author: GOETTEL, District Judge.

text:
    CAPITAL NATIONAL BANK OF NEW YORK and Capital National Bank of New York as Assignee and Successor-In-Interest to Juan Miranda and Jim Restaurant Corp., Inc., Plaintiff, v. McDONALD’S CORPORATION and McDonald’s Business Facilities Corporation, Inc., Defendants.
    No. 84 Civ. 7238 (GLG).
    United States District Court, S.D. New York.
    Jan. 8, 1986.

      Lester A. Lazarus, P.C., New York City, for plaintiff; Harvey F. Friedman, of counsel.
    Davis, Markel, Dwyer & Edwards, New York City, for defendants; Steven M. Edwards, Paula Lambert Liang, of counsel.
   OPINION

GOETTEL, District Judge.

Before the Court are the motions of defendants McDonald’s Corporation and McDonald’s Business Facilities Corporation, Inc. (collectively “McDonald’s”) to dismiss the amended complaint pursuant to Fed.R. Civ.P. 12(b)(6), or, in the alternative, for summary judgment under Fed.R. Civ.P. 56, and for sanctions, including reasonable attorney’s fees, under Rules 11 and 37(c) of the Federal Rules of Civil Procedure. For the reasons stated below, the defendants’ motions are granted in part and denied in part.

I. BACKGROUND

In 1978, Juan Miranda, the assignor of the plaintiff, Capital National Bank (“Capital”), applied for a McDonald’s fast food franchise and submitted the requisite information on employment and financial status. Based on that information, in July 1980, McDonald’s awarded Miranda a “business facilities lease” franchise for a restaurant located in a minority neighborhood in Philadelphia. A business facilities lease franchise requires a smaller initial investment than a conventional franchise because McDonald’s purchases and owns the furniture, fixtures, and equipment. In November 1981, Miranda and McDonald’s entered into a second business facilities lease franchise agreement for another store in Philadelphia.

For each franchise, Miranda received and assented to three documents: a franchise letter agreement, an operator’s lease, and a license agreement. According to the documents, McDonald’s could terminate the franchise upon Miranda’s failure (1) to pay monthly rent and service fees, (2) to pay his suppliers, (3) to pay taxes, or (4) to submit monthly financial reports. The documents also expressly prohibited the assignment of any interest in the franchises without McDonald’s consent.

At approximately the same time Miranda received each franchise, he applied for and obtained secured loans in the amount of $115,000 from Capital to cover his initial costs. Capital executed Uniform Commercial Code (“UCC”) financing statements in connection with these loans. McDonald’s knowledge of and acquiescence in these financing arrangements is disputed by the parties.

On October 10, 1983, McDonald’s notified Miranda that it was terminating his franchise. The parties dispute the reasons for the termination. McDonald’s asserts that, by early 1983, Miranda had begun to fall behind in his payments to suppliers and to McDonald’s, that he had not filed withholding tax returns since January 1982, and that he owed various taxing authorities in excess of $180,000. Miranda, on the other hand, submits that some of his financial problems, if they in fact existed, were due to McDonald’s own conduct. He also states that he had worked out a payment schedule with his suppliers under which he remained current through the time of termination, and that he had filed timely monthly statements, obtained a deferral of payments to Capital and to McDonald’s, and arranged a tax payment agreement with the tax authorities. Miranda asserts that the termination was unwarranted in light of these financial arrangements. He also asserts that he was given no opportunity to consult with his attorney before the termination, and that he was denied the use of the Ombudsman Procedure, a method by which franchisees may air their grievances. After the termination, Miranda filed for bankruptcy.

On November 16, 1983, Capital notified McDonald’s that it had a perfected security interest in Miranda’s business. In October 1984, Capital commenced this action, as Miranda’s assignee and successor-in-interest, and on its own behalf, seeking over two million dollars in damages based on three claims: (1) the wrongful termination of Miranda’s franchises, (2) the conversion of Capital’s collateral, and (3) the “willful and wrongful violation of the applicable laws, rules, and statutes.” Complaint ¶ 18. On December 3, 1984, McDonald’s moved for a more definite statement of the pleadings.

On January 30, 1985, Capital provided McDonald’s with a more definite statement in the form of a proposed amended complaint that sought more than $100 million in damages. It contained the following 11 claims: (1) the same wrongful termination claim; (2) the same conversion claim; (3) a claim for alleged refusal to permit Miranda to utilize McDonald’s Ombudsman procedure; (4) a claim that the Notice of Termination violated the Illinois Franchise Disclosure Act by not giving Miranda the opportunity to cure defaults; (5) a claim for violations of the thirteenth amendment and 42 U.S.C. § 1981 on the ground that McDonald’s engaged in racial discrimination in granting, implementing, and terminating franchises; (6) a claim that McDonald’s violated the thirteenth amendment and 42 U.S.C. § 1982 by terminating Miranda’s franchise for discriminatory reasons; (7) a claim that McDonald’s practice of racial discrimination violated the price discrimination provision, section 704.2, of the Illinois Franchise Disclosure Act, Ill.Rev.Stat. ch. 121V2, § 704.2 (1981); (8) a claim that McDonald’s engaged in a racially discriminatory refusal to deal with Miranda, and through a restrictive covenant in the franchise agreement prohibited Miranda from engaging in any other food or restaurant business, thereby violating the antitrust laws; (9) a claim that McDonald’s violated the Sherman Act by confining Miranda’s franchises to minority neighborhoods; (10) a claim that McDonald’s attempted to monopolize the hamburger business for white persons by only granting franchises in white neighborhoods to whites; and (11) a claim for tortious breach of contract.

On February 12,1985, McDonald’s filed a supplemental memorandum pursuant to Fed.R.Civ.P. 11, notifying both the Court and Capital of its intention to seek sanctions on the grounds that Capital had no basis in law or fact to assert its civil rights or antitrust claims. Later in February 1985, the Court granted McDonald’s motion for a more definite statement and granted the plaintiff leave to file an amended complaint in lieu of such a statement. On April 29, 1985, Capital filed an amended complaint, identical to the proposed amended complaint. It is this complaint that McDonald’s now seeks to dismiss in its entirety. McDonald’s contends that all of the claims that Capital asserts as Miranda’s assignee must be dismissed because Miranda did not, and could not, assign the claims to Capital. McDonald’s also argues that all of Capital’s claims brought on its own behalf must be dismissed because Capital has no standing to bring those claims.

II. DISCUSSION

A. Capital’s Suit as Assignee of Miranda

Capital asserts its claims pursuant to a “General Loan and Security Agreement” (the “security agreement”) that Miranda executed as collateral for the loans he obtained from Capital. Capital contends that the security agreement assigns it the right to pursue those claims. McDonald's contends that, under New York law, Miranda could not assign any such rights. It also argues that the franchise agreement prohibited any such assignment.

As noted above, Miranda signed three different franchise agreements when he obtained each franchise. By their terms, all three appear to prohibit any type of assignment. The franchise letter agreement, 118, provided that “no other ... corporation [besides the franchisee] shall acquire any interest, whether direct or indirect, hereunder ... without McDonald’s prior written consent.” Defendant’s Notice of Motion, Exhibits F & G. The operator’s lease, 114.06, similarly provided that the “[l]essee shall not ... assign, convey, mortgage, pledge, or encumber this lease or any interest hereunder ... without ... obtaining Lessor’s prior written consent.” Defendant’s Notice of Motion, Exhibits H & I. Finally, 1115 of the license agreement stated, “Without the prior consent of the Li-censor, Licensee’s interest in the license shall not be assigned____” Defendant’s Notice of Motion, Exhibits J & K.

The security agreement granted Capital a security interest in:

All of the debtor’s presently owned and future accounts, contract rights, instruments, general intangibles, inventory, furniture, fixtures, and equipment, wheresoever located, as such terms are defined in the New York Uniform Commercial Code, and all other personal property ... whether now or hereafter existing or now owned or hereafter acquired ... including credits, claims, demands____

Miranda Affidavit, Exhibit A. In addition to its clear assignment of Miranda’s inventory, Capital maintains that this agreement assigned it the right to pursue all of the other claims it asserts herein on Miranda’s behalf. Capital concedes that it did not enter into a separate agreement with Miranda to pursue his choses in action against McDonald’s, but asserts that this general security interest includes an assignment of any choses in action. In addition, Capital asserts that this broad assignment did not violate the franchise agreements or interfere with McDonald’s rights thereunder.

The scope of Miranda’s assignment must be determined in accordance with New York law, as the assignments were executed in New York. American Optical Co. v. Curtiss, 56 F.R.D. 26 (S.D.N.Y.1971) (validity of assignment determined by law of place where executed). The security interest granted by Miranda to Capital is subject to the definitions and limitations of Article 9 of the New York Uniform Commercial Code (“N.Y.U.C.C.”), which applies “to any transaction (regardless of its form) which is intended to create a security interest in personal property or fixtures including goods, documents, instruments, general intangibles, chattel paper or accounts____” N.Y. U.C.C. § 9-102 (McKinney Supp.1984).

The security interest’s reference to items other than inventory, including furniture, fixtures, and equipment, is ineffective. Under the franchise agreement entered into by Miranda, a business facilities lease, the inventory was the only restaurant property he owned. McDonald’s owned the furniture, fixtures, equipment, and land. At the time of Miranda’s termination, the inventory was valued at $12,000.

In addition, although the security interest speaks of “accounts [and] contract rights,” Miranda apparently had no such rights to assign. As defined by the N.Y. U.C.C., an account is “any right to payment for goods sold or leased or for services rendered which is not evidenced by an instrument or chattel paper, whether or not it has been earned by performance.” N.Y. U.C.C. § 9-106 (McKinney Supp.1984). Miranda had no “accounts” due from McDonald’s; the only thing he received from McDonald’s was the franchise itself.

Capital apparently suggests that the agreement’s reference to “general intangibles” authorizes the assignment of this lawsuit thereby permitting it to sue McDonald’s for over $100 million in damages, rather than seeking its own much more modest losses. Section 9-106 of the N.Y. U.C.C. defines general intangibles as “any personal property (including things in action) other than goods, accounts, chattel paper, documents, instruments, and money.” N.Y. U.C.C. § 9-106 (McKinney Supp.1984). The Official Code Commentary to this section’s predecessor states that general intangibles are “miscellaneous contractual rights and other personal property which are used or may become customarily used as commercial security.” Official Comment, N.Y. U.C.C. § 9-106 (McKinney 1969). By its terms and its purpose, the statute appears to include choses in action.

