author: GRADY, District Judge.

text:
    Joseph BIANCO, et al., Plaintiffs, v. TEXAS INSTRUMENTS, INC., et al., Defendants.
    No. 85 C 376.
    United States District Court, N.D. Illinois, E.D.
    Oct. 11, 1985.

      Phillip L. Stern, Jerrold E. Salzman, Daniel Clune, Deborah Bornstein, Richard Davis, Lee Freeman, John F. Kinney, Freeman, Freeman & Salzman, for plaintiffs.
    Jacob H. Stillman, Rosalind C. Cohen, Richard A. Levine, Washington, D.C., Edward G. Kohler, for S.E.C., amicus curiae.
    Stephen P. Beddell, Gardner, Carton & Douglas, Robert F. Finke, Mayer Brown Platt, Hope G. Nightinga, Bartlett H. McGuire, Ialis Polk Wardell, New York City, James E. Dahl, James E. Dahl & Associates, Ronald P. Kane, John F. Stimson, Siegan, Barbakoff, Gomberg, Gordon & Elden, Ltd., for defendants.
   MEMORANDUM OPINION

GRADY, District Judge.

This is a securities action brought pursuant to § 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j, and Rule 10b-5 of the Securities and Exchange Commission (“SEC”), 17 C.F.R. § 240.10b-5. The plaintiffs are options traders who purchased and/or sold options contracts on Texas Instruments, Inc. common stock during the period from June 6, 1983, to June 10, 1983. The defendants are Texas Instruments, Inc. (“TI”) and five named individuals. All of the defendants have filed motions to dismiss the complaint, or in the alternative, -to- transfer the case to the Northern District of Texas.

FACTS

The seventeen plaintiffs in this case are individuals and corporations who traded in options contracts in TI stock on the Chicago Board of Options Exchange (“CBOE”). All of the plaintiffs, with the exception of Sheldon Jospey, are citizens and residents of the Northern District of Illinois, and all apparently opted out of a similar class action brought by stock and options traders against TI in the Northern District of Texas. Council on Social Work Education v. Texas Instruments, Inc., Nos. 3-83-1083, 1167, 1204 and 1373-H (N.D.Tex.).

The named defendants are Texas Instruments, Inc. and four present or former employees of the Consumer Products Group of TI who allegedly traded in TI options: Joseph C. Fox, David L. Ball, Patricia J. Randall and Carl J. Fleece. These four employees are also defendants in an SEC enforcement action in Texas based on the same transactions at issue in this case. SEC v. Fox, No. CA5-84-172 (N.D.Tex.). A fifth individual, Emery Spears, is a self-employed barber, who is not a TI employee but who allegedly traded in TI options using improperly obtained inside information. TI is a Delaware corporation headquartered in Dallas, Texas, and all of the individual defendants are residents of Texas.

For the purpose of deciding defendants’ motions to dismiss, we must assume that the following facts alleged in plaintiffs’ first amended complaint are true. Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 101-02, 2 L.Ed.2d 80 (1957); Ashbrook v. Hoffman, 617 F.2d 474, 475 (7th Cir.1980). During the time prior to March 1, 1983, TI made repeated public announcements projecting favorable earnings as a result of increasing sales of its 99/4A home computer products. On March 1, 1983, TI issued a press release stating that it was voluntarily correcting a potential defect in the 99/4A home computer. The cost of this correction and the anticipated loss in sales would have a negative impact on the company’s first quarter earnings in 1983; however, TI’s Chairman of the Board and Chief Executive Officer was quoted as saying that “1983 still holds the promise of being a significantly better year for TI than 1982.” First Am.Comp., ¶ 19. In May 1983, TI issued a report of its April stockholder meeting and its first quarter results. The report stated that net sales overall had increased nine percent over the first quarter of 1982, and noted that the home computer defect had prevented sales of that product for a month. Nonetheless, it was reported that “production of home computers continued at an accelerated pace,” and that despite the difficulties with the 99/4A home computer, “[cjonsumer electronics should be an important contributor to TI this year.” The report concluded that “1983 holds the promise of being a significantly better year for TI than 1982.” First Am.Comp., ¶ 20.

Despite these public statements, TI was actually experiencing a substantial decline in the demand for its home computer products, and the company was oversupplying its inventory of 99/4A computer products. In addition, price competition in the home computer industry had eroded TI’s profit margins and TI was not keeping pace with its competitors in reducing manufacturing costs. Beginning in late April, TI’s top executives began meeting with members of the Consumer Products Group to consider possible actions in light of the home computer difficulties. During May, the Consumer Products Group considered reducing its home computer production for 1983 by 41 percent. On June 2, 1983, TI’s president met with certain officers at the Consumer Products Group headquarters in Lubbock, Texas, and considered these reductions along with proposed reductions in the monthly, quarterly and annual Consumer Products Group forecasts. On June 3, 1983, a special meeting of the Board of Directors was called for June 10, and on June 6 the regularly scheduled monthly Consumer Products Group forecasting meeting was moved from June 9 to June 8 in order to prepare for the Board meeting. Also on June 6, the Consumer Products Group recommended that production and forecast figures be significantly reduced.

The company’s Board of Directors met on Friday, June 10, 1983. Following this meeting, TI issued a press release stating that it could lose “as much as $100 million” during the second quarter of 1983 as a result of “recent developments” in its home computer operations. First Am.Comp., ¶ 25. The release stated that “it now appears that 1983 will be a significantly poorer year for the company than 1982.” Id. This press statement was not made public until after the securities markets had closed on June 10, and on Monday, June 13, when the markets opened, trading in TI stock on the New York Stock Exchange was delayed by approximately hours because of the disproportionate number of sell orders. When trading opened, the price of TI stock was $119 per share, as compared to its June 10 closing price of $157.75 per share, and closed on June 13 at $117.75 per share.

During the week from June 6 to June 10, all seventeen plaintiffs traded in options on TI stock on the CBOE, allegedly relying on TI’s March and May reports concerning its financial outlook. Nine of the plaintiffs also made “long” purchases of TI common stock on the open market that same week. First Am.Comp., ¶ 4. During the same time period, the individual defendants in this case traded in TI options on the CBOE, using the inside information that TI was experiencing serious difficulties with its home computer products and was about to make a major change in forecasts and production. As a result of this insider trading, and because of TI’s delay in correcting its allegedly false financial statements, plaintiffs suffered losses in excess of $5 million.

Count I of this suit to recover those losses states a Rule 10b-5 claim against TI for making false and misleading statements concerning its financial outlook and for withholding corrective statements. Count II of the complaint is directed against the named and as yet unidentified individual defendants who engaged in insider trading in TI options. Count III is a common law fraud action against all defendants, alleging that the defendants knew of TI’s anticipated losses but failed to disclose this information correcting the pri- or misrepresentations made by the company. These fraudulent misrepresentations and omissions were made with the intent of encouraging plaintiffs to sell TI puts, purchase TI calls and buy TI stock “long.”

DISCUSSION

Motion to Dismiss by TI

Standing of Options Traders to Sue

Defendant Texas Instruments has moved to dismiss the claims based on options transactions. TI claims that options traders have no standing under § 10(b) or Rule 10b-5 to sue the issuer of the underlying security for allegedly misleading statements because there is no fiduciary relationship or obligation between the issuing corporation and the options trader.

TI points out that options contracts are not written or sold by the corporation issuing the underlying common stock, but are instead written by the Options Clearing Corporation. The common stock issuer, in this case TI, derives no financial benefit from the options transactions, and in fact may be harmed inasmuch as the options market draws purchasers who might otherwise buy common stock and invest directly in the corporation. Because the options trader does not actually purchase shares of the underlying issuer, there is no transactional or fiduciary relationship between the options trader and the issuer, and the issuer does not owe the trader a duty to disclose material information. Therefore, the options trader cannot sue for breach of a duty that does not exist.

In support of its argument, TI cites the Supreme Court’s decision in Chiarella v. United States, 445 U.S. 222, 228-30, 100 S.Ct. 1108, 1114-16, 63 L.Ed.2d 348 (1980), in which the Court held that a duty to disclose material information arises only when there exists a “relationship of trust and confidence” between the defendant and the injured party. The defendant in Chiar-ella was a printer who inferred the identify of a corporation that was the target of a takeover attempt from documents sent to his employer for printing. Using this inside information, the defendant purchased shares in the target corporation, and then sold the shares at a profit immediately after the takeover was made public. The Court found that the defendant did not violate the securities laws, despite the fact that he bought shares with improperly obtained inside information, because he was not a corporate insider and was not a fiduciary or agent of the injured sellers. “He was, in fact, a complete stranger who dealt with the sellers only through impersonal market transactions,” and as such did not owe the sellers a duty to disclose his inside information. Id., at 232-33, 100 S.Ct. at 1116-17. See also Dirks v. Securities and Exchange Commission, 463 U.S. 646, 103 S.Ct. 3255, 77 L.Ed.2d 911 (1983) (a tippee does not violate Rule 10b-5 unless the insider’s “tip” was a breach of fiduciary duty, generally determined by the personal benefit the insider derives from the tip.).

Relying on Chiarella, the Eighth Circuit Court of Appeals held in Laventhall v. General Dynamics Corp., 704 F.2d 407 (8th Cir.), cert. denied, 464 U.S. 846, 104 S.Ct. 150, 78 L.Ed.2d 140 (1983), that there was no relationship between options traders and the corporations issuing the underlying common stock where the corporation itself engages in insider trading without disclosing material facts. The issuing corporation had purchased its own common stock on the open market without disclosing that it would soon declare the first cash dividend in eight years. Although the corporation had violated § 10(b) as to persons trading in the stock of the corporation, there was no “transactional nexus” between the corporation and the plaintiff options traders. The court held that:

Had plaintiff been contemporaneously trading in the same market, that is, buying and selling common stock at the same time defendant was trading, there would arguably exist a transactional nexus that defendant had profited through the purchase of stock, whereas plaintiff contemporaneously had sustained a loss through the sale of his stock due to the imbalance of information. The legal justification for liability of the corporate insider to the outside uninformed investor is that if the insider trades on the basis of the inside information it may profit at the expense of outside investors who are disadvantaged in the same or similar transaction by lack of the inside information. Thus, in this hypothetical transaction there is a direct nexus between the defendant’s gain and the plaintiffs loss.
However, the same analysis cannot be applied to a transaction between an options holder dealing with a third party and the corporate insider or his tippee dealing with shares of stock. There is only a speculative relationship between the insider’s trading and the alleged loss caused to the options holder. It may be true that the nondisclosure may have had some indirect effect on the option premium, but the insider’s trading of stock on the stock market has no transactional nexus with the option holder’s loss on the options exchange.

