the existence of other overriding interests, such as the necessity for prompt action in the conduct of crucial military operations. The full context must therefore be considered in each case.” 470 F.2d at 207.

In Hagopian this Court held that a full hearing was required before a cadet could be separated from the United States Military Academy for excessive demerits. The Court noted that at such a hearing a “cadet must be allowed to appear and present evidence, including witnesses, on his behalf.” 470 F.2d at 211. In reaching this conclusion, the Court relied heavily on Wasson v. Trow-bridge, supra, a similar case decided five years earlier.

In Wasson a third year student at the Merchant Marine Academy at Kings Point, New York, was dismissed after a hearing because of his accumulation of demerits in excess of the maximum allowance. Cadet Wasson challenged the denial of counsel at both the hearing awarding his demerits and the hearing recommending his dismissal from the Academy. He further charged in his complaint filed in the District Court that members of the panel awarding the demerits had participated in the investigation of facts leading up to the demerit hearing, that he had been denied a full opportunity to obtain and present favorable witnesses, and that notice of the hearing failed to give him adequate time to prepare a defense and failed to fully inform him of the evidence against him. The District Court’s dismissal of the complaint based on the grounds that the charges contained therein did not amount to a denial of due process was reversed, and the case was remanded for a hearing to determine whether the procedures used in the separation of Wasson comported with due process of law. Taking note of the special context in which the challenged procedures operated, this Court set forth in Wasson in broad outline the required minimum standards of due process:

“While the government must always have a legitimate concern with the subject matter before it may validly affect private interests, in particularly vital and sensitive areas of government concern such as national security and military affairs, the private interest must yield to a greater degree to the governmental. . . . Few decisions properly rest so exclusively within the discretion of the appropriate government officials than the selection, training, discipline and dismissal of the future officers of the military and Merchant Marine. Instilling and maintaining discipline and morale in these young men who will be required to bear weighty responsibility in the face of adversity — at times extreme — is a matter of substantial national importance scarcely within the competence of the judiciary. And it cannot be doubted that because of these factors historically the military has been permitted greater freedom to fashion its disciplinary procedures than the civilian authorities.
“We conclude, therefore, that due process only requires for this dismissal of a Cadet from the Merchant Marine Academy that he be given a fair hearing at which he is apprised of the charges against him and permitted a defense. . . . For the guidance of the parties . . . the rudiments of a fair hearing in broad outline are plain. The Cadet must be apprised of the specific charges against him. He must be given an adequate opportunity to present his defense both from the point of view of time and the use of witnesses and other evidence. We do not suggest, however, that the Cadet must be given this opportunity both when demerits are awarded and when dismissal is considered. The hearing may be procedurally informal and need not be adversarial.
“. . The requirement of counsel as an ingredient of fairness is a function of all of the other aspects of the hearing. Where the proceeding is non-criminal in nature, where the hearing is investigative and not adversarial and the government does not proceed through counsel, where the individual concerned is mature and educated, where his knowledge of the events . . . should enable him to develop the facts adequately through available sources, and where the other aspects of the hearing taken as a whole are fair, due process does not require representation by counsel.” 382 F.2d at 812.

The holdings of Wasson and Hagopian, while they dealt with dismissal proceedings because of excessive demerits, are equally controlling here where appellants were separated from the Academy for violation of the Honor Code. From their teaching, it is clear that before a cadet can properly be dismissed or separated from his service academy, he must have a hearing, be apprised of the specific charges against him, and be given an adequate opportunity to present his defense both from the point of view of time and the use of witnesses and other evidence. A military proceeding conducted within these bounds of procedural due process would be proper and immune from constitutional infirmity. We and other tribunals have expanded at an accelerated pace the scope of judicial access for review of military determinations. Nevertheless, we recognize the constitutional permissibility of the military to set and enforce uncommonly high standards of conduct and ethics.

IV

In the cases now before us, each appellant, after the adverse determination by the Cadet Honor Committee, was given a hearing before a Board of Officers where he had counsel, was allowed to call and cross-examine witnesses, and had the right to offer and object to the introduction of any evidence. Moreover, each appellant was given formal written notice of the charges against him and ample time with the aid of counsel to prepare his defense.

While appellants concede that the procedures followed by the Boards of Officers provide for the protection of their fundamental rights, they challenge the use of the evidentiary standard in Army Regulation 15-6, which provides for decisions of Boards of Officers by majority verdict based upon substantial evidence. Appellants contend that establishment of guilt beyond a reasonable doubt and by unanimous verdict is mandated by “the custom and written interpretation of the Honor Code.” The custom and written interpretation herein alleged to supersede Army Regulation 15-6 are those of the Honor Committee cadets themselves.

Two responses are in order. First, this custom, by its own terms, relates only to the proceedings before the Cadet Honor Committee, and in no way binds the Boards of Officers. Second, insofar as a cadet “regulation” and one by the Secretary of the Army conflict, it is imperative to military discipline that the latter take complete precedence over the former. Appellants’ contrary assertion is unsupported either by the published regulations or by a sensible construction of the scope of the powers of the Cadet Committee. Moreover, since the “custom and written interpretation” of the Honor Code have neither been published in the Federal Register nor distributed under Academy auspices, it does not create legally binding rights or obligations. Cf., Federal Register Act, 44 U.S.C. § 1505, Siomkin v. Fairchild Camera & Instrument Corp., 174 F.2d 289 (2d Cir. 1949) (L. Hand, J.); accordingly, we find that the proceedings before the Boards of Officers in no way impaired any constitutional right.

Appellants further contend that the hearings before the Cadet Honor Committee were “critical stages” in the separation process and, therefore, demand the same procedural safeguards as were present in each Board of Officers’ hearing. They argue that as a result of the “guilty verdicts” by the Honor Committee, the separation process was so tainted and infected by the Honor Committees’ determinations as to foreclose any question of guilt; each cadet suffered a great loss of liberty and privilege; each cadet’s reputation within the corps was irreparably injured; and each cadet was pressured into resigning.

Appellees reply that no particular procedure is required by the Due Process Clause in Cadet Honor Committee hearings, for the requirements of Wasson and Hagopian have been satisfied because the hearings before the Boards of Officers were de novo and each appellant was there afforded his due process rights before he was separated; and the activities of the Cadet Honor Committee should not be considered governmental activity subject to due process limitations because the committee is nothing more than a student-created, student-run, preliminary investigating body whose determinations of an Honor Code violation may trigger but do not otherwise affect the administrative proceedings.

