author: McCREE, Circuit Judge.

text:
    GENERAL INSURANCE COMPANY OF AMERICA, a Washington corporation, Plaintiff-Appellee, v. LAMAR CORPORATION, a Michigan corporation, also known as Lamar Pipe Company, Defendant-Appellant.
    No. 72-1789.
    United States Court of Appeals, Sixth Circuit.
    Argued Feb. 5, 1973.
    Decided July 31, 1973.
    William E. Rheaume, Lansing, Mich., for appellant; Abood, Abood & Abood, Lansing, Mich., on brief for Lamar Corp.
    Stephen C. Bransdorfer, Grand Rapids, Mich., for Concrete Pipe Assn, of Michigan as amicus curiae; Miller, Johnson, Snell & Cummiskey, Grand Rapids, Mich., on brief, amicus curiae, for Concrete Pipe Assn, of Michigan, Inc.
    John A. Kruse, Detroit, Mich., for ap-pellee; Harvey, Kruse & Weston, Detroit, Mich., on brief for General Ins. Co. of America.
    Before WEICK, McCREE, and KENT, Circuit Judges.

       Judge Kent died on May 28, 1973 and did not participate in this decision.

   McCREE, Circuit Judge.

This appeal presents primarily the question whether under the Michigan Building Contract Fund Act of 1931, M. C.L.A. §§ 570.151-570.153, money paid to a contractor performing a public project constitutes a trust fund for the payment of subcontractors and materialmen ion labor and material furnished on that project. We determine that it does not and reverse the judgment of the district court.

Defendant-appellant Lamar Corporation (Lamar), a manufacturer of cement pipe, appeals from a judgment for plaintiff-appellee General Insurance Company (General), a surety on a payment and performance bond. Sheldon Contracting, Inc. (Sheldon), had contracted with the city of Marysville, Michigan, to construct a sewer, and, as required by Michigan law, obtained payment and performance bonds from General. The bonds named Sheldon principal and the city of Marysville and the subcontractors, laborers, and material suppliers of Sheldon on the Marysville job obligees. Lamar is a materialman that supplied sewer tile worth $43,243.16 for the Ma-rysville project. Before Lamar began supplying materials on the Marysville job, Sheldon owed it $50,635.05 on open account, and during the period when Lamar was supplying this tile, Sheldon paid it a total of $80,555.86, which Lamar first applied to the old indebtedness and to debts incurred by Sheldon on other projects under construction contemporaneously with the Marysville job.

Sheldon defaulted before the Marys-ville project was completed, and General, its surety, was required under the obligation of its performance bonds to complete the job. In doing so, General incurred costs in excess of $40,000 and brought this action against Lamar for the excess Lamar received from Sheldon over the cost of materials it supplied for the Marysville project. Lamar counterclaimed for $25,974.41, the balance it claimed was due on the Marysville job, but the district court did not discuss the counterclaim in its findings and conclusions and Lamar does not press the matter on appeal.

The district court, sitting without a jury, found that the money paid to Lamar by Sheldon during the period in question came entirely from the Marys-ville job even though Sheldon was working on other jobs at the time. It also found that Lamar knew the source of these funds and that Lamar had “an affirmative duty to apply the payments received first to the discharge of the indebtedness incurred for materials supplied on the City of Marysville job.” The court accordingly determined that the funds paid by the city of Marysville to Sheldon constituted a trust fund under the provisions of M-C.L.A. § 570.-151; that in the alternative, independent of the statute, Lamar was a constructive trustee for the other material-men; that the funds did not lose their trust character when Sheldon paid Lamar; and that Lamar is therefore obligated to repay General as subrogee of the beneficiaries of the trust $37,312.70 with interest from the date of the last payment by Sheldon.

On appeal, Lamar and amicus curiae Concrete Pipe Association of Michigan, Inc., attack both the factual findings and the legal conclusions of the district court. However, in the view we take of the case, it is unnecessary to determine whether the findings of fact are correct, although we observe that a review of the evidence reveals that the only facts about which any dispute exists depend upon an assessment of credibility, a function of the district court in which an appellate court should indulge the better perspective of the trial judge. See Fed.R.Civ.P. 52(a).

Because this is a diversity case, our duty is to decide the appeal as the law and policy of Michigan commands. Erie Railroad Co. v. Tompkins, 304 U.S. 64, 58 S.Ct. 817, 82 L.Ed. 1188 (1938); Angel v. Bullington, 330 U.S. 183, 67 S.Ct. 657, 91 L.Ed. 832 (1947). The principal issue of Michigan law for our consideration is whether the Michigan Building Contract Fund Act applies to public as well as to private projects. Resolution of this issue requires reconciliation of the two Michigan Supreme Court cases in which the Act has been interpreted.

In Club Holding Company v. Flint Citizens Loan & Investment Company, 272 Mich. 66, 261 N.W. 133 (1935), a subcontractor on a municipal construction project assigned the funds due it from the principal contractor to a bank that was financing the subcontractor’s operations. The bank applied the funds received from the contractor to the debt owed by the subcontractor on the construction project and to unassociated debts of the subcontractor. The subcontractor, however, had not notified the bank of certain debts it owed to materi-almen on the municipal sewer project. After one materialman recovered against the contractor’s surety for its debt, People for use of Youngs v. United States Fidelity & Guaranty Company, 263 Mich. 638, 249 N.W. 20 (1933), the contractor sued the bank to impress a trust by virtue of the Building Contract Fund Act on the funds received by the bank from the contractor. In affirming a judgment for the defendants, the Michigan Supreme Court held that the act did not create a civil cause of action and did not apply to the construction of public projects:

Section 2 defines the statutory fraud and provides a penalty, while section 3 states what shall be evidence of intent to defraud. The act affects those matters which are criminal in their character and creates a particular statutory crime. The civil rights and obligations existing between owners, contractors, subcontractors, mate-rialmen and the various trades, etc., seem to be undisturbed by the act.
To hold in the instant case that the Investment Company received such assigned funds in a trust capacity might require a similar application to moneys the subcontractor might pay anyone, including his butcher, baker, or candlestick maker, and such a holding might possibly relieve the principal contractor’s surety from the obligations imposed by Act No. 187, Pub. Acts 1905, as amended, being [3] Comp. Laws 1929, §§ 13132-13136, and bonds given pursuant thereto. The act in question stands alone, without any reference to another; it is in harmony with the various provisions of the mechanics’ lien law, and we cannot presume, in the absence of explicit language, that it was intended to apply to the erection of public buildings or to public works. To do so might have a nugatory effect on the provisions of the 1905 act as amended, and strike from the books a line of well-understood and established authorities. It is fundamental that the law does not favor repeal by implication and that penal statutes must be strictly construed.

272 Mich. at 72, 261 N.W. at 135.

The second time the Michigan Supreme Court had occasion to interpret this statute was in B. F. Farnell Company v. Monahan, 377 Mich. 552, 141 N.W.2d 58 (1966). In that case, a contractor received payment for work performed on a private construction contract and shortly thereafter filed a voluntary petition in bankruptcy and delivered the contractual payment to the trustee in bankruptcy instead of to the materialmen and subcontractors working on the job. The materialmen brought suit under the Building Contract Fund Act for civil relief against the contractor. Overruling the first ground for decision in Club Holding, the Michigan Supreme Court reversed the trial court’s dismissal of the case and held that the Building Contract Fund Act created a civil remedy: “When a statute provides a beneficial right but no civil remedy for its securanee, the common law on its own hook provides a remedy, thus fulfilling law’s pledge of no wrong without a remedy.” 377 Mich. at 555, 141 N.W.2d at 60, citing Ferguson v. Gies, 82 Mich. 358, 46 N.W. 718 (1890), and Creek v. Laski, 248 Mich. 425, 227 N.W. 817 (1929). The court summarized the effect of its decision on Club Holding in this way:

To conclude: It is clear that a contractor or subcontractor, by delivering to his trustee in bankruptcy what he himself holds as trustee under the act of 1931, cannot thereby defeat the common law remedy this Court has provided in favor of those who under the act are aggrieved by his statutory violation. Whether defendant’s act of turning the funds over to his trustee did or did not place such funds beyond the reach of plaintiff is beside the point. Plaintiff had the remedy it seeks to pursue, as against the defendant, when the latter retained or used the funds as charged in its complaint. That remedy was not destroyed#either by defendant’s voluntary petition in bankruptcy or by his voluntary payment to the trustee in bankruptcy of that which was not his. To the extent Club Holding collides with these views, Club Holding should be overruled,4
4 An examination of all briefs filed for and against reversal of Club Holding discloses that the common-law doctrine to which Michigan became committed by Stout v. Keyes [2 Doug. (Mich.) 184] Ferguson v. Gies and Greek v. Lnski, all supra, was neither urged upon the Court nor discussed by any counsel in the case. No one of the three cases was cited or mentioned. The thrust of the argument made by the complaining parties turned exclusively upon their request for a decree of constructive trust. Such is the reason, doubtless, for omission of reference to said doctrine by the court.

377 Mich. at 557-558, 141 N.W.2d at 61 (emphasis added).

The italicized language in the last sentence of the above quotation makes it clear that any pronouncements in Club Holding that do not concern the creation of a civil remedy by the Act remain unaffected. Accordingly, the decision in B. F. Farnell did not extend the reach of the statute to “the erection of public buildings or to public works.” Club Holding, supra, 272 Mich. at 72, 261 N.W. at 135. We must follow the construction given the Act by the Michigan Supreme Court, and we therefore hold that the Act does not make funds paid on public projects a trust fund in the hands of a contractor.

Our conclusion is consistent with the apparent purpose of the type of legislation of which the Michigan statute is representative.

The legislative history of the Michigan statute itself is obscure. The briefs of the parties do nothing to illuminate it, and our research has not disclosed the exact circumstances of the statute’s enactment. Nevertheless, the date of its passage, 1931, identifies the act as one of a genre of Depression-era measures intended to afford relief to subcontractors affd materialmen in the construction industry.

During the boom period of the 1920’s, speculative builders often undertook to construct projects too large for their available capital to finance, and they frequently paid suppliers and material-men on older projects with funds received as payment on more current operations. With the advent of the crash of 1929 and the consequent widespread insolvency of many building contractors, these pyramided empires also collapsed and many subcontractors and suppliers were never paid. Subcontractors and materialmen on private projects were left only with mechanics’ liens as remedies, and these were often ineffective. See generally Grossman, Trust and Penal Provisions of the New York State Mechanics’ Lien Law, 5 Brooklyn L.Rev. 14, 16-22 (1935).

On the other hand, suppliers of labor and material on public projects were protected by statutorily required payment and performance bonds. These bonds required for public projects were intended “to. afford protection to the suppliers of labor or materials, similar to that afforded under the mechanics’ lien laws in the case of private buildings or construction.” Annot., 92 A.L.R.2d 1250, 1257 (1963). Mechanics’ or materialman’s liens ordinarily do not apply to public projects. E.g., Lake States Engineering Corporation v. Lawrence Seaway Corporation, 15 Mich. App. 637, 651, 167 N.W.2d 320 (1969).

