author: LEVAL, District Judge.

text:
    UNITED STATES of America, v. BADALAMENTI, et al., Defendants. In re Subpoena Served on Ivan FISHER, Esq.
    No. S.S. 84 Cr. 236 (PNL).
    United States District Court, S.D. New York.
    July 10, 1985.
    As Amended July 23, 1985.

      Rudolph W. Giuliani, U.S. Atty. S.D.N.Y., New York City, for the U.S.; Richard A. Martin, Asst. U.S. Atty., New York City, of counsel.
    Ephraim Margolin, Nicholas C. Arguimbau, San Francisco, Cal., for Ivan Fisher, Esq.
    Herman Kaufman, Austin V. Campriello, Henry J. Steinglass, New York City, for amicus curiae New York State Bar Ass’n.
    Friedman & Atherton, Boston, Mass., for amicus curiae Nat. Ass’n of Crim. Defense Lawyers; Rikki J. Klieman, Boston, Mass., of counsel.
   AMENDED OPINION AND ORDER

LEVAL, District Judge.

Ivan Fisher, Esq., attorney for the defendant Salvatore Catalano, moves to quash a trial subpoena duces tecum served upon him under Rule 17(c) by the Government. Defendant Catalano joins in the motion. The motion also is supported by amicus briefs of the National Association of Criminal Defense Lawyers and the New York Criminal Bar Association.

The subpoena commands that Mr. Fisher “testify ... and produce ... all documents ... relating to” his fee arrangement with Catalano.

The movants oppose the subpoena on numerous grounds including claims that it violates (i) Rule 17(c); (ii) the attorney-client privilege; (iii) the defendant’s Sixth Amendment right to counsel; (iv) the defendant’s privilege against self incrimination; (v) Mr. Fisher’s privilege against self incrimination; and (vi) the defendant’s right to redress a grievance under the First Amendment.

The Government argues that the subpoena violates none of the asserted privileges or rights and that it seeks proper evidence of Catalano’s commission of the crimes charged by showing the element of “substantial income” derived from a “continuing criminal enterprise,” (“CCE”), 21 U.S.C. § 848(b)(2)(B) and from a “pattern of racketeering activity” (“RICO”), 18 U.S.C. § 1962. The Government contends it has reason to believe that Mr. Fisher’s fee is in the vicinity of $500,000 and that the evidence of Catalano’s possession of such a sum to pay his attorney is proof of his revenues from narcotics trafficking. The Government has further asserted it may seek to seize those funds from Mr. Fisher under the provisions of the two statutes for forfeiture of the proceeds of such criminal activity, even after transfer to another person. 21 U.S.C. § 853(a), (c) and (n)(l)-(7) and 18 U.S.C. § 1963(a), (c) and (m)(l)-(7).

The issue of possible forfeiture of the attorney’s fees arises as to both trial evidence, by which the Government may seek “a special verdict of forfeiture,” 18 U.S.C. § 1963(c), 21 U.S.C. § 853(c), and to post-trial proceedings disputing the attorney's right to exemption from such forfeiture as a “bona fide purchaser for value ... without cause to believe that the property was subject to forfeiture.” 21 U.S.C. § 853(n)(6)(B) and 18 U.S.C. § 1963(m)(6)(B).

Forfeiture

In my view the Government’s position as to the liability of Mr. Fisher’s legal fee to forfeiture is not well taken and cannot serve as a basis to sustain the subpoena. I acknowledge that a literal reading of the two forfeiture statutes would seem to encompass the legal fee. But the liability to forfeiture of bona fide legal fees paid to the indicted defendant’s trial attorney would raise such constitutional and ethical problems, I cannot conceive that this was intended by Congress, absent some indication in statute or legislative history. And if it had been intended, such application would in all likelihood violate the Sixth Amendment.

The two provisions enacted in the Comprehensive Forfeiture Act of 1984, Pub.L. No. 98-473, Title II, §§ 302, 303, 2301, 98 Stat. 2040, 2044, 2192, 2193, state that the “right, title, and interest in [the] property [subject to forfeiture] vests in the United States upon the commission of the act giving rise to forfeiture” and that “such property ... subsequently transfered to [another] person [may be forfeited] unless the transferee establishes ... that he is a bona fide purchaser for value ... who at the time of purchase was reasonably without cause to believe that the property was subject to forfeiture____” 18 U.S.C. § 1963(c), 21 U.S.C. § 853(c).

The statute is apparently intended to dissuade the commercial world from dealing with racketeers and traffickers, warning that one who accepts dirty money in payment for goods or services may forfeit it. To the jeweler, for example, the statute says “Don’t sell diamonds to a racketeer. You may lose the proceeds.”

