author: SHADUR, District Judge.

text:
    STATE OF ILLINOIS by the ILLINOIS DEPARTMENT OF PUBLIC AID, Plaintiff, v. Margaret HECKLER, Secretary of Health and Human Services, Defendant.
    No. 85 C 359.
    United States District Court, N.D. Illinois, E.D.
    Aug. 23, 1985.

      Barbara Greenspan, Chicago, Ill., for plaintiff.
    Mary Rigdon, U.S. Atty., Chicago, Ill., for defendant.
   MEMORANDUM OPINION AND ORDER

SHADUR, District Judge.

Invoking federal-question jurisdiction under 28 U.S.C. § 1331, the State of Illinois (“Illinois”) seeks judicial review of the dis-allowance by Secretary Margaret Heckler (“Secretary”) of the United States Department of Health and Human Services (“HHS”) of reimbursement claimed by Illinois under Title XX of the Social Security Act (the “Act”), 42 U.S.C. §§ 1397-13971 Each party has moved for summary judgment under Fed.R.Civ.P. (“Rule”) 56. For the reasons stated in this memorandum opinion and order, Secretary’s motion is granted and Illinois’ motion is denied.

Facts

Illinois has long provided free educational services for handicapped children, consistent with the declaration in Ill. Const. art. X, § 1 that every Illinois child has the right to a “free common school education.” See Ill.Rev.Stat. eh. 122, §§ 14-1 to 14-12 (in the form enacted by the School Code of 1961 and hence applicable to the years at issue in this case). In the wake of the federal Education for All Handicapped Children Act of 1975, 20 U.S.C. §§ 1411-1420 (“EAHCA”), Illinois stepped up its efforts to provide “a free appropriate public educational to all handicapped children” (EAHCA § 1412(3)) and sought to qualify for federal financial assistance (see Illinois Mem.Ex. E).

Local school districts, under the guidance of the Illinois Office of Education, are responsible for identifying children in need of special education (id.). Other state agencies may then participate in the treatment and education of the students, but the Office of Education is charged with overseeing the educational programs offered by the other agencies (Illinois Mem. 9; Ill.Rev. Stat. ch. 122, 1114-8.01, part of the current version of the School Code).

During nearly the entire period relevant to this action, Illinois’ Department of Children and Family Services (“DCFS”) operated three residential schools for the education of handicapped children:

1. the Illinois Braille and Sight Saving School (now renamed the Illinois School for the Visually Impaired);
2. the Illinois School for the Deaf; and
3. the Illinois Children’s Hospital-School (now called the Illinois Children’s School and Rehabilitation Center) for children with orthopedic handicaps.

Students at those schools were drawn from districts all over the state that did not offer comparable programs. Indeed, the lack of classes at the local level was a prerequisite for admission to at least the first two schools (Illinois Mem. 7).

Illinois has applied to HHS for reimbursement of funds expended between October 1, 1975 and March 31, 1980 on various programs covered by Title XX. Its claim included $9,104,702 for operation of the DCFS schools, comprising:

1. $6,311,908 for educational programs and
2. $2,792,804 for room and board expenses.

Initially an HHS regional administrator disallowed all the claimed expenses. On July 29, 1983 that decision became Secretary’s when the HHS Grant Appeals Board (“Board”) affirmed the disallowance (Illinois Mem.Ex. A).

Timeliness of This Action

Secretary first argues this action (brought January 15, 1985) is untimely because it was filed nearly 18 months after Board’s decision. Although she concedes there is no directly applicable statute of limitations, she argues alternatively:

1. Illinois’ action is barred by the equitable doctrine of laches.
2. This Court should (a) borrow a 60-day statute of limitations from other types of actions authorized under the Act and (b) apply that statute retroactively to bar Illinois’ Complaint.

Neither alternative is tenable.

1. Laches

Lingenfelter v. Keystone Consolidated Industries, Inc., 691 F.2d 339, 340 (7th Cir.1982) reaffirmed that a laches defense cannot succeed without a showing of both plaintiff’s lack of diligence and prejudice to defendant:

Laches is principally a question of the inequity of permitting a claim to be enforced. It is unlike limitation, which is based merely on time. Rather, laches is based upon changes of conditions or relationships involved with the claim.

Only last week our Court of Appeals again confirmed that twofold aspect of a laches defense (Jeffries v. CTA, 770 F.2d 676, 679 (7th Cir.1985)):

Laches will bar this claim only if [plaintiff] had inexcusably delayed in asserting it and [defendant] has been materially prejudiced by the delay.

Secretary has simply failed to show any “changes of conditions” or other prejudice (material or otherwise) in this case. Instead her Mem. 23-28 conjures up the specter of the administrative havoc and uncertainty that could result if many other litigants delayed as long as Illinois has in seeking review of disallowances. Thus Secretary urges this Court to bar Illinois’ claim strictly as a matter of policy and as a speculative means of deterring other litigants from following Illinois’ example.

But an appeal to equitable relief must focus on the circumstances of this case, not another and purely hypothetical one. Effectively Secretary asks this Court, in the exercise of its equitable powers, to establish a rigid rule of law under which any petition for review of a disallowance, if filed 17 or more months after Board’s decision, would be barred regardless of the individual circumstances of the case.

Such rigidity is antithetic to the very concept of equity. As Black’s Law Dictionary 484 (5th ed. 1979) reflects (mirroring the origins of courts of equity), equity itself involves the rejection of rigid rules to accomplish what is fair and just in a particular situation. Absent a showing of materia] prejudice to Secretary (and none has been made), the equitable doctrine of laches is inapplicable to the circumstances of this case.

2. Retroactive Application of a Borrowed Statute

Secretary then argues at great length this Court should borrow and apply the 60-day statute of limitations applicable to many other Social Security Act claims, just as the Supreme Court has applied “borrowed” limitations periods in Wilson v. Garcia, — U.S. —, 105 S.Ct. 1938, 85 L.Ed.2d 254 (1985) and DelCostello v. International Brotherhood of Teamsters, 462 U.S. 151, 103 S.Ct. 2281, 76 L.Ed.2d 476 (1983). She asserts courts are the appropriate governmental arm to establish a limitations period for disallowance reviews, because jurisdiction to entertain such reviews in the first place has been implied by courts rather than expressly conferred by Congress. State of Illinois, Department of Public Aid v. Schweiker, 707 F.2d 273, 275, 277 (7th Cir.1983).

But even if it were assumed proper to apply a “borrowed” limitations period, and even if Secretary’s proposal of a 60-day period were deemed appropriate to that end, that period should not be applied retroactively to bar Illinois’ claim. Chevron Oil Co. v. Huson, 404 U.S. 97, 106-07, 92 S.Ct. 349, 355-56, 30 L.Ed.2d 296 (1971) teaches a decision may not be applied retroactively if each of two conditions obtains:

1. That new decision resolves “an issue of first impression whose resolution was not clearly foreshadowed.”
2. Retroactive application would be inequitable under the circumstances of the case.

Those rules could not fit the current circumstances more precisely. Secretary concedes no court has ever applied any statute of limitations to claims seeking review of disallowance decisions, even though states have waited up to a year to file them. In fact Secretary R.Mem. 4 admits no court has even looked at the issue.

It is thus an understatement to say there has been no “foreshadowing” of a short limitations period. In the words of Chevron, 404 U.S. at 108, 92 S.Ct. at 356 (citation omitted):

It would also produce the most “substantial inequitable results” ... to hold that the respondent “slept on his rights” at a time when he could not have known the time limitation that the law imposed upon him.

Because a new limitations period could not properly be applied to Illinois’ claim, and in light of this opinion’s disposition on the merits, the issue whether any limitations period should be borrowed—and if so which period—need not be discussed further.

Disallowance of Educational Costs

Both parties agree the educational expenses claimed for DCFS schools would normally be reimbursed under Act § 1397a(a)(l), which during the relevant period authorized Title XX funding for a variety of services including:

services designed to meet the special needs of children ..., the blind, ... [and] the physically handicapped.

But Secretary disallowed the expenses under the then-applicable Act § 1397a(a)(10):

No payment may be made under this section with respect to any expenditure for the provision of any educational service which the State makes generally available to its residents without cost and without regard to their income.

Secretary's corresponding regulation during the years at issue provided (45 C.F.R. § 228.43):

FFP [Federal Financial Participation] is not available for any educational service made generally available through any State or local educational agency to residents of the state without cost and without regard to their income. To the extent a fee is imposed on any resident, FFP is available only for such fee.

