author: WARREN, District Judge.

text:
    CONTINENTAL ASSURANCE COMPANY, an Illinois insurance corporation, Plaintiff, v. AMERICAN BANKSHARES CORPORATION, a Wisconsin corporation; Federal Deposit Insurance Corporation, a federal agency acting as receiver for American City Bank & Trust Company, N.A.; Colonial Bank & Trust Company, an Illinois banking corporation; Ernst & Ernst, a partnership; Harold L. Erickson; Walter F. Benz; William Bruce, II; John D. Cahill; Gerald S. Colburn; John De Belak; Raymond L. Callen; Peter F. Wegmann; Henry S. Lauterbach; Nicholas J. Lesselyoung; Harold F. Lichtsinn; W. Stanley Pearce; Clement J. Schwingle; James W. Sullivan; Robert J. Trecker; Richard D. Wright; Bernard D. Heifetz; Raymond E. Scroggins; William E. Wierdsma; Albert M. Deshur; Edward A. Korpady; Edward C. Radi; and Barrett S. Zuckerman, Defendants.
    No. 76-C-248.
    United States District Court, E.D. Wisconsin.
    Sept. 21, 1984.

      See also, D.C., 540 F.Supp. 54, D.C., 46 B.R. 206.

      Howard A. Pollack, Chame, Glassner, Tehan, Clancy & Taitelman, Milwaukee, Wis., Andrew W. Horstman and Harding A. Orren, Robins, Zelle, Larson & Kaplan, Minneapolis, Minn., for plaintiff.
    Raymond E. Scroggins, pro se.
    Edward C. Radi, pro se.
    Dominic S. Amato, Fiorenza, Weiss, Amato & Persa, Milwaukee, Wis., for defendant Wierdsma.
    Ronald L. Wallenfang and Matthew J. Flynn, Quarles & Brady, Milwaukee, Wis., for defendants Deshur, Heifetz, Korpady, Lauterbach, Lesselyoung, Lichtsinn, Pearce, Colburn, Bruce, Debelak and Schwingle.
    William H. Alverson and William B. Graves, Godfrey & Kahn, Milwaukee, Wis., for defendant Ernst & Ernst.
    David J. Cannon and Jose Olivieri, Michael, Best & Friedrich, Milwaukee, Wis., for defendant Wegmann.
    William E. Callahan, Jr., Davis & Kuelthau, Milwaukee, Wis., for estates of defendants Benz and Wright.
    William R. Soderstrom, Fox, Carpenter, O’Neill & Shannon, Milwaukee, Wis., for defendant Trecker.
    Harold L. Erickson, pro se.
   ORDER

WARREN, District Judge.

This action arises out of the closing of American City Bank (“American”) on October 21, 1975. Plaintiff Continental Assurance Corporation (“Continental”), the holder of a Subordinated Capital Note issued by American on April 10, 1973, seeks to recover $2,000,000.00, the amount of the note, from a number of defendants on various grounds of liability. Essentially, plaintiff alleges that the defendants, to greater and lesser degrees, are responsible for misrepresenting the financial stability of American as of 1972, and thereby induced plaintiff to agree to the $2,000,000.00 loan.

Several motions are currently pending in this case. Defendant Ernst & Ernst (“Ernst”), now known as Ernst & Whinney, has asked that the Court dismiss the complaint on its merits and/or on various jurisdictional grounds. Defendants William Bruce, II, Gerald S. Colburn, John Debelak, Albert M. Deshur, Bernard D. Heifetz, Edward A. Korpady, Henry S. Lauterbach, Nicholas J. Lesselyoung, Harold F. Lichtsinn (deceased), Estate of Clement J. Schwingle, and W. Stanley Pearce (hereafter “the Outside Directors”), have asked for summary judgment dismissing the claims against them. Defendant William Wierdsma has asked for summary judgment dismissing all of the causes of action against him and, in the alternative, that counts 4 and 6 of the complaint be dismissed for lack of subject matter jurisdiction. A similar motion was filed by defendants Richard D. Wright (deceased) and the Estate of Walter F. Benz, and another by defendants Raymond E. Scroggins and Edward C. Radi.

Finally, plaintiff has filed two motions for substitution of defendants who have died during the considerable time span of this litigation. Plaintiffs seek to substitute Geraldine R. Lichtsinn in place of Harold F. Lichtsinn, and Florence M. Hanson in place of Richard D. Wright.

Due to the similarity of the summary judgment motions and the arguments in support thereof, the Court will consider the motions together and simply distinguish the defendants and their arguments when necessary.

I. BACKGROUND

The following is a brief account of the events which led to this case. On July 31, 1972, American filed an application with the Comptroller of the Currency to convert its status from a state bank to a national banking association. The minutes of American’s October 18, 1972 Board of Directors meeting reveal that the application was approved “conditioned upon our selling $2,000,000.00 of debentures within a six-month period” (Groll Affidavit, Exhibit 2).

Late in 1972, American contacted Continental seeking funds to comply with the Comptroller’s capital requirement, and in early 1973, they began the negotiations which led to the Note Agreement upon which this case is based.

On February 9, 1973, Ernst issued an opinion certifying the consolidated financial statements of American Bankshares Corporation and its subsidiaries, including American, for the year ending December 31, 1972. The Note Agreement was finally executed on April 10, 1973.

Despite the infusion of the additional $2,000,000.00 into American’s capital structure, its financial situation continued to deteriorate. American attempted to seek new sources of capital throughout 1973, 1974 and 1975. Such attempts were unsuccessful and, on October 21, 1975, the Comptroller of Currency declared American insolvent.

On April 7, 1976, plaintiff commenced this action against all of the above-named defendants. The original complaint contained 16 counts, not all of the defendants being charged in each count. In response to various motions in the course of this action, the Court dismissed counts 3, 5, 9, 11, 13, 14, 15 and 16.

The following are claims which remain against the defendants Outside Directors, William Wierdsma, Raymond Scroggins and Edward C. Radi, and Richard D. Wright (deceased) and the Estate of Walter F. Benz: count 1 (asserting a claim based on section 10(b) of the Securities Exchange Act of 1934 and Rule 10b — 5); count 2 (asserting a claim under section 17(a) of the Securities Act of 1933); count 4 (asserting a claim under sections 551.41 and 551.59 of the Wisconsin Statutes); and count 6 (asserting a claim for common law fraud). Counts 7, 8, 10, and 12 remain against defendant Ernst. These claims correspond in terms of their statutory or common law basis to counts 1, 2, 4 and 6, respectively, brought against the other defendants.

II. STATUTE OF LIMITATIONS

All of the defendants have moved for summary judgment on the statutory causes of action which have been brought against them (i.e., counts 7, 8 and 10 in the case of Ernst and counts 1, 2, and 4 in the case of the other defendants), alleging that these claims are barred by the applicable statute of limitations. The Court agrees, and grants the defendants’ motions for summary judgment on counts 1, 2, 4, 7, 8 and 10.

There is no dispute that the applicable statute of limitations with regard to the aforementioned claims is found in Wisconsin Statutes § 551.59(5). This Court has previously determined that “the statute of limitations appropriate to section 10b and Rule 10b-5 violations is contained in section 551.59(5) of the Wisconsin Statutes.” Colonial Bank & Trust Co. v. American Bankshares Corporation, 478 F.Supp. 1186, 1191 (E.D.Wis.1979); affirmed sub nom, Cahill v. Ernst & Ernst, 625 F.2d 151 (7th Cir.1980). Clearly, this section also sets forth the statute of limitations with regard to civil liabilities for violations of Wisconsin securities law. Section 551.-59(5) provides that:

(5) No action shall be maintained under this section unless commenced before the expiration of 3 years after the act or transaction constituting the violation or the expiration of one year after the discovery of the facts constituting the violation, whichever first expires, but the time specified for commencing such action shall be extended by reason of any fact and for the time specified in §§ 893.13 and 893.16 to 893.23.

There is also no dispute that plaintiffs cause of action arose when the Note Agreement was executed. Since the complaint was filed on April 7, 1976, and the Note Agreement was executed on April 10,1973, the three-year period referred to in the statute had not expired when the action was brought and is not relevant for purposes of this discussion. It is the one-year period referred to in the statute which defendants contend had passed before the complaint was filed.

The second prong of § 551.59(5) provides that an action may not be brought later than one year after “discovery of the facts constituting the violation____” This Court has previously determined that the term “discovery” as used in § 551.59(5) does not require that the plaintiff become aware of the ultimate fact of fraud. Cahill v. Ernst & Ernst, 448 F.Supp. 84, 88 (E.D.Wis.1978); vacated and remanded, 588 F.2d 835 (7th Cir.1978); reaffirmed on remand sub nom, Colonial Bank & Trust Company v. American Bankshares Corporation, 478 F.Supp. 1186 (E.D.Wis.1979), affirmed, 625 F.2d 151 (7th Cir.1980). Quoting Koehler v. Haechler, 27 Wis.2d 275, 278, 133 N.W.2d 730, 731 (1965), this Court stated that:

“Actual and complete knowledge of the fraud on the part of the plaintiff is not necessary in order to set the limitation period running.
‘When the information brought home to the aggrieved party is such as to indicate where the facts constituting the fraud can be effectually discovered upon diligent inquiry, it is the duty of such party to make the inquiry, and if he fails to do so within a reasonable time he is, nevertheless, chargeable with notice of all facts to which such inquiry might have led.’ [ O’Dell v. Burnham, 61 Wis. 562, 21 N.W. 635 (1884) ].
Commenting on the above passage, the (Wisconsin Supreme) Court stated in 1961: ‘Under the rule quoted above, it is not necessary that a defrauded party have knowledge of the ultimate fact of fraud. What is required is that it be in possession of such essential facts as will, if diligently investigated, disclose the fraud. The burden of diligent inquiry is upon the defrauded party as soon as he has such information as indicates where the facts constituting the fraud can be discovered.’ [Milwaukee Western Bank v. Lienemann, 15 Wis.2d 61, 112 N.W.2d 190 (1961)].”