Initially, we address the question of whether the activities of the Cadet Hon- or Committee can for the purposes of the Due Process Clause be considered governmental activity. The relationship between the Cadet Honor Committee and the separation process at the Academy has been sufficiently formalized, and is sufficiently interdependent, so as to bring that committee’s activities within the definition of governmental activity for the purposes of our review. While the Academy has long had the informal practice of referring all alleged violations to the Cadet Honor Committee, the relationship between that committee and the separation process has to a degree been formalized. The November 29, 1972, memorandum from the Commandant, “USCC Processing of Cadet Honor Cases,” provides in part that apparent violations of the Cadet Honor Code will be referred by the Deputy Commandant to the Chairman of the Cadet Honor Committee; if a cadet is found by the Honor Committee to have committed a violation and then elects to have proceedings before a Board of Officers, the chairman of the Honor Committee will be notified, and if the Board’s findings do not support the allegations of the Cadet Honor Committee, its chairman will be advised by the Deputy Commandant to reconsider the case.

' Regardless of whether the relationship be deemed formal or informal, the Honor Committee under its own procedures provides that a single “not guilty” vote by a member ends the matter, while a “guilty” finding confronts a cadet with the hard choice of either resigning or electing to go before a Board of Officers. An adverse finding there results not only in formal separation from the Academy but also in a damaging record that will follow the cadet through life. Accordingly, we conclude that the Cadet Honor Committee, acting not unlike a grand jury, is clearly part of the process whereby a cadet can ultimately be adjudged to have violated the Cadet Honor Code and be separated from the Academy. Therefore, the effect of the committee’s procedures and determinations on the separation process is sufficiently intertwined with the formal governmental activity which may follow as to bring it properly under judicial review.

To support their claim of taint before the Board of Officers, appellants submitted statistics to show that between 1967 and 1972 there was only one successful appeal out of 150 “guilty” findings by the Cadet Honor Committee, and that only nine cadets chose Board of Officers’ hearings over resignation. The statistics cover a time period before Hagopian required due process in the separation of a cadet from the Academy. We permitted augmentation of the record to show that during the 1973-74 academic year at the Academy, Boards of Officers found no violation in five of that year’s ten separation hearings. In further support of the contention of taint, appellants argue that the Cadet Honor Committee findings had a prejudicial impact upon those members of the Boards of Officers who had been cadets themselves. There are no facts in the record to support this contention. On the basis of mere assertion that a West Point officer, sitting as a member of the Board of Officers, cannot fairly consider the evidence against a West Point cadet, the court below properly rejected the request to take deposition testimony of the officers. The judicial process, taken after administrative fact-finding, does not lightly accept a challenge to the fairness of the hearing officer. See: Lopez v. Henry Phipps Plaza South, Inc., 498 F.2d 937 (2d Cir. 1974). Nor is judicial inquiry into the mental processes of the hearing officer favored. See: National Nutritional Foods Ass’n v. Food & Drug Administration, 491 F.2d 1141 (2d Cir. 1974).

While it is clear that the proceedings before the Cadet Honor Committee were wholly lacking in procedural safeguards, we are unpersuaded by the record now before us that the Cadet Honor Committee hearing was a critical stage in the separation of appellants from the Academy for Honor Code violations. There is no evidence in the record that the decisions by the Cadet Honor Committee in any way influenced the members of the Boards of Officers. On the contrary, the record convinces us that the proceedings before the Boards of Officers were de novo and were as free from infection and taint as is a trial in which jurors are aware that the defendant before them has been indicted by a grand jury. We find, therefore, that the Cadet Honor Committee is a charging body whose decisions had no effect other than to initiate de novo proceedings before a Board of Officers. W'e further hold that the requirements of Wasson and Hagopian were met because each appellant was separated from the Academy only after he was afforded a hearing with full procedural safeguards. Accordingly, we conclude that on the basis of the record now before us, the Due Process Clause does not require the utilization of any particular procedure by the Cadet Honor Committee.

We further find that the District Court correctly determined that segregation of cadets in Boarders Ward was a proper exercise of the discretionary authority of Academy officials. In this respect we are content to rely upon, in no way extending, the traditional doctrine that “[w]ith respect to decisions made by Army authorities, ‘[ojrderly government requires us to tread lightly on the military domain, with scrupulous regard for the power and authority of the military establishment to govern its own affairs within the broad confines of constitutional due process.’ ” Hagopian, supra, 470 F.2d at 208, quoting Friedberg v. Resor, 453 F.2d 935, 937 (2d Cir. 1971). And, as the District Court below noted, “[n]othing that happened to these plaintiffs in the Boarders’ Ward has the slightest bearing upon the question of whether these plaintiffs should be permitted to pursue their military careers, or has been shown to have had any effect on the manner in which the several boards of officers conducted the cases before them.” White v. Knowlton, supra, 361 F.Supp. at 449.

The charges of ignominy and alleged pressure to resign which appellants contend flow from “guilty” determinations by the Cadet Honor Committee are unsupported by the record. Ignominy suffered while at the Academy and injury to future officer careers after graduation of cadets who are found, after adverse Honor Committee findings, by a Board of Officers not to have violated the Cadet Honor Code, clearly raise important questions concerning the need for procedural safeguards at an initial hearing before the Cadet Honor Committee. Because each appellant here was found by a Board of Officers to have violated the Honor Code and was separated from the Academy, the factual foundation upon which the above charges rest is not now before us. The appellants lack standing to assert such claim-.

The regulations which establish the administrative procedure in Honor Code cases also provide that in all cases where Boards of Officers find violations, and their findings are upheld on review, separation from the Academy must ensue. Appellants challenge the sole penalty of expulsion as a violation of administrative due process. The District Court, summarily rejecting this challenge, stated:

“The fact that a cadet will be separated from the Academy upon a finding that he has violated the Honor Code is known to all cadets even prior to the beginning of their careers there. The finding of a code violation by hypothesis includes a finding of scienter on the part of the offender. While separation is admittedly a drastic and tragic consequence of a cadet’s transgression, it is not an unconstitutionally arbitrary one, but rather a reasonable albeit severe method of preventing men who have suffered ethical lapses from becoming career officers. That a policy of admonitions or lesser penalties for single violations might be more compassionate — or even more effective in achieving the intended result — is quite immaterial to the question of whether the harsher penalty violates due process.” White v. Knowlton, supra, 361 F.Supp. at 449.

We agree with the court below and find that, while the penalty is severe, it is nevertheless reasonable and not arbitrary, and therefore does not violate due process.

Finally, we turn to appellant Andrews’ challenge to the manner in which the written explanation of his alleged disciplinary infractions was obtained and later used against him in his separation from the Academy.

