author: COFFIN, Chief Judge.

text:
    Noah GREENSPUN, Plaintiff-Appellee, v. Eugene F. BOGAN et al., DefendantsAppellees (two cases). Appeal of Joseph STEIR. Appeal of MORGAN GUARANTY TRUST COMPANY OF NEW YORK.
    Nos. 73-1303, 73-1304.
    United States Court of Appeals, First Circuit.
    Argued Jan. 8, 1974.
    Decided Feb. 22, 1974.

      Christopher Crowley, New York City, with whom John R. Hally, Daniel C. Sacco, Nutter, McClennen & Fish, Boston, Mass., Davis Polk & Wardwell, New York City, and Hannoch, Weisman, Stern & Besser, Newark, N. J., were on brief, for appellants.
    George C. Caner, Jr., Boston, Mass., with whom John Silas Hopkins, III, Robert Charles Clark, Elizabeth Paine and Ropes & Gray, Boston, Mass., were on brief, for Durand A. Holladay and others, appellees.
    Gordon T. Walker, Boston, Mass., with whom James D. St. Clair and Hale & Dorr, Boston, Mass., were on brief for Eugene F. Bogan and others, appellees.
    Irving Bizar, New York City, with whom Demov, Morris, Levin & Shein, New York City, Harvey A. Silverglate, and Silverglate, Shapiro & Gertner, Boston Mass., were on brief, for Noah Greenspun, appellee.
    Before COFFIN, Chief Judge, McENTEE and CAMPBELL, Circuit Judges.
   COFFIN, Chief Judge.

This consolidated appeal arises from a judgment of August 3, 1973, approving the settlement of a shareholder’s derivative suit, commenced April 5, 1972 on behalf of Continental Mortgage Investors (CMI),- a real estate investment trust, against its management advisor, Continental Advisors (CA), and against its trustees, some of whom were affiliated with CA. The suit alleged that a corporate opportunity had been diverted from CMI, and also that fees paid to CA by CMI, under its advisory contract, were excessive and unwarranted by the services rendered. Appellant Morgan Guaranty Trust Company (Morgan), holding CMI stock as trustee in various trusts, and appellant Joseph Steir (Steir), a stockholder, neither a party to the original suit, contend that the district court abused its discretion in approving the settlement and in denying Morgan’s Rule 60(b) motion to reopen the settlement judgment. They seek to have the entire issue remanded to the district court for the issuance of a new notice of settlement and a new hearing on the fairness of the proposed settlement. We conclude that a remand is unnecessary and improper under the circumstances of this case, and affirm the district court.

Appellants claim that the district court abused its discretion principally because (1) it failed to conduct the independent evaluation of the settlement required under Rule 23.1, F.R.Civ.P.; (2) the settlement itself is grossly unfair; (3) notice to CMI shareholders was inadequate because it failed to disclose material facts relating to the settlement? and (4) since appellant Morgan mislaid notices of settlement through clerical error, the court abused its discretion in refusing to reopen the proceedings.

I

Negotiations concerning a possible settlement spanned several months before it was finally announced that settlement had been reached. On March 19, 1973, the plaintiff in the derivative action filed an amended complaint, expanding its allegations concerning the exces-siveness of the advisory fee schedule. On that same day it was announced that a settlement had been reached “in principle”. Thereafter, depositions were taken of certain trustees, and documents collected, concerning the alleged exces-siveness of the fee schedule. Details of the settlement were finally resolved by June 22, 1973, on which date a stipulation, setting out the terms of the proposed settlement, was executed and filed in court, along with a motion for an order providing CMI shareholders with notice of the proposed settlement and a hearing on the proposal. The notice was approved and mailed to shareholders on July 2, 1973. In it the settlement terms were set forth, a hearing date of August 2 was established, and objectors to the settlement proposal were put on notice that they must file and serve written objections on or before July 26.

By July 30, when no objections to the settlement had been filed by any shareholder, the plaintiff filed a memorandum in support of the settlement, followed on July 31 by a similar memorandum from defendants. During the August 2 hearing, after presentations from counsel, the court asked if anyone else present wished to speak to the settlement. Appellant Steir then identified himself, and argued that the settlement should not be approved because some trustees of CMI were also trustees of CA — this creating an alleged conflict of interest — and because “35 per cent of the profits of [CMI] go to CA; 65 per cent go to the stockholders who have got $115 million invested in the company.” Counsel responded to Steir’s argument. At the close of the hearings, additional documents and exhibits were filed with the court. The following day, August 3, the court found the stipulation of settlement to be “fair, reasonable, and proper”.

It is well established that a court should not merely rubber stamp whatever settlement is proposed by the parties to a shareholder derivative action. A court must, instead, exercise judgment sufficiently independent and objective to safeguard the interests of shareholders not directly involved in the action. See Newman v. Stein, 464 F.2d 689 (2d Cir. 1972), cert. denied, 409 U.S. 1039, 93 S.Ct. 521, 34 L.Ed.2d 488 (1972); cf. West Virginia v. Charles Pfizer Co., 440 F.2d 1079 (2d Cir. 1971), cert. denied, 404 U.S. 871, 92 S.Ct. 81, 30 L.Ed.2d 115 (1971); Protective Committee for Independent Stockholders of TMT Trailer Ferry v. Anderson, 390 U.S. 414, 424-425, 88 S.Ct. 1157, 20 L.Ed.2d 1 (1968). “[I]t is essential . . . that a reviewing court have some basis for distinguishing between well-reasoned conclusions arrived at after a comprehensive consideration of all relevant factors, and mere boilerplate approval phrased in appropriate language but unsupported by evaluation of the facts or analysis of the law.” Protective Committee for Independent Stockholders of TMT Trailer Ferry v. Anderson, supra, 390 U.S. at 424, 88 S.Ct. at 1163. At the very least, the district court must possess sufficient evidentiary facts to show the fairness of the proposed settlement; the burden is placed squarely on the proponents of the settlement to show that it is in the best interests of all those who will be affected by it. Norman v. McKee, 431 F.2d 769 (9th Cir. 1970), cert. denied, 401 U.S. 912, 91 S.Ct. 879, 27 L.Ed.2d 811 (1970). F.R.Civ.P. 23.1.

Appellants contend that the district court could not have exercised independent judgment because it lacked sufficient evidence to show the fairness of the proposed settlement. They point to the fact that the court had access to only two depositions concerning the proposed fee schedule, both of which were conducted after the March 19 announcement that an agreement had been reached “in principle” between the parties of the derivative action. Moreover, two volumes of exhibits and documents were given to the court on the eve before it approved the settlement, giving rise to the speculation that the court did not have a full opportunity to review their contents. And appellants point, most particularly, to the fact that the court did not have any documents in its possession which could show that the proposed fee schedule was comparable to the fee schedules of other, similar real estate investment trusts and their advisors.

While the district court’s evaluation of the proposed settlement may not have been as comprehensive or intensive as it could have been, appellants have failed to show that the district court clearly abused its discretion in approving the settlement because it lacked sufficient evidence on which an independent appraisal might be based. See West Virginia v. Charles Pfizer Co., supra, 440 F.2d at 1085. We think that the district court had ample opportunity to gain familiarity with the subtleties of the proposed settlement. By the time of the August 2 hearing, the court had read the memoranda from the parties to the action, and had had access to numerous documents and exhibits, which had been gathered in various discovery proceedings over the preceding months. The two additional volumes of exhibits given the court shortly before final approval of the settlement were indeed bulky, but the information that was both new and germane to the fairness of the settlement terms constituted a minor proportion. They were well within the digestive capacity of a judge familiar with the proceedings.

