source: Caselaw Access Project

author: DAVID S. PORTER, Senior District Judge:

license: Public Domain

text:
    L. Kathleen PORTER, et al., Plaintiffs, v. UNITED STATES of America, et al., Defendants.
    Civ. A. No. C-1-82-1298.
    United States District Court, S.D. Ohio, W.D.
    May 21, 1985.

      James V. Heath, Milford, Ohio, Ronald D. Major, Cincinnati, Ohio, for plaintiffs.
    D. Michael Poast, Richard M. Goehler, Cincinnati, Ohio, for Robinson Helicopter Co. and Franklin D. Robinson; D. Michael Poast, Frost & Jacobs, Cincinnati, Ohio, of counsel.
   MEMORANDUM AND ORDER

DAVID S. PORTER, Senior District Judge:

This wrongful death case arises under the Federal Tort Claims Act, 28 U.S.C. § 2671 et seq. (1981). The United States has moved, pursuant to Rule 12(b)(1), Fed. R.Civ.P., to dismiss the claims against it based upon the Court’s asserted lack of subject-matter jurisdiction (doc. 24); plaintiffs responded (doc. 26), and the government replied (doc. 28). We heard argument on the motion on May 2, 1985. Although, as developed below, we seriously question our jurisdiction based on procedural deficiencies with regard to the timing of the amended complaint, the question is close enough that we reach the merits of the government’s motion. Because we find that the allegations against the government fall within the proscriptions of the discretionary function exception to the Tort Claims Act embodied in 28 U.S.C. § 2680 (1974), we grant the government’s motion in its entirety.

I. Facts

Plaintiff L. Kathleen Porter is the executrix of the estate of her late husband, Dr. Joseph Porter. On October 21, 1982, Dr. Porter was learning to fly a small helicopter manufactured by defendant Robinson Helicopter Company. The helicopter crashed, with Dr. Porter at the controls, and he was killed. At the time of the crash, Dr. Porter was hovering over a high school athletic field where his son, plaintiff Gary Porter, was participating in football practice. Plaintiffs allege, and we accept as true for purposes of resolving the instant motion, that the crash was caused by a design defect in the helicopter which caused the primary rotor to shear off the tail cone, causing the craft to plummet to the ground.

Plaintiffs initially filed this action against Robinson Helicopter. In an amended complaint filed October 19, 1984, plaintiffs named the government as defendant, alleging negligence on the part of agents or employees of the Federal Aviation Administration. In particular, plaintiffs allege that

[t]he defendant, the United States of America, acting through the Federal Aviation Administration, negligently and carelessly continued to certify the airworthiness and the production of the Robinson R-22 helicopter and negligently failed to suspend such certifications at a time when the FAA knew, or in the exercise of ordinary care, should have known of the defective and unsafe characteristics of the Robinson R-22 helicopter posed an immediate threat to the safety of the public.
The [FAA] negligently and carelessly issued a production certificate to Robinson helicopter Company, Inc., and/or failed to suspend such certification at a time when the FAA knew, or in the exercise of due care should have known that the Robinson Helicopter Company, Inc., did not have liability insurance or the financial capacity or responsibility to respond in damages for injuries and deaths resulting from the defective and unsafe characteristics of the Robinson R-22 helicopter.

Doc. 7, Amended Complaint, at paragraphs 8-9. At hearing, plaintiffs’ counsel sought in effect to orally supplement his complaint by alleging that there had been several accidents involving Robinson R-22 helicopters in the months prior to Dr. Porter’s death, including one only three weeks before, and that the FAA had actual knowledge of these accidents, but failed to take steps to prevent use of already-manufactured R-22s. Counsel further alleged that the FAA did suspend the R-22 airworthiness certificate shortly after Dr. Porter’s death. While we strongly disapprove of the practice of counsel’s making oral representations not contained in the complaint and unsupported by affidavit or otherwise, we accept these allegations as constituting amendments to the amended complaint, and grant leave therefor. Rule 15(a), Fed. R.Civ.P.

II. Administrative Procedure

On May 2,1984, plaintiffs filed an administrative claim with the Federal Aviation Administration, in compliance with 28 U.S.C. § 2675(a):

An action shall not be instituted upon a claim against the United States [under the Act] unless the claimant shall have first presented the claim to the appropriate Federal agency and his claim shall have been finally denied by the agency in writing____ The failure of an agency to make final disposition of a claim within six months after it is filed shall, at the option of the claimant ... be deemed a final denial of the claim for purposes of this section.

On October 19, 1984 — two days before the second anniversary of Dr. Porter’s death, on which date the relevant statute of limitations, Ohio Rev.Code Ann. § 2305.10 (Page’s 1983) would have expired, but only some five and one-half months after the administrative filing — plaintiffs filed an amended complaint naming as additional defendants the United States, two Ohio companies, two Ohio individuals, and one John Doe.

The government filed its motion to dismiss on March 11, 1985. The principal basis for the motion is that we do not have subject-matter jurisdiction over the claims against the government because of the exception to the Act’s waiver of sovereign immunity embodied in the second clause of 28 U.S.C. § 2680(a). Defendant parenthetically argues (doc. 24 at 2 n. *) that “[technically, plaintiffs were premature in filing their Amended Complaint,” because they failed to wait the full six months after filing their administrative claim required by the terms of § 2675(a). Plaintiffs did not address this assertion in their response, and when questioned on the point at argument, asserted that the government’s position simply elevated form over substance. In addition, counsel asserted that because the limitations period was about to expire, plaintiffs had no choice but to file prematurely.

A.

“It is a principle of first importance that the federal courts are courts of limited jurisdiction.” C.A. Wright, The Law of Federal Courts 22 (4th Ed.1983). Thus, “the party seeking to invoke the jurisdiction of a federal court must demonstrate that the case is within the competence of such a court.” Id. It is firmly established that the provisions of § 2675(a) are jurisdictional, e.g., Rise v. United States, 630 F.2d 1068, 1071 (5th Cir.1980); Shelton v. United States, 615 F.2d 713, 714 (6th Cir.1980). Because the issue is one of a limited waiver of sovereign immunity, the issue is particularly sensitive:

It is well settled that the United States, as sovereign, is immune from suit except as it consents to be sued and that the terms of its consent to be sued in any court define the court’s jurisdiction to entertain the action.

Rosario v. American Export-Isbrandtsen Lines, Inc., 531 F.2d 1227, 1230-31 (3d Cir.), cert. denied, 429 U.S. 857, 97 S.Ct. 156, 50 L.Ed.2d 135 (1976), citing United States v. Sherwood, 312 U.S. 584, 586, 61 S.Ct. 767, 769, 85 L.Ed. 1058 (1941). Thus, we cannot agree with plaintiffs that the question is merely a technicality.

In Rogers v. United States, 675 F.2d 123, 124 (6th Cir.1982) (per curiam), the court affirmed the district court’s dismissal of a claim under the Act as time-barred where the plaintiff did not know within the limitations period that an alleged tort-feasor was acting within the scope of government employment at the time of an accident. The case was initially filed in state court; the government removed it pursuant to 28 U.S.C. § 2679, and successfully moved to dismiss under § 2675(a) for failure to proceed administratively. Plaintiff argued that if the government knew that the tort-feasor was acting within the scope of his employment, but failed to notify plaintiff, it should be estopped from requiring a timely administrative claim.

The court of appeals declined to rely upon a Second Circuit case which supported plaintiff’s position, and affirmed the trial court, holding that

[tjhere is no equitable exception to the jurisdictional prerequisites of the Federal Tort Claims Act in this Circuit, and we decline to create one. While we are sympathetic to the plaintiff’s position, we are not free to enlarge the consent to be sued which the government, through Congress, has limited.

Id., citing Shelton, 615 F.2d 713. In Shelton, the court stated (in what may have been dictum) that “§ 2675 gives an agency only six months to take final action on a claim. At the end of that time, the injured party has recourse to suit in federal court.” Id. at 715 (emphasis supplied).

There can be no doubt, then, that the statutes which establish the jurisdictional predicates of the Tort Claims Act are to be strictly construed. The first issue before the Court is thus whether when a plaintiff has timely filed her administrative claim, but failed to wait the requisite six months before instituting a civil action, we have authority to assume subject-matter jurisdiction over the case.

A reasonable point of departure is the language of § 2675(a) itself. There is no uncertainty: “An action shall not be instituted’’ until the claim has been filed and the six months waited. Courts have not hesitated to strictly apply the statute in cases where it appeared that, for example, plaintiffs have treated the administrative filing as simply an expedient. See Insurance Company of North America v. United States, 561 F.Supp. 106, 117-18 (E.D.Pa. 1983) (complaint filed three days after administrative filing, dismissed); Schaefer v. Hills, 416 F.Supp. 428-29 (S.D.Ohio 1976) (complaint filed two days after administrative filing, dismissed).