As part of the investigation of the alleged misconduct, Andrews was required to make two written explanations giving his version of the underlying circumstances. The second of those statements formed the basis of the Honor Code charges against him, since it set forth the alleged “lie” that the automobile was present on the Academy grounds for only fifteen or twenty minutes. Andrews contends that the warnings required by the rule enunciated in Miranda v. Arizona, 384 U.S. 436, 86 S.Ct. 1602, 16 L.Ed.2d 694 (1966), should have preceded the request that he submit his second written explanation, and that the failure to administer those warnings should have barred the use of his statement in the Honor Code violation hearings. The court below, without deciding if Andrews’ situation was sufficiently custodial to have required Miranda warnings, adopted the government’s contention that failure to give warnings cannot excuse subsequent false statements offered by a suspect in order to exculpate himself. The Court stated:

“The government analogizes the situation at bar to that where a person suspected of a crime perjures himself before a grand jury in the absence of Miranda warnings, and then seeks to prevent prosecution for perjury (by invoking the exclusionary rule) on the basis of absence of warnings. Such failure to warn does not require exclusion of the perjurious statement in the subsequent perjury prosecution. United States v. Winter (2d Cir. 1965, Judge Weinfeld) 348 F.2d 204; United States v. Ponti (E.D.Pa.1966) 257 F.Supp. 925; United States v. Provinzano (E.D.Wis.1971) 326 F.Supp. 1066. Were it otherwise, one would be well-advised to give false testimony, in the hope of avoiding prosecution for the offense originally charged with assurance that there could be no prosecution for the perjury by which such re'sult had been achieved.” Andrews v. Knowlton, supra, 367 F.Supp. at 1265.

It is clear from United States v. Winter, supra, that the absence of warnings does not prevent prosecution for perjurious statements before a grand jury and by analogy, while the absence of warnings might prevent Andrews from being prosecuted for improperly being on campus or violating some other military regulation, his false statement is still subject to “prosecution” as a breach of the Honor Code. We agree with the District Court’s finding that there was no constitutional infirmity in the admission into evidence at Andrews’ hearing of his second report.

Because matters outside the pleadings were considered by the District Court below, the motions to dismiss were treated as motions for summary judgment, as is required by Rule 12(b) of the Federal Rules of Civil Procedure. Carter v. Stanton, 405 U.S. 669, 92 S.Ct. 1232, 31 L.Ed.2d 569 (1972). We are satisfied that there are no genuine issues as to any material fact, and as a matter of law appellees are entitled to summary judgment. Accordingly, the orders (judgments) of the District Court are

Affirmed.

      . See, for example, an exhaustive compilation, treatment, and critique of the law as it applies to the service academies, Rose, A Prayer for Relief, The Constitutional Infirmities of the Military Academies’ Conduct, Honor and Ethics Systems (1973), New York University School of Law.

      . The record shows that in the hearing before the Board of Officers, the officers responded in the negative when asked by the lawyer who represented Andrews whether they would be influenced in any way by what had happened prior to the Board hearing.

      . See Rose, supra, note 1, at 41^42, 139 — 43, 192.


author: HASTINGS, Senior Circuit Judge.

text:
    U. S. CONTROLS CORP., Plaintiff-Counterdefendant-Appellee and Cross-Appellant, Spencer C. Schantz and Robert Rose, Plaintiffs-Counterdefendants-Appellees, and Erwin E. Nemmers, Counter-defendant-Appellee, v. Richard Q. WINDLE, Defendant-Counterplaintiff-Appellant-Cross-Appellee.
    Nos. 73-1996, 73-1997.
    United States Court of Appeals, Seventh Circuit.
    Argued Nov. 20, 1974.
    Decided Jan. 24, 1975.

      Peter A. Flynn, Chicago, Ill., Owen W. Crumpacker, Hammond, Ind., for Richard Q. Windle.
    Herbert C. Snyder, Jr., Indianapolis, Ind., for U. S. Controls Corp.
    Before HASTINGS, Senior Circuit Judge, and STEVENS and SPRECHER, Circuit Judges.
   HASTINGS, Senior Circuit Judge.

U. S. Controls Corp. (Controls), a Wisconsin corporation, together with Spencer C. Schantz and Robert Rose, brought this diversity action for a declaratory judgment against Richard Q. Windle, a citizen of Indiana. Plaintiffs sought a declaration that there was no binding and enforceable agreement between the parties to transfer to Windle one-third of the outstanding authorized shares of Controls and further that Windle had no rights at all in and to any of such stock.

Windle filed a counterclaim against Controls, Schantz and Rose in three counts claiming (1) $250,000 in compensatory damages; (2) specific performance of the alleged agreement to transfer one-third of the corporate stock and for one-third of the'profits and losses of the corporation; and (3) for an accounting. Subsequently, Erwin E. Nemmers, a stockholder and director of Controls, was added as a defendant to the counterclaim.

Following a trial to the court, without the intervention of a jury, over a period of several days, the trial court filed its written unreported memorandum of decision as its findings of fact and conclusions of law. Based thereon, the court ordered, declared and adjudged that defendant Windle had no rights whatsoever in and to any of the authorized shares of the capital stock of U. S. Controls Corp. Further, in Windle’s counterclaim, the court ordered and adjudged that Windle recover from counterdefendant, U. S. Controls Corp., judgment in the sum of $26,009.25, but that he should recover nothing against counterdefendants Schantz, Rose and Nemmers; each party to bear its own costs. Windle has appealed and Controls has cross-appealed.

The following narrative is gleaned from a pre-trial order and the detailed findings of the trial court as set out in its memorandum opinion. These findings have adequate support in the record and may not be set aside as clearly erroneous under the strictures imposed by Rule 52(a), Federal Rules of Civil Procedure, Title 28, U.S.C.

Early in 1968, Rose was a Wisconsin molded plastics manufacturer. Schantz was an electrical engineer for Deltrol Controls Corporation, an electrical controls manufacturer. Windle, a resident of Indiana, was a salesman for Appliance Manufacturing Company, also a producer of electrical controls. Rose knew both Windle and Schantz, who were unacquainted with each other. After Rose had some preliminary conversations with Windle and Schantz about the possibility of forming a new business, the three met together for the first time on June 21, 1968, at the plant of the Whirlpool Corporation in St. Joseph, Michigan. Windle had been calling upon various employees of Whirlpool, a customer of Appliance. At that time Windle introduced Rose and Schantz to Tom Ludlam, a buyer for Whirlpool. A proposed buzzer was discussed. Rose and Schantz left the meeting with prints of the buzzer for the purpose of building a sample. Subsequently, Rose and Schantz submitted a sample but Whirlpool decided not to buy the buzzer.

