author: ELLEN B. BURNS, District Judge.

text:
    Wilbert SWIFT, v. Roger LEVESQUE.
    Civ. No. N-83-486.
    United States District Court, D. Connecticut.
    July 1, 1985.

      Herbert I. Mendelsohn, New Haven, Conn., for plaintiff.
    Thomas V. McLaughlin, New Haven, Conn., for defendant.
   RULING ON CROSS MOTIONS FOR SUMMARY JUDGMENT

ELLEN B. BURNS, District Judge.

In this action for contribution, plaintiff Wilbert Swift has moved for summary judgment pursuant to Rule 56 of the Federal Rules of Civil Procedure, and defendant Roger Levesque has filed a cross motion for summary judgment on his counterclaim, in which he essentially seeks indemnification. In a related action that forms the basis for this action, both plaintiff and defendant were found by a jury in June of 1981 to be “responsible persons” under 26 U.S.C. § 6672, and thus personally liable for the collection and payment of withholding taxes owed by Swift Steel Erectors, Inc. (“SSE”) for the third and fourth quarters of 1970. Section 6672 enables the United States government, when it cannot collect taxes from a corporation due to its insolvency, to shift liability to those responsible for the corporation’s failure to pay taxes. White v. United States, 372 F.2d 513, 178 Ct.Cl. 765 (1967).

Subsequent to the entry of judgment in the prior action, the plaintiff paid $74,-539.03, partially in payment of taxes covering the period for which defendant was not found liable, and the defendant paid $35,-496.59. The plaintiff now seeks contribution from the defendant in the amount of $15,698.42, plus interest, which plaintiff claims is the difference between what defendant owes for one-half the total amount due for July to December of 1970, and the amount already paid by the defendant. Defendant, on the other hand, has counterclaimed, seeking to recover from plaintiff the $35,496.59 he has paid to the Internal Revenue Service (“IRS”) plus reimbursement of his attorneys’ fees spent in this and the prior litigation. For the reasons stated below, the plaintiff’s motion is granted and the defendant’s motion is denied. The court finds that defendant is not entitled to indemnification, but that plaintiff is entitled to contribution.

As plaintiff readily admits, there is no private federal right of contribution or indemnity under 26 U.S.C. § 6672. Sinder v. United States, 655 F.2d 729, 731 (6th Cir.1981); DiBenedetto v. United States, 75-1 U.S.T.C. 119503 (D.R.I., 1974). The statute serves as a collection device for the government, and not as a source of a cause of action between or among persons found to be “responsible” parties. The statute does not, however, foreclose a right to contribution under state law. This action, then, is one brought under state law principles and is in federal court by virtue of the diversity of citizenship of the parties. Because Connecticut case law is apparently devoid of any case directly on point, the task of this court is to discern whether Connecticut would recognize a cause of action for either contribution or indemnification between these parties. A detailed discussion of the factual contentions of the parties is necessary, however, before the court can decide the state law question.

I. Factual Allegations

Motions for summary judgment, as are presently before the court, may be granted only if no genuine dispute exists as to issues of material fact, and the moving party is entitled to judgment as a matter of law. Adickes v. S.H. Kress Co., 398 U.S. 144, 157, 90 S.Ct. 1598, 1608, 26 L.Ed.2d 142 (1970). Moreover, the inferences to be drawn from the facts must themselves not be disputed. Schwabenbauer v. Board of Education, 667 F.2d 305, 313 (2d Cir.1981). The burden is on the moving party to show the absence of material fact disputes. It remains for this court to determine first, which facts are genuinely undisputed and second, whether those undisputed facts are sufficient to trigger either the equitable remedy of contribution or indemnification.

Plaintiff has attempted to show that he and defendant were both officers of the corporation and therefore co-debtors, equally liable for the taxes assessed which, he claims, would constitute a corporate debt. In an effort to defeat plaintiffs motion, defendant has attempted to create factual disputes on issues that, if his version is accurate, would render it inequitable for plaintiff to receive contribution from defendant, the prior judgment against defendant and in favor of the IRS notwithstanding. Indeed, defendant contends that, if his story is true, he is entitled to be indemnified for monies already paid. Defendant maintains, by way of affidavit, that the corporation may not have been bona fide; that defendant was never a true officer of or partner in the business; that plaintiff made false representations about the financial viability of the business to induce him to become a “partner”; and that defendant did not know the withheld wages were not being paid to the IRS until October of 1970.

At the trial in the underlying action, the verdict indicates that the jury necessarily found SSE to be a corporation between July, 1970, and December, 1970, the period for which contribution is claimed. Claims now that defendant does not know the duration of the corporate life are insufficient to create a fact dispute on this issue.

Regarding defendant’s position in the business, plaintiff asserts the following. Plaintiff was the president of the corporation and that defendant was the vice president, secretary and treasurer. Plaintiff contributed financial resources and defendant contributed his skills of supposed equal value. The business office was located in defendant’s home. Defendant was a signatory on the corporate checking accounts, and signed payroll checks, and the Form 941 Employers Quarterly Federal Tax Returns for the period of June to December of 1970. Defendant also had the authority to hire and fire employees. Defendant, through affidavit and answers to requests to admit, does not dispute that he hired and fired personnel, signed checks, payroll and tax returns, and indeed, “otherwise allowed [himjself to be known as Vice President, Secretary and Treasurer of the corporation.” (¶ 9, Defendant’s Affidavit). Yet he insists he never was “a true corporate co-owner, partner or joint venturer with the plaintiff”. (¶15, Defendant’s Affidavit).

Defendant has failed to raise a triable fact issue as to his true status in the corporation. Equity relies not on titles or form but rather on substance. Defendant has admitted he had at least apparent authority. Because he held himself out to be an officer of the corporation and acted as an officer, the defendant cannot now claim he was neither an officer nor had an officer’s authority. See Henn, Handbook of the Law of Corporations at 201; Restatement of Agency 2d, 7 and 8.

Defendant denies he handled or had knowledge of the financial dealings of the corporation and asserts he did not know until October of 1970 that plaintiff was not covering “bad checks” or providing for the payment of withheld payroll taxes. (¶111, 12, Defendant’s Affidavit). Defendant does admit he signed checks after October, and significantly, he admits he signed the Form 941 for the period ending December, 1970. Defendant attempts to explain his actions as attributable to “pressure from plaintiff” and the fact that the office remained in his home even after he resumed his prior status of an employee. (¶ 6, Defendant’s Counterclaim). However, defendant is collaterally estopped from relitigating the issue of his knowledge of the handling of financial matters and the withheld payroll taxes. In order to find a person personally liable to the IRS under 26 U.S.C. § 6672, the jury must find that the person is required to keep, account for and pay over the taxes and that he failed to do so willfully. The jury’s verdict in the prior case unequivocally shows that defendant’s version of the facts was rejected. The jury answered two interrogatories with respect to Levesque. First it was specifically found that defendant was required to account for and pay over taxes withheld from wages for the third and fourth quarters of 1970, although he was not so obligated for the first quarter of 1971. As a second step, the jury further found that defendant’s failure to pay over the taxes was willful for the third and fourth quarters of 1970. It is beyond dispute that defendant had a full and fair opportunity to litigate his claim that he was not aware of plaintiff’s handlings of the tax matters, and he did so against both the IRS and Wilbert Swift, whose interest was adverse to his own. Willfulness is intentional, voluntary and knowing conduct, and thus defendant cannot be heard now to disclaim his knowledge or involvement for the six-month period in question.

As a final factual matter, defendant contends the plaintiff made false claims about the financial health of the business in order to lure him into partnership. Although a factual dispute does appear to exist on this matter, it is irrelevant to the instant action. Regardless of the reason the defendant accepted plaintiff’s offer to become more than an employee, the fact remains that it has already been conclusively established that, as a corporate officer, defendant had the requisite knowledge and intent when he participated in the failure to pay over the taxes. Once he was in, he knew what he was doing.