448 F.Supp. at 88.

The Seventh Circuit has also addressed this statute of limitations question and stated that “The statutory period does not await (the plaintiff’s) leisurely discovery of the full details of the alleged scheme.” Hupp v. Gray, 500 F.2d 993, 996 (7th Cir. 1974). Thus, the question is whether plaintiff had knowledge of such facts prior to April 7, 1975, which would have disclosed the alleged fraud committed by defendants with regard to the Note Agreement had plaintiff made a diligent investigation.

In order to determine whether there were facts known to plaintiff which, if diligently investigated, would have disclosed the alleged fraud, the Court must first examine in greater detail the events which led to the execution of the Note Agreement, which events constitute the factual basis of plaintiff’s claims. The following information was derived primarily from the Statement of Facts contained in Plaintiff’s Memorandum In Opposition to Defendants’ Motions For Summary Judgment, and is based upon testimony and documents produced during discovery. This statement of facts is not contested by the defendants, and the Court will assume for purposes of this discussion that this information is accurate.

Near the end of 1972, American transferred a large volume of securities from its trading account to its investment account. The transfers were made at cost, rather than at market price. All of the securities transferred showed losses, the aggregate of such losses being approximately $650,-000.00.

Standard accounting practice required that securities held in the trading account be marked down to the lower of cost or market and that securities transferred from the trading account be valued at market. American did not follow this practice in 1972. Had the proper practice been followed, American’s net income would have been reduced by $246,000.00. Plaintiff alleges that Ernst knew about these transfers, but allowed the transfers to be made and recorded at cost.

The second major factual basis for plaintiff’s claims concerns a real estate loan made by American to Bernard I. Mirochnick. The loan was made in order to finance a development known as Beau Court, and was one of American’s largest loans as of December, 1972. On December 31,1972, the loan proceeds had been almost fully disbursed, but the development was less than 70 percent completed, at best.

The deposition of Raymond Scroggins, former president of American, reveals that several of the directors of American were aware of the problems with the Mirochnick loan. This information was not disclosed to the plaintiff prior to the execution of the Note Agreement, however. The 1972 financial statements of American Banks-hares Corporation, audited by Ernst, also did not reflect the poor state of this loan, nor did they disclose that securities transferred out of the trading account had been transferred at cost rather than at market. Therefore, plaintiff has alleged that Ernst materially overstated the 1972 actual income of American due in part to the failure to establish adequate loan loss reserves.

The question now before the Court is whether facts known to plaintiff prior to April 7, 1975, would, if diligently investigated, have led plaintiff to discover these allegedly fraudulent actions by the defendants. It is undisputed that plaintiff was aware of the following information prior to April 7, 1975. This information is contained in documents obtained in the course of discovery from plaintiff’s files, as attested to by Thomas J. Donnelly, one of the attorneys for the Outside Directors, in his affidavit of October 26, 1982.

The first such document is a letter dated August 1, 1973, from Harold (Pete) Erickson, chairman of the Board of American Bankshares Corporation, to Aid Association for Lutherans. This document contains the handwritten markings of William Murry, who, in 1973, was an investment officer for CNA and who reviewed the loan transaction on behalf of plaintiff. The letter discloses that American had sustained substantial securities losses in its trading account:

“Unfortunately, the net income increase from ordinary operations was more than overcome by losses in our trading account ... Even though almost all of our trading securities were in the 1-3 year maturity range, markdown to market and losses from actual sales exceeded our worst expectatons ...”

(Letter of Harold Erickson, August 1, 1973.)

The second document is a copy of the 1973 audited financial statements of American Bankshares Corporation and its subsidiaries which was prepared by Ernst. These' financial statements, particularly Note C attached at the back of these statements, explain the problems associated with the Mirochnik loan and the bad debt reserves established with respect to that loan.

The third document is a letter dated April 26, 1974, from Barrett I. Zuckerman, then senior vice-president of American Bankshares Corporation, to Warren Murry requesting an extension of certain reporting requirements of the Note Agreement. At the close of his letter, Mr. Zuckerman stated that American hoped to “wind this mess up soon and have a prompt meeting with you to completely inform you of our situation.” (Letter of Barrett Zuckerman, April 26, 1974.)

The fourth document is a waiver and amendment dated May 24, 1974. This document contains admissions by American that they are in default as to Section 7.4 of the Note Agreement, which contains certain reporting requirements, and that they may be in default as to Section 7.7, which restricts the payment of dividends and other stock payments. With respect to Section 7.7, American disclosed that its certified public accountants required American to increase its loan loss reserve in 1973 by an additional $3,000,000.00.

This waiver and amendment was not granted by plaintiff, but was replaced by a substitute waiver and amendment drafted by plaintiff’s counsel, Chapman and Cutler. The substitute waiver and amendment contains a clause requiring the shareholders of American to contribute at least $3,000,-000. 00 to increase the capital and/or capital surplus of American, in recognition of the required increase in loan loss reserves.

A further increase in American’s loan loss projection was revealed to plaintiff in a letter dated November 14, 1974, from defendant Raymond L. Callen, president of American City Bank, to Warren Murry. Attached to this letter is the 10-Q Report of American Bankshares Corporation for the nine-month period ending September 30, 1974. The postscript at the end of Mr. Callen’s letter is particularly telling with regard to American’s financial plight:

“P.S. Subsequent to the drafting of this letter, in a meeting with our accountants, Arthur Andersen & Co., we were advised to set up an additional reserve for the (Mirochnik) project in the amount of $1.6 million.
Again, we look forward to the chance to explain all of this to you when we meet with you.”

(Letter of Raymond L. Callen, November 14, 1974, page 2.) At the top of this letter is a handwritten notation by Warren Murry to have a copy of the letter sent to his then immediate superior, Murray Patterson.

In addition to the information contained in these documents, which plaintiff undisputably obtained prior to April 7, 1975, certain other documents which one would expect to find in plaintiff’s files as of that date are conspicuous by their absence. Specifically, American Bankshares Corporation had failed to file an annual 10-K Report for the year ended December 31, 1974, nor did it file a 10-Q Report for the quarter ended March 31, 1975. As a result of American Bankshares’ failure to file the 10-K Report, the Commissioner of Securities for the State of Wisconsin entered an order on April 15, 1975, suspending all trading of the corporation’s common stock by licensed broker-dealers and agents in Wisconsin.

In response, plaintiff claims that knowledge of these facts is not indicative of any fraudulent activities by defendants relative to the 1972 Note Agreement. Plaintiff contends that there was “... no reason to think that the later developments were anything but contemporaneous with” problems that had occurred at American subsequent to the execution of the Note Agreement. (Plaintiff’s Memorandum In Opposition To Defendants’ Motions For Summary Judgment, December 13, 1982, page 9.) In particular, plaintiff points to the depressed real estate market which existed in the early-to-mid 1970’s, and claims that it was a plausible explanation for American’s financial problems. Plaintiff argues that not until August 29, 1975, when a report was issued to the shareholders, customers, and friends of American Bankshares and American, did it obtain any indication of misstatements in American Bankshares’ 1972 financial reports. In addition, plaintiff contends that issues relating to the parties’ intent and/or states of mind are “particularly inappropriate for summary adjudication.” Id., page 3.

The Court agrees, to an extent, with plaintiff’s contentions and statement of the law. Summary judgment is inappropriate where there is a dispute “about either the facts of the controversy or the inferences to be drawn from such facts.” Central National Life Insurance v. Fidelity and Deposit Company of Maryland, 626 F.2d 537, 539 (7th Cir.1980), citing United States v. Diebold, Inc., 369 U.S. 654, 655, 82 S.Ct. 993, 994, 8 L.Ed.2d 176 (1962) (emphasis in original); Howell v. Continental Credit Corp., 655 F.2d 743, 748 (7th Cir.1981). Furthermore, any inferences to be drawn from undisputed facts “must be viewed in the light most favorable to the party opposing the motion.” Diebold, supra, 369 U.S. at 655, 82 S.Ct. at 994.

In this case, there is no dispute that the information contained in the aforementioned documents was known to the plaintiff long before April 7, 1975. Moreover, the Court is willing to accept plaintiffs explanation that it believed that the increases in American’s loan loss reserve were due to the deteriorating real estate market. However, in light of the interpretations of § 551.59(5) made by the Wisconsin Supreme Court in Koehler and this Court in Cahill, the plaintiff’s duty to investigate a possible fraud is not dependent upon its knowledge or “discovery” of that fraud. The duty arises when facts are known which would, “if diligently investigated, disclose the fraud.” Cahill, supra, at 88.

In analyzing the undisputed facts in light of § 551.59(5) and Cahill, this Court is not required to determine to what cause the plaintiff attributed the necessary increases in American’s loan loss reserve. The Court is not being asked to read the plaintiff’s corporate mind and decide whether it knew, prior to April 7, 1975, that a fraud had occurred relative to the 1972 Note Agreement. The Court’s duty in this case is to evaluate the facts known to plaintiff and determine if, upon diligent investigation of those facts, the fraud would have been uncovered.