No one is more on notice of likelihood that the money may come from such prohibited activity than the lawyer who is asked to represent the defendant in the trial of the indictment. If the statute applies to him, its message to him is “Do not represent this defendant or you will lose your fee.” That being the kind of message lawyers are likely to take seriously, the defendant will find it difficult or impossible to secure representation. By the Sixth Amendment we guarantee the defendant the right of counsel, but by the forfeiture provisions of the RICO and CCE statute (if they apply to the fee of the defense attorney), we insure that no lawyer will accept the business. (I note in addition that the RICO and CCE indictments to which the forfeiture provisions apply are generally big cases requiring months to prepare and try, making it all the less likely that the attorney might take a chance on escaping forfeiture.)

That is only the beginning of the problems such construction of the statute would raise. A lawyer who was so foolish, ignorant, beholden or idealistic as to take the business would find himself in inevitable positions of conflict. His obligation to be well informed on the subject of his client’s case would conflict with his interest in not learning facts that would endanger his fee by telling him his fee was the proceeds of illegal activity. If he made efforts to fight the forfeiture claiming he was “reasonably without cause to believe that the property was subject to forfeiture,” the evidence on this issue would consist primarily of privileged matter confided to him by his client. He might furthermore be found to have accepted a contingent fee in a criminal case in violation of DR 2-106(C), since his retention of his fee would depend on gaining an acquittal in the client’s trial. The statute would give attorneys a motive to negotiate a guilty plea that did not involve forfeiture, rather than fight the ease expending valuable time and increasing the risk of incurring forfeiture.

The question whether these statutes reach the defense attorney’s fee was considered by the District Court for Colorado which, reviewing the scant legislative history and the rushed passage of the Comprehensive Forfeiture Act, concluded that the Act was not intended to, and did not, cover the attorney’s bona fide fee for the defense of the criminal trial. United States v. Rogers, 602 F.Supp. 1332 (D.Colo.1985).

The question was considered again in this district in United States v. Payden, 605 F.Supp. 839, 849-850 n. 14 (S.D.N.Y.1985), rev’d on other grounds, 767 F.2d 26 (2d Cir.1985). Judge Edelstein rejected the Colorado court’s analysis. He reasoned that to exempt attorneys’ fees from forfeiture would make lawyers conduits for the laundering of racketeering profits. He argued that if the statute was intended to prevent the racketeer from obtaining “a Rolls-Royce with the fruits of a crime, he cannot be permitted to obtain the services of the Rolls-Royce of attorneys from these same tainted funds,” at 850 n. 14, noting (as I have above) that the defense attorney has clear notice that the funds may be the profits of illegal enterprise.

Although with great respect for the real concerns expressed by my colleague, I must agree with the Rogers court. Absent some supporting indication in the legislative history, I think it most doubtful that Congress can have intended by its broad language to cover a special application so clearly at odds with an accused defendant’s constitutionally guaranteed right to have counsel to defend the charge.

Nothing of great value to the resolution has been cited from legislative history. The Rogers court found support for its position in the legislative history of a related bill, the Comprehensive Drug Penalty Act of 1984, which provides for restraining orders to protect the availability of property that may be subject to criminal forfeiture. The House Judiciary Committee Report stated, “Nothing in this section is intended to interfere with a person’s Sixth Amendment right to counsel.” H.R.Rep. No. 845, pt. 1, 98th Cong., 2d Sess. 19 n. 1 (1984).

The Payden opinion seeks to rebut this inference by the next sentence of the Report stating “The Committee ... does not resolve the conflict in District Court opinions on the use of restraining orders that impinge on a person’s right to retain counsel in a criminal case.” Payden reasons, “Congress intended, not to resolve the sixth amendment conflict through this legislation, but to leave the resolution of these issues to the courts.” Payden, supra, at 849 n. 14.

In my view, the sentence noted in Pay-den addresses a different problem. It is the difficulty the accused may experience in hiring and paying a lawyer if the funds of the accused have been sequestered in anticipation of eventual forfeiture. It is true the accused whose money has been seized may have difficulty hiring paid counsel; on the other hand, he can make out an affidavit of indigency and obtain appointed counsel under the Criminal Justice Act. His right to counsel is not threatened. Like any other defendant without funds, he receives counsel although not counsel of his choice. The problem of the subsequent forfeiture of the fee paid to an attorney is different. The wealthy defendant cannot claim poverty and apply for appointed counsel. His problem is not inability to pay a legal fee but that lawyers will refuse to accept his retainer and will refuse to represent him. He can get neither a paid lawyer, nor a free one.

Payden describes the problem saying “The defendants in Rogers argued that the ‘threat of forfeiture ... prevents them from using their assets to secure counsel of their choice.’ If counsel cannot be paid, they will not work and the clients suffer.” Payden, supra, at 849 n. 14. In my view the constitutional problem is not one of choice of counsel; nor is it one of getting retained lawyers to work. The problem is the unlikelihood of obtaining a lawyer at all if the lawyer will incur forfeiture of his fee upon the client’s conviction. The Government argues that forfeiture will be denied if the money is clean. This is true, but irrelevant. The right to counsel belongs to guilty defendants as well as innocent ones.