The inevitable conclusion, then, is that the defendant has failed to raise any material fact disputes. SSE was a corporation, defendant either was an officer or at least held himself out as an officer, and defendant willfully failed to pay over taxes to the IRS, as did plaintiff.

II. Indemnification

It is readily apparent based on the foregoing, that as a matter of law, defendant is not entitled to indemnification by the plaintiff for the amount defendant has already paid to the IRS. Indemnification is permissible under state law only upon a showing that one party had “primary” liability and that the party with “secondary” or “passive” liability had no “control of the situation” and “[did] • not know of the fault [and had] no reason to anticipate it.” Preferred Accident Ins. Co. v. Musante, Berman & Steinberg Co., 133 Conn. 536, 543, 52 A.2d 862 (1947). See also Kaplan v. Merberg Wrecking Corp., 152 Conn. 405, 207 A.2d 732 (1965). Clearly, defendant Levesque cannot make such a showing in light of the previous jury finding of willfulness on his part. Accordingly, defendant’s cross-motion for summary judgment is denied and judgment shall enter for plaintiff on defendant’s counterclaim.

III. Contribution

Having clarified the undisputed factual posture of this case, the court turns to the question of how a Connecticut court would treat the taxes paid by plaintiff to the IRS.

The Connecticut Supreme Court has recently reaffirmed that “[t]he common law of this state, unlike that of a number of other jurisdictions, does not permit contribution between joint tortfeasors.” Gomeau v. Forrest, 176 Conn. 523, 524, 409 A.2d 1006 (1979). However, the state courts do recognize contribution under other circumstances. In Waters v. Waters, 110 Conn. 342, 148 A. 326 (1930), after co-executors incurred a debt to an estate for which they were found jointly and severally liable, the plaintiff paid the obligation. In the subsequent action for. contribution, the court held that a debtor who paid more than his share of a debt for which another was also liable had an implied contract for reimbursement, and a right of contribution against the other for the amount paid in excess of his proportionate share of the total obligation. Id. at 345,148 A. 326. See also Fidelity & Casualty Ins. Co. v. Sears, Roebuck & Co., 124 Conn. 227, 231, 199 A. 93 (1938), (“This doctrine affording reimbursement is based not on contract but upon the equitable principle that those voluntarily assuming a common burden should bear it equally.”); MacArthur v. Cannon, 4 Conn.Cir. 208, 229 A.2d 372, 374 (1967), (contribution among officers/shareholders of a close corporation who were co-makers of a note; a “familiar principle” that one who pays a debt for which others are equally liable is entitled to contribution from the others for their proportionate shares.) Thus, it appears Connecticut is among those states that have found that the doctrine of contribution, where applicable, is “founded on the equitable principle that where one has been compelled to pay money which the other was equally bound to pay and has thus discharged the common burden, the latter, who has also secured the benefit, should in good conscience refund his own proportion of the obligation.” Waters, 110 Conn, at 345, 148 A. 326.

It is upon this same equitable principle that the court in Esstman v. Boyd, 605 S.W.2d 237 (Tenn.App.1978), relied. Like this action, Esstman was an action for contribution by one officer of a close corporation against another for one-half the withholding taxes paid by the plaintiff to the IRS under 26 U.S.C. § 6672 after the corporation became insolvent. Applying Tennessee law which, like that of Connecticut, views contribution as an equitable doctrine, the Esstman court ultimately found the defendant liable to the plaintiff for his proportionate share of the tax obligation previously paid in full by plaintiff.

Plaintiff would have this court adopt the approach taken by the Tennessee court and the Waters court, and view this matter as a corporate debt, in effect raising an implied contract to reimburse such that the equitable doctrine of contribution applies. In plaintiffs view, the jury’s unequivocal finding of willful conduct by both Swift and Levesque is irrelevant to this contribution claim and was a necessary element only for enabling the IRS to collect the corporate debt from the persons controlling the corporation.

It is not immediately clear, however, that a Connecticut court would adopt the Esstman approach rather than the joint tortfeasor rule of which the Connecticut Supreme Court has so recently approved. Gomeau, supra. The policy behind denying contribution between joint tortfeasors has been stated as follows: “Where there are two joint tortfeasors and each is guilty of intentional wrongdoing, there may be sound justification for a denial of contribution because either party in seeking it would have to take his stand upon his own wrong.” Preferred Accident, 133 Conn, at 543, 52 A.2d 862. It cannot be ignored that in the instant case, plaintiff’s claim does depend on his own intentional wrongdoing as well as that of the defendant.

With these policy considerations firmly in mind, this court nevertheless concludes that a Connecticut court would decide this close question in favor of finding a right of contribution. The jury’s finding of willfulness in the underlying action by the IRS is not dispositive of the obligations between these two parties, as defined by state law. Federal courts discussing § 6672 have clearly stated that although the section is a civil penalty it is quite different from a criminal punishment, and “is simply a means of ensuring that the tax which is unquestionably owed the government is paid.” Feist v. United States, 607 F.2d 954, 957, 221 Ct.Cl. 531 (1979); Botta v. Scanlon, 314 F.2d 392, 393 (2d Cir.1963). In effect, it is “merely” a collection device. Hartman v. United States, 538 F.2d 1336, 1340 (8th Cir.1976). The government must establish willfulness as a means to impose personal liability but willfulness does not require a showing of “bad purpose.” Sherman v. United States, 490 F.Supp. 747, 754 (E.D.Mich.1980).

In Esstman, there had been no trial and thus no jury finding of willfulness because the plaintiff had paid the corporate taxes before the IRS had to bring suit against either corporate officer under § 6672. However, the court made its own factual finding that the defendant was a responsible person as required under § 6672, based on the defendant’s corporate duties and the fact that the defendant participated in the decision not to pay the taxes to the IRS. The Tennessee court considered this finding a necessary step before it could order contribution, to assure that both parties would have been liable to the government. Even though the court had, in essence, found that the plaintiff acted willfully, the court did not hesitate to find that contribution between the two responsible parties was appropriate.

There is also Connecticut precedent for allowing contribution between persons who have acted improperly. In Waters, supra, the co-executors of the estate had used money belonging to the estate for their own personal purposes, resulting in their being relieved of their positions as executors. Nevertheless, the court unhesitatingly ordered contribution.

A finding that Connecticut state law permits contribution between responsible persons under .§ 6672 in no way inhibits the efficient collection of taxes owed to the government, provided the claim of contribution is brought as an action separate from that brought by the IRS pursuant to § 6672. Cf DiBenedetto v. United States, 75-1 USTC at 87,332 (third-party defendant may not implead fourth-party defendants to establish “exculpatory facts” as between responsible persons.) Moreover, it would seem to promote a just result, analogous to the requirement that the government “pursue all persons who may have shared the ‘responsibility’ in order to recover ‘the government’s money,’ otherwise ... persons who were actually responsible and willful may escape the penalty.” Feist v. United States, 607 F.2d at 963. Once it has been established that both plaintiff and defendant are responsible for the nonpayment of taxes, as was established in the prior action, the mere fortuity of IRS collection practices should not shift the ultimate burden of payment to only one of the parties. Equity favors contribution in this case, regardless of the intentional nature of the actions of plaintiff and defendant.

The court concludes that a Connecticut court would view the unpaid taxes of SSE as a corporate debt for which the joint venturers had an implied agreement to be equally responsible. Thus, plaintiff has a right of contribution under state law.

