author: MIHM, District Judge.

text:
    Mary J. WEGRZYN, Plaintiff, v. ILLINOIS DEPARTMENT OF CHILDREN AND FAMILY SERVICES, and Gordon Johnson, individually, Thomas Ward; Martin Lohmann; Joan Kelly; and William St. Arnold, Defendants.
    No. 85-1216.
    United States District Court, C.D. Illinois, Peoria Division.
    Jan. 30, 1986.

      Patricia Benassi, Peoria, Ill., for plaintiff.
    Barbara Collins, Asst. Atty. Gen., Springfield, Ill., for defendants.
   ORDER

MIHM, District Judge.

This case is before the Court on the Defendants’ motion to dismiss the suit against the Defendants Lohmann, Ward, St. Arnold, and Kelly as barred by the statute of limitations. The motion to dismiss raises two issues with regard to the statute of limitations question. The first issue is what is the appropriate statute of limitation for a civil rights action brought in Illinois pursuant to 42 U.S.C. § 1983 in light of the Supreme Court’s decision in Wilson v. Garcia, — U.S.-, 105 S.Ct. 1938, 85 L.Ed.2d 254 (1985). The second issue is whether the Court should give the statute of limitation retroactive or prospective relief if the Court decides that the appropriate limitation period under Wilson represents a change from past law.

The Plaintiff, Mary J. Wegrzyn, filed her original complaint on April 30, 1985. The complaint contained two counts. Count I was a Title VII count claiming sex discrimination by the Department of Children and Family Services (DCFS) against the Plaintiff. Count II was a claim against Defendant Gordon Johnson, Director of DCFS, alleging that Johnson had defamed the Plaintiff by publicly announcing that the Plaintiff and a co-worker had been fired by DCFS and that DCFS had taken other disciplinary action against the Plaintiff and the co-worker because of the death of a child.

On August 28, 1985, the Plaintiff filed her first amended complaint which included five counts. Like the original complaint, the amended complaint asserts claims against the DCFS and the Defendant Gordon Johnson. The first amended complaint also asserts claims against the individual Defendants Thomas Ward, Martin Loh-mann, Joan Kelly, and William St. Arnold, who were not named in the original complaint.

Count I of the first amended complaint is a 42 U.S.C. § 1983 claim based upon the First and Fourteenth Amendments to the United States Constitution in which the Plaintiff alleges that the Defendants willfully and maliciously conspired to discriminate and retaliate against the Plaintiff as a result of her exercise of her free speech rights. Count II of the amended complaint is also brought under § 1983 and is a claim of sex discrimination brought pursuant to the Fourteenth Amendment to the United States Constitution. In count III of the complaint, the Plaintiff brought another § 1983 action in which she alleges that the Defendants did not give her pre-discipli-nary hearings which meet the fundamental prerequisites of due process as guaranteed by the Fifth and Fourteenth Amendments of the United States Constitution. These first three counts of the amended complaint were brought against the five individually named Defendants and the DCFS.

Count IV is a § 1983 action based upon the Fifth and Fourteenth Amendments to the United States Constitution in which the Plaintiff reasserts her allegations that Defendant Johnson had made defamatory statements about the Plaintiff to the news media. Count V is a Title VII action brought pursuant to 42 U.S.C. § 2000e et seq., against the DCFS, alleging that the Defendant had harassed the Plaintiff because the Plaintiff opposed the unlawful employment practices to which her coworker was subjected. The Defendants’ motion to dismiss based upon the statute of limitations does not address these last two counts, nor the portions of the previous three counts brought against Defendant Johnson or the DCFS.

In their motion to dismiss Defendants Ward, Lohmann, Kelly, and St. Arnold, the Defendants take the position that the case of Wilson v. Garcia, — U.S. -, 105 S.Ct. 1938, 85 L.Ed.2d 254 (1985), establishes a two year statute of limitation for a civil rights action in the State of Illinois pursuant to Ill.Rev.Stat. ch. 110, ¶ 13-202 (1983). The Defendants point out that the Plaintiff admitted in her complaint that her employment with the DCFS ended on August 5, 1983. However, the Plaintiff did not file her amended action which, for the first time, named the Defendants Ward, Lohmann, Kelly, and St. Arnold, until August 28, 1985. The Defendants argue that the complaint alleges unconstitutional actions which occurred prior to August 5, 1983, when the Plaintiff left the DCFS. Therefore, the claims must be barred because they were not filed within the two year limitation period.

The Plaintiff responds to this argument in a number of different ways. First, the Plaintiff claims that her complaint states a continuing course of conduct in violation of 42 U.S.C. § 1983 which began in 1980 and continued through March, 1984. As a result of this continuing course of conduct, Plaintiff alleges that she has suffered damage to her reputation and career opportunities which occurred after she was forced to leave the DCFS. Because of this continuing course of conduct, the Plaintiff argues that the date of August 5, 1983, is not the date the Court should look at in determining when the statute of limitation began to run.

Second, the Plaintiff argues that the United States Supreme Court decision in Wilson v. Garcia, — U.S.-, 105 S.Ct. 1938, 85 L.Ed.2d 254 (1985), did not expressly mandate that Illinois use a two year statute of limitation for civil rights actions filed within the state. Rather, argues the Plaintiff, Wilson only requires that each state apply the most appropriate statute of limitation for civil rights actions. Civil rights actions encompass far more types of claims than just personal injury actions. Therefore, in Illinois, the most appropriate statute would be the five-year limitation period for “civil actions not otherwise provided for.” Ill.Rev.Stat. ch. 110, ¶ 13-205 (1983).

Finally, the Plaintiff argues that even if the Court decides that the two year statute of limitation period is appropriate for civil rights actions in Illinois, the Court should refrain from applying it on the facts of this case because the statute would result in substantial inequities to the Plaintiff.

The Court will address first the question of whether the statute of limitations for civil rights actions in Illinois is a two year or five year period. The Court has carefully considered the Supreme Court’s decision in Wilson v. Garcia, — U.S. -, 105 S.Ct. 1938, 85 L.Ed.2d 254 (1985), and concludes that Wilson requires Illinois courts to apply the two year statute of limitation, according to Ill.Rev.Stat. ch. 110, ¶ 13-202 (1983). In the Wilson case, the Supreme Court held that to serve the remedial purposes of the civil rights statutes, each state should select the single most appropriate statute of limitation for all § 1983 claims brought within that state. The Court affirmed the Tenth Circuit’s decision to characterize civil rights actions as tort actions to recover damages for personal injuries for the purpose of applying New Mexico’s three year statute of limitations governing actions “for an injury to the person or reputation of any person.” N.M. Stat.Ann. § 37-1-8 (1978). In reaching this conclusion, the Court noted:

“[Gjeneral personal injury actions, sounding in tort, constitute a major part of the total volume of civil litigation in the state courts today, and probably did so in 1871 when § 1983 was enacted. It is most unlikely that the period of limitations applicable to such claims ever was, or ever would be, fixed in a way that would discriminate against federal claims, or be inconsistent with federal law in any respect.” 105 S.Ct. at 1949 (footnote omitted).