Capital argues that choses in action are freely assignable. However, the assignability of choses in action is not as unlimited as Capital would suggest. First, the holder of a security interest in a chose in action has only a “qualified interest in the assigned chose, commensurate with the debt or liabilities secured, even though the assignment appears to be absolute on its face.” Beaconwear Clothing Co. v. United States, 355 F.2d 583, 590, 174 Ct.Cl. 40 (1966). Capital’s interest in any claim is therefore limited to approximately $115,-000, the maximum extent of Miranda’s indebtedness.

Second, one can only assign a chose in action that is sufficiently choate. A claim that has already accrued or is fully matured is assignable. Stathos v. Murphy, 26 A.D.2d 500, 276 N.Y.S.2d 727 (1st Dep’t.1966). A portion of an expected recovery in a pending lawsuit is also assignable as a general intangible. See Friedman, Lobe & Block v. C.L.W. Corp., 9 Wash.App. 319, 512 P.2d 769 (1973). However, the “assignment of a truly future claim or interest does not work a present transfer of property. It does not because it cannot; no property yet exists.” Stathos v. Murphy, supra, 276 N.Y.S.2d at 730. The choses in action claimed by Capital are such truly future interests; they did not exist at the time Miranda executed the security agreement, and were not specifically referred to therein. It appears that there was no intent to assign them. At the time Capital acquired its security interest, there was no reason to believe that antitrust and civil rights claims would arise. In fact, these and other claims contained in the complaint owe their existence to the dubious creativity of an attorney seeking the repayment of a bad loan made by his client. The choses in action currently pursued by Capital cannot be the sort of “personal property ... customarily used as commercial security.” Official Comment, N.Y. U.C.C. § 9-106, supra (emphasis added). A breach of contract claim that existed at the time a security interest was granted, then unbeknownst to the creditor, does not “partake of the requisite nature of collateral to which a security interest may adhere.” Williamston Pants Co., Inc. v. Bankers Trust Co., 68 A.D.2d 811, 413 N.Y.S.2d 936, 938 (1st Dep’t.1979). Capital’s claims, which are even more remote, cannot constitute such collateral.

The security agreement, then, did not assign to Capital the right to assert most of the claims contained in the complaint. In light of this finding, we need not reach the legal merits of those individual claims. We must,, however, discuss the status of Capital’s security interest in the inventory, the only franchise-related property encompassed by the security interest. We must determine the effect of the franchise agreement’s anti-assignment clauses on that security interest and the claims that arise from it.

Initially we must determine whether the law of New York or Illinois controls. McDonald’s asserts that questions as to the interpretation of the franchise agreements, and whether assignments could be made thereunder, should be governed by Illinois law since the franchise agreements provide that Illinois law shall govern all disputes. The plaintiff has not spoken to the choice of law issue.

The Court sees no reason to depart from the parties’ contractual choice of law. Under New York choice of law principles applicable in this diversity action, Klaxon Co. v. Stentor Electric Mfg. Co., 313 U.S. 487, 61 S.Ct. 1020, 85 L.Ed. 1477 (1941), the contractual selection of governing law is generally determinative so long as the chosen state has sufficient contacts with the transaction, absent fraud or violation of public policy. See CBS, Inc. v. Tucker, 412 F.Supp. 1222, 1226 n. 5 (S.D.N.Y.1975); Hawes Office Systems, Inc. v. Wang Laboratories, Inc., 537 F.Supp. 939, 942 (E.D. N.Y.1982). See also Restatement (Second) of Conflict of Laws § 187 (1971). The New York courts have enforced contractual choice of law provisions when the parties have had little contact with the chosen state. Triangle Underwriters, Inc. v. Honeywell, Inc., 457 F.Supp. 765, 768 (E.D. N.Y.1978), aff'd in part and rev’d in part, 604 F.2d 737 (2d Cir.1979); Fleischmann Distilling Corp. v. Distillers Co. Ltd., 395 F.Supp. 221, 229 (S.D.N.Y.1975). In the instant case, the matter in controversy is sufficiently related to Illinois, the chosen state. McDonald’s is an Illinois resident and Miranda sent his payments of rent and other fees to McDonald’s headquarters there. Not only are the contacts sufficient, but, in addition, other policy reasons support our decision to uphold the parties’ choice. Because McDonald’s enters into a substantial number of franchise agreements in various states, it has an interest in having those agreements governed by one body of law. Following its contractual choice of law will effectuate its intent. We will, therefore, apply Illinois law to determine the validity of the assignments under the franchise agreements.

Capital does not contest the validity or the voiding effect of the anti-assignment clauses under Illinois law, but contends that its security interest did not violate those provisions. It asserts that because the first loan transaction took place before Miranda obtained the first franchise, Capital’s security interest in the franchise inventory did not conflict with McDonald’s rights and could co-exist with them.

A number of different documents purport to control the parties’ rights. First, the security agreements executed by Miranda, perhaps before and certainly after he obtained the franchises, reference the inventory and speak of presently existing and after-acquired property. Capital later perfected its security interests. Second, the anti-assignment provisions of the three different franchise agreements seek to void any interest, including a security interest, obtained by any entity other than the franchisee without McDonald’s consent. Third, the same franchise agreements give McDonald’s the right to seize any inventory upon termination and apply it to a franchisee’s outstanding indebtedness. Operator’s Lease, ¶ 3.06; Defendant’s Notice of Motion, Exhibits H & I. McDonald’s claims that at the time of Miranda’s termination, he owed McDonald’s approximately $59,000.

This situation is not unlike that in which the priority of competing creditors is at issue. We cannot, however, reach the priority issue at this time. Questions of fact exist as to when the first security interest arose, and what inventory is actually covered, i.e., whether it covered the inventory on both restaurant premises at the time of termination, and whether the anti-assignment clauses applied to pre-existing security interests. We may not grant summary judgment when contractual language is subject to different interpretations and when issues of fact exist as to the timing of the various contracts. See, e.g., Schering Corp. v. Home Insurance Co., 712 F.2d 4, 10 (2d Cir.1983); Flli Moretti Cereali v. Continental Grain Co., 563 F.2d 563, 566 (2d Cir.1977). Moreover, the parties have not addressed the issue of priority, except to state their respective entitlements. McDonald’s motion for summary judgment on those claims relating to the inventory and its alleged conversion is, therefore, denied. It’s motion for summary judgment on all of Capital’s other claims as Miranda’s assignee is granted.

B. Capital’s Suit On Its Own Behalf

Capital is also suing on its own behalf, contending that it has suffered injury as a result of McDonald’s wrongful termination of Miranda’s franchises and conversion of the restaurant property. More specifically, Capital asserts that McDonald’s actions impaired its collateral. McDonald’s challenges Capital's standing to sue for wrongs allegedly suffered by Miranda, wrongs that form the basis of each of Capital’s eleven causes of action.

1) The Antitrust Claims

Capital’s eighth, ninth, and tenth causes of actions allege violations of the antitrust laws. Capital asserts that McDonald’s illegally and unreasonably placed restrictive and anticompetitive provisions in the franchise agreements, and restricted the locations of Miranda’s franchises to minority neighborhoods. Capital also alleges that McDonald’s attempted to monopolize the Philadelphia hamburger business for itself and for white persons. Capital claims lost profits and other damage in the amount of $30 million on these claims. In addition, in its seventh cause of action, Capital alleges that this racial discrimination violates section 704.2 of the Illinois Franchise Disclosure Act, Ill.Rev.Stat. ch. 121V2 § 704.2 (1981), which prohibits discrimination between franchisees “in the charges offered or made for franchise fees, royalties, services____” Capital claims actual damages of $5 million and punitive damages of $50 million on this claim. We treat it as an antitrust claim, because section 704.2 relates to commercial practices such as price discrimination. McDonald’s asserts that Capital does not have standing under the antitrust laws to bring these claims and that Capital has not alleged the requisite “antitrust injury.”

Section 4 of the Clayton Act confers a private cause of action upon “any person who shall be injured in his business of property by reason of anything forbidden in the antitrust laws____” 15 U.S.C. § 15 (1982). The Supreme Court has stated that the standing analysis requires an examination of “the plaintiff’s harm, the alleged wrongdoing by the defendants, and the relationship between them.” Associated General Contractors of California, Inc. v. California State Council of Carpenters, 459 U.S. 519, 535, 103 S.Ct. 897, 907, 74 L.Ed.2d 723 (1983). The Supreme Court has identified several factors that should guide the standing inquiry. Factors weighing against a grant of standing include the speculative nature of the damage theory alleged, the risk of duplicative recoveries, and the danger of complex apportionment of damages. Those that counsel for a grant of standing are the directness of the asserted injury, the presence of an improper motive for the conduct alleged, and the manageability of the resulting litigation. Id. See also Triple M. Roofing Corp. v. Tremco, Inc., 753 F.2d 242, 247 (2d Cir.1985) (listing factors). Most of these factors militate against granting standing to Capital. None counsel for such a grant. Capital is not the direct victim of McDonald’s allegedly anticompetitive conduct. There is great potential for duplicative recoveries because Miranda, the true victim, could also sue McDonald’s (though the possibility of such a suit is diminished somewhat by no bankruptcy filing). Moreover, the relationship between the conduct alleged and Capital’s injury is speculative at best; any number of things could have caused Miranda’s insolvency and Capital’s subsequent difficulties in obtaining repayment of its loans. Capital is merely a bank that loaned money to a participant in the fast food market. Capital is an indirect victim of any possible antitrust violation. Capital is not an appropriate complainant to bring this action. See In re Industrial Gas Antitrust Litigation, 681 F.2d 514, 520 (7th Cir.1982), cert. denied, 460 U.S. 1016, 103 S.Ct. 1261, 75 L.Ed.2d 487 (1983) (“[A]s a general rule, stockholders, employees, and creditors of an injured company ... have all been denied recovery because their injuries were too ‘indirect,’ ‘secondary,’ or ‘remote.’ ”). Since we find that Capital does not have standing to assert the antitrust claims in its amended complaint, we need not reach the question of whether Capital has suffered antitrust injury-

2) The Civil Rights Claims

In its fifth and sixth causes of action, Capital seeks $4 million in damages for violations of the thirteenth amendment and the Civil Rights Act of 1866, 42 U.S.C. §§ 1981 & 1982 (1982). Capital alleges that McDonald’s engaged in racially discriminatory practices in granting, implementing, and terminating its franchise contracts, and that this unlawful action damaged its collateral. McDonald’s challenges Capital’s standing to assert these claims, which rest only on a “ripple” theory, i.e., that McDonald’s violated Miranda’s constitutional rights and that Miranda’s injuries, in turn, had an effect on Capital’s security interest.

