author: RAYMOND J. BRODERICK, District Judge.

text:
    Eugene MURPHY et al. v. PHILADELPHIA HOUSING AUTHORITY et al.
    Civ. A. No. 83-4466.
    United States District Court, E.D. Pennsylvania.
    Jan. 8, 1985.
    Harold R. Berk, Philadelphia, Pa., for plaintiff.
    Arthur W. Lefco, Philadelphia, Pa., for defendant.
   MEMORANDUM

RAYMOND J. BRODERICK, District Judge.

This is a civil rights action brought pursuant to 42 U.S.C. § 1983 by elderly and handicapped residents of the Emlen Arms apartment development against the Philadelphia Housing Authority (PHA) and its Executive Director and Director of Operations. The Emlen Arms is a public housing development (limited to occupancy by elderly and handicapped persons) which is owned and operated by the PHA. The complaint alleged, inter alia, that the defendants had denied the plaintiffs their rights to free speech, assembly, and association under the First and Fourteenth Amendments to the Constitution by preventing persons who were not residents of Emlen Arms from attending meetings organized by tenants at Emlen Arms for the purpose of discussing housing problems. The plaintiffs’ verified complaint was filed on September 14, 1983, together with a motion for a preliminary injunction. The plaintiffs sought declaratory and injunctive relief in addition to damages, and sought to enjoin the PHA from prohibiting the plaintiffs from utilizing the community room at Emlen Arms to meet with other tenants and invited non-resident guests to discuss the tenants’ housing problems. The allegations in the plaintiffs’ verified complaint set forth the following sequence of events. On August 10, 1983, the plaintiffs informed the manager of Emlen Arms that they would hold a tenants’ meeting that evening to discuss housing problems at Emlen Arms. The manager informed the plaintiffs that the meeting could not take place and that if such meeting was attempted, the police would be summoned to prevent it. Nevertheless, on the evening of August 10 a group of tenants did meet in the community room of Emlen Arms. Shortly after the meeting commenced, four to six PHA police appeared at the meeting room (together with some officers of the Philadelphia Police Department). Lieutenant Anderson of the PHA police ordered the tenants to disperse immediately, which they did. On August 12, 1983, counsel for plaintiffs sent a letter to the General Counsel of PHA requesting assurance that the tenants could utilize the community room in the future. In a letter dated August 15, 1983 General Counsel of PHA wrote to plaintiff’s counsel and stated in pertinent part:

Mr. Murphy is allowed to meet with any of the other tenants in the Community Room at Emlen Arms whenever he chooses. I am informed that the objection to the August 10th meeting was that there were several people present who were not tenants. The normal procedure is that Mr. Murphy set up the meeting through Ms. Barnes, President of the Tenant Council. If he cannot get the Tenant Council’s approval, for some reason, then Mr. Murphy may call Mr. John Tatum at (215) 561-7946.
At no time will Mr. Murphy be denied a meeting with other tenants of Emlen Arms.

(emphasis in original).

Plaintiff Eugene Murphy contacted Ms. Barnes to set up another meeting at Emlen Arms but she refused to acknowledge his request. Mr. Murphy’s calls to the office of John Tatum, advising him of plaintiffs’ desire to meet in the Emlen Arms community room on August 30, 1983, were not returned. On August 30, 1983 the manager of Emlen Arms informed Mr. Murphy that the plaintiffs could not meet in the community room. Nevertheless, the plaintiffs did meet in the community room that evening. Lieutenant Anderson of the PHA initially stopped the plaintiffs from meeting, but after examining a copy of the August 15, 1983 letter from PHA’s General Counsel he permitted the meeting to continue. However, Lieutenant Anderson refused to permit a non-resident of Emlen Arms, Mark Paulmire of the Friends Weekend Work Camp Program, from attending the meeting. Mr. Paulmire, who operates an educational program for persons working with elderly and handicapped persons, had been invited by the plaintiffs to provide assistance to the tenants at their meeting. Lieutenant Anderson stated that he was prohibited from permitting any persons other than Emlen Arms tenants to meet in the community room, and he prohibited Mr. Paulmire from attending the meeting.

After the plaintiffs’ complaint and motion for a preliminary injunction was filed, the parties entered into negotiations with respect to the plaintiffs’ claim for injunctive relief. After considerable negotiation, and following several conferences with this Court, the parties executed a Stipulation which was approved by this Court on March 5, 1984. The Stipulation provides that the defendants shall permit the plaintiffs to hold meetings of tenants in the Emlen Arms upon twenty-four hours notice where non-residents are expected to attend, and that the plaintiffs must notify the manager of Emlen Arms of the designated time of the meeting together with the identity of all non-residents expected to attend. In entering the Stipulation the defendants did not concede liability, and the issues of plaintiffs’ damages, the defendants’ counterclaim (for back rent), and the plaintiffs’ right to attorneys’ fees were expressly reserved.

Presently before the Court is the motion of Harold R. Berk, Esq. for an award of an attorney’s fee, filed pursuant to the Civil Rights Attorney’s Fees Awards Act of 1976, 42 U.S.C. § 1988. Mr. Berk seeks a total of $1740 for his representation of the plaintiffs in connection with their claim for injunctive relief. Although the plaintiffs’ claim for damages is pending, the plaintiffs have advised Mr. Berk that they no longer desire his representation and it appears they now intend to proceed pro se in this matter. Since it is clear that a “prevailing party” can be awarded statutory attorney’s fees in a civil rights action prior to the conclusion of the litigation, N.A.A.C.P. v. Wilmington Medical Center, Inc., et al., 689 F.2d 1161, 1165 (3d Cir.1983), Mr. Berk’s fee petition is properly before this Court. The defendants do not dispute the reasonableness or the amount of the fee requested by Mr. Berk. However, they do contend that any award of fees would be inappropriate in this case because the plaintiffs are not “prevailing parties” (with respect to their claims for injunctive relief) within the meaning of the statute. For the reasons that follow this Court has determined that the plaintiffs are “prevailing parties” with respect to their claims for injunctive relief, and that Mr. Berk is entitled to an attorney’s fee in the amount requested.

Section 1988, 42 U.S.C. provides that in civil rights actions “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 Supreme Court has stated that the standard for determining whether a plaintiff is a prevailing party under § 1988 is a “generous formulation” which is met by plaintiffs who succeed in achieving “some of the benefits the parties sought in bringing suit” and who have “acquired the primary relief sought.” Hensley v. Eckerhart, 461 U.S. 424, 433 & n. 8, 103 S.Ct. 1933, 1939 & n. 8, 76 L.Ed.2d 40 (1983) (citations omitted). In order to be considered a prevailing party within the meaning of § 1988 a plaintiff need not obtain a formal judgment in his favor:

[t]he fact that respondent prevailed through a settlement rather than through litigation does not weaken her claim to fees. Nothing in the language of § 1988 conditions the District Court’s power to award fees on full litigation of the issues or on a judicial determination that the plaintiffs’ rights have been violated. Moreover, the Senate Report expressly stated that “for purposes of the award of counsel fees, parties may be considered to have prevailed when they vindicate rights, through a consent judgment or without formally obtaining relief.”

Maher v. Gagne, 448 U.S. 122, 131, 100 S.Ct. 2570, 2575, 65 L.Ed.2d 653 (1980) (citations omitted).

In assessing whether a plaintiff is a prevailing party in a civil rights action, the Third Circuit has directed that courts should not “give conclusive weight to the form of the judgment” but rather should “look to the substance of the litigation’s outcome.” Sullivan v. Commonwealth of Pennsylvania Department of Labor, et al., 663 F.2d 443, 448 (3d Cir.1981), quoting Ross v. Horn, 598 F.2d 1312, 1322 (3d Cir.1979), cert. denied 448 U.S. 906, 100 S.Ct. 3048, 65 L.Ed.2d 1136 (1980). The Third Circuit has declared that “[w]hether [a plaintiff] is entitled to a fees award should be determined by whether her case acted as a ‘catalyst’ for the vindication of her constitutional rights.” Sullivan, 663 F.2d at 448-49, quoting Staten v. Housing Authority, 638 F.2d 599, 605 (3d Cir.1980). In summarizing its decisions on this issue the Court of Appeals has stated that “[i]t is settled law in this circuit that as long as the plaintiff achieves some of the benefits sought in initiating a lawsuit, even though the plaintiff does not ultimately succeed in securing a favorable judgment, the plaintiff can be considered the prevailing party for the purposes of a fee award.” N.A.A.C.P. v. Wilmington Medical Center, Inc., 689 F.2d at 1166. Furthermore, “it is established law that plaintiffs must satisfy only two requirements in order to be considered the prevailing party for purposes of a fee award: the plaintiffs must essentially succeed in obtaining some relief on the merits of their claim, and the circumstances under which the plaintiffs obtain that relief must be causally linked to the prosecution of the complaint.” Id. at 1171, citing Sullivan, 663 F.2d at 452. Thus “[t]he critical factor in determining causation is ... whether the relief was implemented as a result of plaintiff’s lawsuit.” N.A.A.C.P. v. Wilmington Medical Center, Inc., 689 F.2d at 161 (emphasis in original). Furthermore, the plaintiffs’ lawsuit need not be the sole cause of the relief obtained. The Third Circuit has advised that

[w]here there is more than one cause, the plaintiff is a prevailing party if the action was a material factor in bringing about the defendant’s [cessation of arguably illegal conduct]. To hold otherwise would be inconsistent with the broad remedial purpose of § 1988 because in many cases causation will hinge on the defendant’s motivation. To require some stricter standard of causation would mean that the defendant could hide his true motivation behind what seems a plausible alternate justification.

Morrison v. Ayoob, 627 F.2d 669, 671 (3d Cir.1980) (per curiam), cert. denied 449 U.S. 1102, 101 S.Ct. 898, 66 L.Ed.2d 828 (1981) (emphasis added). Finally, in addressing the issue of whether or not the relief obtained is causally linked to the institution of the plaintiffs’ lawsuit, the Third Circuit has held that the courts are “bound to apply the most expansive definition of causation.” N.A.A.C.P. v. Wilmington Medical Center, Inc., 689 F.2d at 1169.

