author: BEAM, District Judge.

text:
    CONSOLIDATED BLENDERS, INC., Plaintiff, v. UNITED STATES of America, Defendant.
    No. CV 79-0-509.
    United States District Court, D. Nebraska.
    Nov. 7, 1984.

      David R. Klaassen, Salina, Kan., and George C. Svoboda, Fremont, Neb., for plaintiff.
    Daniel F. Ross, Washington, D.C., for defendant.
   MEMORANDUM

BEAM, District Judge.

This matter is before the Court upon the plaintiff’s objections (filing 17) to the Report and Recommendation of the Magistrate (filing 14) regarding the parties’ cross-motions for summary judgment (filings 9 and 11) and plaintiff’s request for oral argument (filing 17). Under 28 U.S.C. § 636(b)(1), and Local Rules 49(B) and 44(D), this Court is to make a de novo determination of those portions of the Report and Recommendation to which objections have been made.

The issues before this Court concern the extent the plaintiff is entitled to claim net operating loss carryovers pursuant to Section 382(b) of the Internal Revenue Code of 1954, applicable to plaintiff's tax year ending April 30, 1974, and the extent the plaintiff is entitled to claim investment credit carryovers pursuant to Section 383 of the Code for the same year. Section 383 provides the same limitations to the investment tax credit carryover as are applicable to the net operating loss carryover under the provisions of Section 382(b). Since the amount of the investment tax credit carryover allowed under Section 383 is dependent upon the Court’s interpretation of Section 382(b), this Memorandum will generally speak in terms of net operating loss carryovers under Section 382(b). The Court’s holding in regard to Section 382(b) will then be applicable to determine the amount of investment credit carryovers allowable.

The facts in this case are not in dispute and are as agreed to by the parties and as recited in the Pre-trial Order and attached exhibits (filing 8). Briefly, this case concerns the merger of eight corporations with and into Consolidated Blenders, Inc. in a tax-free corporate reorganization under 26 U.S.C. § 368(a)(1)(A). The corporations were variously engaged in farming, grain handling and storage, alfalfa dehydrating and related activities. Consolidated Blenders, Inc. continued these activities after the reorganization.

Six of these corporations at the time of the merger had either a net operating loss (NOL) carryover or an investment credit (IC) carryover. Six of the eight merging corporations were owned directly or indirectly by various members of the Morrison family as set forth in detail in the Pre-trial Order. Four of the six corporations with the contested tax attributes were owned by the Morrison family.

Plaintiff contends that because of the reorganization under Section 368(a)(1)(A), the tax attributes of the several merging corporations became available to the acquiring corporation, Consolidated Blenders, Inc., by virtue of Section 381(a), subject to certain limitations imposed by Section 382(b). Plaintiff argues that for the purposes of determining the limitations imposed by Section 382(b) on carrying over the tax attributes, that all of the loss corporations should be grouped together, and in the alternative, that at least those four corporations owned by various members of the Morrison family should be grouped together. The government contends that for purposes of Section 382(b), each loss corporation involved in the reorganization must be viewed separately to determine the amount of carryover allowed. The government’s position results in a substantial reduction in the amount of the attributes that would pass on to Consolidated Blenders, Inc. because of the reorganization.

The Magistrate agreed with the position of the government. The Magistrate reported that Treasury Regulation § 1.382(b)-1(a)(5), as in effect for the plaintiff’s tax year ending April 30, 1974, interprets Section 382(b) limitations to apply to each loss corporation separately, as individual units within the total reorganization. Therefore, in order for the plaintiff to succeed in its contention that the loss corporations are to be grouped together, the plaintiff bears the burden to show that the above regulation is both unreasonable and plainly inconsistent with Section 382(b) of the I.R.S. Code: See Commissioner v. Portland Cement Co., 450 U.S. 156, 169, 101 S.Ct. 1037, 1045, 67 L.Ed.2d 140 (1981). In addition, the Magistrate distinguished World Service Life Insurance Co. v. United States, 471 F.2d 247 (8th Cir.1973) [World Service] from the case at bar to refute the plaintiff’s reliance on that case to support its contentions that the loss corporations should be allowed to be grouped together for purposes of the 20 percent limitation under Section 382(b)(1)(B). The Magistrate recommended that plaintiff’s motion for summary judgment (filing 9) and motion for oral argument (filing 10) be denied and defendant’s motion for summary judgment (filing 11) be granted.

The plaintiff contends in his objections that the Magistrate erred in (1) relying on Treasury Regulation § 1.382(b)-l(a)(5); (2) misinterpreting Section 382(b)(1)(B) to require each loss corporation’s net operating losses to be analyzed separately in order to determine the extent that the tax attributes are allowable; (3) misinterpreting the “continuity of interest” concept underlying Section 382(b); and (4) failing to consider the beneficial ownership of stock when applying the limitations of Section 382(b)(1)(B) and Section 383.

This case turns on the interpretation of Section 382(b) as it applies to the merger of several loss corporations, some of which are owned by the same family, into a resulting corporation. Section 382(b) provides:

Section 382(b) Change of Ownership as the Result of a Reorganization—
(1) In general. — If, in the case of a reorganization specified in paragraph (2) of section 381(a), the transferor corporation or the acquiring corporation—
(A) has a net operating loss which is a net operating loss carryover to the first taxable year of the acquiring corporation ending after the date of transfer, and
(B) the stockholders (immediately before the reorganization) of such corporation (hereinafter in this subsection referred to as the “loss corporation”), as the result of owning stock of the loss corporation, own (immediately after the reorganization) less than 20 percent of the fair market value of the outstanding stock of the acquiring corporation,
the total net operating loss carryover from prior taxable years of the loss corporation to the first taxable year of the acquiring corporation ending after the date of transfer shall be reduced by the percentage determined under paragraph (2) .
(2) Reduction of net operating loss carryover.—
The reduction applicable under paragraph (1) shall be the percentage determined by subtracting from 100 percent—
(A) the percent of the fair market value of the outstanding stock of the acquiring corporation owned (immediately after the reorganization) by the stockholders (immediately before the reorganization) of the loss corporation, as the result of owning stock of the loss corporation, multiplied by
(B) five.

The Treasury Regulation § 1.382(b)-1(a)(5) upon which the Magistrate relied states:

The reduction provided by section 382(b)(1) may apply to the carryovers of more than one corporation a party to the reorganization. For example, assume that X Corporation acquires the assets of Y Corporation and of Z Corporation in a reorganization described in section 381(a)(2) and that both X Corporation and Y Corporation have net operating loss carryovers at the date of the reorganization. The reduction under section 382(b)(1) will apply to the net operating loss carryovers of X Corporation unless the stockholders (immediately before the reorganization) of X Corporation own, immediately after the reorganization, at least 20 percent of the fair market value of the outstanding stock of X Corporation. Similarly, the reduction under section 382(b)(1) will apply to the net operating loss carryovers from Y Corporation unless the stockholders (immediately before the reorganization) of Y Corporation own, immediately after the reorganization, at least 20 percent of the fair market value of the outstanding stock of X Corporation.

It is thus the position of the regulation that when several loss corporations are engaged in a reorganization, the stockholders of each separate loss corporation must meet the 20 percent ownership test, or that Section 382(b)(1) reductions will apply. For the reasons set forth below, the Court agrees with the plaintiff that the Magistrate improperly relied on Treasury Regulation § 1.382(b)-l(a)(5) and that the Magistrate’s Report and Recommendation should not be followed.

I.

The Court does agree with the Magistrate that World Service is distinguishable from this case, even though the Court in World Service was also concerned with the validity of a regulation promulgated pursuant to Section 382(b). However, World Service was a case of first impression just as is this case and the technique the Court employed to test the validity of the regulation in World Service can be used here to test the validity of the regulation.

The Court noted in World Service, 471 F.2d at 250, that “[s]ection 382(a) has generated considerable litigation, but such has not been the case with section 382(b).” This is still true. Both Commonwealth Container Corp. v. Commissioner, 48 T.C. 483 (1967), aff'd, 393 F.2d 269 (3rd Cir. 1968) and Kern’s Bakery of Virginia, Inc. v. Commissioner, 68 T.C. 517 (1977) concern the particular application of Section 382(b)(3) not Section 382(b)(1). Even World Service itself concerns an interpretation of a different portion of Section 382(b)(1) than is at issue in this case. The cases shed little direct light on the case at bar.

But as stated before, World Service does recite the correct standard for testing the validity of a Treasury Regulation:

[I]f this regulation is a reasonable interpretation of this statute and as such does not distort the intent of Congress, then it must be sustained and the taxpayer’s claim for refund denied. Bingler v. Johnson, 394 U.S. 741 [89 S.Ct. 1439, 22 L.Ed.2d 695] (1969); McMartin Industries, Inc. v. Vinal, 441 F.2d 1274 (8th Cir.1971). However, if the regulation adds to or distracts from the intended Congressional interpretation, then it must be held invalid. General Electric Co. v. Burton, 372 F.2d 108 (6th Cir.1967).

World Service, 471 F.2d at 250.

Initially, the plaintiff argues that the regulation does not support the Magistrate’s conclusion because it must be read in conjunction with Treasury Regulation § 1.382(b)-1(a)(2), a regulation that was held invalid in World Service, 471 F.2d at 253. The Court is not persuaded by this argument.

First, Treasury Regulation § 1.382(b)-1(a)(5) does not need to be read in conjunction with Treasury Regulation § 1.382(b)-1(a)(2) to reach the conclusion that each loss corporation is to be considered separately. The regulation stands by itself. Second, in World Service, the Court was concerned with the specific definition of “to own” as required by Section 382(b) and the more burdensome definition of “to own” embodied in Treasury Regulation § 1.382(b)-l(a)(2). The Court found that the Treasury had improperly added, contrary to the intent of Congress, the requirement that stock be distributed to its shareholders in a Type C reorganization in order for the shareholders to be considered owners of the stock. World Service, 471 F.2d at 253. The Court in World Service did not address that additional section of the regulation that recites the specific words of Section 382(b), “as a result of owning stock of the loss corporation.” Rather, the Court in World Service only held that distribution is not required for ownership. 471 F.2d at 253. In this respect World Service is not direct support for the plaintiff’s argument that Treasury Regulation § 1.382(b)-1(a)(5) does not comport with the intent of Congress by adding or subtracting from Section 382(b). Plaintiff has not proved that the regulation is both unreasonable and plainly inconsistent with Section 382(b) through this argument.

