author: RAMBO, District Judge.

text:
    CITY OF HARRISBURG, Plaintiff, v. BRADFORD TRUST COMPANY, Defendant.
    Civ. A. No. 85-0429.
    United States District Court, M.D. Pennsylvania.
    Nov. 5, 1985.

      R. Stephen Shibla, Rhoads & Sinon, Nathan H. Waters, Jr., City Sol., Harrisburg, Pa., for plaintiff.
    Lewis Kunkel, Pepper, Hamilton & Scheetz, Harrisburg, Pa., for defendant.
   MEMORANDUM

RAMBO, District Judge.

Background and Procedural History

This case is brought by the City of Harrisburg (hereinafter referred to as Harrisburg or the City) against Bradford Trust Company (Bradford), a New York financial and banking institution. The Complaint, filed on April 1, 1985, alleges violation of the federal securities laws, Section 10(b) of the Securities and Exchange Act, 15 U.S.C. § 783(b), and Rule 10(b)-5, 17 C.F.R. 240.-10b-5, as well as common-law fraud and misrepresentation.

For purposes of the present motion to dismiss, the allegations of the complaint will be taken as true. The substance of Harrisburg’s claim is that it suffered serious financial losses due to Bradford’s fraudulent acts in connection with certain “repurchase transactions,” also known as “repo agreements.” Under these agreements, Harrisburg purchased securities from one E.S.M. Government Securities, Inc. (E.S.M.), a Florida corporation. E.S.M. agreed to repurchase the securities on a certain date and at a certain price, which would yield a profit to the City on the funds invested. E.S.M. allegedly represented to the City that these securities were being deposited with Bradford in a segregated account for the City. Bradford also allegedly represented to the City “that the government securities being purchased by the City from E.S.M. were in the custody of Bradford and were being held by Bradford in a segregated account for the City of Harrisburg.” Complaint, ¶ 10. Harrisburg claims that these representations were false. Further, the City alleges that Bradford failed to disclose “that it was or would become a substantial creditor of E.S.M. thereby creating a conflict of interest with its duties as a fiduciary,” and also “failed to disclose that it would sell collateral for its own benefit and to the detriment of the City of Harrisburg, which it did.” Complaint, ¶ 11.

As a result of Bradford’s allegedly fraudulent and tortious conduct, Harrisburg claims that it suffered losses in excess of three million, six hundred thousand dollars, for which it seeks to be compensated. The City further requests punitive and exemplary damages as well as incidental and consequential damages, interest, and costs.

Presently before the court is the defendants’ Motion to Dismiss filed on May 22, 1985. By order dated July 25, 1985, this court ruled that the motion would be converted to a Motion for Summary Judgment in view of the factual material which had been submitted by the parties. Upon defendant’s request for clarification, submitted via letter dated July 29, the court subsequently modified that order and ruled that only the 12(b)(2) and 12(b)(3) prongs of the motion were to be converted; the 12(b)(6) and 9(b) motions, raising no factual issues, would remain as such.

Thus, the instant motion consists of three parts:

(1) a motion to dismiss for lack of in personam jurisdiction over the defendant, Fed.R.Civ.P. 12(b)(2), and for improper venue, Fed.R.Civ.P. 12(b)(3), which have been converted into a motion for summary judgment on those grounds under Federal Rule of Civil Procedure 56;

(2) a motion to dismiss for failure to state a claim upon which relief can be granted, Fed.R.Civ.P. 12(b)(6); and

(3) a motion to dismiss for failure to plead the allegations of fraud with sufficient particularity, as required by Federal Rule of Civil Procedure 9(b).

The court will proceed to address the merits of these motions seriatim.

1. Personal Jurisdiction and Venue

The defendant has moved to dismiss, inter alia, on the ground that this court lacks in personam jurisdiction, and that venue is improper in this district. Fed.R.Civ.P. 12(b)(2) and (3). Bradford contends that the court lacks jurisdiction both under the federal securities laws and under the Pennsylvania statutes which provide the basis for. federal diversity jurisdiction. Because this court finds that it has jurisdiction pursuant to the federal statute, we need not address the state law argument.

Section 27 of the Securities and Exchange Act of 1934 provides in pertinent part that

[a]ny suit or action to enforce any liability or duty created by this title or rules and regulations thereunder ... may be brought in any ... district ... wherein any act or transaction constituting the violation occurred ... or in the district where the defendant is found or is an inhabitant or transacts business, and process in such eases may be served in any other district of which the defendant is an inhabitant or wherever the defendant may be found.

15 U.S.C.S. § 78aa (Lawyers Edition 1983). It is well settled that this authorization of nationwide service of process is constitutionally valid.

Congress has the power to provide for the reach of service of process to the outer limits of the reach of its legislative power which, of course, is anywhere in the United States or its territories____ If suit under the Federal securities anti-fraud acts and rules thereunder is brought in a federal court, (the plaintiff) has the privilege of nationwide service of process.

Kramer v. Scientific Control Corp., 365 F.Supp. 780, 787 (E.D.Pa.1973) (citations omitted). See also, e.g., Fitzsimmons v. Barton, 589 F.2d 330 (7th Cir.1979); Mariash v. Morrill, 496 F.2d 1138 (2d Cir.1974) (“It is simply too late in the day to argue that Section 27 does not authorize nationwide service of process on any individual named in the complaint, provided, of course, the complaint states a claim under the 1934 Act”); Oxford First Corp. v. PNC Liquidating Corp., 372 F.Supp. 191 (E.D. Pa.1974).

Thus, if the defendant is served in the United States, the only objection to in personam jurisdiction that may be raised is “that the actual method of service employed was not reasonably calculated to inform the defendant of the pendency of the proceedings.” Lehman Brothers Kuhn Loeb, Inc. v. Lawrence, [1981-1982 Transfer Binder] Fed.Sec.L.Rep. (CCH) 1198, 314 (S.D.N.Y.1981). Bradford has raised no such objection. Therefore, the focus of the motion to dismiss must be considered to be Bradford’s objections to placing venue in the Middle District of Pennsylvania.

As cited above, Section 27 of the 1934 Act provides that venue is proper in a judicial district in which “any act or transaction constituting the violation occurred.” 15 U.S.C.A. § 78aa. Defendant contends that its alleged misrepresentation and omissions did not “occur” in Pennsylvania, because its sole communication with the City consisted of two telephone calls, initiated by the plaintiff, to which Bradford merely responded. Such response was not sufficiently volitional, defendant argues, to constitute an “act or transaction” within the meaning of Section 27.

A party will be deemed to have effected an “act or transaction” within the meaning of the statute if there has been “any use of instrumentalities of the mails or other interstate facilities made within the forum district constituting an important step in ... [the] consummation” of the allegedly fraudulent scheme. State Teachers Retirement Board v. Fluor Corp., 500 F.Supp. 278, 289-90 (S.D.N.Y.1980) aff'd in part, rev’d in part on other grounds, 654 F.2d 843 (2d Cir.1981) (citations omitted) (emphasis supplied). See also, Sarratt v. Walker, 405 F.Supp. 132, 133-4 (D.S.C. 1975), citing, inter alia, Hooper v. Mountain States Securities Corp., 282 F.2d 195, 204-05 (5th Cir.1960), cert. denied, 365 U.S. 814, 81 S.Ct. 695, 5 L.Ed.2d 693 (1961). The venue provision “is intended to require some actual contact with the judicial district.” Fluor, 500 F.Supp. at 290. This court must disagree with Bradford’s underlying argument that as a matter of law the receipt of telephone calls, as opposed to the initiation of calls, does not qualify as “contact” with the forum and therefore is an improper basis for the establishment of venue. Several cases have held that venue “lies in both the district where the fraudulent communication was transmitted and the district where it was received." Black & Co. v. Nova-Tech, Inc., 333 F.Supp. 468, 473 (D.Ore.1971) (citations omitted) (emphasis added); Schneider v. H.A. Sears, 265 F.Supp. 257, 262 (S.D.N.Y.1967). In Wassel v. Eglowsky, 399 F.Supp. 1330 (D.Md. 1975), aff'd, 542 F.2d 1235 (4th Cir.1976), for example, venue was properly laid in the plaintiff’s forum where the plaintiff contacted the defendants by telephone and left a message with the defendants' answering service. The defendants returned the call several days later. 399 F.Supp. at 1342. Parenthetically, it may be noted that in Wassel the plaintiff made his call in response to an advertisement placed by the defendants in the Wall Street Journal. There, the placing of such an advertisement constituted a volitional use of the forum in that the defendant could reasonably expect telephone inquiries from out of state. Here, Bradford’s allegedly engaging in transactions in which it held the funds of out-of-state investors may similarly be said to establish that Bradford could reasonably expect inquiries from investors in other states.