The defendants contend in their brief opposing the fee petition that the plaintiffs are not prevailing parties because they “obtained nothing more by the Stipulation than that which they possessed prior to the lawsuit.” Defendants’ Memorandum at 6. Although the defendants concede that the Stipulation was reached only after “considerable correspondence” between the parties’ counsel, the defendants contend that the procedures embodied in the Stipulation governing the use of the Emlen Arms community room for meetings with non-resident guests were existing in some form prior to the filing of the complaint. Although defendants’ counsel now asserts that the defendants’ decision to institute the policies now embodied in the Stipulation (with respect to the inclusion of non-resident guests at tenant meetings) was reached “prior to and discrete from any action by the plaintiffs”, nowhere is there any indication that these procedures were formally adopted, set forth in writing, or published or communicated in any way to the plaintiffs. The letter of defendants’ General Counsel dated August 15, 1983 appears only to suggest a procedure by which the plaintiffs could obtain approval for meetings “with other tenants” (emphasis in original).

The defendants have filed no affidavits in support of their contention that the plaintiffs are not prevailing parties with respect to the relief they obtained in the Stipulation. The uncontroverted allegations of plaintiffs verified complaint establish that the plaintiffs were barred by the defendants from meeting with other tenants on August 10, 1983, and that although counsel for PHA later advised plaintiffs’ counsel that the plaintiffs would not be prohibited from meeting with other tenants if they followed applicable procedures, the PHA police barred the plaintiffs’ invited non-resident guest from attending the tenants’ meeting at Emlen Arms on August 30, 1983. In their complaint the plaintiffs sought to enjoin the defendants from excluding non-resident guests at Emlen Arms tenants meetings. The Stipulation executed by the parties establishes a procedure which does permit non-resident guests to attend tenant-sponsored meetings at Emlen Arms.

In Morrison v. Ayoob, 627 F.2d 669 (3d Cir.1980) (per curiam), cert. denied 449 U.S. 1102, 101 S.Ct. 898, 66 L.Ed.2d 828 (1981), the plaintiffs’ complaint that certain state district justices were violating criminal defendants’ right to counsel was mooted when the justices stopped the allegedly unlawful conduct after the suit was filed. In opposing the plaintiffs’ motion for attorneys’ fees pursuant to § 1988 the defendants contended that the cause of their cessation of the complained-of conduct was not the filing of the suit. The district court determined that the plaintiffs were prevailing parties within the meaning of § 1988 because they had succeeded in obtaining the relief which they sought. In affirming the district court’s “prevailing party” determination the Third Circuit, as noted above, held that where there may be more than one cause of the relief received the plaintiffs are entitled to fees “if the action was a material factor in bringing about the defendant’s action.” 627 F.2d at 671. The Morrison court noted that although the defendants were aware of the plaintiffs’ complaints prior to the filing of the lawsuit, they did not take corrective action until after the suit was filed and counsel for both sides had conferred. The court observed that “[t]his sequence of events strongly suggests that the action was a material factor in bringing about the defendants’ change of conduct.” 627 F.2d at 672.

In the present case the plaintiffs’ nonresident guest was barred by the defendants from attending tenant meetings prior to the filing of the suit, and it was not until the action was filed and counsel for the parties conferred that the defendants agreed to a formal, written procedure which permits non-resident guests to attend tenant meetings. Here, as in Morrison, the “sequence of events” clearly indicates that the filing of the action was “a material factor in bringing about the defendants’ change of conduct”, and this Court finds that the plaintiffs are “prevailing parties” (with respect to the injunctive relief which they sought) within the meaning of 42 U.S.C. § 1988.

As noted above, the defendants do not dispute the reasonableness or the amount of the requested fee. The initial estimate or “lodestar” of a reasonable attorney’s fee is calculated by multiplying the number of hours reasonably expended on the litigation times a reasonable hourly rate. Blum v. Stenson, — U.S. -, -, 104 S.Ct. 1541, 1543-44, 79 L.Ed.2d 891 (1984). Reasonable fees under § 1988 are to be calculated according to the prevailing market rates in the relevant community, and the determination of a reasonable hourly rate should be based upon the rate “prevailing in the community for similar services by lawyers of reasonably comparable skill, experience, and reputation.” Id. at — U.S. - n. 11, 104 S.Ct. at 1547 n. 11. Mr. Berk’s petition, accompanied by the appropriate supporting affidavits, requests a lodestar of $1740 based upon 17.4 hours of work multiplied by his customary rate of $100 per hour. This Court is well aware of Mr. Berk’s considerable experience in the area of civil rights litigation, and has had occasion to observe the high quality of his representation of the plaintiffs in Resident Advisory Board v. Rizzo, 425 F.Supp. 987 (E.D.Pa.1976). The Court finds that his requested rate of $100 per hour is reasonable, and the Court further finds that the 17.4 hours claimed by Mr. Berk were reasonably expended on the litigation. Mr. Berk has not requested any “multiplier” or upward adjustment of the lodestar figure of $1740.

For all the reasons set forth above the Court has determined that the plaintiffs are “prevailing parties” with respect to their claim for injunctive relief in this action, and that pursuant to 42 U.S.C. § 1988 Harold Berk, Esq. is entitled to an attorney’s fee in the amount of $1740.


source: Caselaw Access Project

author: DAVID L. RUSSELL, District Judge.

license: Public Domain

text:
    Andy JANKO, an individual and Andy’s Marine Inc., an Oklahoma corporation, Plaintiffs, v. OUTBOARD MARINE CORPORATION, a Delaware corporation, Defendant.
    No. CIV 84-2250-R.
    United States District Court, W.D. Oklahoma.
    Jan. 15, 1985.
    Allan DeVore, Evans & DeVore, Oklahoma City, Okl., for plaintiffs.
    Peter B. Bradford and Clifford A. Jones, Oklahoma, City, Okl., for defendant.
   ORDER

DAVID L. RUSSELL, District Judge.

The Defendant has filed two dispositive motions: a Motion to Dismiss for Lack of Venue or in the Alternative to Transfer, and a Motion to Dismiss for Lack of Subject Matter Jurisdiction and Failure to State a Claim. As the Court is persuaded to transfer this action, only that motion will be addressed by this Order.

In order to sell the products of the Defendant, the Plaintiff Corporation entered into a Dealer Agreement with the Defendant, which agreement sets forth the rights and liabilities of the parties. The contractual provision giving rise to the transfer motion reads as follows:

Any cause of action, claim, suit or demand by Dealer, allegedly arising from or related to the terms of this Agreement or the relationship of the parties, shall be brought in the Federal District Court for the Northern District of Illinois, in Chicago, Illinois, or in the Circuit Court for the Nineteenth Judicial Circuit of the Court of the State of Illinois, in Lake County, Illinois. BOTH PARTIES HERETO IRREVOCABLY ADMIT THEMSELVES TO, AND CONSENT TO, THE JURISDICTION OF EITHER OR BOTH OF SAID COURTS. The provisions of this paragraph shall survive the termination of this Agreement.
(emphasis in original)

Venue selection provisions should be enforced unless a party can “clearly show that enforcement would be unreasonable and unjust, or that the clause was invalid for such reasons as fraud or overreaching.” The Bremen v. Zapata OffShore Co., 407 U.S. 1, 15, 92 S.Ct. 1907, 1916, 32 L.Ed.2d 513 (1972); See also, Bense v. Interstate Battery System, 683 F.2d 718 (2nd Cir.1982); Taylor v. Titan Midwest Const. Corp., 474 F.Supp. 145 (N.D.Tex.1979).

The Plaintiffs argue that even though the Defendant is headquartered in the forum selected by the contract, it would be burdensome for the Plaintiffs to litigate there. However, the Supreme Court has said that the party attempting to show unreasonableness in litigating under a selection clause “should bear a heavy burden of proof.” The Bremen, 407 U.S. at 17, 92 S.Ct. at 1917. To demonstrate unreasonableness, it must be shown that a “trial in the contractual forum will be so gravely difficult and inconvenient that [the party opposing transfer] will for all practical purposes be deprived of his day in court.” Id. at 18, 92 S.Ct. at 1917. Certainly, this is the most convenient forum for the Plaintiffs, and, indeed, they have shown they will be considerably inconvenienced if the transfer is granted. However, the Court is not persuaded it would be unreasonable or unjust for the Plaintiffs to pursue this action in Illinois. Central Contracting Co. v. Maryland Casualty Co., 367 F.2d 341 (3rd Cir.1966); Full-Sight Contact Lens v. Soft Lenses, Inc., 466 F.Supp. 71 (S.D.N.Y.1978); Bense and Taylor, supra.

The Plaintiffs do not suggest the inclusion of the clause was the result of fraud practiced by the Defendant, but do suggest that the clause is present as a result of the unequal bargaining position of the parties. They argue that the clause is contained in a “boiler-plate” contract, which was obviously not freely bargained for by the parties. This Court has previously stated that a form contract does not automatically amount to the overreaching proscribed by The Bremen. Furry v. First National Monetary Corp., 602 F.Supp. 6 (W.D.Okla.1984); Cf. Bense, supra. There is no indication, or allegation, that unfair advantage was taken by the Defendant. In this regard, the Court notes that the Corporate Plaintiff was an established and experienced dealer in marine products prior to entering into a Deal Agreement with the Defendant, and the subject clause was a noticeable part of the contract. Consequently, the Court finds this argument unpersuasive.

The Plaintiff contends that this forum is better qualified to adjudicate Oklahoma claims than is the federal district court in Illinois. As these claims arise out of the relationship between the parties, they are also subject to the selection clause. This Court has stated that it is fully capable of applying another forum’s law when necessary, and we see no reason why the federal courts of Illinois would be less capable. Allison, Inc. v. Minikin Storage of Omaha, Inc., 436 F.Supp. 444, 446 (W.D.Okla.1977); Streed v. The Pacesetter Corp., Civ. 83-1867 (W.D.Okla. Feb. 1, 1984).