For all the reasons discussed above, I conclude that the statute was not intended, and should not be construed to reach bona fide fees charged by the attorney for the defense of the criminal charge. (And if the statute were so intended, I would be forced to conclude that in this application it ran afoul of the Sixth Amendment by effectively preventing the accused from exercising the right to counsel.)

This discussion has no application to a sham fee arrangement whereby the defendant might seek to bank his money with an attorney under the disguise of a fee. I do not suggest such an arrangement would be protected from forfeiture. There is, however, no contention that the fee here paid is anything but bona fide. Nor does the discussion apply to the seizure of funds in the hands of the defendant that he expects to use to pay his attorney. Nor does it necessarily apply to fees paid to attorneys for legal services other than the defense of the criminal trial which is secured by the Sixth Amendment. Those are different problems.

I conclude that the Government may not seek a special verdict as to forfeiture of these fees under 18 U.S.C. § 1963 or 21 U.S.C. § 853 and may not rely on forfeiture in support of the subpoena at issue.

Proof of the Defendant’s Illegal Profits

Use of the fee as evidence of the crimes charged presents a more difficult problem.

In Grand Jury Subpoena Served Upon John Doe, Esq., 759 F.2d 968 (2d Cir.1985), a grand jury subpoena had been served on a RICO target’s attorney seeking evidence that the attorney had received monies with respect to representation of twenty-one individuals believed to be involved with the client in an illegal venture. It was assumed by all that compliance with the subpoena would prevent the subpoenaed attorney from eventually appearing for his client at trial in the event of an indictment. The Court of Appeals ruled, in the face of such likely eventual disqualification, that the Government must show both relevance and need before the court would enforce the subpoena. Since no showing of need had, as yet, been made, the subpoena was ordered quashed.

A strong, and in my view highly persuasive dissent by Judge Timbers argued that the grand jury’s right to investigate was paramount, that the information sought was highly relevant to the grand jury’s investigation of organized crime and was not privileged, and that the Sixth Amendment right to counsel had not attached during preindictment grand jury investigation. Judge Timbers observed that the only loss to the client from enforcement of the subpoena would be to require him to use another lawyer and that this loss would arise only if the client were indicted, if the client wished to engage that lawyer as trial counsel and if the Government proposed to offer the evidence obtained through the subpoena of the attorney.

The Government argues that the rule in John Doe, Esq. should not apply to this case because the material here subpoenaed would not be likely to cause the withdrawal of Mr. Fisher and thus might not deprive Catalano of his chosen lawyer. I find to the contrary that this is an a fortiori case. The impact on the client’s choice of lawyer in John Doe, Esq. pertained only to a possible future indictment as to which the right of counsel had not yet attached and as to which the client would have had the universe of lawyers, minus one, to choose from. Here the subpoena was not served until ten months after the return of the indictment and six months after Mr. Fisher’s appearance in a case of gargantuan proportions. The loss to the defendant of his counsel under these circumstances would have a vastly greater impact on his Sixth Amendment rights. Both the majority and the dissent in John Doe, Esq. would seem to agree that its rule should apply to this circumstance.

I do not agree with the Government that this evidence is easily compatible with Mr. Fisher’s continued representation. For him to be singled out among 22 attorneys by evidence that he earned a fee of one-half million dollars (or more) would damage Mr. Fisher’s ability to represent his client effectively. Members of the jury might well resent the fee and see Mr. Fisher as an unconscionable partner in the narcotics business. Mr. Fisher may feel compelled to rebut the jurors’ sentiments by testifying that he had not met his client until he was retained after indictment, and that his fee is in the normal range charged by lawyers of his standing for cases of this magnitude. Mr. Fisher’s credibility would then be before the jury and these issues might become a distracting focus of the jury’s attention. If there were circumstances to rebut the inference that Catalano had such sums available, such as that payment was expected to be spread over a number of years, or came in part from the defendant’s parents, again Mr. Fisher could not testify to those facts without putting his credibility in issue. See MacArthur v. Bank of New York, 524 F.Supp. 1205, 1208 (S.D.N.Y.1981) (Sofaer, J.) (“[T]he bar is ill-served when an attorney’s veracity becomes an issue in a case; lay observers especially might speculate whether counsel has compromised his integrity on the stand in order to prevail in the litigation”). The Government’s argument that the fee could be introduced by stipulation overlooks those considerations, as well as the fact that this evidence would be damaging to other defendants as well and that they also might be unwilling to stipulate to it.

I recognize that the Disciplinary Rules requiring withdrawal of a lawyer who will be called as a witness provide an exception “[i]f the testimony will relate solely to the ... value of legal services rendered in the case....” DR 5-102(A); DR 5-101(B)(3). On the other hand, Disciplinary Rule 5-102(B) requires withdrawal if “it is apparent that [the attorney’s] testimony is or may be prejudicial to his client.” It is inevitable that advice to the jury singling out Mr. Fisher and advising that he earned a fee of one-half million dollars or more would seriously compromise his ability to act effectively. It would place him at a great disadvantage as an advocate and would, probably as a practical matter, force his withdrawal. It would be no easy matter at this point for his client to replace him.