There are, however, cases which have held that the jurisdictional defect caused by premature filing can be “cured” by the passage of time. In McCormick v. Cooley, 458 F.Supp. 776 (W.D.Pa.1978), claimants under the Act filed a complaint in state court to recover for an automobile accident. Nearly a year later, plaintiffs filed an administrative claim; the government then removed the case to the district court pursuant to § 2679, and moved to dismiss. The court denied the motion:

We recognize that § 2675(a) prerequisites are jurisdictional requirements to maintaining a suit. However, since the six months of agency inaction has now elapsed, and no ‘substantial progress’ has been made in this case, the jurisdictional defect may be considered cured without the necessity of plaintiffs’ refiling the suit.

Id. at 778 (citations omitted). The McCormick court placed principal reliance upon Kubrick v. United States, 581 F.2d 1092, 1098 (3d Cir.1978), rev’d on other grounds, 444 U.S. 111, 100 S.Ct. 352, 62 L.Ed.2d 259 (1979), a malpractice case in which the court excused, in dictum (as the issue was not contested by the government on appeal), filing of a lawsuit prior to institution of administrative proceedings. It is notable that Kubrick was reversed because, by permitting a plaintiff to file outside the 2-year limitations provision of 29 U.S.C. § 2674, the lower courts had expanded the Act’s waiver of sovereign immunity.

Our research has disclosed no other cases in which the theory that jurisdictional defects may be “cured” by passage of time where no “reasonable progress” occurs in a lawsuit has been accepted. It would seem, under such a rule, that plaintiffs would, in most cases, be in a position to file their lawsuit within two or three months of the administrative filing. The United States has, in every civil action, 60 days in which to respond to the complaint, Rule 12(a), Fed.R.Civ.P.; experience tells us that the case in which “substantial progress” occurs within a month or two of the filing of an answer is the exception, rather than the rule.

The Kubrick rationale surely promotes economy. It also, however, arguably constitutes a judicial abrogation of the limitation on sovereign immunity contained in the statute. In addition, the six-month period is itself powerfully justified. The statute was enacted

to improve and expedite the disposition of tort claims against the government by establishing a system of prelitigation administrative consideration and settlement of claims, thereby reducing court congestion and eliminating unnecessary litigation. To permit appellee to maintain this action would undermine the important policy in favor of prelitigation administrative review and possible settlements express in section 2675(a).

Rosario, 531 F.2d at 1233-34 (holding that Jones Act claimant against the government must comply with the terms of § 2675). We think it fair to assume that once the government has been served with a complaint, the administrative evaluation process halts; there is surely no obligation on the part of federal officials to pursue the same case on two fronts.

In sum, we find little support for plaintiffs’ position on this question. Permitting claimants to file civil actions prior to expiration of the six-month period does not raise precisely the same sort of equitable exception expressly rejected by the Sixth Circuit in Rogers, 675 F.2d at 124. The issue, however — whether the jurisdictional prerequisites of the Tort Claims Act are subject to judicial modification — is surely related. Were it necessary for the Court to rule on this point, we doubt whether we could conclude that plaintiffs have met their burden of establishing subject-matter jurisdiction because of their failure to comply with § 2675(a).

Before so ruling, however, we would feel obliged to seek additional briefing from the parties on this issue; inexplicably, the government added it only as an aside, and plaintiffs simply ignored it. Because the question already fully submitted — the effect of the discretionary function exception on this litigation — is, as we find below, dispositive, we address that point in the interest of finality.

III. Discretionary Function

28 U.S.C. § 2680 provides that the government cannot be held liable for claims “based upon the exercise of performance or the failure to exercise or perform a discretionary function or duty on the part of a federal agency or an employee of the Government, whether or not the discretion involved be abused.” The discretionary function exception is jurisdictional in the sense that a district court may not entertain claims which fall within the provisions of the exception. E.g., Feyers v. United States, 749 F.2d 1222, 1227 (6th Cir.1984); Wright v. United States, 719 F.2d 1032 (9th Cir.1983); Monaco v. United States, 661 F.2d 129 (9th Cir.1981), cert. denied, 456 U.S. 989, 102 S.Ct. 2269, 73 L.Ed.2d 1284 (1982). That being so, when the government raises the applicability of such an exception by appropriate motion, the ultimate burden of proving its inapplicability, as in all matters jurisdictional, falls upon the plaintiff once the Court’s jurisdiction is challenged. See generally 13 C.A. Wright, A.R. Miller, & E.H. Cooper, Federal Practice & Procedure § 3522 at pp. 62-64 (2d Ed.1984).

One of the areas of governmental activity courts have consistently held to be within the proscription of § 2680 has been the “failure of a regulatory agency to meet particular requirements desired by a member of the public when the desired action is not explicitly required by statute or regulation.” Reminga v. United States, 631 F.2d 449, 456 (6th Cir.1980), citing Miller v. United States, 522 F.2d 386 (6th Cir.1975) (per curiam).

These holdings received implicit affirmance from the Supreme Court in United States v. S.A. Empresa De Viacao Aerea Rio Grandense (Varig Airlines), 467 U.S. 797, 104 S.Ct. 2755, 81 L.Ed.2d 660 (1984). A unanimous Court held that the United States was not liable for allegedly insufficient pre- or post-certification procedures promulgated by the FAA. In language analogous to that employed in Reminga, 631 F.2d at 456, the Court noted that “whatever else the ... exception may include, it plainly was intended to encompass the discretionary acts of the Government acting in its role as a regulator of the conduct of private individuals.” Varig Airlines, 467 U.S. at -, 104 S.Ct. at 2765. The Court thus reversed appellate rulings that the government could be held liable for failing to ensure before certification that trash receptacles in airplane lavatories were within applicable fire-hazard regulations, and for failing to ensure that a fuel line connected to an airplane’s cabin heater complied with relevant airworthiness standards. Id. at-, 104 S.Ct. at 2768.

In this case, plaintiffs allege that the FAA (1) failed to suspend the airworthiness certificate pertinent to the Robinson R-22 helicopter, and (2) failed to ensure that Robinson Helicopter Company, Inc. had adequate insurance to meet any liability which might arise from the allegedly defective nature of its products.

The latter assertion is readily disposed of. Plaintiffs point to no statute, regulation, or other authority for the proposition that the FAA has, under any circumstances, a duty to require and verify product liability insurance coverage on the part of aircraft manufacturers of private aircraft seeking airworthiness certification for their products. While plaintiffs asserted otherwise at hearing, we think that their effort is, quite simply, to make the United States the insurer of Robinson Helicopter Company; that effort fails. See Garbarino v. United States, 666 F.2d 1061, 1066 (6th Cir.1981). Plaintiffs argue (doc. 26 at 9-10) that because the Department of Transportation has promulgated requirements that motor carriers be insured as a prerequisite to their lawful operation, its failure to do so with regard to aircraft manufacturers is actionable. We find no merit to this argument, as the decision whether to impose a stricter set of regulations than those extant is clearly discretionary. Miller, 522 F.2d at 387. We turn to plaintiffs' other claim.

Plaintiffs recognize that Varig Airlines is not without relevance to their “actual knowledge” claim. They seek to avoid dismissal by reasoning as follows:

Admittedly, had the crash of the R-22 [piloted by Dr. Porter] on October 21, 1982, been the first such accident, and if the FAA had no knowledge or notice of the defective design characteristics of the R-22, then the Supreme Court’s decision in Varig may well be applicable. However, had the evidence in Varig established that the FAA knew that the Boeing 707 did not comply with fire protection standards, that fires had broken out on other aircraft of the same type as a result of this violation, and yet took no action to enforce compliance with the standards, the same result would not have been reached by the Supreme Court.

Doc. 26 at 7.

We understand plaintiffs’ frustration, in light of their belief, which we accept as true, that the FAA was in the best position to put a halt to the use of R-22 helicopters pending correction of the alleged accident-causing defect once they allegedly had knowledge of numerous prior occurrences of crashes similar to Dr. Porter’s, frustration compounded by the fact that the certificate was suspended just after the crash here in issue. At bottom, however, their concern is precisely with the sort of failure of a regulatory agency to regulate as plaintiffs wish, despite the absence of a statutory or other explicit duty, found to be excepted from liability in Reminga, 631 F.2d at 456, and Miller, 522 F.2d at 387.

The statute establishing the duty of the FAA with regard to aircraft manufacturers is 49 U.S.C. § 1421(a), which provides that the administrator of the FAA

is empowered and it shall be his duty to promote safety of flight of civil aircraft in air commerce by prescribing and revising from time to time:
(1) Such minimum standards governing the design, materials, workmanship, construction, and performance of aircraft, aircraft engines, and propellers as may be required in the interest of safety;
(2) Such minimum standards governing applicances as may be required in the interest of safety;
sf: sjs sk Hs # #
(6) Such reasonable rules and regulations, or minimum standards, governing other practices, methods, and procedure, as the Administrator may find necessary to provide adequately for national security and safety in air commerce.