In conclusion, the Court finds the venue selection clause is not unreasonable and unjust, or invalid due to fraud or overreaching. Therefore, under 28 U.S.C. § 1406(a), the Court has the authority to transfer this action to the Northern District of Illinois or to dismiss for improper venue under Rule 12(b)(3), Fed.R.Civ.P.

This Court finds the interests of justice would be best served by a transfer rather than a dismissal and hereby orders this action transferred to the United States District Court for the Northern District of Illinois.


author: CALEB M. WRIGHT, Senior District Judge.

text:
    Lewis B. and Annamae HARRINGTON, Plaintiffs, v. UNITED STATES of America, Defendant.
    Civ. A. No. 83-859 CMW.
    United States District Court, D. Delaware.
    Jan. 17, 1985.

      Robert E. Schlusser, of Schlusser & Reiver, Wilmington, Del., for plaintiffs.
    Joseph J. Farnan, Jr., U.S. Atty., and Richard G. Andrews, Asst. U.S. Atty., Wilmington, Del., Robert L. Gordon, Tax Atty., Tax Div., U.S. Dept. of Justice, Washington, D.C., for defendant.
   MEMORANDUM OPINION

CALEB M. WRIGHT, Senior District Judge.

This is a suit for the refund of individual income taxes paid by the plaintiffs for their 1980 taxable year. The amounts for which a refund is sought were paid on November 29, 1982, and the plaintiffs filed a timely claim for a refund pursuant to 26 U.S.C. § 6511(a). Jurisdiction is conferred upon this Court by 28 U.S.C. § 1346(a)(1).

The plaintiffs owned 2.5% of the stock in CAMB Enterprises, Inc. (“CAMB”), a Delaware corporation formed on February 29, 1980, for the purpose of owning and operating a restaurant in Dover, Delaware under a franchise from H.A. Winston and Company. CAMB filed a valid and timely election with the Internal Revenue Service (the “IRS”) to have its taxable income or loss for its taxable year ended October 31, 1980 passed through to its shareholders pursuant to the then provisions of Subchapter S of the Internal Revenue Code of 1954 (the “I.R.C.”), 26 U.S.C. § 1371 et seq. CAMB reported a loss of $62,026 for its 1980 taxable year, and the plaintiffs claimed a deduction of $1,675.00 as their pro rata share of this loss. The IRS denied the deduction and assessed a deficiency of $528.00. On June 7, 1983, the plaintiffs filed a claim for refund of the $528.00 in tax plus $81.18 in interest paid thereon, and the IRS has taken no action on the claim.

I.

Under I.R.C. § 1374, a shareholder of an electing small business corporation may deduct from his gross income his pro rata share of the corporation’s net operating losses. However, under § 1374(c)(2) this deduction may not exceed the total of the shareholder’s adjusted basis for his stock in the corporation plus the adjusted basis of any indebtedness of the corporation to the shareholder. The adjusted basis of Harrington’s stock in CAMB at the end of his 1980 taxable year was $2.50. Harrington claims that his pro rata share of CAMB’s 1980 indebtedness to its shareholders was $5,000.00. The characterization of the corporation’s indebtedness constitutes the principal issue in this case.

On August 14, 1980, Harrington and the four other shareholders of CAMB executed a promissory note for $200,000 to establish a line of credit with the Delaware Trust Company. The proceeds of the note were to be used to purchase equipment for the restaurant operated by CAMB. According to the testimony at trial, which the Court has no reason to doubt, CAMB Enterprises, Inc., was not a signatory of the original note but was put on later at the bank’s insistence to enable the bank to get a lien on the corporation’s equipment. The bank also later insisted that the five shareholders’ wives be brought in on the note, and this later note, signed by CAMB, the five shareholders and their wives as comakers, was backdated to August 14, 1980, since this was the date from which interest would run.

Harrington contends that the Delaware Trust Company loaned the $200,000 to the individual shareholders and that they, in turn, reloaned the money to CAMB. Under this theory, Harrington’s adjusted basis in his CAMB stock plus his adjusted basis in CAMB’s debt to him was $5,002.50 at the end of his 1980 taxable year, so that Harrington would be entitled to deduct up to that amount of CAMB’s 1980 net operating losses from his gross income for 1980. The government maintains, on the other hand, that, however the rights and obligations of the shareholders and their wives arising from the $200,000 promissory note may be characterized, the note represents a loan from the bank to CAMB, so that there could have been no reloaning of the money from the shareholders to the corporation. On the government’s theory, there was no indebtedness from the corporation to Harrington, and Harrington could deduct from his gross income only that portion of CAMB’s net operating losses which did not exceed the adjusted basis of his stock in CAMB, or $2.50.

A second issue in the case concerns the amount of CAMB’s net operating losses during its 1980 taxable year. In computing its losses for 1980, CAMB included $17,-698.00 of expenses incurred in connection with the opening of the restaurant. Before the restaurant opened to the public, its employees were trained by personnel from the franchisor who were sent to the restaurant for that purpose. During the training period, from October 4, 1980 to October 12, 1980, the restaurant was not open to the public but served free lunches to residents of the Dover senior citizens centers for advertising purposes and to avoid wasting the food. On October 11, 1980, CAMB held a party for several hundred people from the Dover business community and government offices. When the restaurant opened on October 13, 1980, CAMB’s employees were unable to handle the volume of business, and CAMB obtained additional trained help from the H.A. Winston Company. The $17,698 of deductions claimed by CAMB includes amounts paid to the H.A. Winston Company for training CAMB’s employees, the cost of food and liquor given away to the senior citizens and during the opening party and the wages paid after opening to the additional help furnished by the H.A. Winston Company.

The government takes the position that none of these expenses is deductible as an ordinary and necessary business expense under I.R.C. § 162(a), because they are all start-up expenses. Under I.R.C. § 195, start-up expenses may be amortized over a period of not less than five years, if the taxpayer makes a valid election prior to the date of the business’s first income tax return. The government argues that, since CAMB did not make the required election, it cannot deduct any portion of these expenses. Alternatively, the government maintains that these expenses are not deductible under I.R.C. § 162(a) because CAMB was not engaged in a trade or business at the time they were incurred, and because the expenses were used to acquire an asset that yielded benefits to the corporation after the close of its taxable year on October 31, 1980.

Because the adjusted basis of Harrington’s CAMB stock is $2.50, no portion of the disputed $17,698 of expenses will be deductible by him unless the Delaware Trust Company loan created an indebtedness from the corporation to Harrington. Accordingly, if the Court finds that there was no indebtedness running from CAMB to Harrington, it need not consider the deductibility of the expenses incurred in connection with the opening of the restaurant.

II.

The government urges that the loans from the Delaware Trust Company must be deemed to have been made to CAMB as a matter of law and, thus, that there was no reloaning of the proceeds from the shareholders to the corporation. The government relies for its position on Frankel v. Commissioner, 61 T.C. 343 (1973), aff’d., 506 F.2d 1051 (3d Cir.1974). Frankel involved a loan from a partnership to a Sub-chapter S corporation in which the stock was owned in the same proportions as the capital interests in the partnership. The Tax Court held that indebtedness running from the corporation to the partnership was not an indebtedness of the corporation to its shareholders within the meaning of I.R.C. § 1374 and, consequently, that the shareholders could not use it to increase their individual adjusted bases in any indebtedness of the corporation to them. The Tax Court noted that no form of “indirect borrowing” is sufficient to give rise to an indebtedness from a Subehapter S corporation to its shareholders unless or until the shareholders pay part or all of the obligation, id. at 347, citing Raynor v. Commissioner, 50 T.C. 762 (1968).

In Raynor the taxpayer owned stock in three Subchapter S corporations and also made various loans to the corporations along with the other shareholders. In addition to these loans from shareholders, the corporations received loans from third parties that were co-signed or guaranteed by the shareholders, and the shareholders executed notes to one of these third parties as additional security for the corporation’s debt. With respect to these latter loans, the Tax Court stated:

[T]he fact that shareholders may be primarily liable on indebtedness of a corporation to a third party does not mean that this indebtedness is “indebtedness of the corporation to the shareholder” within the meaning of 1374(c)(2)(B). No form of indirect borrowing, be it guaranty, surety, accommodation, comaking or otherwise, gives rise to indebtedness from the corporation to the shareholders until and unless the shareholders pay part or all of the obligation.

50 T.C. 762, 770-71 (1968), citing Borg v. Commissioner, 50 T.C. 257 (1968). Numerous later cases have followed the rule of Raynor and Borg. See, e.g., Brown v. Commissioner, 706 F.2d 755 (6th Cir.1983); Underwood v. Commissioner, 535 F.2d 309 (5th Cir.1976); Wheat v. United States, 353 F.Supp. 720 (S.D.Tex.1973); Silverstein v. United States, 349 F.Supp. 527 (E.D.La.1972); Neal v. United States, 313 F.Supp. 393 (C.D.Cal.1970); Blackman v. Commissioner, 41 T.C.M. 1512 (1981); Williams v. Commissioner, 41 T.C.M. 844 (1981).

The government argues that Raynor, et al. is controlling in this case, and that, because Harrington himself made no repayments on the Delaware Trust Company note during CAMB’s 1980 taxable year, there was no indebtedness from the corporation to Harrington during the latter’s taxable year. This result is indeed compelled if the case is one of “indirect borrowing;” that is, if the note represents a loan from the bank to CAMB as the principal debtor, with Harrington and the other shareholders acting as sureties or accommodation parties. Harrington, however, maintains that the note does not represent a loan from the bank to the corporation guaranteed by the shareholders but a loan from the bank to the shareholders guaranteed by the corporation. Harrington argues correctly that the roles of the bank and the shareholders as signatories of the note are questions of fact. The rule of Raynor and the other indirect borrowing cases applies only after it is first determined that the situation is one of indirect borrowing. In all of these cases, the courts refused to find an indebtedness from the corporation to the shareholder where the shareholder had acted as a guarantor, surety, co-maker or accommodation party on a loan from a third party to the corporation, unless the shareholder had actually made repayments on the loan. Thus, the Court must first determine whether the note in question represents a loan to CAMB as the principal debtor, or whether CAMB merely acted as an accommodation party on a loan to the individual shareholders.