CONCLUSION

The court finds there is no genuine dispute that SSE was a corporation, that defendant was an officer thereof, or at least acted in that capacity, and that both plaintiff and defendant willfully failed to pay withheld wages over to the IRS for the period of July to December of 1970. As there are no triable material factual issues, judgment may enter. Judgment shall enter in favor of plaintiff on defendant’s counterclaim as defendant is not entitled to indemnification as a matter of state law. Judgment shall also enter in favor of plaintiff on his complaint, as he is entitled to contribution. As to the amount of the judgment, plaintiff asserts that $102,380.02 is the total amount owed for the period of time for which both plaintiff and defendant were responsible. Defendant’s share is calculated by plaintiff to be $51,195.01, of which defendant has paid $35,496.59. Plaintiff therefore seeks $15,698.42 from defendant. Defendant has not challenged these figures in any way. Accordingly, judgment shall enter in favor of plaintiff in the amount of $15,698.42. The court awards no interest, however. It is not clear whether interest should be calculated from the time of the judgment in the prior case, from the time plaintiff paid more than his share, or from the time defendant paid less than his share. Plaintiff has not suggested a calculated amount of interest or any method of calculation, or even informed the court of the possible dates from which to calculate. In the equitable discretion of the court, it is found that no interest is appropriate. The parties shall bear their own costs.

SO ORDERED.

      . The former case was captioned Roger Levesque v. United States v. Wilbert Swift, N-77-229.

      . 26 U.S.C. § 6672 provides in relevant part that:
      Any person required to collect, truthfully account for, and pay over any tax imposed by this title who willfully fails to collect such tax, or truthfully account for and pay over such tax, or willfully attempts in any manner to evade or defeat any such tax or the payment thereof, shall, in addition to other penalties provided by law, be liable to a penalty equal to the total amount of the tax evaded, or not collected, or not accounted for and paid over.

      . The jury, by way of special interrogatories, specifically found that Levesque was not liable for any taxes owed for the first quarter of 1971, and that Swift alone was liable for that additional three-month period. Accordingly, this action involves only the taxes due for the latter six months of 1970.

      . Defendant simultaneously argues there are fact disputes precluding summary judgment in favor of plaintiff and yet, that the facts show he is entitled to indemnification as a matter of law. The court is not constrained by the parties' positions, however, and may enter judgment in favor of a party who prevails as a matter of law if the court disagrees with that party’s argument that fact disputes exist.

      . Connecticut also recognizes a statutory right to contribution among partners. . Conn.Gen. Stat. § 34-53 holds partners jointly and severally liable for debts incurred by the partnership and Conn.Gen.Stat. § 34-56(a) holds partners liable for contribution to partnership losses in proportion to their share of the profits. In his complaint at ¶ 19, plaintiff cites § 34-53 as a basis for his recovery, yet in his brief, he argues that SSE was a corporation. Although it is true that an increasing number of jurisdictions have found that the relationship between officer/stockholders in a close corporation approximates that of partners, 1A Fletcher, Cyclopedia of the Law of Corporations, section 70.1 (1961), the court does not find that § 34-53 gives plaintiff a statutory right to contribution. Rather, the existence of § 34-53 is only support for the argument that Connecticut would recognize an equitable cause of action for contribution in this case because of the "practical realities" of small corporations in which the stockholders, officers, directors, and managers are the same two persons. See Helms v. Duckworth, 249 F.2d 482, 486 (D.C.Cir.1957).

      . This policy is not unlike the "clean hands” doctrine which provides that equity will deny relief when a plaintiff’s claim is tainted by fraud and that claim depends on the prior fraud. Gest v. Gest, 117 Conn. 289, 296, 167 Conn. 909 (1933); Forestiere v. Doyle, 30 Conn.Sup. 284, 286, 310 A.2d 607 (1973).


source: Caselaw Access Project

author: HARPER, District Judge.

license: Public Domain

text:
    BAKERS UNION LOCAL NO. 4 OF GREATER ST. LOUIS, Plaintiff, v. SCHNUCK BAKING CO., INC., Defendant.
    No. 85-910C(A).
    United States District Court, E.D. Missouri, E.D.
    July 5, 1985.

      John H. Goffstein, Clayton, Mo., for plaintiff.
    Ralph Edwards, Robin A. Sonneland, St. Louis, Mo., for defendant.
   MEMORANDUM AND ORDER

HARPER, District Judge.

This matter is before the Court on defendant’s motion to dismiss plaintiff’s complaint pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure. Defendant attached several matters outside the pleadings to its motion. The Court, therefore, notified the parties by letter dated May 21, 1985 that it would treat the motion as one for summary judgment pursuant to Rules 12(b) and 56. Plaintiff thereafter filed a cross-motion for summary judgment pursuant to Rule 56, attaching an affidavit of one of its agents. In responding to plaintiff’s cross-motion, defendant also submitted a motion to strike the affidavit pursuant to Rule 56(e). Because the Court finds on defendant’s motion that there exists “no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law, Fed.R. Civ.P. 56(c), the Court does not reach defendant’s motion to strike.

The Court has jurisdiction under section 301 of the Labor Management Relations Act (hereinafter referred to as LMRA), 20 U.S.C. § 185. Plaintiff, Bakers Union Local No. 4 (hereinafter referred to as Local 4), alleges violation of a collective bargaining agreement between it and defendant. Schnuck Baking Company (hereinafter referred to as Schnuck). The union, within this deity it represents employees in an industry affecting commerce as defined in 29 U.S.C. § 142. Schnuck maintains its principal place of business within this district.

The pleadings and other matters before the Court discloses that Schnuck operates a large chain of grocery stores in and around the St. Louis metropolitan area. In 1982, Schnuck introduced “Rock Bottom” warehouse stores to supplement its chain of conventional supermarkets. Warehouse stores utilize modified merchandising and pricing methods to increase sales and minimize costs. Schnuck recognized United Food and Commercial Workers Union, Local 655 (hereinafter referred to as UFCW), as the exclusive bargaining representative for all of its warehouse store employees. By contrast, several unions represent employees at Schnuck’s conventional stores. Local 4 represents all employees at the conventional stores who perform baking operations.

In January, 1984, Schnuck discussed with UFCW its desire to open bakery departments in the warehouse stores. Employees of the new department would perform “bake-off” operations. The “bake-off” operation consists of completing preparation of semi-finished bakery goods manufactured at Schnuck’s bakery plant. Schnuck and UFCW agreed that the new employees would accrete to the existing UFCW-represented warehouse store bargaining unit. The agreement produced a contract addendum incorporating the warehouse bakery department employees under the UFCW contract and establishing department wage rates.

Shortly thereafter, Local 4 filed a grievance with Schnuck alleging that UFCW recognition violated Schnuck’s agreement with Local 4. The grievance stated:

“The Union is filing this grievance for lost work and pay for employees working in Schnuck’s in-store bakeries at their warehouse locations. The current labor agreement between Schnuck’s Markets and Bakers Union Local 4 under recognition states. [Sic.] The company recognizes the union as the sole and exclusive bargaining agent for all in-store bakery employees working in Schnuck’s Markets in the St. Louis metropolitan area to include its store in Columbia, Missouri, current and future stores to be included. The employees at the warehouse stores have been employed under another agreement and is in violation of our contract. Therefore we are seeking lost work and wages.” [Sic.]

Schnuck refused the grievance but agreed to submit the dispute to arbitration.

Although the parties proceeded to arbitration, prior to a hearing before the arbitrator, Local 4 filed unfair labor practice charges with the National Labor Relations Board (hereinafter referred to as NLRB. The union alleged that Schnuck

“unlawfully deprived its employees of their protected concerted rights of self-determination when it agreed to recognize [UFCW] as the exclusive bargaining representative for all of the employees in its ‘Rock Bottom’ thrift stores when a genuine question of representative existed and when another labor organization maintained a majority interest.”

The union charged that such actions violated Sections 8(a)(2) and (3) of the LMRA, 29 U.S.C. §§ 158(a)(2), (3).