II.

However, the Court does find that the plaintiff has successfully proved that Treasury Regulation § 1.382(b)-1(a)(5) is invalid because it distorts what Congress intended to accomplish under Section 382(b). The Treasury Regulation, the government’s contentions and the Magistrate’s Report and Recommendation impose a more onerous burden on the taxpayer than Congress intended when it codified the objective 20 percent continuity of interest requirement into Section 382(b). The Court finds both valid and persuasive the plaintiffs contentions that Treasury Regulation § 1.382(b)-l(a)(5) and the government’s position misinterprets Section 382(b)(1)(B) to require each loss corporation’s net operating losses to be analyzed separately in order to determine the extent the tax attributes are allowable. Such a meaning is a misinterpretation of the “continuity of interest” concept underlying Section 382(b).

A.

After a cursory glance at Section 382(b), the argument that the section requires each individual loss corporation to be regarded separately seems reasonable. However, it is necessary to step back and consider the proper function of a court when interpreting a statute. As the United States Supreme Court has stated:

In the interpretation of statutes, the function of the courts is easily stated. It is to construe the language so as to give effect to the intent of Congress____
There is, of course, no more persuasive evidence of the purpose of a statute than the words by which the legislature undertook to give expression to its wishes. Often these words are sufficient in and of themselves to determine the purpose of the legislation. In such cases we have followed their plain meaning. When that meaning has led to absurd or futile results, however, this Court has looked beyond the words to the purposes of the act. Frequently, however, even when the plain meaning did not produce absurd results but merely an unreasonable one ‘plainly at variance with the policy of the legislation as a whole’ this Court has followed the purpose rather than the literal words.

United States v. American Trucking Ass’n, 310 U.S. 534, 542-43, 60 S.Ct. 1059, 1063-64, 84 L.Ed. 1345 (1940).

In World Service, the Eighth Circuit quoted Judge Learned Hand:

There is no more likely way to misapprehend the meaning of language — be it in a constitution, a statute, a will or a contract — than to read the words literally, forgetting the object which the document as a whole is meant to secure. Nor is a court ever less likely to do its duty than when, with an obsequious show of submission, it disregards the overriding purpose because the particular occasion which has arisen, was not foreseen [emphasis added] [citations omitted].

World Service, 471 F.2d at 250.

Another court with regard specifically to taxing statutes noted:

Taxing statutes must be applied within reasonable limits and construed in the light of their purpose. One designed to prevent tax avoidance may, under some circumstances, be liberally construed in favor of the taxpayer, by confining its scope to the object of its creation.

Musselman Hub-Brake Co. v. Commissioner, 139 F.2d 65, 67 (6th Cir.1943).

In this case the words of the statute alone are not sufficient in and of themselves to determine the proper application of Section 382(b). The statute is written in the singular. However, this case involves eight corporations merging into one corporation in a single, valid reorganization. In such a transaction, to apply the language of Section 382(b) in isolation from related statutes is to reach an absurd result contrary to the purpose of the statutory scheme concerning NOL carryovers.

B.

In view of this, the Court finds that the intent of Congress must be gleaned from analyzing a combination of the statutory language and legislative history of Sections 269, 381 and 382 relating to NOL carryovers.

As the Eighth Circuit in World Service noted, the Congressional Committee Reports state that the purpose of Section 269 was “to put an end promptly to any market for, or dealings in, interests in corporations or property which have as their objective the reduction through artifice of the income or excess profits tax liability.” World Service, 471 F.2d at 251, citing H.R. Rep. No. 871, 78th Cong., 1st Sess. 49 (1943). The government has not argued that Section 269 is applicable to this case since there is no hint whatsoever that the “principal purpose” of the merger of the eight corporations into Consolidated Blenders, Inc. was the avoidance of federal income taxes by means of utilization of the available NOL carryovers.

“Sections 381 and 382 were added to this statutory scheme in 1954 in an effort to ‘protect taxpayers against the loss of favorable tax attributes, as well as to prevent the avoidance of unfavorable ones by paper reorganizations.’ ” World Service, 471 F.2d at 251, citing Bittker and Eustice, Federal Income Taxation of Corporations and Shareholders 14-16 (3rd ed.). The House Report 1337 describes the purpose of these provisions as follows:

Present law makes no provisions for the transfer from one corporation to another, in a tax-free merger or consolidation, of the major tax benefits, privileges, elective rights and obligations which were available to the predecessor. These include such items as carryovers ...
As a result, present practice rests on court-made law which is uncertain and frequently contradictory. Moreover, whether or not the carryover is allowed should be based upon economic realities rather than upon such artificialities as the legal form of the reorganization ____
The new rules [Section 381] enable the successor corporation to step into the ‘tax shoes’ of its predecessor corporation without necessarily conforming to artificial legal requirements which now exist under court-made law. Tax results of reorganizations are thereby made to depend less upon the form of the transaction than upon the economic integration of two or more separate businesses into a unified business enterprise____
This special limitation [Section 382] on net operating loss carryovers provides an objective standard governing the availability of a major tax benefit which has been abused through trafficking in corporations with operating loss carryovers, the tax benefits of which are exploited by persons other than those who incurred the loss. It treats a business which experiences a substantial change in its ownership, to the extent of such change, as a new entity for such tax purposes. [Emphasis added].

H.R.Rep. No. 1337, reprinted in 3 US. Code Cong. & Ad.News 4017, 4066-67 (1954).

Further explanation of Section 382 is offered in Senate Report 1622:

Your committee also limits the allowance of net operating loss carryovers as a result of a tax-free reorganization. Your committee considers it appropriate to allow such carryovers in full only when the shareholders of the predecessor loss corporation have a substantial continuing interest in the successor corporation. Thus, if the shareholders of the old loss corporation have 20 percent of the stock of the new corporation the loss carryover is available to the new corporation without diminution.
Sub-section (b) [Section 382(b)] is designed to prevent the liberalized carryover of net operating losses permitted in Section 381 from being used by one corporation to acquire the total net operating loss carryovers of another corporation without giving up at least a 20 percent share to the stockholders of the corporation with a net operating loss carryover. If the stockholders of the loss corporation have a 20 percent or more interest in the successor corporation, it is felt that there is a sufficient continuity of interest in the net operating loss carryover to justify permitting the entire net operating loss to carry over____
Paragraph (3) [Section 382(b)(3)] provides that the limitations in subsection (b) shall not apply if the transferor corporation and the acquiring corporation are owned substantially by the same persons in the same proportions____ [Emphasis added],

S.Rep. No. 1622, reprinted in 3 U.S.Code Cong. & Ad.News 4684, 4924-25 (1954).

On the basis of the legislative history, Section 381 was codified to liberalize and clarify the use of NOL carryovers in tax-free reorganizations. Section 382(b) was enacted to preclude 100 percent utilization of the tax attributes in such reorganizations unless the acquiring corporation gives up 20 percent control to stockholders of the acquired corporation or unless the acquired corporation is owned substantially by the same persons in the same proportions before and after the reorganization. (The latter criterion is contained in Section 382(b)(3) and is not at issue here.)

C.

The history of Section 382 speaks in terms of an objective standard against which to measure the quantum of substantial continuing shareholder interest required in order for tax attributes to be totally utilized in a reorganization. In addition, it is clear that the intent of Congress, through its enactment of the NOL carryover scheme, was not to have the economic realities of a transaction disregarded. When these two basic ideas are considered with regard to this case, it is clear that the NOL carryovers and IC carryovers should be available to Consolidated Blenders, Inc. Though the United States and the Treasury Regulation contend otherwise, to allow the aggregation of the loss corporations is not inconsistent with the intent of Congress, nor does it render the 20 percent test a nullity.

The numeric standard is not particularly high. Congress was willing to allow full utilization of the tax attributes when a mere 20 percent control of the acquiring corporation was given in return for the shares of the loss corporation. In this case when the loss corporations are aggregated, Consolidated Blenders, Inc. gave up 42.-4962 percent control to the stockholders that formerly owned stock in the aggregated loss corporations. The stockholders using these tax benefits are the same persons who incurred the loss. Compare, 3 U.S. Code Cong. & Ad.News 4067 (1954) (abusive practice when tax benefits are exploited by persons other than those who incurred the loss).

The objective standard was intended by Congress to be available as a shield to the taxpayer as well as a sword to the Tax Commissioner. See World Service, 471 F.2d at 251. It aids in tax planning to know that when certain objective standards are met, certain tax results will occur. In a valid two corporation tax-free reorganization, a transfer of at least 20 percent of the stock of the acquiring corporations will act as a shield that preserves the tax benefits. However, in a valid reorganization of more than five loss corporations, the objective standard becomes solely a sword to the Tax Commissioner against one or more of the corporations if the loss corporations are not allowed to aggregate the percentage of shares they received in the acquiring corporation as a result of the reorganization.

By interpreting Section 382(b) to allow the loss corporations to be aggregated, the objective standard remains intact. The acquiring corporation must be willing to relinquish at least 20 percent of its shares to benefit fully from the tax attributes in a reorganization. The 20 percent standard applies to the shares of the acquiring corporation received by the loss corporation stockholders as a result of the reorganization on account of their owning stock in the loss corporation. Stock acquired otherwise may not be counted.

In this particular case, the stockholders of the six loss corporations acquired 78.8337 percent of the capital stock of Consolidated Blenders, Inc. as a result of the corporate reorganization, and such stockholders acquired 42.4962 percent of the capital stock of Consolidated Blenders, Inc. on account of their ownership of stock of the loss corporations which were parties to the corporate reorganization. The stockholders of the four corporations with investment tax credits acquired 15.7505 percent of the capital stock of Consolidated Blenders, Inc. on account of their ownership of stock of the investment tax credit corporations that were parties to the corporate reorganization.

Consolidated Blenders, Inc. is entitled to the full benefit of the NOL carryovers because 42.4962 percent relinquishment of control surpasses the 20 percent requirement. However, the amount of IC carryovers allowed will have to be reduced in accordance with Section 382(b)(2) since the 15.7505 percent amount of stock received as a result of the reorganization from owning stock in the investment credit corporation is less than the 20 percent standard.