Id., at 412. Without this transactional nexus, a corporate insider could be found “liable to all the world,” and so the court held that the duty to disclose does not arise unless there is “some special relationship” between the plaintiff and defendant in a § 10(b) case. Id., at 413. The Laventhall rule has been extended by one court to dismiss an action brought by options traders against an issuing corporation that did not trade in either options or its own stocks, but simply failed to disclose certain material adverse business and financial information. In re McDonnell Douglas Corp. Securities Litigation, 567 F.Supp. 126 (E.D.Mo.1983).

TI urges us to follow Laventhall and McDonnell Douglas, arguing that it did not owe any duty to the plaintiff options traders in this case. Plaintiffs contend, however, that the corporate defendant in McDonnell Douglas merely failed to disclose information to the public; here, plaintiffs allege that TI’s conduct went beyond nondisclosure because TI’s March and April financial reports were actually affirmative misrepresentations. Plaintiffs maintain that a different rule is required when the corporate issuer engages in affirmative misrepresentation as opposed to mere nondisclosure, citing In re Digital Equipment Corp. Securities Litigation, 601 F.Supp.311 (D.Mass.1984). The corporate defendant in Digital Equipment allegedly issued public statements indicating that it expected to sell 100,000 personal computers before the end of 1984, and that the first quarter earnings in 1984 would be equal to those achieved in 1983. Id., at 314. The plaintiff options traders claimed that these statements were material misrepresentations, since the corporation in fact experienced a sharp decline in earnings due to a drop in personal computer sales. Id., at 312. The court held that the options holders had standing to sue for affirmative misrepresentations, because Rule 10b-5 applies to prohibited acts that occur in connection with the purchase or sale of “any security,” including options contracts. Id. at 315; see supra n. 7. The court distinguished McDonnell Douglas because that ease was decided on the basis of nondisclo-sures by the corporation rather than affirmative misrepresentations, and held that “[t]he better rule is one that recognizes that options holders have standing to sue for affirmative misrepresentations.” In re Digital Equipment, at 315. See also Backman v. Polaroid Corporation, 540 F.Supp. 667, 671 (D.Mass.1982); Lloyd v. Industrial Bio-test Laboratories, Inc., 454 F.Supp. 807 (S.D.N.Y.1978) (decided before Chiarella).

We do not agree that the distinction between affirmative misrepresentation and nondisclosure calls for a different rule as to the standing of options traders to sue under § 10(b). Instead, we read Chiarella and its progeny as indicating that there must be some relationship, or some connection between the plaintiffs and the § 10(b) defendant. Chiarella, 445 U.S. at 228-30, 100 S.Ct. at 1114-16; Dirks v. S.E.C., 463 U.S. at 657-58, 103 S.Ct. at 3262-63; Laventhall, 704 F.2d at 413-14; cf. Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723 at 745-49, 95 S.Ct. 1917, 1929-32, 44 L.Ed.2d 539; Wilson v. Comtech Telecommunications Corp., 648 F.2d 88, 94-95 (2d Cir.1981). Indeed, Rule 10b-5 itself only prohibits those deceptive acts which occur “in connection with the purchase or sale of any security.” See also § 10(b), supra n. 6. Although the “in connection with” requirement has been broadly interpreted in order to facilitate the remedial purposes of the securities laws, see S.E.C. v. Texas Gulf Sulphur Co., 401 F.2d 833, 858-61 (2d Cir.1968), cert. denied, 394 U.S. 976, 89 S.Ct. 1454, 22 L.Ed.2d 756 (1969), it is still necessary to establish some nexus between the defendant’s actions and the plaintiff’s injuries. Where the corporate defendant has acted by releasing misleading or false statements to the public, the “in connection with” element is satisfied if the statements were “of a sort that would cause reasonable investors to rely thereon, and in connection therewith, so relying, cause them to purchase or sell a corporation’s securities.” Id., at 860; see also Teamsters Local 282 Pension Fund v. Angelos, 762 F.2d 522, 528-29 (7th Cir.1985). Options traders, however, are not investors in the corporation making misleading statements, nor do they purchase or sell that corporation’s securities. Their transactions in options contracts are simply too remote to satisfy the “in connection with” requirement when the alleged deceptive acts are merely corporate misstatements not directed in any way to the options market.

We recognize that the question of options traders’ standing to sue for corporate misrepresentations is a close and unsettled one. The underlying goal of the securities laws is to ensure the integrity of the open securities market by protecting its participants from deceptive and misleading information. The options market is to a certain extent based on the fortunes and failures of the corporations issuing common stock, so to that extent the options trader relies on information concerning the business outlook for those corporations and may be misled when that information is in error. However, an options contract is also recognized as a riskier investment than a transaction on the common stock market; the options trader makes the decision to assume greater risk in order to garner greater returns. We do not feel obligated to expand the scope of liability under § 10(b) to make this obviously uncertain market safer for the trader who has no connection whatsoever to the issuer of the underlying stock. We are mindful that if plaintiffs were to succeed in this cause of action, their compensation would be paid by the corporation, and ultimately by the shareholders and investors in common stock. Moreover, TI points out that it does not control the number of options contracts that may be written; its potential liability to options holders is limited only by the whims of the options writers. In addition, we are confident that whatever deterrent purpose is served by § 10(b) and Rule 10b-5 will be amply fulfilled by restricting liability for misrepresentations and omissions to persons trading in the common stock of a corporation.

Therefore, TI’s motion to dismiss those claims under Count I based on options transactions is granted. The claims based on long purchases of TI stock remain, as the complaint sufficiently alleges that those purchases were made in reliance on TI’s statements as to its financial condition, and a duty to disclose existed between TI and the buyers of its common stock.

Aiding and Abetting

Plaintiff options traders also allege that TI is secondarily liable to them for aiding and abetting the securities violations committed by the individual defendants who traded unlawfully in TI options. See infra at 163-164. TI argues that these claims must be dismissed because they are conclu-sory and fail to meet the requirements of Federal Rule of Civil Procedure 9(b).

Three elements are necessary to establish liability for aiding and abetting under the securities laws: (1) there must be an independent primary fraud; (2) the aider and abettor knew of or recklessly disregarded the possibility of the primary fraud; and (3) the aider and abettor must have given substantial assistance to the persons committing the primary fraud. Walck v. American Stock Exchange, Inc., 687 F.2d 778, 791 (3d Cir.1982), cert. denied, 461 U.S. 942, 103 S.Ct. 2118, 77 L.Ed.2d 1300 (1983); Morgan v. Prudential Group, Inc., 81 F.R.D. 418, 424 (S.D.N.Y.1978). Silence and inaction, as well as affirmative acts, may constitute “substantial assistance”; however, the aider and abettor must have actual knowledge of the primary fraud, or should have known of the fraud but for a breach of a duty to inquire. Hochfelder v. Midwest Stock Exchange, 503 F.2d 364, 374 (7th Cir.), cert. denied, 419 U.S. 875, 95 S.Ct. 137, 42 L.Ed.2d 114 (1974); cf. Monsen v. Consolidated Dressed Beef Co., Inc., 579 F.2d 793, 799-800 (3d Cir.1978) (inaction is a predicate for secondary liability only if the aider and abettor “consciously intended to assist in the perpetration of a wrongful act.” (Emphasis in original). In addition, conclusory allegations will not support a claim of aiding and abetting; “unadorned allegations” of “participation” in an allegedly fraudulent scheme are insufficient to meet the particularity requirements of Rule 9(b). Morgan, 81 F.R.D. at 425; see also Frischling v. Priest Oil and Gas Corp., 524 F.Supp. 1107, 1111 (N.D.Ill.1981).

Plaintiffs argue that the complaint adequately alleges that TI substantially assisted the insider trading of the individual defendants by withholding the June 10, 1983, press statement until the close of trading that day in order to allow the individual defendants to complete their unlawful transactions. First Am.Comp., 1132. We agree that these allegations go beyond alleging mere participation. However, since TI did not owe the plaintiff options traders any fiduciary duty, see supra at 159-162, plaintiffs must demonstrate that TI actually knew of the options trading by the individual defendants and delayed releasing the June 10 statements with the intent of assisting those defendants. Hochfelder, 503 F.2d at 374. It is not enough to show that TI knew that the delay “would allow” employees to trade on inside information, without establishing that in fact TI knew that such trading was going on. First Am.Comp., 1132. See Monsen, 579 F.2d at 799 (“Knowledge of the underlying violation is a critical element in proof of aiding-abetting liability, for without this requirement financial institutions, brokerage houses, and other such organizations would be virtual insurers of their customers against security law violators.”).

Plaintiffs have failed to allege any facts indicating that TI had actual knowledge of the fraudulent activity of the individual defendants. Plaintiffs simply make the conclusory statement that the June 10 press release was “withheld with the intent, knowledge or reckless disregard that the fraud of certain insiders and their associates ... would be aided and abetted by such refusal to disclose.” First Am.Comp., II32. A bare legal conclusion without factual allegations to support it is insufficient to withstand a motion to dismiss. Sutliff Inc. v. Donovan Companies, Inc., 727 F.2d 648, 654 (7th Cir.1984) (antitrust complaint dismissed). The Seventh Circuit Court of Appeals has recently admonished that the liberal pleading standard articulated in Conley v. Gibson, supra, is not to be literally applied. Instead, the heavy costs of complex modern litigation and the burgeoning caseload of the federal courts indicate that parties should not be allowed to proceed with discovery “if there is no reasonable prospect that the plaintiff can make out a cause of action from the events narrated in the complaint.” Id. Therefore, plaintiffs must “set out sufficient factual matter to outline the elements of [their] cause of action or clainj, proof of which is essential to [their] recovery.” Id., quoting Daves v. Hawaiian Dredging Co., 114 F.Supp. 643, 645 (D.Haw.1953) (Fair Labor Standards Act case); see also Benson v. Cady, 761 F.2d 335, 338 (7th Cir.1985) (prisoner civil rights case). Plaintiffs have not pled any factual matter to support their conclusion that TI had actual knowledge of the primary fraud in this case. Accordingly, the claims of the plaintiff options traders based on the secondary liability of TI are also dismissed. The claims of those plaintiffs purchasing TI stock remain, since the holding in Hochfelder indicates that a case of aiding and abetting may be based on a failure to act due to a breach of fiduciary duty. See supra at 162. Plaintiff options traders will be allowed to amend the complaint, if they can in good faith allege sufficient facts to support their allegation that TI acted with actual knowledge of the fraudulent activity of the individual defendants. See Fed.R.Civ.P. 11.

Pendent State Claims

Having dismissed the federal securities law claims based on the options transactions, we will exercise our discretion under United Mine Workers v. Gibbs, 383 U.S. 715, 726-27, 86 S.Ct. 1130, 1139-40, 16 L.Ed.2d 218 (1966), and dismiss the pendent state fraud claims based on those transactions. The pendent claims against TI based on stock purchases remain.

