author: NEALON, Chief Judge.

text:
    ALLSTATE INSURANCE COMPANY, Plaintiff, v. A.M. PUGH ASSOCIATES, INC. and Louis and Jeanne Pugh, Defendants.
    Civ. No. 81-0540.
    United States District Court, M.D. Pennsylvania.
    June 29, 1984.

      Harvey Freedenberg, McNees, Wallace & Nurick, Harrisburg, Pa., William B. Somerville, Howard G. Goldberg, Smith, Somerville & Case, Baltimore, Md., for plaintiff.
    Theodore L. Krohn, Krohn & Alcaro, Wilkes-Barre, Pa., for A.M. Pugh Associates, Inc. and Louis Pugh, Jr. and Jeanne A. Pugh.
    Linus E. Fenicle, Enrico & Fenicle, P.C., Harrisburg, Pa., Joseph F. Saporito, Pittston, Pa., for James F. Rittenhouse.
    Jay J. Gurfein, New York City, for Eugene L. Kass.

      Larry S. Keiser, Nogi, O’Malley, Harris & Schneider, Wilkes-Barre, Pa., for Andrew Newell.
   MEMORANDUM AND ORDER

NEALON, Chief Judge.

Plaintiff, Allstate Insurance Company (Allstate), had issued performance bonds and payment bonds on behalf of defendant, A.M. Pugh Associates, Inc. (Pugh Associates), for certain construction projects to be performed by Pugh Associates. Allstate contends that Andrew Newell, an Allstate employee, received monetary bribes in exchange for approving these bonds. Defendant Louis Pugh, Jr., both individually and on behalf of Pugh Associates, and National U.S. Constructors, Inc. and defendant Jeanne A. Pugh, Mr. Pugh’s wife, prior to the issuance of the bonds, executed an agreement of indemnity in favor of Allstate. When Pugh Associates defaulted on certain projects covered by the bonds, Allstate was required to expend significant amounts not only to pay past claims of subcontractors and materialmen but also to complete these projects. In this action, Allstate, asserting diversity jurisdiction under 28 U.S.C. § 1332(c)(1) and also invoking the Racketeer Influenced Corrupt Organizations Act (RICO), 18 U.S.C. §§ 1961, et seq., seeks to recover compensatory damages of $4,034,657.78, consisting of payments of $1,005,616.73 on the performance bonds and $3,029,041.05 on the payment bonds. Liability is predicated on the indemnity agreement, on fraud and conspiracy to defraud, and on the provisions of RICO. Plaintiff also requests punitive damages on the fraud claim and treble damages under RICO against Pugh Associates and Louis Pugh, Jr. The claims against National U.S. Constructors, Inc. and Jeanne A. Pugh are bottomed solely on the indemnity agreement. After considerable discovery and several pretrial conferences, the case proceeded to trial without a jury on May 21, 1984. The trial lasted but one day as defendants Louis Pugh, Jr. and Jeanne A. Pugh did not appear. Their counsel, however, in recognition of an obligation to his clients for whom he had entered an appearance, appeared and offered a defense. Plaintiff’s factual assertions were largely undisputed including the amounts claimed under the indemnity agreement, although defense counsel argued against any finding of liability under the fraud and RICO counts because (a) there was no evidence in the record showing personal gain by defendants; (b) there was no showing that Allstate, through its agent, Andrew Newell, would not have written bonds for Pugh Associates even if there had been no bribes paid to him; and (c) four of the five bonds were written by Allstate before the first bribe to Newell. The findings of fact by the court follow.

FINDINGS OF FACT

1. Allstate is an Illinois corporation with its principal place of business in Northbrook, Illinois. Allstate is in the business of providing insurance coverage to both individuals and businesses throughout the United States. In addition to offering insurance coverage, Allstate has engaged in the business of offering contract bonds to persons, firms and corporations, including construction companies.

2. A.M. Pugh Associates, Inc., one of the defendants, is a New York Corporation with its principal place of business in Kingston, Pennsylvania.

3. Louis Pugh, Jr., one of the defendants, is a Pennsylvania citizen. His wife, Jeanne A. Pugh, also a defendant, was a Pennsylvania citizen when this action was instituted.

4. “Pugh Associates” was formed in 1976 by Louis Pugh, Jr. Prior thereto, Pugh was the owner of other general contracting companies, L. Pugh Constructors of Florida, Inc. and National U.S. Constructors, Inc.

5. In 1973 or 1974, National U.S. Constructors bid on a municipal sewer project in Harvey’s Lake, Pennsylvania. After being awarded the contract, Pugh learned that his successful bid was approximately $600,000.00 lower than the bid of the second bidder. After failing in his effort to have the municipal authority reconsider his bid at a higher amount, Pugh, with the assistance of one Noel Laffan, a broker of surety bonds, decided upon an alternate means of recouping the losses caused by his own error. The plan involved subcontracting a substantial amount of work to a company near bankruptcy and having that subcontractor obtain a performance bond and a payment bond naming Pugh’s company as the obligee. Thereafter, the subcontractor would declare bankruptcy and would default on its subcontract enabling Pugh’s company to assert a claim against the surety company under the subcontractor’s performance bond. The proceeds of the payment from the bonding company would be used in part to retain another subcontractor to complete the work on the project with the remainder of the monies to be shared by Pugh and others.

6. In November, 1974, Pugh’s company, National U.S. Constructors, Inc., entered into a subcontract with Alagia Masons (Alagia), pursuant to which Alagia was to perform the masonry work on the Harvey’s Lake project. Shortly thereafter, Alagia declared bankruptcy and defaulted on its subcontract with Pugh’s company. Pugh filed a claim against Alagia’s performance bond and, in July 1975, Pugh received $275,000.00 from the United States Fidelity and Guaranty Company (USF & G), the surety for Alagia, whose bond had been procured with the help of Laffan. According to Pugh, the mastermind of this activity was Noel Laffan. After he received the money from USF & G, Pugh had a company known as Somerset Valley Construction Company complete the work of Alagia Masons. Before Alagia ceased operations, it entered into a subcontract with a corporation known as Heller Mechanical Contractors, a New York corporation formed by Morton Heller, another employee of Pugh; Cumberland Bay Leasing Company, a company owned by Pugh; and Somerset Valley Construction Company. After Alagia’s demise, each made claim upon Alagia’s payment bond and received $13,800.00, $2,400.00, and $50,000.00 respectively.

7. In September 1975, Pugh’s company, National U.S. Constructors, Inc., began work on a sewerage treatment plant for the city of Hartford, Vermont. On that project, Pugh was bonded by the Maryland Casualty Company. After the project experienced financial difficulty, Pugh signed a subcontract for the mechanical portion of the work to Heller Mechanical Contractors, Inc. Morton Heller had again departed his employment with Pugh to mobilize this company. Another principal in Heller Mechanical was James Rittenhouse, Pugh’s brother-in-law, who had also been employed by Pugh’s firm before going to work for Heller Mechanical. The National U.S. Constructors-Heller Mechanical subcontract was let for an amount greater than the anticipated or actual cost of the work contemplated by that subcontract in order to get money out of National U.S. Constructors. The excess monies were collected by Heller and, subsequently, were circulated through Heller Mechanical Contractors, Inc. back to Pugh Associates. Heller Mechanical thereafter filed a substantial claim against Maryland Casualty Company based upon its payment bond on the ground that it was owed monies.

8. In addition to entering into a fraudulent subcontract with Heller, Pugh, knowing that the job was going bad, decided he had to do everything in his power to protect himself and his companies from default as claimed by the bonding company. On a construction project, a contractor such as Pugh employs a number of subcontractors and purchases materials or equipment from a number of vendors. Upon receipt of partial requisition payments from the owner, the contractor should disburse monies to its subcontractors in payment for their portion of the work and to vendors for the portion of the equipment supplied by those respective vendors.

On the Harvey’s Lake project, Pugh collected substantial monies but failed to pay subcontractors and vendors, instead diverting the payments to his own purposes and uses. The money was withdrawn from the construction company, causing it to become insolvent. One of the ways that the money was withdrawn was by making excess payments to Heller Mechanical. The subcontractors and vendors then made claim against Maryland Casualty Company, who was required under the terms of its payment bond to pay those claimants.

9. Pugh’s first known involvement with Allstate occurred some time in 1975 during a meeting in New York City at the offices of United Coverage, an insurance agency operated by individuals named A1 Mack and Howard Meyer. Prior to the meeting, Pugh had posted a $40,000.00 certified check with the State of New York in lieu of posting a bid bond on a highway project known as the Saranac Lake Project. After being awarded the contract, Pugh approached Maryland Casualty Company about providing payment and performance bonds on the project. Maryland Casualty Company refused to write the bonds. Pugh then approached Noel Laffan, his bond agent, about obtaining bonds from other sources. Laffan told Pugh that bonds could be arranged if Pugh made a “payoff” in addition to the normal bond premium.