Where the litigants part company is over the meaning of “generally available.” Board’s and Secretary’s contention is that free educational services were “generally available” to handicapped Illinois children without regard to income, because those services were provided to every such student through the combined network of local school district programs and DCFS schools. Stripped to its essentials, Illinois’ position is that programs were not “generally available” for purposes of Act § 1397a(a)(10) unless they were provided:

1. both by and within local school districts and
2. by educational agencies meeting those “by and within” criteria.

Under Illinois’ reading, then, the services in dispute were not generally available in the state because many school districts referred their handicapped students out to the centrally-located and social-service-agency-operated DCFS schools. Illinois claims to support that notion with a number of opinions and guidelines published by HHS, but all of them actually confirm Secretary’s contention (Administrative Record [“R.”] 100-15).

Any analysis must of course begin with—and focus on—the language of Act § 1397a(a)(10) itself. “[A]ny educational service which the State makes generally available to its residents” is a sweeping phrase, one that by its literal terms includes services provided by any state agency anywhere in the state. Nothing in the statutory language even hints at the narrow reading Illinois advocates.

That means Illinois cannot force the statutory language into Illinois’ own unnaturally narrow mold without (at a minimum) convincing evidence from the legislative history and purpose or from Secretary’s regulations. Illinois identifies no such evidence.

1. Legislative Purpose

When Congress passed Title XX' it clearly intended to supplement, rather than to replace, state funding of social services. Act § 1397b required states receiving Title XX funds to continue funding social services at prior levels. Title XX was structured to allow states to extend their services further than before, and Act § 1397a reads like a congressional judgment that its supplemental resources were better spent on services in nonexistent or limited state supply than on services already generally available.

Illinois’ skewed reading of Act § 1397a wholly ignores Congress’ unwillingness to take over state funding of existing programs. According to Illinois, Congress would have been prepared to assume the bulk of the expenses of Illinois’ programs even if Illinois were already providing, entirely at its own cost, comprehensive and free educational services to every single handicapped child in the state.

For that reason alone Illinois’ proposed interpretation is highly suspect. But the most fundamental problem with Illinois’ position is that it attributes to Congress a totally arbitrary and rather absurd distinction-based purely on form—among state programs. If Illinois were right, Congress’ concern was not whether states provided services at all, but rather whether the services were provided within local school districts by educational agencies. In those terms Illinois might qualify for extensive federal funding, while a second state that provided exactly the same type and extent of services to handicapped children might not qualify for a single penny—and that would be so merely because its services were provided by and within local school districts.

Illinois offers no suggestion why Congress might have been so preoccupied with such formalities, nor has it produced a shred of evidence of such preoccupation from either the statute or its legislative history. Surely Congress would not have decided multi-million dollar block grants should hinge on such considerations without making some reference to them. Total congressional silence on that score shouts down Illinois’ attempted appeal to legislative history.

2. Regulations and Opinions Promulgated by Secretary

At the outset a fundamental principle of administrative law must be recognized: Secretary cannot effectively “amend” a statute in such a basic respect by means of regulations. Glossing over (or more accurately, wholly ignoring) that proposition, Illinois cites:

1. language in Reg. § 228.43 prohibiting federal funding for services “generally available through any State or local educational agency” (emphasis added); and
2. the test, as stated in HHS’ October 1, 1975 Title XX Program Regulation Guide (“PRG”) (R. 100), for determining whether a service is “generally available.”

Neither of those affords Illinois any comfort. In fact, those and other sources cited by Illinois rather confirm Secretary has consistently construed Act § 1397a in the same way she now urges.

(a) Which Agency May Provide the Educational Service

Illinois interprets Reg. § 228.43 as restricting “general availability” analysis to educational agencies. But Secretary’s comments when that regulation was promulgated make it plain the term “educational” was inserted not to modify (in the limiting sense) “state agency,” but rather to embrace local school districts within the agencies included in “general availability” analysis. Thus “educational” was intended to serve an expansive purpose, not a restrictive one as Illinois urges (40 Fed.Reg. 27352, 27353 (1975)):

Writers [to Secretary about the proposed regulation, among other expressions of views] recommended deletion of “local educational agency.” Since many States provide education through and at the discretion of local agencies, inclusion of such agencies is necessary to carry out the intent of the law.

That regulatory construction, under which services rendered by any state agency were taken into account in determining general availability, is confirmed by the May 11, 1976 opinion memorandum of HEW Regional Commissioner Virginia Smyth (appended to Illinois’ Memorandum in the Board proceeding, R. 107). Ms. Smyth there stated Secretary’s position a service was generally available under Reg. § 228.43 even if provided by a noneducational agency, provided the service conformed to the state Board of Education’s requirements for education of the handicapped. And on that score Illinois Mem. 9-10 asserts the Illinois Office of Education’s role with respect to the DCFS and other state agencies is that of:

insuring that all programs and services provided to handicapped children operated by other state agencies are operated in accordance with appropriate procedural safeguards and standards jointly developed and agreed to by the Illinois Office of Education and the other state agency.

Finally, the PRG on which Illinois relies also states without qualification (R. 100) (emphasis added):

Federal financial participation is available for educational services only if (1) the service is included in the services plan and (2) residents of the State may not usually receive the service free from a public agency.

(b) Whether the Service Must Be Provided Within Each School District

Illinois’ claim as to the meaning of the PRG regarding the location in which services must be provided also clutches at straws. PRG at 2438 (R. 101) provides:

The three methods which a State may utilize in determining if a service is “generally available without cost and without regard to income” are as follows:
1. Total Population Test—an educational service is generally available if it is provided in school districts or other designated areas that have populations which total 75% or more of the total population of the area being tested (geographic area or entire State).
2. Target Population Test—an educational service is generally available if it is provided in school districts or other designated areas to 75% or more of the target population for whom the service is intended in the area being tested (geographic area or entire State).
3. School District Test Without Regard to Population —an educational service is generally available if it is provided in 75% or more of the school districts in the area being tested (geographic area or entire State).

Illinois seeks to interpret the phrase “in school districts” as a requirement that services be provided within the boundaries of each district. But that reading utterly ignores the import of the adjacent phrases:

1. “or other designated areas”; and
2. “(geographic area or entire state).”

It is clear “school districts” are referred to merely as convenient geographical boundaries for defining the populations whose access to services is to be the measure of general availability. By its own terms the PRG test can be applied equally well to populations of larger or smaller geographical areas bearing no relation to school districts. In fact the parenthetical phrase “or entire State” suggests the test may be applied to the state as a whole without regard to smaller boundaries. Thus the PRG actually produces inferences contrary to Illinois’ position.

In sum, every legitimate approach to the meaning of language points to the same conclusion. Board (and hence Secretary) correctly determined Illinois was not eligible for reimbursement of educational costs at DCFS schools.

Room, and Board Costs

During the relevant period Act § 1397a(a)(7)(E) barred the use of federal funds to reimburse states:

for the provision of room or board ... other than room or board provided for a period of not more than six consecutive months as an integral but subordinate part of a service described in paragraph (1) of this section.

Secretary originally implemented that provision in a regulation allowing payment for room and board only (Reg. § 228.41(a) (1976)):

when provided to an individual who is receiving a service of which room or board is an integral but subordinate part and then only for a period of not more than six consecutive months in any 12-month period and for not more than one 6-month period for any one episode or placement.

Later the same regulation was amended to allow payment only [id. (1978)):

as an integral but subordinate part of another service and then only for a period of not more than six consecutive months for any one placement.

Finally, Reg. § 228.41(d) (1978) in turn defined placement as:

an uninterrupted period of time during which an individual takes up, or is placed in, residence in a facility other than his usual place of residence, for the purpose of undergoing a specific regimen of services or treatment according to a prescribed plan.

DCFS schools had a high ratio of returning students. For example, 81% of the students enrolled during the 1977-78 school year returned in 1978-79. That factor leads the litigants to dramatically different results on the room-and-board issue.

Illinois treated each school year as a separate “placement,” claiming room and board expenses for each student each year. Conversely, Secretary disallowed $2,792,-804 of the claimed expenses on the ground that a child’s year-after-year enrollment was a single “placement,” entitling Illinois to reimbursement for only one six-month period per child, no matter how many years the child was enrolled (except in the unusual case where there were two wholly separated enrollments). Secretary viewed the summer months as a vacation rather than a break in the placement.