III.

An accommodation party to a promissory note is “one who signs the instrument in any capacity for the purpose of lending his name to another party to it.” 6 Del.C. § 3-415. Thus, a party who signed a note as a surety would be an accommodation party within the meaning of the Delaware Uniform Commercial Code, while one who signed in the capacity of a principal debtor would not. The difference between the two kinds of signatories is not in the relation of the co-signers to the creditor but in their relative rights and obligations among themselves. Those who signed a note as co-makers, whether their status be that of surety or principal debtor, are jointly and severally liable to the creditor to pay the entire amount of the note. 6 Del.C. § 3-118(e). The payee can, at his option, sue a surety for the entire amount without first attempting to recover from a principal debtor. The surety, however, will have a right of indemnification against a principal debtor for the entire amount paid. If, on the other hand, the payee recovers the entire amount of the note against a co-maker who is not an accommodation maker but who signed in the capacity of a principal debtor, then this co-maker will have a right of contribution from the other co-makers, but not of complete indemnification. See White & Summers, Handbook of the Law under the Uniform Commercial Code § 13-7 (2d ed. 1980).

Whether a signatory of a note is an accommodation party is a question of fact to be determined by the intention of the parties as reflected in the language of the instrument and the surrounding circumstances. See Campo v. Maloney, 122 N.H. 162, 442 A.2d 997 (1982); Lowe v. Peeler, 51 N.C.App. 557, 277 S.E.2d 102 (1981); Philadelphia Bond & Mortg. Co. v. Highland Crest Homes, Inc., 221 Pa.Super. 89, 288 A.2d 916 (1972). In Campo v. Maloney the court considered the following factors to be relevant in upholding the finding of a special master that the defendant signed notes as a principal maker and not as an accommodation party: none of the notes identified the defendant as an accommodation party; the notes stated that the signatories were liable “jointly and severally as principals;” the individual signatories were controlling stockholders of a corporation that was on the note, and each would derive substantial personal benefit from application of the loan proceeds; and the major shareholder of the two debtor corporations knew that they were not officially incorporated at the time of the execution of the instruments.

In the instant case, there is nothing on the face of the instrument to indicate the relative status of the signatories. Both the corporation and the individual shareholders and their wives signed as makers, but there is no explicit distinction between principals and sureties on the face of the note itself. When the status of the parties is unclear from the face of the instrument, courts have given great weight to whether a signatory was a principal beneficiary of the proceeds of the note. See, e.g., Campo v. Maloney, supra; Riegler v. Riegler, 244 Ark. 483, 426 S.W.2d 789 (1968); Stockwell v. Bloomfield State Bank, 174 Ind.App. 314, 367 N.E.2d 42 (1977); White v. Household Finance Corp., 158 Ind.App. 394, 302 N.E.2d 828 (1973); Bank of America, N.T.S.A. v. Super. Court of San Diego Co., 4 Cal.App.3d 435, 84 Cal.Rptr. 421 (1970); MacArthur v. Cannon, 4 Conn.Cir. 208, 229 A.2d 372 (1967). In Riegler v. Riegler, for example, a husband and wife had both signed a note payable to a bank prior to their divorce. The bank secured judgment against both parties, but the wife claimed her former husband was obligated to pay the entire amount because she was merely an accommodation party. The court held that, because the wife had received benefits from the proceeds of the note, she was principally liable along with her former husband. Similarly, in MacArthur v. Cannon, supra, and plaintiff and the defendant were the sole shareholders and officers of a corporation, and both signed a note as co-makers. The proceeds of the note were used to pay corporate debts, and the court held that, where the defendant received a benefit from the proceeds of the note in this way, the lower court was entitled to infer that the defendant was not an accommodation party but a principal debtor, so that the plaintiff, who had paid the note, had a right to contribution from him. On the other hand, in Stockwell v. Bloomfield State Bank, supra, the appellant co-signed a promissory note with one Donald Carty to enable Carty to get a loan. The proceeds of the note went to Carty, who used part of them to lease real estate from Stockwell. The court held that Stockwell was an accommodation party because he had lent his name to the note so that Carty could obtain the loan and had received only an indirect benefit from the proceeds. And in White v. Household Finance Corp., supra, the court held that the plaintiff acted as an accommodation maker in signing his nephew’s note to enable the nephew to obtain funds for a new car.

In the present case, the parties agree that CAMB received the entire benefit from the proceeds of the note; indeed, CAMB itself made most of the draws. The exceptions were four draws totaling $52,-000 made by shareholder James McGinnis, which were deposited in the account of Priscilla Block Associates (“Priscilla Block”), a general partnership in which the five CAMB shareholders owned interests proportionate to their interests in CAMB. Priscilla Block used this $52,000 to pay creditors of CAMB. These facts, along with the absence of any evidence on the face of the note indicating that CAMB signed as an accommodation party, suggest that CAMB was not an accommodation party but a principal debtor along with the individual shareholders and their wives.

Harrington argues, however, that there are other circumstances surrounding the loan transaction that point to CAMB’s status as an accommodation maker, with the individual shareholders and their wives as the sole principal debtors on the note. For example, there was uncontradicted testimony that McGinnis had personally negotiated a loan from the Delaware Trust Company to be used in opening a restaurant before the corporation was formed. The evidence also shows that the original note did not contain CAMB’s signature, but that CAMB was put on after the original note was executed at the insistence of the Delaware Trust Company so that the bank could obtain a lien on equipment purchased with the proceeds of the loan. There was also testimony that any excess remaining of the $200,000 after the restaurant’s requirements had been met was available for the shareholders’ personal use and that the individual shareholders had made repayments on the loan after October 31, 1980.

The Court-finds this additional evidence inconclusive and unpersuasive. McGinnis and his partners may have originally intended to sign a note on which they alone would be principally liable, but they also decided, for their own good reasons, to conduct their enterprise in corporate form, and they agreed to the bank’s insistence that the corporation become a signatory of the note. It is the note in its final form that concerns us here and, while the intention of the parties controls on the issue of who is an accommodation maker, the Court cannot give controlling weight to testimony concerning earlier intentions that is contradicted by the later actions of the parties.

The testimony concerning the availability of excess proceeds for the personal use of the shareholders is unpersuasive, since the entire proceeds of the note were, in fact, used for the restaurant and were fully expended as of October 31, 1980. Statements by McGinnis and Norman Aerenson, another CAMB shareholder, that the individual shareholders had made all the repayments on the note after October 31, 1980 are unsupported by objective evidence of the dates and amounts of the repayments. More importantly, Harrington himself testified that he could not recall how much he had repaid on the note or when he had made repayments, and that he did not know whether he still owed anything on the note. In any case, even if Harrington did make some repayments after October 31, 1980, this would be consistent with the view that both Harrington and CAMB were principal debtors on the note.

The Court concludes that CAMB was not an accommodation party on the note to the Delaware Trust Company but a principal debtor along with the individual shareholders and their wives. Consequently, the rule of Raynor v. Commissioner, supra, and the other indirect borrowing cases applies, and Harrington cannot claim any indebtedness from the corporation to him unless he actually made repayments on or before October 31, 1980. Since it is undisputed that no such repayments were made, the Court finds that Harrington did not make any loans to CAMB on or before October 31, 1980. Accordingly, the adjusted basis of CAMB’s indebtedness to Harrington as of this date was zero, and Harrington was only entitled to deduct from his 1980 gross income that portion of CAMB’s net operating losses that did not exceed the adjusted basis of his CAMB stock, or $2.50.

Because the Court holds that the adjusted basis of the debt from CAMB to Harrington on October 31, 1980 was zero, it is unnecessary to confront the issues concerning the amount of CAMB’s net operating losses in 1980, since none of CAMB’s 1980 net operating losses in excess of $100 could provide a tax benefit to Harrington. Harrington’s demand for a tax refund is denied.

      . Sec. 1374(a). GENERAL RULE.
      A net operating loss of an electing small business corporation for any taxable year shall be allowed as a deduction from gross income of the shareholders of such corporation in the manner and to the extent set forth in this section.

      . (2) LIMITATION.
      A shareholder's portion of the net operating loss of an electing small business corporation for any taxable year shall not exceed the sum of—
      (A) the adjusted basis (determined without regard to any adjustment under section 1376 for the taxable year) of the shareholder’s stock in the electing small business corporation, determined as of the close of the taxable year of the corporation (or, in respect of stock sold or otherwise disposed of during such taxable year, as of the day before the day of such sale or other disposition), and
      (B) the adjusted basis (determined without regard to any adjustment under section 1376 for the taxable year) of any indebtedness of the corporation to the shareholder, determined as of the close of the taxable year of the corporation (or, if the shareholder is not a shareholder as of the close of such taxable year, as of the close of the last day in such taxable year on which the shareholder was a shareholder in the corporation).

      . Under I.R.C. § 1374(c)(2)(B), the indebtedness of the corporation to the shareholder is to be determined "as of the close of the taxable year of the corporation.” CAMB’s 1980 taxable year ended on October 31, 1980, while Harrington’s 1980 taxable year ended on December 31, 1980. Accordingly, under the rule of the indirect borrowing cases, there would be no indebtedness from CAMB to Harrington during Harrington's 1980 taxable year unless Harrington had made repayments on the note prior to October 31, 1980, and it is undisputed that no such repayments were made.

      . There was also a series of transaction between September 19, 1980 and September 26, 1980 in which McGinnis made draws on the note and deposited them in Priscilla Block's account. The partnership, in turn, transferred the money to CAMB and CAMB repaid the same amounts to the Delaware Trust Company. These transactions were without economic substance and evidently intended merely to create a record that would produce favorable tax consequences for CAMB’s shareholders. As such, the Court will ignore them.

      . For this reason, McGinnis’ testimony that some of the money from the note (he did not say how much) was disbursed before CAMB was put on the note is also inconclusive. The note admitted into evidence as plaintiff’s Exhibit A represents the final agreement of the parties for purposes of this proceeding.


author: NEWCOMER, District Judge.

text:
    The PHILADELPHIA NATIONAL BANK v. The DOW CHEMICAL COMPANY, Dow Chemical U.S.A., and Amspec, Inc., et al.
    Civ. A. No. 83-5408.
    United States District Court, E.D. Pennsylvania.
    Jan. 24, 1985.

