author: WEXLER, District Judge.

text:
    SUN SYSTEM PREFABRICATED SOLAR GREENHOUSES, INC., Plaintiff, v. John VENUTI, d/b/a Pleasure Living Systems, Defendant.
    No. CV 84-1764.
    United States District Court, E.D. New York.
    Nov. 8, 1984.
    Natiss, Ferenzo & Barrocas, P.C., Roslyn Heights, N.Y., for plaintiff.
    Cristini & Hartnett, New York City, for defendant.
   MEMORANDUM AND ORDER

WEXLER, District Judge.

This is an action for breach of an alleged contract. Defendant has moved to dismiss.

Defendant has submitted an affidavit stating that defendant visited New York in May 1982 for the purpose of discussing with plaintiff’s officers the possibility of defendant becoming a retailer of plaintiff’s solar greenhouse units in California. Defendant further states that during this visit “there was no written or oral agreement between the parties”, and that no such agreement was ever reached. Plaintiff’s attorney has submitted an affidavit stating that “all the essential terms that would govern the continued relationship between the parties were discussed” during defendant’s visit to New York. Plaintiff’s attorney contends that the discussions in New York constituted the formation of a contract between the parties.

This action was commenced in New York state court, and subsequently removed to this Court. The summons and complaint were delivered to a secretary at 17547 Ventura Boulevard, Encino, California, which is a business address of defendant. Copies of the summons and complaint were also mailed to the Ventura Boulevard address.

Plaintiff bases personal jurisdiction upon N.Y.C.P.L.R. Section 302(a)(1), which provides for jurisdiction over a non-domiciliary who “transacts any business within the state”, as to a cause of action arising from such act.

The affidavit of plaintiff’s attorney sets forth no basis for personal knowledge on the attorney’s part of the content of the discussions in New York. Defendant, by contrast, makes his affidavit on the basis of his personal participation in the discussions. We therefore accept defendant’s affidavit as true, for the purposes of this motion. On the basis of defendant’s affidavit, we find that defendant did not transact business within the state within the meaning of N.Y.C.P.L.R. Section 302(a)(1). This case should therefore be dismissed for lack of personal jurisdiction.

There is an additional reason why this case should be dismissed. Under N.Y.C.P.L.R. Section 308(2), where service is made by delivering the summons to a person of suitable age and discretion at defendant’s place of business, the summons must be mailed to defendant at his “last known residence”. In the instant case, the summons was mailed to 17547 Ventura Boulevard, which is certainly not defendant’s “residence”. Plaintiff argues that mailing to a business address was proper here because defendant is being sued in his “business capacity” rather than his “individual capacity”. We find plaintiff’s argument on this point meaningless. Defendant controls only one set of assets, namely his personal assets, and it is against these assets which plaintiff seeks judgment. There is only one “capacity” in which defendant can be sued, namely his “individual” capacity, and there does not exist any “capacity” distinct from the “individual” capacity known as the “business” capacity. Plaintiff further argues that the mailing of the summons to an address used by defendant and known as such is sufficient, relying upon Karlin v. Avis, 326 F.Supp. 1325, 1330 (E.D.N.Y.1971). That case, however, was decided at a time when Section 308(2) required mailing to the “last known address” rather than the “last known residence”. The statute has now been amended to return to the original language of “last known residence”. Whatever the merits of the Karlin case, service in the instant case clearly did not meet the requirements of the current language of the statute. We see no reason why this defect should be excused.

If dismissal of this action were not required, we would transfer this action to California, as it appears that the testimony of non-party witnesses in California may be relevant to this case.

This action is dismissed for lack of personal jurisdiction. The Clerk shall enter judgment accordingly.

SO ORDERED.


source: Caselaw Access Project

author: GLASSER, District Judge:

license: Public Domain

text:
    E.W. HOWELL CO., INC., Plaintiff, v. UNDERWRITERS LABORATORIES, INC., Defendant.
    No. 84 Civ. 2215.
    United States District Court, E.D. New York.
    Nov. 8, 1984.
    Gordon, Hurwitz, Butowsky, Weitzen, Shalov & Wein, New York City, for defendant.
    Semel, Boeckman & Skydel, New York City, for plaintiff.
   MEMORANDUM AND ORDER

GLASSER, District Judge:

Plaintiff originally commenced this contract action in New York State Supreme Court, Suffolk County. On May 16, 1984, defendant petitioned to remove the action to this Court on the basis of diversity. Plaintiff now moves to remand this action to state court on the grounds that defendant’s petition for removal was untimely. Plaintiff’s motion to remand is hereby denied.

Background

Plaintiff commenced this action on March 7, 1984 by serving defendant with a “Summons with Notice,” but no complaint, as permitted by the New York Civil Practice Law and Rules. CPLR §§ 304, 305. The summons briefly stated plaintiff’s claim.

On or about March 23, 1984, defendant served plaintiff with a notice of appearance and demand for the complaint. On or about April 16, 1984, plaintiff served the complaint on defendant. Defendant filed a petition for removal to this Court on May 16, 1984.

Subsequent to removal, the parties engaged in a variety of acts concerning this case: (1) they entered into two stipulations extending plaintiff’s time to respond to the complaint; (2) defendant served its answer; (3) plaintiff received an extension of time to respond to defendant’s answer and counterclaims; (4) plaintiff served a reply to the counterclaims. On August 14, 1984, a status conference was held before this Court at which time plaintiff first indicated that it intended to move to remand this case to state court. Plaintiff was directed to serve any such motion by September 25, 1984. Plaintiff served the present motion by mail on September 26, 1984.

Discussion

Plaintiff simply asserts, without citing any authority, that defendant’s petition to remove was untimely because it was filed more than thirty days after service of the Summons with Notice. The only cases cited in plaintiff’s memorandum stand for the proposition that exceptions to the requirement of the removal statute should be narrowly construed. The removal statute provides that

[t]he petition for removal ... shall be filed within thirty days after receipt by defendant ... of a copy of the initial pleading setting forth the claim for relief upon which such action is based____

28 U.S.C. § 1446(b) (emphasis added).

Defendant challenges plaintiff’s motion on two grounds. First, defendant contends that the “initial pleading” in this matter is the Complaint, not the Summons with Notice, and therefore the petition for removal was timely filed within 30 days of service of the complaint. Second, defendant contends that plaintiff, by its actions before this Court, waived an objection to the allegedly untimely petition for removal.

A. “Initial Pleading”

There are two cases decided by federal district courts in New York that are factually on “all-fours” with the present case, but reach completely opposite results. In Manufacturers and Bankers Trust Co. v. Hartford Ins. and Indemnity Co., 434 F.Supp. 1053 (W.D.N.Y.1977), plaintiff commenced an action in a New York state court by filing a Summons with Notice that briefly stated the subject matter of the action. Defendant’s petition for removal was filed within thirty days after service of the complaint, but more than thirty days after service of the summons. The court held that the complaint was the “initial pleading” for purposes of removal, and that the petition for removal was therefore timely. Id. at 1055. The court reasoned that (1) the “Summons with Notice” is not a “pleading” as defined in CPLR 3011; (2) the “Notice” has no legal effect except in cases of default; and (3) the federal courts have “uniformly held that a summons or similar writ is not an ‘initial pleading’ within the meaning of § 1446(b).” Id. at 1054-55.

In DiMeglio v. Italia Crociere Internazionale, 502 F.Supp. 316 (S.D.N.Y.1980), the court held that a “Summons with Notice” was the initial pleading for purposes of the removal statute, and therefore ordered a remand to a New York state court because defendant had filed a petition for removal more than thirty days after service of the summons. This case involved an essentially identical factual situation as Manufacturers, with the additional fact that the defendant had ascertained the plaintiff’s state of residence by a telephone call made after the complaint was served. The court reasoned that the “Notice” in the summons, a brief statement of the claim, performed the function of “modern notice pleading,” and therefore constituted the “initial pleading” for purposes of the removal statute. The court attempted to distinguish Manufacturers on the grounds that Manufacturers was decided before CPLR § 305(b) was amended to require that a summons served without a complaint contain a notice stating the nature of the action and relief sought. Id. at 318. The prior version of CPLR § 305(b) merely permitted the attachment of such a notice to a summons.

I believe that Manufacturers represents the better view. First, the attempt to distinguish Manufacturers in DiMeglio is not persuasive — in both cases the plaintiffs commenced the action by serving a Summons with Notice that briefly stated the claim, even though the CPLR did not require such notice at the time Manufacturers was decided.

Second, the result in DiMeglio seems contrary to the legislative intent of both the federal removal statute and the CPLR pleading rules. The legislative history of 28 U.S.C. § 1446(b) indicates that the statute was specifically designed to make the service of a complaint, not the service of a summons without a complaint, the triggering event for the time limits on filing removal petitions. Prior to 1949, § 1446 required that a petition for removal be “filed within twenty days after commencement of the action or service of process, whichever is later.” 28 U.S.C. § 1446(b) (1948), quoted in 1A Moore’s Federal Practice, ¶ 168[3-5-2], at 575. Section 1446(b) was amended to its present form in 1949 The House Report accompanying the 1949 amendment stated that the old [pre-1949] statute

has been found to create difficulty in those States, such as New York, where suit is commenced by the service of a summons and the plaintiff’s initial pleading is not required to be served or filed until later.
The first paragraph of the amendment to subsection (b) corrects this situation by providing that the petition for removal need not be filed until 20 days after the defendant has received a copy of the plaintiff’s initial pleading.

HR Rep. No. 352, 81st Cong., 2d Sess., reprinted in 1949 U.S.Code Cong. & Admin.News, 1248, 1254, 1268. Thus § 1446(b) was intended to treat the service of a complaint, not the service of a summons without complaint, as the “initial pleading” for marking the time period for removal.

The New York CPLR likewise indicates that the complaint is the initial pleading. CPLR § 3011, entitled “Kinds of Pleadings,” states that “[t]here shall be a complaint and an answer,” but does not list a “Summons with Notice” as a pleading. The Practice Commentaries to that section explain that the section “set[s] forth what pleadings there shall be,” C3011:l (McKinneys 1974), and that the “initial pleading in an action is of course the plaintiffs complaint.” C3011:2 (McKinneys 1974) (emphasis added). The Practice Commentaries to CPLR § 305(b), the section which requires that a “notice” be attached to any summons served without a complaint, indicate that the notice requirement was designed to facilitate default judgments. 0305:3-1978 (McKinneys, Supp.1983). The Practice Commentaries do not indicate that the “notice” is otherwise to be treated as a pleading or have any other legal effect.