Illinois bases its view of each year as a separate placement on the individualized nature of treatment at the schools. As Board found, a very detailed individualized education program (“IEP”) is prepared for each student (R. 289). That IEP contains a comprehensive list of goals the child is expected to achieve during a semester, and (id.):

[E]ach facility utilizes a variety of tools to supplement the child’s I.E.P. The Illinois School for the Deaf (ISD) employees [use] aptitude testing to identify individual needs and achievements. Children are grouped on the class list according to individual ability. A child may change classes, or programs, one or more times during a school year if it is determined that a change would improve learning and emotional development. Children are also rated on psychological factors including social adequacy and communication skills. Parent involvement is sought on a regular basis. Report cards and progress reports are sent to all parents at the end of each nine week term. Parents receive an end-of-year report which aids in determining whether another placement is needed. Parent conferences are scheduled throughout the year to obtain input regarding placement, goals, objectives, and curriculum (Tab 11). A recommendation on each child is submitted to the superintendent at the end of the school year when the treatment plan is concluded.

Based on those carefully plotted treatment programs, Illinois says each separate year of schooling is a “specific regimen of services or treatment according to a prescribed plan” (Reg. § 228.41(d)). Because each year’s plan is different, it assertedly amounts to a new course of treatment. And Illinois stresses the parents and the State never determine in advance how many years a child will remain in a special school. Instead such decisions are made on a year-by-year basis, only after a child’s progress has been analyzed and discussed among parents and school officials.

Board gave careful consideration to Illinois’ extensive evidence. It then rejected the State’s factual argument, finding a significant continuity in treatment from year to year (R. 289):

We find that the foregoing, and the documents, evidence much of a continuing, cyclical, arguably even routine, nature. The process appears to be a laudable one, but it nevertheless is much more akin to an on-going evaluation/training process than to anything like the time-constrained exceptional effort for which section 2002(a)(7)(E) allows collateral payment. IDPA cannot change this merely by such superficial things as labeling IEPs “treatment plans.” The IEPs bear a strong resemblence (sic) to periodic education plans one may observe in use in any typical public education program. Furthermore, the IEPs themselves contain a number of statements strongly implying that there is an on-going continuity of process; the Agency quoted these provisions at length in its brief {see pp. 15-16) and we will not repeat them here. IDPA did not explain these provisions in its reply.

Board’s interpretation of “placement” began with the premise that because room and board expenses are not generally reimbursed under Title XX, the exception in Act § 1397a(a)(7)(E) (and the regulations promulgated thereunder) should be narrowly construed (R. 286). Board found further support for a narrow construction in HHS’s 1980 Guide to Federal Financial Participation Under Title XX of the Social Security Act (the “Guide”) 3.D.13 (Illinois Ex. J):

If one placement ends and another placement begins for the same service or the same type of service, FFP is available for the cost of room or board during a second placement only if the individual was discharged from the prior placement because further treatment was not needed, not feasible, or not available and not for purposes of reentering the facility in order to begin another 6-month period of room or board. A new placement would begin, for example, if a person successfully completes a course of treatment, is discharged, or manages well in the community for a period of time until he or she has a relapse which necessitates a second placement.

It is clear the DCFS students did not meet the criteria of the Guide. It distorts the Guide’s language to say of students home for summer vacation that “further treatment was not needed, not feasible, or not available.” Those same students returned to school in the fall, not because of relapses, but rather because parents, guardians, and school officials had determined at the end of the school year further treatment was necessary.

As the Guide makes plain, a break in service of a few months does not necessarily bring a placement to a close. And the hallmarks set forth in the Guide for the end of a placement correspond more to a graduation than to the mere completion of a particular grade (Guide 3.D.9 and 3.D.10):

A placement that is ending is typically marked by indications that the recipient has successfully completed the prescribed course of treatment or services, or that an evaluation of the individual shows that he or she is now able to function outside the facility, or that the person is discharged without the intention of reentering the service facility (or a similar type of service facility) for further treatment. '

Promulgated in 1980, the Guide interprets the language of the 1978 regulation as to “placements.” Illinois contended before Board (though it did not repeat the argument here) the reference in the 1976 regulation to “placement or episode” is more expansive and accommodates Illinois’ position. But Board found no basis in the regulation itself to construe it differently from the newer regulation (R. 290), and Illinois apparently did not submit a pre1978 Guide to flesh out the earlier regulation. In that respect it is worth noting the 1975 Guide would have supported Board’s interpretation had Illinois attempted to rely on it (see Secretary Mem.App. 1, at 2418).

Bedford Medical Center v. Heckler, 766 F.2d 321, 323 (7th Cir.1985) commands a deferential standard of review of the Board’s decision, particularly in interpreting regulations (citations omitted):

Our standard of review of this reimbursement decision has been established by the Administrative Procedure Act. 5 U.S.C. § 706 (1982). When reviewing administrative decisions, federal courts are authorized to set aside agency decisions only when they: are arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with the law; are contrary to constitutional right, power, privilege, or immunity; exceed statutory jurisdiction or fall short of statutory right; are reached in violation of established procedure; or are unsupported by substantial evidence____ We note also that the interpretations of regulations issued pursuant to a statute, especially a statute as complex as the Medicare Act, are entitled to considerable deference.

Board’s decision as to the room and board expenses was thorough, well-reasoned and well supported by the evidence. Bedford and the reasonableness of Board’s decision compel this Court to affirm Board.

Conclusion

There is no genuine issue of fact, and Secretary is entitled to a judgment as a matter of law. Because that conclusion compels the granting of Secretary’s motion for summary judgment (and of course the denial of Illinois’ motion), this action is dismissed with prejudice.

      . Act citations will refer to the section numbering in Title 42, not to the internal numbering of the statute.

      . There is no real dispute as to the facts (but see n. 13 as to certain disputed exhibits tendered by Illinois dehors the administrative record this Court is called upon to review). Even so, the need on cross-motions under Rule 56 to draw all reasonable factual inferences against each movant (Hermes v. Hein, 742 F.2d 350, 353 (7th Cir.1984)) may sometimes create the potential for denying both motions. Fortunately that is not the case here, for factual inferences are really not called for.

      . Illinois Mem. 5 n. 2 explains another agency took the schools over in 1979, just before the end of the audit period at issue in this case.

      . Board also considered—but severed for further development—a third issue (R. 294).

      . See the recent extended discussion by our Court of Appeals in Smith v. City of Chicago, 769 F.2d 408 (7th Cir.1985) announcing a prospective limitations period under circumstances more compelling from the defendants’ perspective than those urged by Secretary.

      . All further citations to 45 C.F.R. will simply take the form "Reg. § —.’’

      . Illinois makes other arguments, but there is no need to consider them separately because they all stand or fall with Illinois’ interpretation of the phrase "generally available.” Board’s decision discusses them adequately.

      . With such unambiguous statutory language, conventional wisdom would foreclose any recourse at all to legislative history (or administrative regulations, for that matter). But the "modern” school of statutory interpretation (sometimes jocularly phrased as "look at the legislative history, and if it is ambiguous then look at the statutory language”) has gained a disturbing amount of currency in the highest circles. Justice Stevens has been especially critical of that tendency by the Supreme Court. See, e.g., Kosak v. United States, 465 U.S. 848, 104 S.Ct. 1519, 1531, 79 L.Ed.2d 860 (Stevens, J., dissenting). If only out of an abundance of caution, this Court will go beyond what should by rights be dispositive: the statute itself.

      . Were the congressional focus as Illinois would have it, we might reasonably expect to find not merely some passing reference, but one or more entire statutory provisions, or substantial discussion in committee reports, directing or encouraging states to adopt the desired structural formalities.

      . Illinois makes a puzzling argument in this area, urging Secretary’s position would result in no state ever being eligible for Title XX funds if it had its own law mandating free appropriate public education for all handicapped children. But that contention is clearly wrong. It must be remembered the statute speaks of services “generally available"—and the plain sense of that phrase is available in fact, not hypothetically via (for example) a non-implemented statutory provision. Thus the very documents Illinois produces to support its assertion show a state would qualify for federal funding if, despite its own law, it were unable in fact to provide such services to all handicapped children.

      . HHS is the governmental successor to HEW.

      . Illinois began its substantive discussion (Mem. 10-13) by invoking Pennhurst State School v. Halderman, 451 U.S. 1, 17, 25, 101 S.Ct. 1531, 1539, 1544, 67 L.Ed.2d 694 (1981), on the theory Secretary has engaged in an impermissible retroactive changing of the ground rules—somehow trapping Illinois into participating in federal grant programs on a false premise as to the bargain involved. As this opinion has reflected, that argument is doubly flawed:
      1. Nothing in the legislation or its history sandbagged Illinois into adopting or expanding its programs on any legitimate misunderstanding it could get federal reimbursement.
      2. Secretary’s position (even if it could somehow change Congress’ decision, as it could not) was consistent and did not improperly "surprise" Illinois.