The Seventh Circuit has not yet ruled upon which Illinois statute of limitations would be most appropriate for application in § 1983 suits. However, the Seventh Circuit, in the case of Bailey v. Faulkner, 765 F.2d 102 (7th Cir.1985), gave some indication of how it would decide this matter. In Bailey, the Seventh Circuit said, “The state statute of limitations that the federal courts must borrow in a section 1983 suit is the statute of limitations for personal-injury suits, Wilson v. Garcia, — U.S.-, 105 S.Ct. 1938, 85 L.Ed.2d 254 (1985), which is two years in Indiana, Ind.Code, § 34-1-2-2.” 765 F.2d at 103.

Prior to the Wilson decision, the Seventh Circuit had held that actions brought pursuant to 42 U.S.C. § 1983 in Illinois were governed by the five year statute of limitation for “civil actions not otherwise provided for.” Beard v. Robinson, 563 F.2d 331 (7th Cir.1977). Eight years later, though, after the Supreme Court’s decision in Wilson, the Seventh Circuit in Bailey concluded rather matter-of-factly that the court should apply the Indiana statute of limitations for personal injury suits in a § 1983 suit in that state. The treatment of this issue in the Bailey case convinces this Court that when faced with the issue, the Seventh Circuit would hold that the Wilson case overruled the Seventh Circuit’s prior decision in Beard and requires that federal courts in Illinois apply the Illinois two year statute of limitation for “injury to the person.” Ill.Rev.Stat., ch. 110, ¶ 13-202 (1983).

Furthermore, specific language in the Wilson v. Garcia case indicates that the federal courts in Illinois should use the two year personal injury statute of limitations in § 1983 actions. Throughout the Wilson v. Garcia decision, the Supreme Court alternated among referring to § 1983 actions as “a remedy for the violation of constitutional rights,” actions “involving claims for personal injuries,” “a general remedy for injuries to personal rights,” and a remedy which encompasses “a broad range of potential tort analogies, from injuries to property to infringements of individual liberty.” Despite these different characterizations, the Supreme Court concluded that under federal law, all § 1983 actions should be characterized as personal injury actions and that state law should be looked to for the statute of limitations appropriate for personal injury actions. In Wilson, the Court concluded that the applicable statute of limitation in New Mexico was the three year statute “for an injury to the person or reputation of any person” and rejected the argument that a § 1983 claim should be governed by the four year limitation period for “all other actions not herein otherwise provided for.”

The Wilson Court considered and then expressly rejected the argument in favor of applying New Mexico’s “catch all” period of limitations. The Court stated:

“The relative scarcity of statutory claims when § 1983 was enacted makes it unlikely that Congress would have intended to apply the catch all periods of limitations for statutory claims that were later enacted by many States. Section 1983, of course, is a statute, but it only provides a remedy and does not itself create any substantive rights.” 105 S.Ct. at 1948.

When the Seventh Circuit announced its decision that the five year statute of limitations would apply to § 1983 actions in Beard v. Robinson, 563 F.2d 331 (7th Cir.1977), the Court relied upon the rule in Wakat v. Harlib, 253 F.2d 59 (7th Cir.1958), which characterized a § 1983 action as a statutory cause of action for purposes of the Illinois five year statute of limitation. However, when the Supreme Court rejected the States’ use of the catch all limitation periods for § 1983 actions, the Court made it clear that the reasoning underlying such decisions as Beard and Wa-kat was not correct. It seems clear to this Court that it is only a matter of time before the Seventh Circuit, in light of the Wilson decision, would overrule the actual holdings of Beard and Wakat as well. Therefore, this Court finds that the appropriate statute of limitations for a 1983 action brought in Illinois is the two year limitation period set forth in Ill.Rev.Stat. ch. 110, ¶ 13-202.

In reaching this decision, the Court notes that it has considered the decision rendered by Judge Shadur in the case of Shorters v. City of Chicago, 617 F.Supp. 661 (N.D.Ill.1985), in which Judge Shadur concluded that the five year statute of limitation of § 13-205, Ill.Rev.Stat. ch. 110 (1983), should apply to § 1983 actions brought in the State of Illinois. Although the decision is well-reasoned and very persuasive, this Court disagrees with the result of the decision because it places too much emphasis upon the state’s own characterization of what is meant by “injury to the person.” Judge Shadur’s opinion also completely disregards the Supreme Court’s explicit rejection of the use of catch all periods of limitation for statutory causes of action in § 1983 cases.

Judge Shadur’s opinion in Shorters v. City of Chicago also addressed the issue presented in this motion to dismiss of whether a complaint filed shortly after the Wilson decision but more than two years after the cause of action had accrued is barred, even though it would have been timely filed under the pre-existing limitations rule of Beard v. Robinson, 563 F.2d 331 (7th Cir.1977). This Court does agree with Judge Shadur’s alternate conclusion that the effect of the Wilson decision was to change the rule of Beard v. Robinson, which had established that the statute of limitation in § 1983 suits filed in Illinois was five years. Therefore, this Court must decide whether to apply this new principle of law retroactively.

In the case of Chevron Oil Co. v. Huson, 404 U.S. 97, 92 S.Ct. 349, 30 L.Ed.2d 296 (1971), the Supreme Court listed a number of factors to be examined by a court when deciding whether the court should apply a principle of law retroactively or prospectively only. Although the Chevron Oil case involved a cause of action which the Plaintiff had filed prior to the Supreme Court’s announcement of a shortened statute of limitations for that particular cause of action, the factors listed by the Supreme Court are of aid to the analysis of the statute of limitations problem posed by the facts of this case in which the Plaintiff filed her cause of action just slightly beyond the newly announced statute of of limitations period. The separate factors listed by the Court in Chevron Oil which a court is to consider are: the extent to which the decision establishes a new principle of law; the merits in each case and whether, in light of the prior history, purpose, and effect of the rule in question, retrospective application of the rule would further or retard its operation; and the amount of injustice or hardship which would be imposed by retroactive application of the new rule. 404 U.S. at 106-07, 92 S.Ct. at 355-56. Because of the clarity with which the Beard court set out the Illinois five year limitations period as the statute of limitation for § 1983 actions in Illinois, and in light of the other factors listed above, this Court concludes, as did Judge Shadur in Shorters v. City of Chicago, that the Wilson rule should not be applied to bar the Plaintiff’s cause of action in this case.

The case of Texaco, Inc. v. Short, 454 U.S. 516, 102 S.Ct. 781, 70 L.Ed.2d 738 (1982), provides further support for the conclusion that the Plaintiff’s cause of action should not be barred by the two year statute of limitations. In a footnote in Texaco, the Supreme Court discussed the constitutionality of implementing statutes of limitation through legislation, saying, “[T]his Court has often cited that statutes of limitation affecting existing rights are not unconstitutional, if a reasonable time is given for the commencement of an action before the bar takes effect.” 454 U.S. at 527 n. 21, 102 S.Ct. at 791 n. 21.