When Depression-era experience demonstrated the inadequacy of mechanics’ liens in many cases because the owner had a defense if he had paid the principal contractor, statutes like the Michigan Act of 1931 were enacted to afford a “supplement to the Mechanics’ Lien Law,” providing a more effective remedy for private project suppliers against their principal contractors than they had previously. It does not appear, in the usual case, that these measures were meant to apply also to public projects since subcontractors on those jobs were adequately protected by statutorily required bonds. The pattern appears to be one of providing only a single civil remedy for subcontractors on public projects. See, e.g. 6 Del. C. § 3502, 29 Del.C. § 6902 (1953); Cal. Civil Code § 3247 (Supp. 1973); Kent. Rev.Stat. § 376.210. The New York Statute, N.Y. Lien Law § 70 et seq. (McKinney’s Con-sol.Laws, c. 33, 1966), is a notable exception. That act was originally passed in 1929, before there was any provision requiring bonds on public projects, see N. Y. State Finance Law § 137 (McKinney’s Consol.Laws, c. 56, 1940), and the extremely detailed act clearly applies to both public and private projects. We have been directed to the law of no other jurisdiction in which subcontractors and materialmen on public projects have been afforded two separate and complete remedies when a principal misapplies moneys due them on projects. We are unpersuaded that the Michigan Supreme Court intended to create a dual remedy by its decision in B. F. Farnell.

The district court appears to have held alternatively that, independently of the statute, a constructive trust was imposed on the funds paid to Lamar by Sheldon, on the theory that Lamar knew of the source of the funds and was therefore under a duty to apply the funds so as to protect the other suppliers on the Marysville project. See St. Paul Fire & Marine Insurance Company v. United States, 309 F.2d 22 (8th Cir. 1962); Savage v. Nee, 212 Cal.App.2d 417, 28 Cal.Rptr. 106 (1963). Appellee does not press this theory on appeal, with good reason in our opinion, because it appears that under Michigan law, Lamar was under no duty to apply the funds to the Marysville account in the absence of fraud or an express direction by Sheldon. See People for the Use of Michigan Electric Supply Company v. Vandenburg Electric Company, 343 Mich. 87, 72 N.W.2d 216 (1955); Club Holding, supra, 272 Mich. at 72-73, 261 N.W. 133; Grace Harbor Lumber Company v. Ortman, 190 Mich. 429, 157 N.W. 96 (1916).

Our decision makes it unnecessary for us to reach the other issues raised by appellant and amicus.

The judgment of the district court is reversed.

      . The Michigan Building Contract Fund Act provides:

        510.151 Building contract fund; status as a trust fund

      Sec. 1. In the building construction industry, the building contract fund paid by any person to a contractor, or by such person or contractor to a subcontractor, shall be considered by this act to be a trust fund, for the benefit of the person making the payment, contractors, laborers, subcontractors or materialmen, and the contractor or subcontractor shall be considered the trustee of all funds so paid to him for building construction purposes. As amended P.A. 1966, No. 104, § 1, Eff. Oct. 1.

        510.152 Same; fraudulent detention or use by contractor or subcontractor, penalty

      Sec. 2. Any contractor or subcontractor engaged in the building construction business, who, with intent to defraud, shall retain or use the proceeds or any part therefor, of any payment made to him, for any other purpose than to first pay laborers, subcontractors and materialmen, engaged by him to perform labor or furnish material for the specific improvement, shall be guilty of felony in appropriating such funds to his own use while any amount for which he may be liable or become liable under the terms of his contract for such labor or material remains unpaid, and may be prosecuted upon the complaint of any persons so defrauded, and, upon conviction, shall be punished by a fine of not less than 100 dollars or more than 5,000 dollars and/or not less than 6 months nor more than 3 years imprisonment in a state prison at the discretion of the court.

        510.153 Same; evidence of fraudulent detention or use

      Sec. 3. The appropriation by a contractor, or any subcontractor, of any moneys paid to him for building operations before the payment by him of all moneys due or so to become due laborers, subcontractors, materialmen or others entitled to payment, shall be evidence of intent to defraud.

      . M.C.L.A. § 129.201 (1967) provides:

        129.201 Bonds of principal contractor on public building, work, or improvement

      Sec. 1. Before any c'ontract, exceeding $5,000.00 for the construction, alteration or repair of any public building or public work or improvement of the state or a county, city, village, township, school district, public educational institution, other political subdivision, public authority or public agency, except the state highway department, hereinafter referred to as the “government unit”, is awarded, the proposed contractor, hereinafter referred to as the “principal contractor”, shall furnish at his own cost to the governmental unit a performance bond and a payment bond which shall become binding upon the award of the contract to the contractor. Neither the invitation for bids, nor any person acting, or purporting to act, on behalf of the governmental unit shall require that the bonds be furnished by a particular surety company, or through a particular agent or broker, or through a company, agent or broker in any particular locality. P.A. 1963, No. 213, § 1, Eff. Sept. 6.
      M.C.L.A. § 570.101 (1967) provides:

        510.101 Bond of contractor on pxiblie works to secure payment for materials and labor

      Sec. 1. When public buildings or other public works are about to be built, repaired or ornamented under contract at the expense of the state, or of any county, city, village, township or school district thereof, it shall be the duty of the board of officers or agents, contracting on behalf of the state, county, city, village, township or school district, to require sufficient security by bond for the payment by the contractor of all subcontractors and for the payment for all labor performed and materials and certain supplies furnished and used in the erection, repairing or ornamenting of such public buildings or works.

      . See, e. g., note 2 supra.

      . State v. Tobasso Homes, 42 Del. 110, 3 Terry 110, 117, 28 A.2d 248, 252 (1942).


source: Caselaw Access Project

author: GEWIN, Circuit Judge:

license: Public Domain

text:
    RANGER INSURANCE COMPANY, Plaintiff-Appellant, v. William R. ALGIE and Edith A. Algie, Defendants-Appellees.
    No. 73-1853
    Summary Calendar.

    United States Court of Appeals, Fifth Circuit.
    Aug. 16, 1973.

      James V. Dolan, Fort Lauderdale, Fla., for plaintiff-appellant.
    Thomas M. Carney, Frank B. Pridgen, Miami, Fla., for defendants-appellees.
    Before GEWIN, COLEMAN and MORGAN, Circuit Judges.

       Rule 18, 5th Cir. See Isbell Enterprises, Inc. v. Citizens Casualty Co. of New York et al., 5th Cir. 1970, 431 F.2d 409, Part I.

   GEWIN, Circuit Judge:

This appeal is taken, from an order of the district court granting summary judgment for appellees, William R. Algie and Edith A. Algie, and awarding attorneys’ fees of $5,000 to their counsel. We affirm.

Appellee William R. Algie was defendant in a suit initiated in the South Carolina courts for damages arising out of his alleged negligent operation of an airplane. Appellant, Ranger Insurance Company (Ranger), initiated the instant suit in the district court seeking a declaratory judgment that the liability to which appellee William R. Algie was potentially subject in the pending South Carolina suit was not within the eover-age of the flight insurance policy issued by Ranger to appellee William R. Algie. It is from the district court’s denial of the relief requested by Ranger and the award of attorney’s fees that Ranger appeals.

Ranger’s first contention is that the district court erred in granting summary judgment for appellees. We affirm the district court’s disposition on this issue. Summary judgment should be granted only where the moving party is entitled to judgment as a matter of law and where the record clearly shows that no genuine issue of material fact exists. Sartor v. Arkansas Natural Gas Corp., 321 U.S. 620, 627, 64 S.Ct. 724, 88 L.Ed. 967 (1944); St. John v. New Amsterdam Casualty Co., 357 F.2d 327, 328 (5th Cir. 1966). The facts in the instant ease fall within this rule.

Ranger relies upon an amendment to endorsement No. 7 of the Declarations in the insurance policy which provides that the policy coverage is amended to include private or commercial pilots having a minimum of 100 total logged hours. Alleging that appellee has failed to satisfy the requisite minimum 100 hours of air time, Ranger maintains that appellee is foreclosed from recovery against it for the liability incurred as a result of the airplane crash. We agree with the district court, however, that Ranger’s reliance on the amendment to Endorsement No. 7 as a basis for excluding coverage is misplaced. Rather, coverage is governed by Paragraph 6 of Endorsement No. 1 which provides that the inclusion of liability for injuries occurring while the aircraft is being operated in flight by a student pilot without supervision of a flight instructor certificated by the Federal Aviation Administration is not applicable to a Student Pilot following his receipt of a Private Pilot Certificate. Appellee William R. Algie being a student pilot to whom a private pilot certificate was subsequently issued prior to the accident, is within the coverage of the policy. The clear import of the amendment to Endorsement No. 7, relied upon by Ranger, was to provide additional coverage under the policy and not to qualify that already provided for in Endorsement No. 1. Since it is clear that Endorsement No. 1 and not Endorsement No. 5 governed coverage, summary judgment for the appellee was appropriate.

Moreover; even if the proper construction of the insurance policy were not free from ambiguity, we would feel constrained to affirm the view of the district court for as Justice Black-mun, then Judge Blackmun, noted, it is “an accepted principle of insurance law and a fact of insurance life” that ambiguities are construed against the insurer. Great Central Insurance Co. v. Marble, 369 F.2d 615, 617 (8th Cir. 1966). Florida law, which governs the construction of the insurance policy contracted for in Florida, is in accord with this principle. Hodges v. National Union Indemnity Co., 249 So.2d 679, 680 (Fla. 1971); Home Insurance Co. v. Southport Terminals, Inc., 240 So.2d 525, 526 (Fla.App.1970); DaCosta v. General Guaranty Ins. Co., 226 So.2d 104, 105 (Fla.1969). Application of this rule of construction would thus render summary judgment appropriate in the instant case.