Thus, jurisdiction and venue are proper, under the Securities and Exchange Act, in the Middle District of Pennsylvania. This court further holds that it has pendent jurisdiction of the state law claim. Klein v. Tabatchnick, 610 F.2d 1043, 1051 (2d Cir.1979); International Controls Corp. v. Vesco, 593 F.2d 166 at 175, n. 5 (2d Cir. 1979), cert. denied, 442 U.S. 941, 99 S.Ct. 2884, 61 L.Ed.2d 311 (1979). Therefore, the court need not reach the question whether it may exercise diversity jurisdiction.

2. The Motion to Dismiss for Failure to State a Claim

Defendant next moves to dismiss the Complaint for failure to state a claim upon which relief can be granted, pursuant to Federal Rule of Civil Procedure 12(b)(6). This motion may be granted only if, taking all of the allegations in the Complaint as true, Cooper v. Pate, 378 U.S. 546, 84 S.Ct. 1733, 12 L.Ed.2d 1030 (1964), “it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief.” Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 102, 2 L.Ed.2d 80 (1957); Bogosian v. Gulf Oil Corp., 561 F.2d 434, 444 (3d Cir.1977), cert. denied, 434 U.S. 1086, 98 S.Ct. 1280, 55 L.Ed.2d 791 (1978) (allegations of complaint must be viewed “liberally giving plaintiffs the benefit of all inferences which may fairly be drawn therefrom”).

The Complaint in this case alleges violations of Section 10(b) and of Rule 10b-5, which is the basic antifraud provision promulgated under that statute. In order to state a claim under these provisions, the plaintiff must allege the following elements: that the defendant effected some misrepresentation or fraud; that there was a purchase or sale of a security; and that the misrepresentation or fraud occurred “in connection with” such purchase or sale. Ketchum v. Green, 557 F.2d 1022, 1025 (3d Cir.1977), cert. denied, 434 U.S. 940, 98 S.Ct. 431, 54 L.Ed.2d 300 (1977). In addition, there is a requirement of scienter on the part of the defendant who made such misrepresentation. Angelastro v. Prudential-Bache Securities, Inc., 764 F.2d 939 (3d Cir.1985).

Turning to the case at bar, there is no dispute that the Harrisburg Complaint alleges a misrepresentation or fraud on the part of Bradford. Therefore, the first element is met. Bradford does raise some question as to the second element, noting in a footnote to its memorandum that “there is a serious question as to whether Harrisburg satisfies the ‘purchaser’ requirement under Rule 10b-5.” Defendant’s Memorandum at 11. In support of this contention, Bradford cites SEC v. Drysdale Securities Corp., 606 F.Supp. 295 (S.D.N.Y.1985). There, however, the court refrained from deciding whether a repo transaction should be considered to be a “purchase or sale” within the meaning of the Rule, since it held that the plaintiff clearly had not met the “in connection with” requirement. 606 F.Supp. at 299. To this court’s knowledge, the only case which has decided this issue is SEC v. Gomez, [current Transfer Binder] Fed.Sec. L.Rep. (CCH) ¶ 92,013 (S.D.Fla.1985). In that case, which also involved repurchase agreements entered into. by E.S.M., the court held that the repos were securities within the meaning of the antifraud provisions. Although the Gomez court limited its decision to the motion before it, which was a motion to quash subpoenas, this court sees no reason not to follow that holding. The repo agreements will therefore be considered to be “securities” governed by the provisions of the Securities and Exchange Act, and thus the “purchase or sale” requirement is met.

The third element of the 10b-5 cause of action is the subject of vigorous contention in this case. Bradford strenuously asserts that Harrisburg has not met its burden of demonstrating that the alleged misrepresentations occurred “in connection with” the purchase or sale of securities. For the reasons set forth below, however, this court disagrees.

The line of cases construing the “in connection with” requirement begins with the Supreme Court’s interpretation in Superintendent of Insurance of New York v. Banker’s Life and Casualty Co., 404 U.S. 6, 92 S.Ct. 165, 30 L.Ed.2d 128 (1971). In that case, Justice Douglas, writing for a unanimous court, construed the requirement broadly:

Section 10(b) must read flexibly, not technically and restrictively. Since there was a “sale” of a security and since fraud was used “in connection with” it, there is redress under 10(b)____ The crux of the present case is that (the plaintiff) suffered an injury as a result of deceptive practices touching its sale of securities as an investor.

404 U.S. at 12, 92 S.Ct. at 169. The Court of Appeals for the Third Circuit has somewhat narrowed this broad “touching” standard, requiring that there be some “causal connection between the alleged fraud and the purchase or sale of stock.” Tully v. Mott Supermarkets, Inc., 540 F.2d 187, 194 (3d Cir.1976). In Ketchum v. Green, 557 F.2d 1022, the court discussed this causation requirement in a slightly different manner. Noting that the Bankers Life standard should be “fleshed out by a cautious case-by-case approach,” the court stated that “[t]he Supreme Court’s opinion in Bankers Life does not reveal how close a nexus must exist between a misrepresentation and a transaction.” 557 F.2d at 1027, 1028. The required nexus was not achieved where “[ijnstead of being one step away from a securities deal, the supposed deception ... is somewhat removed from the ultimate transaction.” Id. at 1028. The court suggested that the “causal connection” required by Tully may not be “precisely the same as” the “connection” element of 10(b)(5), since the fraudulent transaction complained of in Bankers Life “only made possible the accomplishment of the fraud as opposed to having caused it.” Id. at 1029 (emphasis in original). However, the two concepts are similar “because both the ‘connection’ and ‘causation’ principles speak to the degree of proximity required between a misrepresentation and a securities transaction.” Id. Thus the concepts of “connection” and “causation” are to be deemed “to be closely intertwined.” Id. A similar test to that set forth in Ketchum was again applied in Cramer v. General Telephone & Electronics Corp., 582 F.2d 259, 271 (3d Cir.1978), cert. denied, 439 U.S. 1129, 99 S.Ct. 1048, 59 L.Ed.2d 90 (1979), in which the fraud was required to be an “essential part” of, and “inextricably linked” to, the transaction.