As Judge Shadur suggests in his decision in Shorters, a similar analysis can be used under the facts of the present case. Not only should the Court decline to apply the Wilson two year statute of limitation retroactively, but it should also allow Plaintiffs who had relied upon the previous five year statute of limitation a reasonable time after the change in the law in which to file their suits. A court must make the decision of what is a reasonable time for filing upon the particular facts of each case, and in this case the Court recognizes that its decision regarding “reasonable time” must take into account the fact that the Plaintiff already had an attorney and a complaint on file prior to filing her amended complaint in late August, 1985. Nevertheless, the Court concludes that it would be unnecessarily strict to say that the four months between the date of the Wilson decision and the Plaintiffs filing of her amended complaint is an unreasonable length of time.

Therefore, the Court orders that the Defendants’ motion to dismiss count I, II, and III against the Defendants Thomas Ward, Martin Lohmann, Joan Kelly, and William St. Arnold on the grounds that the claims against them are barred by the statute of limitations is DENIED.


source: Caselaw Access Project

author: ENSLEN, District Judge.

license: Public Domain

text:
    Hattie ARDISTER, for herself, Mildred Taylor, for herself and her children, Susie Maxwell, for herself, and Pamala Read, for herself and her children and on behalf of a class of similarly situated individuals, Plaintiffs, v. Agnes Mary MANSOUR, Director of the Michigan Department of Social Services, and the Michigan Department of Social Services, Defendants and Third-Party Plaintiffs, and Secretary, United States Department of Health & Human Services, Third-Party Defendant.
    No. G85-1163.
    United States District Court, W.D. Michigan, S.D.
    Jan. 30, 1986.

      M. Ann Miller, Lansing, Mich., Jacqueline Doig, Midland, Mich., Thomas Carey, Inkster, Mich., Susan McParland and Kathleen Gmeiner, Detroit, Mich., for plaintiffs.
    Frank J. Kelley, Atty. Gen. by Janis Mei-ja, Asst. Atty. Gen., Lansing, Mich., John A. Smietanka, U.S. Atty. by Daniel M. La-Ville, Asst. U.S. Atty., Grand Rapids, Mich., for defendants and third-party plaintiffs.
   OPINION

ENSLEN, District Judge.

This opinion is intended to supplant the oral opinion delivered from the bench after oral argument at the December 27, 1985 hearing. This case was originally brought by four named plaintiffs, as heads of their respective households, to secure rights guaranteed to child beneficiaries under Title II of the Social Security Act and to their families under the Aid to Families with Dependent Children (AFDC) and Michigan General Assistance (GA) programs. The December 27th hearing was the second time that this matter had come before the court. On November 30, 1985,1 granted a temporary restraining order (TRO) preventing the Michigan Department of Social Services (DSS) from implementing a policy of including the income of minor children derived from Old Age, Survivors, and Disability Insurance (OASDI or Title II) benefits, 42 U.S.C. § 402(d), in the income theoretically available to the household for purposes of determining GA eligibility. Plaintiffs did not request a TRO on the AFDC issue at that time. Also on November 30,1 conditionally certified a class of all other similarly situated individuals in the State of Michigan for the purposes of this litigation. The December 27th hearing was on plaintiffs’ motion for a preliminary injunction on the AFDC issue, the parties having stipulated that the DSS policy regarding GA eligibility will not be implemented during the pendency of this suit.

In essence, the AFDC question turns on the congressional intent behind § 2640(a) of the Deficit Reduction Act of 1984 (DE-FRA), codified at 42 U.S.C. § 602(a)(38), and the validity of the Department of Health and Human Services’ (HHS) implementing regulations, found at 45 C.F.R. § 206.10. These provisions both deal with mandatory State filing unit requirements for AFDC eligibility. AFDC is a cooperative federal-state program pursuant to which matching grants are made to the states to enable them to furnish financial assistance and services to needy dependent children and the households in which they live. See Title IV-A of the Social Security Act, 42 U.S.C. § 601 et seq.; King v. Smith, 392 U.S. 309, 88 S.Ct. 2128, 20 L.Ed.2d 1118 (1968). While the State administers the program, its plan must be in conformity with federal statutes and implementing regulations. 42 U.S.C. §§ 602-603; 45 C.F.R. § 201 et seq. Therefore, when the DEFRA amendments to the AFDC program took effect in October 1984, the state’s only options were to conform its administrative plan to the amendments or to forego its federal funding.

Section 602(a)(38) provides that for purposes of AFDC:

A State plan for aid and services to needy families with children must—
(38) provide that in making the determination under paragraph (7) with respect to a dependent child and applying paragraph (8), the State agency shall (except as otherwise provided in this part) include—
(B) any brother or sister of such child, if such brother or sister meets the conditions described in clauses (1) and (2) of section 606(a) of this title, if such parent, brother, or sister is living in the same house as the dependent child, and any income of, or available for such parent, brother, or sister shall be included in making such determination and applying such paragraph with respect to the family (notwithstanding section 4050) of this title, in the case of benefits provided under subchapter II of this chapter) [emphasis added].

HHS’ interim final regulation, purportedly implementing § 602(a)(38), provides in pertinent part:

(a) State plan requirements. A State plan under title I, IV-A, X, or XIV(AABD), of that Social Security Act shall provide that:
(1) Each individual wishing to do so shall have the opportunity to apply for assistance under the plan without delay. Under this requirement:
(vii) For AFDC only, in order for the family to be eligible, an application with respect to a dependent child must also include, if living in the same household and otherwise eligible for assistance:
(B) Any blood-related or adoptive brother or sister.

45 C.F.R. § 206.10(a)(1)(vii)(B).

Plaintiffs argue that the reference to § 405(j) in § 6Q2(a)(38) is ambiguous because § 405(j) is the representative payee provision for OASDI. Further, they argue that the effect of the HHS’ regulation wrongfully deprives Title II benefit recipients to their entitlements by presuming for AFDC purposes that such benefits are available for the use of the entire household. Plaintiffs cite Mathews v. Lucas, 427 U.S. 495, 507, 96 S.Ct. 2755, 2763, 49 L.Ed.2d 651 (1976), and Snider v. Creasy, 728 F.2d 369 (6th Cir.1984), for the proposition that children’s OASDI benefits are intended to replace the support lost by the child when an income-earning parent dies. At least in the past, such payments have been for the sole purpose of providing for the current maintenance of the child beneficiary. 20 C.F.R. § 2040. Any portion of the benefit payments which is not exhausted by current maintenance expenses is to be conserved and/or invested on behalf of the beneficiary. 20 C.F.R. § 2045. Knowing and willful conversion of these payments by the representative payee to the use of someone other than the intended minor beneficiary is punishable as a felony. 42 U.S.C. § 408(e).

It is the well-established rule in the Sixth Circuit that a district court must consider the following four elements in deciding to issue or withhold a preliminary injunction:

1. Whether the movant has shown a strong or substantial likelihood or probability of success on the merits.
2. Whether the movant has shown irreparable injury.
3. Whether the preliminary injunction could harm third parties.
4. Whether the public interest would be served by issuing the preliminary injunction.