Motions to Dismiss by Individual Defendants

All of the individual defendants have also moved to dismiss the claims of the plaintiff options traders on the basis that options traders have no standing to sue for violations of Rule 10b-5. Defendants argue that, like the defendant in Chiarella, they were strangers to plaintiffs and had no fiduciary obligation to persons trading in TI options. See Chiarella v. United States, 445 U.S. at 232-33, 100 S.Ct. at 1116-17; supra at 159.

However, unlike the defendant in Chiarella, the individual defendants in this case were employees of TI or were tippees of employees. As such they were corporate insiders, who, by virtue of their fiduciary duty to their employer and its shareholders, were subject to a separate duty to abstain from trading or disclose inside information. Because the securities laws are designed to protect the entire open market, see supra at 161, this duty is owed not only to the shareholders of the corporate employer, but also to the investing public at large. O’Connor & Associates v. Dean Witter Reynolds, Inc., 529 F.Supp. 1179, 1187 (S.D.N.Y.1981). The transactional nexus required under the rule between plaintiffs and defendants exists by virtue of the fact that corporate insider defendants who choose to buy or sell options are trading contemporaneously in the same market with the plaintiff options traders. Id., at 1188; see also Laventhall, 704 F.2d at 412; supra at 159. Defendants had the advantage over plaintiffs of knowing in advance of TPs home computer downfall, and used that advantage to plaintiffs’ detriment. In contrast, TI took no actions that directly affected the options market, and accordingly, no transactional nexus existed. See supra at 161-162. Therefore, although we find that plaintiffs do not have standing to assert claims against TI based on options transactions, plaintiffs do have standing to assert their claims against the individual defendants, all of whom actively participated in the options market at the same time as plaintiffs. The motions to dismiss of the individual defendants are denied.

As for defendant Emery Spears’ motion for summary judgment, Spears has failed to demonstrate that there is no genuine issue as to any material fact. Fed.R. Civ.P. 56(c). Indeed, his affidavit denying that he possessed any material inside information simply creates a fact question to be determined at trial in the face of plaintiffs’ allegation to the contrary. First Am. Comp., H 11. Spears’ motion for summary judgment is denied.

Motions to Transfer

All of the defendants, including TI, have moved under 28 U.S.C. § 1404(a) to transfer this action to the Northern District of Texas, for the convenience of the parties and witnesses, and in the interest of justice. The defendants argue that all of the witnesses with knowledge of the facts involving the insider information concerning TI’s financial condition reside in Texas; the vast majority of relevant documents, involving hundreds of thousands of pages, are located in Texas; and there are already two suits, a civil class action and an SEC enforcement action involving the same facts and defendants, pending in Texas. In addition, the individual defendants maintain that they are not financially able to assume the costs involved in simultaneously defending lawsuits in two jurisdictions. Defendant Fox also informs us that he is in ill health, and that the strain of having to travel to Chicago for proceedings in this court would jeopardize his physical condition.

We have recently set forth the various factors we must consider in determining whether to transfer a case under § 1404(a). Communications Associates, Inc. v. Novatel Communications, Inc., No. 84 C 6076, slip op. at 3-7 (N.D.Ill. March 1, 1985) (Grady, J.). Defendants bear the burden of demonstrating that there is a “clear balance” of inconvenience to defendants in order to justify transfer of the case, and in the absence of such a clear difference, plaintiffs’ choice of forum should not be disturbed. Id., at 3; NTN Bearing Corp. v. Charles E. Scott, Inc., 557 F.Supp. 1273 (N.D.Ill.1983). This is especially true where plaintiffs are residents of the chosen forum. Communications Associates, slip op. at 4; Magnavox Co. v. Bally Manufacturing Co., 414 F.Supp. 891, 892 (N.D.Ill.1976). Plaintiffs’ choice is insignificant only if the chosen forum lacks any significant contact with the cause of action. Communications Associates, slip op. at 4; Hotel Constructors, Inc. v. Seagrave Corp., 543 F.Supp. 1048, 1050 (N.D.Ill.1982).

In this case, all but one of the plaintiffs reside in this district. Defendants attempt to diminish the significance of this fact by arguing that this district lacks any significant contact with the case because all of defendants’ actions in issuing misleading statements, failing to disclose material information, and acquiring insider information occurred in Texas. Defendants overlook the fact that the allegedly illegal securities transactions actually took place in this district, on the CBOE, and that this district has a significant interest in ensuring that the options market located here is free from fraud. We therefore give plaintiffs’ choice of this forum considerable weight.

Nevertheless, plaintiffs’ choice may be overcome if the convenience of witnesses, convenience of the parties and the interests of justice point to the Northern District of Texas as the preferable jurisdiction. Defendants claim that all of the material witnesses in this case reside in Texas, with the exception of plaintiffs and whatever experts are necessary to testify as to the nature of the options market. Defendants maintain that the crucial issue in this case is the allegedly fraudulent scheme carried out in Texas to withhold material inside information in order to profit from that information on the stock market and options market. All of the witnesses and documents concerning this scheme are located in Texas, and the individual defendants in particular make the point that the live testimony, as opposed to deposition testimony, of these witnesses is critical, as the determination of this case at trial is likely to revolve around questions of credibility. In evaluating the convenience of witness factor, however, we must take into account the parties’ control over witnesses. Communications Associates, Inc. v. Novatel Communications, supra, slip op. at 5; Associated Mills, Inc. v. Rush-Hampton Industries, 588 F.Supp. 1164, 1167 (N.D.Ill.1984). Most of the necessary witnesses from Texas are either defendants in this case or are employees of TI, and are subject to TI’s control. Since TI is still a defendant in this case, it should be able to produce its employees as witnesses here in Chicago, even though the individual defendants would not have been able to do so. The only witnesses who may be unavailable for trial may be the options brokers in Texas through whom certain defendants made their options purchases. See, e.g., Motion to Dismiss or for Transfer, Affidavit of P. Joanne Randall, ¶ 3. These brokers would not be subject to the compulsory process of this court. We note, however, that it is difficult to predict at this early stage of the litigation exactly which witnesses will prove to be necessary, or desirable, to call at trial. Cf. Somerville v. Major Exploration, Inc., 576 F.Supp. 902, 907 (S.D.N.Y.1983). As for defendants’ argument concerning the location of relevant documents, wé do not believe that this is a compelling factor, given the ready availability of photocopying and the relative ease with which documents may be selectively shipped around the country. See American Standard, Inc. v. Bendix Corp., 487 F.Supp. 254, 264 (W.D.Mo.1980).

We are concerned, however, by the apparent imbalance in the convenience of the parties. Plaintiffs argue that transfer of this case to Texas will simply shift the inconvenience from defendants to plaintiffs, and therefore this factor does not outweigh the consideration accorded plaintiffs’ choice of forum. See Communications Associates, slip op. at 6; Ronco, Inc. v. Plastics, Inc., 539 F.Supp. 391, 401-02 (N.D.Ill.1982). But there is more than just a shift of equally inconvenient circumstances here. The individual defendants point out that they are already defending the SEC enforcement action in Texas and would be required to obtain additional Chicago counsel if this case were to remain here. All have stated that this would place undue financial hardship on them, and some of the defendants have indicated that they are persons of very modest financial means. On the other hand, if this case were moved to Texas, plaintiffs would have to obtain local counsel; however, as plaintiffs are all represented by one set of attorneys, a transfer will only result in duplication of that one set of attorneys, rather than duplication of six sets.

In addition, defendants contend that transfer of the case is in the interest of judicial economy, as there is a civil action as well as the SEC action pending in Texas, and the Texas court is familiar with the events in question. The civil action, however, has apparently concluded with a settlement between the parties, and as a result, we are not convinced that judicial economy would necessarily be served by moving this case. We will, however, grant defendants’ motion for a transfer because of our concern for the ability of the individual defendants to defend adequately two lawsuits simultaneously in two such disparate locales. Justice will not be served by forcing these individuals to shoulder attorneys’ fees and costs for duplicative work, or to forego a vigorous defense in one case or the other due to a lack of resources. These concerns would not outweigh plaintiffs’ decision to litigate here if the only defendant in the case were TI or other defendants capable of handling the financial burden of simultaneous suits. Certain individual defendants have made it clear, however, that it would be an undue hardship for them. Defendants’ motions to transfer this case to the Northern District of Texas are therefore granted.

CONCLUSION

Defendant Texas Instrument’s motion to dismiss the complaint is granted only as to the claims based on options transactions. The motions to dismiss by each of the individual defendants are denied. Plaintiffs may have until November 22, 1985, to amend their complaint if they can in good faith allege facts to support a claim against TI for aiding and abetting. The motions to transfer this action to the Northern District of Texas are granted.

      . Counsel for TI informed us in April 1985 that the district court in Texas had issued a final judgment order in the class action approving a settlement between the parties. Letter from Bartlett H. McGuire, April 17, 1985.

      . We granted leave for the SEC to file an amicus curiae memorandum in response to the motions to dismiss submitted by defendants Fox, Ball, Randall and Fleece. Order of April 10, 1985. The SEC filed its appearance and memorandum on May 2, 1985, on the question of whether § 10b and Rule 10b-5 prohibits insider trading of options as opposed to common stock.

      .This suit is also brought against Does 1 through 50, who are individuals who engaged in large-scale purchases of TI options and stock based on inside information improperly received from one or more of the named defendants; and Does 51 through 56 who are brokerage houses that aided and abetted the alleged securities violations by facilitating and suggesting the options and stock trades based on improper inside information.

      . All of the parties in this case have made admirable attempts at explaining the unique nature of the options market to the court, which we will now attempt to paraphrase. Options traded on the CBOE are issued by the Options Clearing Corporation, a clearing agency that is regulated by the SEC. Options contracts on common stock are described as either "puts” or "calls.” A "put” option conveys the right to sell a specified number of shares in the underlying common stock for a specified "exercise price” at or before a specified time, or "expiration date.” A "call" option conveys the right to buy a specified number of shares for a specified exercise price at or before the specified expiration date. Under the rules of the Options Clearing Corporation, the expiration date falls on the Saturday following the third Friday of the expiration month identified in any given options contract. Accordingly, at the time of the events alleged in this lawsuit, at TI "July 140” put entitled its holder to sell 100 shares of TI common stock at $140.00 per share on or before Saturday, July 16, 1983; and a TI "July 140" call entitled the holder to buy 100 shares of TI stock at $140.00 per share on or before the same date. The individual defendants in this case allegedly purchased July 140 puts, July 150 puts and October 140 puts during the week of June 6, 1983, for prices as low as $1.00 per underlying share. These put contracts conveyed the right to sell TI stock at $140.00 per share or $150.00 per share in July and October when the defendants allegedly knew that TI stock would be worth considerably less due to the difficulties in the Consumer Products Group. Following the announcement of TI's revised financial forecasts on June 10, the price of put contracts rose dramatically, and defendants were able to sell their puts for prices as high as $139.00. The price of July call contracts, which conveyed the right to buy TI stock in July at now unrealistically high prices decreased; the closing price on call contracts on June 10 prior to the announcement was $19.50 per underlying share, while the closing price on June 13 was $1.50. Plaintiffs in this case allegedly sold put contracts during the week of June 6 and bought call contracts, thereby losing mon.ey when the market in TI options contracts turned around following the June 10 press release.