Ordinarily, a party has no standing to assert the civil rights claims of third persons. See e.g., Singleton v. Wulff, 428 U.S. 106, 114, 96 S.Ct. 2868, 2874, 49 L.Ed.2d 826 (1976); Sterngass v. Bowman, 563 F.Supp. 456, 459 (S.D.N.Y.1983), aff'd, 742 F.2d 1440 (2d Cir.1983). Although there are a number of exceptions to this rule, none apply to this case. This is not a case in which an adjudication of the rights of third parties is necessary to an adjudication of the constitutional controversy between the parties at bar. See Regents of University of Minnesota v. National Collegiate Athletic Association, 560 F.2d 352, 364 (8th Cir.1977), cert. dismissed, 434 U.S. 978, 98 S.Ct. 600, 54 L.Ed.2d 472 (1977). No such constitutional controversy exists. Nor is this a case in which the right sought to be protected — Miranda's right to be free from racial discrimination — would be forfeited if. the aggrieved party were forced to appear on his own behalf. See NAACP v. Alabama, 360 U.S. 240, 79 S.Ct. 1001, 3 L.Ed.2d 1205 (1959).

Capital’s situation is closest to the exception formulated in Pierce v. Society of Sisters, 268 U.S. 510, 45 S.Ct. 571, 69 L.Ed. 1070 (1925). In that case, a party, whose property deprivation was the indirect result of a constitutional deprivation of an absent party, was permitted to raise the issue of the absentee’s rights upon seeking to enjoin the application of the state law in question. That case, however, is distinguishable, as it involved an unconstitutional state action, and a party who sought only to forestall enforcement of an unconstitutional law not to recover for another’s injury.

Capital lacks standing to assert these civil rights claims on its own behalf.

3) The Breach of Contract Claims

Capital’s first, third, fourth, and eleventh causes of action allege wrongful termination, denial of use of an “Ombudsman Procedure,” termination in violation of section 704.3 of the Illinois Franchise Disclosure Act, Ill.Rev.Stat. ch. 121‘A, § 704.3 (1981), and tortious breach of contract, respectively. Although framed differently, these causes of action effectively state one claim: that McDonald’s breached its contracts with Miranda when it wrongfully terminated his franchises. Capital claims that it has suffered injury as a result of these breaches.

McDonald’s contends that Capital may not assert the breach of contract claims on its own behalf because it is not in privity of contract with McDonald’s and is not a third-party beneficiary of the contract. We agree.

Contract remedies exist to give injured parties the benefit of their bargain. See County of Suffolk v. Long Island Lighting Co., 728 F.2d 52, 63 (2d Cir.1984); Martin v. Julius Dierck Equipment Co., 43 N.Y.2d 583, 589, 374 N.E.2d 97, 403 N.Y.S.2d 185, 188 (1978). Absent a contractual relationship, there can be no contractual remedy. Id. Capital has no such relationship with McDonald’s; it is neither in privity with McDonald’s nor is it a third-party beneficiary of the franchise agreements between McDonald’s and Miranda. To succeed on a third-party benefit theory, a non-party must be an intended and not merely an incidental beneficiary of the contract. Owens v. Haas, 601 F.2d 1242, 1250 (2d Cir.1979), cert. denied, 444 U.S. 980, 100 S.Ct. 483, 62 L.Ed.2d 407 (1979); Reiner v. West Village Associates, 600 F.Supp. 233, 239 (S.D.N.Y.1985) aff'd, 768 F.2d 31 (2d Cir.1985); Lawrence v. Fox, 20 N.Y. 268 (1859). The franchise agreements were not intended to benefit Capital. Indeed, the intent of those agreements was to avoid any possible benefit Capital might claim. Capital does not have standing to assert the breach of contract claims on its own behalf.

4) The Conversion Claim

Capital’s second cause of action asserts that McDonald’s converted its collateral, valued at $150,000. We first note that the only property that McDonald’s could have converted, was approximately $10,000 in inventory that was on hand at the time of the termination. We defer decision on whether Capital may assert this conversion claim until it is determined whether Capital had any interest in that inventory, and whether that interest was superior to McDonald’s.

C. McDonald’s Motion for Sanctions

McDonald’s has requested sanctions, including reasonable attorneys fees, under Rules 11 and 37(c) of the Federal Rules of Civil Procedure, and under 28 U.S.C. § 1927 (1982) and 42 U.S.C. § 1988 (1982). McDonald’s asserts that Capital’s claims were frivolous and without any legal basis. Any time a party sues for a thousand times its actual losses (increasing its claims fifty fold in response to a request for a more definite statement of already exaggerated claims), an attempt to abuse the litigation process may have occurred. However, since we have not dismissed the entire complaint, it is premature to consider McDonald’s application for attorneys fees under Rule 11 at this time.

III. CONCLUSION

For the foregoing reasons, McDonald’s motion to dismiss is granted with respect to all claims except those relating to the conversion of the inventory. McDonald’s motion for sanctions is denied at this time without prejudice to its reconsideration at a later date.

SO ORDERED.

      . Apparently, Capital asked Miranda’s attorney for these rights, but he refused to assign them to Capital.

      . A chose in action is “[a] personal right not reduced into possession, but recoverable by a suit at law.” Black's Law Dictionary 305 (5th ed. 1979).

      . Miranda valued it at $12,000, but McDonald's valued it at $8,917.46, and offset that amount against Miranda’s indebtedness.

      . In 1977, section 9-106 amended, and the reference to contract rights was omitted. Prior to that time, a “contract right” was defined as "any right to payment under a contract not yet earned by performance and not evidenced by an instrument or chattel paper.” N.Y. U.C.C. § 9-106 (McKinney 1972).

      . Capital relies on Liberty Mutual Insurance Co. v. Davis, 412 F.2d 475, 484 (5th Cir.1969), to support this argument. Capital’s reliance is misplaced. In Liberty Mutual an insured assigned to an injured claimant the insured’s cause of action against an insurer for failure to settle. Assignment is favored in such cases in order to provide a remedy to an injured party who has been awarded damages against a judgment-proof debtor, when the debtor’s only valuable asset is his claim against his insurer. Assignment in such cases also prevents insurers from neglecting or strong-arming their less affluent policyholders. Those policies are not implicated in this case.

      . See supra note 2, and accompanying text.

      . N.Y. U.C.C. § 1-105(1) (McKinney Supp.1984) also permits parties to transactions to agree to apply the law of a particular state if the transaction bears a "reasonable relation" to the chosen state.

      . Even if Capital contested the validity of the anti-assignment clauses, it would not succeed. There is little question that these provisions are valid. See, e.g., Seligson v. Plum Tree, Inc., 361 F.Supp. 748 (E.D.Pa.1973); Security National Bank v. General Motors Corp., 345 Mass. 434, 187 N.E.2d 820 (1963).

      . We are only concerned with the first security agreement. The second security agreement arose after the second franchise was awarded to Miranda, at which time Capital should have been aware of the nonassignability clauses. Those clauses prevented Miranda from assigning to Capital any rights in franchise property.


source: Caselaw Access Project

author: WARRINER, District Judge.

license: Public Domain

text:
    Willard M. MASON v. RICHMOND MOTOR CO., INC., et al.
    Civ. A. No. 85-0808-R.
    United States District Court, E.D. Virginia, Richmond Division.
    Jan. 8, 1986.

      Everette G. Allen, Jr., John W. Vaughan, Jr., Hirschler, Fleischer, Weinberg, Cox & Allen, Richmond, Va., for plaintiff.
    Henry M. Massie, Jr., Robert B. Delano, Jr., Sands, Anderson, Marks & Miller, Richmond, Va., for defendants.
   OPINION AND ORDER

WARRINER, District Judge.

Presently under consideration by this Court is the question of whether the Court should exercise pendent jurisdiction over the claims asserted by plaintiff under Virginia law in this action brought under the Age Discrimination In Employment Act, 29 U.S.C. § 621 et seq. (hereinafter “the ADEA”).

On 17 October 1985 plaintiff filed his complaint. The first two counts of plaintiff’s complaint allege that plaintiff was discharged by his employer, defendant Richmond Motor Co., solely because of his age and thus in violation of the ADEA. Under Counts I and II, plaintiff alleges that the Court’s jurisdiction is derived from the ADEA and plaintiff seeks to recover his actual and liquidated damages as provided for by that legislation.

Count III of plaintiff’s complaint alleges that plaintiff had an oral contract with Richmond Ford by which he was promised that he would “always” have a position with Richmond Ford and that he would enjoy certain promotions if he continued to work for Richmond Ford. Plaintiff alleges that when defendants fired him they violated this oral contract and that plaintiff suffered injury by detrimentally relying upon the oral contract.

Count IV of the complaint alleges “willful and tortious misconduct on the part of the defendants in violation of a duty owed the plaintiff of continued employment” and essentially sounds as a violation of the “duty of fair dealing.” Plaintiff alleges that this Court has jurisdiction over Counts III and IV by means of “ancillary jurisdiction,” which I interpret as asserting that the Court has pendent jurisdiction over the claims in Counts III and IV.

I

The law presently in force with regard to pendent jurisdiction was enunciated almost twenty years ago by the Supreme Court in United Mine Workers v. Gibbs, 383 U.S. 715, 86 S.Ct. 1130, 16 L.Ed.2d 218 (1966). In that case, the Supreme Court held that in order for pendent jurisdiction to exist:

The state and federal claims must derive from a common nucleus of operative fact. But if, considered without regard to their federal or state character, a plaintiff’s claims are such that he would ordinarily be expected to try them all in one judicial proceeding, then, assuming substantiality of the federal issues there is power in federal courts to hear the whole.

Id. at 725, 86 S.Ct. at 1138 (footnote omitted).

The question of whether a court has the power to hear claims arising under pendent jurisdiction is an issue precedent to and distinct from the second question— whether the Court, in its discretion, should exercise that power. The Supreme Court in United Mine Workers v. Gibbs held that:

[The] power need not be exercised in every case in which it is found to exist. It has consistently been recognized that pendent jurisdiction is a doctrine of discretion, not of plaintiff’s right.

Id. at 726, 86 S.Ct. at 1139 (footnote and citation omitted). Thus the analysis a court must follow in determining whether to hear pendent State claims is two-fold: First, the court must determine whether it has the jurisdiction, i.e., the power, to hear the claim; second, the court must determine whether in its discretion it should hear pendent State claims which it in law has the power to hear.