Mason County Medical Ass’n v. Knebel, 563 F.2d 256, 261 (6th Cir.1977). The appellate court has recently reaffirmed that the Mason County criteria do not constitute a “rigid and. comprehensive test for determining the appropriateness of preliminary injunctive relief, [rather] the four considerations ... are factors to be balanced, not prerequisites that must be met.” Frisch’s Restaurant, Inc. v. Shoney’s Inc., 759 F.2d 1261, 1263 (6th Cir.1985). The emphasis on balancing the four factors in the Frisch opinion could suggest that a particularly strong showing of irreparable injury would lessen the moving party’s burden of showing a “substantial likelihood or probability of success on the merits.” Nevertheless, at least one other Circuit has held that a literal showing of likelihood of success is necessary where the preliminary injunction is sought against implementation of a federal statute. See Union Carbide Agricultural Products Co. v. Costle, 632 F.2d 1014, 1017-18 (2d Cir.1980).

In the principal case, plaintiffs have made a showing of irreparable injury. The named plaintiffs and members of the class will no doubt either be denied AFDC benefits or have existing aid substantially reduced due to the presence of Title II recipients in the household. By the same token, issuance of a preliminary injunction will doubtless cause some harm to others by virtue of nonuniform application of AFDC eligibility requirements nationwide and diversion of funds otherwise available to other needy applicants. Therefore, the analysis of the remaining two elements of the Mo,son County test — the likelihood of success and the public interest — will determine the outcome of the balance, and hence, whether preliminary injunctive relief should be granted. Resolution of these remaining issues necessarily depends upon the congressional intent behind § 602(a)(38).

Throughout the pendency of this suit, and related cases, I have given a great deal of thought to the question of the apparent incongruities of the relevant DEFRA amendments. Certainly, § 602(a)(38) is not a model of legislative draftsmanship. It is some small solace to me that other federal judges in my position have found the amendments equally perplexing. Compare Frazier v. Pingree, 612 F.Supp. 345 (M.D. Fla.1985); Gorrie v. Heckler, 606 F.Supp. 368 (D.Minn.1985) and White Horse v. Heckler, 627 F.Supp. 848, (D.S.D.1985) (preliminarily enjoining implementation of HHS’ regulation) with Sherrod v. Hegstrom, 629 F.Supp. 150 (D.Or.1985); Creaton v. Heckler, 625 F.Supp. 26 (C.D.Cal.1985); Huber v. Blinzinger, 626 F.Supp. 30 (N.D.Ind.1985) and Shonkwiler v. Heckler, 628 F.Supp. 1013 (S.D.Ind.1985) (denying preliminary in-junctive relief).

My particular concern about this amendment relates to the unquestionably strong statutory and common law precedent regarding the “untouchability” of a child’s Title II benefits, and the backhanded way in which Congress apparently deemed these benefits available to other members of the child’s household. Plaintiffs voice these same concerns when they speak of the “ambiguity” of § 602(a)(38). However, setting aside any personal feelings about the propriety or logic of this particular aspect of DEFRA, I conclude that the congressional intent of § 602(a)(38) is sufficiently clear — Congress intended to halt the prior practice of allowing AFDC applicants to exclude OASDI recipients from the household filing unit for AFDC purposes. See Oliver v. Ledbetter, 624 F.Supp. 325, 329-330 (N.D.Ga.1985); House Conference Report No. 98-369, 98th Cong., 2d Sess., reprinted in 1984 U.S.Code Cong. & Ad.News 751, 1407. This interpretation of the statute is fully consistent with the HHS’ implementing regulation at 45 C.F.R. § 206.10(a)(l)(vii)(B).

I should note that this interpretation of the statute was influenced to some degree by the plaintiffs’, and indeed my own, inability to attribute any other meaning to the language of § 602(a)(38). If the § 405(j) language of that provision does not mean what the HHS says it means, then I confess that I am at a complete loss to explain its purpose. As a responsible jurist charged with the duty of interpreting congressional enactments, I am loathe to conclude that any provision of the United States Code is gibberish — if Congress took the time to pass the measure, and the President signed it into law, it must mean something. In this particular case, § 602(a)(38) can only mean one thing. Congress, in its wisdom, has decided that in the interests of deficit cutting and social welfare program management, Title II payments to a child beneficiary must be deemed available for the common use of the other members of his or her household unit.

Since I find that the HHS’ interpretation is reasonable and consistent with the underlying purpose of DEFRA, that interpretation must be accorded substantial deference. See Schweiker v. Hogan, 457 U.S. 569, 583, 102 S.Ct. 2597, 2606, 73 L.Ed.2d 227 (1982); Blum v. Bacon, 457 U.S. 132, 141-42, 102 S.Ct. 2355, 2361, 72 L.Ed.2d 728 (1982). Furthermore, pursuant to a long line of Supreme Court authority, I find that this particular legislation is rationally related to the cognizable goals of dealing with bugetary constraints and responsibly allocating limited social welfare funds. See, e.g., Califano v. Aznavorian, 439 U.S. 170, 174, 99 S.Ct. 471, 473, 58 L.Ed.2d 435 (1978); Dandridge v. Williams, 397 U.S. 471, 90 S.Ct. 1153, 25 L.Ed.2d 491 (1970). The instant plaintiffs are not denied any due process or equal protection rights by Congress’ reallocation of AFDC benefits. See United States Railroad Retirement Board v. Fritz, 449 U.S. 166, 101 S.Ct. 453, 66 L.Ed.2d 368 (1980).

Returning to the remaining two elements of the Mason County test, I find that the plaintiffs have not shown a substantial likelihood of success on the merits of their AFDC claim. Moreover, since it is Congress, and not the judiciary, that speaks for the public interest in the area of social welfare programs, I conclude that issuing a preliminary injunction against further implementation of the instant statute and regulation in the State of Michigan would not be in the public interest. Therefore, plaintiffs’ motion is denied.


author: HILTON, District Judge.

text:
    UNITED STATES of America, Plaintiff, v. CITY OF MANASSAS, VIRGINIA; Arthur L. Shoemake, Commissioner of Revenue for the City of Manassas, Defendants. and William H. Forst, State Tax Commissioner of the Commonwealth of Virginia Defendant-Intervenor.
    Civ. A. No. 85-0731-A.
    United States District Court, E.D. Virginia, Alexandria Division.
    Jan. 30, 1986.

      Joseph A. Fisher, III, Asst. U.S. Atty., Alexandria, Va., for plaintiff.
    James W. Hopper, Washington, D.C., for defendants.
    Marion S. Cooper, Asst. Atty. Gen., Richmond, Va., for defendant-intervenor.
   MEMORANDUM OPINION

HILTON, District Judge.