As to the comparability of the fee schedule with other fee schedules in the industry, the affiliated trustees alleged in their memorandum that the new fee schedule was indeed comparable, and referred the court to an exhibit listing fourteen other real estate investment trusts and their fee arrangements. Appellants now contend that the exhibit is grossly misleading in that it fails to show that the fee schedule is one of the highest in the industry since only two trusts on the list are similar to CMI in that they have no Blue Sky limitation on their fees and, as to these two trusts, unlike CMI, undisbursed commitments are not included in their fee base. Appellees argue, however, that several of the trusts on the list do have a fee schedule comparable with CMI’s, in which the advisor is paid a fee of 1.2 per cent against the base and, while CMI does not have the Blue Sky limitation, it does not receive other kinds of compensation realized by many other ad-visors, such as incentive compensation or a portion of forfeited commitment fees or capital gains. Moreover, appellees contend that, for a highly leveraged real estate investment trust (i. e., a trust conducting its business with greater reliance on borrowed money than others, which utilize equity capital to a greater degree), a more meaningful measure would compare fees with gross revenues, instead of with net income, and on this measure CMI stands close to the median in the list. It may be that a different judge with additional data would find that the settlement fell on the short side of fairness. The important point, for present purposes, is that, from the data provided it, the district court could have concluded that the fee schedule built into the proposed settlement was not so out of line with other fee schedules in the industry, considering the difference in circumstances between CMI and others, that the proposed settlement was unfair.

Finally, it should be noted that between the time that notice of the hearing on the settlement was issued, on July 2, and the hearing itself, on August 2, not a single discordant sound was heard from any shareholder concerning the advisability of the settlement. No shareholder filed an objection by July 26, when objections were due. Many shareholders were large, institutional investors, who could be expected to safeguard their interests with a modicum of diligence. At the hearing itself the only voice raised in opposition was that of appellant Steir, who alleged a conflict of interest and excessive fees, but presented no documents, data, or other evidence to underline his opposition. Under these circumstances we think that the district court operated within the bounds of its discretion in approving the settlement. The absence of any detailed opposition is a relevant, if not always reliable, factor in assessing the fairness of such a proposal. Altman v. Liberty Equities Co., 54 F.R.D. 620 (S.D.N.Y.1972).

II

Appellants urge, however, that the terms of the settlement itself are so obviously unfair — resulting in little or no benefit to CMI — that, regardless of the sufficiency of the evidence, the district court should have seen through the “sham” and rejected the proposal. Not to have done so, say the appellants, was a clear abuse of discretion.

They point out that, under the terms of the settlement, a service to CMI which had been performed by CA under the old advisory contract — that of finding borrowers directly — will be shifted to a new entity, the Conco Mortgage Company (Conco), which is owned or controlled, in part, by trustees of CMI affiliated with CA. However, unlike CA, Conco will charge borrowers a percentage “finder’s fee” for referring borrowers to CMI, thereby acting as a kind of “middleman”, serving CMI by locating borrowers, and serving borrowers by referring them to sources of funds. Appellants allege that this “finder’s fee” charged borrowers properly belongs to . CMI, not Conco, since Conco is the agent of CMI, and that any “finder’s fee” which borrowers are willing to pay Con-co will necessarily reduce the interest rate which borrowers are willing to pay for the use of CMI’s money. Thus, according to appellants, Conco’s profits will come at the expense of CMI. The guaranteed minimum $400,000 reduction per year in the advisory fee payable by CMI to CA under the terms of the settlement is therefore an obvious sham, say the appellants, which will result in no net benefit to CMI at all whenever Conco’s profits on CMI match the reduction in fees. Appellant likens the situation to that of a household cook whose employer would not tolerate tak-’ ing a kickback from a grocer for “finding” a household for the grocer to serve.

The major premise of appellant’s claim is that Conco’s “finder’s fee” ultimately comes out of CMI’s pocket. But this is not at all obvious. Appellees argue that, because Conco will provide borrowers with various services, such as assistance in obtaining long-term mortgage commitments necessary to qualify their loans for consideration by CMI, and access to a full range of lenders besides CMI, borrowers will willingly pay an extra fee beyond the cost of money. CMI therefore loses none of the gains from the reduction in its fee payable to CA. In fact, say appellees, CMI gains. Not only will Conco be able to put CMI in contact with more potential borrowers than could CA, but CMI will also reap the benefit of Conco’s profits, because, according to the terms of the settlement, the advisory fee which CMI pays to CA will be reduced by the amount of Coneo’s profits on CMI loans, under one aspect of the formula, whenever those profits exceed $400,000 per year. Appellee, in effect, likens Conco to a real estate broker organized by an owner of office buildings to find tenants, who also,’ to enlarge his offerings, solicits owners of industrial, commercial, and residential properties. Appellee would say that the fees paid by the tenants to the broker, which are not taken out of the rents paid any of the landlords, resemble the finder’s fees to be paid Conco.

Again, the important point, for our present purposes, is not to decide whose assertions are correct, but merely to ascertain whether the district court clearly abused its discretion in approving the settlement. It does not seem to us that the terms of the settlement are so obviously unfair, resulting in a “sham” benefit to CMI, that the district court could not have wisely approved it. Given the fact, in addition, that no evidence was offered the court to support appellants’ present assertions, we think that the district court acted well within its authority.

The settlement might not be so favorable to CMI as would a final judgment on the merits. But any settlement is the result of a compromise — each party surrendering something in order to prevent unprofitable litigation, and the risks and costs inherent in taking litigation to completion. A district court, in reviewing a settlement proposal, need not engage in a trial of the merits, for the purpose of settlement is precisely to avoid such a trial. See United Founders Life Ins. Co. v. Consumer’s National Life Ins. Co., 447 F.2d 647 (7th Cir. 1971); Florida Trailer & Equipment Co. v. Deal, 284 F.2d 567, 571 (5th Cir. 1960). It is only when one side is so obviously correct in its assertions of law and fact that it would be clearly unreasonable to require it to compromise to the extent of the settlement, that to approve the settlement would be an abuse of discretion.

Ill

The reason that shareholders did not make the foregoing detailed objections before the settlement was approved, according to the appellants, lay in the fact that the notice to shareholders of the terms of the proposed settlement was grossly misleading. They claim that this fact alone should result in a remand. In particular, appellants point out that the Notice of Settlement failed to show the “illusory nature” of the $400,000 per year guaranteed reduction in fees payable to CA, failed to show the cost of expenses to be shifted to CMI, and failed to alert the shareholders to the “fact” that the fee schedule would be immunized from judicial scrutiny for up to ten years.

The Notice to Shareholders of CMI, announcing the date of the settlement hearing, first outlined the allegations which prompted the litigation, including the allegation of excessive fees, and the answers to those allegations by the defendant. The Notice then summarized the settlement terms, describing Conco and the loan origination responsibilities which would be shifted from CA to Conco. The Notice then set out the formulae for the reduction of CMI fees payable to CA, stating specifically that one formula would be based upon “the amount of net profits earned and received by Conco on brokerage fees paid by borrowers on loans originated by Conco and placed with CMI . . . ” and that “CA will guarantee that the amount of the reduction under this arrangement will be no less than $400,000 per year . .” The Notice also stated that “Under this new Advisory Contract CMI will assume the obligation of paying its audit fees and expenses and the fees and expenses of its trustees, each of which were formerly borne by CA.” The Notice thereby set out all the facts on which appellants now rely for their assertion that the benefits of the settlement to CMI are “illusory”. We find nothing misleading about it. Appellees were under no obligation to include arguments for or against the settlement in the Notice. United Founders Life Ins. Co. v. Consumers National Life Ins. Co., supra, 447 F.2d at 655. Clearly, there was no obligation to point out the alleged “illusory nature” of the $400,000 reduction in fees. This assumes a fact yet to be convincingly supported.