Lastly, the decision in DiMeglio appears to contradict the implication in § 1446(b) that the pleading triggers the time period for a removal only if the grounds for removal appear in the pleading itself. In DiMeglio, the court rejected defendant’s argument that the Summons with Notice did not mark the time period because it did not indicate removability on its face. In the present case, plaintiff specifically crossed out the printed designation of plaintiff’s “residence” on the summons form and substituted the words, “business address.” Plaintiff has offered no explanation for this alteration of the form. It was thus impossible for defendant to determine removability, on diversity grounds, from the face of the summons. Section 1446(b) provides that “[i]f the case stated by the initial pleading is not removable,” a removal petition may be filed within thirty days after receipt by the defendant of an “amended pleading, motion, order or other paper from which it may first be ascertained that the case is removable.” The clear implication of this section is that an “initial pleading” is a document from the face of which a defendant can “intelligently ascertain removability ____” Ardison v. Villa, 248 F.2d 226, 227 (10th Cir.1957); Manufacturers, 434 F.Supp. at 1055. This conclusion is buttressed by defendant’s persuasive public policy argument that, requiring removal within thirty days of receipt of a Summons with Notice from which removability cannot be ascertained, “could give rise to cases of unwarranted removal, resulting in unnecessary, wasteful litigation and expense in the Federal Court.” Defendant’s Memorandum at 7.

For the above reasons, I am persuaded by the decision in Manufacturers and hold that plaintiff’s complaint was the “initial pleading” for purposes of § 1446(b), and that, therefore, defendant’s petition for removal was timely. Accordingly, the plaintiff’s motion to remand is denied.

In light of the foregoing, it is not necessary to address defendant’s contention that plaintiff waived the right to object to defendant’s allegedly untimely petition for removal.

SO ORDERED.

      . The Notice portion of the summons stated: Notice: The nature of this action is breach of contract; foreclosure of mechanic’s lien. The relief sought is judgment of lien foreclosure; money damages.
      Upon your failure to appear, judgment will be taken against you by default for the sum of $321,846.00 with interest from January 3, 1984 and the costs of this action.

      . DiMeglio v. Italia Crociere Internationale, 502 F.Supp. 316 (S.D.N.Y.1980); Manufacturers and Traders Trust Co. v. Hartford Ins. and Indemnity Co., 434 F.Supp. 1053 (W.D.N.Y.1977).

      . A 1965 amendment to § 1446(b) merely extended the filing period to thirty days. The 1949 amendment provided that the filing period was twenty days.


author: SACHS, District Judge.

text:
    Donald D. POWELL, Plaintiff, v. KOVAC’S, INC., Defendant.
    No. 82-6057-CV-SJ.
    United States District Court, W.D. Missouri, St. Joseph Division.
    Nov. 9, 1984.

      Joseph A. Sherman, Sherman, Wickens, Lysaught & Speck, Kansas City, Mo., for plaintiff.
    R. Edward Murphy, Watkins, Boulware, Lucas & Miner, St. Joseph, Mo., for defendant.
   MEMORANDUM AND ORDER

SACHS, District Judge.

In response to plaintiff’s third amended complaint, accepted and filed by the court in a September 13, 1984 order, defendant Kovac’s, Inc. has moved to have United Food and Commercial Workers Union, Local 576 (hereinafter Union) added as a necessary party (Fed.R.Civ.P. 19(a)) or, in the alternative, for leave to file a third party complaint against the Union (Fed.R.Civ.P. 14(a)). For the reasons discussed below, defendant’s motions will be denied and the case will remain scheduled for a December 10, 1984 trial.

Counts II and III of plaintiff’s third amended complaint premise subject matter jurisdiction on Section 301 of the Labor Management Relations Act as amended, 29 U.S.C. § 185. Those counts allege that plaintiff was a union member and was employed by defendant pursuant to a collective bargaining agreement between the Union and defendant. Article XIX of that agreement established a seniority basis for lay-offs “if fitness and ability is comparable.” Plaintiff alleges that his lay-off in June, 1980 (and his subsequent termination) were in violation of the collective bargaining agreement. He seeks actual and exemplary damages from his former employer, but does not seek reinstatement. However, he has not sued the Union.

Plaintiff’s third amended complaint was filed at least in part to respond to defendant’s invocation of the exhaustion rule of Republic Steel Corp. v. Maddox, 379 U.S. 650, 85 S.Ct. 614, 13 L.Ed.2d 580 (1965) in its August 13, 1984 motion to dismiss. The Supreme Court there held that “[a]s a general rule in cases to which federal law applies, federal labor policy requires that individual employees wishing to assert contract grievances must attempt use of the contract grievance procedure agreed upon by employer and union as the mode of redress.” 379 U.S. at 652, 85 S.Ct. at 616. A prerequisite to a § 301 suit by an employee against his employer is a showing that the plaintiff has exhausted the mandatory remedies for breach of the collective bargaining agreement, including arbitration, that are provided for in that agreement. Painters District Council No. 2 v. Tiger Stripers, Inc., 582 P.Supp. 860, 862 (E.D.Mo.1984). In the present ease, Article X of the collective bargaining agreement requires an employee to present his complaint against the employer first in the form of a grievance, and if satisfaction is not subsequently obtained the grievance can be submitted to arbitration at request of either the Union or the employer. Arbitration must be undertaken before any non-contractual remedies (such as a federal court action) can be pursued.

At issue in defendant’s motion to dismiss was plaintiff’s failure to plead facts sufficient to fall within one of the exceptions to the Republic Steel exhaustion rule. Specifically, the Supreme Court in Vaca v. Sipes, 386 U.S. 171, 186, 87 S.Ct. 903, 914, 17 L.Ed.2d 842 (1967) held that the employee’s failure to exhaust contractual remedies does not bar a § 301 action by the employee against his employer “provided the employee can prove that the union as bargaining agent breached its duty of fair representation in its handling of the employee’s grievance.” Plaintiff’s third amended complaint has added allegations that the Union failed to present and prosecute plaintiff’s grievance, that the Union acted “arbitrarily, discriminatorily, or in bad faith” in processing plaintiff’s grievance, and that the Union breached its statutory duty of fair representation (Count II, paragraph 12; Count III, paragraph 11). Because the Union had the sole power to invoke the arbitration procedures on plaintiff’s behalf, plaintiff can sue his former employer without first arbitrating the dispute if failure to exhaust mandatory contractual remedies was caused “by the union’s wrongful refusal to process the grievance.” Vaca, 386 U.S. at 185, 87 S.Ct. at 914. This is precisely the theory of the third amended complaint.

Defendant employer now argues that the Union must be added as a party to this litigation either as a Rule 19 necessary party or as a Rule 14 third-party defendant. Defendant contends that plaintiff’s union is a necessary party because (1) the Union’s breach of its duty of fairly representing plaintiff is a prerequisite to plaintiff’s recovery against the employer; and (2) damages cannot be properly apportioned in the absence of the Union as a defendant. For the same reasons, defendant suggests that it be allowed to implead the Union if Rule 19(a) joinder is disallowed.

Although there is some language in the Vaca opinion that joinder of the union and employer would facilitate the giving of relief to an aggrieved employee (see 386 U.S. at 188 n. 12, 87 S.Ct. at 915 n. 12), the Court did not require such joinder in order to fit within the above-described exception to the Republic Steel exhaustion rule. In fact, the plaintiff-employee in Vaca sued the employer and the union in separate actions. The Eighth and Ninth Circuits have considered similar motions to join the union as a party to an employee versus employer breach of contract suit and have both concluded that the union does not qualify as a Rule 19 necessary party. Sandobal v. Armour & Co., 429 F.2d 249, 257-58 (8th Cir.1970); Kaiser v. Local No. 83, 577 F.2d 642, 644 (9th Cir.1978). See also Fosbroke v. Emerson College, 503 F.Supp. 256, 257-58 (D.Mass.1980).

The cited cases make clear that the plaintiff-employee in a § 301 suit is the master of his action. He can sue his employer for a breach of the collective bargaining agreement, allege that the union’s wrongdoing was the reason why he did not exhaust his mandatory contractual remedies, and choose at his option to join the union as a defendant on a claim of breach of the duty of fair representation. Plaintiff need not sue the employer and the union in one lawsuit and the defendant-employer cannot compel plaintiff to make such a joinder by invoking Rule 19, Fed.R.Civ.P. Joinder of union and employer might be required when plaintiff seeks reinstatement in addition to monetary relief (see Gersbacher v. Commercial Carriers, Inc., 91 F.R.D. 533 (E.D.Mich.1981)), but the union is not an indispensable party to a § 301 suit when the aggrieved employee seeks only money damages from his former employer. Case law seems clear that it is the plaintiff-employee who determines the parties to his § 301 cause of action.

Defendant’s motion to implead the union as a third party defendant pursuant to Rule 14(a), Fed.R.Civ.P. presents a more difficult issue because of certain language in the majority opinion in Bowen v. United States Postal Service, 459 U.S. 212, 103 S.Ct. 588, 74 L.Ed.2d 402 (1983).

Defendant-employer has no need for relief against the Union if the court follows certain dicta contained in Justice White’s majority opinion in Vaca v. Sipes, supra p. 1522. That case dealt with the issue of union liability for alleged breach of duty in representing a former employee in a wrongful discharge controversy. The court ruled as a matter of federal law that the union had not breached its duty. Justice White’s opinion undertook to outline the applicable principles of remedial relief, assuming liability, in order to establish that the union should never be held liable for all of an employee’s damage if the employer was the initial wrongdoer. Id. 386 U.S. at 197-8, 87 S.Ct. at 920-21. Justice White’s opinion for the Court stated, in addition, that “increases if any in [an employee’s] damages caused by the union’s refusal to process the grievance should not be charged to the employer.” Id.

The period and extent of the union’s liability was reaffirmed in Bowen as beginning when arbitration should have ended an employee’s losses. Applying the Vaca rule of apportionment would use that same rather elusive date as the terminating date of employer liability. Justice Powell’s opinion for the court in Bowen apparently adds new exposure for the employer, however, as it states in dicta that the employer is “secondarily liable for the full loss of backpay” and thus the employer would be contingently responsible for backpay during the period of the union’s primary responsibility if a judgment against the union is not collectible. 459 U.S. at 223 n. 12, 103 S.Ct. at 595 n. 12. (emphasis added).

Somewhat inexplicably, Justice White, the author of Vaca, dissented in Bowen in an opinion which construes Bowen as imposing a limitation on an employer’s primary liability that corresponds with what he said in Vaca, and then protests the limitation. 459 U.S. at 230-1, 103 S.Ct. at 599. Speaking for himself and Justices Marshall, Blackmun and Rehnquist, he would now impose on employers primary liability for all backpay. Id. at 232, 103 S.Ct. at 600.