10. Based upon the statement of Laffan, Pugh had made a secret “under the table” payment of $20,000.00 in cash to Messrs. Mack and Meyer in order to guarantee the availability of a bond from Allstate. Kass, Pugh’s accountant, understood from Pugh that it was to go to Robert Throckmorton, then national bond manager for Allstate. Pugh, however, did not know from personal knowledge whether any Allstate employee actually received any portion of that payment.

11. In attendance at the first meeting with Allstate were Throckmorton and Andrew Newell, then an employee of Allstate in its regional office in Huntington Station, New York. As of the date of that initial meeting, Pugh Associates had not yet been formed and Pugh was still operating under the corporate name of National U.S. Constructors, Inc. Pugh’s purpose for that meeting was the procurement of a bid bond from Allstate on behalf of National U.S. Constructors, Inc., as principal, for the Saranac Lake project.

12. In 1976, A.M. Pugh Associates, Inc. was formed. Thereafter, a bond was issued by Allstate on behalf of Pugh Associates on the Saranac Lake project. Although the bid was submitted to National U.S. Constructors, Inc., it was awarded to A.M. Pugh.

13. Subsequent to that initial meeting, Newell became Pugh’s liason with Allstate, thereafter handling the Pugh accounts.

14. On September 30, 1976, an Agreement of Indemnity in favor of Allstate was executed by Louis Pugh, Jr., both individually and on behalf of A.M. Pugh Associates, Inc. and by Mr. Pugh’s wife, Jeanne A. Pugh. The Agreement was executed in consideration of the issuance by Allstate of an indeterminate number of performance bonds and payment bonds naming Pugh Associates as the principal. The Agreement provided in pertinent part:

INDEMNITY. The Principal and the Indemnitors shall at all times exonerate, indemnify and keep indemnified Allstate and hold it harmless from any and all liability for losses, cost, damages, attorneys’ fees and expenses of whatever kind including, but not limited to, those which Allstate may sustain or incur by reason of having executed or procured the execution of said Bonds, or any renewal, continuation, extension or successor thereof, and all other Bonds heretofore or hereafter executed or procured for or at the request of the Principal, and which Allstate may sustain or incur in making any investigation, in defending or prosecuting any actions, suits or other proceedings which may be brought under on in connection therewith, or in recovering or attempting to recover salvage or any unpaid premiums for said Bonds, in obtaining or attempting to obtain release from liability, or in enforcing any of the covenants of this Agreement; it is further agreed that in any accounting which may be had between Allstate, the Principal and the Indemnitors, Allstate shall be entitled to charge for any disbursements made by Allstate in good faith in and about the matters herein contemplated by this Agreement or Indemnity, under the belief that it is or was liable for the sum or amounts so disbursed, or that it was necessary or expedient to make such disbursement to reduce, minimize or prevent any increase in the loss anticipated by and through Allstate’s investigation, whether or not such liability, necessity or expediency existed, and that the vouchers or evidence of any such payments made by Allstate will be prima facie evidence of the fact and amount of the Principal’s and the Indemnitor’s liability to Allstate; the Principal and the Indemnitors agree to pay over, reimburse and make good to Allstate, its successors or assigns, all money which Allstate or its representatives shall pay, or cause to be paid or become liable to pay, by reason of the execution of said Bonds, and any renewal, continuance, extension or successor thereof, and all other Bonds heretofore or hereafter executed or produced for or at the request executed or produced for or at the request of the Principal; and such payment shall be made to Allstate as soon as it shall become liable therefor, whether Allstate shall have paid out such sum or any part thereof, or not.
RESERVE FOR LOSS. If for any reason Allstate shall deem it necessary to set up a reserve to cover any contingent claim, loss, costs, attorneys’ fees, disbursements or expenses in connection with any of said Bonds by reason of default of the Principal, abandonment of contract, liens filed, unpaid and past due bills, dispute with the owner or obligee, or for any reason whatsoever, and regardless of any proceedings contemplated or taken by the Principal or the pend-ency of any appeal, the Principal and Indemnitors jointly and severally covenant and agree, immediately upon demand, to deposit with Allstate, in current funds, an amount sufficient to cover such reserve and any increase thereof such funds to be held by Allstate as collateral, in addition to the indemnity afforded by this instrument, with the right to use such funds or any part thereof, any time, in payment or compromise of any judgment, claim, loss, damage, attorneys’ fees, and disbursement or other expenses; and if Allstate is required to enforce performance of this covenant by action at law or in equity, the costs, charges, and expense, including attorneys’ fees, which it may thereby incur, shall be included in such action and paid by the Principal and the Indemnitors. (Demand shall be sufficient if sent by registered mail to the Principal and the Indemnitors at the address given herein or last known to Allstate, whether or not actually received.)
ALLSTATE OBTAINING DISCHARGE. That, Allstate may, at any time hereafter, without releasing or discharging the Principal and the Indemnitors from any claim, demand, action, costs or any other expense heretofore incurred or accrued, take such action as it might deem necessary or proper to obtain its release from any and all liability under the said Bonds, and the Principal and the Indemnitors further agree that they shall further secure and indemnify Allstate against any and all charges, liabilities and expenses of whatever nature which Allstate may sustain or incur or be put to in obtaining such release.
TAKEOVER. In the. event of any breach, delay or default asserted by the Obligee in any of said Bonds or failure by Principal to perform such bonded contracts or to pay obligations incurred thereunder, or in the event of Principal’s death, disappearance, conviction of a felony, imprisonment, incompetency, insolvencey [sic], or bankruptcy, or the appointment of a receiver, assignment or for benefit of creditors or any action taken by or against the Principal under the National Bankruptcy Act or state insolvency laws, Allstate shall have the right, at its option, and is hereby authorized, but not required, to take possession of any part or all of the work under any contract covered by any said Bonds, and at the expense of the Indemnitors to complete or arrange for the completion of same and the Indemnitors shall promptly, demand, pay to Allstate all losses and expenses so incurred.
ASSIGNMENT. The Principal, the Indemnitors hereby consenting, will assign, transfer and convey to Allstate and does hereby assign, transfer and convey to Allstate, as collateral to secure the obligations in any and all of the paragraphs of this Agreement of Indemnity, and any other indebtedness and liabilities of the Principal and the Indemnitors to Allstate, whether heretofore or hereafter incurred, the assignment of this case of each contract to become effective as of the date of the ond covering such contract, but only in event of any abandonment, forfeiture or breach of any contracts referred to in the Bonds or of any breach of any such Bonds: (a) all of their rights under the contract, including their right, title and interest in and to, (1) all subcontracts let in connection therewith and such subcontractors’ surety bonds, (2) all machinery, plant, equipment, tools and materials which shall be upon the site of the work or elsewhere for the purposes of the contract, including all materials ordered for the contract, and of any and all sums due or which may thereafter become due under such contract and all sums due or to become due on which the Principal or Indemnitors have an interest, and the Indemnitors and and Principal hereby authorize Allstate to endorse in the name of the Payee and to collect any check, draft, warrant or other instrument made or issued in payment of any such sum, deferred payment or retained percentages, and to disburse the proceeds thereof.

15. In 1978, Newell was transferred to Allstate’s home office in Northbrook, Illinois, a community near Chicago, and in early 1979 was promoted to the position of Senior Bond Manager for Allstate, succeeding Robert Throckmorton. In this capacity, Newell had final decision-making authority regarding all surety bonds issued by Allstate, including those issued on behalf of Pugh. Upon Newell’s promotion to the home office, Eugene Hessian, an Allstate employee in the Huntington Station office, was promoted to Newell’s former position as the underwriter in charge of contract bonds in the Huntington Station office. Pugh dealt directly with Newell in the Allstate home office with regard to Pugh Associates’ bonds.

16. From September, 1976 through the end of 1978, Pugh Associates received continued bonding from Allstate. Pugh Associates performed work in two principal geographical areas — western Pennsylvania and the Norfolk-Newport News, Virginia area. In late 1978 or early 1979, Pugh Associates was experiencing severe financial difficulties as a result of several unprofitable projects then in progress. Eugene L. Kass (Kass), the accountant for Pugh Associates, advised Pugh that the deteriorating financial condition of Pugh Associates was jeopardizing Pugh’s ability to continue to receive bonding from Allstate.

17. At about this time, Pugh had become aware that Newell was acutely dissatisfied with life in Illinois and especially with the climatological conditions of the upper Midwest.

18. In November 1978, Pugh contacted Newell and arranged for Newell and New-ell’s wife Rita to accompany him on an all expense paid trip to Las Vegas, Nevada. Thereafter, Pugh, Pugh’s son, Newell and Rita Newell went to Las Vegas all at Pugh's expense.

19. By the spring of 1979, Newell was becoming more specific with regard to his plans for leaving Allstate. Newell confided to Pugh that he desired to leave Illinois to purchase and operate a motel in a state with a more temperate climate. Pugh, concerned that his company would lose its source of bonding during this period of acute financial distress, traveled to Chicago, met with Newell, and attempted to give Newell $10,000.00 in cash to induce Newell to continue to remain employed with Allstate and continue to write bonds for Pugh Associates. Newell refused the offer.