The Regional Director disagreed, refusing to issue a complaint against Schnuck. After having “carefully investigated and considered” the charge, he found insufficient evidence that Schnuck unlawfully recognized UFCW in violation of Sections 8(a)(2) and (3). Specifically, as he reported in a letter to the union dated October 31, 1984:

“The investigation did not * * * establish that the warehouse stores’ bakery department employees have a sufficient separate group identity, such that those employees would constitute a separate appropriate collective-bargaining unit. Thus, although bakery department employees have separate departmental seniority and wage rates, those employees have regular contact with other employees covered by the UFCW contract, regularly perform sales duties similar to other employees, work similar hours, and share common supervision with those employees. Moreover, although employees at the Employer’s convention stores who perform baking duties are separately represented from bakery department employees at those stores who perform sales duties, that collective-bargaining unit was established at a time when in-store employees performed a full range of ‘scratch’ baking duties (involving the initial mixing and preparation of bakery products, using raw ingredients), rather than performing the finishing or ‘bake-off’ duties now involved at the in-store bakery department. Such separate units are an exception to the normal collective bargaining practice in the St. Louis-Metropolitan area, where both bake-off and bakery sales employees are included under contracts between various employees and the UFCW. It therefore appears that the bakery department employees were lawfully accreted to the warehouse collective-bargaining unit represented by the UFCW and I am, therefore, refusing to issue complaint.”

Local 4 did not appeal the Regional Director’s decision as provided for by NLRB regulations and as explained by the Director in his letter. Rather, it attempted to reinstitute arbitration proceedings. When Schnuck refused to arbitrate, the union filed this action. Schnuck’s refusal to arbitrate the dispute, the union alleges, violated the arbitration provision of the collective bargaining agreement between Schnuck and Local 4. It asks this Court to compel Schnuck to arbitrate the grievance.

In support of its motion to dismiss Schnuck argues that Local 4’s grievance turns upon the union’s assertion that it, not UFCW, properly represents the warehouse store bakery department employees. According to Schnuck, because the Regional Director found that UFCW properly represents the bakery department employees, under the relevant case law damages for breach of contract cannot lie. Likewise, it argues, the Court should not compel it to arbitrate the same issues.

Local 4 counters with several arguments. First, it asks this Court to defer to the strong federal policy favoring arbitration. Secondly, it asserts that it did not seek, and the NLRB did not make, a representational determination. Section 9 prescribes the procedure for representational decisions. Local 4 maintains that such determinations made in the context of a Section 8 unfair labor practice proceeding neither constitute an NLRB determination of the issue nor carry “precedential value.” Finally, the NLRB, according to the union, defers to arbitration of these issues and, in particular, would defer to arbitration in this case if the union sought a representational determination.

Although federal courts favor arbitration of labor disputes and resolve all doubts concerning the arbitrability of specific issues in favor of arbitration, see, e.g., United Steelworkers of America v. Warrior & Gulf Co., 363 U.S. 574, 581-82, 80 S.Ct. 1347, 1352-53, 4 L.Ed.2d 1409 (1960), the courts refuse to compel arbitration of representational issues previously determined by the NLRB pursuant to proceedings under Section 9 of the LMRA. See, Yellow Freight System, Inc. v. Automobile Mechanics Local 701, Int’l Assoc. of Machinists, AFL-CIO, 684 F.2d 526 (7th Cir.1982); Smith Steelworkers v. A.O. Smith Corp., 420 F.2d 1 (7th Cir.1969) (hereinafter Smith)-, McGuire v. Humble Oil & Refining Co., 355 F.2d 352 (2nd Cir.), cert. denied, 384 U.S. 988, 86 S.Ct. 1889, 16 L.Ed.2d 1004 (1966). See also, Carey v. Westinghouse Electric Corp., 375 U.S. 261, 272, 84 S.Ct. 401, 409, 11 L.Ed.2d 320 (1964) (in dicta stated that a subsequent NLRB decision would override an inconsistent arbitration award). Citing Smith and McGuire, the Eighth Circuit “noted that courts have consistently refused to order arbitration where the Board had previously resolved the dispositive representational issue.” Local Union 204, Int’l. Brotherhood of Electrical Workers v. Iowa Electric Light & Power Co., 668 F.2d 413, 419 n. 11 (8th Cir.1982). While noted in the context of Section 9 proceedings, this Court finds no reason to apply a different rule when the case involves Section 8 proceedings, for “[representational] disputes may be resolved in the context of an 8(a)(5) unfair labor practice proceeding.” Metromedia, Inc. v. N.L.R.B., 586 F.2d 1182, 1190 (8th Cir.1978 (hereinafter Metromedia ).

Local 4 characterizes the grievance as “a contract dispute concerning the manning of the bakery operations,” and asserts that the parties agreed to stay arbitration “pending a determination of related issues of representational rights at the [NLRB]” (emphasis added). However, the grievance clearly involves a representational dispute — “a controversy as to which union should represent the employees doing particular work” rather than “a controversy as to whether certain work should be performed by workers in one bargaining unit or those in another.” Carey v. Westinghouse, supra, 375 U.S. at 263, 84 S.Ct. at 404; Metromedia, supra, at 1189. UFCW recognition and employment of the bakery department employees under the UFCW agreement, the union charged, violated its contract with Schnuck. To recover at arbitration, Local 4 would have to convince the arbitrator that it has the right to represent the employees. Whether contractual or not, the representational issue would fully dispose of the grievance.

Contrary to Local 4’s assertion, the charge filed with the NLRB discloses that the representational issues formed the basis of the alleged Section 8 violations. The complaint itself states that the union sought “a determination of related issues of representational rights.” More importantly, the Regional Director’s decision clearly reveals that he perceived the issue as representational, and that he refused to issue an unfair labor practice complaint against Schnuck solely on the ground that Schnuck recognized the correct bargaining unit.

Finally, the Regional Director clearly did determine that the bakery department employees were an appropriate accretion to the warehouse store bargaining unit. To define the appropriate bargaining unit under Section 9 of the LMRA, the Board and the courts apply a community-of-interest analysis. The analysis includes “such factors as bargaining history, operations integration, geographical proximity, common supervision, similarity in job function, and degree of employee interchange. N.L.R.B. v. Metal Container Corp., 660 F.2d 1309, 1313 (8th Cir.1981); N.L.R.B. v. Target Stores, Inc., 547 F.2d 421, 423 (8th Cir.1977). In holding that the warehouse store bakery department employees did not “have a sufficient group identity” to “constitute a separate appropriate collective-bargaining group,” the Director considered several of these factors. Inasmuch as this Court is not called upon to review the findings, it must hold that the Regional Director did in fact determine the appropriate bargaining unit and, thus, the union’s representational rights. Cf N.L.R.B. v. Metal Container Corp., 660 F.2d at 1313-14 (affirmed strikingly similar findings of a Regional Director).

Local 4 insists, however, that if it petitions the NLRB under Section 9, “the Board would have to take jurisdiction and render a ruling unlike its practice of non-precedent setting General Counsel denial to accept jurisdiction [sic] in the case at bar” (emphasis added). Thus, it argues, if the Court accepts Schnuck’s position that the Section 8 proceedings disposed of the arbitrable issues, it would deny the union “a due process hearing.” This argument is wholly without merit. First, the Court holds only that Schnuck need not arbitrate the issue. The holding does not preclude Local 4 from petitioning the NLRB under Section 9. Nor does the holding bind the NLRB in any way. Secondly, under the NLRB guidelines, “[n]either hearing nor consent-election possibilities should be explored if it appears upon initial contacts that no representation question affecting commerce exists.” § 11010.4. “Prior to issuance of a notice of hearing * * * the case in question must meet the test — Is there reasonable cause to believe that a question of representation affecting commerce exists?” § 11010.5 (emphasis in original). Thus, the NLRB does not conduct a full hearing upon every Section 9 petition just as it does not review every Section 8 charge filed with the Regional Director.

The decision of the Regional Director of the NLRB fully disposes of the dispute underlying the grievance filed with Schnuck. This Court refuses to compel Schnuck to arbitrate the issue.