The Court believes that, for whatever reasons it had, the plaintiff failed utterly in its duty to monitor the loan it made to American. The undisputed facts in this case, along with the admissions of Warren Murry in his deposition, reveal that no investigation whatsoever was undertaken once plaintiff became aware that American’s financial status had taken a marked downturn since the Note Agreement was executed in 1973. While the Court does not presume to be expert in the affairs of the banking world, and giving due deference to plaintiff’s explanation for it inactivity, the Court is astounded that a major financial institution such as plaintiff would sit idly by, knowing what it did about American’s financial straits, and simply assume that the declining real estate market was the one and only cause. The undisputed facts will admit no other conclusion than that plaintiff’s knowledge of American’s required increase in its loan loss reserves, American’s default with respect to the Note Agreement, and the revelation of the disasterous Mirochnik loan imposed a duty upon plaintiff to investigate the origin of these problems and that plaintiff failed to do so.

In concluding that the statute of limitations bars plaintiff’s statutory causes of action, the Court notes that there has been no charge made, nor is there any indication from the record that defendants in any way attempted to cover up for their alleged misrepresentations. As the Seventh Circuit stated in Trecker v. Scag, 679 F.2d 703, 708 (7th Cir.1982), concealment of the fraud would toll the statute of limitations until the fraud was actually discovered:

“At least two types of fraudulent concealment toll a statutory period ... In the first type, the most common, the fraud goes undiscovered even though the defendant after commission of the wrong does nothing to conceal it and the plaintiff has diligently inquired into its circumstances. The plaintiff’s due diligence is essential here. (Citations omitted.) In the second type, the fraud goes undiscovered because the defendant has taken positive steps after the commission of the fraud to keep it concealed ... this type of fraudulent concealment tolls the limitations period until actual discovery by the plaintiff.”

Id. (emphasis in original.)

Since there is no evidence of concealment in this case, plaintiff’s “due diligence” was essential in order to toll the statute of limitations. Having known of the tremendous increase in loan loss reserves, the sudden appearance after 1972 of reported problems with the Mirochnik loan, and the failure by American Bankshares to file certain annual and quarterly reports, plaintiff should have investigated the cause of these remarkable occurrences. Had plaintiff waited until it had evidence that American’s financial problems existed prior to the execution of the Note Agreement, there would have been, as defendants claim, nothing to investigate. Such a “leisurely” discovery of the fraud cannot be condoned. See Hupp, supra.

While this Court is not anxious to dismiss through summary judgment a case against defendants whose culpability might well have been demonstrated at trial, plaintiff’s own lack of diligence compels the result herein. The fact that plaintiff waited until three days before the three-year deadline under the first prong of § 551.59(5) implies that plaintiff waited as long as possible, for relief other than that which is dispensed by the courts. Under the second prong of § 551.59(5), however, plaintiff waited too long.

As a final point, this case is not one where the Court is deciding an issue of fact in resolving the motions for summary judgment. The facts are uncontroverted; the only decision to be made is whether, pursuant to § 551.59(5), knowledge of these facts imposed a duty upon plaintiff to investigate their cause. Thus, the Court is merely interpreting the law in light of undisputed facts, not resolving an issue which should be decided by the judge or jury at trial, as plaintiff contends.

For the foregoing reasons, counts 1, 2, 4, 7, 8, and 10 of the complaint are dismissed as to all defendants. Since this decision disposes of those claims, defendants’ other arguments in favor of dismissing those counts need not be considered.

III. COMMON LAW CLAIMS

Having dismissed plaintiff’s statutory causes of action, two common law claims remain pending before the Court: count 12 is a common law negligence claim against Ernst, and count 6 is a common law fraud claim against the remaining directors.

A. Count 12: Common Law Negligence.

Ernst contends that, should the federal claims be dismissed, the state claims must also be dismissed for lack of jurisdiction. Alternatively, Ernst argues that count 12 should be dismissed for failure to state a claim, since Ernst owed no duty of care to plaintiff.

In opposition, plaintiff asserts that its state law claims would be barred by the applicable statute of limitations, and that there now exists no other forum to bring these claims. Plaintiff cites O’Brien v. Continental Illinois National Bank & Trust, 593 F.2d 54, 65 (7th Cir.1979), for the proposition that pendent state law claims should not be dismissed on jurisdictional grounds when a subsequent state court action would be time-barred.

Clearly, there is no independent federal jurisdiction regarding the twelfth claim. Ernst has submitted an affidavit which demonstrates that a number of partners in Ernst are residents of Illinois, the same state of which plaintiff is a citizen. This Court has previously stated that, “for purposes of diversity, the citizenship of a partnership is that of each of its partners.” Cahill, supra, at 89. Therefore, no diversity jurisdiction exists as to count 12.

Ernst’s argument that count 12 should be dismissed for failure to state a claim upon which relief can be granted also has merit. At issue here is the duty of an accountant to those who are not in privity of contract. Both parties cite the Seventh Circuit’s decision in Hochfelder v. Ernst & Ernst, 503 F.2d 1100 (7th Cir.1974) in support of their positions.

In Hochfelder, the court discussed the. evolution of the duty owed by accountants to those who had not contracted to have the financial statements at issue prepared. Originally, the courts held that accountants owed no duty to persons not in privity of contract. Id. at 1107. The foundation for these decisions was laid by Judge Cardozo in Ultramares Corp. v. Touche, 255 N.Y. 170, 174 N.E. 441 (1931), where he stated:

“If liability for negligence exists, a thoughtless slip or blunder, the failure to detect a theft or forgery beneath the cover of deceptive entries, may expose accountants to a liability in an indeterminate amount for an indeterminate time to an indeterminate class. The hazards of a business conducted in these terms are so extreme as to enkindle doubt whether a flaw may not exist in the implication of a duty that exposes to these consequences.”

255 N.Y. at 179, 174 N.E. at 444.

In time, however, courts began to recognize a limited liability of accountants “to those who, although not themselves foreseen, are members of a limited class whose reliance on the financial statements is specifically foreseen.” Hochfelder, supra, at 1107. See also R.I. Hospital Trust National Bank v. Swartz, et al., 455 F.2d 847, 851 (4th Cir.1972); Rusch Factors, Inc. v. Levin, 284 F.Supp. 85 (D.R.I.1968).

The Court is of the opinion that count 12 should be dismissed since the Court lacks pendent jurisdiction over this state law claim and because the plaintiff has failed to state a claim upon which relief can be granted. Considering first the jurisdiction question, plaintiff has correctly stated the law that jurisdiction over pendent state law claims may be retained if a subsequent state action would be time-barred. O’Brien, supra, at 65. However, the Seventh Circuit’s decision in O’Brien was premised on the fact that the plaintiff there had pursued his federal claim “in good faith and with diligence.” Id. This Court has already decided that plaintiff did not diligently pursue its federal claims, and therefore O’Brien is distinguishable. Moreover, when the plaintiff, as here, did not diligently pursue its federal claims, this Court sees no reason why such an extraordinary remedy should be granted in its favor.

As for the merits of plaintiff’s claim, Ernst has submitted affidavits in support of its contention that it had no knowledge of the possible loan from plaintiff to American at the time the American Bankshares financials were prepared. On the other hand, plaintiff has submitted certain notes obtained from Ernst’s files which demonstrate that Ernst knew that American would seek a $2,000,000.00 loan in order to be chartered as a national bank.

Even though Ernst knew that American proposed to sell $2,000,000.00 worth of debentures, it is evident that the buyer of those debentures was unknown to Ernst at the time the financials were prepared. It is important to note in this regard that the duty owed by accountants does not extend to all of those who might “foreseeably” rely on the financial statements, but only to those in a “limited class whose reliance on the financial statements is specifically foreseen.” Hochfelder, supra, at 1107. Absent Ernst’s knowledge as to who the purchaser of those debentures would be, it is impossible to characterize plaintiff as a member of a “limited class” of potential purchasers. Nor is it possible that plaintiff’s reliance on the financials could have been foreseen when plaintiff’s identity was not known. As such, plaintiff was one of an indeterminate number whose reliance on the financials was probably foreseeable, but not specifically foreseen.

Since plaintiff’s reliance on the financials was not specifically foreseen, no duty was owed them and this claim is therefore dismissed on its merits, pursuant to Rule 12(b)(6), Federal Rules of Civil Procedure. For the reasons discussed above, the claim is also dismissed for lack of subject matter jurisdiction, pursuant to Rule 12(b)(1), Federal Rules of Civil Procedure.

B. Count 6: Common Law Fraud.

The final remaining claim in this action is the common law fraud claim against the defendants other than Ernst, which group consists of former Outside Directors and former officers and directors of American. The Court finds that plaintiff has stated a claim upon which relief may be granted, and that material issues of fact exist as to this claim. Therefore, the Court will not dismiss this count.

Defendants Outside Directors contend that no duty was owed by the directors of American to disclose any misrepresentations with respect to American’s financial statements. Citing Lanza v. Drexel & Company, 479 F.2d 1277 (2nd Cir.1973), the Outsidé Directors contend that a director is not “an insurer of the honesty of individual officers of the corporation,” nor is a director “under a duty to investigate each ... transaction and to inquire as to what representations had been made ...” Id. at 1281. Finally, citing In Matter of Estate of Lecic, 104 Wis.2d 592, 312 N.W.2d 773 (1981), the Outside Directors state that the “failure to disclose a fact, is not misrepresentation unless the nondisclosing party has a duty to disclose that fact ... The question of legal duty to disclose is a questionof law.” 104 Wis.2d at 604, 605, 312 N.W.2d 773.

Defendants Outside Directors’ statement of the law is essentially correct. However, the Second Circuit’s holding in Lanza that a director has no duty to investigate fraudulent transactions was conditioned on the director’s ignorance of the transaction in question. A more complete statement of that portion of the court’s opinion is as follows:

“... neither the language nor intent of section 10(b) or Rule 10b-5 would justify a holding (1) that a director is an insurer of the honesty of individual officers of the corporation in their negotiations which involve the purchase or sale of the corporation’s stock or (2) that, although he does not conduct the negotiations, participate therein, or have knowledge thereof, he is under a duty to investigate each such transaction and to inquire as to what representations had been made, by whom and to whom, and then independently cheek on the truth or falsity of every statement made and document presented.”