If free to rule without appellate direction, I would favor Justice White’s dissenting position in Bowen and reject his Vaca dicta limiting employer liability. I view the situation in the same common law context as that of a primary tortfeasor being held liable for the aggravated injuríes suffered by a personal injury plaintiff who is subjected to medical malpractice after an injury. While the second tortfeasor who is guilty of malpractice may be obligated for contribution to the first tortfeasor, there is no limitation on the liability of the first tortfeasor to the injured person. Thus, apportionment may be necessary, as between tortfeasors, but not when suit is brought against the first tortfeasor.

I am, however, bound to-j follow Vaca and Bowen as best I am able. Although neither case involved a suit against the employer only, considered dicta in Supreme Court opinions will generally be deemed binding. Under Vaca, there appears to be a good defense against employer liability for the period after the hypothetical date upon which an arbitrator would have issued an award if plaintiffs union had taken the matter to arbitration. Justice White says this is the rule of Bowen, and it is clearly the rule stated with respect to the employer’s “primary” liability. How Justice Powell and the majority in Bowen would want the trial courts to handle “secondary” liability, when the union is not a party to the litigation, is less certain. The majority in both eases would not permit a simple judgment against the employer for immediate recovery of full backpay, the result plaintiff doubtless seeks in this case.

One way to carry out the apportionment rule, when only the employer is sued, would be to limit liability in the manner described by Justice White’s Bowen dissent. Thereafter, if a plaintiff should sue the union for losses during the period after he should have prevailed in arbitration, he can probably join the employer again, as a party secondarily liable for those losses.

Regardless of the fact that impleader would facilitate an apportionment of damages, such joinder will not be permitted in the present case because of delay in filing the Rule 14 motion, and because plaintiff has not sought to join the union. Trial in this case is set for next month. Adding parties at this stage of the proceedings would postpone the trial even further than what has already been allowed. Plaintiff could have added the union as a defendant since the inception of this litigation in July, 1982. Accordingly, it is hereby

ORDERED that defendant’s motion to join party needed for just adjudication and its motion for leave to file a third party complaint are DENIED.

      . The preemption holding in Vaca, that a court is not preempted from deciding an employee’s § 301 suit against his employer merely because the employee must prove an unfair labor practice by the union, applies whether or not plaintiff joins the union as a defendant.

      . See, e.g., McPeek v. Dayton Forging and Heat Treating Co., 574 F.Supp. 300, 304 (S.D.Ohio 1983) "An employee is free to sue only his employer, under § 301, for breach of the collective bargaining agreement____ He is also free to sue only his union, for breach of the duty of fair representation____ But here, plaintiff has sued both employer and union in a hybrid § 301 action ...”

      . The practicality of this procedure may be precluded by the short limitation period announced in DelCostello v. International Brotherhood of Teamsters, 462 U.S. 151, 103 S.Ct. 2281, 76 L.Ed.2d 476 (1983). A prompt suit against the union will ordinarily be required.


author: MAHON, District Judge.

text:
    ROCKWOOD INSURANCE COMPANY v. Bill WILLIAMSON.
    Civ. A. No. 6-83-65-E.
    United States District Court, N.D. Texas, San Angelo Division.
    Nov. 9, 1984.

      Griffis, Griffis, Whiteside & Woodward, Don W. Griffis, San Angelo, Tex., for plaintiff.
    John H. Green, Odessa, Tex., for defendant.
   MEMORANDUM OPINION

MAHON, District Judge.

The defendant, Bill Williamson, was an employee of Haines Pipeline Construction Company (Haines) and was injured during the course of his employment while unloading a caterpillar from a truck owned and operated by Turner Brothers Trucking Company (Turner Brothers). Plaintiff was the workmen’s compensation insurance carrier for Haines and paid medical expenses and workmen’s compensation benefits to the defendant, in the amount of $57,490.31. Thereafter, the defendant received a judgment against Turner Brothers, for compensation for the accident in the amount of $570,539.40 plus post-judgment interest and court costs. This amount was paid in full to the defendant by Turner Brothers.

Plaintiff files this action, claiming that it has a right to be reimbursed in full out of the recovery obtained against Turner Brothers. At no time did the plaintiff intervene in the third-party action to enforce its claim. The single issue in this case is whether an insurance company who did not intervene in a suit between the injured employee and the negligent tortfeasor in which judgment was rendered against the negligent tortfeasor can enforce its claim to recover workmen’s compensation benefits paid to the injured employee. The question presented calls first for a determination of whether to apply Texas or Oklahoma workmen’s compensation law to this action.

When two or more states have contacts with the operative facts of the case, the Court must decide which state law to apply. A federal court exercising diversity jurisdiction is to resolve the choice of law question as would the highest state court where it sits. Klaxon Co. v. Stentor Co., 313 U.S. 487, 61 S.Ct. 1020, 85 L.Ed. 1477 (1941); see also, Erie Railroad Co. v. Tompkins, 304 U.S. 64, 58 S.Ct. 817, 82 L.Ed. 1188 (1938). Accordingly, this Court must apply Texas indicative law in resolving the choice of law question. Article 21.42 of Vernon’s Texas Civil Statutes (1981) provides:

Any contract of insurance payable to any citizen or inhabitant of this State by any insurance company or corporation doing business within this State shall be held to be a contract made and entered into under and by virtue of the laws of this State relating to insurance, and governed thereby notwithstanding such policy or contract of insurance may provide that the contract was executed and the premiums and policy (in case it becomes a demand) should be payable without this State, or at the home office of the company or corporation issuing the same.

This provision has been interpreted as applying to insurance contracts made between Texas citizens and insurance companies doing business in Texas, but only when those contracts are made in the course of the company’s Texas business. Butler v. Mutual Life Assur. Co. of Canada, 600 F.2d 532 (5th Cir.1979).

In General American Life Ins. Co. v. Rodriguez, 641 S.W.2d 264 (Tex.App.1982), the Court applied Texas law over Missouri law. There, the original group policy was applied for and signed in Missouri. All subsequent amendments were issued and accepted in Missouri. However, “the insured was a resident of Texas, worked in Texas, and was covered the entire time by an insurance policy written for the benefit of Southwestern Bell employees in Texas. Under these facts and circumstances, we believe this is a situation where Article 21.42 ... applies.” 641 S.W.2d at 266. See John-Hancock Mutual Life Ins. Co. v. Schroder, 349 F.2d 406 (5th Cir.1965) (Texas law applied where a group life insurance policy was written for the benefit of Texas employees but made and executed in Florida between a Florida based employer and a Massachusetts insurance company.)

In the present case, the defendant was a resident of Texas, worked in Texas, and was injured in Texas. His employer, Haines Pipeline, is an Oklahoma corporation with its principal place of business in Oklahoma but doing business in Texas. The workmen’s compensation policy was issued in Oklahoma and is governed by Oklahoma workmen’s compensation law. The plaintiff, Rockwood Insurance Company, is a Pennsylvania corporation doing business in Oklahoma and Texas. When Williamson was injured, Haines Pipeline filed an employer’s injury report with the Oklahoma Worker’s Compensation Court and Rockwood paid compensation benefits to Williamson pursuant to the Oklahoma weekly compensation rate then in effect. The Court believes that the facts and circumstances of this case place it within the purview of General American Life Ins. Co., 641 S.W.2d 264, and John Hancock Mutual Life Ins. Co., 349 F.2d 406. Plaintiff is in the business of insuring workers in Texas for accidents occurring in Texas, and this business is directly related to the insurance policy in question. Therefore, the Court is of the opinion that article 21.42 applies and that Texas law is controlling.

The next question is whether, under Texas law, the plaintiff is entitled to reimbursement for the monies it paid to the defendant for the injuries he received. The plaintiff claims that under Texas law, the carrier obtains a lien upon any recovery by the injured employee from a third-party tortfeasor. Defendant argues that the plaintiff, by not intervening in the third-party action after being given notice of such action, waived its right to reimbursement from the injured employee. In the alternative, the defendant argues that if the plaintiff is entitled to reimbursement, defendant is entitled to expenses and attorney fees for the defendant’s recovery in the third-party action.

Section 6a of Article 8307 provides in part that “if at the conclusion of a third-party action a workmen’s compensation beneficiary is entitled to compensation, the net amount recovered by such beneficiary from the third-party action shall be applied to reimburse the association for past benefits and medical expenses paid____” The language is clear that the workmen’s compensation carrier can recoup the monies paid to an injured employee from any recovery against a negligent third party. In Capitol Aggregates, Inc. v. Great American Ins. Co., 408 S.W.2d 922 (Tex.1966), the Supreme Court of Texas, in discussing section 6a, explained that an injured employee has no right to funds recovered because of liability of a third party until the workmen’s compensation carrier is paid in full. To hold otherwise would permit the injured employee to receive double recovery, which is exactly what Section 6a is designed to prevent. 408 S.W.2d at 924; see also, e.g. Watson v. Glens Falls Ins. Co., 505 S.W.2d 793, 795-997 (Tex.1974) (workmen’s compensation carrier entitled to recoupment for benefits paid from a judgment against a negligent third party); Granite State Ins. Co. v. Firebaugh, 558 S.W.2d 550, 553 (Tex.Civ.App.1977) (injured employee cannot pursue a third-party claim to its conclusion and then seek workmen’s compensation without accounting to the carrier for the amount recovered).

The defendant had recovered from the plaintiff, prior to obtaining a judgment against Turner Brothers, $57,490.31 for medical expenses and workmen’s compensation benefits. In the judgment against Turner Brothers, the jury found that the defendant was entitled to $70,899.00 for past medical expenses and $30,000.00 for lost wages. This Court held that the defendant should recover sixty per cent (60%) of the total jury verdict which results in $60,539.40 for past medical bills and lost wages. This amount was paid to the defendant by Turner Brothers. Thus, under Section 6a, plaintiff is entitled to reimbursement for the monies it paid to the defendant that were also paid by Turner Brothers.