Ranger’s second contention is that the award of $5,000 in attorney’s fees was excessive. We also find this contention to be without merit. The determination of a reasonable attorney's fee is left to the sound discretion of the trial judge. Weeks v. Southern Bell Telephone & Telegraph Co., 467 F.2d 95, 97 (5th Cir. 1972); Jinks v. Mays, 464 F.2d 1223, 1228 (5th Cir. 1972); Culpepper v. Reynolds Metal Co., 442 F.2d 1078, 1081 (5th Cir. 1971); Electronics Capital Corp. v. Sheperd, 439 F.2d 692, 693 (5th Cir. 1971); B-M-G Investment Co. v. Continental Moss Gordon, Inc., 437 F.2d 892, 893 (5th Cir. 1971); Hoffman v. Aetna Life Ins. Co., 411 F.2d 594, 595 (5th Cir. 1969). His determination should not be set aside, absent a clear abuse of discretion. Weeks v. Southern Bell Telephone & Telegraph Co., supra, 467 F.2d at 97; Hoffman v. Aetna Life Insurance Co., supra, 411 F.2d at 595; Calhoun v. Hertwig, 363 F.2d 257, 261 (5th Cir. 1966) cert. denied, 386 U.S. 966, 87 S.Ct. 1047, 18 L.Ed.2d 116 (1967). Among the factors to be considered in awarding attorneys fees are the briefs filed, the record, the difficulty of appeal, the result obtained and the experience of counsel. Weeks v. Southern Bell Telephone & Telegraph Co., supra 467 F.2d at 98. Additionally, this court has acknowledged the value of an attorney’s services according to the custom or rule in the place of his practice as a relevant consideration. See Sandoval & Panama Canal v. Mitsui Sempaku, 460 F.2d 1163, 1170-1171 (5th Cir. 1972). See also ABA Canons of Professional Ethics No. 2, DR 2-106(B)(3). Although the issues presented in this ease were not unusually difficult of resolution, the preparation undertaken by appellee’s attorney did include client interviews, analysis of the pleadings, analysis of the policy, legal research, preparation for and attendance at appellee’s deposition, telephone calls and correspondence with the F.A.A. regarding appellee’s pilot certification, preparation of memorandum of law opposing plaintiff’s motion to compel discovery and for sanctions, preparation of motion for summary judgment and supporting papers, preparation of unilateral pre-trial stipulation and preparation for attendance at pre-trial and argument on appellee’s motion for summary judgment. Although this preparation may not have been extremely time consuming, this court has adhered to the proposition that hours spent is of dubious virtue as a standard of measurement. Weeks v. Southern Bell Telephone & Telegraph Co., supra 467 F.2d at 98; Electronics Capital Corp. v. Sheperd, supra 439 F.2d at 693. With respect to the result obtained, counsel’s endeavors produced potential indemnification to appellee William R. Algie to the full extent of the $50,000 coverage of the policy. Moreover, in view of the fact that the $5,000 fee was substantially less than the 40% fee authorized by the schedule of customary charges adopted by the Dade County Bar Association, the award of attorneys fees does not appear to be exorbitant. This conclusion is supported by our decision Electronics Capital Corp. v. Sheperd, supra, where on the basis of analogous facts, we affirmed a similar award of attorneys fees. We do feel that the $5,000 award is sufficient to cover the services of counsel for appellees on this appeal. No additional fees will be allowed. For the reasons set forth above, we affirm the judgment of the district court. in

Affirmed.

      . The appellees are husband and wife, Edith A. Algie was plaintiff in a personal injury action against her husband resulting from a plane crash which caused her to become a paraplegic. South Carolina, where the suit was pending, does not recognize the doctrine of interspousal immunity.

      . The provisions of the insurance policy that form the basis for this controversy are as follows:

        Paragraph 6‘ of Endorsement No. 1:
      This policy does not apply to any occurrence or to any loss or damage occurring while the aircraft is being operated in flight by a Student Pilot unless each flight is under the direct supervision and specifically approved by a qualified Flight Instructor certificated by the Federal Aviation Administration. This exclusion is not applicable to any Student Pilot following issuance of a Private Pilot Certificate. Declaration No. 7:

      PILOT CLAUSE: Only the following pilot or pilots holding valid and effective pilot and medical certificates with ratings as required by the Federal Aviation Administration for the flight involved will operate the aircraft in flight:
      STUDENT PILOT WILLIAM R. AL-GIE (SEE ENDORSEMENT NO. 1); OTHERWISE CERTIFICATED FLIGHT INSTRUCTOR PILOTS.

        Endorsement No. 5:

      It is hereby understood and agreed that item No. 7 of the Declarations is amended to include private or commercial pilots having a minimum of 100 total logged hours including a check out in insured make and model by a certificated flight instructor pilot prior to solo.

      . A member of the Florida bar with 15 years experience who had represented carriers on numerous occasions submitted an affidavit to the effect that based upon liis review of the files, the reasonable value of these services provided by attorney for appellees was $7,500.
      The appellant submitted a very short affidavit of a member of the Florida Bar who had practiced for 5 years. He did not state that he had reviewed the files in the case. He only gave a con-clusory statement that a reasonable fee would be $750.00. Counsel for appellees asserts in his brief that this affiant did not review the files in this case. That statement has not been contradicted.


author: LEVIN H. CAMPBELL, Circuit Judge.

text:
    BANGOR AND AROOSTOOK RAILROAD COMPANY et al., Plaintiffs, Appellants, v. BANGOR PUNTA OPERATIONS, INC., et al., Defendants, Appellees.
    No. 73-1059.
    United States Court of Appeals, First Circuit.
    Heard May 7, 1973.
    Decided Aug. 3, 1973.
    Edward T. Robinson and Alan L. Lef-kowitz, Boston, Mass., with whom Ely, Bartlett, Brown & Proctor, Boston, Mass., and Roger A. Putnam, Howard H. Dana Jr., and Verrill, Dana, Phil-brick, Putnam & Williamson, Portland, Me., were on brief, for plaintiffs-appellants.
    James V. Ryan, New York City, with whom C. Kenneth Shank, Jr., Bruce Topman, Webster, Sheffield, Fleisch-mann, Hitchcock & Brookfield,- New York City, and Sumner T. Bernstein, Herbert H. Sawyer and Bernstein, Shur, Sawyer & Nelson, Portland, Me., were on brief, for defendants-appellees.
    Before COFFIN, Chief Judge, Mc-ENTEE and CAMPBELL, Circuit Judges.
   LEVIN H. CAMPBELL, Circuit Judge.

A Maine railroad corporation and its wholly-owned subsidiary bring this action against their former owners, seeking damages under the federal anti-trust and securities laws, and under state law, for the alleged “looting” of the railroad in 1960-67 when the defendants were in control. Over 99% of its stock was purchased from the old owners after the alleged wrongs. The district court granted defendants’ motion for summary judgment, holding that the railroad could not maintain what it termed “typical stockholder claims seeking an accounting for alleged misappropriation and waste of corporate assets by controlling stockholders” since the present owner was not a stockholder at the time of the alleged improper transactions and was not injured thereby. 353 F.Supp. 724, 728 (D. Me. 1972).

Plaintiff, Bangor and Aroostook Railroad Company (BAR), operates a railroad in northern Maine. Plaintiff, Bangor Investment Company (BIC), a Maine corporation, is a wholly-owned subsidiary of BAR. Defendant, Bangor Punta corporation (Bangor Punta), a Delaware corporation the stock of which is listed upon the New York Stock Exchange, is a diversified holding company. Defendant, Bangor Punta Operations, Inc. (BPO), a New York Corporation, is a wholly-owned subsidiary of Bangor Punta.

Bangor Punta, in 1964, through its subsidiary BPO, acquired 98.3% of the stock of BAR, by acquiring all the assets of Bangor and Aroostook Corporation (BAC), a Maine holding company established by BAR in 1960. Bangor Punta, through BPO, continued to own 98.3% of BAR’s outstanding stock until October 2, 1969, at which time, for $5,-000,000, it sold its stock interest in BAR to Amoskeag Company (Amoskeag), a Delaware investment corporation controlled by Frederick C. Dumaine, Jr. Amoskeag later bought additional BAR shares, and now owns over 99% of all the outstanding stock of BAR.

The complaint contains thirteen counts. Damages totalling $7,000,000, for BAR only, are sought on grounds of mismanagement, misappropriation and waste of corporate assets caused by four intercompany transactions taking place among BAC, Bangor Punta, BAR and BIC during the years 1960-67, while BAC and then Bangor Punta were in control of BAR and BIC. The defendants are said to have violated § 10 of the Clayton Act, 15 U.S.C. § 20, and § 10(b) of the Securities Exchange Act, 15 U.S. C. § 78j(b), and Rule 10b-5 thereunder. They are also alleged to have violated the Maine common law and Section 104 of the Maine Public Utilities Act, 35 M. R.S.A. § 104.

The wrongful acts allegedly included overcharge by BAC and BPO for services to BAR; causing BAR to excuse BAC and BPO from interest payments due on loans and to pay improper dividends; the improper acquisition of St. Croix Paper Company stock owned by BAR through BIC; and causing BIC to engage in improper borrowings. In essence, defendants are alleged to have “dominated and controlled BAR and exploited it solely for their own purposes, to the injury of BAR and without regard to BAR’s future obligations both to its creditors and to the public which it serves. By such domination, control and exploitation, [defendants] calculatedly drained the resources of BAR in violation of law for their own benefit . . . .”

The defendants moved for summary judgment “dismissing the entire complaint, as amended herein, with prejudice, for the reason that the complaint fails to state a cause of action on behalf of the corporate Plaintiffs; or in the alternative . . . dismissing each of Count II and Count V [brought under the Maine Public Utilities Act] of the amended complaint herein, with prejudice, for the reason that each of them fails to state a cause of action.”

The district court granted defendants’ motion, stating,

“Defendants seek dismissal of the entire complaint on the ground that Amoskeag, which would be the sole beneficiary of any recovery by the corporate plaintiffs, was not a stockholder of BAR at the time of the alleged improper transactions and itself sustained no injury as a result thereof. The Court agrees. Since the Court therefore concludes that the entire complaint must be dismissed, it does not reach defendants’ alternative motion for dismissal of Counts II and V.” 353 F.Supp. at 726.

Starting with the proposition that F.R.Civ.P. 23.1, the so-called contemporaneous ownership rule, would apply to a shareholder’s derivative action brought to enforce the claims asserted here, the district court reasoned that Amoskeag, by causing the plaintiff corporations (essentially BAR) to bring this action, was attempting to accomplish indirectly what it could not do directly; namely, to bring “typical stockholder claims” for misappropriation and waste. Since Amoskeag,

“which did not itself incur any damage as a result of defendants’ wrongful acts, and not the corporate plaintiffs, is the real beneficiary of any recovery which might be had in the name of the corporate plaintiffs, the corporate claims must fail for lack of equity on the part of those who would ultimately benefit from any corporate recovery.” 353 F.Supp. at 728.