As an epilogue, the Court notes that it is ludicrous to read Section 382(b) to require each loss corporation to meet the 20 percent standard separately when there is a single reorganization as occurred here. As the plaintiff noted, such an interpretation creates an irrebuttable presumption that no more than five loss corporations can ever be validly merged in one reorganization without losing use of NOL carryovers. Under the amended Section 382(b) such an interpretation would conclusively presume that no more than two corporations can merge in one reorganization and still benefit from unused tax attributes. The Court agrees with the plaintiff that “nothing exists in the language of the statutes, or in their background or legislative history to indicate a Congressional intention or purpose to condemn or prevent such multiple mergers, nor to reduce the tax benefits otherwise available in the event of such a multiple merger.” (Plaintiffs Reply Brief at 6.) In fact it is the contrary. Simplification in business enterprises is encouraged. The reorganization of the eight corporations into Consolidated Blenders, Inc. was a valid single reorganization under Section 368(a)(1)(A) that occurred in accordance with relevant state law. (See Neb.Rev. Stat. §§ 21-2070 et seq.; Kan.Stat.Ann. §§ 17-6701 et seq.; Colo.Rev.Stat.Ann. §§ 7-7-101 et seq.) The Commissioner still can use Section 269 to disallow tax benefits if mergers of several small loss corporations start to occur for the principal purpose of avoiding Federal Income Tax.

D.

Finally, the Court does not find it necessary to reach the issue of whether the beneficial ownership of stock needs to be considered when applying the limitations of Section 382(b)(1)(B) and Section 383.

III.

In view of the foregoing, the Court finds that requiring each NOL corporation or IC corporation involved in a single reorganization to separately meet the 20 percent test was not contemplated by Congress. Such a requirement imposes a more onerous burden than Congress intended in a valid reorganization of multiple corporations. It would also place form over substance, and, like the Treasury Regulation invalidated in World Service, would “ignore] the economic realities of the reorganization, and distor[t] the statutory scheme, and manifest intent of Congress in providing for net operating loss carryovers [and investment credit carryovers].” 471 F.2d at 254. Such distortion does not properly interpret the statute. Therefore, the Court finds that Treasury Regulation § 1.382(b)-l(a)(5) is invalid. The proper interpretation of Section 382(b) requires the merging NOL corporations to be considered together for purposes of applying the 20 percent limitation to the NOL carryovers.

An order has been entered contemporaneously in accordance with this Memorandum.

      . All references to sections of the Internal Revenue Code, Treasury Regulations, and state statutes are those sections that were in effect during the time period relevant to the lawsuit unless otherwise indicated.

      . See note 4 infra.

      . This matter has been settled. Kern’s Bakery of Virginia, Inc. v. Commissioner, 68 T.C. 517 (1977). (Acquiring corporation could only use a part of the NOL carryovers of the acquired loss corporation because stockholders of the loss corporation only received 10 percent of the acquiring corporation’s stock for their stock in the acquired loss corporation as a result of the reorganization. This was the .result, even though, the loss corporation's shareholders had interest in other non-loss corporations that were also parties to the merger and received overall 50 percent of the stock of the acquiring corporation as a result of the reorganization.) Commonwealth Container Corp. v. Commissioner, 48 T.C. 483 (1967), aff’d, 393 F.2d 269 (3rd Cir.1968). (Shareholders of loss corporation received 13 percent of the acquiring corporation’s stock as a result of owning stock in the loss corporation. Because of this, the acquiring corporation was permitted to use only a portion of the NOL carryover, in spite of the fact after the merger the same shareholders owned 79 percent of the acquiring corporation.)

      . Paragraph 8 of Section B of the Pre-trial Order (filing 8) shows that the stockholders of the loss corporations received 42.4962 percent of the capital stock of Consolidated Blenders, Inc., as the result of owning stock of the loss corporations, as follows:
      Loss Corporation Percent
      CH Farms, Inc. 17.9523
      Kendale Farms, Inc. 8.7928
      Nu-Pro Products, Inc. 2.1973
      Stanton Milling Co., Inc. 6.3274
      F. J. Higgins Milling Co. 3.6129
      Higgins Warehouse Co. 3.6129
      TOTAL: 42.4962 percent

      . Paragraph 8 of Section B of the Pre-trial Order (filing 8) shows that the stockholders of the investment credit corporations received 15.7505 percent of the capital stock of Consolidated Blenders, Inc., as the result of owning stock of the investment credit corporations, as follows:
      Investment Credit Corporation Percent
      Nu-Pro Products, Inc. 2.1973
      Stanton Milling Co., Inc. 6.3274
      F. J. Higgins Milling Co. 3.6129
      Higgins Warehouse Co. 3.6129
      TOTAL: 15.7505 percent

      . 26 U.S.C. § 382(b)(1) as amended by the Tax Reform Act of 1976. The objective standard is raised from 20 percent to 40 percent of the acquiring corporation’s stock that must be received by the stockholders of the acquired loss corporation before full utilization of the NOL carryover is allowed after a reorganization. This amendment applies only to taxable years beginning on or after January 1, 1984.


source: Caselaw Access Project

author: CORCORAN, Senior District Judge.

license: Public Domain

text:
    Antonio DA SILVA and Maria De Lourdes C.F.M. Da Silva, Plaintiffs, v. James C. SANDERS, Administrator, United States Small Business Administration, et al., Defendants.
    Civ. A. No. 83-2937.
    United States District Court, District of Columbia.
    Nov. 19, 1984.

      Morton A. Faller and Keith A. Rosenberg, Meyer, Faller & Weisman, P.C., Washington, D.C., for plaintiffs.
    Richard T. Tomar, Philipson, Mallios & Tomar, P.C., Washington, D.C., for Nat. Bank of Washington (codefendant).
    John H.E. Bayly, Jr., Asst. U.S. Atty., Washington, D.C., for Small Business Admin. (codefendant).
   MEMORANDUM AND ORDER

CORCORAN, Senior District Judge.

A. Facts

Antonio and Maria Da Silva (plaintiffs) were principal shareholders in a District of Columbia corporation known as April in Portugal Masonry, Inc. (April in Portugal). To cover a loan, April in Portugal executed a $50,000 promissory note in favor the Riggs National Bank of Washington (Riggs). The United States Small Business Administration (SBA) and the plaintiffs guaranteed the note. The plaintiffs secured their guaranty with their personal residence. April in Portugal defaulted on the note in May 1979, and the SBA thereupon purchased the note and plaintiffs’ guaranty from Riggs.

On June 15, 1979, April in Portugal filed a petition in bankruptcy. Consequently, under the terms of the note, the entire unpaid principal became due and payable. From the bankruptcy estate and from redemption of certain stock, the SBA received $32,935.49 as partial payment of the unpaid principal. The plaintiff advised the SBA that they would sell their home to pay the remaining balance.

Homestead Settlement Company (Homestead) sold the plaintiffs’ house on June 19, 1981. On July 8, 1981 a personal check payable to Homestead for $141,092 was deposited in Homestead’s escrow account at the National Bank of Washington (NBW). Five days later, NBW issued and delivered to Homestead a $10,000 cashier’s check payable to SBA. NBW had relied on the proceeds from the $141,092 personal check to serve as consideration for the cashier’s check, even though the personal check had not cleared the proper banking channels.

Homestead forwarded the cashier’s check to the SBA to satisfy the plaintiffs’ loan obligation. The SBA received the cashier’s check on July 28, 1981, and, on the following day, mailed to Homestead the necessary documents to release the plaintiffs’ obligation and SBA’s lien on their property.

On August 28, 1981, the SBA’s Denver Fiscal Office deposited the cashier’s check in its Denver bank. The check cleared the Federal Reserve Bank (FRB), and, on August 31, 1981, the cashier’s check was presented to NBW for payment. More than a month earlier, however, a Florida bank had returned the $141,092 personal check “payment stopped,” because the personal check had been stolen or forged. Further investigation showed that Homestead had closed shop and left town. Consequently, NBW refused to honor its cashier’s check, claiming fraud and lack of consideration. In turn, SBA attempted to regain its secured position on plaintiffs’ residence through the local deeds office and refused to credit plaintiffs’ records for any amount covered by the cashier’s check.

On October 4, 1983, the plaintiffs filed a complaint against the SBA alleging breach of contract and fiduciary duty. On January 17, 1984, the SBA cross-claimed against the NBW for wrongful dishonor of the cashier’s check.

Both SBA and NBW have moved for summary judgment. We find no genuine issue of material fact. Accordingly, we must decide whether the Uniform Commercial Code in the District of Columbia allows the NBW to dishonor its cashier’s check because of fraud or lack of consideration, notwithstanding that the payee of the cashier’s check, the SBA, is an innocent party.

B. Discussion

A cashier’s check is a negotiable instrument drawn by a bank upon itself. Swiss Credit Bank v. Virginia National. Bank, 538 F.2d 587, 588 (4th Cir.1976); Munson v. American National Bank & Trust Co., 484 F.2d 620, 624 (7th Cir.1973); Michie on Banks and Banking, ch. 12, § 13 at 359 (1984). Although the common belief is that cashier’s checks are the same as cash, the provisions of the Uniform Commercial Code (UCC) give no indication as to how the courts should treat them, and, since the enactment of the UCC in 1965, the District of Columbia courts have offered no guidance. Consequently, we examine how other jurisdictions have construed the statutory language of the UCC and what role equity plays in determining whether banks may dishonor their cashier’s checks.

1. The Two Statutory Approaches

Courts in other jurisdictions have divided sharply as to when a bank has a defense which arises from the purchase of a cashier’s check. See generally L. Lawrence, Making Cashier’s Checks and Other Bank Checks Cost Effective: A Plea For Revision of Articles 3 and 4 of the Uniform Commercial Code, 64 Minn.L.Rev. 275, 285-320 (1980) [hereinafter cited as Lawrence, Cashier’s Checks ]. One group considers cashier’s checks as ordinary negotiable instruments and treats them as such under the UCC. Id. at 286. According to these courts, if the payee of the cashier’s check is a holder in due course, the bank may only raise real defenses before dishonoring its cashier’s check. D.C.Code Ann. § 28:3-305. However, if the payee is not a holder in due course, the bank may dishonor a cashier’s check by simply asserting personal defenses, including lack of consideration and fraud in the inducement. Id. at § 28:3-306.

The other group of courts treats cashier’s checks as cash equivalents and disallows banks from asserting those defenses that drawers of ordinary negotiable instruments may raise pursuant to sections 305 and 306. Lawrence, Cashier’s Checks, at 286. In sum, these courts focus less on the status of the payee and more on the fact that the bank backs its cashier’s checks with its own credit.