Thus, under the statute, the FAA has the duty to promulgate minimum standards for certification of aircraft, and for their operation. However,

[t]he FAA certification process is founded upon a relatively simple notion; the duty to ensure that an aircraft conforms to FAA safety regulations lies with the manufacturer and operator, while the FAA retains the responsibility for policing compliance.

Varig Airlines, — U.S.—, 104 S.Ct. at 2766-67. “When an agency determines the extent to which it will supervise the safety procedures of private individuals, it is exercising discretionary regulatory authority of the most basic kind.” Id. at-, 104 S.Ct. at 2768, 81 L.Ed.2d 660.

We think the fact that the FAA is alleged to have known about each of the previous R-22 crashes is of little effect in analyzing this case. Plaintiffs point to no authority for the proposition that the FAA has a duty to withdraw or suspend the airworthiness certificates on aircraft which are involved in accidents; while such may occur, we think it clear that any such occurrence is solely within the discretion of the administrator, and whether her discretion was abused is not a question we are empowered to consider: We note, too, our view that in Dalehite v. United States, 346 U.S. 15, 73 S.Ct. 956, 97 L.Ed. 1427 (1953), the government had actual knowledge of the explosive characteristics of the ammonium nitrate fertilizer which exploded in Texas City, Texas; nonetheless, all decisions regarding processing and handling of the substance were ruled discretionary. Plaintiffs answer that the result in Dale-hite would have been different had other identical explosions occurred before the one at Texas City; again, this proposition is advanced without supporting authority, and we have found none.

In sum, we think that plaintiffs’ effort to distinguish this case from Varig Airlines is futile. Plaintiffs cannot assert that the FAA wholly failed to regulate, as they allege that immediately after Dr. Porter’s accident, the airworthiness certification for the R-22 was suspended. We have no doubt that the timing of regulatory decisions, just as the decision how to regulate, is discretionary. The protected discretion “is the discretion of the executive or the administration to act according to one’s judgment of the best course.” Dalehite, 346 U.S. at 34, 73 S.Ct. 956, 97 L.Ed. 1427.

We do not, then, have jurisdiction over the subject matter of plaintiffs’ claims against the United States in this case, and the complaint against them is dismissed. We also dismiss, sua sponte, defendants Cardinal Air Training, Inc., Colerain Investment Company, George E. Schultz, and Robert P. Kuhn; it is clear that, absent the presence of the United States in this case, we lack subject-matter jurisdiction over those individuals and businesses, as the claims against them are not asserted under Federal law, and both they and plaintiffs are residents of Ohio. Finally, we ask plaintiffs to apprise the Court within 20 days of whether they intend to proceed in this matter as against the Robinson defendants.

SO ORDERED.


author: KINNEARY, District Judge.

text:
    UNITED STATES of America, Plaintiff, v. FLORAL PARK DEVELOPMENT COMPANY, et al., Defendants.
    No. C-2-78-884.
    United States District Court, S.D. Ohio, E.D.
    June 19, 1985.
    Albert E. Ritcher, Asst. U.S. Atty., Columbus, Ohio, John H. Mahoney, Associate Regional Counsel, HUD, Chicago, 111., for plaintiff.
    Thomas E. Cavendish and Robert W. Trafford, Columbus, Ohio, for defendants.
   OPINION AND ORDER

KINNEARY, District Judge.

This matter is currently before the Court on cross motions for summary judgment to determine the entitlement to certain funds. The funds at issue were collected by the defendant, Huntington National Bank (“HNB”), as rental payments derived from an apartment complex known as the Weston Apartments. HNB collected the subject funds while it was in lawful possession of the apartment complex. Plaintiff, the United States of America, claims that the funds collected by HNB rightfully belong to it. The case has been submitted to the Court by the parties on a joint stipulation of facts.

STATEMENT OF THE CASE

On February 24,1971, Floral Park Development Company (“FPDC”) executed and delivered to Citizens Mortgage Corporation a mortgage note in the amount of $3,101,-500. This mortgage note was secured by a mortgage deed which covered the Weston Apartments. On the same date, FPDC entered into a Regulatory Agreement with the Secretary of the United States Department of Housing & Urban Development (“HUD”). This Agreement established certain duties in FPDC in exchange for HUD’s agreement to insure the mortgage note held by Citizens Mortgage Corporation pursuant to § 221(d)(4) of the National Housing Act, 12 U.S.C. § 17151.

On November 17, 1972, FPDC conveyed its interest in the Weston Apartments to William A. Brandwein and Robert E. Horowitz. Messrs. Brandwein and Horowitz held the property as trustees pursuant to a trust agreement. The beneficiary under the trust agreement was Weston Phase I. The conveyance was effected without the prior approval of HUD. The conveyance was, therefore, in violation of paragraph 6 of the Regulatory Agreement to which FPDC and HUD were signatories. Also, on or about November 21, 1972, the mortgage note and deed were assigned by marginal assignment from Citizens Mortgage Corporation to the State Teachers Retirement Board of Ohio.

In 1975, beginning with the January 1, 1975 installment, payments on the mortgage note ceased. On February 27, 1975, Weston Phase I, the beneficial owner of the Weston Apartments, filed a petition under Chapter XI of the Bankruptcy Act. On May 2, 1975, the bankruptcy court entered an Order declaring Weston Phase I a bankrupt.

On April 21, 1975 and June 18, 1975, the State Teachers Retirement Board of Ohio executed certain agreements effecting the assignment of the mortgage note and deed relating to the Weston Apartments to HUD. These assignments were duly recorded. No actual notice of the assignments was provided to either Weston Phase I or the Weston Trustee. On or about July 24, 1975, HUD paid the State Teachers Retirement Board of Ohio $2,866,-701.54 on the latter’s mortgage insurance claim arising out of the default on the mortgage note. HUD, as noted above, insured the mortgage note originally executed between Citizens Mortgage Corporation and FPDC. A final payment of $238,-960.14 was made by HUD to the State Teachers Retirement Board of Ohio on or about July 26, 1977. Neither Weston Phase I nor Fred G. Preston, the trustee in bankruptcy for Weston Phase I, had knowledge of the payments made by HUD to the State Teachers Retirement Board.

On August 26, 1975, Messrs. Brandwein and Horowitz, as legal owners, conveyed the Weston Apartments by fiduciary deed to Fred G. Preston, as the trustee in bankruptcy for Weston Phase I. This conveyance was also effected without the prior approval of HUD as required under paragraph 6 of the Regulatory Agreement. On August 15, 1978, Mr. Preston conveyed legal title to the Weston Apartments to defendant HNB. This conveyance was made pursuant to an agreement, to which the bankruptcy court consented, which was entitled “Joint Application of Trustees to Compromise Claims.” The agreement constituted a settlement of the claims HNB, as a creditor, had against Weston Phase I. HNB held a mortgage on the Weston Apartments in the amount of $590,707.69. The agreement also provided that the trustee, Mr. Preston, would collect the rents from the Weston Apartments which accrued prior to July 1, 1978. Thereafter, HNB would be entitled to all rents which accrued. During the time it was in possession, HNB collected $246,500.76 in rental payments. It is with respect to this money that plaintiff makes its claim of entitlement.

HUD was never served formal notice by the bankruptcy court of the arrangement proceedings concerning Weston Phase I or its subsequent adjudication in bankruptcy. Also, HUD was not served formal notice with respect to the hearing on the Joint Application of Trustees to Compromise Claims. However, HUD, the State Teachers Retirement Board of Ohio and Citizens Mortgage Corporation did have actual knowledge of the bankruptcy of Weston Phase I and the appointment of Fred G. Preston as the trustee in bankruptcy at least by the first meeting of the creditors on May 22, 1975. HUD and Citizens Mortgage Corporation also had actual notice of the August 3, 1978 hearing on the Joint Application of Trustees to Compromise Claims. Finally, HUD had actual knowledge that the trustee, Mr. Preston, had employed a management company to manage the Weston Apartments. HUD never made a demand or request that either the trustee or the management company deliver any rents collected by them to HUD.

Citizens Mortgage Corporation, the State Teachers Retirement Board of Ohio and HUD did not file any proof of claim or other pleading or document in the case of In re Weston Phase I, No. 75-571 (S.D. Ohio July 1, 1983). HUD did, however, respond to a subsequent complaint filed by the trustee, Mr. Preston, to determine the identity of claimants to funds in his possession acquired during the period May 2, 1975 to June 30, 1978 while he was in possession of the Weston Apartments. In response to the complaint, HUD filed an answer setting forth its claim to the funds collected by the trustee. In deciding that HUD was not entitled to the collected funds, the bankruptcy court held:

In conclusion, HUD is not entitled to the rents under Ohio law by virtue of its failure to take affirmative action after the default on the mortgage. Further, HUD is not entitled to rents under the assignment provisions of the mortgage and regulatory agreement due to its failure to follow the provisions thereof.