      . There has been some procedural wrangling by the parties over the matters this Court may consider in what is essentially the review of an administrative decision (and as to which this Court should therefore be limited by the administrative record). Those disputes have not affected this decision. For example, the 1980 Guide was not of course in force (or existence) during the audit period at issue in this case. However, the Regulation did not change between 1978 and 1980, and there is no indication Secretary’s interpretation of it changed during that period. Moreover, Illinois offered the Guide both before Board and in this Court as evidence favoring its interpretation. Though Secretary has not objected to this Court’s consideration of the 1980 Guide (and she has suggested this Court could consider the 1975 Guide as a matter of judicial notice, Secretary Mem. 11-12 n. 4), she has moved to exclude other exhibits now tendered by Illinois that were not part of the administrative record. Because this Court has reviewed the challenged exhibits and determined they would not change the decision on the merits, resolution of that issue is unnecessary.

      . Illinois relies heavily on the opinion of an HHS auditor that Illinois did in fact meet the Guide’s criteria. But such an auditor is a lower-echelon employee with no decisionmaking authority. Familiar principles render his opinion non-binding against the federal government. Schweiker v. Hansen, 450 U.S. 785, 788-91, 101 S.Ct. 1468, 1470-72, 67 L.Ed.2d 685 (1981). Indeed, under the circumstances the auditor’s view can carry no real weight here.


source: Caselaw Access Project

author: PATRICK F. KELLY, District Judge.

license: Public Domain

text:
    UNITED STATES of America, Plaintiff, v. CENTRAL LIVESTOCK CORPORATION, Defendant.
    No. 85-1065-K.
    United States District Court, D. Kansas.
    Aug. 26, 1985.

      Stephen K. Lester, Asst. U.S. Atty., Wichita, Kan., for plaintiff.
    Forrest James Robinson, Jr., Kahrs, Nelson, Fanning, Hite & Kellogg, Wichita, Kan., for defendant.
   MEMORANDUM AND ORDER

PATRICK F. KELLY, District Judge.

Plaintiff filed this suit seeking damages for defendant’s conversion of certain livestock in which the Farmers’ Home Administration (FmHA) held an allegedly perfected security interest. The Court’s jurisdiction is provided in 28 U.S.C. § 1345. Defendant Central Livestock Corporation (Central) answered and raised a number of affirmative defenses, one of which denied the FmHA held a perfected security interest in the livestock. Central then filed a motion to dismiss under F.R.Civ.P. 12(b)(6), or in the alternative for summary judgment under F.R.Civ.P. 56, arguing the FmHA possesses only an unperfected security interest because its financing statement lapsed under K.S.A. 84-9-403(2). As a result plaintiff's interest is inferior to, and defeated by, the rights of defendant, a purchaser for value. The Court agrees.

The facts of this case, taken in the light most favorable to plaintiff, are as follows. At various times from June, 1978, through February, 1981, the FmHA loaned a total of $35,700.00 to Alan R. Allison. He executed promissory notes and granted the FmHA a security interest in various crops, livestock, farm machinery and other equipment. On May 22, 1978, the FmHA filed a financing statement covering this collateral with the Register of Deeds of Kiowa County, Kansas. At no time thereafter did the FmHA file any continuation statements.

Sometime in 1981, Allison sold to Central a number of boars, sows and pigs valued at $29,775.81. This livestock was subject to the FmHA’s security interest. There is no evidence the agency was aware of, or consented to, the sale.

Allison defaulted on the FmHA loans, although plaintiff does not specify when that occurred. The present suit against Central, seeking damages for conversion, was filed January 23, 1985.

The first question raised by Central’s motion to dismiss or for summary judgment is whether this Court should apply Article 9 of the Kansas Uniform Commercial Code, K.S.A. 84-9-101 et seq., to determine the parties’ rights. Plaintiff contends it should not, because the FmHA is a federal agency entitled to application of federal common law rather than state law.

Both parties rely on the Supreme Court’s decision in United States v. Kimbell Foods, Inc., 440 U.S. 715, 99 S.Ct. 1448, 59 L.Ed.2d 711 (1979). Kimbell Foods was actually two consolidated cases. The first concerned two competing perfected security interests in the same personal property. The United States’ lien secured a loan guaranteed by the Small Business Administration (SBA), while the private lien, arising from security agreements preceding the federal guarantee, secured advances made by a private corporation after the federal guarantee. Both security interests were perfected under Texas’ Uniform Commercial Code, and the question was, which of the creditors had priority? In the second ease, the FmHA perfected a security interest in certain crops and farm equipment by filing a standard FmHA financing statement with state officials. A private individual later acquired a lien under state law by retaining possession of the tractor after the borrower failed to pay repair bills. The borrower filed for bankruptcy and the government sought to obtain possession of the tractor. The question in that case was whether the adequacy of the description of the collateral in the FmHA financing statement was to be tested under state or federal law. Kimbell Foods, 440 U.S. at 718-725, 99 S.Ct. at 1453-1457.

The Supreme Court phrased the common issue as “whether contractual liens arising from certain federal loan programs take precedence over private liens, in the absence of a federal statute setting priorities.” Kimbell Foods, 440 U.S. at 718, 99 S.Ct. at 1453. Looking first to the government interests implicated by nationwide federal programs, the Court noted there was little question federal law governed cases involving the United States’ rights arising under those programs. The more difficult question concerned the content of the federal law to be applied. The Court held that “absent a congressional directive, the relative priority of private liens and consensual liens arising from these Government lending programs is to be determined under nondiscriminatory state laws.” Id. at 740, 99 S.Ct. at 1465.

In reaching that decision the Court looked at the need for uniform controlling rules in these cases, the degree to which application of state law would frustrate specific objectives of the federal programs, and whether application of a federal rule would disrupt commercial relationships predicated on state law. On all three points the Court concluded state commercial codes furnish convenient solutions as well as adequate protection of federal interests. Kimbell Foods, 440 U.S. at 728-729, 99 S.Ct. at 1458-1459. Adoption of a uniform federal law was unnecessary because both the SBA and the FmHA regulations mandate compliance with state law and procedures for “perfecting and maintaining valid security interests____” Id. at 731, 99 S.Ct. at 1460 (emphasis added).

Thus, the agencies’ own operating practices belie their assertion that a federal rule of priority is needed to avoid the administrative burdens created by disparate state commercial rules. The programs already conform to each State’s commercial standards. By using local lending offices and employees who are familiar with the law of their respective localities, the agencies function effectively without uniform procedures and legal rules.

Kimbell Foods, 440 U.S. at 732, 99 S.Ct. at 1460. Application of state law will not frustrate the specific objectives of the loan programs because the government is in substantially the same position as private lenders. Finally, the Court concluded application of a different federal rule would seriously disrupt commercial relationships established under state law.

Creditors who justifiably rely on state law to obtain superior liens would have their expectatons thwarted whenever a federal contractual security interest suddenly appeared and took precedence.
Because the ultimate consequences of altering settled commercial practices are so difficult to foresee, we hesitate to create new uncertainties, in the absence of careful legislative deliberation. Of course, formulating special rules to govern the priority of the federal consensual liens in issue here would be justified if necessary to vindicate important national interests. But neither the Government nor the Court of Appeals advanced any concrete reasons for rejecting well-established commercial rules which have proven workable over time. Thus, the prudent course is to adopt the readymade body of state law as the federal rule of decision until Congress strikes a different accommodation.

Id. at 739-740, 99 S.Ct. at 1464 (emphasis added).

This Court cannot gainsay the following observations:

The importance of the Kimbell Foods eases is that federal lending agencies are clearly governed by the same rules which control the rights and duties of private secured parties. With respect to filing and perfection, priorities, and default provisions, federal agencies will be measured by the same standards as commercial banks, credit unions, finance companies, and credit sellers. This means uniformity, which is the hallmark of the UCC. If Congress desires to establish a special rule to give protection to a federal lending agency, it may do so. At this writing, however, the only federal statutes which preempt Article I are ... statutes geared to unique types of collateral rather than federal lending agencies as creditors____ Kimbell Foods reinforces the notion that Article 9 should continue as the paramount law of secured transactions unless Congress speaks out loudly.