20. On March 23, 1979, Pugh traveled again to Chicago, met Newell and again offered Newell an envelope containing $10,-000.00 in cash, ostensibly as expense money to enable Newell to conduct a search for a suitable motel for Pugh to purchase. Pugh intended that he and Newell would become partners in the motel business, although he admitted that the issuance of continuing bonding played a part in making the payment. On this occasion, Newell accepted the payment. Newell did not, however, begin a search for a motel after receiving the money.

21. The money used for the payment was taken from either Pugh Associates or Eastern Seaboard, another company controlled by Pugh, and further weakened the financial condition of those companies.

22. At the time he accepted this cash payment from Pugh and the trip to Las Vegas, Newell was aware that his acceptance of the money was in direct contravention of express policies promulgated by Allstate. That policy prohibited the acceptance by an Allstate employee of anything of value from any person who had a business relationship with that company.

23. Although Pugh and Newell both described this and other payments as “loans” toward the purchase of a motel which they intended to operate in partnership, both admitted that no promissory notes or other evidence of indebtedness were ever executed by Newell and that none of the so-called loans were repaid in part or in whole.

24. Prior to March, 1979, Somerset Valley Construction Company (“Somerset Valley”), which had served as Pugh’s subcontractor on the project at Harvey’s Lake after Alagia Masons’ default and another one of Kass’ accounting clients, applied for bonding with Allstate. Newell declined to write the account. Since Somerset Valley could not obtain bonding, it could not work as the prime contractor on federal or state funded projects. The owner of that firm was one Oscar Renda.

25. Thereafter, Pugh and Renda agreed that Pugh’s company would obtain contracts which were to be performed by one or another of Renda’s companies. The contracts would be obtained in the name of either Pugh Associates or Eastern Seaboard. Allstate would be used to provide payment and performance bonds. In return for obtaining the bonds, Pugh would receive a two percent fee based upon the total value of the respective contracts. Thus, Renda’s function was to do the work and Pugh’s was to procure the bonds.

26. Within three weeks of the first cash payoff to Newell, Pugh Associates bid on and was awarded a project in Cape St. Clair, Maryland and Eastern Seaboard was awarded a project at Newport Township, Pennsylvania, both on behalf of Somerset Valley.

27. When Pugh told Newell about the bids, Newell questioned why Pugh would bid on sewer projects in which he had no expertise. Pugh explained his arrangement with Somerset Valley and that with the additional money generated from the Somerset Valley arrangement, Pugh could provide additional funds for the motel. Pugh agreed to pay Newell twenty five percent of Pugh’s payment, i.e., one-half of one percent of the Somerset Valley contract price, which came to approximately twenty-five thousand dollars per job. Based on that arrangement, Newell agreed to write the first so-called “Somerset Valley” bond for the Cape St. Clair project.

28. On July 23, 1979, Pugh went to meet Newell in Mt. Prospect, Illinois and delivered $24,600.00, which represented the payment for the first Somerset Valley project.

29. Thereafter, on August 6, 1979, Newell wrote a second bond for the Newport Township project.

30. By the fall of 1979, Newell was actively looking for motels, first in the Texas gulf area and then in the southern Florida area. On September 20, 1979, two days before the payment for the Newport Township bond, Newell went to Fort Meyer, Florida to inspect a motel.

31. On September 22 or 23, 1979, New-ell met Pugh at Pugh’s office in Kingston, Pennsylvania. At that meeting, Pugh gave Newell $25,000.00, again in cash, this time for the Newport Township bond.

32. The true identity of the general contractor on these projects, Somerset Valley, was disguised from both the owners and from other Allstate employees. Pugh authorized Renda to represent himself to the owners of the project as an officer of Pugh Associates. As to Allstate, when Hessian wrote to Rittenhouse inquiring as to whether the work on these projects was being performed by Pugh Associates or by some other firm, he was advised by Rittenhouse that all of the work was performed by Pugh Associates.

33. The payments by. Pugh to Newell further weakened Pugh Associates’ financial condition, and Pugh was concerned that he might not be able to raise the additional money necessary to purchase the motel. In order to recoup the money paid to Newell and to raise additional funds, Pugh, Kass and Noel Laffan entered into a further arrangement to broker Allstate bonds to companies who could not themselves procure bonds. To put this scheme into effect, Pugh, Kass and Laffan met in Pennsylvania in the fall of 1979. At that meeting, the four agreed that Laffan would locate the companies which required bonds. Allstate was identified as the source of the bonds. They further agreed that the payoff from the customers would be split four ways, lh to Kass, lh to Laffan, xk to Eugene Hessian, another Allstate employee who reported to Newell, and who as has been pointed out, had assumed New-ell’s position as Regional Bond Manager in the Huntington Station, New York office; and split between Pugh and James Rittenhouse.

34. One of the accounts which Laffan suggested during the Pennsylvania meeting, was a company known as Fred Wendel Company. Pursuant to the scheme, the Wendel account was submitted to Hessian in the Huntington Station office. Hessian approved the account and submitted it to Newell in the home office for final review. On November 30, 1979, Newell disapproved the account and advised Hessian that the account would not be approved until after receipt and review of Wendel’s 1979 year end figures.

35. Hessian advised Mr. Wendel that bonding had not been approved and that Allstate required the December 31, 1979 financial data. On December 4, 19*79, Mr. Wendel called Newell while Hessian and Newell were in a motel in Pennsylvania. In that conversation, Wendel threatened to reveal the Pugh-Newell payoffs (about which he had apparently learned from some unknown source) to Allstate officials unless the necessary bond was issued. The bond was thereafter authorized by Newell on December 14, 1979.

36. As a result of the issuance of the bond, Wendel made a payoff in the amount of $25,000.00 and delivered the money to Rittenhouse. Hessian received $2,500.00. He believed that the payoff was only $10,-000.00 and his partners did not advise him that the real amount was $25,000.00. Rittenhouse and/or Pugh received the rest of the funds, which were laundered through the account of an entity known as American Consulting, Ltd., another entity controlled by Pugh.

37. Another bonding account written by Allstate involved a firm named Unity Electric, which had previously been unable to procure a bond. Unity Electric had been first introduced to Kass by Laffan. Unity Electric made a payoff of $12,000.00 for its bond. The money was paid to Kass, who deposited the money in an account called AC Trading Co. Hessian received $2,700.00, Kass $300.00 (for laundering Hessian's money) and American Consulting, Ltd. received $9,000.00. American Consulting, Ltd. paid Rittenhouse $6,000.00 in January, 1980.

38. In November 1979, Pugh and New-ell met in Chicago, Illinois. Newell was very insistent that a motel be purchased. Pugh had submitted a bid on a motel in Daytona Beach, Florida, known as the Talisman Motel. The bid had not been accepted. Another bid was submitted on a motel called the Desert Isle. At the Chicago meeting, Newell told Pugh that he wanted “to see the stock of the motel on the top of [his] Christmas Tree”, meaning that he wanted a motel by the end of 1979. Pugh concluded that he “couldn’t stall [Newell] any longer,” and understood Newell to mean that unless the motel was purchased, Pugh would not get any more bonds.

39. On December 3, 1979, Pugh made a $20,000.00 deposit on a motel in Daytona Beach, Florida called the Hi Seas Motel. Thereafter, he formed a corporation called the Hi Seas Corporation. Pugh kept one half of the stock and placed the other one half in the name of Rita Newell, Andrew Newell’s wife. On December 29, 1979, the motel purchase was closed. At that time, Hi Seas Corporation purchased the motel for $1,900,000.00, paying $350,000.00 in cash and financing the balance. Newell paid nothing for his wife’s half interest in the motel. The $350,000.00 was taken out of Pugh Associates’ accounts.

40. In late December, 1979, or the first week of January, 1980, Pugh was advised by Kass that one of Kass’ clients, Olympic Construction Company (“Olympic”), was in need of bonding. Olympic had previously applied for bonding to Allstate and had been refused.

41. On January 3, 1980, Pugh, Rittenhouse and Kass went to 4407 W. Street, Washington, D.C. to meet with representatives of Olympic. Pugh was unaware that the address in question was wired for video and sound by the Federal Bureau of Investigation.

42. At the meeting, the persons discussed various alternative schemes. One involved simply procuring bonds for Olympic as had been done for Unity and Wendel. Another involved merging Olympic into Pugh Associates, putting substantial additional business on the books of the combined companies (as much as $40 million) and then “pulling the plug” as Pugh had done to Maryland Casualty Company, i.e., taking monies out of a company immediately prior to or during the course of going into default with the intention of transferring those monies to himself or some other person, firm or corporation which is not entitled to the monies.

43. While at the meeting, Pugh called Newell, who was then at his office in Chicago. By use of a prearranged code, Newell then returned the call from a pay telephone in the Allstate building.