      David Berger, Howard I. Langer, Berger & Montague, P.C., Philadelphia, Pa., for plaintiff Philadelphia National Bank Building.
    Bruce D. Lombardo, Elizabeth M. McKenna, Harvey, Pennington, Herting & Renneisen, Ltd., Philadelphia, Pa., for third-party defendants Ewing Cole Cherry Parsky and Tecton, Inc.
    Joseph G. Manta, William R. Hourican, Frumkin & Manta, Philadelphia, Pa., for defendants The Dow Chemical Company, Dow Chemical U.S.A., and Amspec, Inc.
    Sean P. Flynn, Waters, Gallagher & Trachtman, Norristown, Pa., for third-party defendant Keyston Wire and Iron Works, Inc.
    Edward Gerald Donnelly, Jr., Antoinette R. Stone, Fox, Rothschild, O’Brien & Frankel, Philadelphia, Pa., for third-party defendant E.L. Conwell and Company.
    J. Grant McCabe, III, Rawle & Henderson, Philadelphia, Pa., for third-party defendant Cornell and Company, Inc.
    R. Thomas McLaughlin, Kelly, Harrington, McLaughlin & Foster, Philadelphia, Pa., for third-party defendant McCloskey and Company, Inc.
   MEMORANDUM

NEWCOMER, District Judge.

PNB brought this action to recover for injuries allegedly brought about by the incorporation of Dow’s product, Sarabond, into the mortar used in the construction of PNB’s Plaza building. PNB contends Sarabond has caused corrosion of metals embedded in the mortar and brick panels of its building and cracking of the masonry on the exterior of the building. Recovery is sought of the costs of inspection and repair of the building, loss of its use, loss of customers, and loss of employee time. PNB also seeks punitive damages. Presently before me is Dow’s motion for summary judgment on all tort counts, which include negligence (Count III), strict liability (Count IV), misconduct (Count V), intentional tort (Count VI), and fraud (Count VII). Defendant also seeks summary judgment on plaintiff’s claim for punitive damages. For reasons discussed below, the motion will be denied.

Dow contends all of PNB’s counts alleging tort liability are defective inasmuch as the damages for which PNB seeks to recover constitute “economic loss.” The parties agree that under Pennsylvania law no negligence or strict liability may be imposed for mere economic loss. Pennsylvania Glass Sand v. Caterpillar Tractor Co., 652 F.2d 1165 (3rd Cir.1981). They differ, however, as to the applicability of this principal to the facts of this case.

Dow’s argument is essentially threefold. It first contends that each of the items of damages for which recovery is sought constitutes economic loss. Second, it argues that no injury to “other” property has occurred inasmuch as the Sarabond has become an integral and indivisible part of plaintiffs building. Finally, Dow contends that recovery in tort hinges upon a sudden and catastrophic loss as opposed to one resulting from gradual deterioration.

The leading case on the subject is Pennsylvania Glass Sand (hereinafter “PGS”). In PGS plaintiff purchased from defendant a front-end loader which functioned without incident for four years. Subsequently, while the machine was in operation, a fire broke out in the front portion. The operator escaped without injury, but in his haste he failed to turn off the motor, which in effect further fueled the fire. As a result the loader was severely damaged. Plaintiff sought to recover the amount spent on repair and replacement of the machine contending the machine was defective in that it had no fire suppression system. Defendant contended these items constituted mere economic loss which could be recovered, if at all, in a contract action.

The issue before the Third Circuit was whether injury to the defective product itself should be regarded as an economic loss recoverable only in a contract action. The Court noted that the items most frequently relegated to the realm of economic loss are decrease in value caused by a defect, cost of repair of replacement, and loss of profits—all items sought by PNB in this action. It nevertheless concluded plaintiffs injuries were cognizable in strict liability.

In reaching this conclusion the Court noted as follows:

The items for which damages are sought, such as repair costs, are not determinative. Rather, the line between tort and contract must be drawn by analyzing interrelated facts such as the nature of the defect, the type of risk, and the manner in which the injury arose.

652 F.2d at 1173. The Court thus sought to draw a line between contract actions in which the gravaman of plaintiffs complaint is that he failed to receive the quality of product he expected, and tort actions, the gist of which is that the plaintiff has been exposed, through a hazardous product, to an unreasonable risk of injury to his person or his property. Stated another way, the issue is whether a defect renders a product unsafe or whether it merely makes the product ineffective.

Dow’s first contention—that the items for which recovery is sought determine whether an injury may be designated “economic loss—” is plainly wrong. PGS clearly concluded that the Court must look behind the actual damages alleged to ascertain the nature of the defect and the type of risk it posed. In fact, one of the items for which recovery is sought here—repair and replacement—is precisely what PGS held plaintiff could recover in strict liability.

Defendant’s next two contentions are more difficult. Because they overlap I will discuss them together. Defendant asserts that under PGS plaintiff must establish actual injury to person or property and furthermore that the injury occurred in a sudden and calamitous manner. Plaintiff disputes that it must establish actual injury to persons or property, contending instead that if a defect presents an unreasonable risk of harm to persons or property then all damages occasioned by the defect are recoverable in tort. Plaintiff further argues that it has in fact created an issue of fact as to whether injury to property other than the defective product has, in fact, occurred. Finally, plaintiff denies that the injury must occur in a sudden and calamitous manner.

Language may be found in PGS to support the positions advanced by both sides. For example, the Court noted that, generally speaking, “defects of quality, evidenced by internal deterioration or breakdown, are assigned to the economic loss category, while the loss stemming from the defects that cause accidents of violence or collision with external objects is treated as physical injury.” 652 F.2d at 1169-1170. Whether PGS intended to require an actual calamitous injury as a prerequisite to tort recovery, however, is brought into question by the Court’s characterization of a products liability case as one in which the plaintiff “has been exposed, through a hazardous product, to an unreasonable risk of injury to his person or his property.” Id. at 1169 (emphasis added). In addition, the Court concluded plaintiffs case presented a tort claim because the alleged defect “constitutes a safety hazard that posed a serious risk of harm to people and property” despite the fact that no one was in fact injured. Id. at 1174 (emphasis added). The Court noted also that with some products an “accident” may not be clearly distinguishable from internal deterioration. Id. at 1171, n. 19.

A more recent Third Circuit case refined and applied PGS in the maritime context. East River Steamship Corp. v. Delaval Turbine, Inc., 752 F.2d 903 (3d Cir.1985). In Delaval plaintiff alleged that component parts of turbines installed in four of its ships were defective. Difficulties arose while one of the ships was near port. Interim repairs were made, but problems again arose during a storm at sea. Ultimately no persons or property, other than the turbine parts themselves, were damaged; however, plaintiff contended that because the difficulties endangered the ship and her crew during the storm the safety-related policies of strict liability were implicated. The defective parts were replaced in plaintiff’s other three ships prior to any dangerous encounters.

Relying on the three factors isolated in PGS—the nature of the defect, the manner in which it presents itself, and the type of risk inherent in the defect itself—the Court denied recovery in strict liability. Specifically, the Court found that the defect was qualitative, as opposed to safety-related, that it manifested itself by gradual internal deterioration, and that it posed an inherent risk of operation at a lower capacity as opposed to sudden injury to persons or property.

While the issue is a close one, I believe Pennsylvania courts would permit recovery in strict liability under the circumstances of this case. PNB has come forward with evidence that “other property” has in fact been injured—the brick panels and steel infrastructure of the building. Furthermore, it has presented evidence that a very real risk of injury to persons, by way of crumbling mortar and falling bricks, is present. Emergency repairs have been undertaken at the PNB building to prevent masonry from becoming dislodged, and numerous instances of crumbling masonry due to the incorporation of Sarabond into other buildings are cited.

Dow relies heavily upon Industrial Uniform Rental Company v. International Harvester, 317 Pa.Super. 65, 463 A.2d 1085 (1983). In Industrial Uniform the Court sustained a demurrer to a complaint which sought to recover in strict liability for the cost of repairing cracked frames in a number of trucks purchased from defendant. The court concluded that recovery in tort was inappropriate:

Extrapolating from the above-mentioned authority we formulate the following rule: In an action between commercial enterprises, where defective design, manufacture and sale of a product is alleged, where there is nothing in the record to indicate that the defect is a condition potentially dangerous to persons or to property, and where the purported defect results in progressive deterioration of the product itself, the buyer’s cause of action for its economic losses against the seller is in breach of warranty under the U.C.C. (emphasis added)

463 A.2d at 1093. Industrial Uniform, however, does not control the case before me inasmuch as PNB has come forward with uncontroverted evidence that its building—like several others containing Dow’s product—presents a very real hazard to people and that the Sarabond incorporated into the building’s mortar has caused serious damage to other property—the steel infrastructure.

Since the ruling in PGS at least two Pennsylvania courts of common pleas have concluded strict liability principles apply in situations highly similar to the one before me. School District of Lancaster v. ASARCO, June Term, 1982, No. 1414 (Phila. C.P. Dec. 6, 1983); Area Vocational Technical Board v. National Gypsum Co., June Term, 1982, No. 119 (Lancaster C.P. Sept. 7, 1983) (“Vo-Tech”). Both cases involve the use of asbestos products in the construction of schools, and both concluded that the risk of injury to persons and/or property implicated the safety concerns of strict liability as opposed to the expectation-bargain policies of contract law. In reaching this conclusion each court relied upon the fact that asbestos presents a real, unspeculative health hazard and that additional property had been damaged inasmuch as repair necessitated removal of more than the defective asbestos product alone. ASARCO, Slip op. at 6-7, Vo-Tech, Slip op. at 3. Vo-Tech specifically rejected the proposition that a sudden calamitous injury is a requirement of Pennsylvania strict liability law. ASARCO distinguished Industrial Uniform on the grounds stated above: unlike the cracked truck frames, defendant’s asbestos product presents a very real, unspeculative risk of injury to persons and/or property.