This does not necessarily make the evidence inadmissible. It does, however, demonstrate, contrary to the Government’s argument, that the rule of John Doe, Esq. is applicable, requiring the Government to show both relevance and need to secure enforcement of the subpoena.

As to relevance, the Government contends the evidence that Catalano possessed $500,000 to pay his lawyer would prove the necessary element of his derivation of substantial profits from narcotics trafficking. I agree that it is relevant for this purpose, although not overwhelmingly persuasive. The Government concedes that Catalano is the owner of Catalano Bros. Bakery and a pizza restaurant. It is certainly within contemplation that the owner of two such businesses might have put aside, or be able to borrow, $500,000 and might use it to pay his lawyer if charged with an offense requiring a six-month trial and carrying a mandatory minimum penalty of 10 years. 21 U.S.C. § 848(a). Proof of Catalano’s payment of such a fee in these circumstances is not the kind of unexplained wealth that adds significantly to the probability that the defendant was professionally engaged in crime. If, however, the jury finds from other evidence that the defendant was engaged in narcotics trafficking, the fee might well satisfy the “significant income” elements of RICO and CCE.

The Government argues that the relevance of the fee will increase because Catalano will offer proof of a modest lifestyle to rebut his involvement in large scale narcotics traffic. (See Gov’t Memorandum, pp. 22-23.) The Government indicates no basis for the assertion that this will be “his chosen defense,” other than the fact that he made such arguments when seeking to have his bail reduced. It does not follow from the fact that a defendant argued modest means in seeking a bail reduction that he will necessarily make the same argument to disprove his involvement in drug dealings. The logical gap becomes wider on recognition that Catalano was represented by a different lawyer at the bail hearings. Nonetheless, it is certainly possible that Catalano might rely on such a strategy and if he does, the relevance of this evidence would, indeed, greatly increase.

As to the Government’s obligation to demonstrate need, there is no decisional authority clarifying what it means since the John Doe, Esq. decision establishing the test dates from only two months ago. The Government’s brief devotes little discussion to it except to say that it addresses a matter of “prosecutorial discretion and tactics” and that the courts should stay out of it. But I am required by the Doe, Esq. rule to assess need. Furthermore, the Government’s position is overstated. Courts are repeatedly required to balance probative value against prejudice, which is a comparable task. See, e.g., United States v. Figueroa, 618 F.2d 934 (2d Cir.1980) (Newman, J.); Rule 403, F.R.Evid.

I would assume that the need test of Doe, Esq. involves an assessment of the probative value and importance of the proof, the ability of the Government to acquire proof of the same facts or other proof of similar value from other sources and a weighing of these against an assessment of the prejudice to the defendant’s Sixth Amendment right, both in terms of likelihood of occurrence and of seriousness.

In Doe, Esq., considering the very slight and speculative future impact on the client’s Sixth Amendment rights, the apparent high value of the evidence being sought, the small likelihood of obtaining it from any other source, and the fact that even if obtained from another source it would have the same effect of disqualifying the attorney, I would expect the Government would have little difficulty demonstrating need.

Here the circumstances are quite different. The subpoena is post-indictment. The subpoena was not served on Mr. Fisher until February 12, 1985, after Mr. Fisher had spent already close to six months in trial preparation, trial then being rescheduled only three months ahead. When the parties requested and were granted adjournment of trial to September, the Government consented to adjourn the making of motions against the subpoena to April 5. The Government did not file its answering brief until May 21, 1985; the reply brief was filed on June 18, 1985. Thus the matter came on for adjudication at a time when it would be most awkward and difficult to substitute a new attorney for Mr. Fisher. The affidavit of the Assistant advises that in September 1984 he told Mr. Fisher that “the Government would very likely serve Mr. Fisher with a subpoena” relating to his fee agreement. The factors which the Government now argue in support of the subpoena are the same ones the Assistant mentioned to Mr. Fisher in September upon the first conversation. I do not criticize the Government’s attorney for courtesy in consenting to allow Mr. Fisher time to prepare his position on an important matter. I do, however, point out that the passage of time from September to July has substantially altered the impact of the issue on the defendant’s ability to be represented at the September trial. Had the subpoena been served in September and the court been advised of the importance of early resolution, it would have been easier to resolve, one way or another, with less impact on the defendant’s right to trial counsel. Now, the prejudice to the defendant resulting from the likely disqualification of Mr. Fisher will be very great. (Also, if a new attorney is hired by Catalano, the same problem may arise as to him or her.)