Below we summarize and examine the statutory arguments of these courts. In our discussion, we label as Group A those courts that treat cashier’s checks like ordinary negotiable instruments and as Group B the courts that view cashier’s checks as cash equivalents.

a. Group A: The Ordinary Negotiable Instrument Approach

The Group A courts offer two different analyses in their treatment of cashier’s checks as ordinary negotiable instruments. Some rely on UCC § 3-118(a) which states that “[a] draft drawn on the drawer is effective as a note.” Because the bank draws on itself when it issues a cashier’s cheek, these courts treat the cashier’s check as a note and the bank as the note’s maker. Hence, they argue that, because a cashier’s check is nothing more than a note, the defenses of sections 305 and 306 are available. See, e.g., TPO Inc. v. Federal Deposit Insurance Corp., 487 F.2d 131, 135-36 (3d Cir.1973); Banco Ganadero y Agricola v. Society National Bank, 418 F.Supp. 520, 524 (N.D.Ohio 1976).

Other Group A courts look to the acceptor’s contract in UCC § 3-413(1). These courts argue that a cashier’s check is a draft of the issuing bank that the bank accepts by the act of issuance. However, they point out that — pursuant to UCC § 3-413(1) — the acceptor’s contract is identical to the maker’s contract. Because makers are subject to the provisions of UCC §§ 3-305 and 3-306, these courts argue that sections 305 and 306 should also govern cashier’s checks. See, e.g., Rezapolvi v. First National Bank of Maryland, 296 Md. 1, 459 A.2d 183, 187-88 (1983); Santos v. First National State Bank, 186 N.J.Super. 52, 451 A.2d 401, 407 (1982).

We believe, as does Professor Lawrence, that the Group A courts misconstrue the application of UCC § 3-118(a) and § 3-413(1). Professor Lawrence explains: UCC § 3-118(a) “was intended simply to eliminate the need for a holder of a note or accepted draft to protest or give notice of dishonor to the instrument’s maker or acceptor. The draftsmen of the Code recognized that requiring these parties to protest or give notice of dishonor would serve no function, since presumably they should already be aware of their own refusal to pay.” Lawrence, Cashier’s Checks at 288. Similarly, UCC § 3-413(1) “was designed to deal with the effect of alteration, and to set out the procedural conditions precedent to the liability of the instrument’s acceptor or maker. Neither sections 3-118(a) nor 3-413 were drafted with the aim of specifying the defenses available to obligors.” Id. Accordingly, we look to the Group B courts for guidance.

b. Group B: The Cash Equivalent Approach

A majority of Group B courts which treat cashier’s checks as cash equivalents have cited UCC § 4-303 for support. That provision reads in part:

Any knowledge ... or stop-order received by ... a payor bank, whether or not effective under rules of law to terminate ... the bank’s ... duty to pay an item ... comes too late to so terminate ... such ... duty if the knowledge ... [or] stop-order ... is received ... and ... the setoff is exercised after the bank has ... accepted ... the item____

These courts reason that a bank accepts a cashier’s check as soon as the bank issues the check. Accordingly, the bank cannot refuse payment of a cashier’s check under sections 305 or 306 because such refusal is, in effect, a stop-order, and UCC § 4-303 disallows stop-orders on accepted items. See, e.g., Swiss Credit Bank v. Virginia National Bank, 538 F.2d 587, 588 (4th Cir.1976); Munson v. American National Bank & Trust Co., 484 F.2d 620, 623-24 (7th Cir.1973); State ex rel. Chan Siew Lai v. Powell, 536 S.W.2d 14, 16 (Mo.1976) (en banc); Wertz v. Richardson Heights Bank and Trust, 495 S.W.2d 572, 574 (Tex.1973).

Several courts and commentators have criticized this application of UCC § 4-303. They state that the concept of stopping payment has relevance only to relations between a bank and its customer who draws a check against the bank. A personal check is an order to pay, and a customer has the right to revoke the order before it is carried out. But, since the bank, as drawer and drawee, is its own customer when it issues a cashier’s check, it is nonsensical, the critics argue, to speak of the bank’s liability to itself for failing to stop payment on its own cashier’s check. See, e.g., Rezapolvi v. First National Bank of Maryland, 296 Md. 1, 459 A.2d 183, 188 n. 7 (1983); Santos v. First National State Bank, 186 N.J.Super. 52, 451 A.2d 401, 408 (1982); J. McDonnell, Freedom From Claims and Defenses: A Study In Judicial Activism Under the Uniform Commercial Code, 17 Ga.L.Rev. 569, 615 (1983); Lawrence, Cashier’s Checks, at 292 n. 59.

But we believe the foregoing reading of UCC § 4-303 may be unjustifiably narrow. Although the concept of a stop-order may necessitate both a bank and a bank customer, the application of UCC § 4-303 is not restricted to stop-orders. UCC § 4-303 also includes “any knowledge ... received by a payor bank.” Accordingly, as we read UCC § 4-303, a bank may not dishonor any accepted item when it receives later knowledge that would otherwise terminate its duty to honor that item. It follows that the defenses of sections 305 and 306 are not available when such defenses are based on knowledge that is received after the bank has accepted the item. In such circumstances — because a cashier’s check is an accepted item — the bank may not dishonor a cashier’s check.

We believe that this interpretation of UCC § 4-303 adheres to the UCC rules of construction. UCC § 1-102 states that the Code “shall be liberally construed and applied to promote its underlying purposes and policies.” One such underlying purpose and policy is “to permit the continued expansion of commercial practices through custom [and] usage ____” UCC § 1-102(2)(b). Cashier’s checks have always played a significant role in commercial practices. People and businesses have come to view cashier’s checks as cash because such treatment furthers certainty in commercial transactions. As one New Jersey court elaborated:

A cashier’s check circulates in the commercial world as the equivalent of cash____ People accept a cashier’s check as a substitute for cash because the bank stands behind it, rather than an individual. In effect the bank becomes a guarantor of the value of the check and pledges its resources to the payment of the amount represented upon presentation. To allow the bank to stop payment on such an instrument would be inconsistent with the representation it makes in issuing the check. Such a rule would undermine the public confidence in the bank and its checks and thereby deprive the cashier’s check of the essential incident which makes it useful. People would no longer be willing to accept it as a substitute for cash if they could not be sure that there would be no difficulty in converting it into cash.

National Newark & Sussex Bank v. Giordano, 111 N.J.Super. 347, 268 A.2d 327, 329 (1970). Because certainty promotes the expansion of commercial practices, we believe our interpretation of UCC § 4-303 heeds to the mandate of UCC § 1-102. See State ex rel. Chan Siew v. Powell, 536 S.W.2d 14, 16 (Mo.1976) (en banc) (“The nature and usage of cashier’s checks in the commercial world is such that public policy does not favor a rule that would permit stopping payment of them.”); White & Summers, Uniform Commercial Code § 17-6, at 681 n. 110 (2d ed. 1980). (The public treats cashier’s checks as the equivalent of cash, and the draftsmen did not intend to overturn this public expectation.); cf. Bristol Associates, Inc. v. Girard Trust Bank, 505 F.2d 1056, 1062 (3d Cir.1974) (“Where language is susceptible of two reasonable meanings, a court, in the commercial field, should choose that interpretation which comports with current universal practice in the business world.”).

Here, NBW ultimately discovered that its cashier’s check had been issued due to fraud and for no consideration. However, NBW received this knowledge only after NBW had accepted the cashier’s check through issuance. NBW cannot now rely on UCC §§ 3-305 and 3-306 to dishonor its cashier’s check because knowledge of the fraud and lack of consideration comes too late under UCC § 4-303. NBW has no choice but to pay.

.2. Principles of Equity

Equity also requires the bank to honor its cashier’s checks with respect to innocent third parties. D.C.Code Ann. § 28:1-103 (principles of equity supplement the UCC). In a pre-UCC case from the Court of Appeals for the District of Columbia Circuit, a bank refused to honor its cashier’s check because the payee was not a holder in due course. Whitehead v. American Security and Trust Company, 285 F.2d 282, 283 (D.C.Cir.1960) (en banc). The bank claimed that it had issued the cashier’s check due to a third-party fraud on the bank, though the payee herself was an innocent party to that fraud. The Court of Appeals noted that the payee was without opportunity to protect herself from fraud, while the bank could protect itself by requiring an indemnity bond. Id. at 283-84. Ordering the bank to honor its cashier’s check, the court held: “Since the obligation of the bank to appellant as owner of the [cashier’s check] was not discharged by this [fraud], with the consequence that one of the two innocent parties, the payee and the bank, must suffer the loss, equity casts it ... upon the one who has most trusted the party through whom the loss came.” Id. at 284.

This principle of equity applies here. Both the SBA and the NBW are innocent parties to the fraud perpetrated by Homestead. However, NBW could have required a bond or awaited the clearance of Homestead’s personal checks. NBW did neither. Therefore, with respect to cashier’s checks, we agree with the Court of Appeals: Between two innocent parties, equity casts the loss upon the party who has trusted the third-person through whom the loss came and who was in a position to protect itself. In this case, NBW should bear the loss.

C. Conclusion and Order

For the above reasons, we hold that NBW cannot refuse to dishonor its cashier’s check. It is accordingly,

ORDERED that the motion for summary judgment of the defendant NBW against the defendant SBA be DENIED, and it is further

ORDERED that the motion for summary judgment of the defendant SBA against the defendant NBW be GRANTED.

      . Plaintiffs had also named NBW as a codefendant in this case, charging wrongful dishonor of cashier’s check and negligence. Complaint ¶ 34-47 (filed Oct. 4, 1983). However, NBW moved to dismiss these counts because the plaintiffs were not real parties in interest as required by Fed.R.Civ.P. 17(a). Motion to Dismiss Complaint as to the Defendant (filed Nov. 4, 1983). On March 8, 1984, the Court granted NBW’s motion. Memorandum and Order (filed Mar. 8, 1984).

      . On September 26, 1984, the plaintiffs responded to SBA's and NBW's motions for summary judgment. Plaintiffs' Response to Motion for Summary Judgment of Federal Defendants and Response to Third Party Defendant Motion to Dismiss or, in the Alternative, Motion for Summary Judgment (filed Sept. 26, 1984). They ask us to grant SBA’s motion for summary judgment, id. at 1, but also discuss issues concerning possible refunds by the SBA. In addition, the plaintiffs respond to SBA’s questions concerning restrictions on this Court’s jurisdiction under the Tucker Act, 28 U.S.C. § 1346(a)(2). We do not choose to address these issues in this memorandum and order.