Lanza, supra, at 1281.

The testimony of defendant Raymond Scroggins at his deposition was that all directors were aware of the problems with the Mirochnik loans prior to the execution of the Note Agreement. Furthermore, the directors were undeniably aware of the pending sale of debentures. Under these circumstances, the Lanza decision does not compel this Court to conclude that no duty was owed by the Outside Directors to plaintiff.

As the Outside Directors demonstrate in their supporting briefs, plaintiff has merely alleged in the complaint that the directors exerted “control” over American at the times relevant to this cause of action. Paragraph 38 of the complaint states:

“Upon information and belief, each of the defendants to this claim ... exerted practical control and legal control over American City at all times material to this claim.”

While this allegation does not specifically claim that the directors knew about the pending loan or the fraudulent misrepresentations, the implication is clear that “practical control” would imply such knowledge. Regardless, the Court is not willing to grant summary judgment on this count based on such a fine distinction. An issue of fact exists regarding the common law fraud claim, and that issue must be resolved by the appropriate finder of fact. See Wisconsin Real Estate Investment Trust v. Weinstein, 509 F.Supp. 1289, 1297-98 (E.D.Wis.1981).

In the alternative, all defendants as to count 6 move that this claim be dismissed on jurisdictional grounds. In support of this argument, defendants state that defendant Ernst is a partnership, some of whose partners are citizens of Illinois, and that as a result, there is no independent diversity jurisdiction as to all defendants in this case.

This argument does not merit much consideration. First, defendant Ernst was not charged in count 6, which is a separate allegation against certain officers and directors of American. Second, those officers and directors are not in partnership with Ernst, nor do any of them claim to be citizens of Illinois. Therefore, the Court would have diversity jurisdiction to hear this state law claim, and it need not be dismissed as a pendent claim.

Finally, defendant William Wierdsma states in his affidavit that he has no recollection of being at the March 21,1973 meeting of the Board of Directors of American City Bank and Trust at which meeting a resolution was passed authorizing the sale of the debentures to Continental. Furthermore, defendant Wierdsma testified at his deposition that he had no knowledge of any discussions concerning the sale of capital notes to plaintiff.

Although defendant Wierdsma claims to have no recollection of his involvement in or knowledge of the sale of capital notes to plaintiff, the Court is not satisfied beyond doubt that no issue of fact exists as to such knowledge or involvement. Summary judgment is not appropriate under these circumstances. See Weinstein, supra, at 1297-98. Likewise, the motions of Raymond E. Scroggins and Edward C. Radi, and Richard D. Wright and Estate of Walter F. Benz must also be dismissed, since they simply rely upon the briefs submitted by the other movants in this case and advance no different arguments in their favor.

For the foregoing reasons, the Court denies the motions of all of the defendants charged in count 6 of the complaint for summary judgment and/or dismissal of that claim.

IV. MOTIONS TO SUBSTITUTE DEFENDANTS

Two motions for substitution of defendants pursuant to Rule 25(a)(1) of the Federal Rules of Civil Procedure are pending in this case. Plaintiff has moved that the Court substitute the personal representative of defendant’s estate, Geraldine R. Lichtsinn, in place of defendant, Harold F. Lichtsinn. Plaintiff has also moved that the personal representative of defendant’s estate, Florence M. Hanson, be substituted as a defendant in place of defendant Richard D. Wright. The motion to substitute Geraldine R. Lichtsinn has been opposéd, while the other motion for substitution has not. For the reasons stated below, both motions are granted.

Defendant Harold F. Lichtsinn died on August 19, 1982, and his death was suggested upon the record on October 27, 1982. Defendant Richard D. Wright died on November 13, 1983, and his death was suggested upon the record on November 22, 1983. Both motions for substitution were made within 90 days after the respective deaths were suggested upon the record, as required by Rule 25(a)(1), Federal Rules of Civil Procedure.

Since the motion to substitute Florence Hanson in place of defendant Richard D. Wright is unopposed, the following discussion will pertain to the arguments in support of and opposing the substitution of Geraldine Lichtsinn in place of defendant Harold E. Lichtsinn. This motion is opposed on two grounds: (1) that this Court should reconsider its prior decision on the same issue with respect to another defendant in this case, and (2) that plaintiff’s laxity in failing to prosecute its claims has impaired defendant’s ability to defend the claims, so that laches should bar the instant motion.

A. Reconsideration of Prior Decision.

Defendant urges that this Court reconsider its earlier decision in this case on an identical issue published in Continental Assurance Company v. American Bankshares Corporation, et al., 483 F.Supp. 175 (E.D.Wis.1980), in which the Court permitted substitution of co-personal representatives in place of the defendant’s estate. Plaintiff argues first, with regard to the federal claims, that the Court should reverse its own decision in Continental on the basis of United States v. Daniel, 47 U.S. (6 How) 11, 12 L.Ed. 323 (1848), despite the “clear trend” in lower courts away from Daniel that this Court noted in Continental, supra, at 483 F.Supp. 175. Because plaintiff produces no new authority to indicate that a federal securities claim should not survive defendant’s death, the decision in Continental must stand, as to this point. See e.g., Derdiarian v. Futterman Corporation, 223 F.Supp. 265 (S.D.N.Y.1963).

Second, with regard to the underlying state claims, plaintiff argues that the holding of the Wisconsin Supreme Court in Wogahn v. Stevens, 236 Wis. 122, 294 N.W. 503 (1940), should control, because the Wisconsin Supreme Court’s subsequent citations of the case indicate that the case is still viable and applicable. See Prunty v. Schwantes, 40 Wis.2d 418, 423-24, 162 N.W.2d 34 (1968), and P.C. Monday Tea Company v. Milwaukee County E. Comm., 24 Wis.2d 107, 111, 128 N.W.2d 631 (1964). However, as plaintiff points out, neither of those cases involved securities claims, nor was the actual holding of Wogahn followed in either of those cases: that statutory securities law claims do not survive death. Moreover, the Wisconsin survival statute, Wis.Stat. § 895.01(1) continues to be applicable to the state law portions of plaintiff’s claims providing that the claims survive defendant’s death. See Continental, supra, 483 F.Supp. at 178-79.

Because plaintiff has produced no new law on the issue of state claim survival, this Court’s decision in Continental must stand as to this part.

B. Laches.

Defendant’s other argument is that plaintiff has failed to diligently prosecute this action over a period of several years, resulting in prejudice to defendant, because the suit can no longer be successfully defended. The record does not reflect that plaintiff has been lax in prosecuting this action since the complaint was filed. More importantly, it does not appear that laches is contemplated under the federal rules as a basis for denying a motion for substitution, or that delay in prosecution supports denial. Defendant has cited no authority in support of the laches argument.

Plaintiff’s motions for substitution of Geraldine Lichtsinn in place of Harold F. Lichtsinn and Florence Hanson in place of Richard D. Wright are both granted.

In summary, defendants’ motions for summary judgment as to counts 1, 2, 4, 7, 8, 10, and 12 are Granted. Defendants’ motions for summary judgment and/or dismissal of count 6 are Denied. Plaintiff’s motions for substitution of defendants are Granted.

      . This information was obtained from American Bankshares Corporation’s 8-k Report for the month of November, 1975. Although it is not relevant for purposes of what plaintiff knew as of April 7, 1975, regarding American’s financial status, this report also reveals that no 10-Q Reports were filed on June 30, 1975, or on September 30, 1975.

      . The Court also notes that this argument is moot, since the federal claims have been dismissed as to all defendants.


source: Caselaw Access Project

license: Public Domain

text:
    CONTINENTAL ASSURANCE COMPANY, an Illinois insurance corporation, Plaintiff, v. AMERICAN BANKSHARES CORPORATION, a Wisconsin corporation; Federal Deposit Insurance Corporation, a federal agency acting as receiver for American City Bank & Trust Company, N.A.; Colonial Bank & Trust Company, an Illinois banking corporation; Ernst & Ernst, a partnership; Harold L. Erickson; Walter F. Benz; William Bruce, II; John D. Cahill; Gerald S. Colburn; Peter F. Wegmann; Henry S. Lauterbach; Nicholas J. Lesselyoung; Harold F. Lichtsinn; W. Stanley Pearce; Clement J. Schwingle; James W. Sullivan; Robert J. Trecker; Richard D. Wright; Bernard D. Heifetz; Raymond E. Scroggins; William E. Wierdsma; Albert M. Deshur; Edward A. Korpady; Edward C. Radi; and Barrett S. Zuckerman, Defendants.
    No. 76-C-248.
    United States District Court, E.D. Wisconsin.
    Nov. 20, 1984.
    As Amended Jan. 4, 1985.

      Howard A. Pollack, Chame, Glassner, Tehan, Clancy & Taitelman, Milwaukee, Wis.; Andrew W. Horstman and Harding A. Orren, Robins, Zelle, Larson & Kaplan, Minneapolis, Minn., for plaintiff.
    Raymond E. Scroggins, pro se.
    Edward C. Radi, pro se.
    Dominic S. Amato, Fiorenza, Weiss, Amato & Persa, Milwaukee, Wis., for defendant Wierdsma.
    Ronald L. Wallenfang and Matthew J. Flynn, Quarles & Brady, Milwaukee, Wis., for defendants Deshur, Heifetz, Korpady, Lauterbach, Lesselyoung, Lichtsinn, Pearce, Colburn, Bruce, Debelak and Schwingle.
    William H. Alverson and William B. Graves, Godfrey & Kahn, Milwaukee, Wis., for defendant Ernst & Ernst.
    David J. Cannon and Jose Olivieri, Michael, Best & Friedrich, Milwaukee, Wis., for defendant Wegmann.