      . TI’s motion to dismiss and supporting memo-randa were directed at plaintiffs' original complaint, which only alleged that plaintiffs had bought and sold options on TI stock. Three months after TI’s motion to dismiss was filed, plaintiffs filed their First Amended Complaint, which added allegations as to the long purchases of TI common stock made by nine of the plaintiffs. The amended complaint does not detail the amount of common stock purchases involved in this cause of action; the only allegation as to this issue is a statement that one unidentified plaintiff purchased 1,000 shares long on June 6, for a loss one week later of $42,000.00. First Am.Comp., ¶ 16. TI, in it supplemental memorandum requested by the court following the filing of the amended complaint, apparently concedes that the plaintiffs who purchased common stock have standing to assert the claims contained in the complaint. TI’s motion to dismiss, therefore, is only addressed to the claims of those plaintiffs who purchased only options, and to the options-related claims of the remaining nine plaintiffs. Memorandum with Respect to the Addition by Certain Plaintiffs of Rule 10b-5 Claims Based on Purchases on TI Stock, at 2. TI believes that the over- . whelming majority and dollar volume of plaintiffs’ claims are based on options transactions. Id., at 3.

      . Section 10(b) reads in pertinent part:
      It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce or of the mails, or of any facility of any national securities exchange—
      ******
      (b) To use or employ, in connection with the purchase or sale of any security registered on a national securities exchange or any security not so registered, any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors.
      15 U.S.C. § 78j.
      Rule 10b-5 reads:
      It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails, or of any facility of any national securities exchange,
      (1) to employ any device, scheme, or artifice to defraud,
      (2) to make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or
      (3) to engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person in connection with the purchase or sale of any security.
      17 C.F.R. § 240.10b-5.

      . TI does not argue, nor can it, that options contracts are not covered by the terms of the federal securities laws, since the 1934 Act explicitly provides that the "right to subscribe to or purchase” stocks are “securities." 15 U.S.C. § 78c(a)(10); see also Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 750-51, 95 S.Ct. 1917, 1932-33, 44 L.Ed.2d 539 (1975).

      . Plaintiffs and the SEC counter this argument by citing studies indicating that the existence of the options market in fact enhances trading in the underlying common stock by increasing liquidity and permitting large institutional investors to hedge their purchases and sales. Memorandum in Opposition to Texas Instruments’ Motion to Dismiss or Transfer, at 11-12; Memorandum of the Securities and Exchange Commission, Amicus Curiae, at 7-8. We do not decide this particular question one way or the other, as it does not affect the result we reach.

      . TI disputes this characterization of the facts in McDonnell Douglas and has submitted the complaint from that case. The plaintiffs alleged there that the corporate defendant not only failed to disclose material facts, but also issued favorable earnings reports predicting bright future prospects. Reply Memorandum in Support of Texas Instruments’ Motion to Dismiss or Transfer, at 3-4, Exh. A. The district court opinion in the case does not fully set out the facts, and simply states that plaintiffs claim that "the defendants failed to disclose to the investing public certain material adverse information ” McDonnell Douglas Corp., 567 F.Supp. at 126. However, our own decision does not turn on the scope of the McDonnell Douglas holding.

      . We are, however, skeptical as to whether the amended complaint in fact states a claim under Illinois law for common law fraud. The alleged misrepresentations contained in the March and April statements as to the prospects for TI in 1983 seem to be predictions of future occurrences or mere expressions of opinion, neither of which are considered fraudulent under Illinois law. Carter v. Mueller, 120 Ill.App.3d 314, 320, 75 Ill.Dec. 776, 781-82, 457 N.E.2d 1335, 1340-41 (1st Dist.1983); Metropolitan Bank & Trust Co. v. Oliver, 4 Ill.App.3d 975, 283 N.E.2d 62, 64 (1st Dist.1972). See also Duhl v. Nash Realty, Inc., 102 Ill.App.3d 483, 489-91, 57 Ill.Dec. 904, 909-11, 429 N.E.2d 1267, 1272-74 (1st Dist.1982) (although opinions are generally not actionable, where they involve the value of an item for sale and are made as statements of fact for the buyer to rely on, they may give rise to a claim for fraud). Omissions or the concealment of existing facts may be tortious when they occur with the intent to deceive and under circumstances creating the opportunity and duty to speak. Perlman v. Time, Inc., 64 Ill.App.3d 190, 195, 20 Ill.Dec. 831, 835, 380 N.E.2d 1040, 1044 (1st Dist.1978). The plaintiffs who purchased stock may be able to demonstrate that TI fraudulently concealed information concerning the decline in its home computer market, because it had a duty to purchasers of common stock to speak. We are not convinced, however, that the same duty to reveal information existed as to options traders. See supra at 159-62. Although the question was not addressed by the parties, it may also be determined that Texas law applies. See Pittway Corp. v. Lockheed Aircraft Corp., 641 F.2d 524, 526-27 & n. 1 (7th Cir.1981) (explaining Illinois’ use of the most significant relationship test contained in the Restatement (Second) of Conflict of Laws). We leave it to the transferee court in this case to determine the proper application of either Illinois or Texas law. See infra at 166.

      . In addition to the motions to dismiss based on standing, defendants Ball, Fleece and Fox have moved to dismiss the complaint for improper venue under 28 U.S.C. § 1391(b) because this is not the district where plaintiffs’ claims arose. Venue in this case, however, is governed by the more liberal venue provision of the 1934 Act, which provides that securities actions may be brought in "the district wherein any act or transaction constituting the violation occurred.” 15 U.S.C. § 78aa. The allegedly unlawful options transactions through which plaintiffs were injured and defendants profited all took place on the CBOE, here in Chicago. Blau v. Lamb, 242 F.Supp. 151, 159-60 (S.D.N.Y.1965), aff’d in relevant part and rev'd in part, 363 F.2d 507 (2d Cir.1966) (venue proper in New York because unlawful common stock transactions took place on the American Stock Exchange, located in New York). The motions by Ball, Fleece and Fox based on improper venue are utterly without merit.
      In addition, we are not persuaded by defendants' argument that plaintiffs’ fraud claims against the individual defendants are insufficient under Rule 9(b). The complaint clearly alleges the insider information defendants allegedly possessed, and sets forth in detail the transactions in which each of the engaged on the options market. These allegations are sufficient to notify defendants of the nature of plaintiffs’ claims, and stand in marked contrast to the more conclusory allegations made against TI.

      . It may be, however, that these brokers will become party defendants in the case, see supra n. 3, and will then, of course, be present at trial. '

      . See, e.g., Affidavit of P. Joanne Randall, ¶ 4; Affidavit of David L. Ball Submitted in Support of Defendant’s Motion to Transfer, ¶¶ 8-9; Affidavit of Joseph C. Fox Submitted in Support of His Motion for Transfer, ¶¶ 8-9. We would take a very different view of this question if it appeared that defendants’ Texas counsel were going to take the laboring oar in this court and that local counsel were going to be retained simply for the purpose of accepting notice of motions and handling routine matters. In that event, the cost of local counsel here would be minimal.

      . Implicit in defendants’ argument is the representation that this case will be handled in Texas by the same attorneys who are already representing defendants there on the SEC case, and that a substantial saving of time and expense will therefore be effected by the transfer. If this is not the situation, and defendants are going to be represented in this case by attorneys other than those already familiar with the factual and legal issues by virtue of their work in the other Texas cases, that fact should be brought to our attention on a motion to reconsider the transfer order.


source: Caselaw Access Project

author: HOLSCHUH, District Judge.

license: Public Domain

text:
    William SCHOFFNER, Plaintiff, v. UNITED STATES of America, Defendant.
    No. C-2-83-1355.
    United States District Court, S.D. Ohio, E.D.
    Oct. 15, 1985.
    William Schoffner, pro se.
    Albert R. Richter, Asst. U.S. Atty., and David Monson, Dept, of Justice, Washington, D.C., for the U.S.
   MEMORANDUM AND ORDER

HOLSCHUH, District Judge.

Plaintiff William Schoffner brings this action seeking review of two five hundred dollar penalties assessed by the Commissioner of Internal Revenue against him for ■filing frivolous tax returns for the tax years 1980 and 1981. This matter is before the Court on defendant’s motion to dismiss or for summary judgment.

I.

On October 7, 1982 plaintiff filed two tax forms 1040A for the tax years 1980 and 1981. Each line of the returns, including the spaces for filing status, exemptions and income, was marked either “none” or with an asterisk. At the top of the forms plaintiff wrote “I offer to amend or to refile this return exactly as you wish it if you will please show me how to do so without waving [sic] my constitutional rights.” On the right margin of the two returns was written, “I do not understand this return nor the laws that apply to me. Signature involuntarily given under threat of statutory punishment. I request complete immunity per 18 U.S.C. § 6002 and § 6004 before waiving any constitutional or natural rights including the fifth amendment guarantee of not being a witness against myself.” At the bottom of the page, plaintiff explained the numerous asterisks on the return, “This means specific objection is made under the 5th Amendment, U.S. Constitution, and that similar objection is made to the question under the 1st, 4th, 7th, 8th, 9th, 10th, 13th, 14th and 16th Amendments.”

On April 25, 1983 the Commissioner assessed two five hundred dollar penalties against plaintiff for filing a “frivolous” return for 1980 and 1981, pursuant to 26 U.S.C. § 6702. Plaintiff was notified by mail of the assessment and of his appeal rights. On April 29, 1983 plaintiff filed two claims for refund, accompanied by the required payment of fifteen percent (15%) of the assessed penalty. On July 24, 1983 the IRS denied the claims for refund. This action followed.

II.

The provisions of the tax code under which the penalties were assessed, 26 U.S.C. § 6702, provides:

(a) Civil penalty. — If—
(1) any individual files what purports to be a return of the tax imposed by subtitle A but which—
(A) does not contain information on which the substantial correctness of the self-assessment may be judged, or
(B) contains information that on its face indicates that the self-assessment is substantially incorrect; and
(2) the conduct referred to in paragraph (1) is due to—
(A) a position which is frivolous, or
(B) a desire (which appears on the purported return) to delay or impeded the administration of Federal income tax laws, then such individual shall pay a penalty of $500.
(b) Penalty in addition to other penalties. —The penalty imposed by subsection (a) shall be in addition to any other penalty provided by law.

Section 6702 was enacted in 1982 in an attempt by Congress to stem the growth of deliberate defiance of the tax laws by tax protestors. S.Rep. No. 494, 97th Cong.2d Sess. 277, reprinted in 1982 U.S.Code Cong. & Ad.News 781, 1023-24. The Senate report provides that “[t]he penalty will be immediately assessable against any individual filing a ‘return’ in which many or all of the line items are not filled in except for references to spurious constitutional objections.” Id. at 1024.