The assignment provisions to which the bankruptcy court refers are located at paragraph 4 of the mortgage deed and at paragraph 12 of the Regulatory Agreement.

On August 24, 1978, HUD instituted the instant foreclosure proceedings. On May 2, 1979, a judgment was rendered in favor of HUD against FPDC in the sum of $4,184,351.83, plus interest through the date of sale and any authorized expenses incurred by HUD and chargeable to FPDC. HUD purchased the property at the subsequent foreclosure sale on June 20, 1979 for $4,183,687.67. On August 6, 1979, this Court entered an Order of Confirmation of Sale. On March 3, 1980, the Court entered a deficiency judgment against FPDC in the sum of $315,222.40.

DISCUSSION

The issue presented by this case is which party, plaintiff or the defendant HNB, is entitled to the funds collected by HNB as rental payments during the time it held legal title to, and was in possession of, the Weston Apartments. HNB argues that it, and not plaintiff, is entitled to the funds because plaintiff failed to take any affirmative action after the default on the mortgage note to ensure that the rents collected from the Weston Apartments accrued to its benefit. The type of affirmative action HNB would have required plaintiff to take would be to move, sometime prior to the date HNB took possession of the property, to take possession itself or for the appointment of a receiver. Plaintiff argues, however, that, under the applicable law, it was not required to take any affirmative action to establish its entitlement to the funds collected after the default on the note. Plaintiff claims that by operation of certain assignment provisions contained within the mortgage deed and the Regulatory Agreement, its entitlement to the rents, profits and income was established on the date of Weston Phase I’s default.

The assignment provisions to which plaintiff refers, as noted earlier, are located at paragraph 4 of the mortgage deed and paragraph 12 of the Regulatory Agreement. Paragraph 4 of the mortgage deed provides:

That all rents, profits and income from the property covered by this mortgage are hereby assigned to the Mortgagee for the purpose of discharging the debt hereby secured. Permission is hereby given to the Mortgagor so long as no default exists hereunder, to collect such rents, profits and income for use in accordance with the provisions of the Regulatory Agreement.

Paragraph 12 of the Regulatory Agreement provides for the same arrangement as paragraph 4 of the mortgage deed. As is apparent from the facts of this case, Weston Phase I, the beneficial owners of the Weston Apartments, the mortgaged property, did default. Plaintiff argues that, by the simple operation of the assignment provisions, it, and not HNB, is entitled to the rents collected notwithstanding the fact that the rents were collected during a period of time in which HNB had legal title to, and was in possession of, the Weston Apartments.

To determine which party is entitled to the subject funds, the Court need not enter into a detailed analysis of the controlling law on its own. That is because the Court finds the analysis and decisions of the courts in United States v. American National Bank & Trust Co., 573 F.Supp. 1319 (N.D.Ill.1983) and United States v. Dunn Garden Apartments, Inc., 335 F.Supp. 439 (N.D.N.Y.1971) to be persuasive. These cases are predicated upon factual situations which are very similar to the factual situation underlying this case. They also hold in favor of HUD.

In the American National Bank ease, a mortgage note and deed and regulatory agreement containing the same assignment provisions as those involved herein were executed between the owner of the mortgaged property, Drexel Towers South, and the mortgagee, American National Bank & Trust Co. The mortgage was, of course, insured by HUD. In December, 1980, Drexel Towers South defaulted on the mortgage note. On September 12, 1983, the district court granted HUD immediate possession of the mortgaged property. During the period between the default and HUD’s taking possession of the property, certain funds, totaling approximately $100,-000 derived through rents collected from the property during the period, were used to purchase treasury bills. In ruling that HUD, despite its failure to be in possession of the property during the time in which the rents were collected, was entitled to the funds represented by the treasury bills, the court stated:

The mortgaged property, as defined by the mortgage, includes rents, profits, and issues. Under the mortgage, “all rents, profits, and income from the property covered by this mortgage are hereby as-signéd to the mortgagee.” ... The regulatory agreement contains a comparable provision____ Both the mortgage and the regulatory agreement, however, permit the mortgagor to collect and retain the rents so long as it is not in de-fault____ Upon default, the mortgagor’s entitlement to further rents ceases and the United States’ right to such receipts is perfected. Under federal law, the mortgagee is entitled to all income from the project upon the default of the mortgagor. United States v. Pine Hill Apartments, 261 F.2d 667 (5th Cir.1958). When the mortgagor defaults, the United States is .entitled to apply all further rents to the mortgagor’s indebtedness whether or not the mortgagee or a receiver takes possession. United States v. Dunn Garden Apartments, Inc., 335 F.Supp. 439 (N.D.N.Y.1971). See also Clark Investment Co. v. United States, 364 F.2d 7 (9th Cir.1966) (net rents to be applied to debt under Fair Housing mortgage). Admittedly, the United States is not entitled to project receipts collected before default. Upon the default, however, the United States, under the mortgage, the regulatory agreement, and federal law, became entitled to rents collected thereafter.

United States v. American National Bank & Trust Co., supra, at 1322-23.

In the Dunn Garden Apartments case, the default on the HUD insured mortgage occurred in June, 1959. The mortgage was assigned to HUD, as insurer, in April, 1960. The mortgage contained an assignment of rent clause. HUD filed its complaint on September 20, 1960. The funds at issue were paid by the mortgagor to a third party after the default but before the complaint was filed. The district court, in holding that HUD was entitled to the subject funds, stated:

The formidable array of case law above demonstrates to my mind that in this federal mortgage foreclosure proceeding the state law which the defendants seek to invoke in regard to the rents is not applicable here. Under the mortgage clause in this instance, from its plain language, the mortgage holder acquired a lien upon the rents upon the occurrence of the default without requirement of other affirmative action____

United States v. Dunn Garden Apartments, Inc., 335 F.Supp. 439 (N.D.N.Y. 1971).

The two cases upon which this Court relies establish that federal law is to be applied to resolve the issue involved herein. See also United States v. Scholnick, 606 F.2d 160 (6th Cir.1979). In fashioning the federal law, these courts found that, at the moment the mortgagor defaults, the assignment of rent provisions operate to cause the funds to be derived from the property thereafter to be HUD’s, as the mortgagee. This rule is to apply notwithstanding the fact that HUD pursues no affirmative action to seek possession of the property or the appointment of a receiver during the time the subject funds are being collected. Further, the rule is to apply notwithstanding the fact that HUD is not the mortgagee at the time of default. See United States v. Dunn Garden Apartments, Inc., supra.

The Court is aware that a contrary decision was reached in the preceding bankruptcy action. In re Weston Phase I, No. 75-571 (S.D.Ohio July 1,1983). This Court, however, does not believe that the bankruptcy court gave the proper effect to the assignment of rent provisions located in the mortgage deed and the Regulatory Agreement. Further, the Court does not believe that the bankruptcy court acted consistently with the purpose underlying the need to apply federal law in this case:

[I]n any consideration of remedies available upon default of a federally held or insured loan, federal interest predominates over state interest____ This rule obtains because of an overriding federal interest in protecting the funds of the United States and in securing federal investments, thereby promoting the purposes of the National Housing Act---Local rules that limit the effectiveness of remedies available to the United States are not to be adopted----

United States v. Scholnick, supra, at 164.

CONCLUSION

The Court has determined from its analysis above, that plaintiff, the United States of America, is entitled to the funds collected by HNB during the time it held legal title to, and was in possession of, the Weston Apartments. Plaintiff’s motion, seeking this determination, was titled “Plaintiff’s Motion for Accounting and Judgment Against Defendant Huntington National Bank.” An accounting has already been conducted and has resulted in a determination that HNB collected $246,500.76 during the relevant period. The Court will treat plaintiff’s motion, therefore, as one merely for summary judgment.

WHEREUPON, upon consideration and being duly advised, the Court determines plaintiff’s motion for summary judgment to be meritorious and it is, therefore, GRANTED. FURTHER, the Court determines the defendant HNB’s cross-motion for summary judgment to be without merit and it is, therefore, DENIED. FURTHER, the Court determines that judgment should be entered in favor of plaintiff and against the defendant HNB in the amount of $246,-500.76. The Clerk of Courts is DIRECTED to enter judgment accordingly.

IT IS SO ORDERED.

      . The mortgage note held by HNB was inferior to the mortgage note held by HUD.

      . In fact, Citizens Mortgage Corp. did receive formal notice from the bankruptcy court of the filing of Weston Phase I’s petition in bankruptcy and the date, time and place of the first meeting of creditors under Chapter XI, the first meeting of creditors following the adjudication in bankruptcy of Weston Phase I, and the hearing on the Joint Application of Trustees to Compromise Claims. Citizens Mortgage Corp. was the servicing agent for both the State Teachers Retirement Board and HUD.

      . The Court is somewhat uncertain as to whether this is the operative date since HUD became the holder of the mortgage after the default occurred. At the time of the default, the State Teachers Retirement Board of Ohio held the mortgage. The operative date may have been the date after the default upon which HUD became the mortgagee. In light of the facts in this case, however, this discrepancy is irrelevant.