I conclude on the basis of the limited Pennsylvania authority before me that Pennsylvania would permit recovery in tort where an allegedly defective construction product causes injury to other components used in construction and creates a real, unspeculative risk of harm to passers-by on the street below. Under the circumstances here presented I believe that the safety-related policies behind tort law are implicated.

Dow’s remaining arguments can be readily dismissed. Dow first asserts that because no “product” or “chattel” was sold recovery in strict liability is barred, relying on Cox v. Shaffer, 223 Pa.Super. 429, 302 A.2d 456 allocatur denied, (1973). In Cox the court concluded that “a silo constructed in place on the employer’s land is not a sale of a ‘product.’ ” 302 A.2d at 457. Dow makes the rather metaphysical argument that because the Sarabond has now been incorporated into the structure of the Plaza Building the Sarabond is more akin to the silo than it is to a “product.” I reject this contention. Sarabond, in and of itself, is obviously a product and not real property or a permanent fixture upon real property. The fact that it is used in the construction industry does not change that fact.

Dow also contends strict liability is unavailable to plaintiff because the Sara-bond reached PNB in a condition substantially changed from that in which it was sold. To absolve the manufacturer, the alteration in its product must be one which could not be reasonably foreseen or expected. Merriweather v. E.W. Bliss Co., 636 F.2d 42, 45 (3d Cir.1980). At this stage Dow has presented no evidence that suggests the alterations plaintiff or its agents made to the Sarabond were anything other than the very alterations Dow anticipated would occur with a mortar additive. The issue of substantial, unforeseeable alteration will therefore be left for the jury’s determination.

Dow’s argument that punitive damages are not available in this action is predicated on dismissal of all tort counts. Because I have not dismissed any tort counts, this portion of the motion will also be denied.

      . Plaintiff named as defendants the Dow Chemical Company, Dow Chemical U.S.A., and Am-spec, Inc. For the sake of convenience all three defendants shall be collectively referred to as "Dow.”

        . Although Delaval raised the issue of the applicability of products liability principles in admiralty cases, the Court found no reason to apply rules other than those applied on land and relied heavily on PGS.

      . I am reluctant to rely solely on this contention because it could well lead to the application of strict liability to all construction cases.

      . Judge Troutman predicted Pennsylvania law would move in this direction in Pearl v. Allied Corp., 566 F.Supp. 400 (E.D.Pa.1983) (installation of urea-formaldehyde insulation in plaintiffs' homes presented risk of injury to persons and/or property, thereby permitting recovery in tort).

      . In addition, I believe a principled distinction can be drawn between PGS and Delaval, on the one hand, and the Pennsylvania asbestos cases on the other. In the asbestos cases, as in the case before me, the product itself is inherently dangerous to people. No outside intervention is required to make the defect hazardous. In PGS and Delaval the defect became hazardous only upon the occurrence of some unrelated danger such as a sudden fire or a storm. Of course, no distinction need be drawn. Delaval was primarily concerned with admiralty law and thus would not have searched Pennsylvania precedent for guidance, and as noted above, nothing in PGS would preclude the possibility of recovery under the circumstances presented here or in the asbestos cases.


author: WHITE, District Judge.

text:
    James F. PELOWSKI, et al., Plaintiff, v. UNITED STATES of America, Defendant.
    No. C82-1793.
    United States District Court, N.D. Ohio, E.D.
    Jan. 30, 1985.

      Joseph Picardini, Mentor, Ohio, for plaintiff.
    Mathew Yackshaw, Trial Atty., Tax Div., Dept. of Justice, Washington, D.C., for defendant.
   MEMORANDUM AND ORDER

WHITE, District Judge.

This action arises under the Internal Revenue Laws of the United States, the Court having jurisdiction under 28 U.S.C. §§ 1340 and 1346(a). The matter was tried before the Court and the Court having heard the testimony of witnesses and having examined the exhibits and briefs submitted by counsel, makes this memorandum and order which constitutes the Court’s findings of fact and conclusions of law.

The following facts were stipulated by the parties:

Plaintiffs filed a joint U.S. Individual Tax Return (Treasury Form 1040) for 1978. Plaintiffs paid the tax shown due on the return.

On their 1978 return, plaintiffs claimed, in pertinent part, deductions of $2,006 as employee business expenses and $270. as unreimbursed entertainment expenses. Plaintiffs failed to report on their 1978 return a grant received from Lake Erie College by James F. Pelowski in the amount of $10,000. Plaintiffs reported a $4,000 distribution received by Barbara Pelowski from the Testamentary Trust of Seabury S. Gould IV.

Plaintiffs’ 1978 return was examined by the Internal Revenue Service. As a result, a deficiency assessment of tax was made against the plaintiffs in the amount of $4,816 on September 7, 1981.

By two payments received October 5, 1981, and February 22, 1982, plaintiffs paid the deficiency assessment of tax.

On October 6, 1981, plaintiffs filed an Amended U.S. Individual Income Tax Return (Treasury Form 1040X) (claim for refund # 1) with the Internal Revenue Service claiming a refund of the tax paid in response to the deficiency assessment, as well as the tax attributable to the inclusion in gross income of $4,000 received by Barbara G. Pelowski in 1978 from the Testamentary Trust of Seabury S. Gould, IV.

By letter dated January 13, 1982, plaintiffs’ claim for refund # 1 was denied.

On January 13, 1983, plaintiffs filed an Amended U.S. Individual Income Tax Return (Treasury Form 1040X (Claim for refund # 2) with the Internal Revenue Service claiming a refund of the tax paid in response to the deficiency assessment, as well as the tax attributable to the inclusion in gross income of $4,000 received by Barbara Pelowski in 1978 from the Testamentary Trust of Seabury S. Gould, IV.

The Internal Revenue Service has failed to act upon plaintiffs’ claim for refund # 2.

During 1978 Michigan State University was an “educational organization” as described in 26 U.S.C. § 170(b)(l)(A)(ii) and an “educational institution” as defined by 26 C.F.R. § 1.117-3(b).

During 1978, James F. Pelowski was a “candidate for a degree” as defined by 26 C.F.R. § 1.117—3(c).

$10,000 GRANT

In 1978 James Pelowski received a $10,-000 grant from Lake Erie College. These payments were awarded after seven years of employment. Mr. Pelowski attended Michigan State University (MSU) with this grant. During the period of time he was a student at MSU he took a leave of absence from Lake Erie College. He had no obligation to return to Lake Erie College after he completed his Ph.D. work. During the time he was at MSU he was not employed at Lake Erie College. The Lake Erie College did not select the curriculum for his Ph.D. thesis. While at MSU he received no benefits from Lake Erie College. No reports on his progress were given to his former employer.

26 U.S.C. § 117 provides that gross income does not include any amount received as a fellowship grant. However there are certain exceptions. Pertinent to this case is 26 C.F.R. § 1.117-4(c) which states:

“The following payments or allowances shall not be considered to be amounts received as a scholarship or a fellowship grant for the purpose of § 117:
(1) Except as provided in paragraph (a) of § 1.117-2, any amount paid or allowed to, or on behalf of, an individual to enable him to pursue studies or research, if such amount represents either compensation for past, present, or future employment services or represents payment for services or represents payment for services which are subject to the direction or supervision of the grantor.
(2) Any amount paid or allowed to, or on behalf of, an individual to enable him to pursue studies or research primarily for the benefit of the grantor.”

Upon examination of the facts set forth above, the Court concludes that the $10,000 does not represent compensation for past, present or future employment services.

In addition, the second exception does not apply to the facts of this case. The evidence does not show that plaintiff’s studies were primarily for the benefit of Lake Erie College.

EMPLOYEE BUSINESS EXPENSE

The second issue is whether plaintiffs are entitled to claim as a business expense $2,006. This sum consists of rent payments of $1,875 and utility bills of $131 incurred while Mr. Pelowski was attending MSU.

An important consideration in determining whether to allow this deduction is whether it be classified as a business expense or educational expense. Plaintiffs’ tax return shows they listed these deductions as a business expense on form 2106, Employee Business Expenses. (Joint Exhibit 1). Plaintiffs explain in their reply to defendant’s Post Trial Brief that the deduction was listed under business expenses because there is no room on form 2106 under Part III for listing of educational expenses.

The law in the 6th Circuit is that grounds on which a claim for a tax refund is made must be specifically set forth in the claim for refund or the Court is without jurisdiction to consider the claim in a tax refund suit. However, Internal Revenue was on notice that plaintiffs deductions for rent and utilities were in connection with education. Under the section for occupation in which expenses were incurred on form 2106 plaintiff answered scholarship grant. His employer was Lake Erie College. There is no place on the form to list educational expenses nor are there directions on what to do if you have educational deductions.

26 C.F.R. 1.162-5(e) provides:

“Travel away from home. (1) If an individual travels away from home primarily to obtain education the expenses of which are deductible under this section, his expenditures for travel, meals, and lodging while away from home are deductible. However, if as an incident of such trip the individual engages in some personal activity such as sightseeing, social visiting, or entertaining, or other recreation, the portion of the expenses attributable to such personal activity constitutes nondeductible personal or living expenses and is not allowable as a deduction. If the individual’s travel away from home is primarily personal, the individual’s expenditures for travel, meals and lodging (other than meals and lodging during the time spent in participating in deductible education pursuits) are not deductible. Whether a particular trip is primarily personal or primarily to obtain education the expenses of which are deductible under this section depends upon all the facts and circumstances of each case. An important factor to be taken into consideration in making the determination is the relative amount of time devoted to personal activity as compared with the time devoted to educational pursuits. The rules set forth in this paragraph are subject to the provisions of section 162(a)(2), relating to deductibility of certain traveling expenses, and section 274(c) and (d), relating to allocation of certain foreign travel expenses and substantiation required, respectively, and the regulations thereunder.”

The evidence in this case demonstrates that the Pelowski stay in East Lansing, Michigan was primarily for educational purposes. There is nothing in the record showing that more time was devoted to personal activities as compared with educational pursuits. Therefore the $2,006 for rent and utilities is deductible as an educational expenses.