Plaintiffs tax returns clearly fall within the parameters of section 6702. The returns contain no information at all. Section 6702(a)(1)(A). Moreover, plaintiff’s claim of a fifth amendment privilege as to every item on the return is based upon a frivolous position. Section 6702(a)(2)(A). A claim is frivolous where there is no argument on either the law or the facts to support the claim, Davis v. Oklahoma Dept. of Corrections, 516 F.Supp. 5 (W.D. Okla.1980), or where the law has long been settled against the claimant. Lonsdale v. Commissioner, 661 F.2d 71 (5th Cir.1981).

It is a matter of well-established law that a taxpayer may not avoid submitting any information on his income tax return by making spurious constitutional objections. United States v. Sullivan, 274 U.S. 259, 47 S.Ct. 607, 71 L.Ed. 1037 (1927). Only a validly exercised privilege as to specific items may excuse the failure to provide certain income tax information. Garner v. United States, 424 U.S. 648, 96 S.Ct. 1178, 47 L.Ed.2d 370 (1976). In this regard, the Supreme Court stated in United States v. Sullivan, supra:

If the form of return provided called for answers that [Sullivan] was privileged from making, he could have raised the objection in the return, but could not on that account refuse to make any return at all_ He could not draw a conjurer’s circle around the whole matter by his own declaration that to write any word upon the government blank would bring him into danger of the law.

274 U.S. 259, 47 S.Ct. 607, 71 L.Ed. 1037 (1927).

In a case with very similar facts, the Sixth Circuit recently reiterated its position that a tax return which contains absolutely no information from which tax liability can be calculated is equivalent to no tax return at all. United States v. Heise, 709 F.2d 449 (6th Cir.), cert. denied, 464 U.S. 918, 104 S.Ct. 285, 78 L.Ed.2d 262 (1983). This is also the predominating view among the other Courts of Appeal. See e.g., United States v. Pilcher, 672 F.2d 875 (11th Cir.), cert. denied, 459 U.S. 973, 103 S.Ct. 306, 74 L.Ed.2d 286 (1982); United States v. Johnson, 577 F.2d 1304 (5th Cir.1978); United States v. Jordan, 508 F.2d 750 (7th Cir.), cert. denied, 423 U.S. 842, 96 S.Ct. 76, 46 L.Ed.2d 62 (1975); United States v. Daly, 481 F.2d 28 (8th Cir.), cert. denied, 414 U.S. 1064, 94 S.Ct. 571, 38 L.Ed.2d 469 (1973). Since plaintiff’s position has no basis in the law, it is frivolous within the meaning of the statute, United States v. Lee, 455 U.S. 252, 102 S.Ct. 1051, 71 L.Ed.2d 127 (1982), and the penalty was properly assessed. Plaintiff did not merely object to revealing specific information on his tax return, he refused to supply any information at all. Further, he has made no attempt to demonstrate the legitimacy of his invocation of the Fifth Amendment.

III.

Plaintiff alleges that the penalty assessment constitutes a denial of due process in that he should have been afforded a hearing regarding the validity of his Fifth Amendment assertions prior to the imposition of the penalty.

Plaintiff’s argument is without merit. Due process is a flexible concept and its procedural protections are dependent upon particular factual situations. Morrisey v. Brewer, 408 U.S. 471, 481, 92 S.Ct. 2593, 2600, 33 L.Ed.2d 484 (1972). Exceptions to the general constitutional rule requiring both notice and hearing prior to a governmental taking of property exist where a significant governmental interest justifies delaying the hearing until after the seizure of the property rights. Mathews v. Eldrige, 424 U.S. 319, 96 S.Ct. 893, 47 L.Ed.2d 18 (1976); see also United States v. Crooksville Coal Co., Inc., Civil Action No. C-2-80-861 (S.D.Ohio, Jan. 15, 1983) (payment of penalty prior to appeal not a violation of due process); Powell v. Kopman, 511 F.Supp. 700 (S.D.N.Y.1981) (payment of tax penalty prior to litigation not a violation of due process). Further, “[w]here only property rights are involved, mere postponement of the judicial inquiry is not a denial of due process, if the opportunity given for the ultimate judicial determination of the liability is adequate.” Phillips v. Commissioner, 283 U.S. 589, 596, 51 L.Ed. 608, 611, 75 L.Ed. 1289 (1931). The Supreme Court has held that collection of a penalty prior to hearing is not a denial of due process provided that the taxpayer has access to judicial review in a refund action. Bob Jones University v. Simon, 416 U.S. 725, 94 S.Ct. 2038, 40 L.Ed.2d 496 (1974). See also Riley v. Commissioner, 566 F.Supp. 21 (S.D.Ohio 1983). In the present case, plaintiff had a right to file a refund action subsequent to the assessment of the penalty in which to litigate the validity of his constitutional assertions. Accordingly, no due process violation occurred.

IV.

Plaintiff also challenges the constitutionality of the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA) on the ground that it was improperly enacted, i.e., that it was introduced and passed first in the Senate, rather than in the House of Representatives. The origination clause of the Constitution, Article I, Section 7 provides “[a]ll bills for raising Revenue shall originate in the House of Representatives; but the Senate may propose or concur with Amendments as on other Bills.”

The legislative history of TEFRA indicates that much of the act that was ultimately passed was introduced by way of Senate amendment to the original House bill. The House ultimately passed the Senate version of the Bill. Trent v. United States, 52 A.F.T.R.2d 83-5822 (E.D.Mich.1983). In Trent, the district court concluded that TEFRA was enacted in accordance with the Constitution: “The Court finds that the Act did originate in the House of Representatives. Nothing in the [origination] clause indicates that the Senate may not amend a revenue raising bill by a wholesale substitution of the text of that bill.” Id. at 83-5825.

This approach is consistent with the Supreme Court’s decision in Flint v. Stone Tracey Co., 220 U.S. 107, 31 S.Ct. 342, 55 L.Ed. 389 (1911), where the constitutionality of a bill with a similar legislative history was upheld. In Flint, a general bill for the collection of revenue was introduced in the House of Representatives. In its original form, the House bill contained an inheritance tax. The Senate removed the inheritance tax from the bill, and substituted in its place a corporation tax. In upholding the validity of the legislation, the Supreme Court stated:

The bill having properly originated in the House, we perceive no reason in the constitutional provision relied upon why it may not be amended in the Senate in the manner which it was in this case. The amendment was germane to the subject matter of the bill, and not beyond the power of the Senate to propose.

220 U.S. at 143, 31 S.Ct. at 346.

In accordance with the foregoing analysis, plaintiff’s claim that TEFRA is unconstitutional is without merit.

V.

Finally, plaintiff argues that section 6702 is unconstitutionally vague because it does not define the term “frivolous.” Initially, it must be noted that the Senate report defines “frivolous,” at least in part, as a return in which many or all of the items are objected to on spurious constitutional grounds. Case law has long defined the term as a claim which is unsupportable on either law or facts. See part II, infra. Even the United States Supreme Court has stated that a self incrimination claim against every question on the tax return would be “virtually frivolous,” so as to fall within the meaning of the statute. Albertson v. SACB, 382 U.S. 70, 86 S.Ct. 194, 15 L.Ed.2d 165 (1965).

Again, the Court emphasizes that while plaintiff did not object on Fifth Amendment grounds to every question on the 1040A forms, he objected to most of the items on that basis, including his filing status, number of exemptions, and income. He did not provide a single piece of information to assist the IRS in determining his tax liability. He has made no attempt to justify his claim of the privilege as to any of these items.

WHEREUPON, the Court HOLDS that plaintiff’s complaint is without merit. Defendant’s motion to dismiss is GRANTED. This action is hereby DISMISSED.

IT IS SO ORDERED.


author: RAMSEY, District Judge.

text:
    TOWNE MANAGEMENT CORP., et al., Plaintiffs, v. HARTFORD ACCIDENT AND INDEMNITY CO., et al., Defendants.
    Civ. A. No. R-84-2966.
    United States District Court, D. Maryland.
    Oct. 18, 1985.

      M. Michael Cramer, Benjamin A. Klop-man, Rockville, Md., for plaintiffs.
    John C. Hayes, Jr., Washington, D.C., for defendant — Hartford Acc. and Indem. Co.
    Dan Free, Washington, D.C., for defendant — Howard & Hoffman.
   MEMORANDUM AND ORDER

RAMSEY, District Judge.

Presently before the Court are plaintiff’s motion for partial summary judgment, defendant Hartford Accident and Indemnity Company’s motion for summary judgment, and defendant Howard & Hoffman, Inc.’s motion for summary judgment. Both defendants have responded to plaintiff’s motion for partial summary judgment. Plaintiff has in turn responded to both defendants’ summary judgment motions. Defendant Hartford Accident and Indemnity Company has filed a reply to plaintiff’s memorandum in opposition to Hartford’s motion for summary judgment. In addition, plaintiff has filed a supplemental memorandum opposing defendant Hartford’s motion for summary judgment and has replied to defendant Hartford’s opposition to plaintiff’s motion for summary judgment. Plaintiff has also filed a supplemental reply memorandum and opposition to defendant Howard & Hoffman’s motion for summary judgment, and a second supplemental memorandum in response to defendant Hartford’s opposition to plaintiff’s motion for summary judgment.

Maryland law is the appropriate law to apply in this case. Finding oral argument unnecessary, the Court now rules pursuant to Local Rule 6 (D.Md.1985).

When presented with cross-motions for summary judgment, “[t]he court must rule on each party's motion on an individual and separate basis, determining, in each case, whether a judgment may be entered in accordance with the Rule 56 standard.” Wright, Miller & Kane, Federal Practice and Procedure: Civil 2d § 2720.

A grant of a motion for summary judgment is appropriate only when “there is no genuine dispute as to any material fact and ... the moving party is entitled to a judgment as a matter of law.” Fed.R.Civ.P. 56; National Constructors Ass’n v. National Electrical Contractors Ass’n, Inc., 498 F.Supp. 510, 529 (D.Md.1980), modified on other grounds, 678 F.2d 492 (4th Cir.1982). In addition, there should be “no disagreement as to the inferences which may be drawn from the undisputed facts.” Steinberg v. Elkins, 470 F.Supp. 1024, 1030 (D.Md.1979). The burden is on the moving party and any doubts as to the existence of a genuine issue of material fact will be resolved against the movant. See Adickes v. S.H. Kress & Co., 398 U.S. 144, 90 S.Ct. 1598, 26 L.Ed.2d 142 (1970). The Court is satisfied that the issue to be resolved in this case is one of law and not of fact, and that decision for the defendants under Rule 56 is appropriate.

Towne Management Corporation (hereinafter “Towne”) was incorporated in Maryland in February, 1980 to engage in the business of property management. Eighty-one percent of the stock of Towne from February, 1980, to April 29,1982, was owned by Diversified Property Investments, Inc. (hereinafter “Diversified”), and nineteen percent was owned by Daniel Burner.