Windle again communicated with Ludlam. Schantz received a letter dated August 8, 1968, from the products engineer of Whirlpool with a sketch showing the specifications for a magnetically latched push-to-start switch and an invitation to submit a design for such a device. In September 1968, Rose and Schantz submitted a sample push-to-start relay to Whirlpool, with a price quotation. Rose and Schantz had additional meetings with various personnel at Whirlpool and Windle was included in some of these meetings.

On February 4, 1969, Whirlpool issued a tool purchase order in the amount of $37,835 for tooling the device. Between that time and July 1969, tooling was obtained and sample push-to-start relays were produced. This work was all done at the premises of Rose Tool and Plastics, Inc., in Milwaukee. A blanket purchase order for the relays had been issued. Whirlpool continued to order in large quantities. Although U. S. Controls Corp. was not incorporated until on or about July 1, 1969, the tooling order and the blanket purchase order for the push-to-start relays were both addressed to U. S. Controls Corp.

U. S. Controls Corp. was incorporated by Schantz and Rose. Of the 10,000 shares of common stock authorized, Schantz and Rose each received 4,300 shares, and Erwin Nemmers received 200 shares with an option to buy 200 additional shares. The remaining shares were held principally for conversion of $25,000 of 7 per cent convertible debenture bonds issued to investors. Although Windle was first asked to be a director, Rose and Schantz subsequently withdrew the offer and first named Schantz’s wife, who was later succeeded by Nemmers, as the third director.

Windle was not informed of the actual incorporation of Controls or of the issuance of the stock at the time of the occurrence. Shortly after Controls began actual production and shipment of the push-to-start relays to Whirlpool in late July 1969, Windle came to the office of Rose and Schantz at the Rose plant and demanded one-third of the stock in the corporation. Windle’s stock demand was refused but he was offered compensation which he did not accept. The present litigation followed.

The essential issue raised on the complaint is whether the trial court erred in finding and concluding that the “evidence in this case fails to establish, even by implication, an agreement between the parties as alleged by Windle.” We have carefully considered the reasons advanced by the trial court in its memorandum opinion, as well as the after-the-fact showing of an eventual dispute and falling out between Rose and Schantz. We -have concluded that the record supports the findings of the court and that they are not clearly erroneous. We also agree that there is no reason to further consider plaintiffs’ contention that such an agreement falls within the statute of frauds. We have considered other contentions by defendant but are not persuaded by them.

The issue raised on defendant Windle’s counterclaim is essentially whether the trial court erred in limiting the amount of his compensation to the sum of $26,009.25. The record clearly shows that Windle was entitled to compensation for his services and was offered compensation at the time of his stock demand. The trial court quite properly held that the “absence of an enforceable contract does not defeat Windle’s right to recover for the reasonable value of his services to the corporate counterdefendant under a quantum meruit theory.” Goldberg v. Liston, 7 Cir., 431 F.2d 1101, 1103 (1970).

The record shows that practically all of Control’s business was furnishing products to Whirlpool Corporation and Hobart Mfg. Co. Each of these customers for Controls was the result of initial contacts and introductions made by Windle at the instance and solicitation of Schantz and Rose. Windle performed the services with a reasonable expectation of payment therefor. The trial court correctly found “this to be a proper case for equitable relief in order to prevent the manifest unjust enrichment of plaintiffs at the expense of Windle.”

The record indicates that for the two-year period from July 1, 1969, when Controls commenced operations, to June 30, 1971, Controls made net sales of $1,040,-370. Commissions paid on sales of such electrical components ranged from 2V2 to 10 per cent. The court found a commission of 2V2 per cent to be reasonable under the circumstances and on this basis allowed Windle the sum of $26,009.25 as the reasonable value of his services to Controls. Controls argues that the allowance is entirely precluded because Windle breached his duty to his own employer, Appliance, by not relaying the information concerning the opportunity to it instead of to Controls, a prospective competitor. In any event, Controls urges that the award is unreasonably high. Windle contends the award is too low.

The trial court reviewed the record and found that Appliance was not engaged in the manufacture or sale of any electrical switch or relay directly competitive to the push-to-start device at the relevant time. The court also noted that Windle continued in the employment of Appliance and its successor corporation.

Rose testified that the usual rate of commissions in the Milwaukee area in the appliance control field varied from 3 per cent to 12 per cent, depending upon the’ product for sale, and that the average in the area was 5 per cent. He also testified that he had employed a commissioned salesman at 2V2 per cent. Controls employed a salesman in 1971 at a rate of 3 per cent. There was other testimony which indicated a rate higher than 2V2 per cent. Further, the trial court limited Windle’s compensation to the sales for the first two years. This appears to have been a reasonable cutoff date, although Controls had additional sales of $95,800.71 in December 1971; $1,750,957.22 in 1972; and $735,217.35 in the first six months of 1973.

The accuracy of the sales figures and the testimony of the prevailing rates of compensation were not effectively rebutted. Controls was largely in the business of selling and continued to sell the same products to the same two customers which Windle discovered and secured for them. Based upon our examination of the record, we have concluded that the finding of the trial court that “a commission of 2V2 per cent [is] reasonable under the circumstances [and that] Windle is thus entitled to recover the sum of $26,009.25 as the reasonable value of his services to U. S. Controls Corp.,” is clearly erroneous. We have further concluded that this would not adequately compensate Windle for his services during the two-year period in question.

It is our considered judgment that a commission of 5 per cent on the net sales of $1,040,370, or $52,018.50, would more fairly provide equitable relief for Windle in this situation, and that such amount should be paid by counterdefendant U. S. Controls Corp. We have further concluded that the judgment on the counterclaim in favor of Nemmers, Schantz and Rose should not be disturbed.

In light of the foregoing, we affirm the judgment on the complaint that defendant Richard Q. Windle has no rights whatsoever in and to any of the authorized shares of the capital stock of U. S. Controls Corp. We further affirm the judgment on defendant Windle’s counterclaim in favor of counterdefendants Erwin E. Nemmers, Spencer C. Schantz and Robert Rose, and that defendant take nothing from them. We vacate the judgment on the counterclaim in favor of defendant in the amount of $26,009.25 and remand the case to the district court with directions to modify the same by rendering judgment thereon in favor of defendant Windle in the amount of $52,-018.50. Each party shall bear its own costs.