On the question of the importance of this proof to the Government, its need for this proof seems modest. As noted above, Catalano’s access to such an amount is not incompatible with accumulated savings or borrowing power based on the earnings of the bakery and the pizza restaurant. Furthermore, the Government has more compelling proof of Catalano’s access to large sums, in that he has posted real property valued at three million dollars to secure his bail. Secondly, the Government can muster substantially equivalent proof without posing the same problems for the continuing representation of the defendant. It could do this by offering expert testimony on the fees charged by criminal defense attorneys for a case of these dimensions. For example, if the Government had found in the defendant’s possession a collection of jewels and rare coins and wished to prove what the defendant had paid for them for the same purpose of showing profits derived from the illegal enterprise, in the absence of proof of the actual purchase prices the Government could offer expert testimony as to the market value for such objects. I see no reason why the Government could not proceed in the same fashion through expert testimony to establish the market range in 1984 for the services of criminal lawyers in cases of six months’ duration requiring many months to prepare. Such evidence would give the Government exactly what it seeks — proof that Catalano must have expended several hundred thousand dollars — without focusing on Mr. Fisher and putting him in the untenable position of inviting the jury to speculate that the trial attorney occupies the position of counsel to the board of directors of a racketeering enterprise.

The Government’s need for the specific evidence of Mr. Fisher’s fee could be far more extreme if, as noted above, Catalano seeks to offer evidence of his own modest resources to rebut his involvement in drug trafficking. For Catalano to offer evidence of modest means that did not include the funds necessary to pay the fee would give the Government a strong argument that the door had been opened to proof of the fee, regardless of possible prejudice to Mr. Fisher’s effectiveness with the jury. It would seem then that Catalano could not, as a practical matter, offer (or argue) such evidence unless he included full allowance for the payment of Mr. Fisher’s fee (without necessity of telling the jury what the funds were used for). Accordingly, Catalano is on notice that any such contention that does not fully reflect the funds needed to pay the fee will throw open the issue of the attorney’s fee.

In conclusion, to sustain the subpoena under these circumstances the Government must show relevance and need. It has shown relevance but has failed to show need. Accordingly, the motion to quash the subpoena must be granted. See John Doe, Esq., supra. On the other hand, proof by Catalano of modest means that does not include the funds needed to pay the fee would open the door and satisfy the requirement of need.

Fifth Amendment

Alongside his arguments to quash the subpoena, Mr. Fisher asserts his right under the Fifth Amendment to refuse to respond to the subpoena and demands that immunity be conferred on him under 18 U.S.C. § 6002. The Government’s argument that he is not entitled to plead the Fifth Amendment is unpersuasive. Mr. Fisher points to the possibility that he could be charged with commingling and theft of Government property if the Government’s position on the liability of the fee to forfeiture is sustained, as well as the possibility that he could be charged with complicity in the manner suggested by the discussion in Doe, Esq., supra. Although it is doubtful that Mr. Fisher in fact fears prosecution, one who would plead the Fifth Amendment is not put to such a test. The Government argues that Mr. Fisher’s stationary proclaims him to be a professional corporation and thus ineligible to plead the Fifth Amendment. It is sufficient answer to this that the Government’s subpoena was addressed to Ivan Fisher, Esq. in person and not to the professional corporation.

Although Mr. Fisher’s invocation of the Fifth Amendment is not a basis for quashing the subpoena, it moots the issue of its enforceability.

SO ORDERED.

      . The Government disclaims any intention to compel testimony, stating that it seeks only the production of the documents evidencing the attorney’s fee. The subpoena also excludes privileged documents.


source: Caselaw Access Project

author: BECHTLE, District Judge.

license: Public Domain

text:
    21 WEST LANCASTER CORP. v. MAIN LINE RESTAURANT, INC., William Plaginos, Maria Plaginos, the United States Internal Revenue Service, and the Commonwealth of Pennsylvania Department of Revenue.
    Civ. A. No. 84-2005.
    United States District Court, E.D. Pennsylvania.
    July 10, 1985.

      Ronald N. Rutenberg, Philadelphia, Pa., for 21 West Lancaster Corp.
    Edward S.G. Dennis, Jr., U.S. Atty., Rachel Shao, Asst. U.S. Atty., Philadelphia, Pa., Hunt, U.S. Dept, of Justice, Washington, D.C., for U.S. of America and Internal Revenue Service.
    David S. Fishbone, Michael Kaliner, Philadelphia, Pa., for William and Maria Plaginos.
   MEMORANDUM AND ORDER

BECHTLE, District Judge.

Presently before the court is a motion for summary judgment filed by defendants William and Maris Plaginos (“Plaginos”), and a motion for summary judgment filed by defendant United States Internal Revenue Service (the “government”). Briefly stated, the moving parties here call upon the court to resolve the validity and priority of an assignment of a Pennsylvania liquor license to the Plaginos and of a subsequently filed federal tax lien on that liquor license. For the reasons stated herein, the motion of the government will be denied, and the motion of the Plaginos will be granted.

FACTS

The parties have stipulated to all of the material facts.