The Court does not believe that the plaintiff should be deemed to have waived its right to reimbursement because it failed to intervene in the suit between the defendant and Turner Brothers. Section 6a does not speak of intervention when it discusses a carrier’s right of reimbursement. Furthermore, the Court has not been able to find a Texas case which holds that if the insurer fails to intervene in the suit between the claimant and the third party, it loses its right of reimbursement. As a matter of judicial economy, courts permit the workmen’s compensation carrier to intervene in the claimant’s suit against the third party tortfeasor. However, Section 6a is not intended to hinge on whether or not a party intervenes. The Supreme Court of Texas, in Capitol Aggregates, Inc., said that the purpose of Section 6a is:

to prevent overcompensation to the employee and to reduce the burden of insurance to the employer and to the public. See Consolidated Underwriters v. Kirby Lumber Co., Tex.Com.App., 267 S.W. 703. These purposes will not be accomplished if the employee is allowed to retain the proceeds of the settlement in addition to his compensation benefits which the carrier is only partially reimbursed for what it has paid.

408 S.W.2d at 924. In order to carry out this intent of Section 6a, the party that paid the benefit to the injured employee is entitled to reimbursement from any recovery against a third party and it is immaterial whether that party intervened in the action against the negligent third party. See Arnett v. General Motors Corp., 22 Mich. App. 658, 177 N.W.2d 704 (1970).

The Court believes that the result would be the same under Oklahoma law. Section 44 of the Oklahoma Worker’s Compensation statute provides in part that “[wjhenever recovery against [a third person] is effected without compromise settlement by the employee or his representative, the employer or insurance company having paid compensation under the Worker’s Compensation Act shall be entitled to reimbursement____” In Russell v. Bill Hodges Truck Company, Inc., 663 P.2d 724 (Okla.1983), the Supreme Court of Oklahoma held that under Section 44, the insurance carrier was entitled to reimbursement for paid medical benefits and money allowance out of a settlement between the claimant and a third party. See also, Sharrock v. Perkins, 297 F.Supp. 1285 (W.D. Okla.1969) (claimant recovers insurer’s interest as trustee to the extent of the benefits paid to him).

The defendant argues that under Oklahoma law, a carrier does not have a lien on an amount collected by the employee, nor in the money held in trust for the carrier. Defendant cites Oklahoma Natural Gas Co. v. Mid-Continent Casualty Co., 268 F.2d 508 (10th Cir.1959) as authority for this proposition. Plaintiff is correct in its assertion that while this might have been the law in Oklahoma in 1959, it is no longer the law of Oklahoma. The 1959 version of Section 44 did not have an express provision for reimbursement to the insurer whereas the 1977 version of Section 44 has express language providing for reimbursement.

Defendant further argues that plaintiff’s action is barred by the two-year statute of limitations for tort actions. Plaintiff contends that because this is an action in contract based on the insurance policy, the four-year statute of limitations should apply. In the alternative, plaintiff claims that even if the two-year limitation period applies, this suit was timely because it was filed within two years of the commencement of the third-party suit.

Defendant was injured on July 29, 1981 and filed suit against Turner Brothers on February 7, 1982. A judgment was rendered on February 10, 1983. Plaintiff filed this action for reimbursement on November 23, 1983. Defendant would be correct in his assertion that this case is barred by the two-year statute of limitations if the period began on the date of injury. However, such is not the case.

Plaintiff’s suit is based upon a contract in writing and comes within the four-year statute of limitations rather than the two year statute. The two year statute of limitations, T.R.C.S. Art. 5526, does not include actions for reimbursement by the insurer. Although recovery in this type of action depends upon proof of damages due to the tort of the negligent third party, the cause of action arises by reason of the insurance policy, a written contract. See Franco v. Allstate Ins. Co., 505 S.W.2d 789 (Tex.1974). Furthermore, the date of defendant’s injury would not be controlling for purposes of this action. See Hastings v. Royal Globe Ins. Co., 521 S.W.2d 869, 872 (Tex.Civ.App.1975). A legal injury must be sustained before a cause of action arises. Id. No cause of action against the defendant arose until after he received a judgment and refused to reimburse the plaintiff for the benefits previously paid. Therefore, assuming that the two-year statute of limitations applies, this action would have been brought within two years of the date of judgment against Turner Brothers, the date when plaintiff was entitled to reimbursement.

Because the plaintiff has not intervened in the third-party action, defendant asks that he be granted expenses and attorney fees incurred for defendant’s recovery in the third-party action. Defendant claims that it would be not only unjust but also result in a windfall for the plaintiff if the plaintiff is awarded reimbursement without having to bear its part of the burden for obtaining a judgment in the third-party action. Defendant maintains that without this judgment, the plaintiff would not be entitled to reimbursement for the monies it paid to the defendant.

Section 6a provides in pertinent part that:

when the claimant is represented by an attorney and the association’s interest is not actively represented by an attorney ... the court shall allow a reasonable attorney’s fee to the claimant’s attorney for recovery of the association’s interest which in no case shall exceed thirty-three and one-third per cent (33V3%) payable out of the association’s part of the recovery.

Thus, the carrier who did not participate in the third-party action is responsible for paying attorney’s fees out of the sum received by it to the claimant’s attorney who was responsible for the recovery in the third-party action. See Texas General Indemnity Co. v. Jones, 601 S.W.2d 194, 196 (Tex.Civ.App.1980).

In Lee v. Westchester Fire Ins. Co., 534 S.W.2d 392 (Tex.Civ.App.1976), the Court held as a matter of law that the carrier’s interest was actively represented by its attorney in the third-party action. There, the carrier’s attorney received the file to determine the proper petition for intervention; filed an original petition in intervention and notified opposing counsel; reviewed the discovery material forwarded to him; and amended the petition in intervention when the injured employee’s claim was settled. 534 S.W.2d at 395-96. Here, there is no evidence that the plaintiff’s attorney took any part in the third-party action or that its interest was actively represented by its attorney. Therefore, the Court is of the opinion that the defendant is entitled to reasonable fees out of the plaintiff’s recovery in accordance with Section 6a. Defendants’ attorney claims that he incurred fees in the amount of $19,000.00. Such amount is approximately thirty per cent (30%) of the plaintiff’s recovery and would be just and equitable due to the trial and appeal of the third-party action.

In conclusion, the Court holds that the plaintiff is entitled to reimbursement for medical expenses and workman’s compensation benefits paid to the defendant and that the defendant’s attorney is entitled to recover expenses and attorney fees from the plaintiff for defendant’s recovery in the third-party action, payable from the reimbursement proceeds. It is therefore ORDERED that plaintiff receive $57,409.31 and defendant’s attorney receive $19,000.00 payable out of the plaintiff’s part of the recovery.

A judgment will be entered accordingly.


author: SWEET, District Judge.

text:
    R. Stockton RUSH III, Plaintiff, v. OPPENHEIMER & CO., INC. and Scott Seskis, Defendants.
    No. 84 Civ. 3219 (RWS).
    United States District Court, S.D. New York.
    Nov. 9, 1984.

      Lovell & Stewart, New York City, for plaintiff; Victor E. Stewart, New York City, of counsel.
    Joan Caridi, New York City, for defendant Oppenheimer & Co., Inc.
   OPINION

SWEET, District Judge.

This is a motion for reargument seeking reinstatement of the plaintiff’s punitive damages claim appended to the common law fraud count of the complaint. The motion is granted and the prior order of August 23, 1984, striking the punitive damage claim, is vacated.

Procedural Background

This case was commenced on May 8, 1984 by Rush (“Rush”) seeking damages against his securities broker Oppenheimer & Co. and Scott Seskis (“Brokers”) alleging violations of section 10(b) of the Securities Exchange Act of 1934, the Organized Crime Control Act of 1970 (“RICO”) and New York common law. Brokers brought a motion to dismiss pursuant to Fed.R. Civ.P. 12(b)(6), and in an opinion dated August 23, 1984 this court denied that motion with respect to the Rule 10(b) claim, granted the motion with respect to the RICO claim, and granted the motion with respect to the New York common law claim to the extent of eliminating the plaintiff’s claim for punitive damages. 592 F.Supp. 1108. Rush now brings this motion seeking reinstatement of the punitive damages aspect of the common law claim. The underlying facts are set forth in this court’s earlier opinion.

The Issue

In this court’s August 23, 1984 opinion, I dismissed the punitive damages element of Rush’s common law claim, holding that a necessary element for punitive damages under New York law was an allegation of fraud aimed at the public generally. At 1112-13, citing Durham Industries, Inc. v. North River Insurance Co., 673 F.2d 37, 41 (2d Cir.), cert. denied, 459 U.S. 827, 103 S.Ct. 61, 74 L.Ed.2d 64 (1982). The practical consequence of permitting a claim of punitive damages in fraud actions where the fraud was solely private in nature is to extend substantially by judicial fiat the extent of relief obtainable in any fraud case. In the context of apparent confusion among the New York courts, therefore, I chose to follow Durham, supra, and Marcus v. Marcus, 92 A.D.2d 887, 459 N.Y.S.2d 873 (S.Ct. App.Div. 2d Dep’t 1983) in requiring a public impact from the fraud before punitive damages were available. I found that the facts pled by Rush did not allege such a public fraud.

Conclusions

On re-examination upon reargument which referred to an opinion not previously cited, Roy Export Co. Estab. of Vaduz v. Columbia Broadcasting, 672 F.2d 1095 (2d Cir.1982), cert. denied, 459 U.S. 826, 103 S.Ct. 60, 74 L.Ed.2d 63 (1982), I conclude, as have others, that Durham, supra, and Marcus, supra, do not state prevailing New York law. The Second Circuit panel in Durham Industries, supra, stated that before punitive damages could be awarded “[t]here must be fraud ‘aimed at the public generally,’ evincing a ‘high degree of moral turpitude,’ and demonstrating ‘such wanton dishonesty as to imply a criminal indifference to civil obligations.’ ” Citations omitted. Similarly, in Marcus v. Marcus, supra, the Court held that “[p]unitive damages may be awarded in actions for fraud and deceit only where the fraud is gross, involves high moral culpability, and is aimed at the general public.” Id. 459 N.Y.S.2d at 874.

Another, and apparently prevailing line of authority maintains, however, that punitive damages are available where the allegations set forth a gross, wanton, or willful fraud or other morally culpable conduct, whether or not the acts alleged were aimed at the public generally. In Borkowski v. Borkowski, 39 N.Y.2d 982, 387 N.Y.S.2d 233, 355 N.E.2d 287 (Ct.App.1976) the Court of Appeals said: “It is not essential, as the Appellate Division stated, that punitive damages be allowed in a fraud case only where the acts had been aimed at the public generally. [Punitive damages are available upon showing] gross, wanton, or willful fraud or other morally culpable conduct.” See Bader’s Residence for Adults v. Telecom Equipment Corp., 90 A.D.2d 764, 455 N.Y.S.2d 303 (S.Ct.App.Div.2d Dep’t 1982) (citing Borkowski); Greenspan v. Commercial Ins. Co., 57 A.D.2d 387, 395 N.Y.S.2d 519 (S.Ct.App.Div.3d Dep’t 1977) (quoting Borkowski).