44. Shortly after the meeting in Washington, Pugh was advised that he was one of the subjects of a federal investigation.

45. Thereafter, Pugh Associates became insolvent. That firm defaulted on at least five major construction projects and left numerous suppliers and subcontractors unpaid.

46. The investigation conducted in Washington by the United States Attorney resulted in indictments against Pugh, Kass and Newell, charging each with conspiracy to defraud Allstate of the faithful and honest services of its employees. Pugh entered a guilty plea and was convicted.

47. From 1980 through 1982, Allstate received and processed numerous claims from unpaid subcontractors and materials suppliers pursuant to payment bonds which it had issued to Pugh Associates for nine projects. Ultimately, Allstate paid $2,923,-196.85 in payment bond claims.

48. Similarly, Pugh’s failure to complete performance on five of the projects bonded by Allstate caused Allstate to incur significant expenditures completing the work remaining on each of the defaulted projects.

49. On or about September 23, 1977, Pugh Associates had entered into a contract (N62470-76-C-6233) with the United States Government for the construction of a processing facility at the Fleet Combat Training Center in Dam Neck, Virginia. On or about October 3, 1977, Allstate had executed a performance bond and a payment bond naming Pugh Associates as the principal for the aforesaid project. Thereafter, Pugh Associates began to perform under the contract with the government. By letter dated October 16,1980, Alan Wallace, Vice President of Pugh Associates notified the government that Pugh Associates was incapable of completing its obligations under the contract. By letter dated November 10, 1980, the government terminated for default the contract with Pugh Associates effective retroactively to November 5, 1980. On or about February 19, 1981, a Takeover Agreement was executed between Allstate and the United States Government pursuant to which Allstate was to undertake the completion of the work begun by Pugh Associates on this project. On or about February 20, 1981, Allstate entered into a contract with Conrad Brothers, Inc. for the completion of the project. Allstate paid Conrad $75,478.10 for labor and materials provided for the completion of the project. The loss incurred by Allstate under its performance bond totalled $0.00. In addition, Allstate paid claims under the payment bond for this project in the aggregate amount of $831,584.25.

50. On or about November 11, 1977, Pugh Associates had entered into a contract (N62470-7-C-7497) with the United States Government for the construction of a squadron training building at the Naval Air Station, Oceana, in Virginia Beach, Virginia. On or about November 20, 1978, Allstate had issued a performance bond and a payment bond on behalf of Pugh Associates for this project. Pugh Associates was directed by the government to begin performance of this contract on December 5, 1978. By letter dated December 2, 1980, the government notified Allstate that the contract with Pugh Associates for this project had been terminated for default on November 25, 1980. On February 19, 1981, Allstate entered into a Takeover Agreement with the United States Government pursuant to which Allstate assumed responsibility under its performance bond for the completion of this project. On February 20, 1981, Allstate entered into a contract with Conrad Brothers, Inc. for the completion of the work remaining on this project. Allstate paid Conrad Brothers, Inc. $361,592.09 for labor and materials supplied under the contract for the completion of the project. The loss incurred by Allstate under its performance bond totalled $199,039.09. In addition, Allstate paid claims under the payment bond for this project in the aggregate amount of $367,595.15.

51. On March 28,1979, Pugh Associates had entered into a contract with the Commonwealth of Virginia for the construction of student housing on the campus of Old Dominion University in Norfolk, Virginia. On or about March 28, 1979, Allstate had issued a performance bond and a payment bond on behalf of Pugh Associates for this project. By letter dated October 31, 1980, Old Dominion University made demand upon Allstate that it take action pursuant to its performance bond to remedy the default of Pugh Associates on this project. On or about March 18, 1981, Allstate entered into an Agreement with Old Dominion University for the completion by Allstate of the work remaining on this project. Allstate paid L.J. Hoy, Inc. $1,843,561.00 for labor and materials supplied under their contract for the performance of the work on this project. The loss incurred by Allstate under its performance bond totalled $561,486.00. In addition, Allstate paid claims under the payment bond for this project in the aggregate amount of $736,296.60.

52. On or about June 19, 1979, Pugh Associates had entered into a contract with the United States Government for the construction of projectile magazines at the Naval Weapons Station in Yorktown, Virginia. On the same date, Allstate issued a performance bond and a payment bond on behalf of Pugh Associates for this project. The government directed Pugh Associates to begin performance under this contract on July 4, 1979. The government notified Allstate that the contract with A.M. Pugh Associates for this project had been terminated for default. On February 19, 1981, Allstate entered into a Takeover Agreement with the United States Government pursuant to which Allstate assumed responsibility under its performance bond for the completion of this project. Allstate entered into a contract with Cochran Construction Company for the completion for the work remaining on this project. As of May 1, 1983, Allstate had paid Cochran $2,214,564.25 for labor and materials supplied in the performance of the work on this project. The loss incurred by Allstate under its performance bond totalled $75,-362.25. In addition, Allstate paid claims under the payment bond for this project in the aggregate amount of $523,781.69.

53. On or about February 8, 1980, Pugh Associates entered into a contract with the Hampton Roads Sanitation District for the construction of an influent pump station in Dam Neck, Virginia. By letter dated October 10, 1980, the Hampton Roads Sanitation District notified Pugh Associates and Allstate that the contract between the District and Pugh Associates would be terminated for default effective October 25, 1980. On or about January 16, 1981, Allstate entered into an Agreement with the Hampton Roads Sanitation District pursuant to which Allstate assumed responsibility under its performance bond for the completion of this project. On or about January 16, 1981, Allstate entered into a contract with J.B. Denny Company for the completion of the work remaining on this project. Allstate paid J.B. Denny Co. $1,940,427.95 for labor and materials supplied in the performance for the work of this project. The loss incurred by Allstate under its performance bond totalled $169,-729.39. In addition, Allstate paid claims under its payment bond for this project in the aggregate amount of $426,574.61.

54. In addition to payment bond claims on the five projects which Allstate was required to complete, it paid laborers, subcontractors and materialmen on other bonded projects a total of $143,208.75.

55. The loss sustained by Allstate on its performance bonds amounted to $1,005,-616.73 and on its payment bonds $3,029,-041.05, for a total loss of $4,034,657.78.

DISCUSSION

Initially, the indemnity claim can be disposed of with little comment as the defendants did not deny the execution of the indemnity agreement or the fact that it was breached. Finally, the amounts allegedly expended by the plaintiff were not challenged.

The court must next make a determination as to the liability of Pugh on the fraud count. It is clear that in a case such as this, a surety may institute an action for fraud and conspiracy to defraud. See Seaboard Surety Co. v. Permacrete Construction Corp., 221 F.2d 366 (3d Cir.1955). Since the fraud claim is in federal court based on diversity jurisdiction, this court must look to applicable Pennsylvania law in determining whether fraud exists. The Pennsylvania Supreme Court in Frowen v. Blank, 493 Pa. 137, 425 A.2d 412 (1981), stated: “A fraud consists in anything calculated to deceive, whether by single act or combination, or by suppression of truth, or a suggestion of what is false, whether it be by direct falsehood or by innuendo, by speech or silence, word of mouth, or look or gesture.” Id. at 143, 425 A.2d 412. In order to establish a claim of fraud the defendant must have made a false representation of a material fact that he knew was false and on which the plaintiff justifiably relied causing injury as a result of the reliance. See Contractor Utility Sales Co. Inc. v. Certain-Teed Products Corp., 638 F.2d 1061, 1082 at n. 27 (7th Cir.1981).

It is a well established rule that nondisclosure or concealment of material facts amounts to culpable misrepresentation no less than an intentional false affirmation. See Marian Bank v. International Harvester Credit Corp., 550 F.Supp. 456, 461 (E.D.Pa.1982), aff'd, 725 F.2d 668 (3d Cir.1983); Delahanty v. First Pennsylvania Bank, 318 Pa.Super. 90, 464 A.2d 1243, 1252 (1983). In addition, in order for fraud to be proved, it is not necessary to establish the motive of personal gain. A finding of fraud may be made without anyone in fact having derived any benefit or advantage from making the false representation. See generally 37 Am.Jur.2d. Fraud and Deceit, § 187 at 249 and § 18 at 42. The burden of proof for one attempting to establish that fraud existed is higher than the usual preponderance of the evidence standard. The Supreme Court of Pennsylvania has held that fraud or intent to defraud must be proved by “evidence that is clear, precise and convincing.” Snell v. Pennsylvania, 490 Pa. 277, 416 A.2d 468 (1980). See also Contractor Utility Sales Co. Inc. v. Certain-Teed Products Corp., 638 F.2d at 1082; Delahanty v. First Pennsylvania Bank, 464 A.2d at 1252-53.

In the case sub judice, it is apparent to the court that the elements necessary for a claim of fraud have been established. The defendant made a false representation of a material fact by failing to disclose the payment of the bribes themselves and the actual financial condition of Pugh Associates. It is beyond dispute that the defendant knew the representation was false or that the plaintiff would justifiably rely on the misrepresentation.