On June 5, 1980, Main Line Restaurants, Inc. (“Main Line”) borrowed $60,000.00 from Jaybee Loan Company (“Jaybee”). Main Line gave Jaybee a security interest in all of its restaurant equipment, including Restaurant Liquor License No. R-12993. Subsequently, financial statements were timely filed covering the equipment, including the liquor license, with the Recorder of Deeds of Montgomery County, the Prothonotary of Montgomery County, and the Secretary of the Commonwealth of Pennsylvania. Presumably Jaybee also took possession of the liquor license.

On April 13, 1981, April 20, 1981, and August 3, 1981, the Commissioner of the Internal Revenue Service (the “Commissioner”) assessed against, gave notice to, and demanded payment from Main Line for unpaid trust fund federal employment taxes and interest for the third and fourth quarters of 1980 and the first quarter of 1981. On July 20, 1981, the Commissioner assessed against, gave notice to, and demanded payment from Main Line for unpaid federal unemployment taxes and interest for 1981. These assessments remain unsatisfied, and additional amounts have accrued since the date of notice and demand. The government filed notices of a federal tax lien under the Internal Revenue Code with the Prothonotary of Montgomery County on July 15, 1981, September 1, 1981, and June 22, 1983.

During the month of May, 1981, Main Line and 21 West Lancaster Corp. (“21 West”) signed an agreement of sale (“May agreement”) which purported to transfer the assets of Main Line’s liquor and restaurant business to 21 West. In this May agreement Main Line agreed to sell the liquor license to 21 West in accordance with the rules and regulations of the Pennsylvania Liquor Control Board (the “board”).

On May 23, 1983, Jaybee assigned its title and interest in the liquor license to the Plaginos. The appropriate financing statements were timely filed with the Recorder of Deeds of Montgomery County, the Prothonotary of Montgomery County, and the Secretary of the Commonwealth of Pennsylvania. Presumably the Plaginos also took possession of the liquor license.

On June 23, 1983, the May agreement was revised by supplemental agreement (“June agreement”) between Main Line, the Plaginos, and 21 West. In the June agreement Main Line agreed to transfer the liquor license directly to 21 West for a consideration of $60,000.00, and the Plaginos agreed to sell the other liquor and restaurant assets of Main Line, excluding those for which the May agreement directed an inventory to be taken, to 21 West for a consideration of $115,000.00. Payment of the consideration for the liquor license and the $115,000.00 inventory was to be made directly to the Plaginos.

On August 17, 1983, the government served notice on 21 West seeking all property of Main Line which was in 21 West’s possession, plus statutory additions. This amount totaled $60,359.58. On June 18, 1984, 21 West, pursuant to a court Order, deposited the sum of $62,283.12 with the Registry of the Court which represents the sum of $60,000.00 plus interest thereon from December 20, 1983. From this fund, 21 West was awarded costs of $30.50.

The Plaginos and the government are now before the court claiming the interest in the fund. The parties stipulate that no funds have been turned over to the government.

Main Line, 21 West, and the Commonwealth of Pennsylvania disclaim all further interest in the fund.

The Plaginos argue: (1) the government’s execution on a Pennsylvania liquor license is wrongful because the federal statute permits the government to levy upon property only as defined by state law and a liquor license is not property under Pennsylvania law; (2) execution on the liquor license by the government is wrongful because the execution would impair the Plaginos’ property interest in the license; and (3) execution on the liquor license by the government is wrongful because the execution would impair the Plaginos’ property interest.

The government argues on the contrary that: (1) the Plaginos acquired no property right directly in or collateral to the liquor license; and (2) the Internal Revenue Code authorizes the Commissioner to lien and levy upon property, including a Pennsylvania liquor license.

DISCUSSION

At the heart of this case is the validity of the government’s claim and the Plaginos’ claim. Determination of the validity of the claims involves a two-prong analysis. In re Halprin, 280 F.2d 407 (3d Cir.1960). The first prong is merely an examination of the “incidences” of a Pennsylvania liquor license under Pennsylvania law. The second prong is “whether an interest thus created and defined falls within the ‘property or rights to property’ category” under the federal statute or the “property” category under the Uniform Commercial Code (“UCC”), which authorizes federal and UCC liens on property.

A. Validity of Private Creditor’s Claim

With respect to the Plaginos’ claim, the court turns to the first prong of the analysis. A summary of the relevant principles of the Pennsylvania Liquor Code, 47 Pa. Cons.Stat.Ann. 1-101, et seq. (Purdon 1984) (the “Code”), is appropriate here.

The Code creates the Pennsylvania Liquor Control Board, Code § 2-201, and authorizes the board to issue retail liquor licenses for premises kept or operated by a restaurant. Code § 4-401(a). A liquor license is a privilege. It does not constitute property in the hands of the licensee. Code § 4-468(b.l); 1412 Spruce v. Pennsylvania Liquor Control Board, 504 Pa. 394, 474 A.2d 280 (1984). A restaurant liquor license entitles the restaurateur to purchase liquor from Pennsylvania liquor stores and sell, on the restaurant premises, liquor to patrons.