ENTERTAINMENT EXPENSES

The plaintiffs claim a deduction of $270 for expenses incurred while hosting a going away party at their home. The party was given just before Mr. Pelowski was to leave Lake Erie College to pursue his doctorate studies. He testified at the trial that the persons invited were contributors to the College and the party was to show appreciation and hopefully to convince those invited to continue contributing.

Plaintiffs contend that the $270 was a business expense under 26 U.S.C. §§ 62 and 162. According to § 62(2) travel and business expenses consist of (1) expenses paid or incurred by the taxpayer in connection with the performance of his services as an employee under reimbursement or other expense allowance arranged with his employer; (2) expenses for travel away from home; (3) transportation expenses; and (4) outside salesman expenses.

26 U.S.C. § 274 pertains to entertainment expenses. Section 274(a) disallows an entertainment deduction unless the Taxpayer establishes that the item was directly related to or that such item was associated with the active conduct of the Taxpayers trade or business. The Taxpayer must substantiate by adequate records or by sufficient evidence corroborating his own statement the amount of such expense, time and place of the entertainment, the business purpose, and the business relationship to the Taxpayer of the persons entertained.

The plaintiffs have failed to show that the expenses relate to the categories in § 62(2). There was no evidence of a reimbursement arrangement regarding the entertainment expenses with Lake Erie College. Also plaintiffs did not clearly establish that the expenses was incurred in connection with their services as employees of Lake Erie College. The fact that the persons invited to the party were contributors to the College did not prove this requirement. It was not shown that the party was an ordinary and necessary expense in carrying on a trade or business.

Plaintiff also did not satisfy the requirements of section 274(a) and (d). There was no substantiation by adequate records or sufficient evidence corroborating plaintiffs statement of the amount of the expense, time, and place of the entertainment, the business purpose or the business relationships of the guests to the plaintiffs.

INCOME FROM TESTAMENTARY TRUST

The issue of whether plaintiffs are entitled to exclude from gross income $4,000 received by Barbara Pelowski from the Testamentary Trust of Seabury S. Gould, IV arose shortly before trial. There was no testimony at trial on this issue. The parties stipulated plaintiffs are claiming a refund of tax attributable to the inclusion in gross income of $4,000 received by Barbara Pelowski in 1978 from the Testamentary Trust of Seabury S. Gould, IV.

26 U.S.C. § 102 provides that income from a gift, bequest, devise or inheritance is not excludable from gross income. Any amount included in gross income of a beneficiary under Subchapter J, Estates, Trusts, and Beneficiaries, shall be treated as a gift, bequest, devise, or inheritance of income from property. Whether a section 102 exclusion applies requires reference to Subchapter J. 26 U.S.C. § 662(a) requires inclusion in gross income of a beneficiary to whom an amount specified in § 661(a) is paid by an estate described in § 661. Section 661 allows a deduction for a trust any amounts required to be distributed or properly paid which does not exceed the distributable net income of the trust. Distributable net income is defined in § 643(a) and includes capítol gains where there is a distribution of any amount required to be paid, credited or distributed during the taxable year. Review of Exhibit 5 and considering the definition of distributable net income show that distributable net income exceeded the $158,608.25 paid to the beneficiary by the $4,000.

Section 663(a) provides exclusions for amounts falling under §§ 661(a) and 662(a). The only possible applicable subsection is 663(a)(1). However, it is not applicable as an exclusion because the Testamentary Trust does not authorize payment or credit of a specific sum of money or property at one time or in not more than three installments. The Trust contains no limitation as to the amount of money or the number of installments which might be given to Mrs. Pelowski.

Plaintiffs have submitted after trial a statement from the Assistant Vice President of the First Pennsylvania Bank, Trustee of the Seabury S. Gould Trust, stating that it deems the trust to be a simple trust with income distributions to the surviving spouse. The bank taxes the surviving spouse on the distributable net income. Based on this statement plaintiffs argue that the $4,000 should be excluded.

The statement from the bank cannot be considered. It was not introduced during trial and was not marked as an exhibit. The scant evidence before the Court necessitates that the $4,000 be included as gross income.

Accordingly, judgment is for plaintiff on the issues of the $10,000 grant and the $2,006 employee business expense. Judgment for defendant on the issues of the $270 entertainment expense and the $4,000 income from the Testamentary Trust.

IT IS SO ORDERED.


author: SHADUR, District Judge.

text:
    CASHCO OIL COMPANY, a Delaware corporation, Plaintiff, v. Edward L. MOSES, Jr., etc., et al., Defendants.
    No. 85C1205.
    United States District Court, N.D. Illinois, E.D.
    Feb. 11, 1985.
    Harry P. Lamberson, Raymond A. Fylstra, Chapman & Cutler, Chicago, Ill., for plaintiff.
   MEMORANDUM OPINION AND ORDER

SHADUR, District Judge.

Cashco Oil Company (“Cashco”) has filed a multi-count Complaint against Edward L. Moses, Jr. (“Moses”) and a number of affiliated corporations and a Moses sole proprietorship, Pelican Mud (“Pelican”). Because the Complaint poses a number of problems on its face and no one’s interests would be advanced by the delays inherent in a Fed.R.Civ.P. (“Rule”) 12(b) motion and the required briefing on that motion, this Court is sua sponte ruling on some of the obvious defects in the Complaint.

Rule 17(b) looks to Illinois law to determine Pelican’s capacity to be sued. As a sole proprietorship, it has no legal existence apart from Moses and is not separately suable under Illinois law. Accordingly, Pelican is dismissed as a defendant.

Complaint Count I is a RICO count that reflects a number of the flaws this Court (speaking on the topic “A Judicial Perspective on Civil RICO”) identified in the January 30, 1985 one-day institute sponsored by IICLE, devoted exclusively to civil RICO:

1. Though Count I if 8 asserts “Each of the defendants have [sic] transacted certain of their [sic] affairs in this district,” only Moses himself is alleged to have negotiated and consulted here (Count I If 11). No valid predicate has been asserted for venue here as to the corporate defendants.
2. To sustain the conversion of a breach-of-contract (Count I II15) or breach-of-fiduciary obligation (Count I ¶¶ 14, 15(f)) claim into a mail or wire fraud claim (the predicate offense for RICO purposes), Cashco must prove promissory fraud—knowingly false statements of future intentions (Count I 1116). Rule 11 now imposes a more stringent standard on a party’s or its lawyers’ allegations than heretofore (In re Ronco, 46 B.R. 444, 446-448 (N.D.Ill., 1985)), and this Court expects such allegations to have the kind of factual and legal foundation the new standards require.
3. Of course an entity can be both a “person” and an “enterprise” under Section 1961 (Count I ¶ 18). But it can not fit both definitions for purposes of the same RICO claim. Haroco v. American National Bank and Trust Company of Chicago, 747 F.2d 384, 399-401 (7th Cir.1984), approving this Court’s earlier analysis in Parnes v. Heinold Commodities, Inc., 548 F.Supp. 20, 23-24 (N.D.Ill.1982). That means:
(a) Collectivizing “defendants” in the alleged pattern of racketeering activity (Count I ¶¶ 19-21) will not suffice. As to each defendant—a “person” in Section 1961 terms—the pattern and the involved “enterprise” must be identified. Only such an identified person, having the requisite statutorily-defined relationship with an enterprise, can be sued as a RICO defendant.
(b) “Investing” income and proceeds in oneself (Count I ¶ 22) is an impermissible concept that does not track with Section 1962(a), for that would pose the same person-enterprise problems. Haroco, 747 F.2d at 402 permits those concepts to be mixed somewhat (and perhaps in a somewhat doubtful fashion), but not as Cashco has done. As for investing in others, the undifferentiated form of Count I ¶ 22’s allegations cannot be sustained. Cashco must allege in particular, and must be prepared to prove, which defendant or defendants in fact invested in which other defendant or defendants.
(c) Allegations of a Section 1962(d) conspiracy “as a result of the foregoing acts” (Count I ¶ 24) also improperly blurs the concepts under RICO. Again, once each “person” violating Section 1962(a) or (c) has been properly identified, the identity of the other alleged conspirator or conspirators as to each such person, and the means of implementing the conspiracy, must be alleged with reasonable particularity.

Count I is therefore dismissed (without prejudice of course to repleading in proper form).

Count II ¶ 9 says Cashco’s claim for an accounting arises from Illinois-based activity by defendants “as more fully hereinafter alleged.” But no such allegations are then made at all (except as to Moses, referred to in Count I ¶ 11 and reincorporated into Count II). Accordingly, Count II is dismissed as to all defendants save Moses. Moreover, Count II 1121 is stricken (see Morrow v. L.A. Goldschmidt Associates, Inc., 126 Ill.App.3d 1089, 1093, 82 Ill.Dec. 152, 156, 468 N.E.2d 414, 418 (1st Dist. 1984)).

Finally, Count V is stricken in its entirety. Newman-Green, Inc. v. Alfonzo-Larrain, 590 F.Supp. 1083, 1085-88 (N.D.Ill.1984). Unlike the other portions of this opinion, leave is not granted to replead this claim.

Counsel for Cashco are ordered to apprise counsel for defendants (if known to Cashco’s counsel) of this order, to avoid needless work in answering the stricken portions of the initial Complaint. If defendants’ counsel are not known, counsel for Cashco are ordered to mail copies of this order to defendants at their respective addresses for service of process.

      . Because the issues have not been tested in the adversary process, this opinion should not be taken as any implication as to whether or not any unmentioned aspects of the Complaint are free from Rule 12(b)(6) attack.

      . Citations to RICO will take the form "Section —,” referring to the section numbering in Title 18.

      . Parties and lawyers cannot simply reach for the brass ring of treble damages in every case, on the theory that if unsuccessful they can always fall back on their single damages claims. This text paragraph’s reference to Rule 11 should be kept in mind as to each of the problems referred to in this opinion.