The district court relied on Commissioner Roscoe Pound’s opinion in Home Fire Ins. Co. v. Barber, 67 Neb. 644, 661-662, 93 N.W. 1024, 1030-31 (1903), and like cases. See, e. g., Capitol Wine & Spirit Corp. v. Pokrass, 277 App.Div. 184, 98 N.Y.S.2d 291, aff’d, 302 N.Y. 734, 98 N.E.2d 704 (1951); Amen v. Black, 234 F.2d 12, 23 (10th Cir. 1956). Matthews v. Headley Chocolate Co., 130 Md. 523, 100 A. 645 (1917). Home Fire and its successors hold that a person who was not a stockholder at the time of the alleged mismanagement of a corporation may not later sue derivatively, nor, if he becomes the sole stockholder, may he cause the corporation itself to sue. Central to the conclusion that even the corporation may not sue is the assumption that “the stockholders are the real and substantial beneficiaries of a recovery.” Home Fire Ins. Co. v. Barber, supra, 67 Neb. at 669, 93 N.W. at 1033. Equity, “penetrating all fictions and disguises”, treats the corporation as the alter ego of its stockholders: because it would be unjust to enrich them, the corporation may not be enriched. A corollary is that the corporation is barred from suing only if recovery would inure solely to the benefit of the estopped stockholders. If other eligible interests, such as creditors or minority shareholders, would benefit, the corporation may sue; since recovery is for the corporation the estopped stockholders would also benefit, but that is “an injustice which might be necessary to be suffered . . . .” Capitol Wine & Spirit Corp. v. Pokrass, supra, 98 N.Y.S.2d at 293.

The Home Fire rule prevents a purchaser of all or most of the corporate stock, who probably purchased it at a price tied to the value of the assets at the time of sale, from recovering a windfall. Where maintenance of the corporate cause of action serves no other interest, such a result seems reasonable —although we leave open whether the equities reflected in Home Fire should be permitted to prevent suits under laws, such as the federal anti-trust and securities acts, that were enacted to protect interests other than, or in addition to, those of the current stockholders. Cf. Perma Life Mufflers, Inc. v. International Parts Corp., 392 U.S. 134, 139, 88 S.Ct. 1981, 20 L.Ed.2d 982 (1968).

Our difficulty here, however, is more fundamental. Even accepting Home Fire, we doubt its applicability. We reject the premise — critical both to the district court’s holding and to the Home Fire rationale — that BAR’s chief stockholder, Amoskeag, would be the “sole beneficiary” of a recovery by BAR. The premise, applied to a rail carrier, seems to us to be an over-simplification, although, without doubt, BAR’s recovery would be highly beneficial to Amoskeag. Because of the nature of their services and of regulatory restrictions affecting them, and, more generally, because of their legal status as “quasi-public corporations”, railroads cannot realistically be described as mere alter egos of their chief stockholders. If BAR’s management complies with the law, recovery of monies by BAR may be expected not only to benefit its stockholders but to improve the economic position of the carrier, enabling it to enhance its services and helping stave off the financial crisis faced today by so many railroads. The net result likely will be of benefit to the public. Such considerations might be irrelevant in cases involving ordinary, closely held businesses; their survival is not usually deemed to be of public concern and they are typically viewed as mere projections of their stockholders. But courts — even before passage of extensive regulatory laws — have for years held that the public has an identifiable interest in a railroad corporation and in its ability — including its financial ability — to provide services and, indeed, to survive.

The public’s interest, unlike the private interest of stockholder or creditor, is not easily defined or quantified, yet it is real and cannot, we think, be overlooked in determining whether the corporation, suing in its own right, should be estopped by equitable defenses pertaining only to its controlling stockholder. Here we think the public’s interest in the financial health of BAR provides a separate interest, quite apart from Amoskeag’s, which is served by the corporate cause of action. Thus, regardless of the latter’s motivations or potential receipt of undeserved benefits, BAR should be permitted, and indeed has a duty, to recover for itself any assets which were divested from it in violation of state or federal law.

A railroad is a “public” or “quasi-public” corporation. United States v. Trans-Missouri Freight Ass’n, 166 U.S. 290, 321-322, 332-333, 17 S.Ct. 540, 41 L.Ed. 1007 (1897); Railroad Com’rs v. Portland and O. C. R. R., 63 Me. 269, 18 Am.Rep. 208 (1872); for a recent state case reaffirming the traditional concept, see Louisville and Nashville Ry. v. Sutton, 436 S.W.2d 487, 490 (Ky.Ct.App.1969); see generally 1 Fletcher Cycl. Corps., § 63 (1963). According to the Maine Supreme Judicial Court,

“Railroad charters are contracts made by the legislature in behalf of every person interested in anyhing to be done under them.” Railroad Com’rs v. Portland and O. C. R. R., supra, 63 Me. at 278.

The provision of roads and “other artificial structures” for travel is a duty of government recognized from earliest times. Id. at 275. The granting of a franchise to operate a railroad was seen by the Maine court as a farming-out by government of a duty owed to the public.

“The fare is the consideration for the service performed, whether done by the State directly, or by a corporation under a grant from the State; it is simply a substitute for the tax rendered necessary when the State builds and conducts railroads at the public expense; the corporation, upon the payment of the fare, is under the same obligation to render the required service for the public, that the State would be, if railroads were free, and conducted by State authority. Nor does the ownership of railroads, whether it be in the State or a private corporation, affect the nature of their use, since in either case the function to be exercised and the uses to be sub-served áre public.” Id. at 275-276.

It can, of course, be argued that all manner of businesses are affected with a public interest. See Munn v. Illinois, 94 U.S. 113, 24 L.Ed. 77 (1877) (regulation of private grain elevators). However that may be, railroads, involving the use and often the forced taking of interests in land and providing essential transportation, have acquired a unique status in our law; they were said by the Maine court in Railroad Com’rs v. Portland and O. C. R. R., supra, 63 Me. 275, to be “preeminent” among private instrumentalities affected with a public interest. While the development of other modes of transportation has eroded this “preeminence”, the Maine courts have not modified their view of the unique legal status of railroad companies, which are also regulated “public utilities” under Maine Law, 35 M.R.S.A. [§ 15, subd. 13 et seq.]

Federal courts, including the Supreme Court, early took the same view of the public or quasi-public character of railroads. In United States v. Trans-Missouri Freight Ass’n, supra, 166 U.S. at 332-333, 17 S.Ct. at 555, the Supreme Court said,

“. . . railways are public corporations organized for public purposes, granted valuable franchises and privileges, among which the right to take the private property of the citizen in invitum is not the least, . . . many of them are donees of large tracts of public lands, and of gifts of money by municipal corporations, and . . . they all primarily owe duties to the public of a higher nature even than that of earning large dividends for their shareholders. The business which the railroads do is of a public nature, closely affecting almost all classes in the community ....”

More recently, the public importance of the rail carriers has been recognized in context of the economic crisis threatening their continued existence. Indeed, since the temporary nationalization of the railroads in World War I, the preservation of the railroads has been a national concern. Interpreting the Transportation Act, 1920, Mr. Justice Brandéis said,

“By that measure, Congress undertook to develop and maintain, for the people of the United States, an adequate railway system. It recognied that preservation of the earning capacity, and conservation of the financial resources, of individual carriers, is a matter of national concern; . . Texas & Pac. Ry. v. Gulf, etc., Ry., 270 U.S. 266, 277, 46 S.Ct. 263, 266, 70 L.Ed. 578 (1926).

In 1933, Congress added Section 77 to Chapter VIII of the Bankruptcy Act, providing for the financial reorganization of ailing railroads. A policy of Section 77 is “that the operation of railroads as sound, economic units should be achieved for the benefit of the public, regardless of the interests of creditors and stockholders.” 5 Collier on Bankruptcy, 14th ed., U 77.02. p. 469. In Reconstruction Finance Corp. v. Denver & R. G. W. R. R., 328 U.S. 495, 536, 66 S.Ct. 1282, 1303, 90 L.Ed. 1400 (1946), the Court said, “[B]y their entry into a railroad enterprise [security holders] assumed the risk that in any depression or any reorganization the interests of the public would be considered as well as theirs.” See New Haven Inclusion Cases, 399 U.S. 392, 492, 90 S.Ct. 2054, 26 L.Ed.2d 691 (1970). Cf. Note, Takings and the Public Interest in Railroad Reorganization, 82 Yale L.J. 1004 (1973). Worry over the public effect of the Northeastern railroads’ insolvency appears in the Interstate Commerce Commission’s Northeastern Railroad Order of Investigation (Ex Parte No. 293, Feb. 7, 1973, 38 Fed.Reg. 6253 (1973)), noting the entry into Section 77 reorganization of seven Class I railroads, and the danger that acute cash crises of several might lead to the eventual cessation and liquidation of the transport facilities of the carriers. The I.C.C. found these matters to “create implications of nationwide importance.” Similar concern resulting from the Penn Central financial crises was expressed in Senate Joint Resolution 59 approved Feb. 9, 1973 (P.L. 93-5, 87 Stat. 5, 1973 U.S. Code Cong. & Admin.News 379).

In 1960 the Maine Supreme Judicial Court concluded that local freight lines (BAR is one such) were crucially important to the Maine economy. The court said, in Maine Cent. R. R. v. Public Utilities Comm’n, 156 Me. 284, 163 A.2d 633, 637 (1960):

“There can be no question as to the very real need which the whole public of Maine has for an efficient freight service by rail. There are many raw materials and products of great weight and bulk which can only be carried efficiently in and out of Maine in freight cars. This state is somewhat remote from the principal markets and thus dependent on fast and economical transportation of goods. We are engaged in spirited competition with our sister states for new industry which will add to payrolls and taxes and assure the economic health of Maine. Moreover, existing established industry must be encouraged and preserved and agriculture must not be deprived of indispensable freight service. Here we are dealing with the public interest in its broad sense for every citizen of Maine has a stake in the industrial and economic vitality of his state.”

Given today’s circumstances of which we are all generally aware, and the legal history above cited, it would be unrealistic to treat a railroad’s attempt to secure the reparation of misappropriated assets as of concern only to its controlling stockholder. To do so grants to the defendants an undeserved immunity from suit, to the disadvantage of the public, solely to avoid a windfall to Amoskeag which, whatever its own lack of equity, is neither a wrongdoer nor a participant in any wrong. We see BAR and its management as seeking a corporate recovery in which the public has a real, if inchoate, interest. Amoskeag’s windfall is irrelevant to that interest, and should not be the factor which determines whether or not BAR may sue.

Moreover, to prevent BAR from suing to recover assets wrongfully divested is to reject the use of private litigation as a deterrent to patently undesirable conduct. The management of a rail carrier —whoever it may be and whatever its private aims — is best situated to learn of wrongs to the railroad and to take effective action to redress them. The looting of a railroad and its possible decline or even failure are so clearly violative of state and federal policies, as expressed both in legislation and in the decisions of courts, as to invite the encouragement of private lawsuits as a supplement to public enforcement. See J. I. Case Co. v. Borak, 377 U.S. 426, 432, 84 S.Ct. 1555, 12 L.Ed.2d 423 (1964); Perma Life Mufflers, Inc. v. International Parts Corp., supra, 392 U.S. at 139, 88 S.Ct. 1981, 20 L.Ed.2d 982. The private financial incentive for those bringing the action helps assure that it will be brought; federal and state agencies, sometimes hampered by inadequate funding or diverted by other concerns, may not be able to take the necessary action.

Thus we hold that neither the federal nor the state counts are foreclosed by the failure of BAR’S principal stockholder to own its stock during the period of the wrongful conduct nor by Amoskeag’s purchase of the stock from the alleged wrongdoers.