The federal courts have recognized and applied the Borkowski statement of the standard for punitive damages in fraud actions. In Roy Export Co. Estab. of Vaduz v. Columbia Broadcasting, supra, a different panel of the Second Circuit stated: “We agree with Judge Lasker’s careful analysis [that] New York law clearly permits punitive damages where a wrong is aggravated by recklessness or willfulness [citations omitted] whether or not directed against the public generally.” Id. at 1106, citing Borkowski, supra. Judge Lasker had stated: “[P]unitive damages are appropriate where ‘the wrong is aggravated by evil or a wrongful motive or where there was a willful and intentional misdoing or a reckless indifference equivalent thereto.’ ” Roy Export v. Columbia Broadcasting System, 503 F.Supp. 1137 (S.D.N.Y.1980). Similarly, in Juster v. Rothschild, Unterberg, Towbin, 554 F.Supp. 331 (S.D.N.Y. 1983) the Court had held, in the context of a state common law action pendent to a section 10(b) action, that “the availability of this remedy ... is determined by state law. The New York Courts have held that such damages are available even where, as in the instant case, a plaintiff has not alleged a fraud perpetrated on the public.” Id. at 334, citing Borkowski, supra, and Greenspan, supra. See also Aldrich v. Thomas McKinnon Securities Inc. and George Serhal, 589 F.Supp. 683 at 684 (1984) (interpreting New York law to permit punitive damages even where no fraud on public).

The weight of authority indicates that punitive damages in fraud actions are not conditioned on an allegation that the fraud was perpetrated on the public. Despite the Second Circuit statement in Durham Industries, supra, the New York Court of Appeals’ decision in Borkowski, supra, and the Second Circuit statement of the law in Roy Export, supra, seem to represent the prevailing New York view.

In order to plead a case sufficient to survive a motion to dismiss pursuant to Fed.R.Civ.P. 12(b)(6), then, a plaintiff seeking punitive damages as a consequence of common law fraud must allege gross, wanton, or willful fraud, or other morally culpable conduct. It is necessary to allege fraud that is founded upon such moral indifference as to be “aggravated by evil” or to be demonstrative of a criminal indifference to civil obligations. The facts alleged in Rush’s complaint, as set forth in this court’s August 23rd opinion, meet this threshold pleading burden.

Conclusion

Rush’s claim for punitive damages based on the common law fraud claim is reinstated. Discovery in this case shall be completed by February 6, 1985 and a joint pretrial order submitted by February 13, 1985.

IT IS SO ORDERED.


author: KANE, District Judge.

text:
    Shauna SUPRE also known as Ralph Spencer, Plaintiff, v. James G. RICKETTS, Ph.D., Executive Director, Colorado Department of Corrections, L. Dennis Kleinsasser, Ph.D., Robert McGowan, M.D., Robert Warren, Ph.D., and Robert T. Moore, Defendants.
    Civ. A. No. 82-K-24.
    United States District Court, D. Colorado.
    Nov. 13, 1984.
    Lawrence J. Schoenwald, Denver, Colo., for plaintiff.
    David R. DeMuro, Asst. Atty. Gen., Denver, Colo., for defendants.
   ORDER ON ATTORNEY’S FEES

KANE, District Judge.

The plaintiff has moved for an award of attorney fees, costs and expenses pursuant to, respectively, 42 U.S.C. § 1988 and 28 U.S.C. § 1920.

Section 1988 states that “... In any action or proceeding to enforce a provision of sections 1981,1982, 1983, 1985, and 1986 of this title ... the court, in its discretion, may allow the prevailing party, other than the United States, a reasonable attorney’s fee as part of the costs.”

The issue is whether the plaintiff was the “prevailing party.”

The complaint was filed on January 7, 1982, while the plaintiff was in the custody of the Colorado Department of Corrections. The gravaman of the complaint is that the prison authorities were withholding proper medical treatment for plaintiff’s sexual dysphoria. Then an exceedingly effeminate male, the plaintiff was in 23 hour a day protective custody. After spending time in the general population, serving sentences for auto theft and escape, during which the plaintiff was raped an indeterminate number of times, and labeled a “snitch,” the plaintiff could no longer safely be kept in the proximity of other prisoners.

A confidential memorandum dated July 1, 1981, written by the Chief of Surgery at the Colorado State Hospital, Dr. T.J. Fogel, contains a concise history of the plaintiff up to that date:

The patient has made six attempts to emasculate himself over a period of years. He feels that he is a woman though he’s in a man’s body and that he’s had psychiatric evaluation by Dr. Dorn [sic Dorian] at the Colorado State Penitentiary who has felt that he is sane and rational and a transexual. He [plaintiff] attempted to arrange [female] hormonal treatment which apparently was not given for reasons of policy. He would like to have a transexual operation in Trinidad, but the State of Colorado has no provision for this. He has made avowedly six attempts in his life to remove his own testicles, one of which resulted in his being put in the Colorado State Hospital Surgical Ward and he recovered from this attempt. He made at least one attempt to kill himself by hanging which was unsuccessful. On the 29th of June he incised and removed a portion of his scrotum, placed string and rubber bands about the spermatic cords bilaterally and this was found the next day and the constricting bands removed and he was sent to the Surgical Service at Colorado State Hospital with the problem. He stated cateorically that he would not allow any treatment if it did not involve the removal of his testicles. He made this very clear. He was quite rational. He was seen by Dr. Huffaker, the Colorado State Hospital phychiatrist, who in a very clear evaluation felt that he was sane in every regard and a true transexual. He was seen by myself, Dr. Fogel. The wound was as described-completely bare testicles, obviously contaminated and beginning to be infected, an absent portion of the scrotum, at this point good circulation of the testicles, but covered with fibrinous exudate. He was very clear in his statement that he had only the loss of his testicles in mind and that he was purposely forcing the issue and he was quite apologetic for putting me in this position, but he felt he must and that he would not allow any treatment unless it was made clear that he would have his testicles removed. Consultation with Dr. Robert Herrmann, Dr. Haydee Kort, Attorney James Hartley, who represents the patient to some degree, Mr. Tarkington [sic Tarquín J. Bromley] of the Attorney General’s office, Jack Ewing of the State Hospital and Dr. Wesley Boucher, Urologist who saw the patient in consultation, has made me reach the conclusion, with a good deal of thought and some difficulty, that the patient, at this point, should have his testicles removed. This is based on the fact that he is not, in anyone’s opinion, insane; that he is absolutely determined to have this done and from the psychiatrist’s evaluation, in two instances, that he is a true transexual who is so determined that he has made intelligent efforts to lose his male gonads____

On July 2, 1981, the plaintiffs testicles were surgically removed at the Colorado State Hospital. In September of 1981, John D. Glismann, M.D., a psychiatrist on retainer to the Department of Corrections, recommended that plaintiff receive female hormones and be permitted to “live as a female” while in custody. In February of 1981, Kathleen K. Graze, M.D., a retained endocrinologist trained and experienced in the treatment of transexuals, also recommended estrogen therapy for the plaintiff.

The official response of the defendants to the mutilations, castration, doctors’ diagnosis and recommendations, and plaintiff’s requests for female hormones was a written policy statement dated April, 1982, which concluded that treatment for gender dysphoria and evaluation of sexual reassignment could not be provided in a penal setting.

A trial on the merits began on January 4, 1982. On the morning of the second day of trial, court was recessed for an hour and a half while the parties attempted to reach a stipulation. Although a full stipulation was not reached, the parties did agree to move jointly for a continuance of the trial to a later date, if necessary. In no other case have I tried as hard to persuade the parties to find a nonjudicial resolution to their controversy. Such effort was unavailing.

I granted the motion for a continuance conditioned on the defendant’s respecting the plaintiff’s right to treatment with low level doses of female hormones for so long a period as would be in the plaintiff’s best interests according to physician of the plaintiff’s choice. It was also understood that the committee formed by the Department of Corrections to study the problem of treating incarcerated transexuals would address the specific problems of the plaintiff.

It is important to point out that although the defendants had planned to form the committee of experts even before this lawsuit was filed, it was not until immediately after the aborted trial that the committee held a meeting or made a policy recommendation. In a letter to Drs. Graze and Gadpaille dated January 6, 1983, Richard T. Moore, the Director of Medical Services for the Department of Corrections states that “Although the department still holds with the objection to the treatment outlined in Judge Kane’s order, I would like to assure you of our cooperation in carrying out the spirit as well as the letter of the judge’s order____” Drs. Graze and Gadpaille were both early proponents of female hormone therapy for the plaintiff whose diagnosis and treatment recommendations had previously been ignored by the Department of Corrections.

The plaintiff contends that but for this lawsuit, neither the enlightened recognition by the defendants of the plaintiff’s problem nor the subsequent commutation of the plaintiff’s sentence by the Governor of Colorado pursuant to the recommendation of the Governor’s Executive Clemency Advisory Board, would have occurred. The defendant contends that changes in the plaintiff’s treatment were inevitable and were under consideration by prison officials even before the plaintiff filed this lawsuit. The defendants further contend that “with the possible exception of a temporary order allowing plaintiff to take low levels of female hormones, none of his [sic] claims were ruled upon by this court.”

The plaintiff contends that the positive results which have been caused, at least in part by this litigation, include:

1. The court’s interim order dated 1/5/83 enabling plaintiff to obtain prescribed medications, including estrogen, through physicians of her own choice;

2. The creation of a panel of experts to make recommendations to the Department of Corrections regarding the treatment of transexuals, including special recommendations regarding the plaintiff;

3. Recommendations by prison officials and staff, subsequent to the plaintiff having developed breast tissue as a result of receiving female hormones, that the plaintiff be granted early release;

4. Plaintiffs parole after the parole board reviewed opinions and reports of experts retained by plaintiff and supplied to the parole board by plaintiffs lawyer — parole granted 7/25/83;

5. The 8/24/83 unanimous recommendation of the Executive Clemency Advisory Board to the Governor that plaintiff’s sentence be commuted to time served. Plaintiff’s counsel had supplied the board with pertinent reports and materials from experts retained in this action by plaintiff;

6. The Governor’s August 30, 1983 Executive Order commuting the plaintiff’s sentence as recommended by the board.

The plaintiff further notes that before her release, there were no rehabilitative programs available to her due to the extraordinary protective custody measures being taken.