      William E. Callahan, Jr., Davis & Kuelthau, Milwaukee, Wis., for the Estates of defendants Benz and Wright.
    William R. Soderstrom, Fox, Carpenter, O’Neill & Shannon, Milwaukee, Wis., for defendant Trecker.
    Harold L. Erickson, pro se.
   DECISION AND ORDER

WARREN, District Judge.

All but two of the parties in this action have filed motions for reconsideration of various portions of the Court’s order dated September 21, 1984, 601 F.Supp. 265. The plaintiff requests that the Court reconsider its decision dismissing counts 1, 2, 4, 7, 8, 10 and 12 of the complaint. Defendants William Bruce II, Gerald S. Colburn, John Debelak, Albert M. Deshur, Bernard D. Heifetz, Edward Korpady, Henry S. Lauterbach, Nicholas J. Lesselyoung, Harold F. Lichtsinn (deceased), Estate of Clement J. Schwingle, and W. Stanley Pearce (hereafter the “Outside Directors”), move the Court to reconsider its denial of their motion for summary judgment against plaintiff’s sixth claim for relief alleging common law fraud. Defendants Raymond E. Scrog-gins and Edward C. Radi, Estate of Walter F. Benz and Estate of Richard D. Wright, and William E. Wierdsma (whom the Court notes, with regret, has recently died) also move for reconsideration of the decision denying their motions for summary judgment on count six.

Defendants Ernst & Whinney (hereafter “Ernst”) and Robert J. Trecker have not filed motions for reconsideration. Ernst has filed a brief in opposition to plaintiffs motion for reconsideration of the decision dismissing counts 7, 8, 10, and 12. Defendant Trecker, who has not, until recently, been represented by counsel, did not previously file a motion for summary judgment in this action. However, Mr. Trecker’s new attorney has written to the Court seeking to clarify whether the September 21, 1984 order dismisses counts 1, 2, and 4 as to Mr. Trecker.

Although it is a rare circumstance when a motion for reconsideration is the appropriate method by which to seek review of a court’s decision, the Court has given careful consideration to each of the motions now pending. Some of these motions are well-founded; others apparently were filed due to an instinctive reaction to those filed initially. While the Court believes that its order of September 21,-1984, is essentially sound, it has decided to grant the Outside Director’s motion for reconsideration as to count 6, and to grant in part the plaintiff’s motion for reconsideration as to count 12. The Court will also dismiss counts 1, 2, and 4 against defendant Trecker.

I. THE STATUTORY CLAIMS: COUNTS 1, 2, 4, 7, 8 AND 10

The plaintiff has moved for reconsideration of that portion of the Court’s order dismissing counts 1, 2, 4, 7, 8 and 10 of the complaint. These counts are based on alleged violations of state and federal securities statutes, and the Court held that they were barred by the applicable statute of limitations.

In support of its motion, plaintiff merely restates arguments it made in its original brief in opposition to defendants’ motion for summary judgment. Plaintiff claims, once again, that issues of material fact exists concerning the inferences to be drawn from its knowledge of certain facts, and whether knowledge of those facts would have led it to discover the alleged misrepresentations had these facts been diligently investigated. The Court examined the facts of which plaintiff was undisputedly aware, and decided that a diligent investigation of those facts would have uncovered the alleged misrepresentations. Having made this determination, dismissal by summary judgment was appropriate. See Gieringer v. Silverman, 731 F.2d 1272, 1277 (7th Cir.1984).

II. COMMON LAW NEGLIGENCE: COUNT TWELVE

Count 12 of the complaint is a claim against Ernst based on common law negligence. Plaintiff contends that Ernst was negligent in certifying the financial statements of American Bankshares Corporation and its subsidiaries, and that the plaintiff relied upon these financial statements when it decided to execute the note agreement with American City Bank. The Court held that this claim should be dismissed for two reasons: first, it is a claim based upon state law, over which this Court should not retain jurisdiction; second, Ernst owed no duty of care to the plaintiff, thus the plaintiff had not stated a claim upon which relief could be granted.

It is undisputed that the Court does not have independent jurisdiction with regard to the twelfth claim. The claim is based on state law, and there is no diversity of citizenship. Plaintiff argues that the Court should retain jurisdiction over this claim for reasons of judicial economy and final resolution of the merits of the dispute.

In its prior decision, the Court cited O’Brien v. Continental Illinois National Bank & Trust, 593 F.2d 54, 65 (7th Cir. 1979), for the proposition that pendent state claims should not be dismissed on jurisdictional grounds when a subsequent state court action would be time-barred. The Court of Appeals qualified its decision, however, as follows:

“At least when, as here, a plaintiff has pursued his federal claim in good faith and with diligence, his pendent claim should not be foreclosed by the passage of time required to dispose of the federal claim.”

Id. at 65.

The plaintiff now admits that, pursuant to Wis.Stat. § 893.15, its state law claim may not be barred by the state statute of limitations. The Court believes that the claim would not be time-barred if brought in state court. Therefore, there is apparently no authority for retaining jurisdiction over this claim in federal court.

In its order of September 21, 1984, this Court distinguished the decision in O’Brien on a different basis. This Court found that the plaintiff had not diligently pursued its federal claims, as the plaintiff had in O’Brien. Although the Court acknowledged that the plaintiff has diligently prosecuted this action from the time it was commenced, the decision that the statute of limitations had run on the federal claims precluded a finding that the plaintiff had been diligent in bringing the action.

The plaintiff now contends that the term “diligence,” as it was used by the Court of Appeals in O’Brien, refers to diligence in prosecuting the claims once the action has been brought. The Court of Appeals did not, plaintiff claims, mean to imply that pendent state claims should be dismissed on jurisdictional grounds where the federal claims were barred by the statute of limitations, or that the “diligence standard” be applied to pre-filing laxity.

This Court does not see any basis for distinguishing between diligence in filing an action and diligence in prosecuting that action once it has been filed where the issue of jurisdiction over pendent state law claims has been raised. Nor does this Court believe that the Court of Appeals intended to make such a distinction. In fact, in deciding this question, the Court of Appeals in Gieringer was primarily concerned with the plaintiffs diligence in bringing the action, not in prosecuting it thereafter. 731 F.2d at 1279.

The well established rule of law is that when federal claims are dismissed before trial, pendent state law claims should also be dismissed. United Mineworkers of America v. Gibbs, 383 U.S. 715, 726, 86 S.Ct. 1130, 1139, 16 L.Ed.2d 218 (1966); Metz v. Tootsie Roll Industries, Inc., 715 F.2d 299, 307 (7th Cir.1983), cert. denied, — U.S.-, 104 S.Ct. 976, 79 L.Ed.2d 214 (1984); Hupp v. Gray, 500 F.2d 993, 997-998 (7th Cir.1974); Gieringer v. Silverman, 539 F.Supp. 498, 507 (E.D.Wis.1982), aff'd 731 F.2d 1272 (7th Cir.1984). This Court properly dismissed count 12 on jurisdictional grounds, and thus plaintiffs motion for reconsideration of this aspect of the Court’s September 21, 1984 order is denied.

The Court also dismissed count 12 for failure to state a claim upon which relief can be granted. In doing so, the Court relied upon the well established rule, cited by Ernst in its briefs, that an accountant owes a duty of care only “to those who, although not themselves foreseen, are members of a limited class whose reliance on the financial statements is specifically foreseen.” Hochfelder v. Ernst & Ernst, 503 F.2d 1100, 1107 (7th Cir.1974); see also R.I. Hospital Trust National Bank v. Swartz, et al., 455 F.2d 847, 851 (4th Cir. 1972); Rusch Factors, Inc. v. Levin, 284 F.Supp. 85 (D.R.I.1968). The Court found that plaintiff was not a member of a limited class whose reliance on the financial statements was specifically foreseen, and therefore dismissed count 12 on its merits.

In its brief in support of its motion for reconsideration, the plaintiff now brings to the Court’s attention a decision by the Wisconsin Supreme Court which substantially expands the liability of accountants to third parties who rely upon negligently prepared financial statements. In Citizens State Bank v. Timm, Schmidt & Co., 113 Wis.2d 376, 386, 335 N.W.2d 361 (1983), the court stated:

“The fundamental principle of Wisconsin negligence law is that a tortfeasor is fully liable for all foreseeable consequences of his act except as those consequences are limited by policy factors...
We conclude that accountant’s liability to third parties should be determined under the accepted principles of Wisconsin negligence law.”

The Wisconsin Supreme Court went on to list several policy factors which might, under certain circumstances, preclude a finding of liability on behalf of accountants to third parties. One of these policy considerations was whether “allowance of recovery would enter a field that has no sensible or just stopping point. 113 Wis.2d at 387, 335 N.W.2d 361. Considering the possibility of this and other policy considerations that may preclude the imposition of liability in certain cases, the Wisconsin Supreme Court declared that a “full factual resolution” of each case should be undertaken. Id.

The long standing rule limiting the liability of accountants to third parties was set forth by Judge (later Justice) Cardozo in Ultramares Corp. v. Touche, 255 N.Y. 170, 174 N.E. 441 (1931), where he stated:

“If liability for negligence exists, a thoughtless slip or blunder, the failure to detect a theft or forgery beneath the cover of deceptive entries, may expose accountants to a liability in an indeterminate amount for an indeterminate time to an indeterminate class. The hazards of a business conducted in these terms are so extreme as to enkindle doubt whether a flaw may not exist in the implication of a duty that exposes to these consequences.”