The Notice did not specify the precise cost of audit and trustee expenses to be shifted to CMI under the new Advisory Contract, but it is doubtful that precise figures were available. Appellees now estimate that such costs will not exceed $100,000 per year, but the costs might fall considerably below that. Perhaps an estimate within the Notice would have been preferable. But we think this deficiency so insignificant that “[it does] not affect the essential purpose of the notice, namely, to fairly apprise the prospective members of the class of the terms of the proposed settlement and of the options that are open to them .” Philadelphia Housing Authority v. American Radiator and Standard Sanitary Corp., 323 F.Supp. 364, 378 (E.D.Pa.), aff’d, 403 F.2d 30 (3d Cir. 1971).

Finally, appellants’ contention that the new fee schedule will be immunized by settlement from judicial scrutiny for up to ten years is unfounded. The proviso to the Stipulation of Settlement merely states that the court’s finding that the settlement is “fair, reasonable, and proper” should not bar any shareholder from questioning the legality of the fee schedule in the future, whenever a materially different set of facts should occur. We understand this proviso to stand, simply, for the finality of the settlement, barring subsequent suit until material circumstances change — a necessary result if parties are to be willing to settle, and an implicit feature of all such agreements.

IV

Appellant Morgan claims that the district court abused its discretion in denying Morgan’s motion to reopen judgment on grounds of “excusable neglect”. Morgan alleges that it failed to receive notice due to its own clerical error.

Rule 60(b) of the F.R.Civ.P. is a remedial rule which normally receives a liberal construction from courts concerned that cases not be decided in default against parties who are inadvertently absent. Tolson v. Hodge, 411 F.2d 123, 130 (4th Cir. 1969); Nicholson v. Allied Chemical Corp., 200 F.Supp. 206, 207 (E.D.Pa.1961). But the liberal construction is usually reserved for instances where error is due to failure of attorneys or other agents to act on behalf of their clients, not where the client’s own internal procedures are at fault. Supermarkets General Corp. v. Grinnell Corp., 59 F.R.D. 512, 514 (S.D.N.Y.1973). Moreover, in a derivative action such as this, where the party claiming the benefit of the rule is one member of a large class who received notice, an indulgent construction of the rule might unduly protract settlement proceedings. This suggests that 60(b) relief should rarely be given to any member of the class whose failure to appear at a hearing is due to mistake bordering on carelessness, or carelessness itself. 7 Moore’s Federal Practice ¶60 22 at 254

Here, Morgan’s failure to appear could well be said to fit into this unexcused category. Morgan was apparently informed on May 22 that settlement had been reached, and that a hearing would be held. On July 2, formal Notice was sent to Morgan in its thirteen different nominee names to three different addresses but, due to clerical error, the Notice failed to reach the proper desk. Subsequent mailings to Morgan referred to the settlement, its terms, and the upcoming hearing. On July 16, Morgan was sent, in addition, thirteen sets of proxy material in preparation for the annual meeting, in which there appeared a description of the litigation and another mention of the August 2 hearing. On July 30, Morgan was sent thirteen quarterly reports which also referred to the settlement and hearing date. Under these circumstances, the district court did not abuse its discretion in denying Morgan’s 60(b) motion. See generally Robinson v. Bantam Books, Inc., 49 F.R.D. 139 (S.D.N.Y.1970).

Affirmed.

      . According to the reduced fee schedule built into the new Advisory Contract, the annual reduction in the advisory fee payable by CMI to CA would be the larger of two amounts: (1) The first amount would be the amount of net profits earned and received by Conco on brokerage fees paid by borrowers on loans originated by Conco and placed with CMI. CA guarantees that the amount of the reduction under this arrangement will be no less than $400,000 per year for each of the ten fiscal years beginning April 3, 3973. (2) The second and alternative amount, to be applied if it exceeds the first amount, would be an amount equal to t/io of 1% of that portion in’ excess of $850 million of the sum of the average annual assets of CMI invested in loans and average annual amount of committed but undisbursod investments of CMI in such loans.
      Thus, if in year 1, Conco’s profits were only $300,000 and CMI’s commitments only $950 million, the advisory fee would be reduced by the guaranteed minimum of $400,000. If, however, in year 2, Conco’s profits amounted to $500,000, while CMI’s commitments stayed at the $950 million level, then the fee would be reduced by $500,000. Thou in year 3, if Conco’s profits stayed at the $500,000 level, but CMI’s commitments soared to $1500 million, the fee would be reduced by l/w of 1% of $650 million ($1500 million minus $850 million) or $650,000.
      Appellants allege that because Conco’s profits rightfully belong to CMI, the only real benefit to CMI comes in the difference between CMI’s profits and the reduction in fees payable to OA. Tims, to take the above example, appellants allege that in year 1, the real benefit to CMI is only $100,000 (much of which would be eliminated by the shift of audit and trustee expenses from CA to CMI, see infra) ; in year 2, CMI’s real benefit would be zero; and in year 3, CMI’s real benefit would be $150,000.

      . Appellants argue strenuously that Coneo’s exclusive role in loan origination and dominant role as CA’s major correspondent in indirect financing will inevitably save CA substantial funds which it previously paid its own personnel for such services. We view this argument as depending wholly on the reality, or illusoriness, of the credit guaranteed CMI by CA. So long as CMI’s own pocket is unpicked by Conco’s operations, the fact that the “saving” comes out of CA’s pocket rather than Conco’s is irrelevant.


source: Caselaw Access Project

author: KOELSCH, Circuit Judge:

license: Public Domain

text:
    Edward C. CADIGAN, on behalf of himself and all others similarly situated, Plaintiff-Appellant, v. TEXACO, INC., and Wickland Oil Co., Inc., doing business as King Dollar, Inc., Defendants-Appellees.
    No. 72-1194.
    United States Court of Appeals, Ninth Circuit.
    Feb. 19, 1974.

      M. K. Tescher, Jr. (argued), of Lopez, Kennedy & Srite, John D. Barr, of Coshow Barr & Tocher, Redding, Cal., for plaintiff-appellant.
    Nels A. Christensen, Chico, Cal. (argued) for Wickland.
    Robert E. Laughlin, of Laughlin, Craig & Christensen, Chico, Cal., William Tousley Smith, New York City (argued), for Texaco.
    Robert K. Puglia, of McDonough, Holland, Schwartz, Allen & Wahrhaftig, Sacramento, Cal., for defendants-appellees.

      Before KOELSCH, GOODWIN and WALLACE, Circuit Judges.
   OPINION

KOELSCH, Circuit Judge:

Plaintiff Cadigan appeals from summary judgment rendered in favor of defendants Texaco, Inc., and Wiekland Oil Co.

■ In his complaint plaintiff alleges a violation of § 2(a) of the Robinson-Pat-man Act, 15 U.S.C. § 13(a) et seq., by Texaco, and of § 2(f) by Wiekland. These sections provide:

“(a) It shall be unlawful for any person engaged in commerce..... either directly or indirectly, to discriminate in price between different purchasers of commodities of like grade and quality, where either or any of the purchases involved in such discrimination are in commerce,
* * * * -X- -X
“(f) It shall be unlawful for any person engaged in commerce. . , knowingly to induce or receive a discrimination in price which is prohibited by this section.”

Both defendants concede in their answers that the price at which Texaco sold to Wiekland was lower than that charged plaintiff, but, relying on the statutory defense provided by § 2(b) of the Act, allege that the discriminatory price was offered in good faith to meet the equally low price offered by Texaco’s competitors.

Defendants introduced several affidavits in support of their § 2(b) defense and moved for summary judgment. Plaintiff, despite the admonition of Fed.R.Civ.P. 56(e), rested on the allegations of his complaint.

On appeal, of course, we must determine whether the pleadings and affidavits present any genuine issue as to any material fact and whether defendants are entitled to judgment as a matter of law. Finding none, and agreeing with the district court, we affirm.