The Third Circuit’s most recent discussion of the “in connection with” requirement occurred in Angelastro v. Prudential-Bache Securities, Inc., 764 F.2d 939 (3d Cir.1985). There, the court stated that “[t]he purpose underlying section 10(b) and the rules adopted under it is to insure that investors obtain disclosure of material facts in connection with their investment decisions regarding the purchase or sale of securities.” Id. at 942. The Rule prohibits misrepresentation not only with regard to the investment value of particular securities, but also concerning the “course of dealing” in the trading process more generally. Id. at 943. The Angelastro court discussed some of the many contexts in which the “in connection with” requirement has been found to have been met, thus bringing various types of fraudulent activity within the scope of the Rule. E.g., A.T. Brod & Co. v. Perlow, 375 F.2d 393, 397 (2d Cir.1967) (defendant placed orders for securities with fraudulent intent of paying for them only if their market value had increased); Costello v. Oppenheimer & Co., 711 F.2d 1361, 1367-68 (7th Cir.1983) (churning; that is, securities broker engages in excessive number of transactions solely for the purpose of increasing commissions); In re Catanella and E.F. Hutton and Co., 583 F.Supp. 1388, 1405 (E.D. Penn.1984) (churning); Arrington v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 651 F.2d 615, 619 (9th Cir.1981) (broker’s failure to explain risks of trading on margin).

Finding that the plaintiff had met the “in connection with” requirement by alleging that the defendant brokers had failed to disclose certain material facts regarding their customer’s margin accounts and that these misrepresentations induced plaintiff to purchase through the defendants, the Angelastro court reversed the district court’s dismissal of the complaint. In so doing, it emphasized that “the federal securities laws were designed ‘to achieve a high standard of business ethics ... in every facet of the securities industry ’ ”. Id. at 944 (citations omitted) (emphasis in original). While the “in connection with” requirement should not be construed “so broadly that virtually any type of misconduct related to a securities transaction even in the most tenuous or tangential way might be claimed to give rise to a federal securities law violation,” the potential overextension of the rule’s provisions which had been warned against in Banker’s Life pertained specifically to internal corporate mismanagement, id. at 945, which was not the case before it.

Applying the principles set out in Angelastro, this court finds that the Harrisburg Complaint satisfies the “in connection with” element of the City’s 10b-5 case. Harrisburg alleges that Bradford misrepresented or failed to disclose certain facts regarding the manner in which it was holding the securities for the City, and that the City relied upon this erroneous information in continuing to engage in the repo transactions with E.S.M. These allegations, if proven, would constitute fraud in connection with the purchase of securities.

We thus reject Bradford’s argument that the Chemical Bank v. Arthur Andersen & Co., 726 F.2d 930 (2d Cir.1984), cert. denied, — U.S. -, 105 S.Ct. 253, 83 L.Ed.2d 190 (1984) should govern this case. In Chemical Bank, the Court of Appeals for the Second Circuit adopted a somewhat more restrictive interpretation of the “in connection with” requirement, holding that that element had not been met where the plaintiff failed to demonstrate that the defendant had misrepresented the value of the securities in question. 726 F.2d at 943. Plaintiff had shown only that but for the defendant’s misrepresentation it would not have entered into the transaction in question; it had thus failed to show the required “loss causation.” Id. See also, SEC v. Drysdale Securities Corp., 606 F.Supp. 295 (S.D.N.Y.1985). Bradford contends that in this case, similarly, its alleged misrepresentations related not to the value of the securities but only to the question whether they were being kept in a segregated account, and that Harrisburg has thus alleged at most only “transaction causation”.

The Third Circuit’s opinion in Angelastro discussed the Chemical Bank holding and declined to follow it. While the court agreed that “too broad an interpretation of Section 10(b) is unwarranted,” 764 F.2d at 946, it nevertheless did not adopt the requirement that the alleged fraud must relate to the investment value of the securities in question, nor did it follow the more restrictive analysis of causation contained in the Chemical Bank opinion. Therefore, this court does not consider that Chemical Bank states the law in this circuit.

In a related argument regarding causation, Bradford contends that Harrisburg has failed to meet the “in connection with” requirement because the City’s loss resulted not from its decision to engage in the repo transactions, but rather from its failure to take possession of the securities underlying those transactions. In support of this argument, defendant cites Rich v. Touche Ross & Co., 415 F.Supp. 95 (S.D.N. Y.1976). In that case, the plaintiff sued the independent accountant of a brokerage house, claiming that the accountant had certified materially false and misleading financial statements regarding the broker’s financial condition, and that in reliance on these statements the plaintiff had made securities purchases through the broker. The broker then went bankrupt, and the securities in its possession were liquidated, resulting in a loss to the plaintiff. The court held that the “in connection with” requirement had not been met, because “when the plaintiffs ... allowed their shares to remain in possession of (the broker), they made a separate decision quite apart from the decision to purchase their shares.” 415 F.Supp. at 99. The resulting damage flowed not from the decision to purchase, but rather from the decision to allow the broker to act as bailee for the securities. Id.

This court declines to analogize the present case to that presented in Rich. There, the alleged misrepresentation was made by someone other than the one in custody of the shares. Here, Bradford’s alleged misrepresentations are said to have directly induced Harrisburg tp continue to engage in ongoing transactions which allowed Bradford to retain possession of the securities, in which Bradford itself allegedly had an interest. There is thus a closer connection between the alleged fraud and the purchase of securities. Cf. Braun v. Northern Ohio Bank, 480 F.Supp. 367 (N.D.Ohio 1977) (plaintiffs stated claim under securities laws by alleging that they were fraudulently induced to enter into merger transaction by misrepresentation of one of parties to merger).

Bradford sets forth two additional reasons why the Harrisburg Complaint fails to state a claim on which relief can be granted. First, defendant contends that the City has failed to allege the elements of fraud.

To make out a prima facie case of fraud, the plaintiff must prove affirmatively the element of justifiable reliance on the alleged misrepresentation. Marian Bank v. International Harvester Credit Corporation, 550 F.Supp. 456, 461-62 (E.D.Pa.1982), aff'd without opinion, 725 F.2d 669 (3d Cir.1983). See also, Sharp v. Coopers & Lybrand, 649 F.2d 175, 186 (3d Cir.1981), cert. denied, 455 U.S. 938, 102 S.Ct. 1427, 71 L.Ed.2d 648 (1982). Defendant asserts that here, as a matter of law, plaintiff could not reasonably have relied on Bradford’s claimed misrepresentations as to the manner in which the securities were allegedly being held for the City, because those misrepresentations occurred two years prior to the losses plaintiff incurred. The temporal remoteness, defendant argues, between the telephone conversations and the losses suffered renders any reliance on plaintiff’s part unreasonable as a matter of law.

This court finds that the question whether Harrisburg’s reliance on Bradford’s statements was reasonable may not be resolved at this stage. That question presents a factual issue not capable of being resolved on the pleadings. In the cases cited by defendant, the sequence of events was such that plaintiff’s reliance on defendant’s conduct was impossible, not merely unreasonable. For example, in Clinton Hudson & Sons v. Lehigh Valley Cooperative Farms, Inc., 73 F.R.D. 420, 425 (E.D. Pa.1977), aff'd without opinion, 586 F.2d 834 (3d Cir.1978), the allegedly fraudulent activity occurred five years after the plaintiff’s purchase. Similarly, in Rediker v. Geon Industries, Inc., 464 F.Supp. 73 (S.D. N.Y.1978), the “plaintiff’s purchase and sale of stock occurred outside the period during which the defendant’s allegedly illegal conduct occurred.” 464 F.Supp. at 79 (emphasis added). In the case sub judice, there is a sufficient temporal relationship between the alleged fraud and the harm suffered to raise at least the possibility that plaintiff relied reasonably on defendant’s statements. This possibility preeludes a dismissal of the Complaint at this juncture, as it raises an issue which must be resolved at a later stage. The court is unable to hold as a matter of law that a lapse of two years, in the context of this series of repo transactions, rendered the City’s reliance on Bradford’s statements unreasonable.