In opposing a finding of fraud, Pugh alleges there is no evidence in the record establishing personal gain by the defendants. As stated above, one may be guilty of fraud without in fact having derived any benefit or advantage from making the false representation. Additionally, since Pugh is the majority, if not the sole shareholder of Pugh Associates, it is evident he did personally benefit from the bribes as he drew a salary from the company and borrowed $350,000.00 from the company for the purchase of the motel. The defendant also argues that there was no showing that Allstate, through its agent, would not have written bonds for Pugh Associates even if there had been no bribes paid to them. It is not necessary that there be a direct statement by one of the Allstate’s agents in order to make a finding of fraud. Fraud may be established not only by direct proof but also by circumstantial evidence. See 37 Am.Jur.2d. Fraud and Deceit, § 477 at 659. As the Fifth Circuit Court of Appeals in Colonial Refrigerated Transportation, Inc. v. Mitchell, 403 F.2d 541 (5th Cir.1968), explained: “What was in a man’s mind may be determined not only by what he says he thought, by what he said and did. In law, as elsewhere, actions may speak louder than words.” Facts such as Kass, Pugh’s accountant, telling Pugh before the first bribe to Newell that Pugh Associates’ financial condition would not justify further bonding,' clearly permits the finder of fact to determine that the individual receiving the bribe would not have acted otherwise but for the receipt of the bribe. It is common sense to assume that one would not pay a bribe to another if the bribe were unnecessary in order to receive the requested benefit. Pugh's final contention, that since four of the five bonds were written by Allstate before the first bribe to Newell no fraud can be found, also must fail. It is clear that Newell, holding a supervisory position, would have the ability to cancel the project or make Pugh Associates perform according to the contract in precise terms. The identical contention espoused by Pugh was made in Seaboard Surety Co. supra, and rejected. The Third Circuit Court of Appeals explained that “here was the situation where had the facts become known the whole picture could have changed very rapidly.” Id. at 376. Had the background of the issuance of the first bond been disclosed to honest Allstate employees, no subsequent bonds would have been issued and no losses would have been incurred by Allstate. Moreover, knowledge of the ongoing payoffs would no doubt have caused plaintiff to terminate this unscrupulous activity as promptly as possible. Therefore, it is clear that the plaintiff has carried its burden of establishing by clear, precise and convincing evidence the existence of fraud on the part of the defendant, Pugh.

The plaintiff also alleged the actions of defendants Pugh, Rittenhouse, Newell and Kass constituted a conspiracy to defraud Allstate. Conspiracy, under Pennsylvania law, is “a combination or agreement between two or more persons to do an unlawful thing or to do a lawful thing in an unlawful manner. A conspiracy to defraud on the part of two or more persons means a common purpose supported by a concerted action to defraud, that each has the intent to do it, and that it is common to each of them, and that each understands that the other has that purpose.” Ballantine v. Cummings, 220 Pa. 621, 630, 70 A. 546 (1908) (citation omitted). See also Stern v. Bricklin, 455 F.Supp. 346, 349 (E.D.Pa.1978). The evidence in the record of meetings and of concerted actions of, inter alia, Rittenhouse, Newell, Kass and Pugh, amply demonstrate a knowing plan to defraud Allstate.

In addition to compensatory damages, Allstate also requests an award of punitive damages. Under Pennsylvania law, an award of punitive damages must be supported by evidence of conduct more serious than the mere commission of the underlying tort. Punitive damages are never awarded as a right, no matter how “outrageous” the defendant’s conduct. See Smith v. Wade, 461 U.S. 30, 103 S.Ct. 1625, 1638, 75 L.Ed.2d 632 (1983).

Pennsylvania courts have recognized the standards governing punitive damages set forth in § 908 of the Restatement of Torts (1939). See Chambers v. Montgomery, 411 Pa. 339, 344-445, 192 A.2d 355 (1963). The Pennsylvania Supreme Court in Chambers, quoting the Restatement of Torts § 908, has stated “ ‘Punitive Damages’ are damages, other than compensatory or nominal damages, awarded against a person to punish him for his outrageous conduct.” Id. at 344, 192 A.2d 355. It further explained that, “[i]n determining whether punitive damages should be awarded, the act itself together with all the circumstances including the motive of the wrongdoer and the relations between the parties should be considered.” Id. at 345, 192 A.2d 355. Therefore, conduct involving bad motive or reckless indifference may justify the special sanction of punitive damages. See Franklin Music Co. v. American Broadcasting Co., Inc., 616 F.2d 528, Inc., 616 F.2d 528, 542 (3d Cir.1980); Delahanty v. First Pennsylvania Bank, 464 A.2d at 1262-63. The purpose of punitive damages is both to punish the wrongdoer for past conduct and to deter both him and others from engaging in similar conduct in the future. See Chuy v. Philadelphia Eagles Football Club, 595 F.2d 1265, 1277 (3d Cir.1979); Delahanty v. First Pennsylvania Bank, 464 A.2d at 1263.

It is clear in this case that within the past ten years Pugh has admittedly defrauded three surety companies: United States Fidelity and Guaranty Company; Maryland Casualty Company; and Allstate Insurance Company. He has devised various schemes and has caused the companies enormous losses. It is clear that the conduct of Pugh falls within the bounds of being deemed “outrageous” — i.e., “malicious”, “wanton”, “reckless”, “willful”, or “oppressive.” See Chambers v. Montgomery, 411 Pa. at 344-45, 192 A.2d 355; Delahanty v. First Pennsylvania Bank, 464 A.2d at 1263 (where the court stated “it is difficult to picture a fact pattern which would support a finding of intentional fraud without providing proof of “outrageous conduct” to support an award of punitive damages.”) An award of punitive damages is therefore clearly justified.

In Pennsylvania, not only is the decision of whether to award punitive damages within the discretion of the fact finder but also within its discretion is the amount to be awarded. Id. In the case sub judice, while an award of punitive damages will be made, it will be minimal due to the extreme size of the compensatory award. It is the court’s belief that to make an additional large award of punitive damages would serve no purpose as it appears that Mr. Pugh is not even in a position to pay such an award.

Plaintiff’s final allegation is that pursuant to 18 U.S.C. §§ 1962(c) and 1964(c), the anti-racketeering statute (RICO), it is entitled to an award of “threefold the damages [it] sustains.” The statute provides:

It shall be unlawful for any person employed by or associated with any enterprise engaged in, or the activities of which affect, interstate or foreign commerce, to conduct or participate, directly or indirectly, in the conduct of such enterprise’s affairs through a pattern of racketeering activity or collection of unlawful debt.

18 U.S.C. § 1962(c). Thus, there are several requirements in order to maintain a RICO claim: the activity involved must constitute “racketeering activity” pursuant to 18 U.S.C. § 1961(1); the defendant must be affiliated with an “enterprise” as defined in 18 U.S.C. § 1961(4), engaged in or affecting interstate commerce; and the enterprise must conduct its affairs through a “pattern of racketeering activity” pursuant to 18 U.S.C. § 1961(5). It is clear that this court’s finding of fraud, resulting from Pugh’s, bribery of the Allstate employees, falls within the statute’s definition of “racketeering.” It is also evident that the “pattern of racketeering activity” element, requiring at least two acts of racketeering activity within ten years, has been satisfied. See United States v. Salvitti, 451 F.Supp. 195, 199-200 (E.D.Pa.1978). The final requirement, that of an “enterprise,” is more difficult to establish. An enterprise is defined as “any individual, partnership, corporation, association or other legal entity, and any union or group of individuals associated in fact although not a legal entity.” 18 U.S.C. § 1961(4). There is a conflict existing in the federal courts concerning the proper scope of the “enterprise” element in RICO. The majority of courts, liberally construing the RICO statute, have found an enterprise to exist “where a group of individuals are associated solely because they jointly commit the predicate racketeering offenses under RICO.” See, Comment, Reading the “Enterprise” Element Back into RICO Sections 1962 and 1964(c), 76 N.W.Univ.L. Rev. 100, 104 (1981). It is the opinion of other district courts within the circuit that the Third Circuit Court of Appeals would likely adopt such a broad reading of the statute. See United States v. Mazzio, 501 F.Supp. 340, 342 (E.D.Pa.1980) aff'd 681 F.2d 810 (3d Cir.1982); Comment, supra, at 104-06. A minority position, however, would narrowly confine an enterprise to a “pre-existing” economic association — i.e., “an association having an ascertainable structure which exists for the purpose of maintaining operations directed toward an economic goal that has an existence that can be defined apart from the commission of the predicate acts.” See United States v. Anderson, 626 F.2d 1358, 1372 (8th Cir.1980) cert. denied 450 U.S. 912, 101 S.Ct. 1351, 67 L.Ed.2d 356.