Accordingly, the Court sustains defendant’s motion to dismiss under Rules 12(b) and 56, and further denies plaintiff’s Rule 56 motion for summary judgment.

      . The collective bargaining agreement, effective May 3, 1982 to May 5, 1985, provided:
      “Article II — Recognition
      "Section 1. The Company recognizes the Union as the sole collective bargaining agent for all bakery employees engaged in the manufacture of bakery products for its plant (a) in the St. Louis Metropolitan Area.
      "Article XV — Grievance and Arbitration
      "Section 1. Should any grievance arise between the parties to this Agreement pertaining to the application or interpretation of any of the provisions of this Agreement * * * an earnest effort shall be made to settle such grievance promptly in the following manner. ******

        "Section 3. If a settlement fails by the foregoing process, the grievance may be appealed * * * to arbitration.”
      Local 4, in its memorandum, cites a recognition provision presumably of the previous agreement:
      “If the Company does any baking on the premises of any of its branch stores, it shall be done exclusively by a member of Local No. 4 as classified in Exhibit A, who shall be included in the bargaining unit covered by this agreement.”
      Even assuming that this is the appropriate provision, it would not alter the disposition of this case.

      . Schnuck and Local 4 disagree as to the precise status of the arbitration proceedings resulting from the union’s appeal to the NLRB. Local 4 asserts that the parties agreed "to indefinitely continue” the arbitration proceedings, apparently meaning that the parties agreed to continue the proceedings after the NLRB decision. Schnuck alleges that the arbitrator "canceled" the arbitration proceedings. Local 4 appears to concede the same when it states that the parties agreed to another arbitrator after the Regional Director’s decision. In either case, the disputed facts are not material.

      . In pertinent part, Section 8 provides:
      "(a) It shall be an unfair labor practice for an employer—
      "(1) to interfere with, restain or coerce employees in the exercise of the rights guaranteed in section 157 of this title;
      "(2) to dominate or interfere with the formation or or administration of any labor organization or or contribute financial or other support to it * * *;
      "(3) by discrimination in regard to hire or tenure of employment or any term or condition of employment to encourage or discourage membership in any labor organization
      ******
      "(5) to refuse to bargain collectively with the representatives of his employees, subject to the provisions of section 159(a) of this title.”

      . According to Local 4, Schnuck agreed to an arbitrator after the NLRB decision. It apparently argues that even if Schnuck did not have to arbitrate the grievance in light of the Regional Director’s decision, its subsequent agreement to an arbitrator nevertheless obligated it to arbitrate. If, as this Court finds, Schnuck was under no obligation to arbitrate, the Court finds no reason why it should compel it to arbitrate that issue merely because it subsequently agreed to do so, only to change its mind.

      . In pertinent part, Section 9, 29 U.S.C. § 159, provides:
      "(a) Representatives designated or selected for the purposes of collective bargaining by the majority of the employees in a unit appropriate for such purposes, shall be the exclusive representatives of all the employees in such unit for the purposes of collective bargaining in respect to rates of pay, wages, hours of employment, or other conditions of employment * * *.
      “(b) The Board shall decide in each case whether in order to assure to employees the fullest freedom in exercising the rights guaranteed by this subchapter, the unit appropriate for the purposes of collective bargaining shall be the employer unit, craft unit, plant unit, or subdivision thereof * * *.
      "(c)(1) Whenever a petition shall have been filed, in accordance with such regulations as may be prescribed by the Board * * * the Board shall investigate such petition and if it has reasonable cause to believe that a question of representation affecting commerce exists shall provide for an appropriate hearing upon due notice. Such hearing may be conducted by an officer or employee of the regional office, who shall not make any recommendations with respect thereto. If the Board finds upon the record of such hearing that such a question of representation exists, it shall direct an election by secret ballot and shall certify the results thereof.”


author: KOCORAS, District Judge:

text:
    UNITED STATES, Plaintiff, v. ONE PARCEL OF LAND ... COMMONLY KNOWN AS 4204 CEDARWOOD, MATTESON, IL, et al., Defendant.
    No. 85 C 4967.
    United States District Court, N.D. Illinois, E.D.
    July 8, 1985.

      Thomas P. Walsh, Asst. U.S. Atty., Chicago, Ill., for plaintiff.
    Sam Adam, Edward M. Genson, Jeffrey B. Steinback, Thomas A. Corfman, Genson & Steinback, Chicago, Ill., for defendant.
   MEMORANDUM OPINION

KOCORAS, District Judge:

This matter comes before the Court on claimant Benson Hilt’s motion to exclude attorney’s fees and costs from forfeiture to the Government. On May 22, 1985, the Government filed a complaint alleging that Hilt’s real estate, money, cars, and other things of value are subject to forfeiture because they were allegedly acquired through illicit drug transactions. This court has entered an order restraining the transfer of assets subject to forfeiture during the term of this litigation. The Government stated that it intends to seek forfeiture of all proceeds of Hilt’s drug activities, including any payment of money by Hilt to his attorneys. Hilt’s attorneys, therefore, have not filed appearances in this case and have not yet accepted any fees from their client, Hilt. In response to the Government’s stated intentions, Hilt and his attorneys have moved this Court to exclude from any forfeiture under 21 U.S.C. section 881 all of Hilt’s attorney’s fees and costs of litigation. They argue that: (1) such fees are not explicitly mentioned in section 881’s list of items subject to forfeiture, (2) that payment of attorney’s fees would fall within section 881’s innocent ownership defense or exception, and (3) to permit section 881 to encompass attorney’s fees would deprive Hilt of his Sixth Amendment right to counsel, would violate due process by destroying the attorney-client relationship, would deprive Hilt of his right to due process at the forfeiture proceeding, and would deprive Hilt’s attorneys of their rights under the Fifth Amendment. In response, the Government contends that the motion to exclude is procedurally defective because it seeks an advisory opinion and is substantively defective because section 881 includes all drug proceeds, because Hilt’s attorneys do not fall within the innocent owner exception or defense, and because including such fees does not render the statute unconstitutional under either the Sixth or Fifth Amendments.

The Government argues that Hilt and his attorneys are seeking an advisory opinion because no fees have yet been received from Hilt. The pre-trial threat of forfeiture of attorney’s fees has been considered and addressed by another District Court, where counsel had filed conditional appearances which they stated would be revoked if the fees were held forfeited under the forfeiture provisions of the Racketeer Influenced and Corrupt Organizations Act. United States v. Rogers, 602 F.Supp. 1332, 1348 (D.Colo.1985). This Court believes that an actual case or controversy presently exists which is ripe for adjudication and should rule on the issue of whether, under 21 U.S.C. section 881, attorney’s fees and litigation costs are excluded from the forfeiture action.

Section 881(a)(6) provides: “(a) the following shall be subject to forfeiture to the United States and no property rights shall exist in them: (6) All monies ... furnished or intended to be furnished in exchange for a controlled substance, ... all proceeds traceable to such an exchange, and all monies ... used or intended to be used to facilitate any violation of this sub-chapter, except that no property shall be forfeited under this paragraph, to the extent of the interest of an owner, by reason of any act or omission established by the owner to have been committed or omitted without the knowledge or consent of that owner.”

The plain language of the statute provides that “all monies” and “all proceeds” are subject to forfeiture. Hilt first argues that because attorney’s fees are not expressly included in section 881, they cannot be subject to forfeiture. Such fees or payment, however, certainly fall within the broad items of monies and proceeds and need not be listed as an individual item when such expansive categories have been established. Therefore, the plain language of section 881 includes attorney’s fees within its list of property subject to forfeiture.