The following uncontroverted facts appear from the pleadings and affidavits :

Wiekland Oil Co. is the owner and operator of 15 “King Dollar” gas stations in Northern California and Oregon. One of these stations is across the street from that formerly operated by plaintiff in Redding, California. Plaintiff leased his station from Texaco and bought “Texaco” brand gasoline from Texaco for resale to the public. Before September 1, 1967, Wiekland purchased its gasoline requirements from Richfield; the gas was rebranded and sold to the public as “Rocket” gas.

During August, 1966, however, Wiek-land had become interested in selling major brand gasoline and began negotiations with Humble Oil. Humble offered to supply Wiekland’s requirements of Humble’s major brand gas at a discount of $.0325 per gallon of regular and $.0375 per gallon of premium off posted dealer tankwagon prices. By February, 1967, Wiekland decided a switch to major brand sales by “King Dollar” stations was economically feasible, and notified Richfield of the termination of the supply arrangement for “Rocket” gas, effective after the month of August, 1967. Wiekland thereafter negotiated with American Oil Co., which offered the same discount as Humble, and beginning in Márch, 1967, with Texaco.

Wiekland informed Texaco’s local sales representatives of the discounts offered by Humble and American Oil at the outset of the negotiations, and was assured that Texaco’s prices would be competitive. In mid-August, 1967, after recommendation of a higher discount by the local representatives, the Texaco home office approved an offer of discounts of $.0300 per gallon of regular and $.0325 for premium. Wickland’s president expressed disappointment at the offer, but at the end of August, 1967, signed a supply agreement with Texaco, with the understanding that Texaco’s local representative would continue efforts to win approval of a higher discount. In September, 1967, Wickland’s “King Dollar” stations commenced selling Texaco gas, which they advertised under the “Texaco” label.

Wickland continued to inform Texaco of offers of higher discounts, and indicated that it would terminate the arrangement with Texaco if the discount was not raised. In March, 1968, Texaco approved a discount of $.0325 on regular and $.0350 on premium, thereby equal-ling the discount offered by Humble and American Oil on regular and remaining below that offered on premium. Wick-land thereafter continued to seek lower prices from Texaco and to receive competitive offers from other companies, and in September, 1970, it terminated the arrangement with Texaco and converted to Atlantic-Richfield’s “Arco” brand.

Plaintiff alleges that the price discrimination allowed Wickland’s “King Dollar” stations to sell “Texaco” brand gas at a price lower than that at which he could sell the identical gas at his station across the street, and that as a result, he was driven but of business. Nevertheless, the district court’s grant of summary judgment was entirely appropriate. Section 2(b) provides a complete defense to a prima facie case of price discrimination, despite any adverse effect on competition created by the price differential. Standard Oil Co. (Indiana) v. FTC, 340 U.S. 231, 71 S.Ct. 240, 95 L.Ed. 239 (1951). The sole permissible inference which may be drawn from the uncontroverted facts is that Texaco offered the discriminatory discounts in a good faith effort to secure Wickland’s business by matching prices offered by Texaco’s competitors, Humble and American. Plaintiff having failed to introduce any evidence to support a contrary finding, a summary judgment motion was appropriate to establish the § 2(b) defense to plaintiff’s claim. See, Jones v. Borden Co., 430 F.2d 568 (5th Cir. 1970); Krieger v. Texaco, Inc., 373 F.Supp. 108 (W.D.N.Y.1973).

Of plaintiff’s several contentions, none has merit, and only three warrant discussion.

Plaintiff makes much of the fact that Wickland was allowed to use the “Texaco” brand name to advertise the gas “King Dollar” stations sold, arguing that price discrimination by a seller (Texaco) against its own “locked-in” retailers (plaintiff) should be “inherently illegal” under the Robinson-Patman Act when the seller also allows the independent retailer (Wickland) favored by the discrimination to use the brand names.

We see no justification for en-grafting such an exception onto the § 2 (b) proviso; the Act, in express terms, makes price discrimination illegal, not the competitive use of a brand name. Indeed, the construction appellant urges on us would defeat the competitive purposes of the Act by preventing cost competition in products such as gas once a brand name is affixed.

Appellant’s argument might be more appropriately construed to assert that summary judgment is improper because a triable issue of fact remains — whether Texaco’s sale of branded gasoline at a lower price to the Wickland station operating across the street from plaintiff’s Texaco station evidences bad faitli and defeats the § 2(b) defense. While there may be eases in which the requisite good faith is lacking because the competitor’s lower price is met primarily in order to drive a retailer out of business, this is not such a ease. Plaintiff has not offered any evidence to support an inference of anti-competitive intent other than the sale of the branded product. In the face of the fact that Texaco had a financial stake in the continuing operation of its own leased station, the fact that Texaco’s discounts were lower than its competitors’, and the defendants’ affidavits detailing the negotiations, the sale alone is insufficient to defeat summary judgment.

Plaintiff also contends that summary judgment was improperly rendered because defendants, not having shown that the prices of Texaco’s competitors were lawful, failed to bring themselves within the § 2(b) proviso. We reject this contention. A defendant need not prove the actual lawfulness of his competitor’s price in order to secure the protection of the proviso. The well established rule is that § 2(b) is satisfied unless it appears that the defendant either knows the price being met is unlawful or that it is inherently unlawful. Standard Oil Co. v. Brown, 238 F.2d 54 (5th Cir. 1956). See Balian Ice Cream Co. v. Arden Farms Co., 231 F.2d 356, 366 (9th Cir. 1955), cert. denied 350 U.S. 991, 76 S.Ct. 545, 100 L.Ed. 856 (1956). Plaintiff has offered no proof to suggest that the competitor’s prices were unlawful, much less that Texaco knew them to be such.

Finally, appellant argues that the § 2(b) defense can be asserted only when the price discrimination is made to retain old customers, and not, as in this case, when a seller meets competitive prices in order to obtain a new customer. The distinction is unsound and has been rejected by the courts, Sunshine Biscuits, Inc. v. FTC, 306 F.2d 48 (7th Cir. 1962); see Jones v. Borden Co., supra; and is not applied by the Federal Trade Commission, see Beatrice Foods Co. [1967-70 Transfer Binder] Trade Reg.Rep. ¶ 19,045 (FTC 1970). We agree with the Seventh Circuit that:

“If, in situations where the Section 2(b) ' proviso is applicable, sellers could grant good faith competitive price reductions only to old customers in order to retain them, competition for new customers would be stifled and monoply be fostered. In such situations an established seller would have a monopoly of his customers and a seller entering the market would not be permitted to reduce his price to compete with his established rivals unless he could do so on a basis such as cost justification. Moreover, the distinction would create a forced price discrimination between a seller’s existing customers to whom he had lawfully lowered his price under Section 2(b) and a prospective new customer. These results, we believe, are incompatible with the purpose for which the Robinson-Patman Act was enacted.” 306 F.2d at 52.

The judgment is affirmed.

      . Section 2(b), 15 U.S.C. § 13(b), provides in part:
      “(b) Upon proof being made, at any hearing on a complaint under this section, that there has been discrimination in price or services or facilities furnished, the burden of rebutting the prima-facie case thus made by showing justification shall be upon the person charged with violation of this section, . . . : Provided, however, That nothing herein contained shall prevent a seller rebutting the prima-facie case thus made by showing that his lower price or the furnishing of services or facilities to any purchaser or purchasers was made in good faith to meet an equally low price of a competitor.”

      . A buyer in Wickland’s position is entitled to rely on the seller’s § 2(b) defense when charged with receiving the benefits of an illegal price discrimination in violation of § 2(f), Automatic Canteen Co. v. FTC, 346 U.S. 61, 74, 73 S.Ct. 1017, 97 L.Ed. 1454 (1953), except in instances when it has knowingly manipulated the competitive bidding through false or disingenuous reporting of competitor’s bids to induce lower bids. See Beatrice Foods Co., [1967-70 Transfer Binder] Trade Reg.Rep. ¶ 19,045 (FTC 1970). Plaintiff has not suggested that Wickland is not entitled to the protection of Texaco’s § 2(b) defense.