Clark, The Law of Secured Transactions Under the Uniform Commercial Code, ¶ 1.8[l][g] (1980).

Following the Kimbell Foods decision a number of courts have applied state commercial law to resolve priority conflicts involving federal lending agencies. See United States v. Lattauzio, 748 F.2d 559 (10th Cir.1984) (New Mexico UCC applied in an SBA suit upon a guarantee of a government loan); United States v. Southeast Miss. Livestock Farmers Ass’n, 619 F.2d 435 (5th Cir.1980) (Mississippi UCC applied to assess legal sufficiency of FmHA’s security agreements and financing statements); United States v. Burlington Industries, 600 F.2d 517 (5th Cir.1979) (Florida commercial law applied to determine priority between SBA security interest and competing warehouseman’s lien); United States v. S.K.A. Associates, 600 F.2d 513 (5th Cir.1979) (Florida non-UCC law allowed landlord’s lien to prevail over SBA’s Article 9 security interest); and United States v. Oakley, 483 F.Supp. 762 (D.Ark. 1980) (adequacy of description of collateral in FmHA’s security agreement must stand or fall under Arkansas UCC). Notably, the only two cases to date which have relied on Kimbell Foods for the conclusion the respective federal interests involved demanded application of other than state law, have both concerned programs different from the FmHA and SBA lending operations. See Jones v. Federal Deposit Ins. Corp., 748 F.2d 1400 (10th Cir.1984) (FDIC regulations, rather than state law, adopted as uniform rule of federal law governing ownership of accounts on deposit); and Marine Midland Bank v. United States, 687 F.2d 395 (Ct.Cl.1982) (resort to state law inappropriate in eases of priority of liens arising from government defense procurement contracts, the creation of which, unlike FmHA and SBA loans, generally does not follow individual state practices).

Plaintiff attempts to distinguish the present case from Kimbell Foods, arguing any constructive release of its security interest under state law would conflict with federal law contained in 7 C.F.R. § 1962.17 (1985), which provides that “[e]hattel security may be released only when release will not be to the financial detriment of FmHA.” This Court has serious reservations about whether an administrative regulation is the sort of congressional proclamation the Supreme Court referred to in Kimbell Foods. But even assuming that in an appropriate case the Regulations of the Department of Agriculture, rather than nondiscriminatory state commercial law, might become the “federal rule of decision,” that result is not justified here. 7 C.F.R. § 1962.17 (1985) is merely a program regulation addressing the circumstances in which FmHA officers and agents have the authority to affirmatively release security interests. It does not purport to, and cannot be interpreted to, govern the priorities of FmHA security interests and competing interests acquired under state commercial law. To read that regulation in the manner plaintiff urges would mean not only that state commercial law could never apply when the result would be detrimental to the FmHA, but as well, that on the merits the agency would always prevail, without regard for the status and rights of the competing party under state law. Clearly, the Department of Agriculture could not have dictated that result, nor did it intend to in the regulation on which plaintiff relies.

In another novel argument plaintiff contends K.S.A. 84-9-403 should not apply to this case because the statute imposes on the government the doctrine of laches. This argument misconstrues the nature of both that doctrine and this case.

Laches is an equitable device to bar stale claims in certain instances. Perpetual Royalty Corp. v. Kipfer, 253 F.Supp. 571 (D.Kan.1965), aff’d 361 F.2d 317 (10th Cir.1966), cert. denied 385 U.S. 1025, 87 S.Ct. 743, 17 L.Ed.2d 673 (1967). The question of laches is addressed primarily to the discretion of the court. Russell v. Price, 612 F.2d 1123 (9th Cir.1979), cert. denied sub nom Drebin v. Russell, 446 U.S. 952, 100 S.Ct. 2919, 64 L.Ed.2d 809 (1980). Equity will not act when there is an adequate remedy at law. Record Head, Inc. v. Olson, 476 F.Supp. 366 (D.N.D. 1979). Plaintiff has not sued under equity. The FmHA attempted to protect its interests under the Kansas UCC, and now brings suit under common law, seeking damages for conversion. Defendant has shown plaintiff simply failed to properly maintain its perfected security interest under Kansas law. Plaintiffs response, that the statute requiring that result wrongly imposes the equitable bar of laches, is inherently contradictory. Laches has nothing to do with statutory enactments; equity in that sense does not enter into this case. If it appears the absence of a remedy at law is due to plaintiffs failure to pursue that remedy, equity will not intervene. Smaldone v. Kurtz, 450 F.Supp. 1138 (D.D.C.1978).

It is true that without a clear manifestation of congressional intent the United States is not bound by state statutes of limitation. Cassidy Commission Co. v. United States, 387 F.2d 875, 880 (10th Cir.1967). But Kimbell Foods was nothing if not an invitation to Congress to respond to the principle the government is bound by both the substantive and procedural requirements of the UCC as adopted in the majority of states. Congress has not done so, at least regarding the FmHA. Plaintiff fails to show current federal law is significantly different than that in effect when Kimbell Foods was decided. The Court has no difficulty with inferring congressional acceptance of that decision; as a result, the FmHA continues to be bound by state commercial laws. In light of Kimbell Foods and its progeny, this Court would be remiss if it failed to apply the Kansas UCC in this case.

The next question is whether Kansas law requires a judgment for defendants on the merits. K.S.A. 84-9-403(2) provides:

... [A] filed financing statement is effective for a period of five (5) years from the date of filing. The effectiveness of a filed financing statement lapses on the expiration of the five-year period unless a continuation statement is filed prior to the lapse. If a security interest perfected by filing exists at the time insolvency proceedings are commenced by or against the debtor, the security interest remains perfected until termination of the insolvency proceedings and thereafter for a period of sixty (60) days or until expiration of the five-year period, whichever occurs later. Upon lapse the security interest becomes unperfected, unless it is perfected without filing. If the security interest becomes unperfected upon lapse, it is deemed to have been unperfected as against a person who became a purchaser or lien creditor before lapse.

Under this provision, after filing lapses the interest of the secured party is subject to defeat by purchasers and lienors even though before lapse the conflicting interest may have been junior. K.S.A. 84-9-403, Official UCC Comm. 3. Subsection (2) above does not vary from the 1972 Official UCC Text.

Plaintiff does not dispute that the FmHA failed to file a continuation statement covering its May 22,1978 financing statement. Under K.S.A. 84-9-403(2) that financing statement lapsed five years later, on May 22, 1983. Defendant Central Livestock, which gave value for and received the livestock in 1981, was a buyer in the ordinary course of business as defined in K.S.A. 84-1-201(9). Plaintiffs status as an unperfected financing statement, relates back in time to 1981 as against Central, a post-perfection, pre-lapse purchaser. K.S.A. 84-9-403(2). The rights of the two parties are governed by K.S.A. 84-9-301(l)(c), which states that an unperfeeted security interest is subordinate to the rights of a buyer of farm products in the ordinary course of business. Defendant Central is entitled to judgment on the merits.

IT IS ACCORDINGLY ORDERED this 23 day of August, 1985, that summary judgment be entered in favor of defendant Central Livestock Corporation on plaintiffs claim of conversion of certain specified livestock valued at $29,755.81.


author: GERALD J. WEBER, District Judge.

text:
    Goldie SLAGELL, Plaintiff, v. John BONTRAGER, Jr. t/d/b/a Oklahoma Energy Investments, Defendant.
    Civ. A. No. 84-1407.
    United States District Court, W.D. Pennsylvania.
    Aug. 26, 1985.

      James S. Lederach, Seottdale, Pa., for plaintiff.
    Denis A. Kitchen, Jr., Clarence, N.Y., Alex H. DTppolito, Pittsburgh, Pa., for defendant.
   OPINION

GERALD J. WEBER, District Judge.

In this action alleging a violation of Section 12(1) of the Securities Act, 15 U.S.C. § 77 Z (1), defendant has filed a motion for summary judgment with an affidavit claiming that the action is barred by the statute of limitations, that the plaintiff’s complaint is insufficient, and that venue is improper. Plaintiff has responded in opposition to this motion and the issues have been fully briefed. Since we believe that the statute of limitations argument is dispositive we will deal solely with that issue.

Plaintiff’s complaint alleges that plaintiff purchased a security from defendant on June 9, 1981 for $12,000 which security was not registered with the Securities Exchange Commission, and on which plaintiff has received no income. Plaintiff filed her complaint on June 8, 1984.