II

With respect to the question of whether this Court has power to exercise pendent jurisdiction over plaintiff’s State claims, plaintiff quotes from Gibbs and then states that: “In this case, the operative facts for all counts are drawn from the same nucleus of facts — the wrongful discharge of Willard Mason solely because of age and without cause.” (Plaintiff’s Brief in Opposition at p. 6). Plaintiff then proceeds to argue that considerations of comity) jury confusion, judicial economy and convenience, and fairness to the litigants all indicate that the Court should, in its discretion, exercise jurisdiction over the pendent State claims found in Counts III and IV of plaintiff’s complaint.

Defendant, on the other hand, does not address the question of whether this Court has the power to hear plaintiff’s pendent State claims, but immediately proceeds to argue that this Court should decline, as a discretionary matter, to exercise jurisdiction over those claims. Defendant cites three cases in support of its assertion that this Court should decline to exercise pendent jurisdiction over plaintiff’s State claims: Chavez v. Guaranty Bank & Trust Co., 607 F.Supp. 484 (D.Col.1985); Ritter v. Colorado Interstate Gas Co., 593 F.Supp. 1279 (D.Col.1984); and Lettich v. Kenway, 590 F.Supp. 1225 (D.Mass.1984). In each of those cases the district court found that it had the power to hear the plaintiff’s State claims. In each the judge exercised his discretion to decline.

In Chavez, a Title VII employment discrimination action, the court apparently assumed that a common nucleus of operative fact existed because the federal and State claims both were centered on the single incident of the plaintiff’s being fired. Chavez, 607 F.Supp. at 484-85. The Court therefore found that it had power to hear the pendent State claims but in the exercise of its discretion declined to do so. Id. at 485-86.

Similarly, in Lettich v. Kenway, 590 F.Supp. 1225, an ADEA case, Chief Judge Caffrey apparently found that a “common nucleus of operative facts” was present in light of the fact that the event that gave rise both to the federal claim and the State claim was the firing of the plaintiff. See 590 F.Supp. at 1226. As did the district judge in Chavez, Chief Judge Caffrey nevertheless declined to exercise pendent jurisdiction over the State claims asserted by the plaintiff. Id. at 1226-28.

In the third case cited by defendant, Ritter v. Colorado Interstate Gas Co., 593 F.Supp. 1279, the district court was faced with an action brought under the ADEA in which the plaintiff sought to have the Court exercise jurisdiction over related pendent State claims. The Court in Ritter did not assume that it had jurisdiction simply because the ADEA claim and the pendent State claims all arose from plaintiffs firing. Nevertheless, the Court did find that it had the power to hear the pendent State claims. The Court noted that: “[a] loose factual connection between the [federal and State] claims has generally been held sufficient to satisfy” the requirement that the federal and State claims arise out of a “common nucleus of operative fact.” Id. at 1281. The judge proceeded to present the jurisdictional questions that arise in a case such as that presently before the Court:

All three claims here joined arise from [defendant’s] termination of the plaintiff’s employment. Evidence of the parties’ conduct at the time of the termination, the plaintiff’s job performance, and the company’s motivation for discharging him would have to be introduced to prove each of the claims. But the contract claims would require evidence not needed to prove the ADEA claim — such as proof of the existence and terms of the alleged ... oral agreement. The “common nucleus of operative facts” test, however, does not require that the facts giving rise to the state and federal claims be identical. In my view, the pendent contract claims meet the second Gibbs test. Accordingly, this Court is empowered by Article III of the United States Constitution to exercise jurisdiction over the pendent state claims.

Id. Again, the district judge in Ritter declined to exercise the power which he discerned. Id. at 1281-85.

Judge Hamilton of the District of South Carolina has interpreted the Gibbs test in a manner very similar to that set forth by Judge Carrigan in Ritter. In Frye v. Pioneer Logging Machinery, Inc., 555 F.Supp. 730 (D.S.C.1983), a Title VII action, Judge Hamilton stated that:

The better rule ... and the view of the Fourth Circuit, appears to require only a loose factual connection between the claims to satisfy the requirement that they arise from a common nucleus of operative fact. Only when the state law claim is totally different from the federal claim is there no power to hear the state claim. See Wright, Miller & Cooper, Federal Practice and Procedure: Jurisdiction, § 3567 pp. 445-47; Webb v. Bladen, 480 F.2d 306 (4th Cir.1973); Cf. Hales v. Winn-Dixie Stores, Inc., 500 F.2d 836, 848 (4th Cir.1974) ...

Frye, 555 F.Supp. at 732.

I have read each one of the above mentioned cases carefully. I think the respective judges have misread Gibbs. In so doing they have expanded federal jurisdiction beyond the Gibbs limit. Only Congress is empowered to expand the jurisdiction of the district courts. U.S. Const, art. Ill, § 1. Accordingly, I must decline to follow the judges’ lead. In particular, I must take exception to the concept that only a “loose factual connection” between the federal and State claims is required to empower the federal court to exercise pendent jurisdiction. A fortiori, I wholly disagree with Judge Hamilton that jurisdiction exists in such cases unless the facts in the State and federal claims are “totally different.” I think that a plain reading of the language in United Mine Workers v. Gibbs illustrates why such an interpretation is fallacious. I also think that this progression from “common nucleus” to “totally different” is a paradigm of judicial lawmaking.

The Supreme Court in Gibbs held that for pendent jurisdiction over a State claim to be exercised by a federal court, the asserted federal claim must be “sufficient to confer subject matter jurisdiction on the Court.” 383 U.S. at 725, 86 S.Ct. at 1138. The Court then went on to hold that: “The state and federal claims must derive from a common nucleus of operative fact.” Id. This sentence is not a statement that the State and federal claims must have some common facts or that the two claims must arise from the same incident. The Court requires a “common nucleus of operative fact.” My understanding of the word “nucleus” is that it refers to something at the heart or center of the subject in question, not to a matter that is peripheral or tangential, not within the penumbra but in the umbra. A “loose connection” and a “common nucleus” simply aren’t synonymous. They aren’t even similar. They are closer to antonyms than to synonyms.

Not only must the facts be at the nucleus of both State and federal claims, the facts common to each case must be the operative facts. Mere commonality of facts is insufficient. Even commonality at the nucleus is insufficient. The facts which operate to give rise to the federal claim must be the facts which operate to give rise to the State claim. The word “operative” as used in Gibbs makes sense, and is given meaning, only when so construed. Furthermore, the Supreme Court held in Gibbs that the claims must derive from a common nucleus of operative fact, not that they may do so.

Had the Court in Gibbs stood on that mandate, without further explanation, the limitation on a federal court’s jurisdiction to hear pendent State claims would be relatively well-defined. The Court, however, added the following sentence:

But if, considered without regard to their federal or state character, a plaintiff’s claims are such that he would ordinarily be expected to try them all in one judicial proceeding, then, assuming substantiality of the federal issues there is power in federal courts to hear the whole.

Id. One could read the introductory phrase “But if” as a qualification or even an avoidance of the requirement that the State and federal claims derive from a common nucleus of operative fact. To do so would be to eviscerate the requirement. Indeed, the mandate would be wholly subsumed by the qualification. Such an interpretation would be inconsistent with common sense. Allowing the exception to swallow the rule makes stating the rule pointless.

I cannot, and do not, assume that those who interpret our laws are devoid of common sense. I must therefore read the phrase “but if” as introducing an additional requirement for the existence of pendent jurisdiction and not as a qualification or diminution of the jurisdictional prerequisites. To interpret Gibbs otherwise would be to allow a federal court to exercise jurisdiction over pendent claims any time that a plaintiff “would ordinarily be expected to try them» all in one judicial proceeding.” Fed.R.Civ.P. 18 indicates that one may “ordinarily be expected” to try in one suit “as many claims ... as he has____” Thus, if the second sentence be not read within the constraints of the first sentence there is no limit on pendent jurisdiction.

My reading of Gibbs not only comports with the language of the decision, it also is consistent with basic principles of federal jurisdiction. Federal courts are courts of limited jurisdiction and cannot usurp State claims from State courts unless empowered to do so under the Constitution by Congress. The conclusion that a federal court has the power to hear and decide any State claim is not one that should be reached lightly or routinely, for to do so would be to violate a tenet of our federal system.

My understanding of United Mine Workers v. Gibbs, then, precludes any interpretation that permits a federal court to exercise its pendent jurisdiction based upon a “loose factual connection” between the federal and State claims. See, e.g., Ritter v. Colorado Interstate Gas Co., 593 F.Supp. at 1281; Frye v. Pioneer Logging Machinery, Inc., 555 F.Supp. at 732. It is not the rule that pendent jurisdiction exists in every case except in those rare instances where the facts are “totally different,” as Frye would have it. Justice Brennan is not tongue-tied. If he had wanted to say “loose connection” he would not have said “common nucleus of operative fact.”

Applying United Mine Workers v. Gibbs to the case presently before me, then, I must conclude that I do not have jurisdiction to hear plaintiff’s pendent State claims because there is no “common nucleus of operative facts” shared by plaintiffs ADEA claims and his breach of employment contract and tort claims.

Only one fact is common to both the federal and the State claims; and that is that plaintiff was fired by his employer, Richmond Motor Co. That fact must be proven by plaintiff both under the ADEA claim and under the State common law claims. With respect to his ADEA claim, plaintiff must also prove that he is at least forty but less than seventy years of age; that he was discharged because of his age; that a younger man was appointed to the position formerly held by plaintiff; and that plaintiff has complied with the administrative exhaustion requirements of 29 U.S.C. § 626(d). Each of these facts is irrelevant, or at least immaterial, to plaintiffs successfully proving his State breach of employment contract and tort claims.

Conversely, with respect to his State claims, plaintiff must prove, inter alia, that plaintiff had a contract of employment with defendant; that during the course of his employment various promises were made to plaintiff; that these' promises either created an oral contract or that plaintiff detrimentally relied upon those promises or actions; that defendant failed to deal “fairly” with plaintiff; and that the agreement between plaintiff and defendant was not terminable at the will of defendant. None of these facts is material to proof of plaintiffs ADEA claim.

In an ADEA case very similar to the one at hand, District Judge Richard C. Erwin refused to exercise pendent jurisdiction, noting that:

The plaintiff has not alleged that his employment contract was breached because of his age; rather, his state and federal claims “present entirely different elements of proof and theories of recovery.”

Sanders v. Duke University, 538 F.Supp. 1143, 1148 (M.D.N.C.1982) (quoting Wilder v. Irvin, 423 F.Supp. 639, 642 (N.D.Ga. 1976)). I agree with Judge Erwin’s formulation.