The Code bars the restaurateur from assigning or transferring a restaurant liquor license directly to another person. Code § 4-468(a). The Code, however, permits the board to transfer a license issued by it from one person to another “upon payment of the transfer filing fee and the execution of a new bond.” Code § 4-468(a). The board has the exclusive power to fix the time of transfer of liquor licenses “except in cases of emergency such as death, serious illness, or [certain] circumstances beyond the control of the licensee.” Id. In the case of death of a licensee, the board may transfer the license to the surviving spouse or personal representative or a person designated by him. Id.

It is well settled in Pennsylvania that a liquor license cannot be subject to the execution process, 1412 Spruce, supra, nor can it be subject to a valid security interest. In re Revocation of Liquor License No. R-2193, 456 A.2d 709 (Pa.Commw.Ct.1983). The rationale underlying this rule is that the “Uniform Commercial Code — Secured Transactions,” 13 Pa. Cons.Stat.Ann. § 9101, et seq. (Purdon 1984), which provides for the attachment and enforceability of security interests, permits only attachment and enforcement of security interests upon collateral. 13 Pa.Cons.Stat.Ann. § 9203. Collateral is defined as “[t]he property subject to a security interest____” 13 Pa.Cons.Stat.Ann. § 9105(a). Since, under the Code, a liquor license is expressly not property, a liquor license cannot be collateral under the UCC. It cannot be attached nor can a lien upon it be enforced under the UCC by a private creditor.

Although a liquor license is not assignable, the license does enhance the value of the licensee’s business. A liquor license is not without value. Due process requires the state to pay the licensee just compensation for the liquor license in the context of condemnation proceedings. Redevelopment Authority of Philadelphia v. Lieberman, 461 Pa. 208, 338 A.2d 249 (1975). Also, after the licensee’s death the statutory right to apply for transfer of the liquor license is includable in decedent’s estate for Pennsylvania inheritance tax purposes, even though the value of a liquor license is not includable in the decedent’s estate. See In re Feitz Estate, 402 Pa. 437, 167 A.2d 504 (1961). Therefore the court concludes that although the Code bars assignment of the license, it does not bar assignment of the value enhancement component of the license. See Branding Iron, Inc. v. Business Loans, Inc., 7 B.R. 729 (Bankr.E.D.Pa.1980). The “assignee” cannot transfer or assign the license nor can he initiate execution proceedings. The “assignee” can, however, claim a prior right to the proceeds in the event that the liquor license is transferred by the board. Id.

In the present case, Main Line intended to assign and did assign its interest in the liquor license to Jaybee, which in turn intended to and did assign its interest to the Plaginos. Since, at the time of the assignments, the only interest in the assignor was the liquor licensee’s value enhancement component, only this component was assigned to Jaybee and, subsequently, to the Plaginos.

B. Validity of the Government’s Claim

Following Halprin’s two-prong analysis, the court turns to the first prong and incorporates by reference here the discussion above of the “incidences” of a Pennsylvania liquor license under Pennsylvania law. Additionally, the court notes that the government does not contend that it has the power or authority to transfer the liquor license, absent approval by the board. Under the Code, only the board can transfer the liquor license. Code § 4-468. In fact, the government’s brief seems to concede that, prior to the transfer of liquor licenses collected by the government, the board must have the opportunity to review and approve the location descriptions and plans of the transferee’s business.

The court turns now to the government’s rights in the liquor license, the second prong of the Halprin analysis.

The Internal Revenue Code provides for a lien on “all property and rights to property” of a delinquent taxpayer, 26 U.S.C. § 6321, and authorizes the Secretary of the Treasury to levy on “all property or rights to property” belonging to a delinquent taxpayer or on which there is a lien. 26 U.S.C. § 6331.

The government argues in the present case that a Pennsylvania liquor license should be characterized as “property or rights to property” under the Internal Revenue Code, and, thus, that the government has a lien upon and can execute upon the liquor license.

In order to resolve this question, the court must first determine whether, as a matter of statutory construction, the characterization of “property or rights to property” as used in 26 U.S.C. §§ 6321 and 6331, is a question of state law or federal law. The Plaginos argue that interpretation of the term property or rights to property is the question of state law, and, since Pennsylvania law characterizes a Pennsylvania liquor license as a privilege and not as property, 26 U.S.C. §§ 6321 and 6331 do not authorize the government to lien or execute on a Pennsylvania liquor license. The government, arguing the contrary position, asserts that interpretation of a federal statute is a federal question, and that characterization of a Pennsylvania liquor license, therefore, is a federal question.

The Supreme Court in Morgan v. Commissioner, 309 U.S. 78, 60 S.Ct. 424, 84 L.Ed. 585 (1940), considered an analogous question. The Court held that a power of appointment characterized by Wisconsin state law as a special power of appointment could be classified and taxed under the federal estate tax as a general power of appointment.