Defendant has filed evidentiary material to show that plaintiff actually purchased and paid for the security on April 29, 1981. Furthermore, the facts necessary to decide this motion are stated in the affidavits of John Bontrager, Jr. and Goldie Slagell, and are essentially uncontroverted:

1) In April 1981, H. Ralph Hernley approached Goldie Slagell regarding an investment opportunity in an oil and gas limited partnership formed by Mr. Bontrager;
2) On April 29, 1981, pursuant to Mr. Hernley’s advice, Goldie Slagell sent her check for $12,000 to John Bontrager, Jr. at his address in Alden, New York;
3) On or about June 9, 1981, John Bontrager, Jr. sent to Goldie Slagell a copy of the Oklahoma Energy Investment Contract Participating and Operating Agreement by United States mail.
4) Before that time Goldie Slagell had received no prospectus or written offering statement of any kind regarding the nature of the investment, and relied solely on Mr. Hernley’s advice and judgment.

The law is equally clear. Section 13 of the Securities Act entitled “Limitations of Actions”, 15 U.S.C. § 77m, provides as follows:

No action shall be maintained to enforce any liability created under ... section 77Z (1) of this title, unless brought within one year after the violation upon which it is based. In no event shall any such action be brought to enforce a liability created under section 77k or 77Z(1) of this title more than three years after the security was bona fide offered to the public____

Defendant argues that the one year limitation period applicable to section 771 (1) began to run on the date the investment contract was entered into. Defendant provides a copy of plaintiffs cancelled check dated April 29, 1981, and argues that any section 77Z violation, which would consist of an offer or sale of a security in violation of section 77e, had to have taken place on or before that date. Plaintiff counters this argument by indicating that section 77e is violated when the mails or interstate commerce are used to offer, sell, or deliver unregistered securities. Since defendant used the mails only once, on or about June 9, 1981, to deliver the Participating and Operating Agreement, plaintiff argues that this is the time of the last event necessary to establish a section 77e violation. Therefore the limitations period did not begin to run until June 9, 1981.

For purposes of this summary judgment motion we accept the facts in the light most favorable to the plaintiff against whom the motion is directed. See Conley v. Gibson, 355 U.S. 41, 78 S.Ct. 99, 2 L.Ed.2d 80 (1957). Therefore we accept plaintiff’s premise that the one year limitations period began June 9, 1981.

Plaintiff urges this court to adopt equitable tolling of the one year period. She argues that H. Ralph Hernley acted both on behalf of defendant Bontrager and, at the same time, had a fiduciary relationship to the plaintiff which plaintiff claims results in a lessening of her duty of inquiry regarding the legality and the quality of the investment. Even accepting all that plaintiff argues as fact, we do not see a basis for equitable tolling in this ease since there was no fraudulent concealment of the violation. In fact, the Participation and Operating Agreement, attached to plaintiff’s complaint, specifically states in paragraph 7A that the security “... is not registered under the Securities Act of 1933 or the Blue Sky Law of any state.” Plaintiff argues that despite the lack of concealment, fraudulent or otherwise, she did not discover the existence of a legal remedy until January of 1984 when she contacted her attorney with a view to developing an estate plan, and that equitable tolling should therefore be applied. We do not believe that there is legal authority for this position, nor do we believe that adoption of such a position in this case would further the policies underlying equitable tolling. Furthermore, even were we to apply equitable tolling to extend the one year limitations period, we would have to dismiss this action because plaintiff failed to file her complaint within the three year limitation period with which she must also comply. See Ingenito v. Bermec Corporation, 376 F.Supp. 1154, 1173 (S.D.N.Y. 1974).

Plaintiff argues that she has complied with the three year period which begins to run when a “bona fide offer to the public” is made. Defendant says that in the case of an unregistered security, the period begins to run when the investor is first offered the security, which in this case must have occurred no later than April 29, 1981 when plaintiff wrote her check. Plaintiff argues that this limitations period does not begin to run until the date upon which the security is first legally available to the public for purchase and sale, i.e., the effective date of the registration statement. Since no registration statement has been filed in this case, the logical conclusion of plaintiff’s argument is that the statute has not yet begun to run and the complaint meets the three year limitations requirement. This would effectively eliminate the limitations period for section 12(1) violations which involve unregistered securities.

We disagree with plaintiff’s argument and adopt defendant’s position as a correct statement of the law. See Campito v. McManus, Longe, Brockwehl, Inc., 470 F.Supp. 986, 995 (N.D.N.Y.1979); Brick v. Dominion Mortgage & Realty Trust, 442 F.Supp. 283, 291 (W.D.N.Y.1977); Boone v. GLS Livestock Management, Inc., CCH Federal Securities Law Reports, par. 97, 174 (D.Utah 1976). For these reasons we will grant defendant’s motion for summary judgment and dismiss this action with prejudice.

An appropriate order will issue.

      . Both cases cited in support of plaintiffs position involve fraudulent representations and concealment and are therefore distinguishable.

      . Morse v. Peat, Marwick, Mitchell & Co., 445 F.Supp. 619 (S.D.N.Y.1977) on which the plaintiff relies, indicates that the three year limitations period on actions alleging material misrepresentations or omissions in the registration statement begin to run no earlier than the effective date of the registration statement. This is not our case where the violation is the lack of a registration statement.


author: NANGLE, Chief Judge.

text:
    EQUAL EMPLOYMENT OPPORTUNITY COMMISSION, Plaintiff, v. KENNETH BALK AND ASSOCIATES, INC., Defendant.
    No. 84-1959C(1).
    United States District Court, E.D. Missouri, E.D.
    Aug. 26, 1985.

      James R. Neely, Jr., Gretchen D. Huston, Feme P. Wolff, E.E.O.C., St. Louis, Mo., Johnny J. Butler, Michael Middleton, E.E. O.C., Washington, D.C., Morgan Stewart, St. Louis, Mo., for plaintiff.
    G. Carroll Stribling, Jr., St. Louis, Mo., for defendant.
   MEMORANDUM

NANGLE, Chief Judge.

This is an employment discrimination case wherein plaintiff alleges that defendant discriminated against Margo Mischeaux by terminating her because of her race and/or thereafter failing to offer her other and alternative employment with defendant because of her race.

This case was tried to this Court sitting without a jury. This Court having considered the pleadings, the testimony of the witnesses, the documents in evidence, and the stipulations of the parties, and being fully advised in the premises, hereby makes the following findings of fact and conclusions of law, as required by Rule 52 of the Federal Rules of Civil Procedure. Fed.R. Civ.P. 52.

A. FINDINGS OF FACT

1. Plaintiff Equal Employment Opportunity Commission (hereinafter “EEOC”) is an agency of the United States of America charged with administration and enforcement of Title VII of the Civil Rights Act of 1964, as amended, and is expressly authorized by § 706(e) to bring this action. 42 U.S.C. § 2000e-5(f)(l).

2. Defendant Kenneth Balk and Associates, Inc. (hereinafter “KBA”), is a corporation engaged in the architecture and engineering business in St. Louis County, Missouri. KBA employs more than fifteen (15) employees and is engaged in an industry affecting commerce. KBA employs professional, clerical and accounting employees. KBA’s employees are divided into a number of divisions, among them the accounting and finance division. KBA’s accounting and finance division was divided into four (4) distinct groups: project cost accounting, data processing, accounts payable and bookkeeping. These four (4) functions were overseen prior to 1981 by Ron Silber, the Corporate Treasurer and Vice President of Finance of KBA and, after his termination from employment in 1981, by Stephen Gossett, Treasurer of KBA.

3. Margo Mischeaux is a black female who was employed by KBA as a keypunch operator. Margo Mischeaux was hired by KBA on April 5, 1978 and was discharged on March 18, 1983. On April 5, 1978, Margo Mischeaux did not have the necessary skills or knowledge to operate the general automation computer, but she subsequently learned how to operate said computer and, after its replacement with a IV-Phase computer terminal tied to a main computer at McDonnell Douglas Automation Company, she operated the IV-Phase terminal. By the end of her employment in 1983, Margo Mischeaux was responsible for data entry upon the IV-Phase terminal, running reports on the IV-Phase terminal, calling and transmitting data to the main computer at McDonnell Douglas Automation Company, occasional ordering of supplies and occasional backup for other accounting clerks. Generally, Margo Mischeaux’s duties with KBA never involved word processing, receptionist or secretarial duties. At the time of her discharge, Margo Mischeaux’s annual salary was $18,480.00.