Affirmed in part, vacated in part and remanded with directions.


author: SPRECHER, Circuit Judge.

text:
    CALUMET FEDERAL SAVINGS AND LOAN ASSOCIATION OF CHICAGO, a corporation of the United States of America, Plaintiff-Appellant, v. LAKE COUNTY TRUST COMPANY, a corporation of Indiana, as Trustee under Trust Agreement dated February 1, 1966, and known as Trust No. 1217 et al., Defendants-Appellees. CALUMET FEDERAL SAVINGS AND LOAN ASSOCIATION OF CHICAGO, a corporation of the United States of America, Plaintiff-Appellee, v. E. J. LEWIS INVESTMENT CO., INC., et al., Defendants-Appellants, and Hil-Budd Corporation, Defendant-Appellee et al.
    Nos. 74-1117 and 74-1118.
    United States Court of Appeals, Seventh Circuit.
    Argued Nov. 20, 1974.
    Decided Jan. 17, 1975.
    Rehearing Denied Feb. 19, 1975.

      Paul R. Hoffman and J. Stirling Mortimer, Chicago, Ill, for Calumet Fed. Sav.
    Joseph D. Anderson, South Bend, Ind., for E. J. Lewis Inv.
    Harvey J. Barnett, Chicago, Ill, for Lake County Tr.
    Before HASTINGS, Senior Circuit Judge, and STEVENS and SPRECHER, Circuit Judges.
   SPRECHER, Circuit Judge.

There are two major questions raised by the two consolidated appeals of this diversity case. First, whether the mortgage held by the plaintiff, Calumet Federal Savings and Loan Association of Chicago (Calumet), was in default, and second, whether and to what extent Hil-Budd Corporation (Hil-Budd) as holder of a second mortgage on the subject properties was entitled to damages because of Calumet’s failure to give them thirty days notice of intent to foreclose, pursuant to an agreement between the two. Since these two appeals arise from the same set of transactions, they have been consolidated and we deal with the facts together.

I

In early 1966 Hil-Budd negotiated a construction loan with defendant-borrowers in the amount of $192,307.64. These funds were to be used for the construction of homes on 25 parcels in Meadowdale Subdivision, Michigan City, Indiana and were secured by a blanket mortgage. Borrowers’ note was to be paid in full by January 31, 1967 and to bear interest at 6 percent per annum from February 1, 1966. In addition, upon any event of default, interest from that time was to accrue at the rate of 2 percent per month. The Hil-Budd mortgage went into default no later than December 1966.

Prior to the Hil-Budd mortgage, on January 18, 1966 Calumet issued a letter of commitment addressed to Hil-Budd in which it promised to make 25 $8,000 mortgage loans on the Meadowdale properties. Calumet in January 1967 declined to honor this commitment because its appraisers informed them that the improvements on the subject properties did not meet the terms and conditions of the commitment agreement.

Subsequent to this, a meeting of the parties was held in Chicago. Calumet agreed to make the 25 $8,000 loans. In regard to each loan, a 6 percent note was given by borrowers calling for monthly payments of $58 per month with payments to begin April 30, 1967. Calumet further required as part of the compromise agreement that a collateral pledge of $37,500 ($1,500 for each loan) be deposited with it to further secure the 25 notes and mortgages.

Hil-Budd received $156,875 from the proceeds of the Calumet loan and there was then left a balance of approximately $30,000 on the Hil-Budd loan. Since federal regulations required that Calumet have a first lien, Hil-Budd agreed to subordinate its first mortgage on the property to Calumet’s individual mortgages. In consideration for Hil-Budd . agreeing to accept a junior status Hil-Budd and Calumet executed the following agreement:

In consideration of the subordination of Hil-Budd’s prior mortgage, as aforesaid, the Association has agreed and hereby confirms its agreement, that in the event any default shall exist, in any of the Association’s $8,000 mortgage loans, or in the notes evidencing the same, or the mortgages serving the same,’ the Association will give Hil-Budd written notice of such default and 30 days to cure such default prior to the Association’s institution of foreclosure proceedings upon its said mortgages.

The first payments on the subject notes and mortgages were due in June 1967. The monthly payment for each parcel was $58 for principal and interest and $40 for the tax and insurance escrow. Borrowers paid $2,920 in August 1967 and were in default from the start.

In August 1968, proceeds of the previously established pledge accounts were applied to cure the delinquencies on the various loans. Calumet took the position that the pledged savings account had to be maintained at the full level. Stock in the name of Anna Lewis and Georgiana Shinn was deposited with Calumet with the understanding that if the money to replenish the pledge accounts was not forthcoming within - 30 days, the stock would be sold. Pursuant to that agreement the stock was sold and $5,300 was applied to further delinquencies on loan accounts and the balance was applied to the pledge accounts.

II

On March 4, 1969 Calumet filed foreclosure actions on all 25 of its loans to borrowers. Hil-Budd immediately sought to have the action dismissed or in the alternative be granted summary judgment, pleading that the action should not have been filed until they had received 30 days notice of Calumet’s intent to foreclose and an opportunity to cure. Calumet affirmatively opposed Hil-Budd’s motions on the grounds that an agent of Hil-Budd had represented to Calumet that Hil-Budd had sold its interest in these properties and that therefore notice was no longer necessary. Given the dispute as to whether Hil-Budd had waived its right to notice the district judge denied the motions to dismiss and for summary judgment.

On January 25, 1972 the district judge entered an order finding that Hil-Budd was entitled to notice from Calumet before the filing of its foreclosure actions. Although the court determined that a restoration of Hil-Budd’s priority would not be appropriate, it reserved the question of the precise formula to be used in calculating Hil-Budd’s damages. In a later order the district judge determined that Hil-Budd was entitled to receive from Calumet the present amounts due upon its notes that remained unsatisfied after the foreclosure sale, which were subsequently determined to total $119,-652.34. Calumet appeals from this decision.

The district judge also found that at the time the foreclosure actions were filed that there was a delinquency of approximately $300 on each of the 25 loans and that Calumet had acted within its rights with respect to borrowers in accelerating the entire balance due and instituting foreclosure proceedings. It is from the confirmation of the foreclosure sales which borrowers appeal.

Ill

In No. 74 — 1118, borrowers raise numerous issues with regard to whether the foreclosure action by Calumet was proper. We consider the more substantial arguments individually.

Borrowers put forth most vigorously the assertion that they were entitled to 30 days notice from Calumet before a foreclosure action could be commenced. They argue that A1 Shinn, one of the named defendants, was at the January 19th Chicago meeting in his capacity as guarantor of the Hil-Budd note and as representative of the Shinn family interests (borrowers), and that they therefore were also entitled to the 30 days notice that Calumet promised Hil-Budd before foreclosure.