The findings of fact as determined by the court indicate that Pugh’s arrangements with Newell, Laffan, Kass, Hessian and Rittenhouse, clearly constitute an “enterprise” within the broad definition of the statute. Additionally, since A.M. Pugh Associates was a pre-existing, economic structure from which Pugh operated, the defendants’ association would also fall within even the more narrow reading of the statute. Therefore, the court finds a RICO violation has been made out and the plaintiff entitled to an award of treble damages.

CONCLUSIONS OF LAW

1. The amount of compensatory damages claimed under the indemnity agreement was agreed on by counsel at trial to total $4,034,657.78.

2. The actions of Louis Pugh, Jr. and A.M. Pugh Associates, Inc. constitute a fraud upon Allstate.

3. Defendants Pugh, Pugh Associates and others, engaged in a conspiracy to defraud Allstate.

4. Allstate is entitled to recover punitive damages for Pugh’s participation in the fraud against Allstate in the amount of $10,000.00.

5. Pugh’s conduct demonstrates a violation of RICO, 18 U.S.C. § 1962(c), entitling Allstate to treble damages in the amount of $12,103,973.34.

6. Judgment is entered against Pugh and Pugh Associates in the amount of $12,-113,973.34.

      . The other defendants in this case and in a related action, 81-0675, viz,, Andrew Newell, Eugene L. Kass, Eastern Seaboard Constructors, Inc., James F. Rittenhouse and Karen M. Rittenhouse, entered into settlement agreements with Allstate and are no longer parties.

      . 18 U.S.C. § 1961(1) provides:
      "Raceteering activity" means (A) any act or threat involving murder, kidnaping, gambling, arson, robbery, extortion, or dealing in narcotic or other dangerous drugs, which is chargeable under State law and punishable by imprisonment for more than one year; (B) any act which is indictable under any of the following provisions of title 18, United States Code: Section 201 (relating to bribery), section 224 (relating to sports bribery), sections 471, 472, and 473 (relating to counterfeiting), section 659 (relating to theft from interstate shipment) if the act indictable under section 659 is felonious, section 664 (relating to embezzlement from pension and welfare funds), sections 891-94 (relating to extortionate credit transactions), section 1084 (relating to the transmission of gambling information), section 1341 (relating to mail fraud), section 1343 (relating to wire fraud), section 1503 (relating to obstruction of justice), section 1510 (relating to obstruction of criminal investigations), section 1511 (relating to the obstruction of State or local law enforcement). section 1951 (relating to interference with commerce, robbery, or extortion), section 1952 (relating to racketeering), section 1953 (relating to interstate transportation of wagering paraphernalia), section 1954 (relating to unlawful welfare fund payments), section 1955 (relating to prohibition of illegal gambling businesses), sections 2314 and 2315 (relating to interstate transportation of stolen property), sections 2341-2346 (relating to trafficking in contraband cigarettes), sections 2421-24 (relating to white slave traffic), (C) any act which is indictable under title 29, United States Code, section 186 (dealing with restrictions on payments and loans to labor organizations) or section 501(c) (relating to embezzlement from union funds), or (D) any offense involving fraud connected with a case under title 11, fraud in the sale of securities, or the felonious manufacture, importation, receiving, concealment, buying, selling, or otherwise dealing in narcotic or other dangerous drugs, punishable under any law of the United States.

      . Other elements of the RICO statute such as activity related to interstate commerce and causation are likewise sufficiently satisfied.


source: Caselaw Access Project

author: RICE, District Judge.

license: Public Domain

text:
    DAYTON CHRISTIAN SCHOOLS, et al., Plaintiffs, v. OHIO CIVIL RIGHTS COMMISSION, et al., Defendants.
    No. C-3-80-410.
    United States District Court, S.D. Ohio, W.D.
    July 30, 1984.

      Bruce Pence, Daniel N. Kosanovich, Dayton, Ohio, William B. Ball, Harrisburg, Pa., for plaintiffs.
    Helen Ninos, Asst. Atty. Gen., Columbus, Ohio, for defendants.
   DECISION AND ENTRY SUSTAINING PLAINTIFFS’ MOTION FOR AN INJUNCTION PENDING APPEAL; ORDER ENJOINING DEFENDANTS, PENDING APPEAL, FROM INVESTIGATING AND CONDUCTING A HEARING ON CHARGES OF SEX DISCRIMINATION AND RETALIATORY EMPLOYMENT PRACTICES MADE AGAINST DAYTON CHRISTIAN SCHOOLS BY ONE OF ITS FORMER TEACHERS; BOND SET

RICE, District Judge.

This cause is before the Court on Plaintiffs’ Motion for an injunction pending appeal (doc. # 30), together with the parties’ various memoranda in support of and contrary to such a request for injunction (doc. ## 31, 35, 37 and 38). Plaintiffs have supported their Motion by reference to Rule 62(c), Fed.R.Civ.P.

Rule 62(c) provides:

Injunction Pending Appeal. When an appeal is taken from an interlocutory or final judgment granting, dissolving, or denying an injunction, the court in its discretion may suspend, modify, restore, or grant an injunction during the pendency of the appeal upon such terms as to bond or otherwise as it considers proper for the security of the rights of the adverse party. If the judgment appealed from is rendered by a district court of three judges specially constituted pursuant to a statute of the United States, no such order shall be made except (1) by such court sitting in open court or (2) by the assent of all the judges of such court evidenced by their signatures to the order.

In deciding whether to grant the requested injunction herein, the Court must consider four factors:

(1) whether it is likely that the Plaintiffs will prevail on appeal;

(2) whether Plaintiff will suffer irreparable harm unless the injunction is granted;

(3) whether other parties or interested persons will suffer substantial harm if the injunction is granted; and

(4) whether the public interest will be harmed or served by granting the injunction.

See e.g., Washington Area Transit Commission v. Holiday Tours, Inc., 559 F.2d 841 (D.C.Cir.1977); Long v. Robinson, 432 F.2d 977 (4th Cir.1970); Belcher v. Birmingham Trust National Bank, 395 F.2d 685 (5th Cir.1968); N.L.R.B. v. General Motors Corp., 510 F.Supp. 341 (S.D.Ohio 1980); 11 Wright and Miller, Federal Practice and Procedure, § 2904 at p. 316; 7 Moore’s Federal Practice, ¶ 62.05.

In the present case, as with most cases in which an injunction pending appeal is sought, the first factor is, conceptually, the most difficult to apply. Logie dictates that a court will seldom deny an injunction, then turn around and grant one pending appeal, finding, in part, that the party seeking injunctive relief is likely to prevail on appeal, i.e. that it is likely that the court erred in denying injunctive relief. Herein, the Court remains convinced that its Decision of January 6, 1984, overruling Plaintiff’s request for a permanent injunction, (doc. # 25) was correct. 578 F.Supp. 1004.

However, it is not necessary for the Plaintiffs to demonstrate that it is more probable than not that they will succeed on appeal before the Court can grant an injunction pending appeal. Washington Metropolitan Area Transit Commission, supra. In that case, the Court explained the relationship between the first and the other three factors:

Instead, we hold that under Virginia Petroleum Jobbers [Association v. FPC, 259 F.2d 921 (1958)] a court, when confronted with a case in which the other three factors strongly favor interim relief may exercise its discretion to grant a stay if the movant has made a substantial case on the merits. The court is not required to find that ultimate success by the movant is a mathematical probability, and indeed, as in this case, may grant a stay even though its own approach may be contrary to movant’s view of the merits. The necessary “level” or “degree” of possibility of success will vary according to the court’s assessment of the other factors.
* ^ * * *
We believe that this approach is entirely consistent with the purpose of granting interim injunctive relief, whether by preliminary injunction or by stay pending appeal. Generally, such relief is preventative, or protective; it seeks to maintain the status quo pending a final determination of the merits of the suit. An order maintaining the status quo is appropriate when a serious legal question is presented, when little if any harm will befall other interested persons or the public and when denial of the order would inflict irreparable injury on the movant. There is substantial equity, and need for judicial protection, whether or not movant has shown a mathematical probability of success.

559 F.2d at 843-44.

With this understanding of Rule 62(c), the Court turns to the question of whether an injunction pending appeal would be proper herein. As stated above, the Court is satisfied that it reached the correct decision in this case. Nonetheless, this case raises serious legal questions. Anytime a court must engage in the delicate balancing required by First Amendment jurisprudence, the case raises serious legal issues. Additionally, the Court notes that the Sixth Circuit has not ruled on the precise questions presented by this case. Accordingly, if Plaintiffs have made a strong showing on the other three factors, the Court may properly grant the requested injunction.

If this Court does not grant an injunction pending appeal, the Plaintiffs will suffer irreparable harm. The focus of the Plaintiffs’ claim in this case was that even investigatory proceedings by the Ohio Civil Rights Commission (“OCRC”) would violate their First Amendment Rights. In the absence of the requested injunctive relief, the challenged investigations will proceed and appellate review of this Court’s decision will have all the practical consequences of “locking the barn after the horse has been stolen.” However, beyond the loss of potential benefits from pursuing appellate rights, Plaintiffs face the prospect of a much severe form of irreparable harm. In the event that this Court incorrectly denied Plaintiffs permanent injunction in this case, they will irretrievably lose their First Amendment rights. In Elrod v. Burns, 427 U.S. 347, 373, 96 S.Ct. 2673, 2689, 49 L.Ed.2d 547 (1976) (plurality opinion), the Court noted:

The loss of First Amendment freedoms for even minimal periods of time unquestionably constitutes irreparable injury.