This action was instituted by the United States for the purpose of obtaining (1) a declaratory judgment that Code of Va. § 58-831.2 unconstitutionally discriminates against the United States by permitting taxation of property furnished by the United States to its contractors but not subjecting to tax the use of property furnished by the State to certain contractors or property leased by local transportation districts; (2) preliminary and permanent injunctions preventing the defendants and those acting in concert with them from imposing, assessing or collecting taxes pursuant to Va.Code Ann. § 58-831.2 on property owned by the United States and furnished to its contractors; and (3) for a refund of taxes paid to the City of Manassas from 1981 to 1984 by International Business Machines Corporation (“IBM”) pursuant to Va.Code Ann. § 58-831.2.

IBM Federal Systems Division, which is located in the City of Manassas, has a number of contracts with the Department of Defense and administered by the Defense Logistics Agency, including approximately twenty-nine contracts involved in this case which are primarily contracts let by the Navy for advanced signal processing and submarine sonar work. Some of the contracts are for research and development and others are production contracts which involve manufacturing and testing of equipment. IBM receives a fee in addition to reimbursement of its costs for the performance of these contracts. The contract fees are a profit for IBM.

Under the contracts, the United States through the Defense Logistics Agency has provided Government-owned property to IBM. The provisions of the contracts and federal regulations allow this property to be used only in the performance of Government contracts.

On June 23, 1981, the City of Manassas informed IBM by letter that by Code of Virginia § 58-831.2, IBM was subject to local taxation and that under Virginia law manufacturers are subject to local taxation on machinery and tools used in manufacturing such as the machinery and tools furnished to IBM by the Federal Government for the performance of the contracts at the Manassas facility. At the direction of the Defense Logistics Agency, IBM has paid the City of Manassas under protest the taxes assessed pursuant to Code of Va. § 58-831.2 for the tax years 1981 through 1984. The amounts of the taxes that have been paid are as follows:

Tax Year Amount Paid

1981 $ 69,179

1982 71,397

1983 73,318

1984 76,471

Total $290,364

The contracts between IBM and the Department of Defense are cost-plus fee contracts under which taxes such as the taxes imposed pursuant to Code of Va. § 58-831.2 by the defendants are reimbursable costs. IBM has been reimbursed by the United States for the tax payments listed above. The United States is therefore the real party in interest. William H. Forst, State Tax Commissioner of Virginia has been permitted to intervene in this action pursuant to F.R.C.P. 24(b)(2) in order to defend the statute in issue.

The taxes imposed pursuant to Va.Code Ann. § 58-831.2, by the defendant, the City of Manassas, on the use of Government property furnished to IBM were assessed at the original cost of the property less depreciation.

This case is presently before the Court upon the briefs of the parties and a-joint stipulation of facts. Based on the stipulation of facts and argument presented at a hearing on December 13, 1985, I find that the material facts are not in dispute and summary judgment is appropriate under F.R.C.P. 56.

The statute under consideration, Code of Va. § 58-831.2, states as follows:

Any person, firm, association, unincorporated company, or corporation engaged in business for profit who or which leases, borrows or otherwise has made available to it any tangible personal property to be used in such business from any agency or political subdivision of the federal, state or local governments shall be liable to local taxation, unless otherwise exempted or partially exempted by state or local laws, to the same extent, in the same manner, and on the same basis as if the lessee were the owner thereof. This section shall not apply to any such property owned by the Virginia Port Authority and leased in connection with the operation of piers and marine terminals and related facilities, or to property owned by any transportation district organized under the Transportation District Act of 1964.

This statute has since been recodified, without amendment of its provisions, at § 58.1-3502.

The Virginia Port Authority is an agency of the Commonwealth of Virginia established by Code of Va. § 62.1-128 et seq. Local transportation districts are political subdivisions of the Commonwealth of Virginia created by § 15.1-1342 et seq. The parties are in agreement that the City of Manassas is not a member of a local transportation district commission, and that the Virginia Port Authority does not exercise its authority in the City of Manassas in that there are no water terminals, port facilities or other such authority property located within the geographical boundaries of the City of Manassas.

The defendants contend that because there are no Virginia Port Authority contractors or local transportation district contractors within the boundaries of the City of Manassas, the statute is not unconstitutional because it has not been discrimi-natorily applied. However, the proper examination of the statute is an examination of its language and its affect in the State and not its application in a particular local jurisdiction. Phillips Chemical Co. v. Dumas Independent School Dist., 361 U.S. 376, 80 S.Ct. 474, 4 L.Ed.2d 384 (1960) requires a determination of how other taxpayers similarily situated are treated and that determination requires an examination of the whole tax structure of the state.

The United States’ first argument is that § 58-831.2 is unconstitutional on its face in that it authorizes the imposition of local personal property taxes on property furnished to contractors of the Federal Government but does not apply to property furnished to contractors of the Virginia Port Authority or local transportation districts.

A state tax may not discriminate against the Federal Government or those with whom it deals. McCulloch v. Maryland, 17 U.S. (4 Wheat.) 316, 4 L.Ed. 579 (1819). In Phillips Chemical Co., supra, the Supreme Court ruled on a Texas statute which authorized the taxation of the full value of property leased by a Federal Government contractor, but not contractors with similar leases, using tax exempt property owned by the state and its political subdivisions. The court held that while a statute is seemingly discriminatory against the United States, the inquiry must go further to determine whether the statute is discriminatory in its application or the discrimination can be justified. The State of Texas argued that the state could collect in rent what it loses in taxes from its own lessees and could not from the United States government. It also argued that the state may legitimately foster its own interests by adopting measures which facilitate the leasing of its property, and that federal leasing of exempt land has a more serious impact on the finances and operations of local government than do the states own leasing activities. The court held that none of these arguments were adequate to justify what appears to be so substantial and transparent a discrimination against the government.

As seen in Phillips, although a statute is seemingly discriminatory on its face, it will not be unconstitutional if the discrimination is justified. Likewise, the economic burden on a federal function of a state tax imposed on those who deal with the Federal Government does not render the tax unconstitutional so long as the tax is imposed equally on the other similarly situated constituents of the state. United States v. County of Fresno, 429 U.S. 452, 97 S.Ct. 699, 50 L.Ed.2d 683 (1977). In Washington v. United States, 460 U.S. 536, 103 S.Ct. 1344, 75 L.Ed.2d 264 (1983) the Supreme Court affirmed its holding in Phillips in rejecting the argument that a tax is invalid simply because it treats those who deal with the Federal Government differently than it treats others, and again stated that the determination whether a tax is discriminatory requires an examination of the whole tax structure of the state.

In the present case, § 58-831.2 of the Code of Virginia carves out two classes of exempt property: the Virginia Port Authority and local transportation districts. Both areas are of vital concern to the Federal Government as well as the state. With the exception of intrastate commerce, the Federal Government has jurisdiction over and regulates virtually every aspect of shipping. The Virginia Port Authority was established by the General Assembly to foster and stimulate the commerce of the ports of the Commonwealth (See Joint Stipulation No. 16). Among other things, the Authority is granted police powers regarding matters affecting the safety and security of Authority property. Code of Va. § 62.1-132.11. And the Authority is specifically empowered to cooperate with the United States and its instrumentalities in the maintenance, development, improvement and use of harbors and seaports of the Commonwealth § 62.1-132.13.