      . The Court notes that this rule is made more plausible by the arrangement by which HUD insures the mortgage. Generally, the default will occur when the mortgagee is the private lender. Several months often will lapse before the assignment of the mortgage to HUD is effected. HUD should not be penalized for the failure of the private lender to seek the activation of the assignment of rents provisions. Therefore, it is most reasonable for those provisions to be activated by the default, as they provide, and not by the doing of some subsequent affirmative act by HUD.


author: ROBERT D. POTTER, Chief Judge.

text:
    Mayzell LITTLEJOHN, Plaintiff, v. NULL MANUFACTURING COMPANY, Defendant.
    No. ST-C-81-143-P.
    United States District Court, W.D. North Carolina, Statesville Division.
    June 25, 1985.

      J. LeVonne Chambers, Gilda S. Glazer, Charlotte, N.C., for plaintiff.
    John 0. Pollard, Charlotte, N.C., for defendant.
   ORDER

ROBERT D. POTTER, Chief Judge.

THIS MATTER is before the Court on the Plaintiff’s motion for appropriate relief. The Plaintiff moves the Court to enter an Order calculating back pay, front pay, counsel fees, costs and expenses.

The Court previously determined by Memorandum and Order of May 4, 1983 that the Plaintiff is entitled to back pay, front pay, reinstatement, counsel fees, costs and expenses. The Judgment specifically provides that:

IT IS, THEREFORE, ORDERED that:

(1) The Defendant’s motion to alter or amend the Judgment entered February 16, 1983 is DENIED;
(2) The Plaintiff, pursuant to the Judgment, be immediately reinstated by the Defendant and have and recover of the Defendant $21,485.70 in back pay continuing $204.00 per week until reinstatement is effected;
(3) The Plaintiff receive pre-judgment interest from December 10, 1981 to the date of this Order at the rate of 8% per annum and receive post-judgment interest from this date until paid and satisfied at the rate of 8.98% per an-num; and
(4) Plaintiff’s counsel receives $11,977.20 for attorneys’ fees and $918.00 for costs and expenses.

The Defendant appealed the Judgment to the United States Court of Appeals for the Fourth Circuit which affirmed the Judgment. The Defendant then filed a Petition for Writ of Certiorari with the United States Supreme Court which Petition was denied on October 9, 1984. The Judgment was stayed during all appellate proceedings by Orders of July 6,1983 and July 10,1984. The May 4, 1983 Judgment is now final with the Plaintiff prevailing in all appellate proceedings.

The Plaintiff was reinstated on November 5, 1984. The Defendant made a payment to the Plaintiff with respect to the amount of back pay and attorney’s fees in the amount of $30,779.12 ($17,883.92 in back pay plus $12,895.20 in attorney’s fees). The litigants attempted to agree on the additional relief to which the Plaintiff is entitled to pursuant to the Judgment of May 4, 1983. They, however, were unable to agree on the following four issues:

(a) Whether pre-judgment interest should be calculated based on the gross back pay awarded by the Court of $21,485.70 or on the sum of $14,-245.02 ($21,485.70 less alleged deductions for federal and state income taxes and FICA taxes in the amount of $7,240.68). The Defendant contends interest should be computed based on the net back award which the Plaintiff would have received in May 1983. The Plaintiff contends that she is entitled to interest on the gross sum of her back pay award.
(b) Whether the interest should be calculated based on the gross front pay award of $204.00 per week or on the net front pay award (gross front pay less alleged withholding deductions).
(c) Whether the Defendant should pay post -judgment interest on the $12,-895.20 awarded for attorney’s fees in the May 4, 1983 Judgment.
(d) With respect to the attorney’s fees incurred subsequent to the previous award, whether the Plaintiff’s counsel is entitled to a fifty percent “upward adjustment” in the fee.

The Court in the May 4, 1983 Judgment found that the Plaintiff is entitled to $21,-485.70 in back pay with 8% prejudgment interest and 8.98% post-judgment interest. The Defendant elected to pay the Plaintiff $17,883.92 (which represents the net back pay of $14,245.02 and $3,638.90 in interest) instead of $23,947.11 (which represents the gross back pay award of $21,485.70 plus 8% pre-judgment interest of $2,461.41) plus post-judgment interest of 8.98%.

In addition, the Court awarded the Plaintiff $204.00 per week in pay until reinstated. As the Plaintiff was reinstated on November 5, 1984 the award equals $16,-320.00 (4/15/83 to 11/2/84, 80 weeks at $204.00 per week). The Plaintiff’s interim earnings during this relevant time period, which earnings are deductible under Section 706(g) of Title VII from the gross entitlement to pay, are $72.76. Accordingly, the Plaintiff is entitled to recover $16,-247.24 ($16,320.00 less $72.76) plus 8.98% interest until paid, from the Defendant. The Defendant has not paid the Plaintiff with respect to the April 15, 1983 to November 5, 1984 award. The Defendant contends that this award should be treated the same as the Defendant treated the back pay award, with interest being calculated only upon the net amount.

The Defendant has unilaterally concluded what deductions for taxes allegedly should have been made in the Plaintiff’s back pay award and has unilaterally elected to calculate interest on the net after these deductions. To allow the Defendant to pay less because of the Plaintiff’s tax liability would give the Defendant a benefit it has not earned. The Defendant had the entire use of the money during the litigation. The Defendant did not withhold or pay any taxes on the Plaintiff’s back pay during the litigation. If the back pay award had been paid into the Clerk’s Registry during the appeal the Plaintiff would have earned interest on the entire sum. Further, the Plaintiff’s tax liability is a matter between the Plaintiff and the respective taxing authority. The calculation of the Plaintiff’s taxes would presumably include allowances for exemptions, deductions, etc. that the Plaintiff will elect to take based on her particular situation and may not consist of standard deductions and exemptions. Finally, since the Plaintiff is receiving her back pay in a lump sum rather than over the years she may incur a higher tax liability. Accordingly, the amount the Defendant owes the Plaintiff, including the calculation of interest, should not be reduced by deductions for the federal and state income taxes and the FICA taxes. See, e.g., Curl v. Reavis, 608 F.Supp. 1265 (1985).

The May 4,1983 Judgment awarded attorney’s fees and costs in the amount of $12,895.20. On December 3, 1984 the Defendant paid the Plaintiff $12,895.20 but declined to pay the 8.98% post-judgment interest on the attorney’s fees award in the amount of $1,987.13. The Defendant contends that post-judgment interest was not due because the Judgment does not explicitly provide for post-judgment interest on the attorney’s fees award. Actually, the Judgment does not differentiate between the back pay award and the attorney’s fees award with respect to post-judgment interest. Even assuming that the Judgment does not explicitly provide for post-judgment interest, 28 U.S.C. § 1961 provides that post-judgment interest “shall be allowed on any money judgment in a civil case recovered in a district court.” Accordingly, post-judgment interest was due on the attorney’s fees award and thus the Plaintiff is entitled to $1,987.13 plus 8.98% post-judgment interest from December 3, 1984 until paid.

The last area of dispute between the parties relates to the amount of attorney’s fees to which the Plaintiff is entitled. The Plaintiff has submitted affidavits documenting the time and costs incurred. The Plaintiff expended a total of 134.50 hours and incurred expenses in the amount of $776.69. The Plaintiff requests a fee of $15,153.75. In support of this request the Plaintiff presented sufficient evidence that the requested rates are in line with rates prevailing in this community for similar services by attorneys of comparable skill, experience, and reputation, although Mr. Chambers’ rate appears to be the upper echelon of the market rate. The Defendant failed to submit any evidence or to argue against the accuracy and the reasonableness of the hours charged, and thus waived their right to an evidentiary hearing as to the proper fee award. Blum v. Stenson, 465 U.S. 886, 104 S.Ct. 1541, 79 L.Ed.2d 891 (1984).

The Defendant’s only asserted objection to the attorney fee request is that a 50% upward adjustment is not justified. The Plaintiff contends that “[sjince the fee issue must be litigated, ... an upward adjustment for the contingent nature of the case should be allowed.” Plaintiffs Memorandum In Support Of Plaintiffs Motion Concerning Appropriate Relief, p. 8.

In setting attorney’s fees the Court is required to follow the recent guidelines set forth in Blum v. Stenson, 465 U.S. 886,104 S.Ct. 1541, 79 L.Ed.2d 891 (1984). In Blum the Supreme Court recognized that a reasonable attorney’s fee is usually the product of a reasonable number of expended hours multiplied by reasonable rates. Id. 465 U.S. at-, 104 S.Ct. at 1548. Thus, if the rate and the number of hours are found to be reasonable “the resulting product is presumed to be the reasonable fee.” Id. In this case the Defendant does not challenge the number of hours or rates claimed by the Plaintiff.