Hilt’s attorneys argue that the plain language of the statute expressly places them within the innocent owner exception. Such an exception applies where an owner’s property is used for an illicit purpose. without the owner’s consent or knowledge. The attorneys contend they acquired an interest in the fees payment after the illicit act or omission by virtue of honest legal services rendered to their client in an arm’s length transaction. By obtaining their interest after the illicit act, the attorneys argue that they could not consent to the act, have knowledge of the act, or prevent the act. Therefore, they assert that they are innocent owners of property — their earned attorney’s fees.

This court, however, cannot agree with this analysis. The attorneys are not property owners whose property, without their knowledge or consent, was used for an illicit purpose. The Government acquired an interest in all monies and all proceeds at the time those funds were used to violate the drug laws. United States v. $84,000 U.S. Currency, 717 F.2d 1090 (7th Cir.1983), cert. denied, — U.S. -, 105 S.Ct. 131, 83 L.Ed.2d 71 (1984), See 21 U.S.C. § 881(h). The forfeiture actually occurs at the moment of illegal use and no third party can acquire a legally recognizable interest in the property after the activity that subjects it to forfeiture. United States v. One Piece of Real Estate, 571 F.Supp. 723 (W.D.Tex.1983). Therefore, if these “tainted” funds are used to pay the attorneys, the Government has an interest in them which it will seek to establish in the forfeiture proceedings. The attorneys are not innocent owners, but may establish their adverse interest in the funds by establishing that untainted legal funds were used to pay them for their services and, therefore, the funds are property not subject to forfeiture.

The legislative history of section 881 does not suggest a different interpretation. Congress amended section 881 in 1978 to include the categories of “all monies” and “all proceeds,” but there is no discussion or treatment of attorney’s fees within the new terms. Joint Explanatory Statement, 124 Cong.Rec. S17647 (Oct. 7, 1978), 1978 U.S. Code Cong. & Adm.News 9518. Congress has acted consistently to attack the economic aspects of drug crimes and has sought to “increase the use of forfeiture and criminal fines____” H.R. 98-845, 98th Cong., 2d Sess. at 1 (Committee on the Judiciary). The Committee on the Judiciary discussed attorney’s fees in the context of the RICO amendments, but did not settle existing court conflicts regarding restraining orders and the right to retain counsel. Id. at 19, n. 1.

The Report of the Senate Judiciary Committee, in addressing the related forfeiture provisions of RICO, states that third party claims to property will prevail where the third party acquired his or her legal interest after the acts giving rise to the forfeiture, but did so in the context of a bona fide purchase for value and had no reason to believe that the property was subject to forfeiture. It has been held that an indictment constitutes notice that the assets are subject to forfeiture. United States v. Raimondo, 721 F.2d 476 (4th Cir.1983), cert. denied, — U.S.-, 105 S.Ct. 133, 83 L.Ed.2d 74 (1984). The notice is no less when the complaint in a forfeiture action contains allegations that virtually all of the assets of the person named were acquired through illegal drug deals. Notice that assets may have been so acquired defeats the notion of an innocent and bona fide purchaser for value. That is particularly true when the transfer of the assets under siege has not yet been effected.

Finally, Hilt’s attorneys have argued that to permit forfeiture under section 881 of any fees paid them would render the statute unconstitutional in several respects. The attorneys assert their own constitutional rights would be infringed by the forfeiture of fees. They argue that they would be deprived of their property, the fees, without due process. The Government, however, has asserted rights in the money at issue and both parties will be permitted to participate in the forfeiture proceedings. The attorneys further argue that the forfeiture would constitute government interference in their right to practice their profession. The court is not persuaded that the eventual forfeiture of money paid to attorneys which has been determined to be derived from drug crimes creates unwarranted government interference with the attorneys’ practice of law.

Hilt’s constitutional rights are also raised. Hilt’s Sixth Amendment right to assistance of counsel in a criminal trial is not applicable to the civil case currently before the court. While the court does not resolve this issue today, the purpose of the forfeiture statutes is to attack the economic base of the illicit drug industry and Hilt’s right to choose his counsel may be dictated by his ability to use legally obtained resources to pay his counsel.

The attorney-client relationship between Hilt and his attorney is also alleged to be destroyed by the threat of fee forfeiture. Generally, information about the fees paid to an attorney is not considered privileged information and its production does not destroy the attorney-client relationship. In Re Witnesses Before Special March 1980 Grand Jury, 729 F.2d 489, 492 (7th Cir.1984).

The attorneys argue further that Hilt’s inability to retain counsel in this forfeiture proceeding will deny him due process. They assume, apparently, that the threat of forfeiture of fees and adverse publicity will deprive Hilt of counsel and leave him to face the forfeiture proceedings pro se. If all competent attorneys refuse to accept Hilt as a client and he is indigent, counsel may be appointed.

In brief, this court cannot grant the motion to exclude all attorney’s fees and litigation costs from a potential forfeiture under section 881. If the fees prove to be monies or proceeds from illicit drug transactions, this court has no power to exclude them from forfeiture.


author: BECHTLE, District Judge.

text:
    UNITED STATES of America, v. Joseph CALABRIA.
    Crim. No. 85-00112-02.
    United States District Court, E.D. Pennsylvania.
    July 9, 1985.
    As Amended July 15, 1985.

      Edward S.G. Dennis, Jr., U.S. Atty., Ewald Zittlau, Asst. U.S. Atty., Philadelphia, Pa., for plaintiff.
    Thomas Bergstrom, Philadelphia, Pa., for defendant.
   MEMORANDUM

BECHTLE, District Judge.

On Thursday, June 13, 1985, the court granted the government’s motion to disqualify Walter M. Phillips, Jr., Esquire, from representing defendant Joseph Calabria. The reasons for the court’s Order are as follows.

FACTS

Joseph Calabria (“Calabria”) testified before a Federal Grand Jury on July 24 and July 25, 1984. The Grand Jury was seeking to determine whether General Electric Company (“GE”) and any of its employees participated in a scheme to defraud the United States whereby overrun labor costs, which accrued under a fixed price incentive contract with the Air Force and were not reimbursable, were claimed as costs of other government contract work. In the course of his testimony Calabria, the Grand Jury indictment alleges, made several knowingly false declarations in response to questions regarding matters material to the Grand Jury investigation. As a result, the Grand Jury indictment charged Calabria with violations of 18 U.S.C. § 1623.

In order to understand the pending criminal action, and the government’s motion to dismiss Walter M. Phillips, Jr. (“Phillips”), a review of the facts underlying the indictment is helpful.

A. Allegations Set Forth in the Indictment

At some time prior to the initiation of the Grand Jury investigation, GE and the United States Department of the Air Force entered into a series of contracts relating to parts of the Minuteman intercontinental ballistic missile, in particular, arming and fusing systems and re-entry vehicles. The contracts provided for the development, manufacture, installation, and checkout of physical components (“hardware”) and computer programs (“software”) used to test automatically the reliability and condition of the arming and fusing system and its component parts.

Two contracts were relevant to the Grand Jury investigation. The first contract (“First Buy”) was for the fabrication, testing, installation, and checkout of hardware. The hardware facilitated the running of a software package for testing the reliability of the arming and fusing system. The second contract involved two buys in which GE was to develop and manufacture (“Second Buy”) and install and checkout (“Third Buy”) hardware and software for a system to test, repair, and maintain the individual components of the arming and fusing system.

The First Buy, a cost reimbursement contract, provided that the United States would reimburse GE all allowable costs incurred in the performance of the contract to the extent prescribed in the contract. It also established an estimate of total cost for the purpose of obligation of funds and established a ceiling price which GE could not exceed, without prior approval or subsequent ratification by the United States. Under the contract, GE was required to absorb costs sustained by GE in excess of the ceiling.

The Second and Third Buy contract was a fixed-price incentive contract. This contract provided for a target cost, a target profit, a target price, and a price ceiling. The United States agreed to reimburse costs to GE up to a target cost limit. In addition, the Air Force paid the target profit as a cost of GE under the contract. The contract provided, also, that the target cost plus the target profit was called the target price. Any costs incurred by GE over the target price, but under the ceiling price, were partially reimbursed by the United States. Any costs incurred by GE over the ceiling price were not reimbursable, and would have to be absorbed by GE.