Prior to Towne’s incorporation, defendant Hartford Accident and Indemnity Company (hereinafter “Hartford”) had issued a commercial blanket fidelity bond to Diversified. Pursuant to the request of Janna Warner, Secretary of Diversified Property Investments, Inc., Hartford added Towne under the bond previously issued to Diversified, as an additional insured, effective October 24, 1980.

Plaintiff was providing property management services to Walker Mill Associates Limited Partnership in 1981 and 1982. Walker Mill Associates was an owner of a HUD apartment project in District Heights, Maryland. On April 29, 1982, Diversified sold its eighty-one percent stock interest in Towne to Daniel Burner.

During the years of 1981 and 1982, Towne managed monies in accounts at various banks for the Walker Mill project.

These funds included HUD monies provided under an agreement between HUD, D.C. National Bank and Walker Mill whereby HUD would pay monies for project improvements. These monies were in the D.C. National Bank. Other funds included security deposit accounts which represented funds paid by the tenants of Walker Mill as security deposits. These funds were being held at Central National Bank in Maryland. Finally, Towne Management Corporation was charged with the management of an operating account for the benefit of Walker Mill. These funds were also at Central National Bank.... Towne Management Corporation had access to all of the above monies.

Plaintiff’s Memorandum of Points and Authorities in Support of Motion for Partial Summary Judgment at 6.

Plaintiff argues that several of the withdrawals made from the above accounts “could not be supported and there was no evidence that the withdrawals were made for the benefit of Walker Mill.” Id. at 7. Plaintiff claims that $114,346 were withdrawn from the HUD monies at D.C. National Bank & Trust and $111,886 were taken from the security deposits and monies held in the operating account at Central National Bank. Plaintiff argues that these withdrawals were made by an employee of Towne, Daniel Burrier and that “[t]hese monies were not expended for the benefit of Walker Mill and were withdrawn by Daniel Burrier for purposes other than the management of the Walker Mill project for which they were intended.” Id.

On July 27, 1983, Mr. Burrier pled guilty to the charge of interstate transportation of stolen property from D.C. to Virginia, knowing that said monies were stolen and taken by fraud. This charge related to Mr. Burner’s misappropriation of $69,700.50 of the HUD monies held at D.C. National Bank. D.C. National Bank has paid Walker Mill $69,700. Upon petition of Walker Mill, Towne has been placed into receivership.

Towne filed a proof of loss with Hartford, providing that $226,232.00 of unauthorized withdrawals were made by Daniel Burrier while an employee of Towne. Hartford has refused to make payment under the bond. Towne filed suit in the Montgomery County Circuit Court. Hartford removed the case to this Court. Towne has brought this suit “to recover monies for the entire loss it has sustained, part of which is for the benefit of D.C. National Bank in the amount of $69,700.00, which D.C. National Bank has paid over to Walker Mill.” Id. at 9.

The motions and responses in this case focus on three main issues:

1) Did Towne sustain a “loss” within the meaning of the bond;

2) Was Daniel Burrier an “employee” of Towne; and,

3) Did defendant Howard and Hoffman, Inc. make certain misrepresentations made in relation to the addition of Towne to the bond.

For reasons detailed below, the Court finds that Towne has the burden to prove that it did sustain a loss, and has offered no proof on this issue. Accordingly, summary judgment in favor of defendant Hartford is appropriate. Because of this finding, the Court need not reach the issue of whether Daniel Burrier was an employee of Towne, within the meaning of the bond, but will assume arguendo that he was. The question of who was responsible for certain alleged misrepresentations made in relation to the addition of Towne under the bond is really not an issue in this case for two main reasons. First, Hartford has not relied in its motions or responses on these misrepresentations to deny liability under the bond and second, given the Court’s finding that there was no “loss,” Hartford incurs no liability regardless of who was responsible for any misrepresentations. Therefore, summary judgment in favor of defendant Howard & Hoffman is also appropriate.

1. Defendant Hartford’s Motion for Summary Judgment.

As modified by a rider effective August 17, 1979, the Insuring Agreement states, in pertinent part, that the underwriter “agrees to indemnify the Insured against loss of money or other property which the insured shall sustain resulting directly from one or more fraudulent or dishonest acts of an Employee, acting alone or in collusion with others, to an amount not exceeding in the aggregate the amount stated in item 3 of the Declarations.”

The rider also added the following paragraph to the Insuring Agreement:

Dishonest or fraudulent acts as used in this Insuring Agreement shall mean only dishonest or fraudulent acts committed by such Employee with the manifest intent:
(a) to cause the Insured to sustain such loss; and,
(b) to obtain financial benefit for the Employee, or for any other person or organization intended by the Employee to receive such benefit, other than salaries, commissions, fees, bonuses, promotions, awards, profit sharing, pensions or other employee benefits earned in the normal course of employment.

{Emphasis added).

It is clear from the plain language of the Insuring Agreement that Hartford need only indemnify Towne if Towne has “sustained” a “loss ” of money or other property-

It is elementary that a surety or insurer on a fidelity bond is not liable unless the insured employer actually suffers a loss. An undertaking to indemnify “against the direct loss sustained while this bond is in force” refers to an actual present loss, as distinguished from a theoretical or bookkeeping loss.

35 Am.Jur.2d, Fidelity Bonds and Insurance § 39, p. 530 (citations omitted). Numerous Fourth Circuit cases support this view. See Note 1 infra and accompanying text. Hartford’s Memorandum of Points and Authorities in Support of Opposition to Motion for Partial Summary Judgment at 3. On page 5 of this memorandum, Hartford sums up its position by stating that “[w]hat is present here is evidence that the insured, Towne Management Corporation, transferred money from accounts it controlled to itself.”

Defendant Hartford states that:
With the exception of three checks totaling $798 there is absolutely no evidence that any money taken from the Walker Mill accounts controlled by Towne Management Corporation was paid to Daniel Burrier or any other individual employed by Towne Management Corporation. The undisputed facts are that Towne Management took the funds out of the Walker Mill accounts by checks payable to itself.

This simply is not sufficient to establish that Towne suffered a loss. As the Court stated in Phoenix Savings and Loan, Inc. v. The Aetna Casualty and Surety Company, “[t]he bond insured Phoenix, the corporation. Thus it covers loss to Phoenix, not loss to customers, stockholders, or creditors.” Phoenix, 266 F.Supp. 465, 469 (D.Md.1966), reversed on other grounds, 381 F.2d 245 (4th Cir.1967) 302 F.Supp. 832 (D.Md.1969), reversed on other grounds, 427 F.2d 862 (4th Cir.1970).

Plaintiff makes the following argument in response to defendant Hartford’s position that Towne did not sustain a loss:

The facts however, show that Towne Management has been dissolved.... The fact that monies amounting to $226,-232.00 were transferred from the trust funds held by Towne Management Corporation, and then disappeared as it appears in this case, indicates that a loss covered under the bond has been made out by Towne Management.

Plaintiff’s Memorandum in Support of Opposition to Motion for Summary Judgment of Defendant Hartford Accident and Indemnity Company at 2.

Plaintiff states that it does not know whether the thefts were recorded as bookkeeping entries or were concealed, and that this is for Hartford to prove. Id. at 4.

Thus, instead of refuting Hartford’s facts on the issue of where the money from the Walker Mill accounts went, plaintiff argues that Hartford has the burden of proving that the money went for legitimate corporate expenses, id. at 3, and that the fact that the money has “disappeared” is enough to prove that Towne sustained a loss.

There is no question that if plaintiff has the burden of proving that a loss was sustained, as defendant Hartford argues, that plaintiff cannot meet that burden simply by arguing that placement of Towne into receivership on September 9, 1983, a year after the last withdraw, is “conclusive evidence that ... a loss has been sustained.” Id. at 5.

Plaintiff relies on the case of Fidelity and Deposit Co. of Maryland v. Usaform Hail Pool, Inc., 523 F.2d 744 (5th Cir.1975), cert. den. 425 U.S. 950, 96 S.Ct. 1725, 48 L.Ed.2d 194, to argue that Hartford bears the burden of proof on the loss issue. However, Towne stretches this case too far when it cites it for the proposition that “Hartford must first prove that the stolen money was spent by Daniel Burrier for corporate expenses of Towne Management Corporation and second, that those expenses were legitimate.” Plaintiff’s Memorandum in Support of Opposition to Motion for Summary Judgment of Defendant Hartford at 4. While it is true that Usaform places the burden on the insurer to prove that certain known expenditures were valid, it does not require the insurer to prove what those expenditures were.

In Usaform, the inquiry was whether transfers from one insolvent corporation to another were for legitimate business purposes. The insurer in that case argued that the transfers were valid. In this case, Hartford is not arguing that particular known transfers of money were made for legitimate corporate purposes. Hartford is simply arguing that the evidence shows that the money went to Towne Management. Reply of Defendant Hartford to Plaintiff’s Memorandum in Opposition to Hartford’s Motion for Summary Judgment at 4. There simply is no evidence in this case concerning where the money went after all but a tiny percentage of it went to Towne. All Towne seems to be able to argue about this money is that Towne did not have any of it left a year later. If the corporation that received the money cannot produce any more evidence than this, it is simply unreasonable and illogical to require an outside corporation to discover where Towne spent this money. The burden of proof, at least as to this initial information about how the money was spent, is appropriately placed on Towne, the corporation that spent it. Clearly Towne has failed to meet this burden. Accordingly, summary judgment for defendant Hartford is appropriate.

II. Defendant Howard & Hoffman, Inc. ’s Motion for Summary Judgment.

In Count V of its amended complaint, Towne states a claim against defendant Howard & Hoffman, Inc. for certain alleged misrepresentations made in procuring coverage for Towne under the bond. In Towne’s motion for summary judgment, it argues that Howard & Hoffman should be held liable for negligent misrepresentation and that such liability is for the damage resulting from such misrepresentation, which Towne states to be the loss of the full value of its claim. Towne states that defendant Hartford has in part denied Towne’s claim because of these misrepresentations. Plaintiffs Memorandum of Points and Authorities in Support of Motion for Partial Summary Judgment at 17.

The elements of the tort of negligent misrepresentation in Maryland are as follows:

(1) the defendant, owing a duty of care to the plaintiff, negligently asserts a false statement;
(2) the defendant intends that his statement will be acted upon by the plaintiff;
(3) the defendant has knowledge that the , plaintiff will probably rely on the statement, which, if erroneous, will cause loss or injury;
(4) the plaintiff, justifiably, takes action in reliance on the statement; and
(5) the plaintiff suffers damage proximately caused by the defendant’s negligence.

Martens Chevrolet, Inc. v. Seney, 292 Md. 328, 439 A.2d 534, 539 (1982).