If the proceedings before the OCRC go forward, Plaintiffs face the permanent loss of First Amendment rights, rather than their loss for a minimal period of time. Accordingly, the Court concludes that Plaintiffs have made a strong showing that they will suffer irreparable harm without an injunction.

If the Court grants the requested injunction, it is conceivable that the Defendants and Mrs. Linda Hoskinson, an interested person, will suffer some harm. However, the risk of harm that confronts the Defendants and Mrs. Hoskinson is of a different magnitude than that which the Plaintiffs face. If this Court is affirmed on appeal, then the Defendants have merely been delayed in carrying out their statutory duty of enforcing Ohio’s civil rights laws. If Mrs. Hoskinson prevails in the state administrative proceedings, she will also have experienced some delay in obtaining whatever relief to which she is entitled. However, an award of back pay will fully compensate her for that delay. Accordingly, the Court concludes that any harm that either the Defendants or Mrs. Hoskinson will suffer as a result of an injunction is insubstantial, particularly when compared with the potential harm which confronts the Plaintiffs.

The Court is of the opinion that the public interest will be served by issuing an injunction pending appeal. As the Defendants argue, there is a significant public interest in the eradication of discrimination. See e.g., EEOC v. Pacific Press Publishing Association, 676 F.2d 1272 (9th Cir.1982). However, it is axiomatic that the public has an equal interest in fostering the values which underlie the religion clauses of the First Amendment. The Court is convinced that the public interest will best be served by issuing an injunction and allowing an appeal in this case. This will assure that a higher court will be able to weigh and to consider the need and obligation of the state to act to end alleged sex discrimination without offending fundamental First Amendment values. The granting of an injunction will guarantee that the appellate court’s opinion, whatever it might be, will be effective — from a practical consideration — in resolving the litigation. To deny the injunction would have the practical effect of rendering any appellate decision meaningless, insofar as the fundamental legal issues herein are concerned.

The Court has applied the four factors and concludes that this case cries out for the maintenance of the status quo, pending appeal. Therefore, pursuant to the authority granted by Rule 62(c), the Court hereby enjoins the Defendant Ohio Civil Rights Commission, its agents, successors and all persons acting by or through its authority, from proceeding to a public hearing concerning the employment practices of Plaintiff, Dayton Christian Schools, Inc., from subpoenaing records of Dayton Christian Schools, Inc. related to its employment practices, from conducting investigations into its employment practices, or from otherwise intruding upon or becoming entangled with Plaintiffs’ free exercise and establishment of their religious belief. This injunction shall remain in effect until the disposition of the appeal now pending before the United States Court of Appeals for the Sixth Circuit.

The final remaining matter is the setting of an appropriate bond. The Court orders that Plaintiffs execute a bond in an amount equal to one year of Mrs. Hoskinson’s pretermination salary. Since the appellate process will take approximately one year to conclude, a bond in the amount of one year of Mrs. Hoskinson’s pre-termination salary will guarantee that, should she ultimately prevail upon the merits, she will have suffered no monetary loss by virtue of the delay occasioned by the Defendants’ appeal of this Court’s decision. This injunction pending appeal shall become effective upon the filing of evidence of such a bond with the Office of the Clerk of Courts.

      . In deciding whether to grant a preliminary injunction under Rule 65(a), Fed.R.Civ.P., courts have expressed similar concerns in analyzing the requirement that the party seeking a preliminary injunction demonstrate some likelihood of success on the merits. Thus, the court in Metropolitan Detroit Plumbing and Mechanical Contractors Assn. v. H.E.W., 418 F.Supp. 585, 586 (E.D.Mich.1976), “In general, the likelihood of success that need be shown will vary inverseIy with the degree of injury the plaintiff will suffer absent an injunction.” See also, Roth v. Bank of the Commonwealth, 583 F.2d 527, 537-38 (6th Cir.1978); Hamilton Watch Co. v. Benrus Watch Co., 206 F.2d 738, 740 (2d Cir.1953).

        . In Elrod v. Burns, supra, the Supreme Court spoke of the First Amendment freedoms of political belief and association. Nonetheless, this Court believes that the concept is equally applicable to the religion clauses of the First Amendment.


text:
    John McDIARMID, et al., Plaintiffs, v. ECONOMY FIRE & CASUALTY COMPANY, et al., Defendants.
    No. C-3-81-010.
    United States District Court, S.D. Ohio, W.D.
    Aug. 1, 1984.

      R.J. Stidham, Dayton, Ohio, for plaintiffs McDiarmid and Wingfield.
    Noel Vaughn, Dayton, Ohio, for plaintiff Wingfield.
    Allen Brown, Cincinnati, Ohio, for plaintiff Carolyn Scott.
    Stephen Olden, Cincinnati, Ohio, for plaintiffs Vivian Maxwell and Community Land Co-op. of Cincinnati.
    Neil F. Freund, Dayton, Ohio, for defendant Economy Fire & Cas.
    Ronald E. Schultz, Dayton, Ohio, for defendant Southwest Ohio Ins. Agency.
    Gregory C. Gibson, Dayton, Ohio, for defendant Rose & Associates.
    Gregory P. Dunsky, Dayton, Ohio, for defendant Hal Pennington Agency.
   DECISION AND ENTRY OVERRULING DEFENDANTS’ MOTIONS TO DISMISS

RICE, District Judge.

This cause is before the Court on the Motions to Dismiss of Defendants Economy Fire & Casualty Company (doc. # 58) and Defendants Rose & Associates, Inc. and Southwest Ohio Insurance Agency (doc. # 60). In this action, Plaintiffs allege that the Defendants have engaged in a pattern of “insurance redlining” and, therefore, have denied them home owners insurance, based on their race, all in violation of Title VIII of the Fair Housing Act of 1968, 42 U.S.C. § 3601 et seq.

In their motions, Defendants argue that to deny a person insurance coverage, even because of that person’s race, does not violate Title VIII. Alternatively, Defendants contend that the McCarran-Ferguson Act, 15 U.S.C. § 1011 et seq., forbids this Court from considering the Plaintiffs’ Title VIII claims.

With their motions, Defendants seek to have this Court re-examine decisions entered in Dunn v. Midwestern Indemnity Company, 472 F.Supp. 1106 (S.D.Ohio 1979) and Pierce v. Metropolitan Property and Liability Insurance Company, No. C-3-82-044 (S.D.Ohio Nov. 25, 1983). In Dunn, Judge Rubin concluded that insurance redlining was outlawed by § 804(a) of the Fair Housing Act, 42 U.S.C. § 3604(a). Section 804(a), relied on by Judge Rubin, provides in part that it shall be unlawful to “otherwise make unavailable or deny, a dwelling to any person because of race____” This Court has followed Dunn, most recently in its decision in Pierce v. Metropolitan Property and Liability Insurance Co., supra. Defendants seek a reappraisal of Dunn and Pierce, in light of the Fourth Circuit’s decision in Mackey v. Nationwide Insurance Companies, 724 F.2d 419 (4th Cir.1984). In Mackey, the court rejected Judge Rubin’s interpretation of § 804(a) and held that Title VIII does not apply to the sale of insurance.

The Court has reconsidered Dunn and Pierce in the reflected light of Mackey. Nonetheless, for reasons that follow, the Court will not stray from the path followed by the Dunn and Pierce decisions.

First, courts in the Sixth Circuit have painted with a broad brush when sketching the parameters of Title VIII. In Zuch v. Hussey, 366 F.Supp. 553 (E.D.Mich.1973) aff'd 547 F.2d 1168 (6th Cir.1977), Judge Keith (now an Appellate Judge, but then on the District Court Bench) said that Congress intended Title VIII to have a broad scope and broad objectives, “to prohibit not only direct discrimination but also all practices which have a racially discouraging effect.” 366 F.Supp. at 557. In Laufman v. Oakley Bldg. & Loan Co., 408 F.Supp. 489 (S.D.Ohio 1976), Judge Porter interpreted § 804(a) as making mortgage redlining unlawful. In United States v. City of Parma, 494 F.Supp. 1049 (N.D.Ohio 1980), aff'd in part rev’d in part, 661 F.2d 562 (6th Cir.1981), cert. den. 456 U.S. 926, 102 S.Ct. 1972, 72 L.Ed.2d 441 (1982), Judge Battisti held that § 804(a) prohibits municipal land use practices which make housing unavailable on the basis of race. Additionally, courts in other circuits have taken a similar broad view of Title VIII and § 804(a). For instance, in United States v. American Institute of Real Estate Appraisers, 442 F.Supp. 1072 (N.D.Ill.1977), the court held that § 804(a) prohibits the use of race as a negative factor in making appraisals. The court said:

The promulgation of standards which cause appraisers and lenders to treat race and national origin as a negative factor in determining the value of dwellings and in evaluating the soundness of home loans may effectively “make unavailable or deny” a “dwelling” and may “interfere” with persons in the exercise and enjoyment of rights guaranteed by the Act. When such denial or interference occurs as a result of considerations relating to race or national original, sections 804(a) and 817 are transgressed.