      . The SBA outlined the material facts in this case in its Federal Defendant’s Statement of Uncontested Material Facts (filed Sept. 4, 1984). In its opposition, the NBW failed to file a statement of genuine issues. Third-Party Defendant the National Bank of Washington’s Opposition to Federal Defendant’s Motion for Summary Judgment. Accordingly, we may assume that NBW has admitted the facts in SBA’s statement. Local Rule 1 — 9(h). Another source for our statement of facts was the unquestioned Affidavit of the National Bank of Washington (filed Aug. 29, 1984).

      . The Code’s only reference to cashier’s checks is D.C.Code Ann. § 28:4-211 (1981), which enumerates the types of payment that collecting banks may take in settlement of an instrument for the payment of money.

      . One pre-UCC case, Whitehead v. American Security and Trust Co., 285 F.2d 282 (D.C.Cir.1960) (en banc), did decide this issue, holding that equity requires the bank to honor its cashier's check. We discuss this case below.

      . D.C.Code Ann. § 28:3-305 reads:
      To the extent that a holder is a holder in due course he takes the instrument free from
      (1) all claims to it on the part of any person; and
      (2) all defenses of any party to the instrument with whom the holder has not dealt except
      (a) infancy, to the extent that it is a defense to a simple contract; and

        (b) such other incapacity, or duress, or illegality of the transaction, as renders the obligation of the party a nullity: and
      (c) such misrepresentation as has induced the party to sign the instrument with neither knowledge nor reasonable opportunity to obtain knowledge of its character or its essential terms; and
      (d) discharge in insolvency proceedings; and
      (e) any other discharge of which the holder has notice when he takes the instrument.

      . D.C.Code Ann. § 28:3-306 reads:
      Unless he has the rights of a holder in due course any person takes the instrument subject to
      (a) valid claims to it on the part of any person; and
      (b) all defenses of any party which would be available in an action on a simple contract; and
      (c) the defenses of want or failure of consideration, nonperformance of any condition precedent, nondelivery, or delivery for a special purpose (section 28:3-408); and
      (d) the defense that he or a person through whom he holds the instrument acquired it by theft, or that payment or satisfaction to such holder would be inconsistent with the terms of a restrictive indorsement. The claim of any third person to the instrument is not otherwise available as a defense to any party liable thereon unless the third person himself defends the action for such party.

      . See D.C.Code Ann. § 28:3-118(a).

      . D.C.Code Ann. § 28:3-413(1) reads:
      (1) The maker or acceptor engages that he will pay the instrument according to its tenor at the time of his engagement or as completed pursuant to section 28:3-115 on incomplete instruments.

      . D.C.Code Ann. § 28:4-303(1) reads in full: (1) Any knowledge, notice or stop-order received by, legal process served upon or setoff exercised by a payor bank, whether or not effective under other rules of law to terminate, suspend or modify the bank's right or duty to pay an item or to charge its customer’s account for the item, comes too late to so terminate, suspend or modify such right or duty if the knowledge, notice, stop-order or legal process is received or served and a reasonable time for the bank to act thereon expires or the setoff is exercised after the bank has done any of the following:
      (a) accepted or certified the item;
      (b) paid the item in cash;
      (c) settled for the item without reserving a right to revoke the settlement and without having such right under statute, clearing house rule or agreement;
      (d) completed the process of posting the item to the indicated account of the drawer, maker or other person to be charged therewith or otherwise has evidenced by examination of such indicated account and by action its decision to pay the item; or
      (e) become accountable for the amount of the item under subsection (l)(d) of section 28:4-213 and section 28:4-302 dealing with the payor bank’s responsibility for late return items.

      . UCC § 3-410(1) and D.C.Code Ann. § 28:3-410(1) define acceptance:
      Acceptance is the drawee's signed engagement to honor the draft as presented. It must be written on the draft, and may consist of his signature alone. It becomes operative when completed by delivery or notification.
      These courts argue that the bank officer’s signature on the bank’s cashier’s check constitutes acceptance when the check is “delivered” or issued.

      . Although we believe that our reading of UCC § 4-303 is straightforward, we know of no other court that has adopted our particular construction.

      . This is not a case where the payee of the cashier’s check deals directly with the bank and engages in some fraud to obtain issuance of the check from the payor bank or where there has been a lack of consideration running from the payee who deals directly with the payor bank. See, e.g., Anderson, Clayton & Co. v. Farmers National Bank, 624 F.2d 105 (10th Cir.1980) (payee fraudulently induces bank to issue cashier's check); TPO, Inc. v. Federal Deposit Insurance Corp., 487 F.2d 131, 137 & n. 1 (3d Cir. 1973) (noting exception when bank deals directly with payee); Wilmington Trust Co. v. Delaware Auto Sales, 271 A.2d 41 (Del.1970) (bank deals directly with purchaser of automobile); Wertz v. Richardson Heights Bank and Trust, 495 S.W.2d 572, 575 (Tex.1973) (Walker, J. dissenting) (“a bank from which a cashier’s check has been procured by fraud would certainly be entitled to set up the fraud and defeat liability as long as the check remained in the hands of the payee who perpetrated the fraud.’’). Under such circumstances, several courts have noted that "the strong considerations of public policy favoring negotiability and reliability of cashier’s checks” are not present and therefore a bank may refuse payment. Anderson, Clayton & Co. v. Farmers National Bank, 624 F.2d 105, 110 (10th Cir.1980); TPO, Inc. v. Federal Deposit Insurance Corp., 487 F.2d 131 (3d Cir.1973). Indeed, principles of equity may not require the bank to honor its cashier’s check. UCC § 1-103.

      . D.C.Code Ann. § 28:1-103 reads in part: Unless displaced by the particular provisions of this subtitle, the principles of ... equity ... shall supplement its provisions.

      . The court of appeals used the term “treasurer's check" in Whitehead. 285 F.2d at 283. However, the authorities agree that a treasurer’s check is the same thing as a “cashier’s check.” Reitman, 6 Banking Law § 133.10[4], at 133-62 (1984).

      . A separate equity argument also favors SBA. Under D.C.Code Ann. § 28:3-802, the payee of a cashier’s check loses his rights against the purchaser when the payee accepts the cashier's check for payment of the underlying debt. See Moon Over the Mountain, Ltd. v. Marine Midland Bank, 87 Misc.2d 918, 386 N.Y.S.2d 974, 976 (N.Y.Civ.Ct.1976). In other words, under § 28:3-802, the SBA lost any rights it may have had against Homestead when the SBA accepted the cashier’s check from NBW. As one court noted: “To permit [the] bank to avoid liability ... on account of the [bank’s refusal to pay] ... would result in an obvious inequity.” Meckler v. Highland Falls Savings & Loans Ass'n, 64 Misc.2d 407, 314 N.Y.S.2d 681 (N.Y.Sup.Ct.1970); but see Santos v. First National State Bank, 186 N.J.Super. 52, 451 A.2d 401, 409 (1982) (inequity can be resolved by applying principles of equity and allowing payee to sue purchaser despite § 3-802).


author: FORRESTER, District Judge.

text:
    SLIMFOLD MANUFACTURING COMPANY, INC., Plaintiff, v. KINKEAD INDUSTRIES, INC. and United States Gypsum Company, Defendants.
    Civ. A. No. C78-1798A.
    United States District Court, N.D. Georgia, Atlanta Division.
    Nov. 20, 1984.

      Robert E. Richards, Jones & Askew, Atlanta, Ga., for plaintiff.
    Patrick F. Henry, Jr., Atlanta, Ga., for defendants.
   ORDER

FORRESTER, District Judge.

This action is before the court on plaintiff’s “Motion to Enforce Defendants’ Agreement to be Bound and to Strike Defendants’ Second Motion for Summary Judgment” and on plaintiff’s related motion for partial summary judgment. Consideration of both motions requires a discussion of the history of this action.

Plaintiff filed this action on October 20, 1978, alleging that the defendants had infringed United States Patent Number 3,810,274 (hereinafter referred to as the ’274 patent). After extensive discovery defendants moved for an order compelling plaintiff to submit the ’274 patent to a reissue proceeding pursuant to 37 C.F.R. §§ 1.171-1.179. Defendants’ brief in support of the motion explained the nature of a reissue proceeding and pointed out that during such proceeding the defendants “and others who have an interest in the subject matter of the patent, can identify to the PTO (Patent and Trademark Office) prior art that they regard as anticipatory, explain why the patent claims are anticipated by such prior art, and set forth all other grounds upon which they believe the patent or any of its claims should not have been allowed.” “Memorandum in Support of Defendants’ Motion for Order that Plaintiff be Required to File Application for Reissue of the Patent in Suit under Rule 1.175 and that Proceedings Herein be Stayed Pending Termination of Proceedings on that Application” (emphasis added). On page 7 and 8 of that brief defendants intimated that plaintiff had violated its duty to disclose prior art and asserted that such failure to disclose cast a shadow upon the validity of the ’274 patent.

Plaintiff vigorously opposed defendants’ motion to compel it to seek reissue of the ’274 patent, arguing that the motion was interposed for delay and that defendants had no right under law to compel plaintiff to seek reissue of its patent. Plaintiff conceded, however, that some courts had compelled reissue. Plaintiff’s reply brief contains the following request:

In addition, should this court be inclined to grant Defendants’ Motion, Plaintiff requests that Defendants be bound by the decision of the Patent Office. The entire reissue process would be wasteful in both time and money if, after submission to reissue, Defendants were permitted to raise the same issues again at trial. Accordingly, Plaintiff submits that Defendants, as the moving party, should be required to be bound by any Patent Office determinations in a reissue proceeding in which Defendants participate. “Plaintiff’s Brief in Opposition to Defendants’ Motion for Order Compelling Plaintiff to File Application for Reissue of the Subject Patent under 37 CFR § 1.175(a)(4) and for Stay of Proceedings Herein Pending Conclusion of Reissue Proceedings” at p. 15-16.

Defendants responded to plaintiff’s allegation that the motion was brought for purposes of delay and stated:

To demonstrate the genuineness of Defendants’ Motion, Defendants fully agree with Plaintiffs request that Defendants be bound by the decision of the Patent Office, and Defendants will stipulate that prior art considered by the Patent Office during the reissue proceedings will not be submitted to the jury or otherwise used as a defense should it be necessary to have a trial, insofar as validity is concerned but not infringement. Defendants’ Rejoinder to Plaintiff’s Brief in Opposition to Defendants’ Motion for Order Compelling Plaintiff to File Application for Reissue under 37 CFR § 1.175(a)(b) and for Stay of Proceedings, at p. 1-2 (emphasis added).