4. On May 12, 1983, Margo Mischeaux filed a charge of discrimination with EEOC alleging that KBA had discharged her because of her race. On May 13, 1983, Margo Mischeaux’s charge was referred to the Commission on Human Rights which waived jurisdiction. Thereafter, KBA was served with notice that Margo Mischeaux’s charge had been filed and EEOC proceeded to investigate Margo Mischeaux’s charge. On February 29, 1984, EEOC issued a letter of determination finding reasonable cause to believe KBA had eliminated Margo Mischeaux’s position and discharged her because of her race, black. On February 29, 1984, EEOC mailed an invitation to KBA to participate in conciliation. However, on March 16, 1984, asserting that it had not discriminated against Margo Mischeaux, KBA declined to participate in conciliation. On April 16, 1984, KBA was advised that conciliation had failed and, on August 20, 1984, over thirty (30) days after Margo Mischeaux’s charge was filed with EEOC, this lawsuit was filed by EEOC.

5. In 1980, KBA lost $47,000.00 and in 1981, KBA lost $170,000.00. In addition, during 1981 and 1982, KBA’s current ratio approached 1 and KBA’s debt to equity ratio exceeded 13 to 1. Thus, KBA was close to financial insolvency.

6. As a result of KBA’s poor financial performance, beginning in 1980 KBA initiated an effort to cut costs through staff reductions, salary eliminations and overhead reductions. For example, during the period from April, 1980 through May, 1984, numerous employment positions were eliminated through layoffs, attrition, discharges and the deactivation of an entire division, the construction management division. Considerably more white employees than black employees were affected by this effort. In many cases, when a position was eliminated or vacated, a new person was not rehired and the job functions of that position were spread among other employees. For example, in the accounting and finance division, when the Corporate Treasurer, Ron Silber, was discharged, he was not replaced because Stephen Gossett and other members of the firm assumed his duties.

7. The accounting and finance division was severely affected by these economizing measures. During the period from January 1, 1980 through April 1, 1983, the division was reduced from eight (8) to four (4) employees through attrition, layoffs, or job elimination. These measures saved KBA in excess of $150,000.00 per year in salaries in the accounting and finance division alone. The discharge of Margo Mischeaux was part of KBA’s economizing efforts. In late 1982 and early 1983 KBA was still losing money, to the tune of $35,-000.00 for the first five months ending January 31, 1983. As a result, KBA’s President told Stephen Gossett in November, 1982 and again in January or February of 1983 to formulate a plan for reducing his department’s expenses. In February, 1983, the plan that Stephen Gossett came up with was to eliminate one (1) position and to spread out that person’s duties among the remaining employees in the accounting and finance division. This Court credits Stephen Gossett’s testimony that he selected Margo Mischeaux’s position for elimination based on a careful evaluation of each job, the training and skills required for each job, the ease of fragmenting the work performed in each job, the work history and potential future of each employee, and the current salary of each employee. Stephen Gossett’s selection of Margo Mischeaux’s position for elimination was not in any way, shape or form motivated by consideration of Margo Mischeaux’s race. Margo Mischeaux’s position was chosen for elimination because its functions could be split up easier than the functions of other positions and because Margo Mischeaux’s salary was the second highest, below Stephen Gos-sett’s salary, in the division. Margo Mischeaux’s position basically consisted of data entry on a CRT, supply ordering, and running reports on the IV-Phase terminal. Other employees in the division were already performing data entry on a CRT and ordering supplies, and another employee could be trained to operate the IV-Phase terminal. Stephen Gossett consulted the President of KBA, Kenneth Balk, and he approved of Stephen Gossett’s plan. Mr. Balk’s approval of the plan also was not motivated in any respect by Margo Mischeaux’s race. Her discharge was simply a matter of economics.

9. Not only was Stephen Gossett’s selection of Margo Mischeaux’s position for elimination not motivated by racial discrimination, but the record supports the finding that Margo Mischeaux and Stephen Gossett were close friends and that KBA was satisfied with Margo Mischeaux’s performance of her job duties. For example, Stephen Gossett attempted to find Margo Mischeaux alternative employment before she left. Following her layoff on March 18, 1983, Margo Mischeaux was given one (1) month’s additional salary under an agreement that if her services were needed during that month in order to take care of problems which might develop as a result of the transition from five (5) employees to four (4) in the department, she would come in and work. In addition, Kenneth Balk authorized Stephen Gossett to spend up to $1,000.00 on employment consultants to assist in Margo Mischeaux’s placement. Stephen Gossett also gave Margo Mischeaux two letters of recommendation.

10. Margo Mischeaux’s position was, in fact, eliminated and the accounting department has not hired additional employees since Margo Mischeaux’s discharge.

11. Since Margo Mischeaux’s discharge from KBA, the only non-professional positions filled by KBA have been those of receptionist/backup word processing operator, word processing operator, executive secretary and administrative assistant. Margo Mischeaux was not qualified for any of these positions. Several of these positions were advertised in St. Louis area newspapers, but she did not apply for any of them. Examples of work performed by Margo Mischeaux at KBA supports KBA’s conclusion that she lacked the necessary spelling, punctuation, Syntax and grammar skills for these positions. Moreover, the persons hired for these positions had qualifications in excess of those possessed by Margo Mischeaux.

B. CONCLUSIONS OF LAW

This Court has jurisdiction over the subject matter and the parties. In addition, venue in this District is proper. All conditions precedent to the institution of this suit have been fulfilled.

To establish a prima facie case of discriminatory discharge, plaintiff must show that Margo Mischeaux was a member of a protected class, was capable of performing her job, and was discharged from her job. Tate v. Weyerhaeuser Co., 723 F.2d 598, 602 (8th Cir.1983). The burden then shifts to defendant to articulate some legitimate, non-discriminatory reason for the discharge. Id. at 603. The employer is only required to present admissible evidence sufficient to raise a genuine factual issue as to whether plaintiff was discriminated against. Id. If defendant offers such evidence, the inference of discrimination resulting from establishment of the prima facie case disappears. Id. The ultimate burden of persuasion with respect to whether defendant intentionally discriminated against plaintiff remains on plaintiff. Id.

In the case at bar, plaintiff established a prima facie case of race discrimination by establishing that Margo Mischeaux is black, that she was capable of performing her job, and that she was discharged. However, defendant articulated a legitimate, non-discriminatory reason for discharging Margo Mischeaux, namely, that her position was eliminated out of economic necessity. See Findings of Fact Nos. 5, 6, 7 and 8. This reason was not pretextual. See Findings of Fact No. 8. Margo Mischeaux’s race did not play any part in KBA’s decision to discharge her. See Findings of Fact No. 8. In addition, KBA did not fail to rehire Margo Mischeaux due to her race. With respect to other positions in KBA that were filled subsequent to her discharge, Margo Mischeaux was either not qualified and/or the person hired for said position was more qualified than Margo Mischeaux. See Findings of Fact No. 11. Accordingly, EEOC failed to carry its burden that KBA’s discharge and failure to rehire Margo Mischeaux were racially motivated. Defendant is entitled to a judgment in its favor on plaintiffs complaint.

A word is in order with respect to the conduct of plaintiff in this case. The complaint in this case was filed on August 20, 1984, and the trial of this matter began on February 11, 1985. Despite having had over five (5) months to prepare this case, plaintiff complained of being unprepared and being forced to trial on schedule. In the opinion of this Court, there was nothing complex or difficult about preparing this case and there was no reason for a competent attorney not to be totally prepared on the date that this case went to trial. The plaintiffs case was weak and no amount of preparation could have remedied this problem.


author: YOUNG, District Judge.

text:
    AMERICAN BUILDINGS COMPANY v. VARICON, INC., et al.
    Civ. A. 85-271-Y.
    United States District Court, D. Massachusetts.
    Aug. 26, 1985.
    David J. Hatem, Posternak, Blankstein & Lund, Boston, Mass., for plaintiff.
    Daniel H. Kelleher, Kelleher and Lamont, Boston, Mass., for defendants.
   MEMORANDUM AND ORDER

YOUNG, District Judge.

The plaintiff American Buildings Company (“American”) brought this action against defendants Varicon, Inc. (“Varicon”) and Allied Fidelity Insurance Company (“Allied”), alleging breach of contract by Varicon, breach of a performance bond by Allied, and unfair trade or business practices by both defendants. The action arises from an alleged default by Varicon under a subcontract agreement relating to steel construction work at the Pilgrim Nuclear Power Station, Plymouth, Massachusetts. American filed this action in the Superior Court of the Commonwealth of Massachusetts for Suffolk County on December 20, 1984. Pursuant to 28 U.S.C. § 1441, the defendants removed the case to the United States District Court for the District of Massachusetts on January 17, 1985. American has now moved to remand the case to the state court on the ground that this court lacks subject matter jurisdiction.