Bradford’s final argument in favor of dismissal of the Complaint is that its alleged failure to inform Harrisburg that it would become a substantial creditor of E. S.M. does not constitute an actionable omission under Rule 10b-5 or the principles of common-law fraud.

In general, an omission is actionable only when there is an independent duty to disclose the omitted information. Staffin v. Greenberg, 672 F.2d 1196, 1202 (3d Cir.1982). “Mere bystanders, even if aware of the fraud, cannot be held liable for inaction since they do not ... associate themselves with the venture or participate in it as something they wish to bring about.” IIT, An International Investment Trust v. Cornfeld, 619 F.2d 909, 927 (2d Cir.1980). Such an independent duty exists, for example, where the party who is alleged to be under an obligation to disclose stands in a fiduciary relationship to the party seeking disclosure. Chiarella v. United States, 445 U.S. 222, 229-30, 100 S.Ct. 1108, 1115-16, 63 L.Ed.2d 348 (1980); Federal Land Bank of Baltimore v. Fetner, 269 Pa.Super. 455, 410 A.2d 344 (1979), cert. denied, 446 U.S. 918, 100 S.Ct. 1853, 64 L.Ed.2d 273 (1980) (Pennsylvania common law requires the existence of a “confidential relationship” as prerequisite to liability for omissions).

Plaintiff asserts that Bradford was its fiduciary and therefore was under a duty to the City to disclose the omitted information. In order to demonstrate the existence of a fiduciary relationship, the plaintiff must show “a relationship involving trust and confidence, and ‘the proof must show confidence reposed by one side and domination and influence exercised by the other’ ”. Lehrer v. Crane Co., 448 F. Supp. 1127, 1131 (E.D.Pa.1978) (citations omitted). A fiduciary relationship “arises whenever a trust, continuous or temporary, is specially reposed in the skill or integrity of another, or the property, or pecuniary interest, in the whole or in a part ... is placed in the charge of another; it may exist in the absence of a specific or technical trust or agency.” Consolidated Oil and Gas, Inc. v. Ryan, 250 F.Supp. 600, 604 (W.D.Ark.1966), aff'd, 368 F.2d 177 (8th Cir.1966). However, it is not enough to show that the plaintiff reposed its trust in the defendant; the latter must also have accepted the fiduciary relationship. “[Mjerely reposing confidence in another may not, of itself, create the (fiduciary) relationship____ there must be such circumstances as indicate a just foundation for a belief that in giving advice ... one is acting not in his own behalf, but in the interests of the other party.” Consolidated Oil, 250 F.Supp. at 604.

An independent duty to speak may also arise in certain circumstances absent a fiduciary relationship. In determining whether such a duty to speak exists, the following factors should be considered:

the relationship between the plaintiff and the defendant, the parties’ relative access to the information to be disclosed, the benefit derived by the defendant from the purchase or sale, defendant’s awareness of plaintiff’s reliance on defendant in making its investment decisions, and defendant’s role in initiating the purchase or sale.

First Virginia Bankshares v. Benson, 559 F.2d 1307, 1314 (5th Cir.1977), reh’g denied, 564 F.2d 416 (5th Cir.1977), cert. denied, 435 U.S. 952, 98 S.Ct. 1580, 55 L.Ed.2d 802 (1978) (citations omitted). “The plaintiff must show that it reasonably relied on the information (or on the notion that it had received all mandated disclosure from the defendant), and exercise due diligence in examining the information otherwise available to it.” Id. (citations omitted.)

Finally, even without a fiduciary relationship or another independent duty to speak, an omission may be actionable “where the defendant has revealed some relevant, material information even though he had no duty (i.e. a defendant may not deal in half-truths).” First Virginia Bankshares, 559 F.2d at 1314.

Applying these principles of law to the present case, this court finds that the Harrisburg Complaint does not provide a sufficient basis for a finding that Bradford acted as the City’s fiduciary. Although the City asserts that such a relationship existed, and the City may well have reposed its trust in Bradford, the Complaint does not establish that Bradford accepted an obligation to act as a fiduciary toward Harrisburg. Furthermore, in general, a clearing agent is “generally under no fiduciary duty to the owners of the securities that pass through its hands.” Edwards &. Hanly v. Wells Fargo Securities Clearance Corp., 602 F.2d 478, 484 (2d Cir.,1979), cert. denied, 444 U.S. 1045, 100 S.Ct. 734, 62 L.Ed.2d 731 (1980). Harrisburg has not alleged that Bradford played any greater role in these transactions than that of a clearing agent.

Similarly, this court cannot find that in the absence of a fiduciary relationship Bradford had a duty to speak arising from any other source. Applying the factors set forth in First Virginia Bank-shares, 559 F.2d 1307, it is evident that no such duty arises. Preliminarily, Harrisburg has not alleged any facts which indicate that the relationship between the City and Bradford was one which of itself would give rise to a duty to disclose. See Edwards' & Hanly, 602 F.2d 478. Furthermore, although Bradford had superior access to the information sought, the City has made no showing that it attempted to obtain this information from any other source, including E.S.M., which would presumably have been able to supply it. Bradford benefitted only indirectly from Harrisburg’s transactions with E.S.M.; it apparently played no role, or at least the City has alleged none, in initiating the transactions between the City and E.S.M.; and Harrisburg has adduced no facts tending to show that the defendant was aware of the City’s reliance upon it in making its investment decisions.

Finally, liability may not be imposed on the theory that Bradford disclosed some portion of the information concerning its relationship with E.S.M. but withheld the rest. The City has alleged only that it made inquiry concerning the status of its securities; it did not ask about the relationship between Bradford and E.S.M.

Thus, liability may not be imposed upon Bradford for its alleged omissions on the basis of the facts pleaded in the Complaint. Those portions of the Complaint which refer to such omissions, therefore, will be dismissed, but plaintiff will be given leave to replead with more specificity the facts concerning Bradford’s role as fiduciary.

3. The Motion to Dismiss for Lack of Particularity

Bradford’s final contention is that the Complaint must be dismissed because it fails to plead the allegations of fraud with sufficient particularity as required by Federal Rule of Civil Procedure 9(b).

It has been held that Rule 9(b) “creates an exception to the general requirement of Rule 8(a) which states that a pleader need only present a short and plain statement of his claim showing that he is entitled to relief”. Arpet, Ltd. v. Homans, 390 F.Supp, 908, 912 (W.D.Pa.1975). However, the more common view appears to be that Rule 9(b) “should not be used to create an insurmountable obstacle to the bringing of Section 10(b) actions and it must be read in conjunction with the general principle of notice pleading adopted by the Federal Rules.” Summers v. Lukash, 562 F.Supp. 737, 739 (E.D.Pa.1983); Thomas v. Tramiel, 105 F.R.D. 568 (E.D.Pa.1985); Cottman Transmission Systems, Inc. v. Dubinsky, 95 F.R.D. 351, 352 (E.D.Pa.1982). “Thus, the plaintiff should only be required to plead with sufficient particularity to give the defendants a fair opportunity to frame an answer and prepare a defense, and to insure that plaintiff has a sufficient factual basis for bringing the action.” Summers, 562 F.Supp. at 739-40. In any case, even where the plaintiff has not met the relatively broad requirements of notice pleading, the proper remedy is to allow the filing of a more definite statement rather than to grant conclusive dismissal of the complaint. See Arpet, 390 F.Supp. at 912. Such a remedy should be granted “only if the pleading is so vague or ambiguous that (the opposing party) cannot frame a responsive pleading.” Cottman, 95 F.R.D. at 352.