The defendants’ contention regarding the commutation of plaintiff’s sentence is that although plaintiff’s attorney had supplied the Governor’s Board with a letter in support of the commutation, the assistant superintendent of the Centennial Correctional Facility had sent letters to the Board on June 9 and July 29 of 1983 — before the plaintiff, and therefore “gratuitously.”

I find that the plaintiff was the “prevailing party” in the sense contemplated by 42 U.S.C. § 1988 because she was allowed long-sought treatment through my January 5, 1983, interim order, because of the catalytic effect that her suit had on her ultimate release, and because of the common benefit that was precipitated on behalf of similarly situated transexuals.

In Nadeau v. Helgemoe, 581 F.2d 275, 278-79 (1st Cir.1978), it was stated that “... plaintiffs may be considered ‘prevailing parties’ for attorney fees purposes if they succeed on any significant issue in litigation which achieves some of the benefit the parties sought in bringing suit.” Nadeau has been cited with approval for this proposition in Hensley v. Eckerhart, 461 U.S. 424, 433, 103 S.Ct. 1933, 1939, 76 L.Ed.2d 40, 50 (1983).

Once the plaintiff has been determined to have obtained some of the benefits sought in bringing the litigation, the plaintiff should be construed to be the prevailing party as long as the underlying constitutional claim is substantial. Battle v. Anderson, 614 F.2d 251, 258 (10th Cir. 1980). The plaintiff has achieved some of the benefits sought. The plaintiff was incarcerated and afflicted with pathology recognized by the established medical community as a serious one with a recognized treatment that was denied the plaintiff by the institution charged with her incarceration and care. Although it would not be reasonable to expect the prison system to finance an expensive sex change operation, minimal treatment was not being administered to the plaintiff; the cost of plaintiff’s female hormones was approximately $10 a month. The failure of the prison system to comprehend the bizarre actions of the plaintiff, while understandable, does not minimize either the urgency of plaintiff’s need for the treatment or the catalytic effect of this lawsuit in obtaining treatment and release. The prison system’s failure to react appropriately also highlights the magnitude of the obstacles that confronted. plaintiff’s counsel in this case.

To this day I remain convinced that the plaintiff’s life was in jeopardy. The record is replete with circumstances I will not mention here which show that the probability of her life being terminated was indeed high. Mr. Lawrence J. Schoenwald’s handling of this unusual case was skillful, doggedly persistent, and brave. There are very few, if any, other attorneys in this community who would have undertaken this unusual representation with such skill and compassion.

The defendants further contend that the two tests posed by Nadeau, supra, are not met. The two tests require that the plaintiff’s lawsuit be both a factual and legal cause of the plaintiff’s improved condition. The defendants do admit that the interim order allowing plaintiff to take low levels of female hormones was “possibly” a factual result of the plaintiffs lawsuit.

The defendants contend, however, that the legal test, which examines whether the defendants’ conduct was required by law, is not met. In support of this contention, the defendants focus on the Governor’s commutation of the plaintiff’s sentence and the recommendation for parole made by the Department of Corrections officers.

This contention fails to take note of the fact that the defendants would not have recommended parole or commutation if the plaintiff had not become such a burdensome management problem at the prison. The September 11, 1984 testimony of Carlos Baca, the assistant superintendent of The Centennial Correctional Facility, revealed that the primary reason he wrote letters to the parole and clemency boards was that the plaintiff’s development of female breast tissue resulted in unmanageable difficulties at the prison facility. It is clear that if the plaintiff’s need for female hormone treatment had not prevailed legally, as it did, then the unmanageable problems would not have arisen, and the plaintiff's sentence would not have been commuted.

The legislative history of § 1988 clearly supports the award of attorney fees to a plaintiff who is only partially successful. “Such awards are especially appropriate where a party has prevailed on an important matter in the course of litigation, even when he ultimately does not prevail on all issues.” Senate Rep. No. 94-1011, 5 U.S. Code Cong. & Admin.News, pp. 5908, 5912 (1976).

THE AWARD AMOUNT

The amount of attorney fees the plaintiff receives should be based on the work performed on the issues in which he was successful. Nadeau, supra, at 279. Under Ramos v. Lamm, 713 F.2d 546 (10th Cir.1983) I must determine: the number of hours reasonably spent by counsel for the party seeking the fees, id. at 553; whether the tasks sought to be charged to the adverse party would normally be billed to a paying client, id. at 554 and; in setting a rate of compensation for the hours reasonably expended, what lawyers of comparable skill and experience practicing in this area would charge for their time, id. at 555.

Mr. Schoenwald’s time spent in discussion with Daniel Grove, the Chairman of the Colorado Board of Parole and in preparing the material for The Executive Clemency Board is not time spent on the issues of the case. Therefor I deduct the 2.55 hours so spent from the 181.2 hours billed to this case. I have reviewed the affidavits and contemporaneous time records submitted by Mr. Schoenwald, and, with the exception discussed above, find that Mr. Schoenwald reasonably spent 178.-65 hours on the case, that the tasks sought to be charged to the adverse party would normally be billed to a paying client, that to an item they are non-duplicative and related to the issue on which the plaintiff prevailed. Mr. Schoenwald’s requested $100 hourly rate times 178.65 hours (181.2 less 2.55) equals $17,865. The $100 hourly rate is less than attorneys with Mr. Schoenwald’s experience and comparable skill normally charge. It is clearly reasonable.

IT IS ORDERED that attorney fees in the amount of $17,865 are awarded to plaintiff’s attorney. The Clerk of the Court is directed to enter judgment in that amount in favor of Mr. Schoenwald and against the defendants.

IT IS FURTHER ORDERED that plaintiff is awarded costs of $4,600.05, to be paid by the defendants. The Clerk of the Court is directed to enter judgment in that amount.


author: GONZALEZ, District Judge.

text:
    Nicholas VISCOMI, Plaintiff, v. PAINE, WEBBER, JACKSON & CURTIS, INC. and Michael Yarmuth, Defendants.
    No. 84-6647-CIV.
    United States District Court, S.D. Florida, N.D.
    Nov. 14, 1984.
    John J. Murphy, Hollywood, Fla., for plaintiff.
    O’Bannon M. Cook, Ruden, Barnett, McCloskey, Schuster & Russell, Miami, Fla., for defendants.
   ORDER OF DISMISSAL WITHOUT PREJUDICE

GONZALEZ, District Judge.

In this action plaintiff Nicholas Viscomi sues defendant Paine, Webber, Jackson & Curtis, Inc. and stockbroker Michael Yarmuth for violation of federal securities laws and Florida common law. The gravamen of plaintiff’s complaint is that defendants “churned” his account. Count I seeks relief under section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C.A. § 78j (1981), and Rule 10b-5, 17 C.F.R. § 240.-10b-5 (1983). Count II charges defendants with common-law fraud, while Count III seeks damages for defendants’ misdelivery of certain bonds. Finally, Count IV requests an accounting for defendants’ failure to keep plaintiff apprised of the transactions executed on his behalf by defendant Yarmuth.

The issue presented is whether plaintiff states a claim for churning under section 10(b) and Rule 10b-5. After reviewing the complaint and defendants’ motion to dismiss, the court answers in the negative and dismisses plaintiff’s entire complaint with twenty days leave to amend in conformity with this order.

“The churning of a securities account occurs when a dealer, acting in his own interests and against those of his customer, induces transactions in the customer’s account which are excessive in size and frequency in light of the character of the account.” Vetter v. Shearson Hayden Stone Inc., 481 F.Supp. 64, 65 n. 1 (S.D.N. Y.1979) (quoting Note, Churning by Securities Dealers, 80 Harv.L.Rev. 869,- 869 (1967)). A broker may be held liable for violating section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 if the investor proves “(1) the trading in his account was excessive in light of his investment objectives; (2) the broker in question exercised control over the trading in the account; and (3) the broker acted with the intent to defraud or with willful and reckless disregard for the investor’s interests.” Miley v. Oppenheimer & Co., Inc., 637 F.2d 318, 324 (5th Cir.1981). Because the act of churning itself is a deception or fraud, the allegations of such wrongdoing should be stated with “particularity”. Rule 9(b), Fed.R.Civ.P. See Miley, 637 F.2d at 324 n. 4 (“Churning is classified as a ‘device, scheme or artifice to defraud’ ....).

Count I of plaintiff’s complaint falls woefully short of stating with the requisite specificity the facts in support of his churning claim. Consider the salient portions of the complaint.

7. At all times defendant Yarmuth knew or should have known that Plaintiff’s investment needs and objectives were for investment only in stable and income-producing securities in that Plaintiff was and is anticipating retirement in 1984 and depends on his investments for income on which to live.
8. Defendant Yarmuth induced and persuaded Plaintiff to allow him to assume control over Plaintiff’s investment account on representation that defendant Yarmuth was an expert in the securities investment field, and that Plaintiff should rely on his expertise and knowledge, and should vest him with actual control over the handling of his account. In reliance on the aforesaid representations, Plaintiff did in fact vest actual control over his investment account with defendant Yarmuth.
9. Having induced Plaintiff to rely on his expertise and skill in handling the account, and having asserted and assumed control over the buying and selling of securities for the account, defendant Yarmuth, beginning on or about January 3, 1983 and continuing on [sic] or about November 3, 1983, wrongfully, intentionally, fraudulently, maliciously, and deceptively manipulated Plaintiff’s account, and “churned” Plaintiff’s account. That is, defendant Yarmuth excessively traded Plaintiff’s account by purchasing and selling volative and speculative securities which trades were excessive in size and frequency in light of Plaintiff’s financial objective and resources, without regard to the investment needs or objectives of Plaintiff. Such trading by defendant Yarmuth, was for the purpose of generating commissions and profits for the defendants and was in total and complete disregard for [sic] the financial and investment needs and objectives of the Plaintiff.
10. In addition to churning Plaintiff’s account, defendant Yarmuth engaged in other manipulative and fraudulent activities in regard to Plaintiff’s account, including but not limited to:
(a) Purchasing of shares of stock in small lots at the commission breakpoint so as to earn greater commissions on such purchases than would have been earned if defendant Yarmuth had purchased such shares in one transaction. Moreover, Yarmuth failed to disclose to Plaintiff the fact that by buying such shares in smaller lots, the commission on such purchases would be greater than if he purchased such shares in one transaction.
(b) Transferring funds into Plaintiff’s account without his knowledge or consent, and without disclosing the source of such funds or purpose of such transfer.
(c) Purchasing and selling shares for Plaintiff’s account without Plaintiff’s approval.
(d) Misrepresenting the value of Plaintiff’s account by advising Plaintiff that the account had increased in value, when in fact the same had decreased in value.