I.

In its petition for removal, the defendants alleged that this court has original jurisdiction over this contract action pursuant to 28 U.S.C. § 1332, by reason of the diversity of citizenship of the parties. For purposes of determining whether diversity exists, a corporation is considered to be a citizen of the state of its incorporation and a citizen of the state where it has its principal place of business. 28 U.S.C. § 1332(c). The defendants alleged, on information and belief, that American was a corporation organized and existing under the laws of Delaware and had a principal place of business in Alabama. They further alleged that Allied is incorporated and has its principal place of business in Indiana, and that Varicon is incorporated and has its principal place of business in Texas.

American argues that this court has no subject matter jurisdiction under 28 U.S.C. § 1332 because there is no diversity of citizenship between American and Varicon. American does not dispute that Allied is an Indiana corporation with a principal place of business in Indiana, or that Varicon is a Texas corporation with a principal place of business in Texas. However, American alleges that it is also a corporation organized under the laws of Texas, thereby defeating diversity jurisdiction.

The confusion in this matter stems from a 1984 change in the corporate status of one of American’s predecessor corporations. In an effort to clear up the confusion, American’s counsel, David J. Hatem, executed an affidavit on June 4, 1985, which has been submitted to the court, along with supporting documents, in support of the motion to remand. According to that affidavit, a predecessor to American was also named American Buildings Company (hereinafter referred to as “American Buildings Company—Delaware”). American Buildings Company—Delaware was incorporated in Delaware in December 1977 and continued as a Delaware corporation until October 1, 1984. On that date, the company merged with three other corporations, including a Texas corporation named Metallic-Braden Building Company, and American Buildings Company—Delaware ceased to exist as a separate corporate entity. The merger agreement provided that the surviving corporation was to be named “American Buildings Company” and was to be governed by the laws of the State of Texas.

According to the Hatem affidavit, at the time the merger became effective on October 1, 1984, there apparently was another Texas corporation which had the identical or a similar name of “American Buildings Company.” As a consequence, an amendment was filed to the new corporation’s charter to change the corporation’s name from “American Buildings Company” to Metallic-Braden Building Company (“Metallic-Braden”). That name change became effective on October 9, 1984. Over the course of the next several months, the new corporation operated under the name of Metallic-Braden but sought to obtain the right to use the corporate name “American Buildings Company” in Texas. After months of negotiations with the party which had the right to use that name, an agreement was reached under which Metallic-Braden obtained the right to call itself “American Buildings Company.” MetallicBraden thereafter changed its name back to American Buildings Company, effective March 18,1985, and has operated under the American Buildings Company name since that time.

In the meantime, while the negotiations regarding the use of the American name were still ongoing, this suit was commenced in the Superior Court for Suffolk County. At the time the state court action was filed in December 1984, American Buildings Company—Delaware apparently no longer existed as a separate corporate entity and the newly merged company was operating under the name of Metallic-Bra-den, a Texas corporation. However, the plaintiff brought the suit under the name “American Buildings Company,” hence the resulting confusion.

With respect to the pending motion to remand, American argues that the proper plaintiff in this action should be MetallicBraden since that was the company’s legal name in December 1984 when the suit was commenced. Furthermore, because Metallic-Braden was a Texas corporation when the petition for removal was filed, there was no diversity of citizenship between it and Varicon, according to American. In response, the defendants argue that for purposes of determining whether diversity jurisdiction exists, the named plaintiff is American Buildings Company—Delaware.

II.

When a party removes a state court action to the federal district court on the basis of diversity of citizenship, and the party seeking remand challenges the jurisdictional predicate for removal, “the burden falls squarely upon the removing party to establish its right to a federal forum by ‘competent proof.’ ” R. G. Barry Corp. v. Mushroom Makers, Inc., 612 F.2d 651, 655 (2d Cir.1979). The removal statutes are to be strictly construed, Shamrock Oil Corp. v. Sheets, 313 U.S. 100, 108, 61 S.Ct. 868, 872, 85 L.Ed. 1214 (1941), and many federal courts have held that if federal jurisdiction is in doubt, such doubt must be resolved in favor of state court jurisdiction and the case remanded. Capehart-Creager Enterprises, Inc. v. O’Hara & Kendall Aviation, Inc., 543 F.Supp. 259, 262 (W.D.Ark. 1982); see 14A C. Wright, A. Miller & E. Cooper, Federal Practice and Procedure § 3739, at 584 (1985). Whether an action should be remanded to the state court must be resolved by reference to the complaint at the time the petition for removal was filed. Rosenberg v. GWV Travel, Inc., 480 F.Supp. 95, 96 (S.D.N.Y.1979).

The question before this court is whether the defendants have satisfied their burden of showing that there was diversity of citizenship between the parties as of January 17, 1985. The issue turns on whether the plaintiff was a citizen of Texas on that date—if so, the court cannot exercise jurisdiction.

American has provided competent evidence, in the form of the Hatem affidavit and supporting documents, to demonstrate that it has been a Texas corporation since the merger on October 1, 1984. The complaint—which alleged that the plaintiff “is a corporation organized under the laws of Texas,” Complaint, 112—is consistent with this evidence. See Exxon Corp. v. Duval County Ranch Co., 406 F.Supp. 1367, 1369 (S.D.Tex.1975) (when two or more corporations merge, the citizenship of the surviving corporation is controlling for diversity purposes).

Although the action appears to have been filed under the wrong corporate name, that mistake is understandable under the circumstances. It is clear that the intent of the merging companies was to name the new corporation “American Buildings Company,” even though they were compelled to adopt another name (Metallic-Braden) between October 9, 1984 and March 17, 1985. In any event, the plaintiff ordinarily would be given an opportunity to amend its complaint to name the correct plaintiff in interest. See Hyatt Chalet Motels, Inc. v. Salem Bldg. & Constr. Trades Council, 298 F.Supp. 699 (D.Ore.1968) (error in bringing suit by a corporation in its former name, although it had reorganized under a new name before the action was filed, went to a matter of form only and might be corrected by an amendment under Fed.R.Civ.P. 17(a)).

In response to the evidence presented by American, the defendants argue simply that the named plaintiff is “American Buildings Company” and that “[o]n the face of the present record American Buildings Company is a Delaware corporation.” However, the defendants have offered no counter-affidavits or any other evidence to dispute American’s contention that American Buildings Company—Delaware ceased to exist on October 1, 1984 when it merged with Metallic-Braden Building Company. See Hoefferle Truck Sales, Inc. v. Divco-Wayne Corp., 523 F.2d 543, 548 (7th Cir. 1975) (“the proposition that separate corporations lose their separate identity after merger is too evident for much discussion”).

The defendants also point to Section 1.3 of the merger agreement, which states that the merger “shall become effective at 11:59 o’clock p.m., Delaware time, on the date when the last of [four specified] actions shall have been completed.” Among the conditions required by that provision are the approval of the merger agreement by the stockholders of each merging corporation and the filing of the articles of merger with the appropriate state officials. Hatem Affidavit Exhibit 1. Relying on this section of the merger agreement, the defendants make the following argument: (1) the merger could not become effective until the specified conditions were satisfied; (2) the record does not demonstrate that each of the conditions was satisfied or that the merger complied with the corporate laws of the respective states; and (3) absent such a showing, the court should presume that American Buildings Company—Delaware continued in existence as a separate Delaware corporation after October 1, 1984.

This argument is flawed for two reasons. First, American has submitted uncontroverted evidence that the specified conditions of Section 1.3 were indeed satisfied on or before October 1, 1984. Second, it is the defendants who bear the burden of showing that this court can properly exercise jurisdiction. The defendants cannot meet that burden simply by suggesting, without factual support, that the merger may not have become effective on October 1, 1984, particularly in the face of a sworn affidavit to the contrary.

For these reasons, this court rules that it lacks subject matter jurisdiction and that the case was improvidently removed. The case is hereby remanded to the Superior Court of the Commonwealth of Massachusetts for Suffolk County. No costs are awarded.

      . The Hatem affidavit states that the superior court action was commenced on December 14, 1984, but the papers on file with this court indicate that the suit was filed on December 20, 1984, with the summons and complaint served by mail on December 21, 1984. For purposes of the pending motion, this discrepancy is immaterial.