      . As perceptively noted by the Fifth Circuit in Standard Oil Co. v. Brown, supra at 58 n. 7:
      “Not only is there no precedent for requiring such proof, but it is apparent that such a requirement would practically destroy the value of the proviso, for the legality vel non of the competitor’s prices depends on many facts, including what it might be doing to meet low prices of its competitors. The inquiry into these collateral issues would be endless.”


author: ROSENN, Circuit Judge.

text:
    UNITED STATES of America, Appellant, v. David Emery SERFASS.
    No. 73-1736.
    United States Court of Appeals, Third Circuit.
    Submitted on briefs under Third Circuit Rule 12(6) Dec. 19, 1973.
    Decided Feb. 20, 1974.
    Certiorari Granted April 22, 1974.
    See 94 S.Ct. 1967.
    James W. Walker, Asst. U. S. Atty., Scranton, Pa., for appellant.
    Harry A. Dower, Boyd G. Hixson, Dower, Mackson, Hauff & Hettinger, Allentown, Pa., for appellee.
    Before VAN DUSEN, ALDISERT and ROSENN, Circuit Judges.
   OPINION OF THE COURT

ROSENN, Circuit Judge.

This appeal is hopefully one of the last of a long series of selective service cases involving the issue of whether an order to report for induction was invalid for failure of the local board to reopen the registrant’s classification pursuant to a post-induction order request for conscientious objector status. Since the district court of the Middle District of Pennsylvania dismissed the indictment, the defendant also raises on appeal the issue of double jeopardy. Because we find the order of dismissal is appealable, and the dismissal was improper in light of the subsequent decision in Musser v. United States, 414 U.S. 31, 94 S.Ct. 196, 38 L.Ed.2d 190 (1973), we reverse.

The facts of this case are not in dispute. On November 16, 1970, Serfass was ordered by his local board to report for induction on December 1. He appeared on December 1 and requested a delay in his induction in order that he could submit additional medical evidence. The delay was granted, but on December 18 he was again ordered to report for induction, this time on January 18, 1971. On December 29, he visited his local board and requested the form for conscientious objector application, SSS-150. His form 150 was returned to the local board on January 8, and on January 13 he received a courtesy interview as he had requested. By letter dated January 14, the board notified him that it had considered his entire file and “unanimously agreed that there was no change over which you had no control and decided not to re-open your file.” The board also informed him that he was still obligated to report for induction on January 18. No other reasons for the refusal to reopen his file were given. On January 18, Serfass appeared at the examining station and refused induction. This prosecution followed under 50 App. U.S.C. § 462.

Before trial, Serfass moved for dismissal of the indictment on the ground that the local board had denied him due process by inadequately setting forth its reasons for denying his request to reopen his classification and to grant him conscientious objector status. The district court granted this motion, relying on defendant’s selective service file, his affidavit in support of his motion which set forth that he had applied for conscientious objector status and had received from his local board only the January 14 letter denying his claim, and a stipulation of counsel that the information he sent to the board set forth a prima facie conscientious objector claim based upon late crystallization of beliefs.

On the basis of the law prevailing in this Circuit at that time, the district court stated in its opinion:

The enumerated facts indicate clearly that Serfass is entitled to full consideration of his claim prior to assignment to combatant training and service. Ehlert v. United States, 1971, 402 U.S. 99, 103-104 & n. 7, 107, 91 S.Ct. 1319, 28 L.Ed.2d 625. Therefore, since the statement of reasons given for refusing to reopen is sufficiently ambiguous to be reasonably construed as a rejection on the merits, thereby prejudicing his right to in-service review, defendant’s motion to dismiss the indictment will be granted. [Footnotes omitted.]

The footnotes indicate that the court relied primarily upon United States v. Ziskowski, 465 F.2d 480 (3d Cir. 1972), and United States v. Folino, No. 72-1974 (3d Cir. June 29, 1973).

I.

We first consider defendant’s contention that we have no jurisdiction to hear this Government appeal from the district court’s dismissal of the indictment. Resolution of this contention turns upon our construction of the Criminal Appeals Act, 18 U.S.C. § 3731, which reads:

In a criminal case an appeal by the United States shall lie to a court of appeals from a decision, judgment, or order of a district court dismissing an indictment or information as to any one or more counts, except that no appeal shall lie where the double jeopardy clause of the United States Constitution prohibits further prosecution.
* X X * * X
The provisions of this section shall be liberally construed to effectuate its purposes.

This version of the Act is applicable to all actions begun in any district court after January 2, 1971 (84 Stat. 1890, 1893) and therefore applies to the present action.

Actions brought prior to January 2, 1971, were governed by an earlier version of the Criminal Appeals Act, the relevant portion of which made a criminal case appealable by the United States to the court of appeals:

[f]rom a decision or judgment setting aside, or dismissing any indictment or information, or any count thereof, except where a direct appeal to the Supreme Court is provided by this section.

See United States v. Pack, 247 F.2d 168 (3d Cir. 1957).

Under this former version of the Act it is clear that no appeal by the United States would lie in the instant case. Appeals were permissible only if the dismissal of an indictment was based upon a defect in the indictment or in the institution of the prosecution, rather than upon evidentiary facts outside the face of the indictment which would possibly constitute a defense at trial. See, e. g., United States v. Ponto, 454 F.2d 657, 663 (7th Cir. 1971) (en banc); United States v. Findley, 439 F.2d 970 (1st Cir. 1971).

The 1971 amendment to § 3731, however, was clearly intended to enlarge the Government’s right to appeal to include all cases in which such an appeal would be constitutionally permissible. Cases decided under the prior version of § 3731 are of little aid in determining appealability under the present version. See United States v. Pecora, 484 F.2d 1289 (3d Cir. 1973).

In Pecora, we held appealable under the present version of § 3731 the district court’s pretrial dismissal of an indictment based upon a stipulation of the facts upon which the indictment was returned.

In discussing the appealability of the pretrial dismissal, we indicated that absent the defendant’s waiver of his right to a jury trial pursuant to Rule 23(a) of the Federal Rules of Criminal Procedure, jeopardy does not attach until the jury has been impaneled and sworn. We held that entering into the stipulation of facts “for the purpose only of attacking the validity of the indictment did not constitute the waiver necessary under Rule 23(a).” Therefore, we concluded, since jeopardy had not attached at the time of the pretrial dismissal of the indictment, the Government could appeal the dismissal. United States v. Pecora, 484 F.2d at 1292-1293. We also rejected as inconsistent with § 3731 the contention that our holding would discourage defense counsel from expediting procedure by making pretrial motions for dismissal, and instead encourage counsel to wait until the jury was sworn before making motions for dismissal. 484 F.2d at 1289. See Fed.R.Crim.Proc. 12(b).

We believe the instant appeal is squarely controlled by United States v. Pecora, supra. As in Pécora, the pretrial motion of dismissal was based upon undisputed facts raising a legal issue and the defendant did not waive his right to a jury trial.

Although the instant dismissal was based upon the trial court’s finding that the defendant had established a defense as a matter of law, rather than upon the finding, as in Pécora, that there were insufficient facts as a matter of law to support a conviction, we see no significant constitutional difference between the two situations. Both involved a determination as to the legal sufficiency of certain facts, and in either case denial of the motion to dismiss entitled the defendant to the jury trial which he has not waived. We therefore hold that jeopardy did not attach and the dismissal of the indictment in the instant case was an appealable order.

II.