We are left with a final major question which we do not now attempt to resolve ; namely, the extent, if any, to which the district court should try to insure that recovery, if any, does not benefit Amoskeag at the expense of the railroad and the public which it serves. If BAR should recover, Amoskeag’s BAR stock will increase in value. An increase in stock value is a windfall which can hardly be avoided; it would not be inconsistent with the public’s interest in a healthier railroad. On the other hand, a syphoning off of BAR’S recovery into the pockets of present stockholders or others would be different. Hopefully, the very logic by which appellants are allowed to sue here may help to deter at least illegal distributions. In any event, we have no doubt of the power of the district court, in conjunction with any recovery, to enter orders, if appropriate, prohibiting distributions by BAR that would conflict with state or federal law. A more difficult question arises with respect to its ability to enter more sweeping prohibitions to ensure that BAR’s recovery is not unreasonably diverted for the private enrichment of its stockholders.

If plaintiffs prevail, the latter is a matter which the parties and the district court may consider further, possibly with the invited assistance of state and federal agencies. Our ruling that the plaintiffs may sue is not conditioned on the devising of court-imposed limitations on the uses of any corporate recovery. Even without limitations, the public interest is better served than were civil immunity to be assured to those who may have syphoned funds from a rail carrier in violation of state and federal law. Whether a court could properly or practicably regulate (beyond existing state and federal law) the use which a carrier might make of any recovered funds, we are not prepared to decide at this time.

We understand the district court’s order for summary judgment to be based solely on its determination that plaintiffs were barred from suing because of Amoskeag’s failure to own stock at the time of the alleged wrongs and its purchasing of stock from alleged wrongdoers. Our decision reverses that determination ; it leaves all other issues open, including the merits of plaintiffs’ claims, which have yet to be tried. The district court not having ruled thereon, we express no opinion on defendants’ motion, on different grounds, to dismiss Counts II and V.

Reversed and remanded for proceedings consistent herewith.

      . It is alleged in the complaint that BAR “is a Maine Corporation organized in 1891 for the purpose of constructing, maintaining and operating a railroad for public use, and has its principal place of business in Bangor, Maine. It operates a railroad providing essential services for those persons and businesses located in the northern part of the State of Maine, BAR connects within the State of Maine with other railroads which serve the northeastern part of the United States, and which, in turn, connect with other railroads serving the remainder of the United States. Freight shipments of BAR consist of products grown and manufactured in the State of Maine, including potatoes, pulp and paper products, which are sold and used in other parts of the United States.”

      . Under tlie view we take of the ease, we need not consider the district court’s conclusion that the present suit is not being maintained in any meaningful way on behalf of the less than 1% of stock not owned by Amoskeag.
      Nor do we analyze the extent to which the contemporaneous stock ownership rule is mandated, in a non-derivative action, by F.R.C.P. 23.1. Whether a stockholder is equitably barred from suit because he did not own the stock at the time of the alleged wrong or because he acquired it from wrongdoers is significant here only if we accept the district court’s premise — as we do not — that BAR’s controlling stockholder is the sole beneficiary of the instant litigation.
      It can be argued, of course, that F.R.C.P. 23.1, dealing with derivative suits, does not establish a federal rule of contemporaneous ownership with respect to non-derivative proceedings. The underlying policies for adoption of the Rule— preventing transfer of a few shares to a non-resident to acquire diversity jurisdiction and to discourage strike suits— relate to abuses associated with minority stockholder proceedings. See Hawes v. Oakland, 104 U.S. 450, 26 L.Ed. 827 (1882); 3B Moore’s Federal Practice, 23.1.15. The Maine Supreme Judicial Court has recently indicated willingness to relax the contemporaneous ownership requirement where fairness and sound policy warrant. See Forbes v. Wells Beach Casin, Inc., 307 A.2d 210 (Me. 1973).

      . Beginning in 1850, Congress lavishly subsidized railroad construction by land grants: for example, an estimated 40,000,000 acres was granted to the Northern Pacific. Great Northern Ry. v. United States, 315 U.S. 262, 276, 62 S.Ct. 529, 86 L.Ed. 836 (1942). Under Maine law, land may be taken for railroad purposes by eminent domain. 35 M.R.S.A. § 651 et seq.


author: GUBOW, District Judge.

text:
    NATIONAL LABOR RELATIONS BOARD, Petitioner-Appellant, v. McCREADY AND SONS, INC., and Mel-co Construction, Inc., Respondents-Appellees.
    No. 72-1320.
    United States Court of Appeals, Sixth Circuit.
    Argued Oct. 16, 1972.
    Decided June 29, 1973.
    Marcel Mallet-Prevost, Asst. Gen. Counsel, N.L.R.B., Washington, D. C., Jerome H. Brooks, Director Region 7, N.L.R.B., Detroit, Mich., Robert A. Gian-nasi, N.L.R.B., for petitioner-appellant; Peter G. Nash, Gen. Counsel, Stephen J. Solomon, Allen H. Feldman, Attys., N.L.R.B., on brief.
    Craig A. Miller, Kalamazoo, Mich., for respondents-appellees; Gemrich, Mos-er, Dombrowski, Bowser & Garvey by Craig A. Miller, Kalamazoo, Mich., on brief for McCready and Sons, Inc.; Hub-bell, Blakeslee, McCormick & Houlihan by James R. McCormick, Traverse City, Mich., on brief for Melco Construction, Inc.
    Before PHILLIPS, Chief Judge, WEICK, Circuit Judge, and GUBOW, District Judge.

       Honorable Lawrence Gubow, Judge, United States District Court for the Eastern District of Michigan, sitting by designation.

   GUBOW, District Judge.

The National Labor Relations Board (hereinafter the Board), after a hearing before a Trial Examiner, found that Respondent employers, McCready and Sons, Inc. and Melco Construction Inc., (hereinafter referred to as McCready and Melco respectively), were guilty of unfair labor practices in violation of Sections 8(a)(1) and 8(a)(5) of the National Labor Relations Act, 29 U.S.C. §§ 158(a)(1) and 158(a)(5). Respondents were ordered to execute and honor the 1970-1973 contract which the Board found had been entered into between Mc-Cready, Melco and other employer-contractors on the one hand, and the Laborer’s Local Union No. 1247 on the other. The Board petitions this court for enforcement of its Order. We have jurisdiction by virtue of Section 10(e) of the Act, 29 U.S.C. § 160(e).

Respondents oppose the enforcement of the Board’s Order, contending that the Board’s action was barred by the six-month limitation provision of Section 10(b) of the Act, 29 U.S.C. § 160(b). In addition, McCready contends that it was not a party to the alleged contract and, furthermore, that it had grounds for challenging the Union’s representative status at the time in question. Our disposition of the Section 10(b) issue makes it unnecessary to reach the merits of McCready’s additional defenses.

Respondents and other building contractors in northwestern Michigan have, in the past, negotiated with the Union on a multi-employer basis, utilizing a single spokesman to present their position. The agreements reached in these negotiations called for execution of individual agreements by individual contractors at a later time. Such negotiations led, on June 5, 1970, to the agreement involved in this case. For present purposes, we shall assume, without deciding, that this agreement was a contract and that both Melco and McCready were bound to execute it.

However, events subsequent to June 5, and prior to the time when Respondents were called upon to execute their individual agreements, led both Melco and McCready to believe that the Union no longer enjoyed representative status with respect to their employees. This belief was apparently based on expressions by employees of their disenchantment with the Union because of continuing strikes in the industry. We shall assume, without deciding, that these circumstances did not alter Respondents’ legal obligation to execute individual contracts with the Union, based on the June 5 agreement.

On June 9, 1970, the Union ratified the June 5 contract. On August 3, 1970, a Union representative presented contracts to Walter McCready, Secretary-Treasurer of McCready, and to Melco’s agent, James Mayer, for their signatures. Both Mr. McCready and Mr. Mayer unequivocally refused to sign on the grounds that the Union did not enjoy representative status. At that time, the Union representative informed each Respondent that, because of the refusal to sign, the Union would pursue its legal remedies. Subsequently, in September 1970 and on February 8,1971, when again asked to sign, Mr. McCready unequivocally reiterated his earlier refusal. Similarly, Mr. Mayer reiterated his refusal to sign on August 19, 1970, September 13, 1970, November 1970, January 1971, and on January 29, 1971.

On February 23, 1971, the Union filed unfair labor practice charges against both McCready and Melco for their refusal to sign the June 5 contract. These charges were the basis of a consolidated complaint which led to the Order for which enforcement is now sought. The charges were filed six months and twenty days after Respondents’ first refusal to sign the contract, but within six months of subsequent refusals.

Section 10(b) of the Act (29 U.S.C. § 160(b)) provides, in pertinent part, “[t]hat no complaint shall issue based upon any unfair labor practice occurring more than six months prior to the filing of the charge with the Board . Respondents contend that this six-month limitation period was initiated by their August 3 refusals to sign the contract, and that since the charges were filed more than six months after August 3, the complaint is barred. The Board concedes that a complaint based on the August 3 refusals is barred. It is the contention of the Board, however, that each refusal subsequent to August 3 was itself an unfair labor practice, and that the complaint is supported by the refusals occurring within six months of February 23, 1971. This position is premised on the theory that a “continuing obligation” to execute the June 5 contract is imposed on Respondents by Section 8(a) of the Act. Under this theory, a complaint is valid if supported by a charge brought within six months of any refusal to execute made during the term of the contract.

The doctrine of “continuing obliga-' tion” is well established under the Act with respect to certain unfair labor practices. Most notably, the doctrine has received acceptance in cases of employers’ discriminatory refusals to hire. Each time an employer discriminatorily refuses to hire a given employee, a separate, actionable unfair labor practice occurs-, and Section 10(b) does not bar a complaint against an employer for such refusals to hire occurring within the six-month period, even if identical refusals to hire the same employee occurred outside the six-month period. See, Phelps Dodge Corporation v. N.L.R.B., 313 U.S. 177, 61 S.Ct. 845, 85 L.Ed. 1271 (1941); N.L.R.B. v. Textile Machine Works, 214 F.2d 929 (3rd Cir. 1954); N.L.R.B. v. Carpenters Local Union, 232 F.2d 454 (10th Cir. 1956).

This situation is to be distinguished, however, from one where the charge is based on the employer’s refusal to rehire an employee discriminatorily discharged from employment. The continuing obligation doctrine has not been applied to allow complaints based on charges brought more than six months after the discharge but within six months of a refusal to rehire, since the illegality of such refusals derives from the illegality of the initial discharge. Machinists Local v. N.L.R.B., 362 U.S. 411, 80 S.Ct. 822, 4 L.Ed.2d 832 (1960); N.L.R.B. v. Textile Machine Works, supra; N.L.R.B. v. Pennwoven, 194 F.2d 521 (3rd Cir. 1952).