In addressing the appropriateness of an upward adjustment to a fee award the Supreme Court stated:

The ‘quality of representation’, however, generally is reflected in the reasonable hourly rate. It, therefore, may justify an upward adjustment only in the rare case where the fee applicant offers specific evidence to show that the quality of service rendered was superior to that one reasonably should expect in light of the hourly rates chaged and that the success was ‘exceptional’.
* * * * * *
Because acknowledgement of the ‘results obtained’ generally will be subsumed within other factors used to calculate a reasonable fee, it normally should not provide an independent basis for increasing the fee award.

Blum, 465 U.S. at-, 104 S.Ct. at 1548-50. In that the contingency factor cited by the Plaintiff for adjusting the fee award is reflected in the reasonable hourly rate and a reasonable number of hours the Court finds that this is not the exceptional case in which an adjustment is necessary to the determination of a reasonable fee. The fee without any adjustment is seventy percent of the Plaintiff’s back pay award. Further, the number of hours and the rate found to be reasonable reflects a fully compensatory fee for an attorney who bills by the hour. Thus, the Court finds that this case does not necessitate an upward adjustment in the fee in order to provide fair and reasonable compensation and the Plaintiff should recover $15,153.75 in attorney’s fees and expenses in the amount of $776.69.

IT IS, THEREFORE, ORDERED that:

(1) The Plaintiff’s motion for appropriate relief is GRANTED IN PART AND DENIED IN PART;
(2) The Defendant is to pay the Plaintiff $2,512.72 plus the 8.98% post-judgment interest from December 3, 1984 until paid;
(3) The Defendant is to pay the Plaintiff $16,247.24 plus the 8.98% post-judgment interest until paid;
(4) The Defendant is to pay the Plaintiff $1,987.13 plus the 8.98% post-judgment interest from December 3, 1984 until paid; and
(5) The Defendant is to pay the Plaintiff $15,153.75 in attorney’s fees and $776.69 in costs with interest at a rate of 8.98% until paid.


author: McMILLAN, District Judge.

text:
    Phyllis A. ANDERSON, Plaintiff, v. CITY OF BESSEMER CITY, NORTH CAROLINA, Defendant.
    No. C-C-81-204-M.
    United States District Court, W.D. North Carolina, Charlotte Division.
    June 25, 1985.
    Jonathan Wallas, Ferguson, Watt, Wallas & Adkins, P.A., Charlotte, N.C., for plaintiff.
    Jeffrey M. Guller, Gastonia, N.C., and Philip M. VanHoy, Charlotte, N.C., for defendant.'
   ORDER

McMILLAN, District Judge.

Plaintiff has filed a motion asking that the court order defendant to pay interest, pursuant to 28 U.S.C. § 1961, on that portion of the judgment entered on February 16, 1983, 557 F.Supp. 412, which represents an award for attorney fees and expenses.

Defendant opposes the application of interest to this portion of the judgment and argues that interest should not begin to run until the date that the Fourth Circuit issued a remand order to this court, 717 F.2d 149. In addition, defendant justifies its failure to pay on its having already paid sufficient amounts on the rest of the judgment.

The court’s judgment of February 16, 1983, has been affirmed by the Supreme Court, — U.S.-, 105 S.Ct. 1504, 84 L.Ed.2d 518 (1985), and stands now as the final judgment in this case. Therefore, the court will not now entertain arguments by the defendant that portions of the award were excessive or that defendant should not be required to pay the full back pay amount awarded by the court.

The only legitimate issue now before the court is whether defendant shall pay interest on attorney fees and expenses as of the date of judgment on February 16, 1983, or as of some later date.

The court’s judgment provided:

That plaintiff is allowed the costs of this action, including reasonable attorneys’ fees and expenses, in the amount of $16,-971.59, plus interest as required by 28 U.S.C. § 1961 as amended, from this date until paid.

The court intended that interest be paid on the entire money judgment, including attorney fees and expenses. Interest is to be allowed on “any money judgment” pursuant to 28 U.S.C. § 1961.

Although the Fourth Circuit has not ruled on this question, other circuits, addressing the same question, have uniformly held that interest is to run from the date of the initial entry of judgment. Perkins v. Standard Oil Company of California, 487 F.2d 672 (9th Cir.1973); Copper Liquor Inc. v. Adolph Coors Co., 701 F.2d 542 (5th Cir.1983); R.W.T. v. Dalton, 712 F.2d 1225 (8th Cir.1983), cert. denied, 464 U.S. 1009, 104 S.Ct. 527, 78 L.Ed.2d 710 (1983); Institutionalized Juveniles v. Sec. of Pub. Wei, 758 F.2d 897 (3rd Cir.1985). The cases cited by defendant do not deal with an original judgment that is affirmed, but consider the issue of interest after the district court has held a new trial or the judgment has been vacated and a new judgment has been entered. Ashland Oil, Inc. v. Phillips Petroleum Co., 607 F.2d 335 (10th Cir.1979); cert, denied 446 U.S. 936, 100 S.Ct. 2153, 64 L.Ed.2d 788 (1980); Hysell v. Iowa Public Serv. Co., 559 F.2d 468 (8th Cir.1977); Riha v. International Tel. & Tel. Corp., 533 F.2d 1053 (8th Cir.1976). These cases do not apply to this case in which the original judgment stands unaltered after the full appellate process.

The court finds that in accordance with its original intention and the case law, interest should be paid on the attorney fees and expenses beginning with the date of entry of the original judgment on February 16, 1983. Common sense, as well as case law, requires this result. Defendant should not be able to hold for over two years money due to plaintiff without some

payment to account for inflation and the benefit of having this money.

The court will not determine the exact amount of the interest due. If the parties are unable to agree on what should be a simple calculation, they may present their differences to the court along with their methods of calculating the interest and the sources for the interest rates used.

IT IS THEREFORE ORDERED that plaintiff’s motion is GRANTED and that defendant shall pay to plaintiff interest on the award of attorney fees and expenses with the interest to accrue as of February 16, 1983. The interest rate sháll be determined in accordance with 28 U.S.C. § 1961.


author: MORAN, District Judge.

text:
    Charles W. LEIGH and Ervin F. Dusek, Plaintiffs, George Johnson, Eleanor Madsen, et al., Intervening Plaintiffs, v. Clyde Wm. ENGLE, Nathan Dardick, Ronald Zuckerman, Libco Corporation, Telco Marketing Services, Telvest, National Boulevard Bank, and the Reliable Employees’ Profit Sharing Plan Trust, Defendants.
    No. 78 C 3799.
    United States District Court, N.D. Illinois, E.D.
    June 27, 1985.

      Ware Adams, Chicago, Ill., for plaintiffs.
    Sachnoff, Weaver & Rubinstein, Chicago, Ill., for defendants.
    Richard Moenning, Chicago, Ill., for intervening plaintiffs.
   MEMORANDUM AND ORDER

MORAN, District Judge.

After an extended bench trial Judge Leighton entered 23 pages of findings of fact and conclusions of law on November 18, 1982. Upon appeal, the Court of Appeals issued a 28-page modified opinion in March 1984. See Leigh v. Engle, 727 F.2d 113 (7th Cir.1984). That opinion affirmed in some respects, reversed in others, and vacated and remanded for further proceedings, with costs to be borne equally by the parties. Upon the commencement of those further proceedings before this court we requested the assistance of the parties in fashioning a damages measure. That assistance was not forthcoming in any meaningful way, and this court detailed its concerns in October 1984 and again asked for assistance. Again the parties have been of little help, apparently not one of them seem to be able to accept what this court has accepted as the mandate from the Court of Appeals. Indeed, the most recent effort has been that of the intervenors seeking clarification from the Court of Appeals. The intervenor asked the Court of Appeals to “clarify” its opinion by adopting the intervenors’ position on damages, a position this court believed the appellate decision had clearly rejected. The Court of Appeals declined. This action’s troubled history continues, and it obviously is not going to end unless this court delineates the issues as we see them and, to the extent it can do so without further “assistance,” acts upon them.

The principal battle is over what recovery there may be from liable fiduciaries because of their involvement in three investments. Two defendants have been found liable for damages, if any. Whether two other defendants are liable remains a factual dispute to be resolved after an evi-dentiary hearing.

A second area of contention relates to a reserve fund. The Court of Appeals directed this court to consider “at the first opportunity the desirability of an immediate distribution of all remaining assets — ” The remaining assets in hand, however, are approximately $80,000, less than 10 per cent of the distribution long since made, and the plaintiffs and intervenors have made it abundantly clear that the remaining assets from their perspective are closer to $250,-000 to $300,000, after the return of attorneys’ fees and expenses to the fund. But that perception raises legal and factual questions which need to be addressed, which will be addressed herein, and which have been virtually ignored or, in this court’s view, erroneously perceived by the parties.

The third major area of dispute is whether distribution was improperly delayed; whether, if so, any damage resulted; and, if so, which of the defendants are liable for those damages and to what extent. There are, as well, other issues which have been less central to the disputes.