Under the contracts, GE was required to segregate all costs incurred in the performance of each Buy and maintain accurate records of these costs. Costs identifiable with a specific Buy were charged to the specific individual task for which the cost was expended. Each specific individual task was assigned a “shop order” number. Other costs, such as those not identifiable with a specific contract, were expended on overhead projects and were charged to overhead shop order numbers. Labor costs were charged to each shop order. These labor costs were calculated from time cards prepared weekly by GE employees. GE was required by federal regulation to retain all time cards and other documents relating to costs so that bills could be substantiated when audited by the United States and its departments and agencies.

When all work on a task was performed, the shop order for that particular task was closed. Information, collected from the shop orders, was used to prepare the bills or billings which were submitted to the Air Force for reimbursement.

On or about January 1, 1980, before the Second Buy was completed, GE’s costs had already exceeded the ceiling set under the Second Buy, which meant that additional costs had to be absorbed by GE. In what appears to have been an effort to reduce the amount of GE’s non-reimbursable costs on these contracts, GE, through its employees allegedly including defendant Joseph Calabria and Roy Baessler (“Baessler”), engaged in a plan to defraud the United States by claiming and causing reimbursement of costs to GE for over $800,000.00 in non-reimbursable overrun labor tasks performed on the Second Buy. In particular, when the cost ceiling on the Second Buy was approached or exceeded, substantial portions of the additional labor costs for the Second Buy were charged to other contracts, including the First Buy, the Third Buy, and an overhead claim, all of which were, at the time, either below their cost ceiling or were directly or indirectly reimbursable by the United States.

The mischarging scheme was carried out by a variety of methods. For example, shop orders for the Second Buy were closed months before the work or tasks assigned to the shop orders were complete. As a result, GE employees were not able to charge their time to the correct Buy. In another technique used to accomplish the scheme, GE, its managers, and employees, directed that labor hours billed on time cards be changed from the Second Buy to the Third Buy.

On March 28, 1984, a federal Grand Jury was impanelled to investigate possible violations of federal criminal laws in the Eastern District of Pennsylvania, including violations of 18 U.S.C. §§ 287 and 1001. In the course of its investigation, the Grand Jury called Joseph Calabria and Roy Baessler as witnesses. Both Calabria and Baessler testified under grants of immunity. Calabria was the GE manager of the 9610 group of engineers and was chief engineer with respect to certain tasks in the Second Buy. Also, it was Calabria’s responsibility to close shop orders of groups in the 9500 series. Baessler was the manager of the 9566 group of engineers and was chief engineer with respect to other tasks in the Second Buy.

Before the Grand Jury, Calabria testified (1) that he did not close nor did he know who closed shop orders for the Second Buy for the 9560 group before the work was completed, and (2) that, when he ordered labor costs billed on Lester Cohen’s (“Cohen”) time card for fiscal week 29 changed from the billing of the Second Buy to the Third Buy, he was not aware that Cohen was working on the Second Buy.

According to the Grand Jury indictment, when Calabria testified before the Grand Jury, (1) Calabria knew that he himself had closed or caused to be closed the shop orders for the Second Buy for the 9560 group before the work was completed, and (2) Calabria knew that Cohen was working on the Second Buy and that the time card was correct as originally submitted by Cohen. In addition, according to the indictment, these facts were significant to the Grand Jury investigation.

B. Facts Not Alleged Nor a Part of the Indictment

Walter Phillips, Jr., Esquire, has represented many of GE’s officials and employees before the Grand Jury. In fact, GE has paid Phillips through the period in which Phillips represented those officials and employees before the Grand Jury until the present time. In the meantime, on May 13, 1985, GE entered a plea of guilty to 108 counts of the Indictment.

GE’s officials and employees, whom Phillips represented before the Grand Jury, include Calabria, Baessler, Cohen, William Kinney (“Kinney”), Thomas Barrett (“Barrett”), Kenneth Lies (“Lies”), John Ellis (“Ellis”), Michael Boyle (“Boyle”), and John Renz (“Renz”). Of these individuals, only Calabria and Baessler were indicted under 18 U.S.C. § 1623 for false declarations before the Grand Jury. The charges against Baessler have subsequently been dropped.

The government expects Baessler, Kinney, Barrett, Lies, Cohen, Ellis, Boyle, and Renz to all testify on behalf of the government in the criminal action against Calabria. None of the government’s prospective witnesses continue to be represented by Phillips.

Each of these prospective witnesses, except Baessler, has said under oath in open court that each knowingly and voluntarily waives his attorney-client privilege for purposes of cross-examination by Phillips at Calabria’s trial. Baessler has refused and continues to refuse to waive his attorney-client privilege.

An offer of proof submitted by the government with respect to Baessler’s prospective testimony at trial indicates that Baessler will give circumstantial evidence which will, at least, marginally indicate, and, at most, establish that Calabria’s answers concerned a material matter, that Calabria must have known who closed the shop order for the 9560 group before the work was completed, and that Calabria knew that Cohen was working on the Second Buy and Cohen’s time card for fiscal week 29 was correct as submitted.

The government moves to disqualify Phillips. The government asserts that (1) because Phillips is paid by GE, Phillips is not independent and cannot be effective counsel for Calabria, and (2) because Phillips is hindered by his duty to Baessler, his former client, Phillips cannot effectively cross-examine and impeach Baessler.

Phillips, on the other hand, cannot perceive any conflicts of interest hindering his effective and zealous representation of Calabria. First, Phillips finds no conflict of interest or impropriety in his representation of Calabria while Phillips is being paid by GE. Second, Phillips, conceding that he cannot impeach Baessler, argues that the best defense tactic is to show Baessler has no personal knowledge because Baessler was on vacation when the 9560 group shop order was closed and when Cohen’s time card was corrected. Phillips believes, therefore, that he need not impeach Baessler and his duty to Calabria does not conflict with his duty to Baessler.

Calabria maintains that he understands his rights to competent and independent counsel. Calabria states, however, that he has complete confidence in Phillips, whether or not Phillips’ representation was hindered by Phillips’ duty to Baessler. In addition, Calabria said that in order to keep Phillips as his attorney, Calabria was willing to hire another attorney to cross-examine Baessler, to waive his right to cross-examine Baessler. He says that he will also waive his right to appeal an adverse verdict on the ground that his attorney’s representation was ineffective.

DISCUSSION

The court must not arbitrarily or lightly interfere with a defendant’s choice of counsel. United States v. Flanagan, 679 F.2d 1072, 1076 (3d Cir.1982), rev. on other grounds, 465 U.S. 259, 104 S.Ct. 1051, 79 L.Ed.2d 288 (1984). For example, if defendant’s attorney’s alleged conflict of interest is highly speculative, the court will not disqualify the attorney on the grounds of his conflict of interest. Where, however, an attorney’s judgment in handling a case is actually or is likely to be tainted or limited by a conflict of interest, the court should disqualify him. Id. Three considerations provide the basis of this rule. First, courts must be concerned with seeing that defendants are provided with their Sixth Amendment right to effective counsel. Second, the court must be concerned with judicial integrity. Third, the court, through its supervisory powers, must make an effort to see that the ethical standards of the legal profession are preserved.

An attorney may have a conflict of interest when one party pays the fees for the attorney to represent another party. Model Code of Professional Responsibility, DR 5-107 (the “Code”). The Code does permit, however, the attorney to accept compensation from one other than his client with the client’s consent after full disclosure. Id.