The clearest reason why Towne has failed to make out the elements of this tort against defendant Howard & Hoffman is that Towne has not suffered any damage proximately caused by Howard & Hoffman’s alleged negligence. Defendant Hartford simply has not relied in its motion for summary judgment in this case nor in its response to Towne’s motion on any misrepresentations in order to deny liability under the bond. As defendant Howard and Hoffman states, “there is no genuine issue of material fact as to whether this defendant achieved the result requested by plaintiff, i.e., to have Towne ... added to the existing commercial blanket bond.” Memorandum of Points and Authorities at 1-2. Furthermore, in light of this Court’s finding that Hartford is not liable to Towne because Towne sustained no loss, the issue of any misrepresentations made in the procurement of Towne’s coverage under the bond is moot.

This Court finds that Towne did not suffer any damage because of Howard & Hoffman’s alleged negligence and therefore grants summary judgment for defendant Howard & Hoffman.

Accordingly, for the reasons stated herein, it is this 18th day of October, 1985, by the United States District Court for the District of Maryland,

ORDERED:

1. That plaintiff’s motion for partial summary judgment is hereby DENIED;

2. That defendant Hartford Accident and Indemnity Company’s motion for summary judgment is hereby GRANTED;

3. That defendant Howard & Hoffman, Inc.’s motion for summary judgment is hereby GRANTED; and,

4. That the Clerk of the Court shall mail copies of this Memorandum and Order to all counsel of record.

      . See also Kerr v. Aetna Casualty and Surety Co., 350 F.2d 146, 150 (4th Cir.1965) ("it is important to note that the bond insured only the several corporations_ Losses in connection with fraud perpetrated on the corporations’ creditors or on the Insurance Commissioner are not covered by the bond”); In re Schulter, Green & Co., 93 F.2d 810, 812 (4th Cir.1938) ("We must therefore inquire in the first instance whether the company, in the language of the bond, suffered a loss through any dishonest or criminal conduct of its employee. The conduct of Miss Seay may fairly be described as dishonest or criminal; but it does not follow that thereby the company suffered a loss. On the contrary, it appears that the money derived from her unlawful behavior was deposited in the company’s bank account, and, unless the company thereafter lost the funds as the result of dishonesty or criminal conduct, the company suffered no detriment. ... there was no basis for the broad view that any loss by a customer from the misconduct of the employee was recoverable under the bond”). See also Fidelity & Casualty Co. of New York v. Hoyle, 64 F.2d 413 (4th Cir.1933); Fidelity and Deposit Co. of Maryland v. Usaform Hail Pool, Inc., 463 F.2d 4 (5th Cir.1972), cert. den., 425 U.S. 950, 96 S.Ct. 1725, 48 L.Ed.2d 194.

      . While it is unclear from the papers filed in this case how much money went to Burrier, it appears it was an amount between $798.00 and $2,871.22. Cf. Hartford’s Memorandum of Points and Authorities in Support of Opposition to Motion for Partial Summary Judgment at 3, with Hartford’s Statement of Material Facts as to Which no Genuine Issue Remains at 5-7. Taking the higher figure, this still amounts to only slightly over one percent of the money at issue. As with the money paid to Towne, plaintiff has not produced any evidence of what this money was used for. Accordingly, the Court finds no reason to treat this money differently than the money paid into Towne’s accounts.


author: CANNELLA, District Judge:

text:
    Joseph RODONICH, Alex Chotowicky, Wasyl Lawro and Harry Diduck, Plaintiffs, v. HOUSE WRECKERS UNION, LOCAL 95 OF LABORERS’ INTERNATIONAL UNION OF NORTH AMERICA, et al., Defendants.
    No. 82 Civ. 5583 (JMC).
    United States District Court, S.D. New York.
    Nov. 7, 1985.

      Hall & Sloan, New York City (Burton Hall and Wendy Sloan, of counsel), for plaintiffs.
    Sipser, Weinstock, Harper & Dorn, New York City (Richard Dorn, of counsel), for defendant Local 95 and individual defendants.
    Connerton, Bernstein & Katz, Washington, D.C. (Orrin Baird and Theodore T. Green, of counsel), and Schulman & Altman, New York City (James Altman, of counsel), for defendant Laborers’ Intern. Union of North America.
   CANNELLA, District Judge:

Defendant Laborers’ International Union of North America’s [“LIUNA’s”] motion for summary judgment is denied. Fed.R. Civ.P. 56(b).

The motion of defendants Local 95 and the individual defendants to, dismiss the Racketeer Influenced and Corrupt Organizations Act [“RICO”] claim is granted in part and denied in part. Fed.R.Civ.P. 12(b)(6).

BACKGROUND

In its decision of September 20,1985, 624 F.Supp. 678 (1985), this Court permitted plaintiffs to supplement and amend the RICO allegations in the complaint. Since that time the parties have conducted expedited discovery, and defendants now make dispositive motions on these allegations. Because this is another in a long line of decisions in this case, the Court assumes familiarity with the facts.

DISCUSSION

I. The Standard of Pleading

Defendants argue that it is necessary to plead RICO allegations with particularity. In support of this contention they direct the Court’s attention to numerous cases including Saine v. AIA, Inc., 582 F.Supp. 1299, 1305-06 (D.Colo.1984); Laterza v. ABC, 581 F.Supp. 408, 413 (S.D.N.Y.1984); Carbone, Inc. v. Proctor Ellison Co., 102 F.R.D. 951, 953 (D.Mass.1984); and Bache Halsey Stuart Shields v. Tracy Collins, 558 F.Supp. 1042, 1045-46 (D.Utah 1983). Although these cases hold that RICO allegations must be pleaded with the particularity required by Fed.R.Civ.P. 9 for pleading fraud claims, some of these cases involve predicate acts of fraud and all antedate the Supreme Court’s recent decision in Sedima, S.P.R.L. v. IMREX Co., — U.S. -, 105 S.Ct. 3275, 87 L.Ed.2d 346 (1985). In Sedima the Court, although expressly leaving the question open, strongly indicated that a fair preponderance of the evidence satisfies the burden of proving predicate acts in a civil RICO action. Id., 105 S.Ct. at 3282. If the burden of proof is not heightened in these cases, as Sedima suggests, the propriety of altering the pleading burden is questionable. In any event, the Court need not decide this question because defendants have had an opportunity to perform expedited discovery on the amended complaint and have received particularized information regarding the nature of the claim stated.

Accordingly, with the exceptions discussed in part IV below, plaintiffs have sufficiently stated a RICO cause of action.

II. Hobbs and Travel Acts

Among the predicate acts added by the amended complaint are violations of the Hobbs and Travel Acts. The Hobbs Act, 18 U.S.C. § 1951, makes it unlawful for any person to obstruct or conspire to obstruct commerce by extortion. Id. § 1951(a). Extortion is defined as “the obtaining of property from another, with his consent, induced by wrongful use of actual or threatened force, violence, or fear.” Id. § 1951(b)(2). Plaintiffs allege that defendants, including LIUNA, engaged in a scheme of intimidation that deprived the union membership of its rights under the Labor Management Reporting and Disclosure Act [“LMRDA”], 29 U.S.C. §§ 411(a)(1), (2). Defendants assert that such intangible rights are not property within the meaning of the Hobbs Act and therefore cannot be extorted.

The Hobbs Act “speaks in broad language, manifesting a purpose to use all the constitutional power Congress has to punish interference with interstate commerce by extortion, robbery or physical violence.” Stirone v. United States, 361 U.S. 212, 215, 80 S.Ct. 270, 272, 4 L.Ed.2d 252 (1960). The concept of property is not limited to tangible property but includes “any valuable right considered as a source or element of wealth.” United States v. Tropiano, 418 F.2d 1069, 1075 (2d Cir.1969) (right to solicit business is a property right), cert. denied, 397 U.S. 1021, 90 S.Ct. 1262, 25 L.Ed.2d 530 (1972). Many courts have held intangible business rights to be property under the Hobbs Act. See, e.g., United States v. Santoni, 585 F.2d 667, 673 (4th Cir.1978), cert. denied, 440 U.S. 910, 99 S.Ct. 1221, 59 L.Ed.2d 459 (1979); Bianchi v. United States, 219 F.2d 182, 189 (8th Cir.), cert. denied, 349 U.S. 915, 75 S.Ct. 604, 99 L.Ed. 1249 (1955); United States v. Nadaline, 471 F.2d 340, 344 (5th Cir.), cert. denied, 411 U.S. 951, 93 S.Ct. 1924, 36 L.Ed.2d 414 (1923); United States v. Stofsky, 409 F.Supp. 609, 615 (S.D.N.Y.1973). Union rights are no exception. See United States v. Local 560, 550 F.Supp. 511, 519 (D.N.J.1982); see also United States v. Boffa, 688 F.2d 919 (3d Cir.1982). Accordingly, rights arising under the LMRDA are properly classified as property rights within the meaning of the Hobbs Act.

Defendants additionally contend that the complaint fails to allege a sufficient effect on interstate commerce to establish a Hobbs Act violation. However, to constitute a violation, interstate commerce need only be affected to a “minimal degree.” See Tropiano, 418 F.2d at 1076. Because the LMRDA was enacted under the auspices of the Commerce Clause, the effect on interstate commerce is clear. See Local 560, 550 F.Supp. at 518, 524 (assuming without discussing the requisite effect on interstate commerce). Accordingly, plaintiffs have fairly alleged a violation of the Hobbs Act.

The Travel Act, 18 U.S.C. § 1952, prohibits the use of any facility of interstate commerce to distribute the proceeds of or commit any crime of violence to further or otherwise promote an unlawful activity. Id. §§ 1952(a)-(c). An unlawful activity includes extortion in violation of state or federal law. Id. § 1952(b)(2). A violation of the Hobbs Act then is necessarily a violation of the Travel Act if the requisite use of commerce is shown. In this respect, defendants contend that a significant connection with interstate commerce is required and that this element is lacking here. However, it is not necessary that interstate travel be an integral part of the criminal activity but only that interstate travel be necessary to carry out that activity. United States v. Herrera, 584 F.2d 1137, 1146-47 (2d Cir.1978). On this question there is a sufficient issue of fact for the jury.

III. RICO Injury

Defendants next contend that plaintiffs have no standing to bring a RICO claim because they were not injured by the predicate acts and suffered no proprietary type injury. Prior to the Supreme Court’s Sedima decision the Second Circuit issued three opinions which established that a RICO injury was a distinct “racketeering injury,” different in kind from that caused by the predicate acts. See Sedima, S.P. R.L. v. IMREX Co., 741 F.2d 482 (2d Cir.1984), rev’d, — U.S.-, 105 S.Ct. 3275, 87 L.Ed.2d 346 (1985); Bankers Trust Co. v. Rhoades, 741 F.2d 511 (2d Cir.1984), vacated, — U.S.-, 105 S.Ct. 3550, 87 L.Ed.2d 673 (1985); Furman v. Cirrito, 741 F.2d 524 (2d Cir.1984). On review of Sedima, the Supreme Court reversed holding that “[a]ny recoverable damages occurring by reason of a violation of [RICO] will flow from the commission of the predicate acts.” Sedima, 105 S.Ct. at 3286. Defendants contend that a racketeering injury is no longer sufficient to confer RICO standing and therefore plaintiffs have failed to state a claim for relief. The Supreme Court noted, however, that RICO injuries “include, but are not limited to” the type of competitive injury advocated by the dissenters. Id. at 3286 n. 15. Presumably this would include the “racketeering injury” concept adopted by the Second Circuit. See id. at 3303 (Marshall, J., dissenting). Consequently, defendants’ arguments fail. It is not necessary for plaintiffs to allege that the predicate acts are directly responsible for the injury as long as the injury flows from the predicate acts.