Defendants’ brief then discussed, as support for its argument that a reissue proceeding was necessary, how various foreign patent offices had treated the corresponding foreign patents.

After both sides had filed additional briefs and cases, Judge Evans issued an order on December 17, 1979 denying defendants’ motion. Judge Evans held that 35 U.S.C. § 251 (which governed reissue proceedings), indicated a congressional intent that such proceedings could be sought by the patent holders, but not by anyone else, including defendants in an infringement suit. Judge Evans found that 37 C.F.R. § 1.172(a) showed that this was the understanding of the Patent and Trademark Office. Finally, Judge Evans noted a recently introduced bill to amend the patent laws which would have provided that “any party to a civil action shall have the right, by motion brought before any responsive pleading, to secure a stay of all proceedings ... and to request reexamination of the patent in view of such prior art____” Judge Evans pointed out that “the need for such an amendment shows that the existing patent laws do not contemplate that a non-patent holder in an infringement action be able to force a patent holder to apply for reissue.”

Shortly before Judge Evans issued her order, the case had been reassigned to Judge Hall. Defendants sought an order from Judge Hall vacating Judge Evans’ order and compelling plaintiff to submit its patent to a reissue proceeding. After both sides had submitted further briefs and authorities, Judge Hall issued an order vacating Judge Evans’ order and compelling plaintiff to submit the ’274 patent to a reissue proceeding. Judge Hall concluded that the provisions of 37 C.F.R. §§ 1.171-179 did not preclude a federal court from compelling a patentee to seek reissue. Judge Hall relied on Skeller Globe Corp., et al. vs. Mobay Chemical Corp., 204 USPQ 1052 (E.D.Mich., Southern Div., Jan. 24, 1980) which had held that a district court has “inherent power” to order a reissue application. Judge Hall plainly felt that compelling reissue would serve the goal of judicial economy and in the long run simplify the issues in the case.

Plaintiff filed its application for reissue, and defendant filed a protest to the reissue pursuant to 37 C.F.R. § 1.291. Defendants simultaneously filed a petition to strike the reissue application pursuant to 37 C.F.R. § 1.56(d). 37 C.F.R. § 1.56 (hereinafter referred to as Rule 56) imposes upon applicants for patents a strict duty of candor and good faith towards the Patent and Trademark Office. At the time the petition to strike was filed Rule 56 provided:

(a) A duty of candor and good faith toward the Patent and Trademark Office rests on the inventor, on each attorney or agent who prepares or prosecutes the application and on every other individual who is substantively involved in the preparation or prosecution of the application and who is associated with the inventor, with the assignee or with anyone to whom there is an obligation to assign the application. All such individuals have a duty to disclose to the Office information they are aware of which is material to the examination of the application. Such information is material where there is a substantial likelihood that a reasonable examiner would consider it important in deciding whether to allow the application to issue as a patent. The duty is commensurate with the degree of involvement in the preparation or prosecution of the application.
.....
(d) An application shall be stricken from the files if it is established by clear and convincing evidence that any fraud was practiced or attempted on the Office in connection with it or that there was any violation of the duty of disclosure through bad faith or gross negligence.

Defendants raised three enumerated grounds for striking plaintiff’s application for reissue: (1) Non-disclosure of § 103 prior art; (2) non-disclosure of evidence of prior public use and/or sale; and (3) misrepresentation of the inventorship of the subject matter of the claims in the reissue application. In addition, defendants devoted almost half of their brief to the argument that plaintiff had obtained several foreign patents by fraud on those foreign patent offices. Defendants argued that by reason of this fraud on the foreign patent offices,

Applicants must be held accountable for their “unclean hands,” and petitioner requests that U.S. Patent No. 3,810,274 be held unenforceable which would be an appropriate remedy. In prosecuting the foreign patent applications, applicants relied upon the U.S. patent application for its Convention priority date, and in litigating U.S. Patent No. 3,810,274, the patent owner is relying upon the fraudulently obtained foreign patents to support patentability and validity. Petitioner contends that this interrelationship is sufficient to hold the U.S. Patent, whose prosecution is also tainted by violation of the duty of disclosure, unenforceable. “Petition to Strike Reissue Application Serial Number 06/172,255 under 37 CFR § 1.56(d)” (attached as Exhibit 3 to Plaintiffs Motion to Enforce Agreement to be Bound and to Strike Defendants’ Second Motion for Summary Judgment), at 12.

Plaintiff responded to Defendants’ arguments concerning fraud on the foreign patent offices, and defendants filed a reply brief which further argued that the fraud on the foreign patent offices should be grounds for striking the application for reissue:

In essence, petitioner is requesting that “fraud” or “violation” of the duty of disclosure practiced on the U.S. Patent and Trademark Office or on any Foreign Patent Office shall render such U.S. patent application or any U.S. patent issuing therefrom subject to being stricken under 37 CFR § 1.56(d). As in this case, where the applicants relied upon their U.S. patent application Serial No. 382,486 as a Convention application to deceive the Patent Offices in France, Italy and Holland, such application and corresponding patent should be stricken or otherwise held to be invalid. The duty of candor and complete disclosure in prosecuting a patent application should apply universally and should not be limited to activities in the United States. Surely, the U.S. Patent and Trademark Office does not condone fraud and deceit in the filing and prosecution of foreign patent applications corresponding to U.S. patent applications and reliance thereon for an effective filing date.
.....
... Petitioner urges that whenever the U.S. Patent and Trademark Office discovers fraudulent conduct relating to or involving a United States patent or patent application, the Patent and Trademark Office has the authority and the duty to strike such applications and to recommend to the United States Courts that such patents be held unenforceable. “Petitioner’s Reply to Slimfold’,s Response to Petition to Strike under 37 CFR 1.56(d) and Response to Requirement for Information” (attached to Plaintiff’s Reply to Defendants’ Brief in Opposition to Plaintiff’s Motion to Enforce Agreement to be Bound and to Strike Defendants’ Second Motion for Summary Judgment) at 9, 11.

The Patent and Trademark Office denied defendants’ petition to strike. In doing so it necessarily held that none of the grounds asserted by defendants warranted striking the application for reissue. After disposing of petitioner’s arguments concerning failure to disclose prior art, the PTO decision states:

PROTESTER’S OTHER ARGUMENTS
Protester in the papers filed November 28, 1980 and December 3, 1982 asserts three other grounds in addition to the allegation of improper withholding of the Roberts Fold Door brochure discussed above. These three other grounds are:
1. That applicant withheld information regarding on-sale activity;
2. That applicant misrepresented the correct inventive entity; and
3. That applicant practiced fraud on one or more foreign patent offices which is grounds for finding a violation of Rule 56 in this reissue application.
.....

The third and final ground alleged by protester asserts that applicant was aware of a public use which barred applicant from obtaining a patent in several foreign patent countries which had an absolute novelty requirement. Nonetheless, (as asserted by protester) applicant filed applications in one or more of those foreign countries and such filing(s) represents a fraud on those patent offices. Protester argues that such fraud taints the earlier filed U.S. application (herein sought to be reissued) and that the present reissue which stems from that application should be similarly held to be tainted by the fraudulent conduct.

There are numerous reasons why protester’s assertions as to this third ground must be dismissed. First, and even assuming arguendo that protester’s assertions as to the facts are correct, applicant’s conduct before the foreign patent offices does not appear to bear directly on the issues affecting this U.S. application. The issues in this application are adequately treated under U.S. laws and practice. That is, the facts asserted are properly considered under U.S. law for treating this application. There is no compelling reason why this office should consider what treatment might be appropriate for the corresponding applications in foreign countries.

For the above reasons and others, the alleged violation based on the above noted third ground is held not to be a violation of 37 CFR 1.56(a). Commissioner’s Decision Refusing Action under 37 CFR § 1.56 (August 24, 1983) (attached as Exhibit 4 to Plaintiff’s Motion to Enforce Agreement to be Bound and to Strike Defendants’ Second Motion for Summary Judgment) (emphasis added).

.On April 17, 1984 the Patent and Trademark Office reissued the ’274 patent as patent number 31,553 (hereinafter referred to as the “Ford patent”). On April 23, 1984 plaintiff moved to restore this case to the trial docket in light of the PTO’s action and at the same time moved for partial summary judgment as to the validity of the ’274 patent and the Ford patent on the grounds that defendants had agreed to be bound by the PTO’s decision. Defendants opposed plaintiff’s motion for partial summary judgment, arguing that the Ford patent was not at issue in this proceeding and that they had only agreed to be bound by the PTO’s decision concerning the ’274 patent. Defendants then argued that the ’274 patent no longer exists, as it was surrendered to the PTO as part of the reissue proceeding.

Defendants later filed two motions for summary judgment. The second motion for summary judgment asked the court to hold the ’274 patent and the Ford patent unenforceable due to plaintiff’s “unclean hands” in committing fraud on the various foreign patent offices. Rather than respond to defendants’ second motion for summary judgment, plaintiff complained that defendants were violating their agreement to be bound by the decision of the patent office and asked the court not to consider defendants’ motion. A conference was held on September 14, 1984, at which time the court heard arguments from the parties concerning the agreement to be bound and concerning the PTO’s decision. The court directed the parties to file briefs on the issue of the PTO’s jurisdiction to consider the issues of plaintiff’s inequitable conduct or unclean hands in connection with the foreign patent applications in the context of a reissue proceeding. Those briefs took the form of the present motion to enforce the agreement to be bound and to strike defendants’ second motion for summary judgment.

After consideration of the entire record in this case, including the events described above, and after consideration of the arguments and authorities submitted by both sides, the court makes the following findings of fact and conclusions of law.

I. DEFENDANTS’ AGREEMENT TO BE BOUND BY THE DECISION OF THE PTO.

The court finds that defendants did agree to be bound by whatever the Patent and Trademark Office did on the reissue application. At the time they filed their motion to compel plaintiff to file an application for reissue of the patent, defendants already had the information concerning the fraud on the foreign patent offices. In explaining the reissue process to the court in its brief in support of the motion, defendants pointed out that protestors could intervene in the reissue proceeding and in addition to identifying prior art, “set forth all other grounds upon which they believed the patent or any of its claims should not have been allowed.” Plaintiff’s argument to the court that defendants should be bound by the decision of the PTO clearly contemplated that defendants should be bound by everything the PTO did:

The entire reissue process would be wasteful in both time and money if, after submission to reissue, defendants were permitted to raise the same issues again at trial. Accordingly, plaintiff submits that defendants, as the moving party, should be required to be bound by any patent office determinations in a reissue proceeding in which defendants participate.