Unfortunately, precedent offers us uncertain guidance in resolving the precise issue which we face. Two circuit courts, on facts very similar to those before us here, have confronted the question of whether the doctrine of continuing obligation applies when the alleged unfair labor practice is the refusal to execute a contract. The Ninth Circuit holds to the view that each refusal to sign a contract occurring within the six-month period “in and of itself constitutes, as a substantive matter, [an] unfair labor practice.” N.L.R.B. v. Strong, 386 F.2d 929, 931 (9th Cir. 1968). In contrast, the First Circuit, in N.L.R.B. v. Field & Sons, 462 F.2d 748 (1st Cir. 1972), expressly rejected the Strong case and held that if the first refusal to sign the contract occurred outside the six-month period, the action is barred by 10(b) even if subsequent refusals are made within the six-month period. The Field court reasoned that the refusal to execute the contract constituted “a failure to perform a particular act” and should be distinguished, for purposes of Section 10(b), from a general “failure to bargain, or breach of a general duty imposed by the Act as to which each refusal . . . may be a new unfair labor practice . . . .” 462 F.2d at 751. With reference to Strong, the Field court stated “[w]e do not think, in terms of a statute of limitations, that to label an act as an unfair labor practice should have substantive consequences any more than, for example, using the term breach of contract.” 462 F.2d at 750.

While we agree with this sentiment, we are hesitant to embrace the equally slippery distinction, drawn by the Field court, between a general failure to bargain and a failure to perform a particular act. Instead, it seems to us that analysis of the problem should focus on the purpose of Section 10(b) and on the needs of the defense.

“[T]he requirement of § 10(b) of the Act that the charge be filed within 6 months after the event was designed to give alleged violators opportunity to prepare defenses and to protect them against stale claims.” N.L.R.B. v. Waterfront Employers, 211 F.2d 946, 955 (9th Cir. 1954). “Congress inserted this limitation provision because there had been complaint that people were being brought to book upon stale charges.” N.L.R.B. v. Pennwoven, swpra at 524. In a case where the alleged violation is the discriminatory refusal to hire, this design is not thwarted by application of the continuing obligation doctrine since the employer’s defense in any event would relate to his motives or legitimate business purposes at the time of the refusal on which the charge is based. See, e. g., Lummus Co. v. N.L.R.B., 119 U.S.App.D.C. 229, 339 F.2d 728 (1964). In contrast, where the alleged violation is the refusal to rehire a discriminatorily discharged employee, it is obvious that an employer’s defense would focus on his motive or business purpose at the time of the discharge. See Machinists Local v. N.L.R.B., supra. Application of the continuing obligation doctrine to allow revival of such a charge on each occasion of the employer’s refusal to rehire would clearly jeopardize the employer’s opportunity to prepare defenses and would risk subjecting him to a stale claim. See N.L.R.B. v. Pennwoven, supra at 525.

As in the ease of a refusal to rehire a discriminatorily discharged employee, application of the continuing obligation doctrine to a charge of refusal to execute a contract is inconsistent with the purposes of § 10(b). An employer so charged would predictably defend against such a charge by denying that a contract binding on him had in fact been formed. Indeed, this is precisely the defense asserted by McCready before the Board and here. Establishment of such a defense could and probably would require reference to facts and occurrences surrounding the contract negotiations, as it did in McCready’s case. With the passage of time, those facts become harder to prove as memories fade and witnesses become unavailable. Adoption of the position urged upon us by the Board would allow a charge to be brought at the whim of a union at any time within the term of the contract at issue — in this case three years. During this period, the employer is left in a precarious position, uncertain of his liability and bearing an onus of defense which increases with time. This clearly contravenes the purpose of Section 10(b).

Nor is there anything in our case to suggest that strict application of the 10(b) limitation would work a hardship on the Union. It is ápparent that the battle lines were clearly drawn on the date of the first refusals — August 3, 1970. The employers unequivocally refused to execute the contract on that date. The Union Representative expressed his intent to pursue legal remedies. On occasions of subsequent refusals, the employers merely reiterated the reasons initially given for refusing. On August 3, when Mr. McCready and Mr. Mayer refused to execute the contract and the Union Representative knew, or thought he knew, that an unfair labor practice had taken place, Respondents’ liability accrued and, absent a change in their position in the interim, action against the Respondents was barred by Section 10(b) after six months had elapsed. See N.L.R.B. v. Pennwoven, supra at 525.

Enforcement of the Order of the Board is denied.

      . In Melco’s case, it is stipulated that the August 3 refusal was unequivocal. In McCready’s case, while the nature of the refusal was not the subject of a stipulation, the record does not leave room for doubt that it, too, was unequivocal.

      . McCready argued that the employers’ representative in the negotiations leading to the June 5 agreement was without authority to bind McCready.

      . Were this not the case, our decision here might well be different. In this regard, it is noteworthy that in N.L.R.B. v. Strong, supra, the employer twice changed his reason for refusing to sign the contract.


author: RONEY, Circuit Judge:

text:
    Mrs. Frances E. QUINDLEN, Plaintiff-Appellee, v. The PRUDENTIAL INSURANCE COMPANY OF AMERICA, Defendant-Appellant.
    No. 72-3149.
    United States Court of Appeals, Fifth Circuit.
    July 11, 1973.
    Rehearing Denied Aug. 13, 1973.
    Neilson S. Jacobs, Shreveport, La., for defendant-appellant.
    Troy E. Bain, Shreveport, La., for plaintiff-appellee.
    Before BELL, INGRAHAM and RO-NEY, Circuit Judges.
   RONEY, Circuit Judge:

Milton D. Quindlen applied for life insurance, paid a full year’s premium, received temporary insurance pending acceptance or rejection of the application by the Company, and then died. The insurance company contended that it had rejected his application and thus had terminated the temporary insurance before the date of death. The District Court found that a five-day notice is required by the Louisiana statute to terminate this type of temporary life insurance, that no notice was given, and therefore held against the insurance company. We hold that the Louisiana statute does not apply to this kind of policy so that a five-day notice is not required, but we further hold that notice of some kind is necessary under the terms of the policy to complete in fact the rejection of the application by the Company. No notice at all having been given prior to death, the corporate act of rejection was never completed and the judgment for the beneficiary of the policy is affirmed.

The insurance industry has developed what is known as temporary or interim life insurance to give insurance protection for the period of time between the application for insurance and the eventual issuance of the policy. Under this kind of insurance, if he pays the initial premium, an applicant can receive immediate, full insurance coverage from the date that he applies for a policy of life insurance.

Inasmuch as the contract provisions of life insurance applications and interim insurance pending acceptance or rejection of the application vary among insurers, it is necessary to pay close attention to exactly what the insurance company here agreed to do.

On August 24, 1967, the insured, a resident of Shreveport, Louisiana, applied to The Prudential Life Insurance Company of America for a $15,000 life insurance policy. On August 26, 1967, he completed a physical examination, paid the first annual premium, and was issued a “Prepayment Receipt,” the effect of which was to establish temporary or interim insurance coverage on his life. On October 3, 1967, a Prudential employee in Houston stamped his application as rejected. On October 5, 1967, the insured died. On October 6, 1967, a form card entitled “Notice of Rejection of Application” was prepared in Prudential’s Houston office and was mailed to the Shreveport office so that the insured could be advised of the rejection. The notice of rejection was communicated to the insured’s wife on October 6, 1967. This suit followed.

The “Prepayment Receipt” required an affirmative act by Prudential to terminate the interim insurance: either rejecting the insurance application or declining to consider it on a prepaid basis during insured’s lifetime.

The pertinent sections of the receipt provide:

NOTWITHSTANDING THE ABOVE PAYMENT NO INSURANCE SHALL TAKE EFFECT OR CONTINUE IN EFFECT EXCEPT AS SPECIFIED IN THIS RECEIPT. IF AND ONLY IF PART I OF THE APPLICATION AND PART II OF THE APPLICATION . . . ARE ALL COMPLETED ... and if and only if the Company has neither rejected the application nor declined to consider it on a prepaid basis, then:
1. Insurance (interim term insurance if requested in the application) in accordance with the terms and conditions of the policy applied for shall take effect on the effective date;
* * * * * -X-
Any insurance under 1 above may be terminated by the Company at any time during the proposed Insured’s lifetime by rejecting the application or declining to consider it on a prepaid basis .... If any insurance is terminated . . . the Company’s sole liability shall be the return of the above payment.

The Louisiana Insurance Code, La. Rev.Stat. 22:636, which governs all contracts of insurance entered into in Louisiana, provides for a basic five-day notice before effective cancellation of coverage under an insurance policy. The Code expressly does not apply to certain temporary life insurance binders, however, because Section E provides:

E. This Section shall not apply to temporary life insurance binders nor to contracts of life or health and accident insurance which do not contain a provision for cancellation prior to the date to which premiums have been paid, nor to the contracts provided in Part XV of this Chapter.

La.Rev.Stat. 22:636(E) (1959).

The critical question as to the statutory five-day notice requirement, then, is whether this “Prepayment Receipt” is a “temporary life insurance binder” expressly excluded from the notice requirement. The answer to this question turns on whether “temporary life insur-anee binders,” as referred to in Section E, is modified by the clause “which do not contain a provision for cancellation prior to the date to which premiums have been made.”

In construing this section, the District Court concluded that the only time notice is not required to terminate temporary insurance is when no premium is paid for it. The Court said:

We conclude that from a grammatical sense the adjectival clause beginning “which do not” modifies not only “contracts of life or health and accident insurance” but also “temporary life insurance binders.” The failure of the Legislature to insert a comma after “binders”, while using one after “paid”, suggests a law-making intent to have the adjectival clause attach to temporary life insurance binders.
Moreover, our conclusion' is buttressed, in fact impelled, by the overall scheme of Section 636. Paragraph “A” requires notice of cancellation by the insurer of any policy which by its terms is cancellable at the option of the insurer. This rule has three exceptions (the third need not be discussed). Subsection “A” requires notice of cancellation and Subsection “E” clearly excepts contracts of life or health and accident insurance which do not contain a provision for cancellation prior to the date to which premiums have been paid. If read literally, the second exception would relieve insurance companies of giving notice where the policy contained no provision for cancellation prior to the date to which premiums have been paid. Such a conclusion is nonsensical. The reasonable explanation is that where a policy of life or health and accident insurance is issued but no premium is paid, then the insurance company could cancel without notice.
The statutory construction principle requiring restrictive interpretation of exceptions demands that we attach the adjectival clause to temporary life insurance binders. Therefore, failure to pay the premium when a “temporary life insurance” policy is issued obviates notice of cancellation. The consequence of this is to have Subsection “E”, in its first and second exceptions, parallel in an exclusory manner, the provisions of Subsection “A.”

Although we acknowledge that Subsection E constitutes an exception from the general rule requiring notice and, as such, must be narrowly construed, the settled rules governing statutory construction and the very nature of temporary life insurance require that we adopt a view different from the District Court.