The trial judge correctly concluded that borrowers were not entitled to the 30 days notice before the foreclosure action was begun. Testimony by A1 Shinn to the contrary was discredited by the statements of other witnesses. The district judge’s conclusion on this point is supported by both the record and reason.

Lester Rosen, an attorney for Hil-Budd, which was neutral in the dispute between Calumet and borrowers, testified that A1 Shinn had nothing to do with obtaining the 30 days notice provision. (Sept. 1971 Tr. 27 — 28). Similarly, Thaddeus Walczak and J. Stirling Mortimer, witnesses for Calumet, testified that no discussion was had with A1 Shinn at the January 19, 1967 meeting with regard to a 30 days notice requirement. (Tr. 183-84, 207). It appears that it was sometime after the meeting that Rosen called Mortimer, Calumet’s attorney, and indicated that as consideration for agreeing to subordinate its mortgage, Hil-Budd wanted a 30 days notice provision. Borrowers not only had no need for a notice provision because as the primary debtor they were continuously aware of any default in payments, but also, unlike Hil-Budd, they had given nothing up with which to bargain for a notice provision. Borrowers were only third-party beneficiaries of the notice agreement to the extent that Hil-Budd chose to exercise its right to cure any default so as to protect its junior position. Borrowers were not direct beneficiaries of the agreement to provide notice of default notwithstanding the fact that they were the guarantors of the Hil-Budd note.

The remainder of borrowers’ arguments seek to prove that as of March 4, 1969, the date this foreclosure action was commenced, that the loans from Calumet were not in default. They contend that the first payment was not due until July 30, 1967 because the escrows did not close until June 5, 1967 and that payments were to begin the month after the closing of the escrows. Borrowers base their argument on the testimony of Carole Lewis, a Calumet loan officer at the time of the transaction. It is unclear from the record whether Lewis was stating that the escrow closed June 5, 1967 or whether that was the date on which Calumet received notice of the closing of the escrow. In any event Mr. Walczak testified that the escrow closed in May 1967 (Tr. 115) and a letter which was sent to borrowers informing them that the first payment was due on or before June 30, 1967 was introduced. Given this evidence we cannot say that the district court’s judgment that payment was to commence in June 1967 was clearly erroneous.

Borrowers next contend that the $40 per loan required each month for the tax and insurance escrow bore no reasonable relationship to what Calumet knew was required to meet these expenses, and thus Calumet wrongfully charged funds received to these accounts rather than reducing principal and interest on the loan itself. The district judge,” relying on ample evidence in the record, found that not only were the amounts in the accounts at the date of foreclosure reasonable, but also that the $40 figure represented the amount agreed upon by the parties.

In connection with the tax and insurance escrow, borrowers make the further argument that Calumet improperly applied $431.50 received by Calumet on January 6, 1968 and $1,000 received on April 22, 1968 from borrowers to the tax and insurance escrows. The basis of this argument is that no payments were required for these accounts prior to June 1968. Again, it is clear from Judge Grant’s order and from his adoption of Calumet’s figures as to the amount of delinquency, he rejected borrowers’ position. As before there is ample evidence in the record for this position.

Borrowers’ final major contention was that the loans were not in default because of Calumet’s improper actions in dealing with pledged stock and savings accounts.

At the Chicago meeting between all the parties it was agreed that Calumet would make all the loans if borrowers would establish pledged savings account in the amount of $1,500 for each loan. The borrowers take the position that these funds were meant to be used to service the mortgages during months when rentals from the subject properties fell short. Calumet on the other hand has taken the position that the agreement reached was that the funds in the pledged accounts remain at the full amount until the amount of indebtedness on each loan was reduced to $5,000 at which time Calumet would release the entire pledge account. The written pledge agreements executed by borrowers reflect Calumet’s position except they do not specifically provide that amounts used to cover delinquencies must be replenished. The district judge, however, concluded that requiring borrowers to replenish depleted pledge accounts was the intent of the agreement. This conclusion is supported by the record.

Calumet’s purpose in requiring the accounts would be completely defeated if borrowers could, without the risk of foreclosure, refuse to make monthly payments and rely instead on the pledge accounts. In addition Mr. Walczak, president of Calumet, testified that the use of pledged funds did not cure a delinquency (Tr. 131) and that Anna Lewis, one of the borrowers, was aware of the fact that any funds used from pledged savings accounts would have to be replenished. (Tr. 159). This was reaffirmed by the testimony of J. Stirling Mortimer who also stated that he specifically explained to Mrs. Shinn that the transfer of funds from the pledge accounts in no way cured the delinquency in the loan accounts. (Tr. 244). Based on this testimony it is impossible to conclude that the district judge’s resolution of this point should be upset.

Borrowers also contend that certain shares of stock pledged by Anna Lewis were wrongfully sold and that the $7,800 received should have been credited to a reduction of principal and interest on the loans themselves.

In July 1968, Calumet informed Anna Lewis, one of the beneficiaries of the trust which borrowed the money, that the accounts were $7,300 in arrears and that there would have to be payment immediately, otherwise there would be a foreclosure. Peter Candela, an accountant for Calumet, testified that they would accept her offer of certain stock as a gesture of good faith, but that if the money was not forthcoming by the end of September the stock would be sold and the proceeds would be applied to the loan delinquencies. (Tr. 365 — 66). Similarly, Walczak testified that the stock certificates were accepted only on a temporary basis with provisions made for its sale after 30 days (Tr. 80), and that notice was given by Calumet after this period that the stock would be sold. (Tr. 80, 230). There is thus sufficient evidence in the record to support the district judge’s decision.

Candela also testified that Calumet would consider a deficiency to exist irrespective of whether the loan accounts were current if there existed a deficiency in the pledged savings accounts. That some of the proceeds were used to cure delinquencies in the pledged savings accounts rather than the loans themselves was of no import, since we have previously determined that Calumet had the right to keep the savings accounts at the full $1,500 level for each loan.

We have examined the remainder of borrowers’ contentions and find them equally without merit. The judgment of the district court in 74 — 1118 is affirmed.

IV

In No. 74 — 1117, Calumet appeals from the judgment of the district court awarding Hil-Budd damages because of Calumet’s failure to give notice to Hil-Budd before instituting the instant foreclosure actions. It argues first that Hil-Budd was not entitled to notice and alternatively that the district judge used an improper formula in calculating Hil-Budd’s damages.