This request by plaintiff clearly contemplated that defendants should be bound by any decision by the patent office, not just decisions concerning prior art. In response to this request defendants stated, “Defendants fully agree with plaintiff's request that defendants be bound by the decision of the patent office____” For defendants now to argue that they only agreed to be bound by the PTO’s decisions concerning prior art and did not contemplate being bound by any decisions concerning fraud or inequitable conduct, when at the time they filed their motion they fully intended to argue issues of fraud and inequitable conduct before the patent office, strikes the court as bordering on bad faith. Defendants led both plaintiff and the court to believe that they would be bound by any decisions of the PTO in which they participated. The court relied upon this understanding in requiring plaintiff to apply for reissue of its patent. Defendants will not now be heard to argue that they did not agree to be bound by the PTO’s decisions on matters which defendants themselves raised before the PTO. The court holds that defendants are bound by the decision of the PTO as to any matters within its jurisdiction.

II. JURISDICTION OF THE PATENT AND TRADEMARK OFFICE TO CONSIDER ISSUES OF FRAUD AND INEQUITABLE CONDUCT IN A REISSUE PROCEEDING.

It appears settled that the Patent and Trademark Office may consider issues of fraud and inequitable conduct when deciding whether to issue or reissue a patent. 37 C.F.R. § 1.56, known as Rule 56, codifies a long-standing patent office requirement of candor and good faith on the part of those seeking patents. Rule 56(d) provides that where there is clear and convincing evidence of fraud on the patent office or a violation of the duty of disclosure through bad faith or gross negligence in connection with any application, the Commissioner may reject the application. Pursuant to Rule 56 the Commissioner has stricken or rejected patents where there has been fraud in connection with the application or any related application. See In Re Stockebrand, 197 USPQ 857 (Comm’r Patents & Trademarks 1978); In Re Altenpohl, 198 USPQ 289 (Comm’r Patents & Trademarks 1976). Rule 56 has been upheld as a valid exercise of the Commissioner’s rule-making powers under 35 U.S.C. § 6:

Rule 56 was promulgated by the Commissioner pursuant to the authority granted by 35 USC § 6, “to establish regulations, not inconsistent with law, for the conduct of proceedings” in the PTO. In 1970, the Court of Customs and Patent Appeals held, in reviewing a denial of a motion to strike an original patent application, that Rule 56 was a proper exercise of the Commissioner’s rule-making authority, and that the Commissioner was empowered thereunder to strike patent applications for “fraud,” as broadly defined in the patent field. Norton vs. Curtiss, 433 F.2d 779, 793, 57 CCPA 1384 (1970). We think there can be no serious doubt, certainly not at this late date, that Rule 56 constitutes in general a valid exercise of the Commissioner’s rule-making powers under 35 USC § 6, and therefore has the force and effect of law except as it may conflict with other statutory or constitutional provisions. Digital Equipment Corp. vs. Diamond, 653 F.2d 701, 707-08 (1st Cir.1981).

The court in Digital Equipment upheld the application of Rule 56 to reissue proceedings where the fraud had been in connection with the original application.

The patent office’s authority to consider issues of fraud and inequitable conduct is not limited to fraud on the patent office itself. As the court stated in Digital Equipment Corp., supra:

It is thus well established that a patent is rendered unenforceable by inequitable conduct — falling somewhat short of common law fraud — on the part of a patentee in his dealings before the Patent and Trademark Office. A logical corollary of this proposition, and the rationale on which the Rule 56 power to strike applications is based, is that “conduct which will prevent the enforcement of a patent after the patent issues should, if discovered earlier, prevent the issuance of the patent.” 653 F.2d at 710 (quoting Norton vs. Curtiss, 433 F.2d at 792); see also Ex parte Mallard, 71 USPQ 294 (Comm’r Pat. 1946).

In Norton vs. Curtiss, 433 F.2d 779 (CCPA 1970), the court examined the role of the patent office in evaluating issues of fraud and inequitable conduct and concluded that there was no reason, “in logic or in law,” why the patent office could not evaluate such issues in the same fashion as would a court of equity. Id. at 792, 793. Relying upon In Re Heany, 1911 C.D. 139, 171 O.G. 983 (1911), the court held that the Commissioner had both the authority and a duty to refuse to issue a patent where such patent would be held to be unenforceable in a court of equity.

It seems clear, therefore, from the above cases that the PTO has the authority to consider any allegations of inequitable conduct which would render a patent unenforceable under the “clean hands” doctrine. It was the defendants in the present case who forced plaintiff to seek reissue of its patent, and it was defendants who urged the PTO to strike plaintiffs application on the grounds that plaintiffs “unclean hands” would render the patent unenforceable. Defendants argued to the PTO that the PTO had the authority to consider plaintiffs unclean hands and shall not be heard to argue here that the PTO lacked such authority. The court holds that the PTO did not exceed its authority in considering whether defendants’ allegations that plaintiff had committed fraud on foreign patent offices, if true, would render plaintiff’s U.S. patent unenforceable.

III. THE PATENT AND TRADEMARK OFFICE’S DECISION.

The PTO expressly considered whether fraud perpetrated on foreign patent offices was grounds for striking plaintiff’s application for reissue of its patent. Under the cases cited above, the PTO had the authority and the duty to consider whether defendants’ allegations of plaintiff’s “unclean hands” would render the patent unenforceable in a court of equity and whether the application for reissue should be stricken on that ground. The PTO rejected defendants’ argument that fraud on foreign patent offices was grounds for striking plaintiff’s application. Since defendants agreed to be bound by the PTO’s determinations as to the validity of the patent, and since defendants squarely placed the issue of plaintiff’s unclean hands before the PTO, defendants are bound by the PTO’s decision.

Even were this court disposed to review the agency’s decision, the court would find no error. Defendants have referred the court to only one case dealing with the question of whether fraud on a foreign patent office renders a U.S. patent unenforceable under the “clean hands” doctrine. In Plantronics, Inc. vs. Roanwell Corp., 185 USPQ 505 (S.D.N.Y.1975), the court stated:

Even assuming, without deciding, that the British patent was obtained by fraud, this would not bar enforcement of the corresponding U.S. patent here in suit. As the U.S. Supreme Court stated in Loughran vs. Loughran, 292 U.S. 216, 229, 54 S.Ct. 684, 689, 78 L.Ed. 1219 (1934),
“Equity does not demand that its suitors shall have led blameless lives.”
Thus, as I stated in Saxton Products, Inc. vs. United States Telephone Co., 182 USPQ 608, 609 (S.D.N.Y.1974), the courts have consistently ruled that fraud in obtaining one patent will not render unenforceable other patents in common ownership, even where the patents cover closely related inventions.
S.H. Kress & Co. vs. Aghnides, 246 F.2d 718, 113 USPQ 395 (4th Cir.1957) involved a situation factually indistinguishable from that at bar. In that case, plaintiff charged infringement of a U.S. patent based on an application filed under the International Convention claiming the benefit of the filing date of a prior application in Belgium, asserting that the U.S. and Belgian applications covered the same invention. The defendant offered to show that the plaintiff had previously represented to the Canadian Patent Office that the corresponding application which he filed there did not cover the same invention as the Belgian application. Thus, the alleged fraud was perpetrated in connection with an application for a Canadian patent on the same invention covered by the U.S. patent in suit. The court ruled that such fraud, even if proven, would not bar recovery on the U.S. patent, stating:
“Whether or not on another occasion [plaintiff] * * * made an inconsistent claim in Canada to obtain a patent there, is an issue that we need not decide. If he made a misstatement there, this might bear upon the validity of his Canadian patent. It would not alter the fact that what he told the United States Patent Office was the truth and that the patent here was obtained without deception or fraud. Even if we were to assume what we are not prepared to adjudicate, that the inventor’s representations to the Canadian Patent Office were untrue, this misconduct would not be so closely related to the proceedings in this country and the issuance of the patent to him here as to invalidate the grant or to constitute such unclean hands as to disentitle him to the relief he asks in this case.” 246 F.2d at 725, 113 USPQ at 400-01.
Defendants’ allegation of fraud by plaintiff in the procurement of the British patent corresponding to one of the three U.S. patents in suit thus does not state an affirmative defense, even if fully proven. Plantronics, Inc. vs. Roanwell Corp., 185 USPQ 505, 506-07.

Defendants have agreed to be bound by the PTO’s determinations as to the validity of the patent at issue in this case. The PTO has rejected defendants’ argument that fraud on foreign patent offices would render the patent unenforceable, and the only authority before the court supports the PTO’s decision. That decision was within the authority of the PTO to make. Defendants agreed to be bound by the PTO’s decision and are estopped from contesting it.

IV. THE MOTIONS PRESENTLY BEFORE THE COURT.

Defendants’ second motion for summary judgment argues that the patent at issue in this case is invalid and unenforceable due to plaintiff’s unclean hands in procuring foreign patents by fraud. As discussed above, defendants have previously made this argument to the PTO, and the PTO has rejected it completely. Defendants had agreed to be bound by the decisions of the PTO as to the validity of the patent at issue in this case and cannot now seek a second bite at the apple. Defendants’ second motion for summary judgment is improper. Plaintiff’s motion to enforce the agreement to be bound and to strike defendants’ second motion for summary judgment is, therefore, GRANTED. Defendants’ second motion for summary judgment shall be STRICKEN.

Plaintiff’s motion for partial summary judgment seeks a declaration of the validity of the patent at issue in this case. Plaintiff’s motion is founded solely on defendants’ agreement to be bound by the decision of the PTO concerning the validity of the patent. As noted above, defendant has advanced the somewhat disingenuous argument that it only agreed to be bound by the PTO’s decision regarding the '274 patent and that that patent no longer exists, having been surrendered to the PTO as part of the reissue proceeding. The court finds defendants’ argument to be without merit. Defendants knew at the time they agreed to be bound that plaintiff would have to surrender the ’274 patent as part of its application for reissue. The court finds, therefore, that defendants’ agreement to be bound by the PTO’s decision covers the Ford patent which came out of the reissue proceeding as well as the ’274 patent which was surrendered. For purposes of this lawsuit, defendants are bound by the PTO’s decision as to the validity of the Ford patent and are es-topped from contesting it. The Ford patent is therefore valid for purposes of this lawsuit. The ’274 patent is valid insofar as its claims are identical to the claims of the Ford patent. To the extent of any identity between the Ford patent and the ’274 patent, the Ford patent relates back to the ’274 patent. Questions of infringement of the Ford patent shall, therefore, relate back to the ’274 patent. Plaintiff’s motion for partial summary judgment as to the validity of the patent at issue in this case is GRANTED.