Plaintiff’s State and federal claims in this case “present entirely different elements of proof and theories of recovery.” Stated differently, plaintiff’s claims fail to depend upon a “common nucleus of operative facts.” The fact that plaintiff was fired is unquestionably at the heart, or nucleus, of both his federal and his State claims and it certainly is an operative fact, but otherwise the facts needed to be developed to prove his respective claims are distinct from each other. I therefore find that this Court does not have jurisdiction to entertain plaintiffs pendent State claims set out in Counts III and IV of plaintiff’s complaint.

III

When a court determines that it lacks jurisdiction the only function that remains is to shut up. But in deference to learned judges who I respect, I think it only prudent to acknowledge that their understanding of pendent jurisdiction may be correct and mine incorrect. On this assumption I will examine the discretionary aspects of pendent claims.

Even assuming that this Court did have the power to hear plaintiff’s pendent claims, I would decline to do so as a matter of discretion. The United States Supreme Court in United Mine Workers v. Gibbs identified four factors which may be considered by a federal court in determining whether to dismiss pendent State claims within the court’s jurisdiction. A federal court should exercise its discretion to dismiss pendent State claims 1) when “considerations of judicial economy, convenience and fairness to litigants” are not present; 2) when needless decisions of State law might be made by the federal court and “a surer-footed reading of applicable law” would be made in the State court; 3) when “it appears that the State issues substantially predominate, whether in terms of proof, of the scope of the issues raised, or of the comprehensiveness of the remedy sought,” and the State claim is not closely tied to questions of federal policy; and 4) when there are reasons that are “independent of jurisdictional considerations, such as the likelihood of jury confusion in treating divergent legal theories of relief.” United Mine Workers v. Gibbs, 383 U.S. at 726-27, 86 S.Ct. at 1139.

The second Gibbs factor — a surer-footed reading of State law in State court — is determinative in this case. Plaintiff’s third count asserts that he is entitled to recover for breach of an oral contract based upon promises allegedly made to him by defendant King, an alleged agent of defendant Richmond Ford. Count IV of plaintiff’s complaint alleges breach of an implied covenant of fair dealing and willful and tortious misconduct as a result of a violation of the employment agreement asserted in Count III. No Virginia court has yet recognized either of these claims for relief so far as I know, nor has any Virginia court ruled, so far as I know, that such relief is in all cases unavailable.

Virginia has long followed the “at will” employment doctrine, which holds that:

[Wjhere no specific time is fixed for the duration of employment, it is presumed to be an employment terminable at will, providing a dismissed employee no basis for recovery of damages against his erstwhile employer. Hoffman Co. v. Pelouze, 158 Va. 586, 164 S.E. 397 (1932). We said, however, that “this presumption ... is rebuttable.” Id at 594, 164 S.E. at 399.

Sea-Land Service, Inc. v. O’Neal, 224 Va. 343, 297 S.E.2d 647, 650 (1982). My research has discovered no case that would indicate that the Virginia Supreme Court has decided to depart from this general rule. But it must be noted that the general rule is not stated in absolute terms.

Quite a few other courts have repudiated the “at will” employment doctrine for their States, finding that a claim for damages may arise where representations have been made to employees that they could keep their jobs as long as they performed satisfactorily. An early departure from the established law in this area was Toussaint v. Blue Cross & Blue Shield of Michigan, 408 Mich. 579, 292 N.W.2d 880 (1980), where the Supreme Court of Michigan held that:

When a prospective employee inquires about job security and the employer agrees that the employee shall be employed as long as he does the job, a fair construction is that the employer has agreed to give up his right to discharge at will without assigning cause and may discharge only for cause (good or just cause). The result is that the employee, if discharged without good or just cause, may maintain an action for wrongful discharge.

408 Mich, at 610, 292 N.W.2d at 890. Numerous courts have followed the Michigan Supreme Court’s ruling in Toussaint, see Brooks v. Trans World Airlines, Inc., 574 F.Supp. 805, 809 n. 1 (D.Col.1983) (listing courts), while numerous others have explicitly declined to do so, see id. at 809 n. 2 (listing courts).

Similarly, plaintiff’s claim under Count IV of the complaint, based on a violation of an implied covenant of good faith and fair dealing, is not one that has been recognized or negated by the Virginia legislature or by the Virginia Supreme Court, so far as I am advised. Other courts have recognized such a cause of action. See, e.g., Cleary v. American Airlines, Inc., 111 Cal.App.3d 443, 168 Cal.Rptr. 722 (1980); Monge v. Beebe Rubber Co., 114 N.H. 130, 316 A.2d 549 (1974); Fortune v. National Cash Register Co., 373 Mass. 96, 364 N.E.2d 1251 (1977). A Virginia judge would have a much firmer grasp of the state of Virginia law in this evolving area.

In Ritter v. Colorado Interstate Gas Co., Judge Carrigan declined to exercise jurisdiction over State claims identical to those asserted here by plaintiff in Counts III and IV. 593 F.Supp. at 1284-85. Judge Carrigan succinctly stated the problem presented this Court by plaintiff’s pendent State claims:

Plaintiff, through his pendent state claims, is not asking this Court to apply current [State] law but to expand [State] law in the direction of increased employee rights.

Id. at 1285. I should think in such an expansion in Virginia would be the work of the General Assembly. Perhaps, the State courts are the proper arena for these policy decisions. Surely a federal judge has no business making such a decision for the people of the Commonwealth.

The split among the State courts that have considered the questions here presented demonstrates that State judges, if they feel a legislative vocation, may decide to alter the law in their respective States. But I would exercise discretion under the Gibbs criterion and leave these problematic questions of State law to State law judges or to the citizens’ elected representatives.

I repeat. Counts III and IV will be dismissed because I believe I lack jurisdiction. If on the other hand Judge Hamilton has better discerned the law, then Counts III and IV will be dismissed as a matter of discretion.

Accordingly, Counts III and IV of plaintiff’s complaint are hereby DISMISSED.

And it is so ORDERED.

      . The requirement of a "common nucleus of operative fact” is mandatory as is indicated by the use of the word "must.” But even so, the claims asserted should "ordinarily be expected" to be tried in one judicial proceeding in order for a federal court to have the “power" to try the State claim. This is my synthesis of the paragraph.

      . The significance of divergent elements of proof with respect to determination of whether there is a "common nucleus of operative facts” is borne out by the cases cited by Judge Hamilton in Frye v. Pioneer Logging Machinery, Inc., supra, in support of his understanding of the "view of the Fourth Circuit." 555 F.Supp. at 732.
      In the first case cited by Judge Hamilton, Webb v. Bladen, 480 F.2d 306 (4th Cir.1973), the plaintiff, a subcontractor, asserted that the defendant union had pressured two general contractors to cease employing the plaintiff. The plaintiff alleged a federal claim for violation of the federal antitrust laws, and four pendent State claims: violation of the State antitrust laws; a State common law action for restraint of trade; tortious interference with contract; and violation of the State "right-to-work" law. See 480 F.2d at 308. The Fourth Circuit reversed the district court's dismissal of plaintiff's pendent claims, holding that the federal court was empowered to hear the pendent claims, even though the federal claim was properly dismissed and the State claims were brought on legal theories different from that advanced with respect to the federal claim. 480 F.2d at 309-10. Significantly, however, in Webb the facts plaintiff was required to prove to make out a prima facie case for his federal claim were identical to those required to be proved with respect to his State claims: that the union had approached the general contractors and had pressured them to terminate their contracts with the plaintiff.
      In the second case cited by Judge Hamilton, Hales v. Winn-Dixie Stores, Inc., 500 F.2d 836 (4th Cir.1974), the Fourth Circuit held that the district court was not empowered to hear plaintiffs pendent claim because the claims asserted by plaintiff under both counts in the complaint were “separately maintainable and determinable without any reference to the facts alleged or contentions stated in or with regard to the other count." Id. at 848. In Hales, the facts plaintiff had to prove with respect to his properly asserted federal claim were, as here, different from those required to prove the pendent claim. The Fourth Circuit therefore held that the two counts did not arise from a "common nucleus of operative facts.” Id. at 847-48.
      It is apparent, then, that far from demonstrating that the Fourth Circuit requires "only a loose factual connection between the claims to satisfy the requirement that they arise from a common nucleus of operative fact,” see Frye v. Pioneer Logging Machinery, Inc., 555 F.Supp. at 732, the two cases discussed above and cited by Judge Hamilton in Frye envision a close factual connection between the claims. Indeed, it could be argued that they require that the facts sought to be proven in the federal and State claims be substantially identical. At the least they require that there be “a common nucleus of opérative fact.”


author: EDWARD C. REED, Jr., District Judge.

text:
    SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. ELMAS TRADING CORPORATION, Republic Overseas Bank, Ltd., James L. Attarian and Donald D. Smith, Defendants.
    No. CV-R-85-263-ECR.
    United States District Court, D. Nevada.
    Jan. 8, 1986.

      Kerry C. Feffer and Robert D. LaFramenta, S.E.C., Los Angeles, Cal., for plaintiff.
    Thomas Nolan, Maryann Marzano, James Ridley Ferrand and Thomas L. Taylor, III, Beverly Hills, Cal., for Republic Overseas Bank, Ltd.
    Robert J. Fry, Reno, Nev., for Elmas Trading Corp.
    John Vandevelde and Stephen B. Sadowsky, Los Angeles, Cal., for Attarian & Smith.
   ORDER

EDWARD C. REED, Jr., District Judge.

DEPOSITOR’S ADVISORY COMMITTEE

This Court, at a previous hearing, rejected the motion of Ronald Yett to select a “watchdog committee” with Mr. Yett as chairperson. We did, however, reserve ruling on whether or not some other form of advisory committee, comprised of depositors, would be formed. This Court has taken into consideration the arguments raised at the oral hearings and the papers filed, both in support and in opposition to the appointment of such a committee. We have concluded that a Depositors’ Advisory Committee is desirable in this case and are, thus, providing the framework for such a committee.

SELECTION AND QUALIFICATIONS OF COMMITTEE MEMBERS

The Receiver proposed that the members of an advisory committee be chosen in a similar manner to that used in reorganizations under bankruptcy. See 11 U.S.C. § 1102. Under Chapter 11 reorganization, committee members appointed are those creditors with the seven largest claims who are willing to serve. 11 U.S.C. § 1102(b)(1). This Court also considered liquidation proceedings in bankruptcy. Under those proceedings, committee members are elected at the creditor’s meeting. See 11 U.S.C. § 705.