Similarly, the federal government indicated its concern and involvement in mass transportation by the enactment of the Urban Mass Transportation Act, 49 U.S.C. § 1601 et seq., which declares Congressional policies designed:

(1) to assist in the development of improved mass transportation ... (2) to encourage the planning and establishment of area wide urban mass transportation systems ... and (3) to provide assistance to State and local governments and their instrumentalities in financing such systems ... 49 U.S.C. § 1601(b)

Likewise, the General Assembly’s purpose in establishing local transportation districts was to promote the orderly growth and development of the urban areas of the Commonwealth for the safety of its citizens and for the economic utilization of public funds (Joint Stipulation No. 20). The exemption of transportation district property further promotes both the Federal and State purposes by removing the additional expense accompanying the acquisition of equipment necessary to facilitate the above mentioned objectives.

It becomes apparent that the federal government has concerns and involvement which are similar to and furthered by the exemption of the Virginia Port Authority and local transportation districts and that federal tax monies in both areas are spared because of the exemptions.

A similar case was presented in Chrysler Corporation v. Township of Sterling, 410 F.2d 62 (6th Cir.1969) where a Michigan use tax was attacked. The statute, referred to as Act 189, provided as follows:

When any real property which for any reason is exempt from taxation is leased, loaned or otherwise made available to and used by a private individual, association or corporation in connection with a business conducted for profit, except where the use is by way of a concession in or relative to the use of a public airport, park market, fairground or similar property which is available to the use of the general public, shall be subject to taxation in the same amount and to the same extent as though the lessee or user was the owner of such property. Provided, however, That the foregoing shall not apply to federal property for which payments are made in lieu of taxes in amounts equivalent to taxes which might otherwise be lawfully assessed or property of any state-supported educational institution.

The Chrysler case arose out of the assessment by the Township of Sterling of an annual tax on Chrysler’s use and occupancy of a U.S. Government-owned plant. Chrysler occupied and used part of the plant for the manufacture of weapons for the Department of the Army.

The Sixth Circuit examined, inter alia, the stautory exemption for property of state-supported educational institutions and found it to be “reasonable and valid because it is founded upon the well recognized policy of both the United States and the State of Michigan to protect, promote and- support education, including colleges and universities. The involvement of the United States along with the States with direct financing of institutions of higher learning completely dispels the contention that the exemption of Michigan state-supported universities and colleges under Act 189 constitutes an unjustifiable discrimination against the United States and its lessees.” 410 F.2d at 70.

Likewise, the United States benefits as well as the State from the promotion and support of Virginia Port Authority and transportation districts. Many federal dollars are spent in both areas and the exemption under the Virginia statute should provide some financial benefits to the United States. Other than two narrow exceptions, which benefit both the Federal and State governments, both Federal and State government contractors are treated the same. That is, property of either government in the hands of a contractor is taxed at the same rate.

Accordingly, the exemptions contained in § 58-831.2 for the Virginia Port Authority and local transportation districts do not discriminate against the United States but creates justified exemptions which benefit both the State and Federal Governments.

The other Constitutional attack on § 58-831.2 by the United States is that the statute fails to tax the interest of the contractor in the government property and thus is in reality a tax on the United States. In particular, in imposing the tax authorized, the City of Manassas assessed IBM’s machinery and tools at their original cots, less depreciation. As the United States is the owner of the property, assessing the full value of the property to IBM, which does not have a full ownership interest, it is argued, necessarily results in the taxation of a portion of the interest of the United States in the property. Taxation of the property of the United States is unconstitutional.

§ 58-831.2 states in pertinent part that government contractors:

shall be liable to local taxation ... to the same extent, in the same manner, and on the same basis as if the lessee were the owner thereof.

Code of Va. § 58-831 requires that machinery and tools segregated for local taxation “shall be valued by means of depreciated cost ...”

The U.S. Supreme Court has already ruled however, that a use tax, as opposed to a property tax, may be based on the full value of the property used. In United States v. Boyd, 378 U.S. 39, 84 S.Ct. 1518, 12 L.Ed.2d 713 (1964) a use tax was imposed upon profit-making contractors of the United States and measured by the purchase price or fair market value of the property so used, whichever was greater. The Court upheld the Constitutionality of this tax, even though it was measured by the value of the government-owned property.

Similarly, in United States v. City of Detroit, 355 U.S. 466, 78 S.Ct. 474, 2 L.Ed.2d 424 (1958), a Michigan statute made the lessees of government property “subject to taxation in the same amount and to the same extent as though the lessee or user were the owner of such property_” p. 468, n. 1, 78 S.Ct. at 475, n. 1. Alike its argument in the instant case, the United States argued in Detroit that because the tax was measured by the value of the property, it should be treated as a tax on the property. The Supreme Court was not persuaded and stated:

A tax for the beneficial use of property, as distinguished from a tax on the property itself, has long been a commonplace in this country, (citations omitted.) In measuring such a use tax it seems neither irregular nor extravagant to resort to the value of the property used.... In our judgment it was not an impermissible subterfuge but a permissible exercise of its taxing power for Michigan to compute its tax by the value of the property used. Detroit at 470, 78 S.Ct. at 476.

Like the Michigan tax in Detroit, the tax in issue here is imposed upon IBM’s use of the government-owned machinery and tools; not upon the property itself. The measurement of such tax by its original cost less depreciation is, therefore, a fair and permissible method of valuation.

Accordingly, an appropriate order will enter denying plaintiff’s requested relief and entering judgment for the defendants.


author: ALSOP, Chief Judge.

text:
    Margaret E. BALE, Plaintiff, v. DEAN WITTER REYNOLDS, INC., and John B. Benson, Defendants. Janet HAERTEL, Plaintiff, v. DEAN WITTER REYNOLDS, INC., and John B. Benson, Defendants.
    Nos. 3-85 Civ. 1280, 3-85 Civ. 1679.
    United States District Court, D. Minnesota, Third Division.
    Jan. 30, 1986.

      Popham, Haik, Schnobrich, Kaufman & Doty, Ltd. by Thomas F. Nelson, Minneapolis, Minn., for defendants Dean Witter Reynolds, Inc. and John B. Benson.
    Robert M. Smith, Minneapolis, Minn., for plaintiffs Margaret E. Bale and Janet Haertel.
   ORDER

ALSOP, Chief Judge.

This matter came before the undersigned on January 10, 1986, upon the motion of defendants Dean Witter Reynolds, Inc. and John B. Benson to dismiss and/or compel arbitration and/or stay litigation in the above-entitled actions. These actions have been consolidated solely for purposes of this joint motion.