To satisfy the relatively broad requirements of notice pleading, the Complaint should specify precisely what statements were made in which oral representations; the time and place of each such statement and the person responsible for it; the content of each statement and the manner in which it misled the plaintiff; and what the defendant obtained as a consequence of the fraud. Dickens v. Chemical Bank, 573 F.Supp. 1129, 1133 (S.D.N.Y. 1983) (citations omitted). Accord, Goodman v. Moyer, 523 F.Supp. 33, 35 (E.D.Pa. 1981) (the complaint need only set forth “the nature of the alleged fraud, the alleged perpetrators, and the time in which the activities took place”); Clinton Hudson & Sons v. Lehigh Valley Cooperative Farms, Inc., 73 F.R.D. 420, 424 (E.D.Pa. 1977) aff'd, 586 F.2d 834 (3d Cir.1978) (plaintiff must “identify what ... statements he relied on, in what respect they were false, misleading or inaccurate, and the relative time frame involved”). The element of scienter may be averred generally, but some factual basis for this allegation must be demonstrated. Summers, 562 F.Supp. at 740.

The Harrisburg Complaint meets the above requirements. It puts Bradford on notice that the subject of the action is the defendant’s alleged response to the City’s telephone inquiries. It sets forth the months in which these statements were allegedly made, states that they were allegedly made by Bradford’s employees or agents, refers to the content of the statements and that the City relied on them in continuing to deal with E.S.M. and therefore, indirectly, with Bradford. Some factual support for the allegations of scienter is contained in paragraph 14, which states that “[b]y virtue of the nature and extent of its dealing with E.S.M. and its related or affiliated entities, Bradford knew or should have known under the circumstances, or was recklessly unaware that municipalities such as the City of Harrisburg believed and were relying upon” its alleged misrepresentations. While the Complaint also contains several paragraphs which merely track the statutory language, and which allege scienter in a conclusory manner, the pleading as a whole contains enough information stated with the required specificity to allow it to survive Bradford’s Motion to Dismiss.

Conclusion

In sum, this court holds that it has jurisdiction to decide this case under the federal securities laws. Further, the Complaint states a claim under those statutes, and is sufficiently pleaded, with the exception of the allegations concerning liability for defendant’s claimed omissions. The City will be granted leave to replead those allegations with more specificity. Otherwise, Bradford’s Motion to Dismiss will be denied.

      . The investments which are the subject of this action were made during the years 1983, 1984 and 1985.

      . The parties have submitted extensive factual documentation regarding the nature and extent of Bradford's contacts with Pennsylvania. This factual material was the basis for the conversion of this motion to a Rule 56 motion. The question of contacts with the state forum, however, is relevant only to the determination of diversity jurisdiction; it is not addressed in this Memorandum because this court holds that it has jurisdiction under the securities laws. The extent of the defendant’s contacts with the forum state are not relevant to the determination of jurisdiction under the federal statutes because those statutes authorize nationwide service of process. Mariash v. Morrill, 496 F.2d 1138, 1142-43 (2d Cir.1974).

      . This language disposes of defendant’s argument that the use of the telephone, rather than the mail, is a basis for distinguishing this case from those which hold that venue is proper where there has been use of interstate facilities. As the Fluor court pointed out, use of the mail "or other interstate facilities” constitutes a proper basis for laying venue in a particular forum.

      . Defendant relies on Pratt v. First California Co., Inc., 517 F.2d 11 (10th Cir.1975) for the proposition that contact initiated by the plaintiff from another forum is insufficient to lay venue in the plaintiff’s forum. Such reliance is misplaced. In that case the Utah plaintiff attempted to establish venue in Utah not on the basis of statements made via interstate communications facilities, but rather on statements made by the California defendants in face-to-face meetings with the plaintiff in California. There was thus a more tenuous connection with Utah than in the present case, in which there was telephone communication with one party in the forum state, Pennsylvania.

      . The doctrine of pendent jurisdiction provides that a federal court may hear state law claims where it has valid jurisdiction over a federal claim, the two claims have a "common nucleus of operative fact” and would "ordinarily” be tried together. United Mine Workers v. Gibbs, 383 U.S. 715, 86 S.Ct. 1130, 16 L.Ed.2d 218 (1966).

      . Section 10(b) of the Securities and Exchange Act provides that:
      It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce or the mails____
      (b) To use or employ, in connection with the purchase or sale of any security registered on a national exchange or any security not so registered, any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors.
      15 U.S.C. § 78j(b) (1982).

      . Rule 10b-5 provides that:
      It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails, or of any facility of any national securities exchange,
      (a) to employ any device, scheme, or artifice to defraud,
      (b) to make any untrue statement of material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or
      (c) to engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security.
      17 C.F.R. § 240.1Ob-5 (1985).

      . This rule provides that "[i]n all averments of fraud ... the circumstances constituting fraud ... shall be stated with particularity." F.R. Civ.P. 9(b).

      . Rule 8(a), Federal Rules of Civil Procedure, provides in pertinent part as follows:
      A pleading which sets forth a claim for relief ... shall contain (1) a short and plain statement of the grounds upon which the court’s jurisdiction depends ... (2) a short and plain statement of the claim showing that the pleader is entitled to relief, and (3) a demand for judgment for the relief to which he deems himself entitled.


source: Caselaw Access Project

author: WILLIAM C. CONNER, District Judge:

license: Public Domain

text:
    Rocco TESTA, Kenneth Mehrtens, Roger Agli, Mike Babcock, Andre Bell, John Boone, Mario Graffeo, Beverly Head, Frank LaGonigro, John Van Orden, and Ken Schaumberg, Plaintiffs, v. Patrick GALLAGHER, individually and as Business Manager of Local 1, Utility Workers’ Union of America; Robert Gallione, individually and as Business Agent of Local 1, Utility Workers’ Union of America; Charles Boyle, individually and as Business Agent of Local 1, Utility Workers’ Union of America; and Local 1, Utility Workers’ Union of America, Defendants.
    No. 85 Civ. 3918 (WCC).
    United States District Court, S.D. New York.
    Nov. 5, 1985.
    Clifton & Schwartz, New York City (Arthur Z. Schwartz, of counsel), for plaintiffs.
    Bochner & Berg, New York City (Stuart Bochner, of counsel), for defendants.
   OPINION AND ORDER

WILLIAM C. CONNER, District Judge:

Plaintiffs are members of Local 1 of the Utility Workers’ Union of America (“Local 1” or “the union”). They commenced this action against the union, the union’s business manager, and two of the union’s business agents, alleging that defendants violated section 301(a) of the Labor Management Relations Act (“LMRA”), 29 U.S.C. § 185(a) (1982), and section 101(a)(1) and (a)(2) of the Labor-Management Reporting and Disclosure Act (“LMRDA”), 29 U.S.C. § 411(a)(1), (a)(2) (1982) (“Title I”). In essence, the complaint alleges that defendants violated Local l’s By-Laws by failing to conduct elections for shop stewards when petitioned to do so by union members. Plaintiffs allege that defendants refused to conduct these elections as part of a scheme to prevent some of them from running for those positions and to suppress criticism of the incumbent union leadership. Thus, plaintiffs allege that defendants denied them their rights to vote and speak freely as guaranteed by Title I of the LMRDA.

This matter is now before the Court on defendants’ motion for summary judgment under Rule 56, Fed.R.Civ.P. Defendants contend that plaintiffs’ claims under Title I of the LMRDA are barred by the applicable statute of limitations, which, relying on DelCostello v. International Bhd. of Teamsters, 462 U.S. 151, 103 S.Ct. 2281, 76 L.Ed.2d 476 (1983), they argue is the six-month limitations period of section 10(b) of the National Labor Relations Act (“NLRA”), 29 U.S.C. § 160(b) (1982). Plaintiffs, on the other hand, contend that DelCostello is not applicable here and argue that the relevant limitations period is the three-year New York statute of limitations used in federal civil rights actions. For the reasons stated below, I conclude that the three-year statute of limitations provides the appropriate limitation period in this case, and therefore deny defendants’ motion for summary judgment.