255 N.Y. at 179, 174 N.E. at 444.

Clearly, the original rule was founded upon a public policy consideration: extension of liability of accountants to third parties would expose an entire profession to an unlimited, unwarranted, and unsolicited liability. This Court wonders whether, unless the term “foreseeable” is defined more narrowly in this area than it has been within the context of Wisconsin negligence law, the new rule in Citizens State Bank is directly opposed to the public policy consideration expressed by Judge Cardoza, if not that expressed by the Wisconsin Supreme Court as well. In other words, very few cases would exist, this Court opines, where the extension of liability of accountants to third persons would not violate this particular public policy, and therefore reduce the number of cases where liability would be found to those where the third party belonged to a “limited class whose reliance on the financial statements is specifically foreseen.” Hochfelder, supra, at 1107. In short, this Court questions whether the rule in Wisconsin has really been changed at all.

In light of the decision in Citizens State Bank, however, this Court feels compelled to vacate that portion of its September 21, 1984 order dismissing count 12 for failure to state a claim. It is apparent that the law as to the liability of accountants to third parties is in the process of evolution in Wisconsin, and it remains to be seen what effect the decision in Citizens State Bank will have. Under the circumstances, the Court feels even more justified than previously in dismissing count 12 on jurisdictional grounds, for this claim is one which should be tried, if at all, by a Wisconsin court under that state’s new rule. As the United States Supreme Court stated in Gibbs:

"... [njeedless decisions of state law should be avoided both as a matter of comity and to promote justice between the parties, and by procuring for them a surer-footed reading of applicable laws.”

383 U.S. at 726, 86 S.Ct. at 1139. The question of liability is this case should be decided in the appropriate state forum.

Finally, with regard to count 12, Ernst urges the Court to decide the question presented in its motion for summary judgment whether the plaintiff actually relied upon the financial statements of American Bankshares and its subsidiaries in deciding whether to execute the note agreement with American City Bank. Although Ernst claims that no issue of material fact exists on this question, the Court believes that the plaintiff has alleged enough facts with regard to this issue that a material question of fact does exist. Therefore, the Court declines to decide this question on a motion for summary judgment.

III. COMMON LAW FRAUD: COUNT SIX

The most difficult question presented by the motions for reconsideration is whether an issue of fact exists concerning the sixth claim in the complaint. The Outside Directors, those who were living at the time this action was brought, have each submitted identical affidavits which include the following paragraph:

4. At all times relevant, affiant was an outside (non-employee) director of American City and Bankshares, who played no part, directly or indirectly, in any of the negotiations or events which resulted in the purchase by Continental Assurance Company of $2 Million principal amount capital notes of American City on April 10, 1973 (“the capital notes”). Affiant did not at any time during the relevant period meet or have any discussion of any kind or any other contact of any kind with any officer, employee or other representative of Continental Assurance Company with respect to the issuance of the capital notes, or with Goldman, Sachs & Co. who acted as agent for American City in connection with the placement of the capital notes. Affiant did not, at any time during the relevant period, have knowledge of any representations being made by American City or any of its representatives, including Goldman, Sachs & Co. to Continental Assurance Company with respect to the issuance of the capital notes, and could not and did not have knowledge of misrepresentations, if any, made by American City, its officers, employees or other representatives, including but not limited to any misrepresentations alleged in the complaint.

Defendant Wierdsma has also submitted the affidavit of his attorney, Dominic S. Amato, which recites certain deposition testimony given by defendant Wierdsma. This testimony was that Wierdsma did not recall being at the Board of Directors meeting prior to the execution of the note agreement, and does not recall the discussion of any negotiations for a loan or sale of capital notes to the plaintiff.

In response, the plaintiff has submitted portions of the deposition of defendant Scroggins, in which he testified that all of the directors were aware of the pending sale of debentures, and that all of them were aware of the troubled Mirochnik loans. In addition, plaintiff claims that the note agreement itself, which set forth the terms and conditions of the sale of debentures, was before the Board of Directors at their March 21, 1973 meeting. Finally, plaintiff contends that the affidavits of the Outside Directors are self-serving, and should therefore be discounted.

Previously, the Court denied the defendants’ motion for summary judgment as to count 6 because it felt that the deposition testimony of defendant Scroggins was sufficient to raise an issue of fact as to the Outside Directors’ knowledge of the pending loan and the fraudulent misrepresentations. Having carefully reread this testimony, the Court is convinced that the plaintiff has not met his duty under Rule 56(e), Federal Rules of Civil Procedure, to “set forth specific facts showing that there is a genuine issue for trial.” The testimony of defendant Scroggins is too vague with regard to what knowledge was possessed by which directors, and does not meet the specificity requirement of Rule 56(e).

As the Outside Directors argue in their briefs, knowledge on the part of an alleged perpetrator that a false representation has been made is an essential element of common law fraud. Federal Deposit Insurance Corporation v. Lesselyoung, et al., 476 F.Supp. 938, 946 (E.D.Wis.1979), aff'd 626 F.2d 1327 (7th Cir.1980). While the affidavits submitted by the Outside Directors are self-serving and apparently the product of the same word processor, the veracity of the statements therein cannot be discounted completely. Plaintiff still has a duty incumbent upon him to demonstrate that these individuals knew that false representations had been made, and the vague recollections of defendant Scrog-gins do not suffice for that purpose.

Accordingly, the Court will grant the motions of the Outside Directors for reconsideration and reverse its decision denying their motion for summary judgment as to count 6 of the complaint. For the same reason, the Court will grant defendant Wierdsma’s motion for summary judgment and dismiss count 6 as to him. The affidavits submitted do not indicate what knowledge of the misrepresentations was had by the other defendants named in count 6, they being defendants Scroggins, Radi, Estate of Wright, Estate of Benz, and Trecker. Therefore, count 6 will not be dismissed as to them, and their motions for reconsideration (excepting Trecker, who did not file one) are denied.

IV. MR. TRECKER: THE MOVANT-COME-LATELY

On October 26, 1984, the Court received a letter from counsel for defendant Trecker, Mr. Soderstrom, in which he seeks clarification as to whether the Court’s order of September 21, 1984, dismissed counts 1, 2, and 4 as to Mr. Trecker. The short answer is that it did not. As there was no motion for summary judgment filed by Mr. Trecker, and since the Court’s order was silent as to him, none of the claims against him were officially dismissed.

Ordinarily, the Court looks with disfavor upon the attempt of a party to become the beneficiary of an order dismissing a claim when that party had stood passively by throughout the motion and briefing stage of the case. Even though he was without counsel, Mr. Trecker could easily have filed a one or two page motion, as some of the other defendants did, relying upon the briefs of other parties for support. For some unexplained reason, Mr. Trecker chose not to do this.

The Court is now faced with an awkward situation. By right, Mr. Trecker should not be allowed to benefit from the Court’s decision. On the other hand, it makes no sense to uphold counts 1, 2 and 4 against Mr. Trecker alone, and thereby further complicate this case. Nor does this Court desire an influx of any more unnecessary motions in this case at this time, since the file is voluminous enough as is.

Since counts 1, 2 and 4 were dismissed because the statute of limitations had run, the position of Mr. Trecker with regard to those claims is no different than that of the other defendants named in those counts. Had he been a party to the previous motions, these counts would have been dismissed as to him, too. Therefore, on its own motion, the Court hereby dismisses counts 1, 2, and 4 of the complaint as to defendant Trecker.

V. CONCLUSION

For the foregoing reasons, the Court hereby:

(1) denies the plaintiff’s motion for reconsideration of the Court’s decision dismissing counts 1, 2, 4, 7, 8 and 10 of the complaint;

(2) denies plaintiffs motion for reconsideration of the Court’s decision dismissing count 12 on jurisdictional grounds;

(3) grants plaintiff’s motion for reconsideration of the Court’s decision dismissing count 12 for failure to state a claim upon which relief may be granted; that portion of the Court’s decision of September 21, 1984, which dismissed count 12 for failure to state a claim is vacated, and the Court makes no decision on the merits of this claim;

(4) grants the motions of the Outside Directors and defendant William Wierdsma for reconsideration of the Court’s decision denying their motion for summary judgment as to count 6; count 6 is dismissed as to the Outside Directors and defendant Wierdsma;

(5) denies the motions for reconsideration of defendants Scroggins and Radi; and Estate of Wright and Estate of Benz;

(6) dismisses counts 1, 2, and 4 of the complaint as to defendant Robert J. Trecker.


author: McMILLAN, District Judge.

text:
    WCCB-TV, INC., Plaintiff, v. TELEREP, INC., Cox Communications, Inc., and Carolina Broadcasting Company, Defendants.
    No. C-C-84-252-M.
    United States District Court, W.D. North Carolina, Charlotte Division.
    Sept. 24, 1984.
    John C. Surles, Charlotte, N.C., for plaintiff.

      John H. Hasty, Hasty, Waggoner, Hasty, Kratt & McDonnell, Charlotte, N.C., for defendant.
   ORDER

McMILLAN, District Judge.

On July 10, 1984, defendants TeleRep, Inc. (“TeleRep), Cox Communications, Inc. (“Cox”), and Carolina Broadcasting Company (“WSOC”) filed a motion, pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure, to dismiss plaintiff WCCB-TV’s complaint. On September 20, 1984, a hearing was held on the motion.

FACTS AND PROCEDURAL HISTORY

Plaintiffs complaint alleges a violation of § 1 of the Sherman Act (15 U.S.C. § 1) arising from a suit filed on March 16, 1984, in the New York Supreme Court by defendant TeleRep. (TeleRep is a corporation that sells radio and television advertising time to national advertisers.) In that New York action, TeleRep sued Mr. Michael Riordan, a former employee of TeleRep, for breach of an employment contract not to compete. TeleRep also sued WCCB and Bahakel Communications Inc. for tortious interference with Riordan’s employment contract with TeleRep on the basis that WCCB hired Mr. Riordan away from his job with TeleRep. The suit was removed to federal court in New York in early May, 1984.