I. Reserve Fund

We turn, first, to the reserve fund issues. No one disputes that some of the $80,000 can be distributed. Plaintiffs and intervenors contend that the assets vested in the beneficiaries upon termination were. thereupon non-forfeitable. Accordingly, even in the absence of a breach of fiduciary obligations or bad faith the Plan thereafter could pay nothing for expenses of whatever nature. Defendants contend that the trust permits a reserve, that such a reserve is necessary to pay ongoing litigation and administration expenses, that it has already been finally determined that any breaches of fiduciary duties were despite their good faith, and that such litigation expenses are therefore reimbursable from the trust pursuant to Sec. 11.1 of the Plan, which indemnifies the fiduciaries from liability for “any act done or admitted to be done in good faith and with reasonable care and prudence,” including “all expenses reasonably incurred in its defense.” This court believes both positions to be in error.

Termination of the Plan occurred sometime in 1979. Upon termination, pension rights vest, and, as vested rights, are non-forfeitable, as defendants admitted in their September 6, 1979 letter to the Internal Revenue Service. A non-forfeitable pension right is defined as one which is “unconditional, and which is legally enforceable against the Plan.” 29 U.S.C. § 1002(19). A non-forfeitable pension right, however, is not necessarily a right to a recipient’s percentage of the total fund. In Alessi v. Raybestos-Manhattan, Inc., 451 U.S. 504,101 S.Ct. 1895, 68 L.Ed.2d 402 (1981), the Supreme Court stated clearly that the amount considered non-forfeitable must be defined by all the provisions of the Plan. “[T]he statutory definition of ‘nonforfeitable’ assures that an employee’s claim to the protected benefit is legally enforceable, but it does not guarantee a particular amount or method for calculating the benefit.” Id. at 512, 101 S.Ct. at 1900. The court, in Alessi, asked and answered a key question. “[Wjhat defines the content of the benefit that, once vested, cannot be forfeited? ERISA leaves this question largely to the private parties creating the Plan.” Id. at 511, 101 S.Ct. at 1900. Thus, this court must look to the trust plan to determine what distributions the beneficiaries should receive. The Pension Plan provisions are determinative respecting reserves, except when they conflict with specific ERISA provisions. Blackmar v. Lichtenstein, 603 F.2d 1306, 1309 (8th Cir.1979).

Section 9.2 of the Trust Agreement provides that, before distribution after termination, the trustee “shall first reserve such reasonable amounts as it may deem necessary to provide for the payment of any expenses then or thereafter chargeable to the trust fund.” Attorneys’ fees have been withheld as chargeable to the trust fund pursuant to Sec. 11.1. Even though the trustees were found to have breached their fiduciary duties, the Seventh Circuit did not overturn Judge Leighton’s finding of good faith. See 727 F.2d at 124; Finding of Fact 23. We can, therefore, assume good faith has been found and defendants, according to the Plan, may possibly be entitled to be indemnified and reimbursed for any liability assessed or attorneys’ fees owed (although it is difficult to square a breach of trust with “reasonable care and prudence”).

The central question, largely ignored by the parties, is whether such indemnification is allowed under ERISA. Indemnification from liability for breach of fiduciary duty by a trust is not allowed under ERISA. 29 U.S.C. § 1110(a). See Chicago Board Options Exchange, Inc. v. Connecticut General Life Insurance Co., 713 F.2d 254, 259 (7th Cir.1983). It has also been found that indemnification for attorney’s fees, even where liability has not attached, is also not allowed. See Donovan v. Cunningham, 541 F.Supp. 276, 289 (S.D.Tex.1982), modified on other grounds 716 F.2d 1455 (5th Cir.1983).

Defendants, quite naturally, rest entirely on the Plan language. Their position might have considerable merit if this were a question of indemnification of a corporate director of a commercial enterprise, where such indemnification is often authorized by state statute. Arguably, indemnification might be permissible under the general law of trusts on the ground that the fiduciaries acted in good faith and the investments in

fact benefited the trust. See generally G. Bogert, The Law of Trust and Trustees, § 871, n. 83 (2d Ed.1981); Craven v. Craven, 407 Ill. 252, 95 N.E.2d 489 (1950). We are dealing here, however, with indemnification of legal expenses of a fiduciary of a trust fund subject to ERISA, when there has been a determination of a breach of fiduciary duty.

In an advisory opinion dated September 9, 1977, the Department of Labor commented on a provision which indemnified trustees for their legal expenses and allowed for payment in advance of the final disposition. The Department found that Sec. 1110(a) did not forbid such advances as long as the fund obtains a written legal opinion from independent legal counsel that, based on review of the relevant facts, the acts in question did not constitute breach of a fiduciary duty. See Department of Labor Advisory Opinion, Ref. No. CA-3588(a) (Sept. 9, 1977). This finding indicates that indemnification for legal expenses, after a finding of breach of fiduciary duty, is not allowed and any advances made would have to be returned.

Such a result has been reached with regard to the Labor Management Reporting and Disclosure Act, 29 U.S.C. § 401 et seq. In Morrissey v. Segal, 526 F.2d 121 (2d Cir.1975), the court ordered defendants to reimburse the fund for legal fees advanced during an unsuccessful defense to a breach of fiduciary duty claim. The court found that allowing indemnification for fees “would undermine both protection to union members and deterrence of union officials intended by [the Act].” Id. at 126. See McNamara v. Johnston, 522 F.2d 1157, 1167 (7th Cir.1975), cert, denied, 425 U.S. 911, 96 S.Ct. 1506, 47 L.Ed.2d 761 (1976) (allowing repayment for legal fees only if defendants prevail). The policies underlying the treatment of pension funds under the LMRDA and ERISA are similar and the provisions in 29 U.S.C. §§ 1109 and 1110 seem to confirm Congress’ intent to keep legal fee policies the same for both acts as, unlike the general law of trusts, there are no exceptions for liability of a trustee who, in breaching his trust, acts in good faith and benefits the fund. Accordingly, the court finds that indemnification for legal fees when a breach of trust has been established, though perhaps provided for by the trust agreement, is not allowed under ERISA.

That does not, however, end the matter. Whether or not the fiduciaries will be successful in defending against the unresolved claims has yet to be determined. The advancement of legal expenses to them for defense against those claims, as the Department of Labor advisory opinion indicates, is an entirely different matter from the question of ultimate liability for legal expenses. And see Central States, Southeast and Southwest Areas Pension Plan Fund v. American National Bank and Trust Co., No. 77 C 4335, slip op. at 6 (N.D.Ill.1979). That issue has not been addressed by the parties. Whether or not an advancement is proper, however, an initial and continuing reserve for reimbursement in the event of exoneration was and remains proper. To the extent that funds have been or will be necessary to defend against unresolved claims, they cannot be available for distribution to the beneficiaries until and unless there is a liability determination adverse to those defendants.

That raises one of several related factual issues. Plaintiffs and intervenors appear to treat legal expenses as some sort of fungible mass. They are not. The lawsuit was against several defendants and raised several issues. Two defendants, Telco Marketing Services, Inc. and Televest, Inc., were apparently represented by a law firm which was not paid by the Plan, nor is there any apparent basis why they could have been. Libco and Engle were also apparently represented by this firm, and the expenses of their defense have not, apparently and for similar reasons, been paid by the Plan. The Plan and three fiduciaries have had their legal expenses advanced by the Plan. They represent that half of those expenses have been borne by an insurance carrier, something specifically sanctioned by ERISA so long as there is recourse. 29 U.S.C. § 1110. Moreover, one of the fiduciaries has not been found liable for anything and the other two have been found liable on only one of the central issues. In those circumstances, some apportionment of defense costs is necessary before an order is entered directing reimbursement of the Plan.

That apportionment is somewhat in the nature of an accounting and could very well be referred to a magistrate for a recommendation and report. Given the proclivity in this case, however, for everything to escalate into a pierhead brawl, this court questions the desirability of initiating such a proceeding when subsequent events, i.e., a determination of liability on other issues, could obviate the need for any such proceeding at all.

That leaves, then, approximately $80,000 presently in the reserve fund, a portion which is immediately distributable to the beneficiaries, and they have waited a long time. It cannot be used to pay the further legal expenses of defendants Dardick and Zuckerman respecting the damages issues left after conclusive determination of the breach of fiduciary duty issues arising from the investments. It may, however, be available to pay their and National Boulevard Bank’s legal expenses in defending against other charges, depending on the outcome. This court is of the view, based on its present knowledge of the case, that those other issues are not likely to be so complex that they require an inordinate amount of legal effort. In those circumstances the court directs that $60,000 be distributed to the beneficiaries within 21 days and the balance be held for possible reimbursement of legal expenses and for the incidental expenses of maintaining the modest balance in trust.