Our consideration of the merits of the Government’s appeal requires a cursory review of the line of cases in this circuit upon which the district court’s dismissal of the indictment was based. At all pertinent times, the post-induction order reopening of a registrant’s selective service classification by his local board was governed by Regulation 1625.2, 32 CFR § 1625.2, which provided that,

[T]he classification of a registrant shall not be reopened after the local board has mailed to such registrant an Order to Report for Induction . unless the local board first specifically finds there has been a change in the registrant’s status resulting from circumstances over which the registrant had no control. [Emphasis supplied.]

In Ehlert v. United States, 402 U.S. 99, 91 S.Ct. 1319, 28 L.Ed.2d 625 (1971), a registrant who had submitted a post-induction order conscientious objector claim refused induction after being notified by his local board that,

[I]t had declined to reopen his classification because the crystallization of his conscientious objection did not constitute the “change in the registrant’s status resulting from circumstances over which the registrant had no control” required for post-induction notice reopening.

402 U.S. at 100, 91 S.Ct. at 1321. The Supreme Court affirmed the ensuing-conviction, rejecting the registrant’s claim that crystallization of conscientious objection is a circumstance over which he had no control. While agreeing that the language of the regulation was “not free from doubt,” the Court regarded as controlling the Government’s “plausible” and “consistently urged” interpretation that the regulation only applied to “objectively identifiable” and “extraneous” circumstances, 402 U.S. at 104, 91 S.Ct. 1319, and that reopening was not required for a change in beliefs.

Furthermore the Court held this interpretation to be a valid timeliness rule, since the military already had procedures for handling in-service conscientious objector claims, and post-induction order claims could legitimately be decided by the military forum as long as claimants were not subject to combatant training or service until their claims had been acted upon.

The Court held, however, that “a ‘no man’s land’ would be intolerable,” 402 U.S. at 104 n. 7, 91 S.Ct. at 1323, and a conscientious objector claimant must be given some opportunity to have his claim heard on the merits, either by his local board or by the military, whenever the change in his beliefs occurred. The Court therefore felt obligated to look at existing military procedures to determine whether the requirement that all claimants receive some forum to present their claims was met in practice. Although recognizing that the “somewhat inconsistent” military regulations “contained formulations seeming to look the other way,” 402 U.S. at 106, 91 S.Ct. at 1324, the Court relied upon a letter written by the General Counsel of the Army which stated that present practice, as well as practice when the registrant had been ordered to report for induction, permitted presentation to the military of such post-induction order conscientious objector claims, and that there was no possibility that late crys-tallizers would find themselves without a forum in which to present their claims. The Court accepted this statement, warning that if a situation should arise “in which neither the local board nor the military had made a full opportunity to present a prima facie conscientious objector claim for determination under established criteria, ... a wholly different case would be presented.” 402 U.S. at 107, 91 S.Ct. at 1325. The Court concluded by stating that,

[W]e hold that the Court of Appeals did not misconstrue the Selective Service regulation in holding that it barred presentation to the local board of a claim that allegedly arose between mailing of a notice of induction and the scheduled induction date.

402 U.S. at 107-108, 91 S.Ct. at 1325.

United States v. Shomock, 462 F.2d 338 (3d Cir. 1972), raised the question of whether Ehlert had overruled our decision in Scott v. Commanding Officer, 431 F.2d 1132 (3d Cir. 1970), and this court answered in the negative. The registrant had filed a post-induction order conscientious objector claim and had refused induction after being informed by the local board that the information he had submitted did not warrant reopening of his classification.

This court reversed the ensuing judgment of conviction. First, we held, under Scott the local board was obliged to inform the registrant of the basis for its denial of his claim, whether it was for “lack of jurisdiction or some other technical reason or was a decision based on the merits of Shomock’s claim.” 462 F.2d at 346. Furthermore, we held, Ehlert did not compel a different result because in the case at hand there was doubt that the registrant would in fact have received a full and fair hearing by the military of his conscientious objector claim. First, this court feared that the military might rely on AR 635-20 ¶ 3 (b)(2), not cited in Ehlert, to deny the registrant an in-service hearing on the merits of his claim on the ground that his claim had already been denied by the local board prior to induction.

Second, we noted that AR 635-20 ¶ 3(b)(1) at the time the registrant had refused induction and until August 15, 1970, precluded on its face in-service review of conscientious objector claims which arose before induction, even if the claim arose after the registrant had received his induction notice. This court therefore did not consider persuasive a letter addressed to it by the General Counsel of the Department of the Army which apparently relied upon the amended version of ¶ 3(b)(1), cited in Ehlert. The letter stated that Army practice was to permit in-service review of post-induction order conscientious objector claims which had been denied by a local board solely because of late crystallization of beliefs.

For both of these reasons, the military might have refused to consider the registrant’s claim on the merits, even though the local board might have rejected his claim by relying solely upon Ehlert without reaching the merits of his claim. There was a strong possibility, therefore, that the registrant had been placed in the “no man’s land” condemned by Ehlert, with no opportunity to have his post-induction order conscientious objector claim considered on the merits. His induction order was therefore held invalid.

The same issue was presented in United States v. Ziskowski, 465 F.2d 480 (3d Cir. 1972). The registrant had filed a post-induction order conscientious objector claim, and in response had received, following an interview, a letter stating that,

It is the determination of the board that there has been no change in your status resulting from circumstances over which you had no control. Your classification has not been reopened.

465 F.2d at 481. On the authority of Scott, supra, this court reversed the ensuing conviction for refusing induction. We distinguished Ehlert by noting that the local board in that case had indicated that its refusal to reopen the registrant classification was based on its finding that crystallization of conscientious objector beliefs was not a circumstance over which the registrant had no control. In the case before the court; however, it was not clear whether the denial was for this reason or for any one of several other reasons. See 465 F.2d at 482-483.

Moreover, this court found “substantial support” for this result from Ehlert itself. Relying on AR 635-20 ¶ 3(b)(2), not cited in Ehlert, the court reasoned that even if the military interpreted that regulation to bar only in-service review of claims which had been denied on the merits by a local board, the military might reasonably have construed the Board’s action as to Ziskowski as having been a determination on the merits precluding in-service review. Therefore Ziskowski would have been in the “no man’s land” which had been disapproved by Ehlert. The local board might have denied his claim for procedural reasons, while the military, interpreting the local board’s denial as having been on the merits, might have then refused to consider his claim.

In United States v. Folino, No. 72-1974 (3d Cir., June 29, 1973), this court reversed a selective service conviction on the authority of Ziskowski.

The Supreme Court appears to have placed an abrupt end to this line of cases, however, by its recent per curiam decision in Musser v. United States, 414 U.S. 31, 94 S.Ct. 196, 38 L.Ed.2d 190 (1973). That ease involved the consolidated appeal by two selective service registrants who had been convicted for refusing induction after having their post-induction order conscientious objector claims rejected by their local boards. One registrant had received a letter from his board stating that the board “did not specifically find there has been a change in status resulting from circumstances over which you had no control.” The other registrant had received a letter stating simply that, the board “found no ground for reopening your classification.”

Petitioners relied upon Ziskowski, Shomock, and United States v. Alioto, 469 F.2d 722 (1st Cir. 1972), a similar case. The Supreme Court flatly rejected the reasoning of these cases. In answering the argument that the military might consider the local board’s refusal to reopen to have been on the merits when it was in fact procedural, the Court stated that Ehlert had held that a local board was “without power” to rule on the merits of a post-induction order conscientious objector claim, and

[f]rom this it follows that in no event can a mere refusal to reopen signify more than a recognition of lack of power to do so; it cannot and does not bear any significance as to the merits of a registrant’s claim. ******
[N]o matter what the board’s apparent motivations in refusing to reopen the petitioner’s classification may have been, the boards were simply without power to reopen, and an expressed or unexpressed indication of the board’s views of the claims cannot be deemed a denial of those claims on the merits.