Complaint (filed July 31, 1984).

Plaintiff neither sets forth the specific securities and transactions involved in his case (including the nature and amount of the purchases and sales), nor states the amount of commissions generated by these transactions. If plaintiff has sued defendants over excessive trading, then plaintiff must do more than state unsubstantiated conclusory allegations or track the elements of a churning action. By requiring that plaintiff state defendants’ alleged fraudulent acts with “particularity”, Rule 9(b)

1) ... ensures that allegations are specific enough to inform a defendant of the act of which the plaintiff complains, and to enable him to prepare an effective response and defense; 2) ... eliminates those complaints filed as a pretext for the discovery of unknown wrongs — a 9(b) claimant must know what his claim is when he files; and 3) ... seeks to protect defendants from unfounded charges of wrongdoing which injure their reputations and goodwill.

Benoay v. Decker, 517 F.Supp. 490, 492 (S.D.N.Y.1981). Allegations of fraud in the securities context should be stated with particularity because generally the information giving rise to the action is available before commencement of the suit.

A comparison of the pleadings in other cases with those in the instant case provides further support for the court’s decision to dismiss plaintiff’s churning claim.

In Vetter v. Shearson Hayden Stone Inc., 481 F.Supp. 64 (S.D.N.Y.1979), the district court dismissed plaintiff’s churning claim for failure to plead the case with the required specificity. In her complaint, plaintiff averred that she opened a specific account with defendant and informed the broker that she was an unsophisticated investor; plaintiff set forth the broker’s specific recommendations; and then she tracked the elements of a churning claim without supplying any underlying facts:

10. Thereafter, JABLON, without the permission or direction of VETTER, entered upon a course of conduct of selling and purchasing securities in VETTER’s securities account which were (a) excessive in number, frequency and amount; (b) not authorized by her; and (c) not consistent with her investment objective.

Id. at 65. Characterizing plaintiff’s allegations of churning as “conclusory”, the court dismissed the complaint.

The pleadings in In re Catanella and E. F. Hutton and Co., Inc. Securities Litigation, 583 F.Supp. 1388 (E.D.Pa.1984), stand in sharp contrast to the generalized pleadings of fraud contained in Vetter and the instant case. In Catenella, the complaint set forth in detail the names of the securities churned, the frequency of trading, the commissions paid and the estimated turnover ratio. Id. at 1407. Similarly, in Juster v. Rothschild, Unterberg, Towbin, Gruntal & Co., 554 F.Supp. 331 (S.D.N.Y.1983), the court ruled that plaintiff’s allegations of churning were sufficient because the complaint stated the extent of plaintiff’s financial acumen; the degree of control defendant broker exercised over plaintiff’s account; the dollar amount of specific shares traded during the period in question; the number of times plaintiff’s average monthly capital was turned over; the percentage of the total number of trades completed in each month of the relevant period; and the commissions paid to the defendants by the plaintiff as a result of those trades. Id. at 332. Cf. Eaton v. Coal Par of West Virginia, Inc., 580 F.Supp. 572, 573-74 & n. 1, 576 (S.D.Fla. 1984) (Gonzalez, J.).

To recapitulate, Count I of plaintiff’s complaint is dismissed because it fails to state with “particularity” the facts giving rise to the churning claim. Plaintiff’s allegations fail to state what stocks were traded and how many shares were involved; there is no indication of the date on which these purchases and sales occurred, how much money was involved, and how much money in commissions was generated by these transactions; no attempt is made to document the frequency of trading or the turnover ratio; and plaintiff does not allege the date or nature of the purported misrepresentation made to plaintiff as to the value of his account, or what was obtained as a consequence of those misrepresentations. To the extent that Count IV, which alleges that defendant broker failed “to account to the Customer for transactions on the Customer’s account,” Complaint ¶ 27, is merely an element in the more generalized churning claim, it too is dismissed.

Even if, arguendo, plaintiff's complaint satisfied the pleading requirements of Rule 9(b), Count I still would be dismissed for failure to state a claim for relief under 10(b) and Rule 10b-5. Although a churning claim can state a cause of action under section 10(b), Thompson v. Smith Barney, Harris Upham & Co., 709 F.2d 1413, 1416-17 (11th Cir.1983), the plaintiff must at a minimum allege that defendant acted with scienter. Ernst & Ernst v. Hochfelder, 425 U.S. 185, 194 n. 12, 96 S.Ct. 1375, 1381 n. 12, 47 L.Ed.2d 668 (1976). Plaintiff fails to allege scienter in regard to defendants' alleged manipulative and fraudulent activities, thus providing an alternate ground for dismissal of Count I.

Counts II and III are state law claims for common-law fraud and misdelivery of bonds, respectively. Plaintiff asserts that the court has jurisdiction over these claims due to the presence of diverse citizenship among the parties. Complaint ¶ 18. However, the complaint fails to allege the citizenship of any of the parties, and thus warrants dismissal. Admittedly, the court can exercise subject-matter jurisdiction over the state actions based on the doctrine of pendent jurisdiction, United Mine Workers v. Gibbs, 383 U.S. 715, 86 S.Ct. 1130, 16 L.Ed.2d 218 (1966), provided there exists an underlying federal claim. If, however, the federal claim is dismissed before trial, then the state claims must also be dismissed. Id. at 726, 86 S.Ct. at 1139; see also Stowell v. S. Finkel Investment Services, Inc., 489 F.Supp. 1209, 1217-18 (S.D.Fla.1980), affd, 641 F.2d 323 (5th Cir. 1981) (federal court should not exercise pendent jurisdiction over common-law fraud claim appended to section 10(b) action because of potential juror confusion caused by different standards of proof in each claim).

Accordingly, Counts II and III (and Count IV to the extent it is considered an independent state claim) are dismissed without prejudice.

In summary, defendants’ motion to dismiss plaintiff’s complaint is granted. Plaintiff shall have twenty days leave to amend his complaint in conformity with this order.


text:
    Eric G. RUSH and Sharaveen L. Rush, Plaintiffs, v. MACY’S NEW YORK, INC., d/b/a Macy’s, a New York corporation, Credit Bureau, Inc., a Georgia corporation, and Federal Trade Commission, Defendants.
    No. 84-1166-Civ-GONZALEZ.
    United States District Court, S.D. Florida, N.D.
    Nov. 14, 1984.

      Henry A. Edgar, Jr., Miami, Fla., for plaintiffs.
    Eric Meyers, Shutts & Bowen, Miami, Fla., for defendant, Macy’s.
    Earl D. Waldin, Jr., Smathers & Thompson, Miami, Fla., for defendant, Credit Bureau, Inc.
    Leslie Rice Melman, F.T.C., Washington, D.C., and Patricia D. Kenny, Asst. U.S. Atty., Miami, Fla., for F.T.C.
   ORDER

GONZALEZ, District Judge.

THIS CAUSE has come before the Court upon the respective Motions to Dismiss filed by the defendants, Macy’s New York, Inc. and the Federal Trade Commission.

The plaintiffs assert claims for violations of Sections 616 and 617 of the Fair Credit Reporting Act (“FCRA”), 15 U.S.C., sections 1681n, 1681o (1983), against the defendants, Macy’s New York, Inc. (“Macy’s”) and the Credit Bureau, Inc. (“CBI”). These asserted violations stem from an allegedly erroneous credit report prepared by CBI from information provided, in part, by Macy’s. This report contained an “R-9” designation next to the Macy’s credit balance. This designation is the poorest credit rating assigned to a consumer. The plaintiffs maintain that the failure of these defendants to correct the credit report caused their denial of additional credit from other retail establishments.

The plaintiffs further contend that the defendant, the Federal Trade Commission («PTC”), refused to enforce the applicable provisions of the FCRA by ignoring their pleas for assistance. The plaintiffs, therefore, seek mandamus, declaratory and injunctive relief.

Macy's argues that it is not a credit reporting agency, did not issue a consumer report and did not negligently or willfully fail to comply with the FCRA. It therefore is not liable for any alleged harm inuring to the plaintiffs. This Court agrees.

The purpose of the FCRA is to assure consumers that reporting agencies use reasonable procedures for collecting, using and disseminating credit information. 15 U.S.C. § 1681(b). Civil liability, however, may be imposed only on a consumer reporting agency or a user of reported information who willfully or negligently violates the FCRA. 15 U.S.C. §§ 1681n and 1681o. By merely providing credit information, Macy’s cannot be classified as a “user of information.” For liability under the FCRA, Macy’s must fall within the definition of a “consumer reporting agency.”

Title 15 U.S.C., section 1681a(f) defines a “consumer reporting agency” as follows:

... any person which for monetary fees, dues, or on a cooperative nonprofit basis, regularly engages in whole or in part in the practice of assembling or evaluating consumer credit information or other information on consumers for the purposes of furnishing consumer reports to third parties, and which uses any means or facility of interstate commerce for the purpose of preparing or furnishing consumer reports.

In Porter v. Talbot Perkins Children’s Services, 355 F.Supp. 174, 176 (S.D.N.Y.1973), the court analyzed section 1681a(f) and delineated four elements necessary for establishing a “consumer reporting agency” under the FCRA;

[T]his definition contains four links. (1) The consumer reporting agency must act for monetary fees, dues or on a cooperative non-profit basis; (2) it must regularly engage in whole or in part in gathering or evaluating information on consumers; (3) the purpose of such activity must be the distribution of information to third parties engaged in commerce; and (4) the agency must use a facility of interstate commerce to prepare or distribute the reports.

The court then applied these elements and determined that an adoption agency was not a consumer reporting agency. In Todd v. Associated Credit Bureau Services, Inc., 451 F.Supp. 447 (E.D.Pa.1977), the court applied the Porter analysis and determined that a department store that merely provided information to a credit reporting agency was not itself a credit reporting agency.

In the instant case, the plaintiffs fail to allege any elements necessary for determining Macy’s status as a consumer reporting agency. They merely allege that Macy’s is a department store that furnished credit information to CBI. “Parties who do no more than furnish information are simply not covered by these sections [sections 1681n and 1681o] of the FCRA.” Mitchell v. First National Bank of Dozier, 505 F.Supp. 176, 177 (M.D.Ala.1981). See, Todd v. Associated Credit Bureau Services, Inc., supra. Thus, relief under the FCRA is not available.