FACTS

Both plaintiffs are individuals who entered into Customer’s Agreements with Dean Witter Reynolds through its broker, John Brady Benson. Each Customer’s Agreement contained a standard arbitration clause. The complaints allege that each plaintiff maintained a “trading account” with Dean Witter Reynolds between January, 1980 and June, 1983. The complaints allege that the plaintiffs invested funds in their accounts and that trading activity commenced thereafter. The complaints further allege that the plaintiffs did not understand the way in which trading was conducted, and that the defendants failed to instruct them with regard to such matters, intending to defraud the plaintiffs. Plaintiffs also allege that defendants engaged in excessive trading in the plaintiffs’ accounts, and that some of the trades in the plaintiffs’ accounts were not suitable to their investment objectives and financial position. Plaintiffs have brought suit in nine counts, alleging violations of Sections 12(1), 12(2), and 17(a) of the Securities Act of 1933; Section 10(b) of the Securities Exchange Act of 1934 and Rules 10b-5 and 10b-16; New York Stock Exchange and National Association Securities Dealers rules; the Racketeer Influenced and Corrupt Organizations Act, 18 U.S.C. §§ 1961-64 (1982); and common law theories of fraud, negligence, and violation of fiduciary duties.

Defendants sought initially to dismiss seven of the nine counts in plaintiffs’ Original Complaints. Subsequently, plaintiffs filed Amended Complaints, in which they re-allege five of the original nine counts. Plaintiffs do not resist dismissal of the remaining four counts in the Original Complaints. Accordingly, the court will dismiss plaintiffs’ claims based upon Sections 12(1), 12(2), 17(a) of the Securities Act of 1933, and violation of New York Stock Exchange and National Association of Securities Dealers rules. Defendants also seek to dismiss plaintiffs’ claims based upon Section 10(b) of the Securities Exchange Act of 1934, RICO and common law fraud, for failure to plead these counts with sufficient particularity. See Fed.R.Civ.P. 9(b). Defendants also seek dismissal of plaintiffs’ RICO claims on the ground that plaintiffs have failed to plead the essential elements of a RICO offense, and that, at least with respect to defendant Dean Witter Reynolds, plaintiffs’ RICO claims are improperly pleaded because Dean Witter Reynolds cannot be both the enterprise and the defendant in the same action.

Defendants further request that the court compel arbitration of any claims not dismissed by this order. Finally, defendants ask that the court stay its consideration of any issues neither dismissed nor directed to arbitration until arbitration proceedings in the case are completed.

DISCUSSION

I. Dismissal

Defendants contend that defendants’ claims based on Section 10(b), RICO, and common law fraud are all based upon claims of fraud. Federal Rule of Civil Procedure 9(b) provides in part:

In all averments of fraud or mistake, the circumstances constituting fraud or mistake shall be stated with particularity.

Defendants argue that plaintiffs’ complaints fail to satisfy the requirements of Rule 9(b), and therefore should be dismissed. Rule 9(b), however, must be read in conjunction with Rule 8, which contemplates simplicity and flexibility in pleading. See, e.g., McGinty v. Beranger Volkswagon, Inc., 633 F.2d 226, 229 (1st Cir.1980); In re: Longhorn Securities Litigation, 573 F.Supp. 255, 263 (D.C.Okla.1983); 5 C. Wright & A. Miller, Federal Practice and Procedure, § 1298, at 406-404 (1969) (hereinafter Wright and Miller).

If the fraud allegedly involved either a course of conduct occurring over an extended period of time or a series of transactions, it is not necessary to recite, in detail, the fact of each transaction of the fraudulent scheme. See General Accident Insurance Co. v. Fidelity and Deposit Company, 598 F.Supp. 1223, 1232 (E.D.Pa.1984). Accord Kimmel v. Peterson, 565 F.Supp. 476, 481-82 (E.D.Pa.1983). The court has now granted plaintiffs leave to amend their complaints. Plaintiffs’ Amended Complaints state their fraud alie-gations with sufficient particularity to give defendants adequate notice and enable them to prepare a responsive pleading. Therefore, plaintiffs’ Amended Complaints satisfy the particularity requirements established by Rules 8 and 9(b). See Wright and Miller, § 1298, at 415.

Defendants further contend that plaintiffs’ RICO allegations should be dismissed because plaintiffs have failed to plead the essential elements of a cause of action under the RICO statute. Plaintiffs’ Amended Complaint, however alleges the existence of a person, John B. Benson, who conducted a distinct enterprise, the affairs of Dean Witter Reynolds, through a pattern of racketeering activity. Despite the sketchy nature of these allegations, they are sufficient to survive defendants’ motion to dismiss at this time. See 18 U.S.C. § 1962(c), 1961(1), (3), (4), and (5) (1982). Further consideration of the sufficiency of plaintiffs’ allegations is best left to the arbitration panel. See Land v. Dean Witter Reynolds, Inc., 617 F.Supp. 52 (E.D.Va.1985).

Defendants also contend plaintiffs’ RICO claim should be dismissed because plaintiffs have alleged that Dean Witter Reynolds is both the enterprise and a defendant for purposes of their RICO allegations. In Ross v. Omnibusch, Inc., 607 F.Supp. 835 (W.D.Mich.1984), the court addressed the same argument. Defendants in that action relied principally on Bennett v. Berg, 685 F.2d 1053 (8th Cir.1982), cert. denied, 464 U.S. 1008, 104 S.Ct. 527, 78 L.Ed.2d 710 (1983), and asserted that plaintiffs RICO allegations should have been dismissed because they failed to allege an enterprise distinct from the defendants. The court in Ross rejected this argument and concluded that the defendants misstated the holding in Bennett. This court believes the same is true of defendants’ argument in this case. The Eighth Circuit clearly held in Bennett that the “enterprise” alleged in a RICO allegation must be an entity distinct from the “pattern of racketeering” and “person” identified in the allegation. Bennett, 685 F.2d at 1059-62. In so holding, however, the Eighth Circuit expressly declined to decide whether the defendants in Bennett might have been enterprises. See id., at 1061. Therefore, the RICO enterprise may be a defendant, providing that one or more of the defendants is the “person” who acts upon the enterprise in such a way that the enterprise’s affairs are conducted in the pattern of racketeering. Id.; Ross, 607 F.Supp. at 838. Accordingly, the court declines defendants’ invitation in this action to dismiss plaintiffs’ RICO allegations as to Dean Witter Reynolds.

II. Defendants’ Motion to Compel Arbitration

Until last year, courts held consistently that RICO claims were nonarbitrable. See, e.g., Witt v. Merrill Lynch, 602 F.Supp. 867 (W.D.Pa.1985); Jacobson v. Merrill Lynch, 605 F.Supp. 510 (W.D.Pa.1984); Universal Marine Ins. Co., Ltd. v. Beacon Ins. Co., 588 F.Supp. 735 (W.D.N.Car.1984); Wilcox v. Ho-Wing Sit, 586 F.Supp. 561 (N.D.Cal.1984); S.A. Mineracao Da Trinadade-Samitri v. Utah Int’l Inc., 576 F.Supp. 566 (S.D.N.Y.1983), aff'd, 745 F.2d 190 (2d Cir.1984) (Samitri). Opinions issued after the Southern District of New York’s decision in Samitri tended to rely heavily on that case.