II. Remedy

This court now faces the “formidable task of finding an appropriate measure of damages, if any, with regard to all defendants found to be liable as fiduciaries.” Leigh v. Engle, 727 F.2d at 137. The remedy statute for breach of fiduciary duty, 29 U.S.C. § 1109, gives two bases for liability. First, fiduciaries are liable for “any losses to the Plan resulting from” any breaches. Second, fiduciaries must “restore to such Plan any profits of such fiduciary which have been made for use of assets of the Plan by the fiduciary.”

A. Losses

Defendants argue that because the plaintiff suffered no losses from the transactions involved, they cannot be liable for damages under the first part of Sec. 1109. The Second Circuit recently dealt with this question and disagreed. In Donovan v. Bierwirth, 754 F.2d 1049 (2d Cir.1985), the court found liability for losses under Sec. 1109 even where the trust made a profit on the transaction. The court found the notion of opportunity cost fixed within trust law and determined that a trustee is liable for “any profit which would have accrued to the trust estate if there had been no breach of trust.” Id., at 1054, quoting Restatement (Second) of Trusts, § 205(c) (1959). See also Eaves v. Penn, 587 F.2d 453, 463 (10th Cir.1978). The court stated:

In view of the intent expressed by Congress in providing for the recovery of “losses,” in the absence of evidence of congressional attempt to penalize, as such, violations of section [1109], we hold that the measure of loss applicable under ERISA, section [1109], requires the comparison of what the Plan actually earned on the [attacked] investment, with what the Plan would have earned had the fund been available for other Plan purposes. If the latter amount is greater than the former, the loss is the difference between the two; if the former is greater, no loss was sustained.

Donovan v. Bierwirth, at 1056.

This measure of opportunity cost is the appropriate measure of losses under Sec. 1109. While in Donovan there was only one purchase which had to be dealt with, the problems of loss determination in this case are exacerbated because there are three different transactions. Together the investments in the present case had a 72 per cent rate of return in about a year, a rate that was unlikely to be matched by other Plan investments. The Hickory purchases alone, however, netted only 4 per cent in about a year.

The court believes that though the decision to use the fund’s assets for the purchases, and the strategy used, was determined as a whole, plaintiffs and intervenors may elect to seek to prove opportunity losses on some investment, presumably Hickory, while seeking restoration of profits on others.

B. Restoration of profits made through use of assets of the Plan.

In discussing the appropriate disgorgement remedy the Seventh Circuit stated that recovery of a fiduciary’s profits could occur “only where there is a causal connection between the use of the Plan assets and the profits made by fiduciaries on the investment of their own assets.” 727 F.2d at 137. “Plaintiff must be denied a windfall, but receive the benefit of such reasonable doubts as appear.” Id. at 139. The court discussed certain copyright and trust cases where profits were apportioned according to what the profits were attributable. The court then stated that “the burden is on the defendants who are found to have breached their fiduciary duties to show which profits are attributable to their own investment, apart from their control of the Reliable Trust assets.” Id. at 138.

This court received certain proposals by the parties and, dissatisfied, asked for new proposals. The second batch was not much different than the first. The intervening claimants have stated a generally proper standard: ■ That does not, however, indicate how such advantages should be measured.

The Engle group must restore all profits and all benefits which each fiduciary admits was received as a result of investing Plan assets. “All profits and all benefits” must be defined for purposes of formulating the appropriate remedy to meet every advantage that could be measured in monetary terms at the close of the controller take-over fight initiated or maintained by the Engle group.

After much thought and in the absence of any alternative bases for measurement proposed by the parties which accord with the appellate mandate, despite two invitations to do so, the court has determined what basis it wishes to have followed in the disgorgement determinations. The court is concerned with the value to the Engle group of the trust's purchase of the shares in question. The value of something to a certain purchaser is equal to what the purchaser would be willing to pay for it. See generally R. Posner, The Economics of Justice, 60-6.1 (1981). There were two points in each of the Engle group’s stock transactions where the trust’s purchase of shares had value to the Engle group: when they bought and when they sold. The court believes that the following determination is a proper method for transferring to the trust the value received by the Engle group through the trust purchases.

When the Engle group began to purchase the shares of the three corporations they undoubtedly endeavored to keep the fact of their purchases quiet as long as possible in order to keep the price of the shares down. Use of the trust assets to buy the shares of these companies may have allowed them to purchase their other shares at a lower price because of an absence of one identifiable group of purchasers. This advantage was noted by the Seventh Circuit when it stated that “the trust investments were made very early in the control contests, when it may have been particularly valuable to acquire the first shares discreetly.” Leigh v. Engle, 727 F.2d at 138. Any price advantage to the trust was reflected in its purchase price and realized upon sale. Any price advantage received by the Engle group in their purchases of the Hickory, Berkely, and OSI stock, apart from the Plan and due to the Plan not being identified as a related purchaser, is, however, a profit attributable to the Plan investment. Thus, the difference, between what was actually paid for the block of shares purchased by the Engle group other than the trust purchases, and what would have been paid for those shares if all shares, including the trust investment, had been purchased entirely by defendants, should be divested. It is expected that expert testimony will be required to determine the difference between the two prices, if any difference exists at all.

When the defendants sold the shares of Berkeley and OSI it can be presumed that the premium received was, in some part, due to the extent of their holdings in the company. For example, when the OSI shares were sold, the Engle group owned 21.73 per cent of the company. See Leigh v. Engle, 727 F.2d at 121. In negotiating a sale, the Engle group was presumably able to negotiate a higher price than a group with 15 per cent, 10 per cent or 5 per cent. Of the block controlled by the Engle group, 1.22 per cent of the OSI stock was purchased by the trust assets. Any premium on the trust shares was realized upon sale. The trust fund is, however, entitled to recover whatever premiums there may have been on the Engle group shares other than the trust investment. That portion of any premium received on the other shares because of that extra 1.22 per cent is attributable to use of the trust assets and is recoverable by the Plan. Finally, given the burden of proof upon defendants, it will be presumed that all profits are attributable to the Plan assets in the absence of evidence to the contrary.

As for the Hickory stock, where no resale by the Engle group occurred, any profit in excess of that realized may be determined by a valuation of the company. The Engle group picked Hickory as a target because it believed it to be undervalued. See Leigh v. Engle, 727 F.2d at 117. It may well be, therefore, that an objective valuation of the company at that time of purchase from the Plan would have valued it at more than the amount the Engle group paid for the stock. The trust purchased about one per cent of the company (12,000 shares). See id. at 122. The trust, therefore, deserves one per cent of the difference between the value of the company as of March 19, 1979, the date the trust sold its shares to defendants and the sales price to the Engle group. Again, expert testimony will probably be required to determine those values. Plaintiffs would probably be entitled to this amount or the difference between the opportunity value of the invested fund assets and the actual four per cent return, whichever is greater.

By requiring disgorgement of benefits obtained by both the purchase of the shares and the sale of the shares the court believes it most adequately restores to the Plan any profits of defendants “which have been made through use of assets of the Plan by the fiduciary.” See 29 U.S.C. § 1109(a). The court recognizes that defendants are being required to disgorge benefits achieved at purchase, based on the assumption that they would have purchased the trust’s shares if the trust had not, and disgorge benefits received at the sale, based on the assumption that they would not have purchased the trusts’ shares if the trust had not. This contradiction is warranted, however, by the heavy burden of proof that is placed squarely upon defendants. See Donovan v. Bier-with, supra, at 1056. The Seventh Circuit, in remanding this case, drew analogies with copyright law and explicitly approved a formulation requiring that “doubts shall be resolved against the defendants so that the amount awarded ‘will favor the plaintiffs in every reasonable chance of error.’ ” Leigh v. Engle, supra, 727 F.2d at 138, quoting Sheldon v. Metro-Goldwyn Pictures Corp., 106 F.2d 45, 51 (2d Cir.1939) (Learned Hand, J.), affd 309 U.S. 390, 60 S.Ct. 681, 84 L.Ed. 825 (1940). The court also recognizes that the proof will be difficult in these areas. Again, the burden rests on defendants and doubts will be resolved against them, but only within the parameters outlined by the court.

III. Matters Still to be Litigated

Two issues of liability remain. First, the court must determine, in accordance with the principles laid out by the Seventh Circuit, see Leigh v. Engle, 727 F.2d at 132-36, whether Engle and Libco are liable as co-fiduciaries under 29 U.S.C. §§ 1104 and 1105. The court must also determine whether the defendants, or any of them, violated their fiduciary duties by delaying distribution of the trust. See Leigh v. En-gle, 727 F.2d at 136-37. Finally, the court must determine what damages, if any, resulted from any improper delay. Evidence respecting investment and delay damages should be heard in the liability proceeding. Reimbursement issues, as well as sec. 1132(g)(1) attorneys’ fees issues, will be subsequently determined. The court directs that the parties submit memoranda indicating what discovery, if any, each believes is necessitated by this Memorandum and Order and suggesting a schedule for the final resolution of this litigation. Those submissions shall be'filed by July 10, 1985. A Rule 16 conference is hereby scheduled for July 12, 1985 at 4:30 p.m.