First, under the “doctrine of the last antecedent,” relative and qualifying words, phrases, and clauses are to be applied to the words or phrase immediately preceding, and are not to be construed as extending to or including others more remote. See, e.g., Mandel Bros. v. FTC, 254 F.2d 18 (7th Cir. 1958), rev’d on other grounds, 359 U.S. 385, 79 S.Ct. 818, 3 L.Ed.2d 893 (1959); United States ex rel. Santarelli v. Hughes, 116 F.2d 613 (3d Cir. 1940); 82 C.J.S. Statutes § 334 (1953).

Second, as a general rule, the use of a disjunctive in a statute indicates alternatives and requires that those alternatives be treated separately. Hence, language in a clause following a disjunctive is considered inapplicable to the subject matter of the preceding clause. See, e.g., In Re Rice, 83 U.S.App.D.C. 26, 165 F.2d 617 (1947); 82 C.J.S. Statutes § 335 (1953). Here the disjunctive “nor” sets off “temporary life insurance binders” from “contracts of life or health and accident insurance.”

Third, under the District Court’s construction of Subsection E, the exemption loses its meaning when applied to temporary life insurance. Under such construction, temporary insurance may be cancelled without the statutory five-day notice only when the premium has not been paid. This presupposes a form of temporary insurance that is not prepaid. But, the payment of the premium at the time of the application is essential to the issuance of temporary insurance. The temporary insurance contract itself is in the form of a receipt for that premium.

Fourth, a construction of Subsection E so that it exempts “temporary life insurance binders . . . which do not contain a provision for cancellation prior to the date to which premiums have been paid” ignores another fundamental characteristic of temporary life insurance. Because temporary life insurance only runs for the time between the application and its acceptance or rejection, no premium can be said to have been paid to any certain date.

In view of these reasons, we hold that the five-day notice required by the Louisiana Insurance Code is inapplicable to the policy of temporary insurance before us in this case.

Before the temporary insurance terminated, however, it was necessary that the Company reject the application. We think that any reasonable interpretation of the policy would lead to the conclusion that this means a completed rejection — not a decision by an employee in the Company to reject — but the corporate act of rejection. We do not see how the Company, as a legal entity, could have rejected the application within the terms of the “Prepayment Receipt” unless it conveyed this information to the applicant. This is not a case of mere nonacceptanee, where something must be done before the policy goes into force, as in the ease of an application that becomes binding “upon approval by the home office.” Under such contracts, unless that “something” is done, there is no insurance coverage. Inaction by the Company leads to no insurance. In this case, there is insurance which continues until the Company acts. It seems to us that action requires some outward thrust from the corporation — some communication to the applicant.

Louisiana holds that the law between the parties is to be found in the insurance policy, in this case, the “Prepayment Receipt.”

It is well settled that policies of insurance are contracts between parties and as such they are the law between them. LSA-C.C. Article 1901; Rogillio v. Cazedessus, 241 La. 186, 127 So.2d 734 (1961). Where there are ambiguities and provisions of doubtful meaning they are to be resolved against the insurer but courts are not allowed to gerrymander provisions that are clear upon their face which would alter terms or change their import. LSA-C.C. Article 1945 et seq.; Muse v. Metropolitan Life Ins. Co., 193 La. 605, 192 So. 72 (1939).

Cormack v. Prudential Insurance Co. of America, 259 So.2d 340, 343 (La.App. 1972).

“The words of a contract are to be understood, like those of a law, in common and usual signification, without attending so much to grammatical rules, as to general and popular use.” LSA-C.C. Art. 1946 (1973); Presten-back v. Prudential Ins. Co. of America, 257 So.2d 698, 699 (La.App.1972).

We think that if not clear, then resolving the ambiguity against the Company, the provision in the “Prepayment Receipt” that the insurance may be terminated by rejection of the application, given common and usual signification, would require a communicated rejection to the applicant.

The whole purpose of the kind of temporary binder issued in this case is to assure an applicant that he is insured until the Company acts — not that he is insured if the Company acts. It would abort the designed purpose of the Company’s program to hold that the applicant could become uninsured without being notified. The entire thrust of the “Prepayment Receipt” is that the applicant will be insured until he hears from the Company. If it were not so, the Company could easily have so provided.

The District Court, in construing the statute, reasoned that the “Legislature intended notice of cancellation to be given in order for the applicant to reapply with another insurance company” and “that notice of cancellation is a sine qua non for rejection of coverage.” Although we think that the reasons find no support in the words of the statute, which plainly exempts temporary insurance binders from the five-day notice, similar reasons support our interpretation of the contract which binds the parties.

On the record before us, there was not sufficient corporate action that would amount to rejection. The stamping of the application as “rejected” and the inter-office communications that led to the notice that was sent on October 6, the day after the insured’s death, amounted to nothing more than the inner workings of the corporation. There could have been no “rejection” within the terms of the contract until some communication was sent to the insured. We need not here decide whether the notice had to be actually received by the applicant.

No case precisely on point can be found in the reported decisions dealing with temporary or interim life insurance. Prudential contends that Leube v. Prudential Ins. Co., 147 Ohio St. 450, 72 N.E.2d 76 (1947), has ruled adversely on this point. In Leube, the Ohio Supreme Court held that the insurer was not required to give notice of the rejection of the application for the permanent insurance in order to terminate the existing temporary insurance. In Leube, however, the receipt provided that the insurance proceeds would be paid if death occurred after the date of the receipt but prior to the issue of the policy “provided said application is approved and accepted at the home office of the company.” 72 N.E.2d at p. 77. The Court said:

It seems too clear to require argument, that the insurer may not be lawfully required to pay a loss against which it had specifically refused to insure or be held liable when it had definitely rejected the application for insurance and thereby refused to accept the risk.

72 N.E.2d at p. 78.

In the case at bar, the Company insured the applicant for the interim period until it rejected the application, and thus was liable on the interim insurance risk, even if it refused to accept the permanent risk by rejection of the application. Thus, it is not held liable on a risk that it refused to accept.

With this view, then, we hold that the District Court was in error in finding that the policy had been rejected within the terms of the “Prepayment Receipt” on October 3. No rejection took place until after the death. There being no rejection, the temporary insurance policy was not cancelled, and was in full force and effect when the insured died. Thus, though by a different road, we arrive at the same destination as the District Court and conclude that the beneficiary is entitled to judgment on the temporary insurance binder.

Affirmed.


text:
    James SIMON, Individually and as representative of a Class, etc., Plaintiff-Appellant, v. MERRILL LYNCH, PIERCE, FENNER AND SMITH, INC., a Delaware corporation, Defendant-Appellee.
    No. 72-2905.
    United States Court of Appeals, Fifth Circuit.
    July 10, 1973.
    Rehearing and Rehearing En Banc Denied Oct. 30, 1973.

      G. Lee Hart, Dallas, Tex., William H. Merrill, Detroit, Mich., A. Joe Fish, William A. McKenzie, Dallas, Tex., for plaintiff-appellant.
    Frank Finn, Jr., Jerry L. Buchmeyer, Dallas, Tex., Brown, Wood, Fuller, Caldwell & Ivey, New York City, Erwin S. Simon, Detroit, Mich., Henry F. Minner-op, Richard Conway Casey, New York City, for defendant-appellee.
    Before BELL, INGRAHAM and RO-NEY, Circuit Judges.
   RONEY, Circuit Judge:

James Simon appeals from a judgment for defendant Merrill Lynch, Pierce, Fenner and Smith, Inc., in a suit for damages resulting from alleged common law fraud and negligence and for nondisclosure violations of the Securities Exchange Act of 1934. 15 U.S.C.A. §§ 78j and 78o(c)(l), 17 C.F.R. § 240.10b-5. After a complicated procedural history, the District Court denied plaintiff’s motions for joinder, intervention, and that the suit be maintained as a class action. At'trial, the Court, sitting without a jury, concluded that Simon had failed to establish a claim against Merrill Lynch. We affirm.

The basis for Simon’s individual suit and the purported class action is the purchase of common stock of Scientific Control Corporation (SCC), a Dallas computer firm, by Simon and some 6,000 others upon Merrill Lynch’s alleged misrepresentations and omissions of material facts in its written and oral statements, advertisements, and acts. Plaintiff alleges that, in March 1969, Merrill Lynch was apprised of SCO’s precarious financial condition, but the defendant continued recommending the stock, thereby creating an artificial market. In November, 1969, SCC filed a petition for reorganization under Chapter XI of the Bankruptcy Act, and the value of SCC common stock declined -substantially-

Simon contends that his purchase of 1,900 shares of the stock during the period May through October, 1969, was based on these misrepresentations, and he claims to represent the class of individuals who also purchased the -stock in reliance upon Merrill Lynch’s misrepresentations. Although not argued in the trial court, he urges on appeal that Merrill Lynch was an “insider” of SCC and that Merrill Lynch made a market in SCC common stock without revealing that fact to all of its customers.

I. Class Action

The District Court’s denial of Simon’s motion for an order that this action be maintained as a class action, Rule 23(b) (1), F.R.Civ.P., rested on its views that “questions of fact and law common to the members of the class [did] not predominate over questions of fact and law affecting only individual members,” and that the use of the class action device in this action would not preclude a multiplicity of suits based on a common wrong. These determinations were based on the Court’s findings that Simon had “unique” access to information regarding SCC through that company’s board chairman, his personal friend, that there was no showing that the oral representations made to Simon by a Merrill Lynch salesman had been similarly made to other members of the purported class, and that plaintiff could not supply the required proof for the entire class on the issues of misrepresentation and omission.

Rule 23 permits a class action only when the Court finds that “the questions of law or fact common to the members of the class predominate over any question affecting only individual members . . . .” Rule 23(b)(3), F.R. Civ.P.

If there is any material variation in the representations made or in the degrees of reliance thereupon, a fraud ease may be unsuited for treatment as a class action. See Rule 23, Advisory Committee’s Official Note, 39 F. R.D. 98, 107 (1966). Thus, courts usually hold that an action based substantially, as here, on oral rather than written misrepresentations cannot be maintained as a class action. See, e. g., Morris v. Burchard, 51 F.R.D. 530 (S.D.N.Y.1971); Moscarelli v. Stamm, 288 F.Supp. 453 (E.D.N.Y.1968); See also Comment, The Impact of Class Actions on Rule 10b-5, 38 U.Chi.L.Rev. 337, 342 (1971). Similarly, if the writings contain material variations, emanate from several sources, or do not actually reach the subject investors, they are no more valid a basis for a class action than dissimilar oral representations. Cf. Harris v. Palm Springs Alpine Estates, Inc., 329 F.2d 909 (9th Cir. 1964); Frankel v. Wyllie & Thornhill, Inc., 55 F.R.D. 330 (W.D.Va.1972); Dolgow v. Anderson, 43 F.R.D. 472 (E.D.N.Y.1968); Richland v. Cheatham, 272 F.Supp. 148 (S.D.N.Y.1967).