      . Count III ¶ 22 and Count VI ¶ 22 may also be vulnerable on the same basis, though this Court has not troubled itself to research those questions. Cashco must be prepared to justify those punitive damages claims in Rule 11 terms too.


author: SAND, District Judge.

text:
    In the Matter of the Arbitration between SAMMI LINE CO., LTD., Petitioner, and ALTAMAR NAVEGACION S.A., Owners of the M/S MARIA SITINAS, Respondent.
    No. 84 CIV 9196 (LBS).
    United States District Court, S.D. New York.
    Feb. 20, 1985.

      Healy & Baillie, New York City, for petitioner; Howard M. McCormack, New York City, of counsel.
    Burlingham Underwood & Lord, New York City, for respondent; Joseph C. Smith, New York City, of counsel.
   OPINION

SAND, District Judge.

The sole issue presented by this petition to vacate an award entered after arbitration pursuant to a standard New York Produce Exchange arbitration clause is the authority of the arbitrator to award attorneys’ fees to the prevailing party. Petitioner preserved its right to object to such an award and seeks, pursuant to 9 U.S.C. § 10, to vacate so much of the second Partial Final Award issued on October 31, 1984 as awarded attorneys’ fees incurred by Respondent in the arbitration proceeding in the amount of $12,000. The balance of the award has been paid.

Petitioner relies primarily on Transvenezualian Shipping Company, S.A. v. Czarnikow-Rionda Co., Inc., 1982 AMC 1458 (S.D.N.Y.1981) and we believe that reliance is well founded. There, a dispute between the parties arising, as here, from a New York Produce Exchange form of time charter was referred to arbitration. The court held that the award granting attorneys’ fees should be vacated as being beyond the scope of the arbitrator’s authority-

Respondent seeks to distinguish Transvenezualian on the grounds that the parties in that case had not only agreed to arbitrate but had entered into a submission agreement which provided:

The arbitrators shall have the discretion to order that such fees [of the arbitrators] and the expenses and costs of the arbitration shall be divided between the parties on any terms which appear just.

1982 AMC at 1459.

In vacating the award of attorneys’ fees, Judge Carter reasoned that the terms “costs” and “expenses” as used in the submission agreement are not generally used to encompass attorneys’ fees. Respondent argues that Transvenezualian is an interpretation, not of the arbitration clause, but rather of the submission agreement.

The argument fails because it would require one to view the quoted phrase of the Transvenezualian submission agreement as a restriction upon a power otherwise possessed by the arbitrators by virtue of the arbitration clause. But clearly the language of the submission agreement was intended to increase not diminish the power of the arbitrators.

Respondents further cite the deference appropriately paid by courts to arbitrators’ determinations. But the scope of the arbitrator’s authority is an issue subject to judicial review “and the reviewing court should not accept the arbitrator’s conclusion as controlling.” Transvenezualian Shipping, supra, 1982 AMC at 1460 and cases cited therein.

Respondents contend that:

“Because the parties did not expressly agree to exclude from arbitration any dispute as to fees, the panel was required to fashion proper relief upon submission of the issue.”

Memorandum in Opposition to Petition to Vacate Arbitrator’s Award, p. 9.

This contention reverses the appropriate burden. Since the traditional American rule is that attorneys’ fees are generally not awarded, and the arbitrators may decide only issues submitted for arbitration, the burden is on respondent to demonstrate that an award of attorneys’ fees was included within the scope of the arbitrable issues.

Respondent urges that petitioner’s failure to object to the panel’s unequal apportionment of arbitrator’s fees is tantamount to a concession with respect to attorneys’ fees. We reject this contention. First, arbitrators’ fees are traditionally awarded and not infrequently divided unequally. Petitioner fully preserved its objection to the inclusion of an attorney fee award at all stages of the proceedings.

Finally, at oral argument Respondent asserted that numerous arbitration awards included attorneys’ fees and pursuant to leave granted, has furnished copies of 23 such awards. In some instances, the fees awarded are for legal services to compel arbitration, not during the arbitration itself (a somewhat different issue); but see Federal Commerce & Navigation Co. v. Associated Metals & Minerals Corp., 1979 AMC 1733 (S.D.N.Y.1978) (vacating an award of such fees in a subsequent arbitration)). It is not possible to determine from these examples how often the issue of the arbitrator’s power to make such an award was disputed. It appears that in several such cases, both sides sought fees which conferred authority over the matter on the panel. In several instances, the question is simply not discussed. Nor can one establish from this submission the frequency of awards omitting attorneys’ fees. Respondent cannot validly assert the existence of a custom so universal that the parties may be deemed to have agreed to arbitration with an understanding that attorneys’ fees might be awarded. Indeed, the general understanding is to the contrary. Domke on Commercial Arbitration, § 43:01 (1984).

The petition to vacate the arbitration award is granted.

SO ORDERED.

      . Paragraph 17 of the Time Charter Agreement approved by the New York Produce Exchange reads:
      "That should any dispute arise between Owners and the Charterers, the matter in dispute shall be referred to three persons at New York, one to be appointed by each of the parties hereto and the third by the two so chosen, their decision or that of any two of them shall be final, and for the purpose of enforcing an award, this agreement may be made a rule of the court. The arbitrators shall be commercial men."

      . It may well be that the shipping industry as a whole or particular parties may prefer that attorneys' fees be awarded, consistent with the concept of making the prevailing party whole. All that is required to accomplish this result is, of course, a single additional sentence in the standard form, or in a rider, to make clear this intention.


author: STANLEY S. HARRIS, District Judge.

text:
    William J. APPEL, Plaintiff, v. SOUTHEASTERN EMPLOYERS SERVICE CORPORATION, Defendant.
    Civ. A. No. 84-2426.
    United States District Court, District of Columbia.
    Feb. 21, 1985.

      Harry J. Jordan, Washington, D.C., for plaintiff.
    Howard T. Weir, Washington, D.C., for defendant.
   MEMORANDUM OPINION AND ORDER

STANLEY S. HARRIS, District Judge.

Now before the Court is defendant’s motion to dismiss or, in the alternative, to transfer the case pursuant to 28 U.S.C. § 1404(a). For the reasons set forth below, the motion to dismiss is denied and the case is transferred to the United States District Court for the Western District of Virginia, Abingdon Division.

The plaintiff, William J. Appel, was employed by the defendant, Southeastern Employers Service Corporation (SESCO), pursuant to a contract which was entered into on August 1, 1981. SESCO is a Tennessee corporation with its principal office in Bristol, Tennessee. The office of SESCO’s General Counsel is in Bristol, Virginia. Bristol, Tennessee, and Bristol, Virginia, are geographically the same town, with the state line which runs through the center of town dividing the respective states. Bristol is some 400 miles from the District of Columbia.

The employment agreement between the parties (Ex. A to defendant’s motion to dismiss) states that plaintiff was hired “for the purpose of serving as the Chief Executive Officer of SESCO of Tidewater, Virginia, Inc. a wholly-owned subsidiary corporation of [SESCO] ____” The agreement also provides: “This contract shall be interpreted pursuant to the laws of the state of Virginia____”

Plaintiff had been a resident of Virginia, but chose in the fall of 1983 to move to the District of Columbia. He seeks to base jurisdiction in this Court upon the District of Columbia long-arm statute, D.C.Code 1981, § 13-423. Reliance is placed upon §§ 13-423(a)(l) and (2), which provide:

(a) A District of Columbia court may exercise personal jurisdiction over a person, who acts directly or by an agent, as to a claim for relief arising from the person’s—
(1) transacting any business in the District of Columbia;
(2) contracting to supply services in the District of Columbia;
* * * * * *

The resolution of any long-arm controversy necessarily is highly fact-intensive. Plaintiff seeks to recover the sum of $38,-573.25 from the defendant. By letter dated July 6, 1984 (Ex. B to defendant’s motion to dismiss), plaintiff’s counsel advised SESCO specifically of the bases for the claims advanced. In the affidavit in support of defendant’s motion to dismiss, defendant’s vice-president asserted that none of the SESCO clients with respect to which plaintiff claims to be owed money has any part of its business within the District of Columbia. Plaintiff does not dispute this. Rather, he states that he has transacted other business for SESCO here (as have others), and that that should suffice to support long-arm jurisdiction over SESCO.

It does not. Plaintiff runs afoul of subsection (b) of § 13-423, which states:

(b) When jurisdiction over a person is based solely upon this section, only a claim for relief arising from acts enumerated in this section may be asserted against him.

While defendant does not dispute plaintiff’s assertion that it has transacted some business here (although it notes that it has no office or registered agent here), plaintiff does not rebut defendant’s contention that all of the alleged acts at issue in this case occurred other than in the District of Columbia. Accordingly, there is an inadequate basis to support long-arm jurisdiction over the defendant in this case.

The Court concludes, however, that it would not serve the convenience of the parties, or be in the interest of justice, to dismiss the case. Since the action properly might have been brought in the Western District of Virginia, it hereby is

ORDERED, that motion to dismiss is denied. It hereby further is

ORDERED, that the case, including a certified copy of this Memorandum Opinion and Order, be transferred to the United States District Court for the Western District of Virginia, Abingdon Division, pursuant to 28 U.S.C. § 1404(a).

SO ORDERED.

      . See, e.g., Willis v. Willis, 655 F.2d 1333 (D.C.Cir.1981); Berwyn Fuel, Inc. v. Hogan, 399 A.2d 79 (D.C.1979); Cohane v. Arpeja-California, Inc., 385 A.2d 153 (D.C.1978).

        Plaintiff relies heavily upon the result reached by the District of Columbia Court of Appeals in Mouzavires v. Baxter, 434 A.2d 988 (D.C.1981) (en banc), cert. denied, 455 U.S. 1006, 102 S.Ct. 1643, 71 L.Ed.2d 875 (1982). However, as pointed out in the opinion dissenting from the result reached in that case (434 A.2d at 998, Harris, J., dissenting), there was no majority (or even plurality) opinion; the Court of Appeals was divided 4-4 on the underlying legal issue. Moreover, subsection (b) of § 13-423 was not at issue in Mouzavires v. Baxter; it is controlling here (when considered in conjunction with the "as to a claim for relief arising from the person’s” language in § 13-423(a)).