The Court turns now to defendants’ argument that plaintiffs have not suffered a proprietary type injury. Such an injury is necessary to state a RICO cause of action. See Bankers Trust Co. v. Rhoades, 741 F.2d 511, 515 (2d Cir.), vacated, — U.S. -, 105 S.Ct. 3550, 87 L.Ed.2d 673 (1985). Much of the defendants’ argument proceeds on the assumption that whatever proprietary injury plaintiffs claim was not caused directly by the predicate acts and is therefore deficient. Having determined that a direct injury is not required, this argument is unavailing. Accordingly, to the extent that plaintiffs’ purported injuries consist of lost wages, sufficient proprietary damage is alleged.

IV. The RICO Conspiracy

To establish conspiracy in a civil RICO action, plaintiffs must prove a conspiracy to violate criminal RICO, 18 U.S.C. § 1962. See Laterza v. ABC, 581 F.Supp. 408, 413 (S.D.N.Y.1984). At a minimum, the Government in a criminal prosecution must show that each alleged coconspirator agreed to commit two or more specified predicate crimes. United States v. Ruggiero, 726 F.2d 913 (2d Cir.1984); United States v. Bagaric, 706 F.2d 42, 62 (2d Cir.1963).

Although each coeonspirator must be shown to have committed two predicate acts in a criminal prosecution under RICO, plaintiffs contend that it should be enough in the civil context if one of the alleged RICO coconspirators has committed two predicate acts. The only support offered for this contention is the Supreme Court’s recent holding that RICO be broadly construed. Sedima, 105 S.Ct. at 3286. The Court declines to read Sedima as making such an important ruling sub silentio. Nor is there reason to impose a different standard in civil RICO actions when the substantive RICO violation, 18 U.S.C. § 1962, is the same in both criminal RICO prosecutions, id. § 1963, and civil actions, id. § 1964. Accordingly, in addition to proving the RICO conspiracy itself, plaintiffs must fairly establish that each alleged coconspir-ator committed at least two predicate acts. See Laterza v. ABC, 581 F.Supp. 408, 413 (S.D.N.Y.1984).

Plaintiffs allege that LIUNA conspired to violate and/or aided and abetted the violation of the Hobbs Act and also aided and abetted the violation of the Travel Act. If established, the requirement of two predicate acts will be met. Defendants contend, however, that there is little or no evidence to support these allegations. Indeed, the evidence implicating LIUNA in these acts appears slim at this point and the Court is moved to say that LIUNA has made a compelling argument. Nonetheless, after long and hard consideration of the matter, the Court concludes that plaintiffs should be given an opportunity to develop the facts before a jury. LIUNA’s motion for summary judgment is, therefore, denied.

The individual defendants contend that, except for defendants John Senyshyn, Joseph Sherman and John Roshetski, the complaint does not allege nor is there evidence to support the claim that each defendant committed two predicate acts. A review of the pleadings and plaintiffs’ answers to interrogatories reveals that defendants Stephean McNair, John Sian, Samuel Adams, Albert Bender and Joseph Pastroski are also alleged to have each committed at least two acts of violence, which may amount to Hobbs Act violations if a plan to suppress dissent within the union is shown. 18 U.S.C. § 1951(a). With respect to the remaining individual defendants, however, the allegations are inadequate. The RICO claim is therefore dismissed as to Andrew Klebetz, William Na-hay, Phil Chillak, Harold Spellman, Peter Jones, Earl Dupree, and John Chillak.

Finally, Local 95 asserts that it cannot be a “person” who conducted a racketeering activity because it is named as the “enterprise”. Plaintiffs concede this point. Accordingly, the RICO claim against Local 95 is dismissed.

CONCLUSION

LIUNA’s motion for summary judgment is denied. Fed.R.Civ.P. 56(b).

The motion of defendants Local 95 and the individuals to dismiss the RICO claim is granted in part, denied in part. Fed.R. Civ.P. 12(b)(6).

SO ORDERED.

      . Defendants also argue that certain predicate acts should be stricken from the complaint because they are unsupported by the evidence. In light of the Supreme Court’s indication that a fair preponderance standard is the appropriate burden of proof, rather than proof beyond a reasonable doubt, this is a question of fact for the jury.

      . The Court finds unpersuasive defendants’ contentions that the civil rights nature of LMRDA rights makes these rights any less a “source of wealth” than ordinary rights to do business. To the contrary, it would appear that LMRDA rights provide many union members with a source of livelihood. Defendants’ other contentions regarding Congressional intent with respect to LMRDA rights are also unavailing. See United States v. Local 560, 550 F.Supp. 511, 519 (D.N.J.1982).

      . Defendants also seek a decision on the availability of equitable relief to plaintiffs. Because this is a question for the Court, not the jury, the Court reserves decision pending the outcome of the trial.


author: SCOTT O. WRIGHT, Chief Judge.

text:
    UNITED STATES of America, Plaintiff, v. Charles C. SHAFER, III, Defendant.
    No. 84-0330-CV-W-5.
    United States District Court, W.D. Missouri, W.D.
    Nov. 8, 1985.
    Linda Parker, Asst. U.S. Atty., Kansas City, Mo., for plaintiff.
    Charles Shafer, Jr., Kansas City, Mo., for defendant.
   MEMORANDUM AND ORDER

SCOTT O. WRIGHT, Chief Judge.

On March 13, 1984, the United States brought this action on behalf of the Small Business Administration (SBA), seeking a judgment against defendant Shafer who was in default of a loan in the amount of $17,722.94 plus interest.

This case came to trial before the Court on September 26, 1985. Based on the parties’ trial briefs and exhibits presented to the Court, this Court makes the following findings of fact and conclusions of law.

Findings of Fact

On January 11, 1978, Shafer entered into a note, a deed of trust, and a loan agreement with SBA for a disaster assistance loan on an apartment building.

The principal sum was $21,300.00 with interest rate at 3%. Payments were to be $150.00 per month beginning five months from date of the note, and balance of principal and interest payable fifteen years from date of note. By letter on August-14, 1979, Shafer requested SBA’s approval to sell the property to Haven Properties, Inc. (Haven). Shafer explained that Haven would be paying Shafer $1,000.00 per month, and in turn Shafer would be paying all debts, including the SBA loan.

By letter of August 15, 1979, SBA approved the sale, and the property was thereafter sold to Haven. In June of 1981, Haven defaulted and subsequently filed a proceeding in bankruptcy. By letters of June 30, July 16, August 3, and August 14, 1981, Shatter asked SBA if it would join in his suit against Haven. SBA refused to join in such a suit.

Conclusions of Law

The parties do not dispute that Missouri law governs this case; therefore, the first issue to address is whether SBA agreed to and whether Haven in fact assumed Shafer’s loan, thus making Shafer a surety, rather than a principal debtor. The letters seeking and giving approval of the sale to Haven do not mention whether an assumption was taking place. Since there is an ambiguity in the language used, this Court may look to surrounding facts and circumstances, including acts of parties indicating what interpretation was placed upon it by parties themselves. H.K. Porter Co. v. Wire Rope Corp. of America, Inc., 367 F.2d 653, 660 (8th Cir.1966); Rouggly v. Whitman, 592 S.W.2d 516, 519 (Mo.App.1979).

In an August 21, 1981 letter from an SBA loan officer to Shafer, the following paragraph is found: “When the assumption by Haven Properties, Inc. et al was approved, you were not released from liability so until the loan is paid in full, you are still liable.” (emphasis added). In a November 16, 1983 letter from the U.S. Attorney’s office to an SBA attorney, reference is made to Shafer’s “assumption letter.” When the SBA attorney responded on November 17, 1983, he wrote:

[Pjlease find enclosed a copy of a SBA letter approving the assumption of the Schafer [sic] loan to Haven Properties .... It is my opinion that under Missouri law an assumption may reduce the original obligor to a surety, but does not release him. (emphasis added)

From these letters the Court concludes that the parties believed an assumption had taken place and acted accordingly. Therefore, as a matter of law, Shafer was a surety at the time Haven defaulted.

The second issue is whether Shafer properly invoked Missouri statutes 433.010, 433.020, and 433.030. These statutes provide that a surety may, by serving notice in writing, require the creditor to file suit against the principal debtor. “If such suit is not commenced within thirty days after the service of such notice, and proceeded with due diligence, in the ordinary course of law, to judgment and execution, such surety shall be exonerated from liability to the person so notified.” R.S.Mo. § 433.-030.

There is no dispute that SBA did not file suit against Haven. But SBA does contend that Shafer failed to give proper notice. SBA cites to Conway v. Campbell, 38 Mo. App. 473, 476 (1889) where § 433.020 was interpreted to require personal service and that notice by mail is insufficient. However, notice requirements of the turn of the century have substantially changed since the advent of Mullane v. Central Hanover Bank & Trust Company, 339 U.S. 306, 70 S.Ct. 652, 94 L.Ed. 865 (1950) where the Supreme Court held that due process requirements are met if the notice is “reasonably calculated to apprise interested parties of the pendency of the action_” Id. at 314, 70 S.Ct. at 657. Missouri courts have made it clear that technical requirements for notice will not be strictly enforced if the party seeking enforcement has actual notice. Macon-Atlanta State Bank v. Gall, 666 S.W.2d 934, 940 (Mo.App.1984).

In the present case, it is not disputed that SBA received Shafer’s letters and in fact had their attorney consider and reject the request to join in a suit against Haven. Whether SBA knew of the existence or import of § 433.010 et seq. is doubtful, but not determinative of the outcome, since it is presumed that everyone knows the law. Hartley Realty Co. v. Casady, 332 S.W.2d 291, 295 (Mo.App.1960). SBA did not commence a suit, or even join in Shafer’s suit against Haven. SBA’s argument that because Haven had filed a bankruptcy petition, no suit could be brought against it, is ill-founded. While it is true an automatic stay would be in effect pending the outcome of the bankruptcy proceeding, that does not preclude compliance with § 443.010. Accordingly, under § 433.030, RSMo., Shafer was exonerated from liability to SBA. Therefore, it is hereby

ORDERED that judgment is entered in favor of defendant Shafer. Each party is to bear their own costs.