Although Simon alleges that Merrill Lynch’s misrepresentations were both oral and written, his testimony premised his reliance on the oral touting of SCC stock by a Merrill Lynch account executive. Even if plaintiff had established that the alleged misrepresentations were primarily written, a class action would not be appropriate unless he could prove the similarity of the writings. His failure to prove any standardized representations by Merrill Lynch bars a class action whether it is based on Rule 10b-5 or the state common law. Furthermore, the geographical dispersion of the alleged representations would bring into issue various state common law standards. With no single law governing the entire class, common issues of law cannot be shown to warrant Rule 23 treatment.

We recognize that the Rule 23(b)(3) suit has been one of the principal weapons against fraud in securities transactions, see Green v. Wolf Corp., 406 F.2d 291, 295-296 (2d Cir. 1968), cert. denied, 395 U.S. 977, 89 S.Ct. 2131, 23 L.Ed.2d 766 (1969); and that the Securities Exchange Commission has advocated its use in such cases, see Dolgow v. Anderson, supra; accord, Wolfson v. Solomon, 54 F.R.D. 584 (S.D.N.Y.1972). But the record before us — indicating no standardized communications, plaintiff’s primary reliance on oral statements made directly to him and his personal access to, if not information about, SCC’s financial condition' — demonstrates no “common course of conduct,” see Richland v. Cheatham, supra; or “common scheme," see Dolgow v. Anderson, supra, on the part of Merrill Lynch which would insure Simon’s adequate representation of the purported class.

Plaintiff, in alleging that he was not afforded sufficient opportunity to support his capacity to represent the class, has overlooked the elaborate two-year history of this suit. Our reading of the District Court’s Order indicates that the Court’s discussion of the reasonableness of Simon’s reliance and his access to inside information was properly directed to the commonality of issues between him and the purported class.

II. Merits

The District Court found that Merrill Lynch’s recommendations of SCC common stock were in no way “fraudulent or negligent or inaccurate in stating facts known by [the brokerage firm] about [SCC],” and that the evidence did not establish that Merrill Lynch was fraudulent or negligent in either its investigation of SCC or its representations about the Company. The Court specifically found that Simon “did not rely on [Merrill Lynch’s representations] regarding these securities.” The Court also found that Merrill Lynch did disclose to Simon, in the midst of his trading, its position as market maker in SCC common stock during the relevant period. Upon these findings, the Court held that Simon had failed to establish a claim against Merrill Lynch under the Securities Act or under common law fraud or negligence.

Simon has not met his burden under Rule 52(a), F.R.Civ.P., of establishing as “clearly erroneous” the trial court’s findings. Nor has he convinced us of the merit of his contentions regarding (a) fraud or negligence, (b) defendant’s disclosure of its role as a market maker in SCC common stock, and (e) Merrill Lynch’s postui-e as an “insider.”

A. Fraud or Negligence

Simon contends that the District Court’s decision turned on inappropriate standards of reliance and proximate cause. He reasons that, since this is allegedly a case of nondisclosure by an insider, the Court’s finding that plaintiff did not rely on Merrill Lynch’s representations is not dispositive.

Simon would have us assert, consequently, that reliance need not be proved in nondisclosure cases. He relies primarily on the standard established by the United States Supreme Court in Affiliated Ute Citizens of Utah v. United States, 406 U.S. 128, 92 S.Ct. 1456, 31 L.Ed.2d 741 (1972):

Under the circumstances of this case, involving primarily a failure to disclose, positive proof of reliance is not a prerequisite to recovery. All that is necessary is that the facts withheld be material in the sense that a reasonable investor might have considered them important in the making of this decision. . . . This obligation to disclose and this withholding of a material fact establish the requisite element of causation in fact. Chasins v. Smith, Barney and Co., 438 F.2d, at 1172.

406 U.S. at 153-154, 92 S.Ct. at 1472. The Courts, in other cases, have pointed out that reliance, “a particularly difficult matter to . prove” regarding the nondisclosure of a fact, Mills v. Electric Auto-Lite Co., 396 U.S. 375, 382, 90 S.Ct. 616, 24 L.Ed.2d 593 (1970) (n. 5), is “an element of causation which plays little role in nondisclosure cases.” Crane Co. v. Westinghouse Air Brake Co., 419 F.2d 787, 797 (2d Cir. 1969), cert. denied, 400 U.S. 822, 91 S.Ct. 41, 27 L.Ed.2d 50 (1970). See Chasins v. Smith, Barney & Co., 438 F.2d 1167 (2d Cir. 1970); 6 L. Loss, Securities Regulation 3876-80 (1969 Supp.).

Simon argues that, under the Ute standard, he was not required to establish his individual reliance on Merrill Lynch’s representations. All that need be shown is that the nondisclosed information was national and that causation of the investor’s injury be established by proof of an obligation to disclose and a withholding of a material fact.

We think the finding that plaintiff did not generally rely upon the broker for advice makes the principle asserted by Simon inapplicable here. Although Ute does state that a plaintiff need not specifically demonstrate reliance on particular omissions, that case did not involve, as here, a general lack of reliance by the plaintiffs on the defendants’ representations. In Ute, concerning the management and distribution of the Indian tribe’s assets, the Court acknowledged that the plaintiffs “considered these defendants to be familiar with the market for the shares of stock and relied upon them when they desired to sell their shares.” 406 U.S. at 152, 92 S.Ct. at 1471. The Court made clear that “if [defendants] had functioned merely as a transfer agent, there would have been no duty of disclosure here.” 406 U.S. at 152, 92 S.Ct. at 1471.

This reasoning is apparent in this Circuit’s holdings that some element of general reliance by plaintiff, even in nondisclosure cases, is essential to a Rule 10b-5 action. Grumbles v. Times Herald Printing Co., 387 F.2d 593 (5th Cir. 1968), cert. denied, 390 U.S. 1028, 88 S.Ct. 1419, 20 L.Ed.2d 285; Clement A. Evans & Co. v. McAlpine, 434 F.2d 100 (5th Cir. 1970), cert. denied, sub nom. Clement A. Evans & Co. v. A. M. Kidder & Co., 402 U.S. 988, 91 S.Ct. 1660, 29 L.Ed.2d 153 (1971). In Grumbles, a Rule 10b-5 action alleging nondisclosure of a material fact in a securities transaction, this Court upheld the District Court’s judgment for defendants on the basis that “[t]he jury [had] decided that the [plaintiffs] failed to prove the substance of their case of reliance and materiality of the withheld information,” 387 F.2d at 593. In Evans & Co., we made clear that

[P]laintiff’s sophistication, expertise and business acumen in the financial community, his access to information and opportunity to detect the fraud are all relevant considerations in determining the exercise of reasonable diligence. [Citing, inter alia, Kohler v. Kohler, 319 F.2d 634 (7th Cir. 1963), a nondisclosure case].

434 F.2d at 104.

In the case at bar, the District Court found no evidence “that plaintiff followed [Merrill Lynch’s] advice to his detriment,” indicating that, unlike those who relied on the defendants in Ute, Simon made his own investment decisions and relied in no way on defendant’s recommendations. The circuit’s requirement of reasonable reliance, therefore, was not met.

Nor does Chasms, supra, provide him with support because the Second Circuit limited that opinion to the fact situation where the defendant “had strongly recommended sales of [plaintiff’s] holdings and purchases of stocks in which [defendant] was dealing as a principal” and the plaintiff relied upon defendant’s recommendations of the purchase. 438 F.2d at 1172. The District Court’s finding that Merrill Lynch informed Simon of its market-making by wire flash prior to his July 8 and October 23, 1969 purchases of SCC common stock both preclude his reliance on Chasms regarding these latter trades and impeach any assertion that he would not have made any purchases had he known of Merrill Lynch’s activities.

B. Market Maker

Simon challenges the District Court’s finding that, “[w]hile Merrill Lynch did not affirmatively disclose to plaintiff it was making a market in [SCC] at the time of his first purchases oh May 9, 1969, it did disclose this to plaintiff and all of its customers by way of a wire flash on or about June 9, 1969, although plaintiff testified he never received this notice.” He argues that Merrill Lynch was obliged to disclose these activities at the outset of his trading in SCC common stock because of the potentially adverse interest represented by market-making. See Chasins v. Smith, Barney & Co., supra.

There is a conflict in the trial testimony regarding whether Simon was orally advised by his account executive at the time of his purchases that Merrill Lynch made a market in SCC common stock. The broker contended that, at the time of Simon’s second purchase, he sent all of his customers, including Simon, a wire flash informing them of the Merrill Lynch market in SCC. Although Simon testified that he never received the wire flash or any other relevant materials from Merrill Lynch, the District Court credited the broker’s testimony that Simon, as record owner of the SCC shares, would have been sent the wire flash, the company’s annual report, a proxy statement, and other notices pursuant to office practice. Simon has not established, consequently, that the trial court’s findings on this point were clearly erroneous.

C. Inside Information

Although plaintiff did not raise the “insider” issue at trial, the record is sufficient for us to determine that the argument is without merit.

Simon asserts that Merrill Lynch was an “insider” of SCC and failed to disclose “inside information” regarding the Company’s adverse financial condition. This argument, however, is based solely on his allegation that the brokerage firm owned, as of September 10, 1969, 27.4% of the outstanding common stock of SCC. What plaintiff has failed to admit is that the uncontradicted evidence shows that Merrill Lynch, as a broker-dealer, was not the beneficial owner of the stock, but only held it in “street name” for the benefit of its customers. As a market maker, Merrill Lynch would have obtained those shares for the firm’s trading account in order to maintain an orderly market and not for investment purposes.

Simon contends that Merrill Lynch received from SCC’s chairman adverse inside information and failed to disclose this information. No support for this allegation can be found in the record. If such information had been communicated to Merrill Lynch, the District Court could not have concluded, as it did, that there was “no evidence that Merrill Lynch’s opinions in 1969 were in any way fraudulent or negligent or inaccurate in stating facts known by it about [SCC].” The facts, therefore, do not sustain Simon’s allegation.

Since the District Court found that Merrill Lynch did not purchase SCC stock for investment purposes, the firm’s ownership of SCC stock is not within the purview of Section 16(b) of the Securities Exchange Act, 15 U.S.G. A. § 78p, which requires certain categories of individuals, with particular relationships with the issuer of securities, to meet various reporting standards. Section 16(d), 15 U.S.C.A. § 78p(d), though, specifically exempts from these reporting requirements “any purchase and sale . . . of an equity security not then or theretofore held by him in an investment account, by a dealer in the ordinary course of his business and incident to the establishment or maintenance by him of a primary or secondary market . . . for such security.” Thus, Merrill Lynch cannot be construed to be an “insider” of SCC as a matter of law.

Affirmed.