On January 2, 1986, however, the Southern District of New York reversed itself and concluded that RICO claims are arbitrable. Brener v. Becker Paribas, Inc., 628 F.Supp. 442 (S.D.N.Y.1986). See West v. Drexel Burnham Lambert Inc., Fed.Sec.L.Rep. If 92, 343 (N.D.Ga. September 11, 1985); Jacobsen v. Merrill Lynch, No. 84-1844 (W.D.Pa.1985); Development Bank of the Philippines v. Chemtex Fibers Inc., 617 F.Supp. 55 (S.D.N.Y.1985). The court in Brener noted that RICO does not include an anti-waiver provision, and there is no indication that Congress intended to exempt RICO claims from the dictates of the Arbitration Act. The court also noted that a strong policy exists in favor of arbitration, and courts are reluctant to disregard the parties’ express agreement to arbitrate. Most importantly, the Supreme Court’s recent decision in Sedima, S.P.R.L. v. Imrex Co., Inc., — U.S.-, 105 S.Ct. 3275, 87 L.Ed.2d 346 (1985), implicitly approved the view that RICO is essentially a federal business tort statute. The majority of civil RICO claims today do not impact on the general society or involve vital national interest, in the manner that the Samitri court anticipated. For these reasons, the Brener court considered it appropriate to compel arbitration of the plaintiff’s RICO claims. In light of the evident shift in the prevailing view regarding the arbitrability of RICO claims, and in light of the persuasive force of the Southern District of New York’s analysis in.the Brener decision, this court will grant the defendants’ motion to compel arbitration of plaintiffs’ RICO claims in this action.

Defendants next seek arbitration of plaintiffs’ claims based upon Section 10(b) of the Securities Exchange Act of 1934, and Rules 10b-5 and 10b-16. In Wilko v. Swan, 346 U.S. 427, 74 S.Ct. 182, 98 L.Ed. 168 (1953), the Supreme Court held that claims brought under the Securities Act of 1933 are nonarbitrable. Id. at 438, 74 S.Ct. at 188. In Surman v. Merrill Lynch, Pierce, Fenner & Smith, 733 F.2d 59 (8th Cir.1984), the Eighth Circuit noted decisions of other lower federal courts that had extended the Wilko ruling to claims arising under the Securities Exchange Act of 1934. Id. at 61. The court agreed with the assumption of the parties and the district court in Surman that such claims are non-arbitrable, but did not squarely hold as such. Id. The Supreme Court’s subsequent decision in Dean Witter Reynolds, Inc. v. Byrd, — U.S. —, 105 S.Ct. 1238, 84 L.Ed.2d 158 (1985), suggests the possibility that further developments may occur in this area. See id., 105 S.Ct. at 1240 n. 1, 1244 (White J. concurring). For the time being, however, the Eighth Circuit’s broad reading of Wilko v. Swan in Surman remains the law in this circuit. See Phillips v. Merrill Lynch, No. 4-81-394, (D.Minn. April 11, 1985). Accordingly, the court will deny defendants’ motion to compel arbitration of plaintiffs’ claims based upon Section 10(b) of the Securities Exchange Act of 1934.

Defendants also seek arbitration of plaintiffs’ common law claims based upon fraud, negligence, and violation of fiduciary duty. The Supreme Court confronted a similar request in Dean Witter Reynolds, Inc. v. Byrd, — U.S.-, 105 S.Ct. 1238, 84 L.Ed.2d 158 (1985). There the court held that the Arbitration Act requires district courts to compel arbitration of pending arbitrable claims when one of the parties files a motion to compel, even where the result would be the possibly inefficient maintenance of separate proceedings in different forums. Id., 105 S.Ct. at 1241; see Surman v. Merrill Lynch, Pierce, Fenner & Smith, 733 F.2d 59 (8th Cir.1984). Accordingly, this court will compel arbitration of plaintiffs’ pending state law claims.

III. Stay Pending Arbitration

Defendants move this court to stay its consideration of plaintiffs’ claims based upon Section 10(b) of the Securities Exchange Act of 1934 pending completion of arbitration proceedings. See 9 U.S.C. § 3 (1982). Although the federal interests implicated in a suit brought upon Section 10(b) are considered important enough at this time to preclude arbitration of such claims, see Surman v. Merrill Lynch, 733 F.2d at 61, the court need not refuse to stay consideration of plaintiffs’ nonarbitra-ble claims solely out of concern that the preclusive effect of an arbitration proceeding may improperly infringe upon federal interests. Instead, courts may directly and effectively protect federal interests by determining the preclusive effect to be given an arbitration proceeding. Byrd, 105 S.Ct. at 1243. As a result, there is no reason for this court to manipulate the ordering of the resulting bifurcated proceedings resulting from this order, simply to avoid an infringement of federal interests. Id., at 1244. Accordingly, the court will stay its consideration of claims brought under Section 10(b) of the Securities Exchange Act of 1934. The parties may continue with such discovery as is provided for by the applicable arbitration rules, but all further discovery will be stayed pending completion of the arbitration proceedings.

Based upon the foregoing, the record as presently constituted, and the submissions and arguments of the parties,

IT IS HEREBY ORDERED That defendants’ motion to dismiss Counts I, II, III, and V of plaintiffs’ Original Complaint is hereby granted, and these Counts are dismissed.

IT IS FURTHER ORDERED That defendants motion to dismiss plaintiffs’ Section 10(b), RICO, and common law fraud claims is respectfully denied.

IT IS FURTHER ORDERED That defendants’ motion to compel arbitration of plaintiffs’ RICO, common law fraud, common law negligence, and common law breach of fiduciary duty is hereby granted. The parties are directed to submit these claims to arbitration as provided for in the Customer’s Agreement.

IT IS FURTHER ORDERED That defendants’ motion to compel arbitration of plaintiffs’ Section 10(b), Rule 10b-5 and Rule 10b-16 claims is respectfully denied.

IT IS FINALLY ORDERED That defendants’ motion to stay plaintiffs’ claims based upon Section 10(b), Rule 10b-5 and Rule 10b-16 pending completion of arbitration proceedings is granted. The parties may continue with such discovery as is provided for by applicable arbitration rules, but all further proceedings in this action will be stayed pending completion of the arbitration proceedings.

      . In light of the court’s decision to compel arbitration of plaintiffs' RICO and common law fraud claims and to stay its consideration of plaintiffs’ 10(b) claims, it would make little sense in any event to dismiss plaintiffs’ fraud allegations without prejudice and await their motions to amend the pleadings. See Bennett v. Berg, 685 F.2d 1053, 1062 (8th Cir.1982) (dismissal without prejudice the proper course), cert. denied, 464 U.S. 1008, 104 S.Ct. 527, 78 L.Ed.2d 710 (1983). See also Fed.R.Civ.P. 15(a) (leave to amend pleadings "shall be freely given when justice so requires”); Asay v. Hallmark Cards, Inc., 594 F.2d 692, 695-96 (8th Cir.1979) (pleading rules are interpreted in accord with the principle that the purpose of pleading is to facilitate a proper decision on the merits). Further consideration of the sufficiency of plaintiffs’ allegations is best left for the moment to the ' arbitration panel. See Land v. Dean Witter Reynolds, Inc., 617 F.Supp. 52 (E.D.Va.1985).