V. CONCLUSION.

In sum, plaintiff’s motion to enforce defendants’ agreement to be bound and to strike defendants’ second motion for summary judgment is GRANTED. Defendants’ second motion for summary judgment shall not be considered and shall be stricken from the record. Plaintiff’s motion for partial summary judgment is GRANTED.

      . At the time defendants filed their petition to have plaintiffs application for reissue stricken, Rule 56(d) provided:
      An application shall be stricken from the files if it is established by clear and convincing evidence that any fraud was practiced or attempted on the office in connection with it or that there was any violation of the duty of disclosure through bad faith or gross negligence.
      Because of procedural questions concerning whether a stricken application was appealable in the same manner as an application which had been rejected, and because of concerns raised by the court in Digital Equipment Corp. vs. Diamond, 653 F.2d 701 (1st Cir.1981), concerning the expertise of the PTO in evaluating issues of fraud and inequitable conduct, Rule 56 was amended in 1982, 1983, and again in 1984. See 47 FR 21751, May 19, 1982; 48 FR 2710,

        January 20, 1983; 49 FR 554, January 4, 1984. As amended, Rule 56 now provides in pertinent part:
      No patent will be granted on an application in connection with which fraud on the Office was practiced or attempted or the duty of disclosure was violated through bad faith or gross negligence. The claims in an application shall be rejected if upon examination pursuant to 35 USC 131 and 132, it is established by clear and convincing evidence (1) that any fraud was practiced or attempted on the Office in connection with the application, or in connection with any previous application upon which the application relies, or (2) that there was any violation of the duty of disclosure through bad faith or gross negligence in connection with the application, or in connection with any previous application upon which the application relies.
      (e) The examination of an application for compliance with paragraph (d) of this section will normally be delayed until such time as (1) all other matters are resolved, or (2) appellant’s reply brief pursuant to section 1.193(b) has .been received and the application is otherwise prepared for consideration by the Board of Appeals, at which time the appeal will be suspended for examination pursuant to paragraph (d) of this section. The prosecution of the application will be reopened to the extent necessary to conduct the examination pursuant to paragraph (d) of this section including any appeal pursuant to section 1.191. If an appeal has already been filed based on a rejection on other grounds, any further rejection under this section shall be treated in accordance with section 1.193(c).
      .....
      (h) Any member of the public may seek to have the claims in an application rejected pursuant to paragraph (d) of this section by filing a timely protest in accordance with section 1.291. Any such protest filed by an attorney or agent must be in compliance with section 1.346.

      . Although defendants argued in the reissue proceeding that the PTO had the authority and the duty to consider plaintiff’s "unclean hands,” they now argue that the PTO is "ill-equipped" to consider such issues. While the court in Digital Equipment Corp. vs. Diamond, 653 F.2d 701 (1st Cir.1981), did express some concerns in this respect, current PTO procedure provides that examinations into issues of fraud and inequitable conduct are to be "conducted by examiners with legal training assigned to the Office of the Assistant Commissioner for Patents." Notice of Rule-Making, May 19, 1982, 47 Fed.Reg. 2174, reprinted in Pat.Tm. & Copy. J. (BNA), May 20, 1982; See D. Chisum, Patents, Vol. 3, § 11.03[4], p. 11-28.12 — 28.13 (Mathew Bender 1984).

      . Any claims in the '274 patent which were not made a part of the Ford patent or which were modified in the Ford patent are excluded from today’s judgment of the validity of the ’274 patent. Further proof as to the reasons why such claims were not carried over into the reissued patent will be necessary before the court can determine whether such claims are valid.

      . At the conference on September 14, 1984 the court granted plaintiff's motion to amend the complaint to assert infringement of the Ford patent. The court wishes to emphasize that it allowed the amendment for purposes of clarification only and not because it believed that the reissued patent was a completely separate patent which did not relate back to the '274 patent.


author: JACKSON, District Judge.

text:
    Joseph A. ALBERTI, et al., Plaintiffs, v. GENERAL MOTORS CORPORATION, Defendant.
    Civ. A. No. 84-0888.
    United States District Court, District of Columbia.
    Nov. 30, 1984.
    Lowell E. Sachnoff, Sachnoff, Weaver & Rubenstein, Chicago, Ill., Timothy J. Bloomfield, Dunnells, Duvall, Bennett & Porter, Washington, D.C., for plaintiffs.
    Jeffrey S. Davidson, Kirkland & Ellis, Washington, D.C., for defendant.
   MEMORANDUM AND ORDER

JACKSON, District Judge.

This matter is now before the Court on plaintiffs’ motion pursuant to 28 U.S.C. § 455(a) for my recusal as trial judge herein on the ground that there is reason to believe that my impartiality “might reasonably be questioned.” The motion originates in an observation I made during an off-record status conference in chambers on October 2, 1984, to the effect that, having heard evidence for some months in the case of United States v. General Motors Corporation, Civil Action No. 83-2220 (the “government case”), I would unavoidably be affected to some extent by the knowledge I had acquired thereby in presiding over this case. This case, a class action in which plaintiffs claim damages from defendant General Motors (“GM”) for alleged breaches of express and implied warranties made to the plaintiff-purchasers of the same motor vehicles involved in the “government case,” presents many of the factual, and at least some of the legal, issues already (or to be) encountered in the “government case”; indeed, it was by reason of their affinity that both cases were assigned to me under this district court’s local “related case” rule, D.D.C. Rule 3-4. I invited counsel for both sides to give thought to whether the circumstance gave either a reason to ask for my recusal, and, if so, to raise the issue promptly, before the case had progressed beyond the optimum point for reassignment if it were warranted. They have done so, and this contested motion has ensued.

Despite language in some decisions suggesting that recusal is the better practice whenever a judge’s impartiality might be questioned for any non-frivolous reason, see, e.g., Hall v. Small Business Administration, 695 F.2d 175, 178 (5th Cir.1983); Potashnick v. Port City Construction Company, 609 F.2d 1101, 1111 (5th Cir.) cert. denied, 449 U.S. 820, 101 S.Ct. 78, 66 L.Ed.2d 22 (1980), other cases, including several from this circuit, teach that a judge to whom a motion for recusal is addressed. must give consideration to policies other than just that of preserving the judicial detachment (or its appearance) which is assumed to accompany a complete absence of familiarity with the subject matter of the action. Thus, in order to discourage “judge shopping” it has been recognized that a judge is as obliged not to recuse himself when there is no occasion for his doing so as he is to step aside when he should. United States v. Mitchell, 377 F.Supp. 1312, 1325 (D.D.C.1974), aff'd sub nom. United States v. Haldeman, 559 F.2d 31 (D.C.Cir.1976), cert. denied sub nom. Ehrlichman v. U.S., 431 U.S. 933, 97 S.Ct. 2641, 53 L.Ed.2d 250 (1977), reh’g denied sub nom. Mitchell v. United States, 433 U.S. 916, 97 S.Ct. 2992, 53 L.Ed.2d 1103 (1977). And, in the interest of conserving judicial resources, the judge should acknowledge that his experience with complex issues in an earlier case may actually enhance the likelihood of a speedy and inexpensive determination of a later case without necessarily diminishing its prospects for a just one. Cf. In re Corrugated Container Antitrust Litigation, 614 F.2d 958, 963-64 (5th Cir.), cert. denied, Mead Corporation v. Adams Extract Company, 449 U.S. 888, 101 S.Ct. 244, 66 L.Ed.2d 114 (1980); In re Hawaiian Hotel Room Rate Antitrust Litigation, 438 F.Supp. 935, 936 (J.P.M.D.L.1977).

Insofar as prior acquaintance with the subject matter of a case derived from sources dehors its own record is concerned, the cases appear to hold that it is not foreknowledge per se which gives rise to misgivings of a recusable order about a judge’s impartiality, but, rather, extrajudicial knowledge, i.e., that which he may have acquired in a nonjudicial capacity. See U.S. v. Mitchell, supra; U.S. v. Jackson, 627 F.2d 1198, 1207 & n. 20 (D.C.Cir.1980); In re Corrugated Container Antitrust Litigation, 614 F.2d at 965; US. v. Professional Air Traffic Controllers Organization, 527 F.Supp. 1344, 1359 (N.D.Ill.1981); United States v. Baker, 441 F.Supp. 612, 618 (M.D.Tenn.1977).

Such knowledge as I now possess with respect to the braking systems of defendant G.M.’s 1980 X-cars, and the circumstances of its offering them for sale to the public, has been acquired by me, in toto, in a judicial capacity. It derives entirely from the evidence adduced by both sides in the “government case,” presumably in accordance with the rules of evidence, and tested by the adversary process, and it is not, therefore, the raw perceptions emanating from personal experience which the cases seem to contemplate as likely to have compromised an open judicial mind. I am certain that learning will facilitate my comprehension of the issues to be litigated here, and I am reasonably certain it has not left any significant residue of preconceptions about them. I note also that the “government case” — after 84 days of trial and no end yet in sight — remains very much at issue. No facts have been found nor conclusions of law reached, and the merits are now and will remain altogether unresolved until the record has closed and the parties have made their post-trial submissions and argued the case.

In summary, I conclude that the education I have received in brake design and engineering, vehicle dynamics, automotive safety regulation, and like subjects has been obtained from appropriate sources, has not resulted in any discernible predisposition on my part, and will be of considerable benefit to me in attempting to make informed rulings on the issues the parties are likely to bring before me here. For the foregoing reasons, therefore, it is, this 29th day of November, 1984.

ORDERED, that plaintiffs’ motion for recusal is denied.

      . They do not suggest "personal bias or prejudice” as a basis for disqualification under 28 U.S.C. § 144.

      . The "government case” is a statutory action brought by the United States under the National Traffic and Motor Vehicle Safety Act of 1966, 15 U.S.C. § 1381 et seq., to compel General Motors to recall approximately 1.1 million 1980 X-cars it is alleged to have marketed with a defective braking system.

      . Judicial economy is, in part, the policy underlying the "related case” rule.