The plaintiffs seek mandamus and other relief forcing FTC intervention into their private financial affairs. Mandamus is available only when a governmental agency has a duty to act on behalf of an individual. In re Wingreen Co., 412 F.2d 1048 (5th Cir.1969); Carter v. Seamans, 411 F.2d 767 (5th Cir.1969), cert. denied, 397 U.S. 941, 90 S.Ct. 953, 25 L.Ed.2d 121 (1970); Linde HomeCare Medical Systems, Inc. v. Harris, 479 F.Supp. 1033 (M.D.Fla.1979). No such duty is alleged by the plaintiffs. Further, the FTC exercises its enforcement powers in a discretionary manner. Moog Industries, Inc. v. FTC, 355 U.S. 411, 78 S.Ct. 377, 2 L.Ed.2d 370 (1958). Additionally,

[T]he Commission acts only in the public interest and does not initiate an investigation or take other action when the alleged violation of law is merely a matter of private controversy and does not tend adversely to affect the public.

16 C.F.R. § 2.3 (1984). See, 15 U.S.C. § 45(b); FTC v. Klesner, 280 U.S. 19, 50 S.Ct. 1, 74 L.Ed. 138 (1929); Saucke v. FTC, 333 F.Supp. 1197 (N.D.Ga.1971). Thus, FTC assistance with a purely private financial problem is unavailable.

Accordingly, it is hereby

ORDERED AND ADJUDGED that the Motions to Dismiss filed by the defendants, Macy’s and the FTC, be and the same are GRANTED. The Complaint, as to these defendants, is DISMISSED with prejudice.

      . Although the plaintiffs allege violations of their fifth and fourteenth amendment rights to obtain credit, this' court finds neither statutory nor case authority supporting this position.

      . Had Macy’s been a consumer reporting agency, its consumer reports then would have to comply with the FCRA. The term “consumer report", however, does not include "any report containing information solely as to transactions or experiences between the consumer and the person making the report.” 15 U.S.C. § 1681a(d)(A). By merely providing CBI information regarding transactions or experiences between Macy’s and the plaintiffs, Macy’s did not issue a consumer report. Thus, Macy’s actions would not have violated the FCRA.

      . The plaintiffs also sought the production of an Agreement or Cease and Desist Order entered by the FTC. A copy of the Order now has been provided to plaintiffs' counsel. Therefore, assuming that the plaintiffs had a cause of action relevant to this issue, it is moot.


author: CALDWELL, District Judge.

text:
    Helen M. PAGE, on behalf of herself and all others similarly situated, Plaintiff, v. Margaret M. HECKLER, Secretary of Health and Human Services, Defendant.
    Civ. A. No. 82-1338.
    United States District Court, M.D. Pennsylvania.
    Nov. 14, 1984.
    Paul D. Welch, Jr., New Bloomfield, Pa., for plaintiff and proposed intervenor Feldser.
    Jonathan M. Stein, .Com. Legal Services, Philadelphia, Pa., for plaintiff-intervenor Grant Schaefer.
    Thomas Dougherty, Jr., Gary S. Turetsky, Asst. Regional Atty., Dept, of Health & Human Services, Philadelphia, Pa., Barbara L. Kosik, Asst. U.S. Atty., Harrisburg, Pa., for defendant.
   MEMORANDUM

CALDWELL, District Judge.

I. Introduction

Before us is defendant’s motion for relief from a portion of our memorandum and order of July 2, 1984. 587 F.Supp. 55. For the reasons discussed hereinafter, the motion is denied.

II. Background

The memorandum and order that are at issue were filed following submission by the Secretary of proposed program instructions with regard to waiver of overpayment under Title XVI of the Social Security Act, 42 U.S.C. § 1381 et seq. In an order filed on April 24, 1984, we directed that the instructions be filed by May 25, 1984 and that responses to those instructions be filed within the timetables set forth in Local Rules 401.6 and 401.7 of the Middle District of Pennsylvania. The Secretary’s proposed instructions were filed on May 29, 1984. Plaintiff filed a reply on June 7, 1984, and any further reaction by the Secretary would have been due by late June. The Secretary chose to file nothing, even though plaintiff’s reply had suggested three modifications to the proposed instructions.

Two of these modifications were rather innocuous and entailed minor changes in the implementation date for the instructions and in the wording in a paragraph regarding the contents of the notice to be sent to individuals for whom an overpayment waiver was not approved. The third modification suggested by plaintiff, however, was of much greater import in that plaintiff opposed the Secretary’s notice regarding cross program recovery of overpaid SSI benefits from Title II Social Security benefits. As support for her position, plaintiff relied on the case of Ellender v. Schweiker, 550 F.Supp. 590, (S.D.N.Y. 1983). The Ellender court held that such cross recovery, even with a beneficiary’s consent, is illegal. Based on Ellender, this court’s decision was that the paragraph dealing with cross collection was to be excluded from notices utilized by the Secretary.

III. The Current Motion

Our memorandum and order on the modifications were filed on July 2, 1984, and included instructions that the Secretary’s procedures, as modified, be put into effect within sixty (60) days. On August 15, 1984, approximately two weeks before the time set for implementation of the procedure, the Secretary filed the current “motion for relief from judgment” and supporting brief. Essentially the Secretary has contended that this court’s conclusions with regard to cross program recovery were erroneous. The Secretary, however, had ample opportunity to oppose the modifications suggested by plaintiff and did not do so timely. She now seeks to bring the cross recovery matter to our attention by use of a motion after failing to comply with a briefing schedule set by court order. For us to allow such a practice is to invite repetition of attempted sidestepping of orderly procedure. This we decline to do. We realize that the Secretary could point to her sizable caseload as an excuse for her inaction, but in the above-captioned matter the plaintiff is represented by counsel in a small legal services office, and not by a large law firm with paralegals and law clerks to help him meet his obligations to this court, which he has capably done on a constant basis. Thus, we feel the workload burdens on all counsel in this case are comparable.

We are greatly concerned that this case has dragged on in excess of two years since the complaint was filed on October 27, 1982. After the filing of numerous motions, briefs, and other documents, numbering forty-six in all, on September 2, 1983, we found that the Secretary’s procedures for recouping purported overpayments from SSI beneficiaries required revision. 571 F.Supp. 872. Those procedures have yet to be implemented, even though our memorandum and order of July 2, 1984, established the time for implementation as sixty days from the July date. As previously indicated, the Secretary waited until approximately two weeks before she was to implement the revised procedures to file her current motion. Thus, even if this motion was not filed solely as a dilatory tactic, the Secretary nevertheless was well aware that it would further and perhaps improperly delay resolution of this case.

Under our local rules, the Secretary’s failure to file timely opposition may result in her being deemed unopposed to the modifications suggested by plaintiff. Though this stance may seem harsh, it is no more inequitable than permitting a party to do nothing initially and then later assert a position that could have and should have been raised earlier. Certainly we need not examine the merits of the Secretary’s position on cross recovery. However, in the interest of putting to rest further disputes on the procedures to be implemented by the Secretary and avoid further delay of their implementation, we shall briefly examine the issue.

The relevant statute, 42 U.S.C. § 407, which clearly prohibits the transfer or assignment of one’s rights to future Social Security benefits and exempts these benefits from all process, provides as follows:

(a) Inalienability of right to future payments

The right of any person to any future payment under this subchapter shall not be transferable or assignable, at law or in equity, and none of the moneys paid or payable or rights existing under this sub-chapter shall be subject to execution, levy, attachment, garnishment, or other legal process, or to the operation of any bankruptcy or insolvency law.

(b) Inamendability of section by inference

No other provision of law, enacted before, on, or after the date of the enactment of this section, may be construed to limit, supersede, or otherwise modify the provisions of this section except to the extent that it does so by express reference to this section.

The regulation promulgated by the Secretary for the implementation of the statute is 20 C.F.R. § 404.1820, which provides:

(a) General. We shall not certify payment to—
(1) Any person designated as your assignee or transferee; or
(2) Any person claiming payment because of an execution, levy, attachment, garnishment, or other legal process, or because of any bankruptcy of insolvency proceeding against or affecting you.
(b) Enforcement of a child support or alimony obligation. If you have a legal obligation to provide child support or make alimony payments and legal process is issued to enforce this obligation, the provisions of paragraph (a) of this section do not apply.

Neither the statute nor the regulation authorizes the Secretary to engage in the cross recovery she has proposed in the present case. We therefore agree with plaintiff that the Secretary should be in no different status than a private creditor, despite the Secretary’s attempt to place herself in a preferential position.

To support her current motion, the Secretary has relied on several cases, the most significant of which appears to be McDaniels v. Heckler, 732 F.2d 150 (4th Cir.1984), affirming 571 F.Supp. 880 (D.Md.1983). The district eourt in McDaniels recognized that there was no explicit authority granted by Congress to the Secretary to engage in cross-program recovery. Nevertheless the court concluded that notwithstanding provisions of her regulations that the Secretary cited as authority for such practices, the Secretary had “inherent power to seek voluntary cross-program recovery.” 571 F.Supp. at 886. The treatment of this issue in the opinion of the United States Court of Appeals for the Fourth Circuit is cursory, and neither the appellate nor the district court discussion reaches the level of careful, thoughtful analysis found in Ellender.

Also of concern to us, although not dis-positive of the present matter, is the conclusion of the district eourt in McDaniels that the notice utilized was inadequate. As that court stated,

[WJhere the program is touted as one which is totally voluntary, notice must, at a minimum, make it clear to the recipient that the decision to repay is voluntary and that no legal process or judicial action will result from refusal to repay. Furthermore, because many of the recipients of these notices are unsophisticated, the Secretary is charged with the duty of making the notice one that is clear and specific. See Memphis Light, Gas & Water Div. v. Craft, 436 U.S. 1, 15, 98 S.Ct. 1554, 1563, 56 L.Ed.2d 30 (1978)....

571 F.Supp. at 886-87. Although the proposed notice in the present matter is an improvement over the one utilized in McDaniels, we find nevertheless that clarification and rewording would be needed and that further delay would naturally result.

The briefs submitted in the present matter have accomplished nothing more than demonstrate that the courts are divided on the issue of cross-program recovery. Absent an express authorization of such recovery from Congress, however, we find that the Ellender case was correctly followed by this court in initially rejecting the Secretary’s proposal.

IV. Conclusion

In accordance with the foregoing discussion, we adhere to our prior position with regard to cross-program recovery. An appropriate accompanying order shall be filed denying the Secretary’s “motion for relief from judgment” and setting an implementation date for the Secretary’s procedures.

AND NOW, this 14th day of November, 1984, IT IS ORDERED that defendant Secretary’s motion for relief from judgment is DENIED and the Secretary shall implement the procedures addressed in our memorandum and order of July 2, 1984, on or before December 4, 1984.