Discussion

Like many other federal civil statutes, Title I of the LMRDA does not contain a statute of limitations. In such circumstances, federal courts usually apply or “borrow” a statute of limitations from an analogous source. As just noted, defendants rely on DelCostello v. International Bhd. of Teamsters, 462 U.S. 151, 103 S.Ct. 2281, 76 L.Ed.2d 476 (1983), and argue that the six-month limitations period of section 10(b) of the NLRA should be applied here.

The issue in DelCostello was what limitations period to apply to a “hybrid” section 301/duty of fair representation suit brought by an employee against an employer under section 301 of the LMRA for breach of the collective bargaining agreement and against a union for breach of its duty of fair representation. The Court explained that where a federal statute does not contain a limitations period, federal courts ordinarily turn to analogous state law actions to find an appropriate limitations period. Id. at 158-60, 103 S.Ct. at 2287-89. The Court stated, however, that the traditional approach was inappropriate for hybrid section 301/fair representation cases because no precise state law analogues exist. Id. at 163-69, 103 S.Ct. at 2289-93. Accordingly, the Court turned to federal law to find an appropriate limitations period. Id. at 169-71, 103 S.Ct. at 2292-94.

Guided by a number of concerns, the Court adopted the six-month period for filing unfair labor charges with the National Labor Relations Board contained in section 10(b) of the NLRA. The Court first noted that section 10(b)’s six-month period was appropriate because section 301/fair representation claims often involve conduct that amounts to an unfair labor practice. Id. at 170, 103 S.Ct. at 2293. Second, and more important, the six-month limitations period in section 10(b) took account of, in a way state law could not, the national interests in the maintenance of industrial peace, the rapid resolution of labor disputes, and the need for national uniformity in the regulation of labor relations. Id. at 171, 103 S.Ct. at 2294.

Defendants in this action contend that for the same reasons, the six-month limitations period of section 10(b) of the NLRA should apply to plaintiffs’ claims under Title I of the LMRDA. There is support for defendants’ argument in authorities from other circuits, see Vallone v. Local Union No. 705, Int’l Bhd. of Teamsters, 755 F.2d 520 (7th Cir.1985); Local Union 1397, United Steelworkers of Am., 748 F.2d 180 (3d Cir.1984); Erkins v. United Steelworkers of Am., 723 F.2d 837 (11th Cir.1984), cert. denied, — U.S. -, 104 S.Ct. 3517, 82 L.Ed.2d 825 (1984), and in decisions of judges of the Southern and Eastern Districts of New York, see McConnell v. Chauffeurs, Teamsters & Helpers Local 445, 606 F.Supp. 460 (S.D.N.Y.1985); Turco v. Local Lodge 5, Int’l Bhd. of Boilermakers, 592 F.Supp. 1293 (E.D.N.Y.1984). However, there is also support in the decisions of district judges of this circuit for plaintiffs’ contention that the three-year New York statute of limitations applicable in federal civil rights actions should be applied in this case. See Rodonich v. House Wreckers Union Local 95 of Laborers’ Int’l Union of N. Am., No. 82 Civ. 5593 (JMC) (S.D.N.Y. Sept. 20, 1985); Gordon v. Winpisinger, 581 F.Supp. 234 (E.D. N.Y.1984); see also Bernard v. Delivery Drivers, 587 F.Supp. 524 (D.Colo.1984). Unfortunately, the Court of Appeals for the Second Circuit has not specifically addressed this question.

However, the court of appeals has recently stated twice its view that DelCostello should be narrowly construed. In O’Hare v. General Marine Transp., 740 F.2d 160 (2d Cir.1984), cert. denied, — U.S. -, 105 S.Ct. 1181, 84 L.Ed.2d 329 (1985), the court rejected an argument that the six-month limitations period adopted in DelCostello should be applied generally to suits under section 301 of the LMRA for breach of collective bargaining agreements. The court stated that “the DelCostello holding turns on the particular nature of the duty of fair representation action, and cannot reasonably be expanded to all section 301 claims that involve facts which might also have established an unfair labor practice charge.” Id. at 168 (emphasis added). Instead, the court applied the six-year New York statute of limitations for breach of contract.

Similarly, in Monarch Long Beach Corp. v. Soft Drink Workers, Local 812, Int’l Bhd. of Teamsters, 762 F.2d 228 (2d Cir. 1985), the court rejected a contention that the six-month limitations period of section 10(b) of the NLRA should be applied to an action under section 303 of the LMRA to recover damages for a union’s secondary boycott. The court explained that the “policy considerations that influenced the Del-Costello Court were rooted in the facilitation and protection of ‘those consensual processes that federal labor law is chiefly designed to promote — the formation of the collective agreement and the private settlement of disputes under it.’” Id. at 231 (quoting DelCostello, 462 U.S. at 162-63, 103 S.Ct. at 2289-90). The court of appeals stated that

Section 303 suits simply do not implicate the same concerns. Although it depends on the commission of an unfair labor practice by the union, specifically a secondary boycott, the section 303 cause of action involves parties who are otherwise completely unrelated. The dispute upon which liability is predicated is not a collective bargaining dispute; it does not arise within the context of a labor-management relationship. Labor peace will not be disrupted if section 303 suits are not rapidly resolved.

Id. The court went on to note that the Supreme Court itself had cautioned that its holding in DelCostello should not be taken as a departure from the prior practice of borrowing statutes of limitation from state law, and that it should not be interpreted “ ‘to suggest that federal courts should eschew use of state limitations periods anytime state law fails to provide a perfect analogy.’ ” Id. at 231 (quoting DelCostello, 462 U.S. at 171, 103 S.Ct. at 2294). Thus, the court of appeals concluded that the Supreme Court’s

own language supports our conclusion that DelCostello should be narrowly construed. The particularized circumstances of the hybrid section 301/duty of fair representation suit, which inevitably involve an immediate and direct impact on labor-management relations, demarcate the limits of DelCostello ’s reach.

Id. (emphasis added).

The court of appeals’ narrow construction of DelCostello persuades me that I should apply New York’s three-year statute of limitations here and not the six-month limitations period of section 10(b) of the NLRA. As the court of appeals explained in Monarch, the Supreme Court’s principal concern in DelCostello was the quick resolution of labor-management disputes in order to preserve labor peace. But, as with the secondary boycott claim under section 303 of the LMRA at issue in Monarch, plaintiffs’ claims under Title I of the LMRDA do not implicate that concern.

Unlike a hybrid section 301/fair representation action, plaintiffs’ claims here are not against the union and the employer, but only against the union. Thus, as in Monarch, “[t]he dispute upon which liability is predicated is not a collective bargaining dispute; it does not arise within the context of a labor-management relationship.” Monarch, 762 F.2d at 231. In other words, since this is an intra-union dispute with no “immediate and direct impact on labor-management relations,” it does not fall within the “particularized circumstances” that “demarcate DelCostello’s reach.” Id. Accordingly, as did the court of appeals in Monarch, I think it appropriate to turn to sources other than section 10(b) of the NLRA to find a more appropriate analogue from which to borrow a limitations period.