Although this case is not a bankruptcy proceeding, this Court is mindful of the similarities that this receivership has to a bankruptcy proceeding. See Local Rule 21(i). Accordingly, we have used as guidance the bankruptcy statutes. We find, however, that neither means of selecting committee members provided for in bankruptcy is wholly appropriate in this case. An election would be unmanageable and of great expense. There are approximately 4,700 investors and an election would, therefore, burden the receivership res. We are also cognizant of the impracticality of the investors having knowledge of each other or of the individual qualifications of particular depositors to vote on an informed basis to protect their interests. This Court also finds that an arbitrary selection of the largest depositors is unreasonable. There is no reason to distinguish among the depositors on the basis of the size of their investments.

We have, therefore, determined that a random selection is the most equitable and practical method to appoint committee members. The Receiver will be charged with randomly choosing a pool of potential committee members by mailing to every two hundredth depositor on his list of depositors a letter and a copy of this order. The letter will outline the authority the committee will possess and will request a response from the recipient of the letter as to whether the person would be willing and desirous of serving on the Depositor’s Advisory Committee. For this purpose, the Receiver shall omit from his list of depositors all financial consultants. We find that financial consultants should not serve on any advisory committee because of the conflict of interest financial consultants have with the receivership. Financial consultants, by virtue of the case which the Receiver has brought against them, possess interests adverse to the receivership assets. To the extent that financial consultants are merely innocent investors, their interest will be adequately represented by those investors selected to serve on the committee.

The Depositors Advisory Committee shall consist of seven persons. In communicating with each said two hundredth depositor on the list of depositors, the Receiver shall set a deadline for their responses of not more than 10 days from the time of receipt of the Receiver’s communication, which shall indicate whether or not they desire to serve on the committee, as mentioned above. As soon as the Receiver has compiled a list of names and addresses of those who wish to serve, he shall file such list with the Clerk of the Court. Within ten days thereafter the Clerk of the Court shall draw by lot seven names from the list submitted and the seven persons whose names are drawn shall comprise the committee. The Clerk shall advise counsel and those selected to serve of the persons so chosen to comprise the committee. AUTHORITY OF COMMITTEE

In determining the parameters of the committee’s authority, we again turned to the bankruptcy proceedings. This Court finds that the more limited role of the committee in Chapter 7 liquidation proceedings is more appropriate because liquidation is more similar to the receivership in this case than is a Chapter 11 reorganization proceeding. The ultimate goal is a liquidation of the receivership res and, therefore, the committee will have a more limited role as in Chapter 7. Compare 11 U.S.C. § 705(b) with 11 U.S.C. § 1103(c).

The Depositors’ Advisory Committee shall have the following authority and responsibilities. The committee may:

(1) state the position of the committee to the Court as to any issue which is brought before the Court;
(2) communicate to investors only after the Court approves any such proposed communication;
(3) consult with the Receiver as to the plans of liquidation which may be proposed and make recommendations to the Receiver as a committee with respect to the same;
(4) communicate with depositors after approval by this Court and in conjunction and coordination with communications being sent by the Receiver to depositors.

The committee shall elect a chairperson and all communications with the Court, the Receiver, and the depositors shall be by or through the chairperson. This Court is requiring approval of all communications because of the danger of misinformation. EXPENSES OF COMMITTEE

This Court refuses to burden the receivership or diminish the receivership assets with unnecessary expenses. Thus, the committee may not hire an attorney, accountant, or other experts. However, the Receiver and his attorneys and accountants shall, on a reasonable basis, make themselves available to meet with and provide information requested by the committee at the time of its meetings as set forth hereinbelow. Information which may be provided on such a basis is limited to those functions which the committee is entitled to exercise as set forth in this order. The committee meetings shall be set on reasonable notice to the members and to the Receiver and his attorneys and accounts and shall make reasonable accommodations for the schedules of all concerned so that all will be able to attend. In the event that any dispute arises as to the operation of the committee or its relationship to the Receiver- and his attorneys and accountants, instructions may be sought from the Court.

The actual expenses of the committee may be paid by the Receiver only upon prior approval by the Court. The expenses of the committee members shall be paid out of the receivership estate and are expressly limited to the following:

(1) members are limited to payment of coach class air fare to and from one committee meeting per month;
(2) no committee meeting shall last longer than two days; no more than one committee meeting may be held per month; all such meetings shall be held in Los Angeles, California, or Reno, Nevada;
(3) per diem expenses for committee members for travel to and from committee meetings and for their period of attendance at such meetings, shall be limited to an amount not to exceed the maximum paid allowances prescribed by the Administrator of General Services pursuant to Section 5702(c) of Title 5 for official travel in the area of attendance by employees of the federal government. In that Los Angeles, California, and Reno, Nevada, have been designated high rate geographical areas by the Administrator of General Services, the committee members shall be allowed a daily subsistence in the amount designated by the Administrator of General Services for such area pursuant to Section 5702(c) for official travel in such areas by employees of the federal government.
(4) members are limited to one conference call per month, for the committee to confer via telephone. No such conference call shall last longer than one hour.

No expenditures are authorized to be made by the committee or its members except as expressly set forth hereinabove.

MISCELLANEOUS

One copy of all documents filed with the Court shall be served upon the chairperson of the advisory committee, as soon as such chairperson is elected.

Neither the committee nor any of its members shall have any authority or responsibility that is not specifically and expressly enumerated in this order.

IT IS SO ORDERED.


author: SPELLMAN, District Judge.

text:
    UNITED STATES of America, Plaintiff, v. ONE (1) 1983 HOMEMADE VESSEL NAMED BARRACUDA, Official No. 662483 with its tackle, apparel and equipment, Defendant.
    No. 85-2089-CIV-EPS
    United States District Court, S.D. Florida, Miami Division.
    Jan. 14, 1986.

      Lynn D. Rosenthal, Asst. U.S. Atty., Miami, Fla., for plaintiff.
    Rhea Grossman, Miami, Fla., for defendant.
   MEMORANDUM OPINION

SPELLMAN, District Judge.

I

This CAUSE came before the Court for a non-jury trial. The Plaintiff, the United States of America, seeks civil forfeiture of the Defendant, Vessel, predicated upon alleged violations of 19 U.S.C. § 1595a, 49 U.S.C. § 781, 21 U.S.C. § 881, and 19 U.S.C. § 1703. This Court has jurisdiction pursuant to 28 U.S.C. §§ 1345 and 1355. This Court concludes that the Defendant, Vessel, should be forthwith forfeited to the United States.

A. PROCEDURAL BACKGROUND

The Plaintiff, the United States of America, filed a Complaint for Forfeiture in Rem, alleging that on or about December 22, 1984, Officers of the United States Customs Service at Key West, Florida seized One (1) 1983 Homemade Vessel named Barracuda, Official No. 662483, with its tackle, apparel and equipment. The Plaintiff alleged that said Vessel was used and/or attempted to be used for the facilitation and/or transportation and/or bringing in of approximately 2,000 pounds of marijuana into the commerce of the United States, and that a secret compartment for the purpose of smuggling was built into the Defendant, Vessel.

The Claimant, Estrella Soria, filed her Answer and Affirmative Defenses to the Complaint for Forfeiture in Rem alleging an interest in the Defendant, Vessel, as its lawful owner. The Claimant also alleged that she had no knowledge of the Vessel’s use in transporting contraband and that she is an innocent owner in these proceedings. The Claimant further defended the action on the basis that the Government had not established probable cause for the seizure.

B. FACTS

The factual scenario for this action began on December 21,1984 when the United States Coast Guard Cutter Shearwater was on patrol and noticed radar contact in the international waters, the Great Bahama Bank. The Shearwater intercepted the radar contact and spotted the Vessel, Barracuda. The Officers noticed that the Barracuda had only sidelights and that it was riding down by the bow. Lt. M.C. Cosenza and three other Coast Guard Officers, boarded the Barracuda pursuant to 14 U.S.C. § 89. The Officers received consent and conducted a search of the Vessel. The Coast Guard Officers found fiberglass resin on the boat, acetone fiberglass on the fuel tanks, excess water tanks on board, and extraordinarily large fuel tanks. By the time the Officers had completed the safety and documentation check, they found five violations of the United States Marine laws and regulations. These included (1) no main beam number, (2) no hailing port displayed, (3) no bell, (4) no throwable device, and (5) a marine sanitation lacking Coast Guard approval. The Officers examined the Immigration and Naturalization documents for the two men who were on board the Barracuda. The documentation revealed that neither of the men were United States citizens and that both of the men had been in Colombia as late as December 14, 1984. During this initial search, the Officers did not discover the contraband.

When the Officers checked with the mainland, they learned that Leoner Jimenez, the alleged master of the vessel, was out of the Southern District of Florida, in violation of his bond pending trial for drug-related crimes. Mr. Jimenez was arrested and the Barracuda, without a United States Master and only one crew member remaining, was towed into Key West, Florida.

Once in port in Key West, the United States Customs Officers in conjunction with the Coast Guard conducted a full border search pursuant to 19 U.S.C. § 1581(a). The search disclosed two hidden compartments affixed to the bottom of the vessel. They measured approximately 15' by 4' by 3'. The Customs agents cut through these aluminum containers and found 2,008 pounds of marijuana. The marijuana field tested positive. Leoner Jimenez and Modesto Maza were arrested and charged with drug crimes.

The Barracuda’s documentation showed Estrella Soria to be the owner of the Vessel. In April 1984, she purchased the Barracuda for $25,000.00. It was established at trial that she paid the monies on two separate dates so she could obtain the highest rate of interest for the certificates of deposit she had to cash. Mrs. Soria testified that she originally purchased the Barracuda to use it herself for fishing. Later, she realized that if she ever decided to sell the Vessel, she could probably obtain a good price for it. Mrs. Soria testified that the boat was inspected by a mechanic, who also testified at trial, to ascertain the seaworthiness and value of the Vessel she was purchasing. Mrs. Soria did not insure the boat. She testified at trial that she failed to do so because of the forbidding cost of the insurance.

Mrs. Soria left the boat docked at Defender Yacht. She testified at trial that she periodically checked on the Vessel while it was docked there. During a period of time in which she was looking to sell the Vessel, she leased it instead. Mrs. Soria testified that she decided to lease the Barracuda to Antonio Herrera, an individual she had known for many years and who had been her tenant for over five years. The agreement between Mrs. Soria and Mr. Herrera was oral. She testified that there was no written lease because she did not wish to be bound by a written document if she subsequently found a purchaser. The terms of the agreement were that Mr. Herrera would pay $1,000 per month, in cash. He did not pay for storage or for insurance.