Conflict of interest concerns arise also when an attorney must prepare a case against, cross-examine, or impeach a former client on subject matter “so closely connected with the subject matter of the earlier representation that confidences might be involved.” Richardson v. Hamilton International Corporation, 469 F.2d 1382, 1384 (3d Cir.1972); United States v. Dolan, 570 F.2d 1177 (3d Cir.1978). The source of this conflict is the duty owed by each attorney to each of his clients to preserve all confidential attorney-client communications. This attorney-client privilege applies when:

(1) the asserted holder of the privilege is or sought to become a client; (2) the person to whom the communication was made (a) is a member of the bar of a court, or his subordinate and (b) in connection with this communication is acting as a lawyer; (3) the communication relates to a fact of which the attorney was informed (a) by his client (b) without the presence of strangers (c) for the purpose of securing primarily either (i) an opinion on law or (ii) legal services or (iii) assistance in some legal proceeding, and not (d) for the purpose of committing a crime or tort; and (4) the privilege has been (a) claimed and (b) not waived by the client.

United States v. United Shoe Machinery Corp., 89 F.Supp. 357, 358-59 (D.Mass.1950).

In order to assert the privilege, the holder of the privilege has the burden of affirmatively raising and demonstrating to the court the elements of the privilege. The court must, however, conclusively presume the existence of specific attorney-client confidences, in attorney disqualification cases, because the court cannot “actually inquire about the matter without thereby ... destroying the confidences.” United States v. Provenzano, 620 F.2d 985, 1005 (3d Cir.1980).

The attorney’s duty to preserve the confidences of his client does not end when the attorney-client relationship ends. The attorney continues to be obligated to protect his former client’s privileged communications until he is released from the duty. See Model Code of Professional Responsibility, Canon 4.

The defendant may waive his Sixth Amendment right to effective assistance of counsel if the waiver is knowing and voluntary. United States ex rel. Hart v. Davenport, 478 F.2d 203 (3d Cir.1973). In order for the waiver to be knowing and voluntary, the court must be satisfied that the defendant, at the time of the waiver, is aware of all the foreseeable prejudices and detrimental consequences which may result therefrom. Dolan, 570 F.2d at 1181.

Turning now to the application of these legal principles to the facts, the court has concluded, after three hearings and many hours of deliberation, that Phillips must be disqualified. Two independent grounds support this conclusion: (1) Phillips’ duty to Baessler not to disclose confidential communications hinders Phillips’ pretrial decision-making and preparation; and (2) at trial, there is strong likelihood that Phillips’ duty to Baessler will materially hinder Phillips’ defense of Calabria.

Phillips does not contest that his former representation of Baessler will limit his ability to impeach Baessler at trial. Instead, Phillips has already decided that Calabria’s best defense against Baessler’s testimony (which he has not heard) will be to limit its harmful effects and Phillips believes that cross-examination of Baessler will indicate that Baessler was on vacation when the time cards were altered and the shop orders closed (which is presumably not privileged information). Phillips concludes that since cross-examination will indicate that Baessler was not present when the time cards were altered or when the shop orders were prematurely closed, the jury will disregard, rather than disbelieve, Baessler’s testimony that Calabria knew that Cohen was working on the Second Buy during fiscal week 29 or that Calabria was responsible for closing the shop orders.

The difficulty with Phillips’ argument is that he has tailored Calabria’s defense in advance of the trial in a way that is the only way to avoid his professional disabilities arising out of previous representation of the government’s chief witness, Roy Baessler. This simply reverses the priorities that the attorney owes to his client because it puts the lawyer’s concerns ahead of the defendant’s needs and then shapes the defendant’s needs to eliminate the attorney’s problems created by a direct conflict of interest. The court must determine whether Calabria’s attorney can be independent without considering which trial tactic is defendant’s best tactic. The court has neither the ability nor the authority to pick and choose which strategy is best or will be best in Calabria’s case. What the court is sure of, however, is that to have to give up before trial the major traditional strategy of impeaching a key prosecution witness in a criminal case simply because that witness was a former client is a very disturbing development. It is true that in some circumstances the best cross-examination is no cross-examination. It is also true that every adverse witness does not have to be impeached or contradicted. It is not true, however, that these decisions are best made in a case such as this before trial. In preparation for trial, Calabria’s attorney should be able to develop all of Calabria’s defenses, unhindered by a duty to a former client. Phillips may be correct that Calabria’s best defense is not to impeach Baessler, but he could easily be wrong. In any event, whether he is right or wrong cannot be decided until Baessler testifies, at the earliest.

All lawyers worth their salt know that as evidence develops at trial, trial strategies frequently emerge and change as a defense tracks the evidence offered against a defendant. Baessler’s testimony alone may be sufficient to convict Calabria. If, in that circumstance, Phillips is unable to impeach his former client because of the risk that he may be using confidential information to do so, he has deprived his client of what may be the only argument to the jury Calabria has in his favor. A defense attorney not having formerly represented Baessler would have the right to probe and inquire and examine in detail Baessler’s role and the foundation for his testimony. Some of this may have been disclosed to Phillips, but this will not be a disability to a new attorney because he will not be barred even if some of the information that he develops might also have been unavailable to Phillips because it had been disclosed to Phillips prior to trial by Baessler as a confidential communication.

With respect to Calabria’s waiver of his rights to confront Baessler, to cross-examine Baessler, and to appeal a guilty verdict for ineffective assistance of counsel, the court finds that Calabria is not aware of the foreseeable prejudices his attorney’s continued representation will entail for his trial and the possible detrimental consequences of these prejudices. Dolan, 570 F.2d at 1181. If Baessler’s testimony is as damaging to Calabria’s case as it is expected by the government to be, and if Phillips is deprived of a full range of cross-examination of Baessler because of prior representation, the court can only conclude that there is a direct conflict of interest in continued representation and not merely a suspicion or a speculative conflict and, accordingly, the court need not accept, and does not accept, Calabria’s waiver of his right to have Phillips continue to represent him despite a disclosure of the prior representation of Baessler by Phillips. See United States v. Dolan, supra.

The court finds without merit the suggestion that the court should allow Calabria to-employ supplemental counsel for the purpose of cross-examining Baessler. This would be awkward, confusing to the jury, a fragmentation of the defendant’s right to a strong unified defense, and of doubtful effectiveness.

CONCLUSION

For the above reasons, on June 13, 1985, the court ruled from the bench that Walter M. Phillips, Jr., Esquire was disqualified from representing Joseph Calabria , in the above captioned criminal action. It was the court’s concern then, as it is now, that Calabria’s rights, inherent and necessary rights in the adversial judicial process, be preserved for trial.

      . The government reimbursed GE for all the costs which GE claimed to have incurred under these other government contracts.

      . The re-entry vehicle is the cone which carries the warhead to its target. Inside the re-entry vehicle is the arming and fusing system which causes the warhead to explode at the appropriate time.

      . The term "Buy” was used to designate the work for which, under the contract, compensation was to be paid in a particular fiscal year. The contracts, therefore, specified that costs for each Buy were to be segregated.

      . This Buy was concerned with Service Star interface adaptor units for the Service Star program.

      . This second contract pertained to the Depot Maintenance Ground Equipment/Aging and Surveillance test program and the Depot Maintenance Ground Equipment/Aging and Surveillance interactive adaptor units.

      . Representation of a defendant by an attorney burdened by a prejudicial conflict of interest "will constitute a constitutionally defective denial of effective assistance of counsel.” Walker v. United States, 422 F.2d 374 (3d Cir.), cert. denied, 399 U.S. 915, 90 S.Ct. 2219, 26 L.Ed.2d 573 (1970).

      . The Sixth Amendment of the United States Constitution provides:
      In all criminal prosecutions, the accused shall enjoy the right to a speedy and public trial, by an impartial jury of the State and district wherein the crime shall have been committed, which district shall have been previously ascertained by law, and to be informed of the nature and cause of the accusation; to be confronted with the witnesses against him; to have compulsory process for obtaining witnesses in his favor, and to have the Assistance of Counsel for his defence.