On May 14, 1984, WCCB, defendant in the New York action, filed a complaint in this court alleging that the New York suit by TeleRep, Cox, et al., was a violation of § 1 of the Sherman Act and a violation of the North Carolina anti-trust statutes (N.C. G.S. §§ 75-1, 75-2).

The defendants filed their motion to dismiss on July 10, 1984.

PLAINTIFF’S FIRST CLAIM FOR RELIEF

Plaintiff’s complaint alleges that TeleRep’s suit in New York against Riordan, WCCB, and Bahakel was part of a conspiracy to restrain trade in advertising in the Charlotte area in violation of § 1 of the Sherman Act. The alleged conspirators were Cox, Cox’s wholly-owned subsidiary WSOC, and Cox’s 80% owned subsidiary TeleRep.

Defendants argue that in light of the Supreme Court’s decision in Copperweld Corp. v. Independence Tube Corp., — U.S. -, 104 S.Ct. 2731, 81 L.Ed.2d 628 (1984), There could be no conspiracy by these related corporations that violated § 1 of the Sherman Act. Copperweld held that there could be no conspiracy in violation of the anti-trust laws between a parent and wholly-owned subsidiary. While the rationale of Copperweld may well apply to parent corporations and less than wholly-owned subsidiaries (in this case TeleRep and Cox), the decision in Copperweld is specifically limited to wholly-owned subsidiaries. Id. at-, 104 S.Ct. at 2739. Because the court dismisses the complaint on other grounds, the court does not address defendants’ Copperweld argument.

Defendants also argue that the New York suit can not be the basis of anti-trust liability. The Supreme Court has recognized that the right to petition adjudicative bodies for redress of private wrongs is ordinarily not actionable under federal antitrust laws. Eastern R.R. Presidents Conference v. Noerr Motor Freight, Inc., 365 U.S. 127, 81 S.Ct. 523, 5 L.Ed.2d 464 (1961); United Mine Workers v. Pennington, 381 U.S. 657, 85 S.Ct. 1585, 14 L.Ed.2d 626 (1965).

The only exception to this immunity for seeking judicial relief applies to a suit that is nothing more than a “sham,” that is, “illegal and reprehensible practices which may corrupt the administrative or judicial processes.” California Motor Transport Co. v. Trucking Unlimited, 404 U.S. 508, 513, 92 S.Ct. 609, 613, 30 L.Ed.2d 642 (1972). This “sham” exception has also been defined as covering a suit that is a “ ‘fraud, corruption or misuse of the state processes.’ ” Hydro-Tech Corp. v. Sundstrand Corp., 673 F.2d 1171, 1174 (10th Cir. 1982).

Defendants’ suit in New York is activity protected by the First Amendment from anti-trust liability as long as it does not fall within the “sham” exception to the Noerr-Pennington doctrine. Even reading the complaint broadly, the court can not find allegations nor a situation likely to support allegations that the New York suit is a sham. Plaintiff only alleges that defendants brought the suit in order to restrain trade. Anti-competitive intent alone does not make a petition to a court a “sham” under the Noerr-Pennington doctrine. Id. at 1175.

Plaintiff does not allege in the complaint any anti-competitive acts by the defendants other than the filing of the suit in New York. At the hearing, the court asked plaintiff four times if there were any other anti-competitive acts by the defendants. The plaintiff responded evasively each time, but the gist of the responses was that there was no other act of which plaintiff was complaining.

Plaintiff has failed to state a claim against the defendants based on § 1 of the Sherman Act. The only alleged anti-competitive act by the defendants, the suit in New York, is protected activity under the Noerr-Pennington doctrine. Therefore, the court dismisses the plaintiffs first claim for relief.

PENDENT STATE CLAIMS

The court has discretion to hear plaintiff’s remaining state claims based on North Carolina anti-trust statutes (N.C.G.S. §§ 75-1, 75-2). In view of the dismissal of the federal claim, the court declines to hear the pendent state claims. Dismissal of pendent state claims is the preferred course of action if all federal claims are dismissed. Kavit v. A.L. Stamm & Co., 491 F.2d 1176, 1179-80 (2nd Cir.1974).

IT IS THEREFORE ORDERED that the action is DISMISSED. The court declines to award attorney fees incurred as a result of this motion. Defendants will recover their costs.


author: TOM S. LEE, District Judge.

text:
    STATE FARM MUTUAL AUTOMOBILE INSURANCE COMPANY, Plaintiff, v. UNIVERSAL UNDERWRITERS INSURANCE COMPANY, Defendants.
    Civ. A. No. J82-0637(L).
    United States District Court, S.D. Mississippi, Jackson Division.
    Sept. 25, 1984.

      Whitman B. Johnson, III, Steen, Reynolds, Dalehite & Currie, Jackson, Miss., for plaintiff.
    Cary E. Bufkin, Jim Bullock, Jackson, Miss., for defendants.
   MEMORANDUM OPINION

TOM S. LEE, District Judge.

This case is before the court on the Motions for Summary Judgment filed by plaintiff, State Farm Mutual Automobile Insurance Company (State Farm), and defendant, Universal Underwriters Insurance Company (Universal). The suit was brought in the Circuit Court of Hinds County and removed by the defendant to this court with jurisdiction premised on diversity of citizenship, 28 U.S.C. § 1332.

On May 8, 1979, an automobile driven by Nanette Johnson collided with a vehicle operated by Patricia Dianne Gray. The Johnson vehicle was owned by Joel Johnson Imported Motor Cars, Inc. (Joel Johnson) and was driven by Nanette Johnson with Joel Johnson’s permission. Joel Johnson had in effect a liability insurance policy with Universal. State Farm had issued a policy of automobile liability insurance to Nanette Johnson. Universal was notified of the accident and on at least two occasions denied coverage.

Gray filed suit against Nanette Johnson on June 19, 1979 in state court. State Farm defended and paid a judgment rendered against Nanette Johnson after a jury verdict for personal injury to Gray and negotiated and paid a settlement of Gray’s claim for property damage.

On July 17, 1980, Joel Johnson filed suit against Nanette Johnson and Gray. Joel Johnson’s claim against Gray and Gray’s counter claim against Joel Johnson were dismissed with prejudice. The only remaining claim, that by Joel Johnson against Nanette Johnson for property damage, was tried without a jury and, upon the court’s request, the parties filed post trial letter briefs. Both briefs focused on the issue of whether Universal was the insurer of Nanette Johnson. In its judgment dated December 9, 1981, the court found Nanette Johnson to be guilty of negligence and awarded Joel Johnson $1523.77 in damages.

A federal court sitting in a diversity case is Erie -bound to apply the law of the forum state to determine whether a previous state court judgment bars the present claim as res judicata. Angel v. Bullington, 330 U.S. 183, 67 S.Ct. 657, 91 L.Ed. 832 (1947); Breeland v. Security Insurance Company, 421 F.2d 918, 921 (5th Cir.1969). In Garraway v. Retail Credit Company, 244 Miss. 376, 141 So.2d 727 (1962), the Mississippi Supreme Court stated:

“Collateral estoppel is one aspect of res judicata developed in civil litigation and firmly established in the jurisprudence of this state. As applied to civil eases, this doctrine means that where a question of fact essential to a judgment is actually litigated and determined by a valid and final judgment, that issue cannot be litigated between the same parties in a future law suit.”

Id. 141 So.2d at 730.

The doctrine of collateral estoppel serves the purposes of both protecting litigants from the burden of relitigation and promoting judicial economy. Mississippi Employment Security Commission v. Philadelphia Municipal Separate School District, 437 So.2d 388, 395 (Miss.1983).

The general rule remains, however, that fact questions should be completely litigated in each case; the doctrine of collateral estoppel is merely an unusual exception to that rule. “Where there is room for suspicion regarding the reliability of those first fact findings, collateral estoppel should never be applied.” Id. at 397. See also Parklane Hosiery Company v. Shore, 439 U.S. 322, 330-31, 99 S.Ct. 645, 651, 58 L.Ed.2d 552 (1979); Montana v. United States, 440 U.S. 147, 164 n. 11, 99 S.Ct. 970, 979 n. 11, 59 L.Ed.2d 210 (1979), Garraway, 244 Miss. 376, 141 So.2d at 730.

Two state court law suits and the settlement of another claim preceded this action. The settled claim was not adjudicated and, therefore, a future suit is not precluded. See Green v. Amerada Hess Corporation, 707 F.2d 201, 207-08 (5th Cir.1983) (collateral estoppel only applicable when issues previously actually litigated), rehearing denied, 714 F.2d 137, cert. denied, — U.S. -, 104 S.Ct. 701, 79 L.Ed.2d 166, State v. Smith, 278 So.2d 411, 415 (Miss.1973) (same); C.I.T. Corporation v. Turner, 248 Miss. 517, 157 So.2d 648, 660 (Miss.1963) (same). Therefore, the issue of liability for insurance coverage of property damage suffered by Gray is not barred.

In applying the doctrine of collateral estoppel, Mississippi courts have required strict identity of parties. Green, 707 F.2d at 207. See Stovall v. Price Waterhouse Company, 652 F.2d 537, 540 (5th Cir.1981); McCarty v. Johns-Manville Sales Corporation, 502 F.Supp. 335 (S.D.Miss.1980); Magee v. Griffin, 345 So.2d 1027 (Miss. 1977); Johnson v. Bagby, 171 So.2d 327 (Miss.1965). In Stovall, the court commented that “Mississippi law in this area has been characterized as being rigid as any now extant.” Stovall, 652 F.2d at 540. See also Note, Collateral Estoppel — the Multiple Tort Claimant Anomaly, 41 Miss. L.J. 497, 498 (1970). The Mississippi Supreme Court in Johnson v. Bagby, 171 So.2d 327, 330-32 (Miss.1965), considered exceptions to the identity of parties requirement. For the reason that the issues in question had not been fully adjudicated, the Court refrained from ruling on the applicability of a derivative liability exception and held that collateral estoppel did not bar the action. Id. at 332. Therefore, the exact parameters of the requirement for party identity in Mississippi have not been established.