Mrs. Soria testified that she knew nothing of any arrangement between Mr. Herrera and Mr. Jimenez, nor did she suspect that her vessel was being used for the transportation of illegal substances. It was established at trial that during the period of time in which the events took place, Mrs. Soria was forced to leave Florida and travel to New York to attend to illness in her family. Upon her return, she discovered that the boat was missing. Mrs. Soria did admit to being aware that narcotics are smuggled into the South Florida area aboard fishing vessels, but stated that it never occurred to her that this would happen to her Vessel.

It was never established at trial exactly when the secret compartments were affixed to the boat. Mrs. Soria claimed that she had no knowledge of any such compartments when she purchased the Vessel. The government attempted to establish that the secret compartments were fitted to the hull when the boat was constructed and that they could not have been the result of subsequent modification. Their alleged expert, however, a Custom’s Officer, who had no expertise in boat construction, was not qualified to give such an opinion. When this Court impressed upon the government their failure to qualify the Custom’s Officer as an expert, they did not then produce a bona fide expert who could give an opinion as to when the compartments were fitted onto the Vessel.

II

A. STANDING

A forfeiture proceeding is an in rem action brought against seized property pursuant to the fiction that the property itself is guilty of facilitating the crime. Calero-Toledo v. Pearson Yacht Leasing Co., 416 U.S. 663, 680-4, 94 S.Ct. 2080, 2090-92, 40 L.Ed.2d 452 (1977).

To contest a forfeiture action, an individual must first demonstrate an interest in the seized property sufficient to satisfy the court of his or her standing as a claimant. United States v. Three Hundred Sixty Four Thousand Nine Hundred Sixty Dollars in U.S. Currency, 661 F.2d 319, 326 (5th Cir.1981). The burden of establishing standing is on the claimant. United States v. Five Hundred Thousand Dollars, 730 F.2d 1437, 1439 (11th Cir.1984). One must claim an ownership or possessory interest in the property seized. Id. Ownership may be established by proof of actual possession, control, title, and financial stake. United States v. One 1945 Douglas C-54 (DC-4) Aircraft, 647 F.2d 864, 866 (8th Cir.1981). The possession, however, of bare legal title by an individual who does not exercise dominion and control over the property is insufficient to establish ownership. United States v. One 1945 Douglas C-54 (DC-4) Aircraft, 604 F.2d 27, 28 (8th Cir.1979).

Estrella Soria has demonstrated an interest in the Defendant, Vessel, sufficient to satisfy this Court of her standing as Claimant to contest the forfeiture. The Barracuda’s documentation showed Estrella Soria to be the owner of the Vessel. It has also been shown that she exercised dominion and control over the property sufficient to establish her ownership. No evidence has been produced that would indicate that she is merely a “nominal owner.”

B. PROBABLE CAUSE

In a forfeiture proceeding, the government bears the initial burden of proof as it must show probable cause for the institution of the suit. 21 U.S.C. § 881(d); 49 U.S.C. § 784; United States v. One 1971 Chevrolet Corvette Automobile, 496 F.2d 210, 212 (5th Cir.1974). See also, United States v. One (1) 1982 28' International Vessel, 741 F.2d 1319, 1321 (11th Cir.1984). Probable cause is defined as a reasonable ground for belief of guilt supported by less than prima facie proof, but more than mere suspicion. United States v. One 1978 Chevrolet Impala, 614 F.2d 983, 984 (5th Cir.1980); United States v. One 1975 Ford F100 Pick-up Truck, 558 F.2d 755, 756 (5th Cir.1977).

The government had probable cause to seize the Defendant Vessel and institute this forfeiture suit. When the government seized the Barracuda, a United States Customs search revealed 2,008 pounds of marijuana located in two hidden compartments attached to the bottom of the Vessel. The Defendant, Vessel, did facilitate the receipt, possession and concealment of a controlled substance and contraband article in violation of 19 U.S.C. § 1595a, 21 U.S.C. § 881, and 49 U.S.C. § 781. This Court therefore, concludes that the United States has met its burden of establishing probable cause for the seizure of the vessel and the institution of the forfeiture action.

The Claimant has also questioned the legality of the search itself. The exclusionary rule applies to forfeiture proceedings, so probable cause for forfeiture cannot rest upon tainted evidence. United States v. One 1979 Mercury Cougar XR-7, 666 F.2d 228, 230 (5th Cir.1982). However, searches at our borders by Customs agents without probable cause and without a warrant are reasonable and do not violate the fourth amendment. United States v. Ramsey, 431 U.S. 606, 97 S.Ct. 1972, 52 L.Ed.2d 617 (1977). The United States Customs Officers conducted a full border search pursuant to 19 U.S.C. § 1581(a). Moreover, when the United States Coast Guard Cutter Shearwater initially intercepted the Vessel, Barracuda, in the international waters and boarded the Vessel pursuant to 14 U.S.C. § 89, they received consent prior to conducting a search of the Vessel. This warrantless boarding and search of the Barracuda was Constitutional because it was conducted pursuant to consent, Schneckloth v. Bustamonte, 412 U.S. 218, 93 S.Ct. 2041, 36 L.Ed.2d 854 (1973), and such was granted by an individual with apparent authority to issue consent, United States v. Carter, 569 F.2d 801, 804 (4th Cir.1977). In sum, under the circumstances of this case, the search of the Barracuda was both reasonable and lawful.

C. INNOCENT OWNERSHIP

Once the government establishes probable cause, the burden of proof shifts to the Claimant to prove a defense to to the forfeiture. 19 U.S.C. § 1615; United States v. One 1975 Ford F100 Pick-up Truck, 558 F.2d 755, 756 (5th Cir.1977); United States v. One 1971 Chevrolet Corvette Automobile, 496 F.2d 210 (5th Cir.1974). The Claimant must prove a defense by a preponderance of the evidence. Ford F100 Pick-up Truck, 558 F.2d at 756.

Innocence of the Claimant, in and of itself, is an insufficient defense to forfeiture. United States v. One 1957 Rockwell Aero Commander 680 Aircraft, 671 F.2d 414, 417 (10th Cir.1982); see also Calero-Toledo v. Pearson Yacht Leasing Co., 416 U.S. 663, 683-90, 94 S.Ct. 2080, 2091-95, 40 L.Ed.2d 452 (1974). To prevail on the defense of innocence, Claimants must establish that 1) they were not involved in the wrongful activity, 2) they were not aware of the wrongful activity, and 3) they had done all that reasonably could be expected to prevent the proscribed use of their property. Id. at 689, 94 S.Ct. at 2094; United States v. One (1) 1982 28' International Vessel, 741 F.2d 1319, 1322 (11th Cir.1984).

This Court finds that the Claimant has established the defense of innocence by a preponderance of the evidence. First, Mrs. Soria was not involved in the wrongful activity. Second, Mrs. Soria was not aware of the wrongful activity. There has been no showing that Mr. Herrera had a questionable background, one that would cause Mrs. Soria to suspect that he would allow the boat to be used for illegal purposes. In addition, no evidence was presented to this Court to even suggest that Mrs. Soria knew about an arrangement between Mr. Herrera and Mr. Jimenez. Moreover, with regard to the very structure of the boat itself, the government failed to show that the Claimant had any knowledge of the secret compartments affixed to the hull. In fact, there still remains an uncertainty as to when these compartments were attached to the Barracuda. In its effort to prove that the containers had to have been part of the original construction of the Vessel, the government attempted to introduce the testimony of a Custom’s Officer. When this Court informed the government that the Custom’s Officer was not qualified to give an opinion on the construction of boats, they failed to supply another expert. In sum, it could not be ascertained whether the compartments were part of the Barracuda that Mrs. Soria purchased or were the result of subsequent modification. Nor could it be established that she noticed the secret compartments or that she even should have noticed them.

Finally, this Court is persuaded that Mrs. Soria has met the third and final element within the defense of innocent ownership. Mrs. Soria has done all that reasonably could be expected to prevent the proscribed use of her property. When she had leased the Barracuda to Antonio Herrera, she had already known him for several years. She had no reason to believe from her prior dealings with him or otherwise that he would allow her boat to be used for drug smuggling. Moreover, there was nothing in the evidence presented to this Court to even suggest that Mrs. Soria had any knowledge of an arrangement between Mr. Herrera and Mr. Jimenez or that she even knew of the existence of a Mr. Jimenez.

At trial and in their memoranda, the government reiterated and underscored the language in Calero-Toledo v. Pearson Yacht Leasing Co., 416 U.S. 663, 686-88, 94 S.Ct. 2080, 2093-94, 40 L.Ed.2d 452 (1974):

Forfeiture of conveyances that have been used — and may be used again — in violation of the narcotics laws fosters the purposes served by the underlying criminal statutes, both by preventing further illicit use of the conveyance and by imposing an economic penalty, thereby rendering illegal behavior unprofitable____ To the extent that such forfeiture provisions are applied to lessors, bailors, or secured creditors who are innocent of any wrongdoing, confiscation may have the desirable effect of inducing them to exercise greater care in transferring possession of their property.

This Court has taken note of the legitimate governmental interests served by forfeiture statutes. Nevertheless, such provisions which serve to encourage owners to take the necessary precautionary measures before leasing their property are not designed to immobilize all transferences of property or to propel human beings beyond the parameters of reasonable behavior.

This Court cannot be persuaded that an elderly woman, a relative newcomer to this country, a seamstress by trade, must suddenly acquire the sophistication of a private investigator just because she wants to rent out her fishing boat. Nor is it reasonable to expect Mrs. Soria to conduct an exhaustive search of the background and character of an individual whom she has known for years and with whom she has always had fair dealings. Subsequent to leasing the Barracuda to Mr. Herrera, she did all that reasonably could be expected to prevent the proscribed use of her property. She checked on the boat periodically. She maintained contact with her lessee. In fact, the only hiatus in communications between herself and Mr. Herrera and in the supervision of her Vessel was the period in which she had to go to New York to attend to illness in her family. This trip was unequivocally established at trial.

It was also clear that upon her return the boat appeared to be missing and that this was around the time the Barracuda was intercepted in international waters. Mrs. Soria, who was not involved in or aware of the wrongful activity and who took all the reasonable steps to prevent a proscribed use of her Vessel, has established the defense of innocent ownership.

D. VIOLATION OF 19 U.S.C. § 1703

In a more unexceptional forfeiture case, an application of 19 U.S.C. § 1703 is inconsistent with a finding of innocent ownership because the Claimant either knew about the compartment, United States v. One (1) 1984 #1 Boat Mfg. Lobster Vessel, 617 F.Supp. 672, 679 (S.D.Fla.1985), or actually constructed the vessel to smuggle merchandise into the United States, United States v. One (1) Defender Lobster Vessel Named Betty II, 606 F.Supp. 32, 36-37 (S.D.Fla.1984). This case raises a novel question, one of first impression in this district: whether an innocent owner is entitled to the return of a vessel constructed to smuggle merchandise into the United States in violation of 19 U.S.C. § 1703. This the Court answers in the negative.