As in Ehlert, the Court then turned “to a consideration of whether ‘the conditions for the validity of such a rule . are met in practice.’ ” The Court noted AR 635-20, ¶ 3(b)(2), which seemed to bar in-service review of a claim which had been “claimed and denied” before induction. The Court stated that,

While the critical word “denied” might arguably be applied to a board’s refusal to reopen a classification, it cannot be so applied to a refusal to reopen a classification based on a claim of conscientious objection crystallizing after issuance of a notice to report, now that Ehlert has made clear that such a refusal can only be based on the board’s lack of power to reopen in such a posture.

The Court also relied upon the letter written by the General Counsel of the Department of the Army which we had considered in Shomock, and which stated that when a refusal to reopen by a local board is not based on the merits, the registrant could receive a full in-service hearing on the merits. The Court concluded that,

In the event that a local board in one way or another manifests its views as to the sincerity of late-crystallizing registrants’ claims, such expressions must be given no effect by the armed forces in reviewing an in-service conscientious objection request.

Mr. Justice Douglas, in dissent, pointed out that “[t]he opinions summarily affirmed today conflict squarely, as the Solicitor General concedes, with decisions in the First, Second, and Third Circuits.” Included in the list of cases that follows this statement are Shomock, Ziskowski, and Folino. We agree that these three cases are inconsistent with Musser and for that reason are no longer the law.

Musser was decided after the district court dismissed the indictment in this case, and of course long after Serfass himself refused induction. We must therefore decide whether Musser is to be applied retroactively to registrants who refused induction before the case was decided.

We have no hesitation in answering this question in the affirmative. Mus-ser did not announce any new principle of law. Rather, the case, by relying on indications of military policy which were already before us in Shomock and Zis-kowski, held that our interpretation of military policy in those cases was incorrect; there was no danger that the registrants whose convictions we had reversed would have found themselves in a “no man’s land.”

Furthermore, the two registrants whose convictions were affirmed in Musser had refused induction in February 1969 and January 1971, respectively. Serfass, as noted, refused induction in January 1971. Musser appears to hold, therefore, that even at the time Serfass refused induction, he would have been permitted by military policy to obtain an in-service review of his conscientious objector claim. He therefore cannot justify his refusal of induction on the ground that he faced the “no man’s land” of Ehlert, even though his local board did not explain why it had denied his conscientious objector request.

The order of the district court granting the motion to dismiss the indictment will be reversed. The case will be remanded to that court for trial or other proceedings consistent with this opinion.

      . The district court in this case expressly found that the defendant did not waive his right to a jury trial. Not only were none of the procedures required by Rule 23(a) complied with, but attached to the motion to dismiss the indictment was a motion to postpone the trial until after the disposition of the motion on the merits. Cf. United States v. Wilson, 492 F.2d 1345 (3d Cir., filed January 15, 1974) (opinion sur denial of panel rehearing) (post-trial directed verdict of acquittal).

        Pecora distinguished United States v. Hill, 473 F.2d 759 (9th Cir. 1972), which held unappealable the district court’s pretrial dismissal of an indictment alleging the mailing of obsceno advertisements. The dismissal was on the ground that the stipulated materials were not legally obscene. Hill was distinguished on two grounds. First, the Court of Appeals in Hill did not determine whether the defendant had waived his right to a jury trial. Second, in Hill “evidence was actually entered into the record. The district court determined the character of that evidence so it may lie said that jeopardy had attached.” We do not consider this second distinction between Pécora and Hill to permit our holding the instant order unappealable. To the extent that Pécora and Hill may be inconsistent, we are of course bound by Pécora

      . Accord: United States v. Martin Linen Supply, 485 F.2d 1143 (5th Cir. 1973); United States v. Brown, 481 F.2d 1035 (8th Cir. 1973).

        Contra: United States v. Southern Railway Company, 485 F.2d 309 (4th Cir. 1973); United States v. Rothfelder, 474 F.2d 606 (6th Cir.), cert. denied, 413 U.S. 922, 93 S.Ct. 3066, 37 L.Ed.2d 1044 (1973); United States v. McCreery, 473 F.2d 1381 (7th Cir. 1973).

        See also: United States v. Hill, 473 F.2d 759 (9th Cir. 1972), distinguished by this court in Pécora. See note 1 supra.

      . Regulation 1625.2, 32 CFR § 1625.2 in pertinent part provided:
      The local board may reopen and consider anew the classification of a registrant upon the written request of the registrant ... if such request is accompanied by written information presenting facts not considered when the registrant was classified, which, if true, would justify a change in the registrant’s classification; . . . provided. . the classification of a registrant shall not be reopened after the local board has mailed to such registrant an Order to Report for Induction (SSS Form No. 252) . . . unless the local board first specifically finds there has been a change in the registrant’s status resulting from circumstances over which the registrant had no control.

      . The Court cited Army Regulation No. 635-20, ¶ 3:
      a. Consideration will be ' given to requests for separation based on bona fide conscientious objection to participation in war, in any form, when such objection develops subsequent to entry into the military service.
      b. Federal courts have held that a claim to exemption from military service under Selective Service laws must be interposed prior to notice of induction, and failure to make timely claim for exemption constitutes waiver of the right to claim .... Requests for discharge after entering military service will not be favorably considered when—
      (1) Based on conscientious objection which existed, but which was not claimed prior to notice of induction, enlistment or appointment.

      . AR 635-20, ¶ 3 (b) provides:
      . . . Requests for discharge after entering military service will not be favorably considered when—
      (2) Based solely on conscientious objection claimed and denied by the Selective Service System prior to induction.
      This provision is quoted in United States v. Ziskowski, 465 F.2d 480, 485 (3d Cir. 1972).

      . The provision had read as follows:
      . . . Requests for discharge after entering military service will not be favorably considered when—
      (1) Based solely on conscientious objection which existed but was not claimed prior to induction, enlistment, or entry on active duty for training. [Emphasis supplied.]
      On August 15, 1970, the emphasized language was amended to read “prior to notice of induction.” The amended version was quoted in Ehlert. See note 4 supra.

      . The relevant portions of the letter asserted the following:
      If the appellant had entered the Army in May 1969 under circumstances where the Selective System actually considered and denied his conscientious objector claim on the merits, he would not have been entitled to an in-service determination on the merits of his conscientious objector claim.
      If the appellant had entered the Army in May 1969 under circumstances where his local draft board merely refused to reopen his classification because his asserted views crystallized subsequent to the receipt of his induction notice, in the view of the Department of the Army personnel responsible for administering the conscientious objector claims of in-service members, he would have been entitled under Army policy to an in-service determination on the merits of his conscientious objector claim.
      462 F.2d at 345 n. 17.

      . See note 5 supra.

      . As noted in Ziskowski, this interpretation was later adopted explicitly. 465 F.2d at 485 n. 12.

        See note 5 supra,

      . See note 7 supra.

      . Ehlert was decided on April 21, 1971. Serfass refused induction after Scott but before Ehlert. Tlie Court in Musser implicitly held Ehlert retroactive, however, since it interpreted Ehlert as requiring the affirmance of two convictions for refusing induction, even though both acts had taken place before Ehlert was decided.
      We note that since neither conviction affirmed by the Court in Musser involved a refusal of induction in a circuit in which the prevailing case law was at the time clearly contrary to Ehlert, the Court did not necessarily decide whether actual good faith reliance on pre-Ehlert case law might negate the element of willfulness necessary to sustain a conviction. See, e. g., United States v. Mercado, 478 F.2d 1108 (2d Cir. 1973).


author: JONES, Circuit Judge:

text:
    Robert James GARCIA, Petitioner-Appellant, v. UNITED STATES of America, Respondent-Appellee.
    Nos. 73-1575, 73-1576.
    United States Court of Appeals, Tenth Circuit.
    Feb. 27, 1974.
    Rehearing Denied March 21, 1974.