In the state court action brought by Joel Johnson against Nanette Johnson, neither State Farm nor Universal were named parties. The insurance companies did, however, control the litigation. In briefs submitted to the state court prior to judgment, both parties focused on the issue of whether Universal provided primary coverage to Nanette Johnson. Attorneys for Nanette Johnson, paid by State Farm, stated in their letter brief that the suit was actually one by Universal. In its brief before this court, Universal refers to the case as “Universal Underwriters Insurance Company v. Johnson”. It appears that the Mississippi Supreme Court has not addressed this particular issue, but this court concludes that the Mississippi Court would find that the requirement for identity of parties is satisfied. The court is further persuaded by the content of the letter briefs that the issue was essential to the state court judgment and was finally adjudicated there. See Mississippi Employment Security Commission, 388 So.2d at 395-96.

In the earlier state court action of Gray v. Nanette Johnson, wherein Nanette Johnson, represented by State Farm, was found liable for personal injuries to Gray, Universal was not a party in any sense of the word. Furthermore, the issue of primary and secondary coverage was not litigated or adjudicated in that law suit. See Johnson, 171 So.2d 327, 330-32 (Miss. 1965) (previous adjudication required for application of collateral estoppel); Garraway, 141 So.2d at 730-31 (same); Magee v. Griffin, 345 So.2d 1027, 1033 (Miss.1977) (Patterson, J. concurring in part and dissenting in part, majority opinion as to Griffin) (same). This issue is not barred by collateral estoppel.

Therefore, the issue properly before this Court relates to insurance liability for property and personal damage suffered by Gray, that is, which insurance company should properly be responsible for coverage.

It is well settled in Mississippi that in the event of a conflict between the language of an automobile liability insurance policy and the statutory requirement, the statutory provisions are incorporated into and become part of the policy. See Missouri General Insurance Company v. Youngblood, 515 F.2d 1254, 1257 (5th Cir. 1975) (applying Mississippi law); Vaughn v. State Farm Mutual Automobile Insurance Company, 359 So.2d 339, 341 (Miss. 1978); State Farm Mutual Automobile Insurance Company v. Moore, 289 So.2d 909, 911 (Miss.1974); United States Fidelity and Guaranty Company v. Stafford, 253 So.2d 388 (Miss.1971). Although there is no case applying Mississippi law in interpreting policy language identical to that in issue here, this court is of the opinion that a Mississippi state court would find that the statutory language, being incorporated into the policy, renders Universal responsible for coverage.

Since State Farm is admittedly responsible for coverage and the court finds that Universal is also responsible, the question arises as to which company provides primary coverage. In Travelers Indemnity Company v. Chappell, 246 So.2d 498 (Miss.1971), the Mississippi Supreme Court held that the policy covering the vehicle involved provides primary coverage. Id. at 504-05. In this case, the State Farm policy was issued to the driver and the Universal policy covered the owner of the vehicle and the vehicle involved in the accident. Therefore, the court concludes that Universal provided primary coverage.

Universal’s contention that State Farm acted as a volunteer and is thereby precluded from recovery is without merit. In State Farm Mutual Automobile Insurance Company v. Allstate Insurance Company, 255 So.2d 667 (Miss.1971), the Mississippi Supreme Court rejected a similar argument. State Farm’s policy in that case, as it does in the instant case, expresses its primary and paramount obligation as:

[To] defend, with attorneys selected by and compensated by the company, any suit against the insured alleging such bodily injury or property damage and seeking damages which are payable hereunder even if any of the allegations of the suit are groundless, false or fraudulent.

State Farm has entered into and has taken on the responsibility inherent in a solemn contract of insurance and does not fit under any definition of volunteer. See Id. at 669.

Having determined that the Universal policy provided primary coverage, the court concludes that the issue for determination is similar to the one faced by the Mississippi Supreme Court in State Farm Mutual Automobile Insurance Company v. Commercial Union Insurance Company, 394 So.2d 890 (Miss.1981). In that case, Keith Alexander was involved in an accident while driving a car owned by Jimmy Smith Chevrolet, Inc. Alexander’s parents maintained an automobile liability insurance policy with State Farm and Jimmy Smith Chevrolet was insured by Commercial Union. Two suits were filed: one by Alexander’s passenger against Alexander, his parents, Illinois Central Gulf Railroad and Jimmy Smith Chevrolet; the other by Alexander against the railroad and Jimmy Smith Chevrolet. A counterclaim was brought against Alexander in the suit in which he was the plaintiff. Both Alexander and Commercial Union employed attorneys. Alexander refused to cooperate with Commercial Union’s attorney or adjusters. A jury returned a verdict for the defendant in Alexander’s case and the suit brought by the passenger was dismissed without prejudice.

The Mississippi Supreme Court acknowledged an insured’s duty to cooperate with a carrier’s investigation but held that, without a showing of prejudice to Commercial Union, the insured’s rights under the policy were not forfeited. Id. at 893. The court affirmed the chancellor’s holding that Commercial Union owed Alexander a defense in the suit brought by Alexander’s passenger but not for the counterclaim in the other suit. The Supreme Court stated:

Because Commercial Union had a clear duty to defend which duty State Farm as the secondary carrier fulfilled upon Commercial Union’s failure to do so, it follows State Farm is entitled to all reasonable and necessary expenses in fulfilling Commercial Union’s obligations.”

Id. at 894.

The court awarded State Farm the attorneys’ fees paid for defense of the insured.

Universal would contend that the State Farm v. Commercial Union case is not dispositive because Universal asserts that it received no demand to defend. This court finds, however, that Universal’s notice of the accident and of its responsibility under Mississippi law to defend was sufficient to impose liability on Universal.

State Farm’s affidavit does not separate its expenditures for these claims from the claim barred from review by this court. Since the court is without evidence of State Farm’s “reasonable and necessary expenses in fulfilling [Universal’s] obligations,” State Farm v. Commercial Union, 394 So.2d at 894, the amount in which Universal is liable to State Farm remains a question of fact.

Therefore, this court finds that Universal is liable to State Farm for the reasonable and necessary expenses incurred in defense and settlement and payment of the judgment relating to personal and property damage to Gray arising from the automobile accident with Nanette Johnson.

The final issue before the court on the parties’ Motions for Summary Judgment is whether Universal is liable for punitive damages to State Farm for its refusal to assume responsibility for coverage. This court finds that punitive damages are not warranted.

In Mississippi, “ ‘punitive damages are not recoverable for the breach of a contract unless such breach is attended by intentional wrong, insult, abuse, or such gross negligence as to consist of an independent tort.’ ” Standard Life Insurance Company of Indiana v. Veal, 354 So.2d 239 (Miss.1977), quoting Progressive Casualty Insurance Company v. Keys, 317 So.2d 396, 398 (Miss.1975). While refusal by an insurer to pay a claim may be an intentional breach of contract, punitive damages are not available “if an insurance company has a legitimate reason or an arguable reason” for failure to pay the claim. Standard Life, 354 So.2d at 242.

Although this court resolves the issue of primary coverage for the personal injury and property damage of Gray by Summary Judgment in favor of State Farm, Universal’s position is not without merit. In the suit by Joel Johnson against Nanette Johnson, a state court held for Joel Johnson, in effect finding that Universal did not provide coverage and thereby reflecting the legitimacy of Universal’s position. An award of punitive damages is not appropriate here, since the insurer had an arguable or legitimate reason for denying coverage.

Furthermore, the court notes that awards of punitive damages in what have become known as “bad faith cases” have been made to the insured and against the insurer. See, e.g., Richards v. Allstate Insurance Company, 693 F.2d 502 (5th Cir.1982); Henderson v. U.S.F. & G. Company, 695 F.2d 109 (5th Cir.1983); Reserve Life Insurance Company v. McGee, 444 So.2d 803 (Miss.1983); Standard Life Insurance Company v. Veal, 354 So.2d 239 (Miss.1977). In this case, however, two insurance companies, which both provided coverage to the insured, are before the court to determine which coverage is primary. In Reserve Life Insurance Company v. McGee, 444 So.2d 803 (Miss.1983), the Mississippi Supreme Court cited with approval the statement of the lower court:

This court is of the opinion that the insurer owes to the insured a duty to deal in good faith ... Where the defendant has violated this duty to act in good faith punitive damages are appropriate to protect the plaintiff, and more importantly, the public from intentional wrong, insult, abuse or gross negligence on the insurer’s part.

Id. at 811 (emphasis omitted).

The insured is not before this court to challenge whether Universal acted in good faith. Punitive damages may, in some circumstances, be appropriately awarded in an action between two insurance companies. However, because Universal had an arguable or legitimate reason for its action, this court finds that punitive damages are not available.

The court finds that summary judgment should be granted in favor of Universal and against State Farm except as to the issues relating to property damage and personal injury of Gray. The court further finds that summary judgment should be granted in favor of State Farm and against Universal on the issue of liability for the costs of representation and payment of the settlement and the judgment relating to the property damage and personal injury of Gray. For the reason that there remains a genuine question of material fact with reference to the amount of damages for which Universal is liable to State Farm, it is the court’s opinion that summary judgment should be denied as to that issue. A separate judgment shall be entered pursuant to Rule 58 of the Federal Rules of Civil Procedure.