442 F.Supp. at 1079 (footnote omitted).

Second, the result in Dunn is the logical extension of Laufman v. Oakley Bldg. & Loan Co., supra, and United States v. American Institute of Real Estate Appraisers, supra. In each of those cases, a court held that § 804(a) is violated when a service such as financing or appraisals, is denied on the basis of race because such a denial effectively makes unavailable or denies a dwelling to a person. Similarly, the availability of housing is likewise dependent on the availability of insurance. It is elementary that without insurance, mortgage financing will be unavailable, because a mortgage lender simply will not lend money on the property. Without mortgage financing, homes cannot be purchased. Thus, the availability of insurance and the ability to purchase a home go hand in hand and vary, in direct proportion, to one another.

Third, this Court, like Judge Rubin in Dunn, will defer to the opinion of the Department of Housing and Urban Development, the governmental agency responsible for both drafting the regulation and enforcing the law in question, which was to the effect that § 804(a) was applicable to insurance redlining. See 472 F.Supp. at 1109.

Fourth, the Court notes that the Mackey court relied, in part, on repeated efforts by Congress to amend Title VIII to expressly extend its coverage to discrimination in the provision of insurance on dwellings. See 724 F.2d at 424. These amendments have been defeated. Id. This Court is not willing to rely on the subsequent, after the fact, actions of Congress as a means to divine the legislative intent in Title VIII as of the time of its enactment. Relying on this type of after the fact legislative history is speculative at best, because the Court has no way of knowing why the proposed amendments were rejected. The amendments may have been rejected because Congress did not think the insurance industry should be regulated by Title VIII. However, ;t is equally likely that Congress perceived the amendments to be unnecessary because insurance or insurance redlining was already within the coverage of Title VIII.

Alternatively, Defendants argue that the McCarran-Ferguson Act, 15 U.S.C. § 1011 et seq., precludes Plaintiffs’ Title VIII claim. Relevant portions of the McCarranFerguson Act provide: “No Act of Congress shall be construed to invalidate, impair or. supersede any law enacted by any state for the purpose of regulating the business of insurance____” 15 U.S.C. § 1012(b). Specifically, Defendants argue that interpreting Title VIII in the manner proposed by Plaintiffs, and adopted in Dunn, would “invalidate, impair or supersede” Ohio’s comprehensive regulation concerning insurance redlining, found in Ohio Rev.Code §§ 3901.21 and 3901.22. This Court does not agree.

Congress enacted the McCarranFerguson Act in response to the Supreme Court’s decision in United States v. Southeastern Underwriters Association, 322 U.S. 533, 64 S.Ct. 1162, 88 L.Ed. 1440 (1944). In Southeastern Underwriters Association, the court overruled Paul v. Virginia, 8 Wall. 168, 19 L.Ed. 357 (1868) and its progeny, and held that an insurance company conducting a substantial portion of its business across state lines was engaged in interstate commerce and thus subject to congressional regulation, including file Sherman Act, under the commerce clause. See e.g., Ohio AFL-CIO v. Insurance Rating Board, 451 F.2d 1178, 1181 (6th Cir.1971). Thus, the primary purpose of the McCarran-Ferguson Act was to ensure to the states the continued ability to regulate and to tax the business of insurance. Group Life & Health Insurance Co. v. Royal Drug Co., Inc., 440 U.S. 205, 217-218, 99 S.Ct. 1067, 1076-1077, 59 L.Ed.2d 261 (1979). A secondary purpose was to grant certain exemptions from antitrust laws to the business of insurance. Id. at 218, 99 S.Ct. at 1076. See also, Mackey, supra, 724 F.2d at 420.

In a number of other contexts, courts have examined the congressional purpose of the McCarran-Ferguson Act and have concluded that the Act does not prevent the application of various federal civil rights statutes to the business of insurance. See e.g., EEOC v. Wooster Brush Co., 523 F.Supp. 1256 (N.D.Ohio 1981), aff'd in part rev’d in part, 727 F.2d 566 (6th Cir.1984) (McCarran-Ferguson Act inapplicable to Title VII); Women in City Government United v. City of New York, 515 F.Supp. 295 (S.D.N.Y.1981) (same); Ben v. General Motors Acceptance Corp., 374 F.Supp. 1199 (D.Colo.1974) (McCarran-Ferguson Act does not bar claims under 42 U.S.C. §§ 1982 and 1985).

Herein, the Defendants contend that interpreting Title VIII to allow Plaintiffs to maintain their claims would invalidate, impair or supersede Ohio’s comprehensive regulation of insurance redlining. The Court does not agree. First, it is not all that clear that the statutes relied on by Defendants do in fact regulate insurance redlining. Second, assuming arguendo that the statutes upon which Defendants rely regulate insurance redlining, allowing Plaintiffs’ Title VIII claims to proceed would not invalidate, impair or supersede the state statutes.

For their argument that Ohio comprehensively regulates insurance redlining, Defendants rely on Ohio Rev.Code § 3901.21(L) and (M), which provides:

The following are hereby defined as unfair and deceptive acts or practices in the business of insurance:
sfc * * * * *
(L) Refusing to issue any policy of insurance, or canceling or declining to renew such policy because of the sex or marital status of the applicant, prospective insured, insured, or policyholder.
(M) Making or permitting any unfair discrimination between individuals of the same class and of essentially the same hazard in the amount of premium, policy fees, or rates charged for any policy or contract of insurance, other than life insurance, or in the benefits payable thereunder, or in underwriting standards and practices or eligibility requirements, or in any of the terms or conditions of such contract, or in any other manner whatever.

Subsections L and M were added to § 3901.21 by Amended Substitute Senate Bill 425 (“Senate Bill 425”), 136 Ohio Laws 891 (1976). If subsection M was the explicit regulation of insurance redlining that Defendants contend it is, then subsection L, which prevents insurance companies from refusing to issue a policy, canceling a policy or declining to renew a policy on the basis of sex or marital status, is surplus-age. The Ohio General Assembly felt it necessary to add subsection L, explicitly prohibiting redlining on the basis of sex. Accordingly, this Court cannot conclude that Ohio General Assembly intended to prohibit all insurance redlining with the general language of subsection M. In other words, this Court concludes that the general language of subsection M does not address the question of insurance redlining. Additionally, an examination of Senate Bill 425 convinces this Court that the Ohio General Assembly did not intend § 3901.21(M) to comprehensively regulate insurance redlining. Rather, the major focus of Senate Bill 425 was the elimination of sex discrimination in the business of insurance. See Eisenman, Gall and Hatfield, Toward Equality for Ohio Men and Women: The ERA and Legislative Response, 37 Ohio St.L.J. 537, 557 (1976). For instance, §§ 3911.10, 3911.11 and 3911.-12 were amended so that their content became sexually neutral. Also, in addition to adding subsections L and M to § 3901.21, Senate Bill 425 added subsection N, which prevents insurance companies from denying disability income insurance solely because the applicant’s occupation is that of managing a household, and subsection O, which related to maternity benefits.

Even assuming, arguendo, that § 3901.-21 regulates insurance redlining, allowing Plaintiffs’ Title VIII claim to proceed will not invalidate, impair or supersede § 3901.-21, since Title VIII does not permit anything that § 3901.21 prohibits and Title VIII does not prohibit anything that § 3901.21 permits. Courts have traditionally resolved the question of whether a statute of one jurisdiction conflicts with that of another jurisdiction in such a manner. See e.g. Village of Struthers v. Sokol, 108 Ohio St. 263, 140 N.E. 519 (1923).

Based on the foregoing, Defendants’ Motions to Dismiss are overruled.

      . In Mackey, the court concluded that the McCarran-Ferguson Act was not an impediment to Title VIII claims. In Mackey, the defendant argued that N.C.Gen.Stat. § 58-131.37, a state statute which prohibits the adoption of discriminatory rates, would be invalidated, impaired or superseded if Title VIII was interpreted to prohibit insurance redlining. 724 F.2d at 421 and n. 1. However, unlike Ohio Rev.Code § 3901.-21, N.C.Gen.Stat. § 58-131.37 does not prohibit discriminatory practices in providing insurance coverage. Therefore, Mackey is inapposite on this issue.

      . Ohio Rev.Code § 3901.22 provides an enforcement mechanism for § 3901.21.

      . The Court also notes that none of the regulations adopted by the Superintendent of Insurance to enforce § 3901.21 relate to insurance redlining. See Ohio Admin.Code § 3901-1-07.