      Jack L. Love, Federal Public Defender, Albuquerque, N. M., for petitioner-appellant.
    William R. Hughes, Jr., Albuquerque, N. M. (Victor R. Ortega, U. S. Atty., and W. R. Hughes, Jr., Asst. U. S. Atty., Albuquerque, N. M. on the brief), for respondent-appellee.
    Before LEWIS, Chief Judge, and JONES and McWILLIAMS, Circuit Judges.

       Of the Fifth Circuit, sitting by designation.

   JONES, Circuit Judge:

The appellant, Robert James Garcia, and three others were charged with the unlawful importation and possession of marihuana. After his arrest Garcia was released on bond. He failed to appear for arraignment. He was indicted for possession with intent to distribute marihuana in violation of 21 U.S.C.A. § 841(a)(1) and 18 U.S.C.A. § 2. By a separate indictment he was charged with jumping bail in violation of 18 U.S.C.A. § 3150. Garcia entered a plea of guilty to each of the indictments. He was sentenced to five years imprisonment on the marihuana charge and was given a like sentence for the bail jumping offense. The bail jumping sentence was to run consecutively with the marihuana term. The sentencing judge inadvertently omitted to impose, as a part of the marihuana sentence, the special parole term required by 21 U.S.C.A. § 841 (b)(1) (B). On September 14, 1972 the court amended its sentence by adding a three year special parole term. On September 18, 1972, the court made a further amendment by which the special parole term was reduced from three years to two years. At the hearing on September 14, 1972, Garcia moved for leave to withdraw his plea of guilty to the marihuana offense. The motion was-denied. Garcia said he wanted to appeal. The court told him to discuss it with his lawyer. No appeal was taken from either the original or subsequent sentence, or from the order denying the motion to withdraw the guilty plea.

Three months after the amended sentence was imposed, Garcia filed a motion under 28 U.S.C.A. § 2255. By the motion Garcia attempts to attack the sentence for the marihuana offense.

In his Section 2255 motion Garcia asserted that the sentence could not be amended by the imposition of an additional sanction because he had started serving the original sentence. The district court apparently agreed with this contention and entered an order setting aside the provision for special parole. All other relief claimed by Garcia was denied. The court’s order was entered on March 7, 1973. On March 21, 1973 Garcia, invoking Rule 60(b), Fed.Rules Civ.Proc., and Rule 35, Fed.Rules Crim.Proc., filed a motion in the Section 2255 proceeding seeking a correction of the sentence by reducing the term of imprisonment on the marihuana charge to three years to be followed by the special parole term of two years. By this motion Garcia departed from his previous contention that his original sentence was proper and the imposition of the mandatory parole term was invalid. The record does not show any ruling upon this motion. On April 3 the Government filed a notice of appeal from the order of March 7, 1973, and on April 5 Garcia filed a notice of appeal from the same order insofar as it denies the original relief sought by him.

The first of the questions requiring consideration is whether the district court properly imposed the statutory special parole term subsequent to the imposition of the original sentence of imprisonment. The Government contends that the imposition of the parole term was proper and the order setting aside the imposition of the parole term should be reversed. Garcia would have this Court affirm the order setting aside the imposition of the special parole term or, preferably, let the two year special parole term stand, but require the reduction of the term of imprisonment to three years so that the aggregate of imprisonment and parole will not exceed the original five year sentence.

It has been said that a sentence which is being served cannot be increased. This was the basis for the setting aside by the trial court of the added special parole term. The rule that the penalty of a sentence cannot be increased after the sentence is being served is applicable only when the sentence is legal and valid and within the minimum and maximum statutory sanctions.

The Supreme Court in Bozza v. United States, 330 U.S. 160, 67 S.Ct. 645, 91 L.Ed. 818, had before it a case where the defendant was originally sentenced to a prison term although the statute which fixed the penalty required both imprisonment and a fine. He was resentenced with a fine as well as imprisonment being imposed. In approving the resentencing the Supreme Court held that “The sentence, as corrected, imposes a valid punishment for an offense instead of an invalid punishment for that offense.” 330 U.S. 160, 167, 67 S.Ct. at 649.

The Fifth Circuit Court of Appeals has recently had before it a ease such as the one before this Court where the original sentence on a marihuana charge did not include the mandatory special parole provision. In approving the resentenc-ing which added the special parole term to the prison term the Court said, “When the district court became aware that the mandatory special parole term had not been imposed, it had a duty to comply with the statute.” Caille v. United States, 5th Cir. 1973, 487 F.2d 614.

An appropriate statement of the principle is found in an opinion of the District Court for the Eastern District of New York in these words, “Since the special parole term is a mandatory addition to the regular term of imprisonment, the sentence to a special parole term which was inadvertently omitted does not constitute an illegal increase in the sentence.” United States v. Thomas, E.D.N.Y.1972, 356 F.Supp. 173, aff’d 2d Cir. 1973, 474 F.2d 1336.

The well established principle that an invalid sentence may be corrected by the imposition of a proper sentence is applicable even though, at the time of the resentencing, the original sentence is being served. Sasser v. United States, 6th Cir. 1965, 352 F.2d 796, cert. den. 385 U.S. 883, 87 S.Ct. 174, 17 L.Ed.2d 111; Hayes v. United States, 1957, 102 U.S.App.D.C. 1, 249 F.2d 516, cert. den. 356 U.S. 914, 78 S.Ct. 672, 2 L.Ed.2d 586.

The application to the cause before us of the principles hereinbefore set forth requires the reversal of that portion of the district court’s order which set aside the imposition of a special parole term of two years in addition to the sentence of five years imprisonment for the marihuana offense.

It follows that there is no merit in Garcia’s contention that his prison term on the marihuana charge should be reduced to three years so that it and the two year parole term would not, overall, exceed the original five year sentence.

Garcia complains that, although he knew that consecutive sentences might be imposed, he was not so informed by the court at the time of his pleas. The question was not raised in the district court until two weeks after the entry of the order on the Section 2255 motion. It was then injected into the case by a motion which has never been ruled upon and is not mentioned in Garcia’s notice of appeal. The question is one which should have been raised and decided in the criminal proceeding. This issue is not before us on appeal.

Garcia asserts that he was not advised of the consequences of his guilty plea, because he was neither advised by the court nor knew that the special parole term is mandatory if imprisonment is ordered. Petitioner then urges that if the special parole term is reinstated, he is entitled to have his guilty plea set aside because he was unaware that both imprisonment and special parole could be imposed. With painstaking care the district court advised Garcia of the effect of a guilty plea to the marihuana charge. Imprisonment, fine and special parole were all explained both on February 10, 1972, when Garcia was arraigned, and again on March 23, 1972, when he entered his guilty pleas. The record and the district court’s findings refute Garcia’s inferences. His contention cannot be sustained.

The final contention of Garcia is that the denial of his request to withdraw his plea of guilty to the marihuana charge was error. At the time of resentencing and the imposition of the mandatory special parole term, Garcia requested leave of court to withdraw his plea. The request was denied. He stated that he wanted to appeal from the court’s ruling. The court told him to confer with his attorney and decide. No direct appeal was taken. This Court is asked to treat the Section 2255 proceeding as a direct appeal to review the denial of the request to withdraw the plea. Section 2255 is not to be used as a substitute for a direct appeal. Kinnell v. Crouse, 10th Cir. 1967, 384 F.2d 811; Hilliard v. United States, 10th Cir. 1965, 345 F.2d 252. No exceptional circumstance exists in this case to cause a search to be made for making an exception to the rule.

That portion of the order of the district court filed on March 7, 1973, which set aside the court's orders entered on September 14, 1973, and September 18, 1973, is reversed and said orders are henceforth in full force and effect. The remaining portion of said order denying said motion in all other respects is affirmed.

Affirmed in part.