After Calumet commenced this action, Hil-Budd filed a motion for summary judgment which was denied by the district judge because there existed- a disputed factual issue as to whether Hil-Budd was entitled to notice and an opportunity to cure. Calumet argued that Lester Rosen, attorney for Hil-Budd, represented to Carole T. Lewis, loan agent for Calumet, that Hil-Budd no longer had any interest in the loans. In actuality what happened was that Hil-Budd had entered into a conditional sales agreement with E. J. Lewis Investment Company to sell its interest in the subject property. Lester Rosen testified that in November 1968, E. J. Lewis defaulted and the conditional sales agreement was voided. At no time did Hil-Budd actually convey to E. J. Lewis its mortgage. (Sept. 1971 Tr. 170). We find that the evidence in the record is sufficient to support the district judge’s determination that Hil-Budd never waived its right to notice. Furthermore, the district judge’s determination is supported by the fact that when this action was initially filed Calumet’s records still showed that Hil-Budd had an interest in these properties. This was evidenced by Calumet’s action in making Hil-Budd a party to its foreclosure suit, an action that is inconsistent with Calumet’s estoppel and waiver defense.

Having concluded that Hil-Budd was entitled to 30 days notice and an opportunity to cure, we next consider the appropriate relief to be granted. The district judge determined in its January 25, 1972 order that it would be inappropriate on the factual circumstances of this case to order a restoration of priority as to the Hil-Budd lien, because “the agreement to give notice of default is merely a covenant, the breach of which would only entitle the defendant Hil-Budd to damages.”

In a subsequent order the court determined that Calumet should pay to Hil-Budd $119,625.34. This amount represented as of March 6, 1974 the total amount of borrowers’ indebtedness to Hil-Budd plus a 24 percent per year penalty interest rate for amounts in default. The district judge stated:

That the proper measure of damages in favor of Hil-Budd Corporation and against plaintiff, Calumet Federal Savings & Loan Association of Chicago, is the extent to which the present amounts due upon Hil-Budd’s notes are not cured or satisfied as a result of the loss of Hil-Budd’s security caused by Calumet’s wrongful institution of these foreclosure proceedings as against Hil-Budd Corporation.

We have determined that the above formulation does not accurately reflect HillBudd’s actual damages on the facts of this case.

Calumet takes the position that the majority of “wrongful foreclosure” cases apply a formula that grants as damages amounts in excess of prior liens up to the fair market value as of the date of the foreclosure sale, but in no case greater than the amount of the secondary indebtedness, Mascot v. Rudman, 37 F.Supp. 588 (D.N.H.1940); Edwards v. Smith, 322 S.W.2d 770 (Mo.1959); Munger v. Moore, 11 Cal.App.3d 1, 89 Cal. Rptr. 323 (1970), and that as of that date, in this case the values of the subject properties were insufficient to cover Hil-Budd’s junior liens. Hil-Budd points out that the cases on which Calumet relies are not applicable in that they deal with situations other than the failure of the first mortgagee to inform the second mortgagee of their intent to foreclose, a situation where the second mortgagee becomes prejudiced as of the filing of the foreclosure action.

Hil-Budd in this court as it did below relies on Howe v. City Title Insurance Co., 255 Cal.App.2d 85, 63 Cal.Rptr. 119 (1967). In Howe, the court awarded “the fair market value of [the real property security] as of the date of conversion, less prior liens and taxes, not, however, to exceed the amount due on the note,” 63 Cal.Rptr. at 122, as damages for the negligent failure to give notice to a party with a junior interest. In the present case Hil-Budd points out that on the date of conversion (the date the foreclosure action was filed) the fair market value of the properties exceeded $62,-370.66, the amount by which borrowers were indebted to Hil-Budd at that time. It does not follow however, as Hil-Budd contends, that having met the Howe standards that Calumet should be liable for the substantially increased total indebtedness (due to the 24 percent penalty interest) owed as of the foreclosure sale.

It is axiomatic that Hil-Budd should not be placed in a better position through the awarding of damages than it would have been in had Calumet not breached the notice requirement. Perry v. United States, 294 U.S. 330, 55 S.Ct. 432, 79 L.Ed. 912 (1935); United Protective Workers v. Ford Motor Co., 223 F.2d 49 (7th Cir. 1955); Irving v. Ort, 128 Ind.App. 225, 146 N.E.2d 107 (1957). If Calumet had given notice, as it was required to do, Hil-Budd would have had two options. It could have chosen not to cure in which case there would have been a foreclosure action, as occurred here, and Hil-Budd’s recovery would have been limited to the amount received at a subsequent foreclosure sale in excess of Calumet’s prior lien. In that case Hil-Budd would have in all probability recovered nothing.

The second possibility is that Hil-Budd could have cured the deficiency. In that case they would be gambling that some time in the future borrowers would have been in a position to pay back the full amount of the loans including penalty interests and amounts advanced as curative payments. Only if this occurred would Hil-Budd have been in a position as advantageous as the district judge left them after the awarding of damages. There is no evidence in the record of the likelihood of this happening. It was at best speculative as shown by the fact that borrowers had allowed both mortgages to go into default, and because of the effect of the 24 percent penalty interest making it probable that the borrowers would fall increasingly further behind in their payments. In other words, on the record before us Judge Grant’s award put Hil-Budd in a substantially better position than it would have been in under either option which it could have pursued had there been no default.

Furthermore, we believe it wholly inequitable to saddle Calumet with responsibility for the amount of Hil-Budd’s claim, attributable to the 24 percent penalty interest, which accrued because of borrowers’ prolonged, and now found to be unwarranted, resistance to Calumet’s foreclosure action. Any injury occurring after the filing of this action is attributable not to Calumet’s wrongful foreclosure, but to borrowers’ continued inability to repay Hil-Budd. Hil-Budd’s appropriate remedy after Calumet’s action was filed, and they were placed on notice as to Calumet’s intent to foreclose, was to file its own foreclosure action against borrowers. This they did and their mortgage was appropriately ordered foreclosed. The fact that the value received at the foreclosure sale was insufficient to cover Hil-Budd’s increased payments due to the penalty interest was not Calumet’s fault, but rather a contingency arising from the risk any second mortgagee undertakes.

For these reasons we decide that Calumet’s liability for damages was completely determined at the date it filed its action and it should be responsible to Hil-Budd for the amount owed by borrowers as of March 4, 1969 ($62,370.66) but only to the extent that the fair market value of the subject properties exceeded the amount of prior liens, which in this case means the entire $62,370.66, plus interest at the legal rate from that date.

The judgment in 74 — 1117 is remanded with directions.

The judgment in 74 — 1118 is affirmed.