19 U.S.C. § 1703 is clear on its face. It provides:

Whenever any vessel which shall have been built, purchased, fitted out in whole or in part, or held, in the United States or elsewhere, for the purpose of being employed to defraud the revenue or to smuggle any merchandise into the United States, or to smuggle any merchandise into the territory of any foreign government in violation of the laws there in force, if under the laws of such foreign government any penalty or forfeiture is provided for violation of the laws of the United States respecting the customs revenue, or whenever any vessel which shall be found, or discovered to have been, employed, or attempted to be employed, within the United States for any such purpose, or in anywise in assistance thereof, or whenever any vessel of the United States which shall be found, or discovered to have been employed, or attempted to be employed at any place, for any such purpose, or in anywise in assistance thereof, if not subsequently forfeited to the United States or to a foreign government, is found at any place at which any such vessel may be examined by an officer of the customs in the enforcement of any law respecting the revenue, the said vessel and its cargo shall be seized and forfeited.

This Court concludes that the Barracuda, at some point, was constructed to smuggle merchandise into the United States in violation of 19 U.S.C. § 1703, as evidenced by the presence of a secret compartment. A false or secret compartment is a prospective storage area that is not apparent to the average user of a conveyance and serves no legitimate function. See United States v. One (1) 1984 #1 Boat Mfg. Lobster Vessel Known as M/V Sea Power, 617 F.Supp. 672, 679 (S.D.Fla.1985). The unusual location of the two hidden compartments attached to the bottom of the vessel which measured 15' by 4' by 3' demonstrates that it was built in such a way as to remain hidden from view. In addition, 2,008 pounds of marijuana were found in the secret compartments.

The proper application of 19 U.S.C. § 1703 renders a vessel outfitted with hidden or false compartments forfeited to the United States independent of any use to which the res has been put. The vessel itself, like a sawed-off shotgun, or like explosives, is contraband. Once such a secret compartment is discovered, and the violation proven, the vessel is thereby forfeited to the United States. The Court cannot, in this context, sanction the return of contraband. To do so would defy the plain language of 19 U.S.C. § 1703 and thwart the intent of Congress to halt the flow of illicit narcotics into the country. To order the return of a vessel whose existence on the waterways and seas is a violation of the law also frustrates a legitimate remedial purpose of forfeiture, the prevention of the continued use of a conveyance which has been used, and could, in all likelihood, be used again in the commission of a crime. See Calero-Toledo v. Pearson Yacht Leasing Co., 416 U.S. 663, 686-87, 94 S.Ct. 2080, 2093-94, 40 L.Ed.2d 452 (1974).

The Claimant herein seeks to evoke the equity of the Court and have the Vessel’s return to her conditioned upon its repair and alteration. This Court does not hesitate to reiterate that it is not within its jurisdiction to order the government to give back a boat with two false compartments beneath the hull that are suitable solely for smuggling illegal substances or to order the alteration of the Vessel so that it will conform to the dictates of the law. There is, however, nothing to prevent the government and the Claimant from negotiating amongst themselves for the excision of the compartments, for the repair of the boat, and for the ultimate return of a seaworthy vessel. However, this Court will not intervene to compel the release of contraband or to administer the transformation of the Barracuda.

Ill

In conclusion, pursuant to 19 U.S.C. § 1703, the Plaintiff, the United States of America, is entitled to a judgment of forfeiture. The Plaintiff is hereby directed to submit to this Court within ten (10) days from the date of this Order a Pinal Judgment in accordance with the same.

      . 14 U.S.C. § 89(a) provides:
      The Coast Guard may make inquiries, examinations, inspections, searches, seizures, and arrests upon the high, seas and waters over which the United States has jurisdiction, for the prevention, detection, and suppression of violation of laws of the United States. For such purposes, commissioned, warrant, and petty officers may at any time go on board of any vessel subject to the jurisdiction, or to the operation of any law, of the United States, address inquiries to those on board, examine the ship's documents and papers, and examine, inspect, and search the vessel and use all necessary force to compel compliance. When from such inquiries, examination, inspection, or search it appears that a breach of the laws of the United States rendering a person liable to arrest is being, or has been committed, by any person, such person shall be arrested, or, if escaping to shore, shall be immediately pursued and arrested on shore, or other lawful and appropriate action shall be taken; or, if it shall appear that a breach of the laws of the United States has been committed so as to render such vessel, or the merchandise, or any part thereof, on board of, or brought into the United States by, such vessel, liable to forfeiture, or so as to render such vessel liable to a fine or penalty and if necessary to secure such fine or penalty, such vessel or such merchandise, or both, shall be seized.

      . 19 U.S.C. § 1581(a) provides:
      Any officer of the customs may at any time go on board of any vessel or vehicle at any place in the United States or within the customs waters or, as he may be authorized, within a customs-enforcement area established under the Anti-Smuggling Act, or at any other authorized place, without as well as within his district, and examine the manifest and other documents and papers and examine, inspect, and search the vessel or vehicle and every part thereof and any person, trunk, package, or cargo on board, and to this end may hail and stop such vessel or vehicle, and use all necessary force to compel compliance.


author: SAMUEL P. KING, Senior District Judge.

text:
    UNITED STATES of America, Plaintiff, v. Gwynne JUDGE, Defendant.
    Crim. No. 85-1914.
    United States District Court, D. Hawaii.
    Jan. 9, 1986.
    Mark J. Bennett, Asst. U.S. Atty., Daniel A. Bent, U.S. Atty., Honolulu, Hawaii, for plaintiff.

      Michael R. Levine, Federal Public Defender, Benjamin B. Cassiday III, Asst. Federal Public Defender, Honolulu, Hawaii, for defendant.
   ORDER AFFIRMING MAGISTRATE

SAMUEL P. KING, Senior District Judge.

On November 20, 1985, Magistrate Bert S. Tokairin entered an order denying the government’s motion to disqualify the Office of the Federal Public Defender [“Federal Defender”] from representing the defendant in this action. The government appeals from that decision.

The government’s concern stems from the Federal Defender’s former representation of a client who will be a crucial prosecution witness in the current case. In 1984, Assistant Federal Public Defender Yvonne Chotzen represented a client named Philip Henri at his guilty plea and sentencing. Assistant Federal Public Defender Benjamin Cassiday has been appointed to represent the defendant in the current, unrelated case. The government expects to call Philip Henri as a witness at defendant’s trial. Because Philip Henri’s credibility will be at issue, the government is concerned that the Federal Defender will use confidential information gained from its former representation of Henri to discredit his testimony at trial. In addition, the government contends that regardless of any actual conflict of interest, the appearance of impropriety inherent in such a situation warrants disqualification.

The government’s position that an actual conflict exists is valid only if all attorneys employed by the Federal Defender are viewed as working for the same “law firm,” and therefore as having access to the collective confidences of all of the “firm’s” clients. The government relies on Model Code of Professional Responsibility DR 5-105(D), which provides:

If a lawyer is required to decline employment or to withdraw from employment under a Disciplinary Rule, no partner, or associate, or any other lawyer affiliated with him or his firm, may accept or continue such employment.

While valid as a general proposition, the vicarious disqualification provision of DR 5-105(D) has been questioned in the context of large law firms and government departments, where there is less reason to presume that confidential information possessed by one attorney is shared by all others in the same office. See, e.g., Comment, The Chinese Wall Defense to Law Firm Disqualification, 128 U.Pa.L.Rev. 677 (1980). Recognizing that indiscriminate application of DR 5-105(D) would defeat other policy objectives, the Ethics Committee of the ABA has tempered the rule as applied to government offices. It has opined that it is unnecessary to disqualify an entire government legal department where appropriate measures are taken to screen department attorneys with confidential information from involvement in the particular case. ABA Comm, on Ethics & Professional Responsibility, Formal Op. 342 (1975), reprinted in, 62 A.B.A.J. 517 (1976).

The government contends that the more liberal approach engendered by the ABA Opinion applies only to government prosecution offices, not to offices such as the Federal Defender. In support of its position, the government points out that public defenders are held to the same standards of professional ethics and competency as are private attorneys. This argument, of course, proves too much, for prosecuting attorneys are also expected to uphold the standards of the general profession. In fact, because of their unique position of public trust, prosecuting attorneys are held to standards of conduct more stringent than those applied to private lawyers. See, e.g., Model Rules of Professional Conduct Rule 3.8 (1983); Model Code of Professional Responsibility EC 7-13, EC 7-14, DR 7-103, DR 7-107 (1979).

Moreover, the presumption of shared confidences embodied in DR 5-105(D) is a rebuttable one. Novo Terapeutisk, Etc. v. Baxter Travenol Laboratories, 607 F.2d 186, 196-97 (7th Cir.1979) (en banc). Here, the Magistrate found that the measures taken by the-Federal Defender to screen Benjamin Cassiday from persons or records involved in the Philip Henri case were adequate to prevent any misuse of confidential information. This finding is neither clearly erroneous nor contrary to law.

It is true that some, including Philip Henri, may detect an appearance of impropriety in the Federal Defender’s attempt to impeach a former client. Nevertheless, as Judge Feinberg has so aptly stated, “when there is no claim that the trial will be tainted, appearance of impropriety is simply too slender a reed on which to rest a disqualification order except in the rarest cases.” Board of Education of New York City v. Nyquist, 590 F.2d 1241, 1247 (2d Cir.1979).

The court finds that Judge Feinberg’s observation has particular force in a criminal case, as here, where the defendant’s choice of counsel should be accorded great deference. The Magistrate conducted an evidentiary hearing in which the defendant was fully informed as to the possible conflicts involved in this case. The defendant made a knowing, intelligent and voluntary waiver on the record of his right to conflict-free representation. Under these circumstances, defendant’s choice of counsel should be respected.

The government has also expressed concern for the rights of Philip Henri who may be required to testify to matters which could jeopardize his probationary status. While Mr. Henri’s rights possibly could be affected by any admissions he makes while testifying, it is the defendant’s rights that primarily are at stake in these proceedings. Nevertheless, should Mr. Henri require representation under the Criminal Justice Act, the court can appoint a private-practice panel attorney to protect his interests.

Accordingly, the decision of the Magistrate denying the government’s disqualification motion is AFFIRMED.

IT IS SO ORDERED.