In this regard, I agree with plaintiffs that the closest analogues to claims under Title I of the LMRDA are actions for violation of federal civil rights laws. Title I delineates the rights of union members with respect to their union, and was intended as a bill of rights for union members similar to that of the Constitution. See United Steelworkers of Am. v. Sadlowski, 457 U.S. 102, 109-12, 102 S.Ct. 2339, 2344-46, 72 L.Ed.2d 707 (1982). Thus, a claim under Title I is closely analogous to, for example, an action under 42 U.S.C. § 1983 (1982) for violation of one’s constitutional rights. Since the two kinds of claims are so similar, I believe it appropriate to borrow the statute of limitations applicable to federal civil rights actions.

The Court of Appeals for the Second Circuit has traditionally held that federal civil rights actions in New York are limited by the three-year statute of limitations of New York Civil Practice Law and Rules (“CPLR”) § 214(2), N.Y.Civ.Prac.Law § 214(2) (McKinney Supp.1984-85). See Keating v. Carey, 706 F.2d 377, 382 (2d Cir.1983); Pauk v. Board of Trustees, 654 F.2d 856, 861-62 (2d Cir.1981), cert. denied, 455 U.S. 1000, 102 S.Ct. 1631, 71 L.Ed.2d 866 (1982). However, in Wilson v. Garcia, — U.S. -, 105 S.Ct. 1938, 85 L.Ed.2d 254 (1985), the Supreme Court held that state statutes of limitations for personal injury actions should apply to federal civil rights actions. In New York, that is the three-year statute of CPLR § 214(5), N.Y. Civ.Prac.Law § 214(5) (McKinney Supp. 1984-85). Accordingly, I apply the three-year period of § 214(5) to plaintiffs’ claims under Title I of the LMRDA.

There is no dispute that under a three-year statute of limitations, plaintiffs’ claims are not time-barred. Therefore, for the reasons stated above, defendants’ motion for summary judgment is denied, and the parties are directed to appear for a pretrial conference on Tuesday, November 12, 1985 at 9:45 A.M. in Room 1902.

SO ORDERED.


author: MacMAHON, District Judge.

text:
    ALICIA OCEAN TRANSPORT, S.A., BMF Ocean Transport, S.A., Emily Ocean Transport, S.A., Barbara Ocean Transport, S.A., Sonia Ocean Transport, Ltd., Menya Ocean Transport, Ltd., RMF Ocean Transport, S.A. and Benyomin Ocean Transport, Ltd., Plaintiffs, v. ROLLINS BURDICK HUNTER OF NEW YORK, INC., Defendant and Third-Party Plaintiff, v. EQUITY STEAMSHIP AGENCIES, LTD., Third-Party Defendant.
    No. 83 Civ. 9309 (LFM).
    United States District Court, S.D. New York.
    Nov. 5, 1985.

      Milgrim Thomajan Jacobs & Lee, P.C. by George Graff and Emily Tabin, New York City, for plaintiffs.
    Lambos, Flynn, Nyland & Giardino by Philip Y. Moyles, New York City, for defendant and third-party plaintiff.
    Dickerson, Reilly & Mullen by Robert W. Mullen, New York City, for third-party defendant.
   OPINION

MacMAHON, District Judge.

This is an action by eight former owners of eight seagoing vessels against a marine insurance broker, Rollins Burdick Hunter of New York, Inc. (“RBH”), to recover $242,822.57 in insurance proceeds. Plaintiffs allege that RBH received the proceeds and either wrongfully paid them to Equity Steamship Agencies, Ltd. (“Equity”), the former general managing agent of plaintiffs’ vessels, or wrongfully withholds them. RBH denies liability but seeks indemnification from Equity if plaintiffs recover. The action was tried before us, without a jury, on September 19 and 20, 1985.

JURISDICTION

The court has subject matter jurisdiction of this action pursuant to 28 U.S.C. §§ 1332 and 1333.

FACTS

After carefully considering the exhibits, hearing and observing the witnesses, and weighing all the evidence and arguments of counsel, we find the following facts:

Each of the eight plaintiff corporations purchased a seagoing vessel between September 1979 and February 1981 and, pursuant to eight essentially identical agreements (“Management Agreement”), retained Equity as managing agent. The Management Agreement gave Equity virtually complete authority to maintain, repair, operate and charter each vessel.

In accordance with its obligation to obtain “all necessary insurances,” Equity obtained hull insurance policies for all eight vessels through defendant RBH. Although both plaintiffs and Equity are named assureds, the loss payable clauses provide for payment either directly to the repairer or to the shipowner as reimbursement for its payment for repairs.

During the two years that Equity was managing agent for plaintiffs, several insurable losses were suffered by the vessels, including the constructive total loss of one vessel, OCEAN ENDEAVOR. ' Most of the proceeds from these claims were paid by RBH.

On December 10, 1981, however, all of plaintiffs, except Benyomin Ocean Transport, Ltd., whose vessel, OCEAN ENDEAVOR, suffered a constructive total loss a year earlier, sold their vessels to corporations controlled by Captain John Emmans, the president of Equity. After the sale, there still remained unpaid insurance claims for casualty losses suffered before the sale. RBH ultimately paid the proceeds on these remaining claims to Equity, but Equity refused to remit to plaintiffs, offsetting them as credits against unpaid trade debts owed to Equity by plaintiffs.

Plaintiffs now seek to recover $242,-822.57 in insurance proceeds from RBH, contending that plaintiffs were the sole loss payees under the applicable marine insurance policies and that Equity was not authorized to receive the payments on plaintiffs’ behalf.

DISCUSSION

The central issue here is one of agency. Did RBH’s payments to Equity constitute payments to plaintiffs?

Equity’s Authority as Plaintiffs’ Managing Agent

Equity agreed under the Management Agreement to act as general manager of plaintiffs’ vessels and was required to procure all necessary insurance on them. There is no question that Equity also had authority, as managing agent, to process insurance claims on behalf of the shipowners, including collection of insurance proceeds.

A managing agent’s authority to receive payment on behalf of his principal is implied by virtue of the comprehensive duties a managing agent undertakes in the execution of his principal’s business. The Restatement (Second) of Agency makes this clear:

“Unless otherwise agreed, authority to manage a business includes authority:
(e) to receive payment of sums due principal and to pay debts due from the principal arising out of the business enterprise.”

Indeed, plaintiffs themselves have recognized Equity’s authority to collect insurance proceeds on their behalf. Rob-Felzenberg (“Felzenberg”), president of all eight shipowning companies, admitted at trial that Equity had authority to process insurance claims and to receive the proceeds as they were honored.

Plaintiffs contend, however, that Equity’s agency terminated under Section 16 of the Management Agreement when a vessel was either declared a constructive total loss or was sold. Plaintiffs argue,' therefore, that Equity’s authority as managing agent terminated with respect to OCEAN ENDEAVOR when she was declared a constructive total loss on October 25, 1980, and, with respect to the remaining seven vessels, on December 10, 1981, when they were sold.

We do not accept such a limited reading of the Management Agreement. The “termination clause,” Section 16, provides in part:

“[T]his Agreement shall terminate in the event and as of the date the Vessel may be declared a total or constructive total loss by underwriters ... or the Vessel may be sold. Upon termination of this Agreement, the Manager shall perform all services necessary to terminate or otherwise settle all transactions arising with respect thereto during the period of this Agreement, and the Manager shall be entitled to reimbursement of all expenses of winding up the business of the Vessel.” (Emphasis supplied.)

The Management Agreement thus expressly provided for Equity’s continued services in “winding up” the unfinished business and affairs of the vessels and made provision for compensation for those services. Equity’s authority as managing agent therefore continued after the constructive total loss of OCEAN ENDEAVOR and the sale of the remaining vessels respecting transactions arising prior to those events. The continued processing of insurance claims and receipt of the proceeds clearly fell within Equity’s express contractual authority and obligation to wind up the business of the vessels.