      . Hil-Budd apparently negotiated the loans with the Lake County Trust Company and the Lee Better Builders, Inc. of Indiana. It is not clear whether all the beneficiaries of the trust held by the Lake County Trust Company were ever disclosed, but it is clear that Lee Larson, A1 Shinn, Georgiana Shinn and Anna Lewis were either beneficiaries of the trust or had at some point guaranteed the loans involved. For the sake of simplicity these individuals will be referred to as borrowers.

      . The actual amount distributed was $175,-256.82 because of an agreed upon discount factor.

      . The $58 figure does not include the money to be paid into escrow accounts for real estate taxes and insurance.

      . The starting date for payments was eventually delayed until June 1967. Payments were to be made by the 15th of each month but Calumet offered a grace period until the 30th.

      . Hil-Budd’s agreement to subordinate its mortgage was made at the Chicago meeting, while the provision requiring notice to Hil-Budd was included in a subsequent non-dated letter. The district judge in rejecting Calumet’s argument that notice need not be given because of a failure of consideration concluded that the letter containing the notice agreement “was indeed executed and delivered pri- or to the consummation of the Escrow Title Company [sic] and prior to the delivery by Hil-Budd of its subordination agreement.”

      . On two previous occasions Calumet had given Hil-Budd the required 30 days notice and both times Hil-Budd made curative payments.

      . Initially Calumet denominated this as their “waiver” argument, but later said that the alleged action of the agent “estopped” Hil-Budd from claiming the right to notice.

      . Calumet put forward other arguments in support of the denial of the motions. First the previously referred to lack of consideration argument (supra, note 5) and the argument that the giving of notice was not a condition precedent to the filing of a foreclosure action, but merely a covenant the breach of which would give rise to an action for damages.

      . Although at one point borrowers attempted to deny receipt of this letter, it was included with a number of loan passbooks which subsequently were found in borrower’s possession.

      . Although there is no specific finding on this point in any of Judge Grant’s orders, his acceptance of Calumet’s figures as to the amount of delinquency indicates that the district judge found for Calumet on this factual issue. Thus, at the time this action was filed, 21 monthly payments were required to have serviced these loans.

      . Carole Lewis testified that the amount of the escrow payments were determined by Calumet on the basis of what would be required to pay tax and insurance liabilities. The estimate took into account other properties in the area and the fact that Calumet could not be certain of whether the existing tax rate would be maintained in light of the recent improvements made to the parcels. (Tr. 304-05). Thaddeus Walczak testified that there was a custom in the industry to have enough on hand at the time payment is required to cover the bill for the preceding year and funds for the months of the present year that had already passed. (Tr. 145-46). Further, there was evidence introduced as to the amount and at what time actual expenditures were made for taxes and insurance and the judge relied on these in making his decision.

      . The borrowers contended that they owed only $20 per month per loan for the tax and insurance escrow. They rely on handwritten entries on their copies of the loan passbooks. The district judge concluded that the proper amount was $40 as evidenced by Calumet’s copies of the loan passbooks. This is supported by Carole Lewis’ testimony that none of the borrowers prior to the institution of these proceedings complained of the $40 figure (Tr. 311), a letter from Calumet to the E. J. Lewis Investment Co. indicating that tax and insurance escrow payments were to be $40 per loan per month (Tr. 308) and the testimony of A1 Shinn that he was aware of the $40 amount and he had decided to “let it ride.” (Tr. 1771-74).

      . Carole Lewis testified that the payments for the tax and insurance escrow were due and payable June 30, 1967. (Tr. 306). (Apparently although the taxes were due originally at this date, after one collection no further funds were applied to these accounts until January 1968.) Requiring payments for taxes which were not yet due was consistent with the custom of the industry. See note 11, supra. (Tr. 145-46). Finally two letters were introduced. The first showing that tax and insurance escrow payments were to commence in January 1968 (Tr. 308) and the second showing that by June 1968 a delinquency in the tax and insurance account existed. (Tr. 309).

      . Borrowers also argue that Calumet breached the pledge agreements by refusing to pay out earnings on the pledged savings accounts. It seems clear from the printed language on pledgor’s copy of the pledge agreements that they were entitled to withdraw any interest on the pledged accounts. Although the district judge did not specifically find, it would not be unreasonable to limit their right to withdraw interest to periods when no delinquency existed in either the loan accounts or the pledge accounts. In any event Calumet’s failure to pay out interest is not grounds for not allowing foreclosure especially since even with the retention of the interest the pledge accounts were still not at full level as we have determined that Calumet had a right to require.

      . This point refutes borrowers’ contention that the stock was wrongfully sold because pledged funds had been applied to the loans to make them current. Calumet had indicated it desired cash and accepted the stock with the condition that the cash would be forthcoming within 30 days. When no cash was paid they had the right to sell the stock pursuant to their agreement with Anna Lewis regardless of whether it was to cure a deficiency for the loans themselves or alternatively on the pledged savings accounts.

      . Borrowers make the further argument that since some of the proceeds over and above the amount needed to cure the delinquencies on the loan were placed into pledge accounts not even bearing Anna Lewis’ name, that Calumet was guilty of criminal conversion. There was testimony, and we find support for the conclusion, that these were inadvertent mistakes, and as far as borrowers’ rights were concerned they were not prejudiced because these funds were placed into other pledged accounts bearing the names of other members of the Shinn family.

      . Hilton Schwartz, president of Hil-Budd, testified that he never informed anyone at Calumet about the agreement to sell their interest in the mortgages to E. J. Lewis Investment Company. (Sept. 1971 Tr, 111). Lester Rosen, attorney for Hil-Budd, specifically denied that he had ever informed Carole Lewis that Hil-Budd no longer had an interest in these loans. (Sept. 1971 Tr. 172-76).

      . If Hil-Budd had failed to cure once having received notice Calumet would have proceeded with its foreclosure action. There is nothing to indicate that borrowers would have been less resolute in their opposition to the foreclosure and therefore nothing to suggest that the eventual foreclosure sale would have occurred at a substantially different time and yield a significantly different sum.

      . Presumably Hil-Budd could have been in as good a position if it cured if the subject properties had increased in value. Not only was there no evidence of this, but there was evidence that some of the homes were in need of substantial repairs.

      . In an order dated October 6, 1973 the district judge determined that as of March 23, 1973 borrowers were indebted to Hil-Budd in the amount of $111,437.30 and that Hil-Budd was entitled to foreclose its mortgage.

      . The district judge found that as of March 4, 1969 the date of the filing of this action, the fair market value of each of the 25 lots was $12,000, that after accelerating principal and interest there was approximately $7,800 due Calumet on each of its 25 notes and that based on the foregoing there was available as security on that date in excess of $62,370.66.