Moreover, Equity informed plaintiffs that it intended to apply any insurance proceeds received for plaintiffs’ account against the outstanding trade debts plaintiffs still owed to Equity, and sent a series of letters to that effect to Felzenberg over the course of 1982. Felzenberg did not object to this arrangement and many insurance payments were received by Equity from RBH during 1982 and credited to plaintiffs’ account.

Thus, plaintiffs knew Equity was collecting insurance proceeds from RBH but continued to permit Equity to hold itself out to RBH as plaintiffs’ authorized managing agent. These circumstances created apparent authority in Equity to act on plaintiffs’ behalf.

We conclude that Equity had express, implied and apparent authority to receive insurance proceeds on plaintiffs’ behalf.

Plaintiffs contend that they should recover from RBH all payments made when plaintiffs notified RBH after March 1983 to stop paying Equity. We find no relevance in this contention because it ignores the relationship of creditor and debtor that existed between Equity and the shipowners. Such notice to RBH does not alter the essential fact that plaintiffs actually received payment in the manner they had previously agreed upon with Equity.

It is clear from the evidence at trial that plaintiffs are indebted to Equity for various trade debts Equity incurred in the operation and management of plaintiffs’ vessels. Captain Emmans’ uncontradicted testimony at trial established that he and Felzenberg agreed that Equity would receive the remaining proceeds and credit them against the outstanding trade debts owed to Equity. Further, Equity’s accountant, William Catalina, testified that plaintiffs’ account was in fact credited with the proceeds as received.

Plaintiffs offered no evidence at trial contradicting this payment arrangement or showing that their account was not properly credited. When Equity credited plaintiffs’ account with the insurance proceeds, plaintiffs in effect received payment in accordance with their own direction and consent.

We hold that the insurance proceeds paid by RBH to Equity constituted payment to plaintiffs as loss payees under the applicable policies of marine insurance.

The foregoing opinion constitutes this court’s findings of fact and conclusions of law in accordance with Rule 52(a), Fed.R. Civ.P.

The Clerk of the court is directed to enter judgment in favor of defendant and third-party plaintiff, Rollins Burdick Hunter of New York, Inc., dismissing the action with prejudice.

      . It is stipulated that the loss payable clause in each hull policy provides as follows:
      "Losses, if any, other than those arising out of an actual or constructive total loss or a compromise constructive total loss or a requisition, shall be payable directly for the repair or other charges involved, or if Shipowner shall have first fully repaired the damage and paid for the salvage and other charges, shall be payable to Shipowner as reimbursement therefor provided, however, if the Mortgagee shall have notified the Assurer that an event of default under the Mortgage shall have occurred and is continuing, then said losses shall be payable to the Mortgagee for distribution by it first to itself and then to Shipowner as their respective interest may appear, and, in the event of an actual or constructive total loss or compromise constructive total loss or a requisition shall be payable to Mortgagee for distribution first to itself and then to Shipowner as their respective interests may appear.”

      . In fact, Equity claims that even with the retention of these proceeds, plaintiffs are indebted to it in an amount exceeding $400,000.00.

      . Section 18 of the Management Agreement provides that the agreement is to be construed and interpreted according to New York Law. Plaintiffs’ Exhibit 1.

      . Restatement (Second) of Agency § 73 (1958); see also Hedman v. Security Guarantee Co., 245 App.Div. 224, 227, 281 N.Y.S. 565 (3d Dep’t 1935) (“authority to manage a business includes authority to receive payment of sums of money due the principal.”); 1 Mechem on Agency § 996 (2d ed. 1914).

      . Trial Transcript ("Tr._”) at 138.

      . Tr. 194-95.

      . Defendant-Third-Party Plaintiffs Exhibits B (letter of 4/28/82 to Felzenberg); D (letter of 6/16/82 to Felzenberg); and E (letter of 10/12/82 to Felzenberg).

      . See Masuda v. Kawasaki Dockyard Co., 328 F.2d 662, 665 (2d Cir.1964) ("Apparent authority ... arises when a principal places an agent in a position where it appears that the agent has certain powers which he may or may not possess”); General Overseas Films, Ltd. v. Robin Intern., Inc., 542 F.Supp. 684, 688-89 (S.D.N.Y. 1982), aff’d, 718 F.2d 1085 (2d Cir.1983) (doctrine of apparent authority rests on the acts or omissions of the principal); Ford v. Unity Hospital, 32 N.Y.2d 464, 473, 346 N.Y.S.2d 238, 299 N.E.2d 659 (1973) (doctrine of apparent authority involved when principal's own conduct permits agent to mislead third party); Restatement (Second) of Agency § 27 (1958).

      . It appears that plaintiffs’ silence in the face of Equity’s professed plan to keep the insurance proceeds as payment for unpaid trade debts also constituted a ratification of Equity’s acts. Section 94 of the Restatement (Second) of Agency states:
      "An affirmance of an unauthorized transaction can be inferred from a failure to repudiate it.”
      Restatement (Second) of Agency § 94 (1958); see abo Restatement (Second) of Agency § 94 comment a (1958) ("silence under such circumstances that, according to the ordinary experience and habits of men, one would naturally be expected to speak if he did not consent, is evidence from which assent can be inferred"); Restatement (Second) of Agency § 94 comment b (1958) ("Acquiescence can be inferred from silence, even though the purported agent was therefore a stranger to the purported principal”); Columbia v. Lee, 243 App.Div. 361, 366, 277 N.Y.S. 161 (2d Dep’t 1935).

      . Tr. 194-95.

      . Tr. 214-15.

      . Harrold v. Commissioner of Internal Revenue, 232 F.2d 527, 529 (9th Cir.1956) (“In law, payment may just as effectively be made by offset or credit”); General Electric Credit Corp. v. Contrucci, 332 F.Supp. 827, 830 (W.D.Pa.1971); Seaboard Surety Co. v. H & R Construction Corp., 153 F.Supp. 641, 649 (D.Minn.1957); 70 C.J.S. Payment § 32 (“When so agreed or consented to payment may be made by the transfer of debits or credits or the application of deposits or funds of the debtor in the hands of the creditor____”).

      . Plaintiffs make much of the fact that RBH paid the disputed claims with checks payable solely to Equity and that Equity had no authority to receive payment in its own name. Plaintiffs’ Pre-Trial Memorandum at 7. We are not persuaded by this argument. The fact remains that Equity was impliedly authorized to collect payment of insurance proceeds and was, in addition, held out as such to RBH. Felzenberg himself admitted at trial that Equity was so authorized. See Tr. 138.
      New York cases that have dealt with the problem of a general agent’s receipt of checks payable to their order have held such payment constitutes proper payment to the principal. In Potter v. Sager, 184 App.Div. 327, 171 N.Y.S. 438 (4th Dep’t 1918), the court reasoned that since an agent empowered to collect his principal’s debts could receive cash payments, he could also receive checks payable to his order:
      “[T]his court should take judicial notice of the fact that checks and drafts are usual and ordinary means of transacting business and transferring money in all business transactions; that where an agent is given authority to collect money ... the giving of such check payable to the agent constitutes payment from the time such check is cashed in due course____”

        Potter v. Sager, supra, 184 App.Div. at 328-29, 171 N.Y.S. 438 (emphasis supplied); see also Cohen v. O'Conner, 5 Daly (N.Y.) 28 (1873), aff’d, 56 N.Y. 613 (1874) (payment by check to agent’s order constituted good payment to principal despite agent’s conversion of the proceeds).
      We find, therefore, that RBH’s direct payment to Equity as general manager was sufficient payment to plaintiffs as loss payees.