State law creates legal interests and rights. The federal revenue acts designate what interests or rights, so created, shall be taxed. Our duty is to ascertain the meaning of the words used to specify the thing taxed. If it is found in a given case that an interest or right created by local law was the object intended to be taxed, the federal law must prevail no matter what name is given to the interest or right by state law.

309 U.S. at 80-81, 60 S.Ct. at 426. At the time Morgan was decided, Congress had not defined in the Internal Revenue Code a general power of appointment. As a result, the Morgan Court looked elsewhere. Citing “Sugden on Powers (8th Ed.) p. 394 [and] Farwell on Powers (2d Ed.) p. 7,” the Court applied “the distinction usually made between a general and a special power” and did not apply Wisconsin law. The Court also found Congressional intent to adopt the “usual distinction” into federal estate tax laws because Congress had reenacted the gross estate inclusion section without tampering with an outstanding Treasury regulation, which had set forth the “usual distinction.”

In Halprin, supra, the Third Circuit Court of Appeals applied an analysis similar to that of the Morgan Court. The Halprin court recognized that, while creation of legal interests is a state law question, construction of a federal statute is a federal question. The circuit court said:

Under the terms of Section 6321 of the Internal Revenue Code of 1954 a duly perfected lien of the United States for taxes attaches to “all property and rights to property, whether real or personal, belonging to” a delinquent taxpayer. Application of this statute involves a two-step inquiry in which both state and federal law must be consulted. State law creates legal interests and defines their incidents, but the ultimate question whether an interest thus created and defined falls within a category stated by a federal statute requires an interpretation of that statute, which is a federal question. Morgan v. Commissioner, 1940, 309 U.S. 78, 60 S.Ct. 424, 84 L.Ed. 585; Fidelity & Deposit Co. of Md. v. New York City Housing Authority, 2 Cir., 1957, 241 F.2d 142.

280 F.2d at 409. The circuit court, assuming that the purported legal interest was valid under state law, proceeded to determine whether it was property or rights to property under 26 U.S.C. § 6321. The appropriate analysis of this second prong of the inquiry, the Halprin court indicated, was as follows:

Our federal problem is whether, in a wholly executory bilateral contract, valid under state law, a promise to pay for goods or services which are yet to be delivered or performed is property of the promisee within the meaning of this lien-creating statute. We must apply what relevant data we can find, including our understanding of the nature and characteristics of contract rights and property rights at common law, in order to decide what kinds of intangible rights Congress covered in the phrase “property and rights to property,” as it is used in Section 6321.

280 F.2d at 409. In applying the “relevant data,” the third circuit did not confine its consideration to the legal principles in Pennsylvania. Instead, the circuit court reviewed and applied the legal precepts of the laws of several states.

In summary, the court concludes that Supreme Court and third circuit precedent directs that interpretation of the phrase “property or rights to property,” set forth in 26 U.S.C. §§ 6321 and 6331, be a federal question.

The Supreme Court has also directed the lower courts to interpret broadly the phrase “property or rights to property.” Glass City Bank v. United States, 326 U.S. 265, 267, 66 S.Ct. 108, 110, 90 L.Ed. 56 (1945); see Citizens Bank of Barstow v. Vidal, 114 F.2d 380, 382-83 (10th Cir.1940). For purposes of this opinion, the court adopts the broadest possible meaning of the phrase “property or rights to property” from the introductory note of the Restatement of the Law of Property:

The word “property” is used in this Restatement to denote legal relations between persons with respect to a thing. The thing may be an object having physical existence or it may be any kind of an intangible such as a patent right or a choose in action. The broader meanings of the word “property,” which include any relationship having an exchange value, are not used.

Restatement of the Law of Property, Introductory Note, p. 3-4 (1936).

No matter how broadly the term “property or rights to property” is construed under federal law, it cannot, however, be construed to authorize the government to lien or execute upon property in which the taxpayer has no interest. Pittsburgh National Bank v. United States, 657 F.2d 36 (3d Cir.1981); In re Halprin, 280 F.2d 407 (3d Cir.1960).

In the present case, Main Line assigned the value enhancement component of the liquor license to Jaybee in 1980. Thus, when the government’s statutory lien on Main Line’s interest in the liquor license subsequently arose, Main Line’s interest in the value enhancement component was limited by the extent to which Jaybee or the Plaginos had a prior right to that component.

The government cites numerous cases for the proposition that a liquor license is property upon which the government can lien and execute. Those cases, however, do not stand for the proposition that the government has a right to the license. Those cases merely indicate that the government may obtain a statutory right to the proceeds arising from the sale of the liquor license.

CONCLUSION

Accordingly, the court holds that the Plaginos have a right to the proceeds from the sale of the liquor license senior to that of the government.

An appropriate Order will be entered.

ORDER

AND NOW, TO WIT, this 10th day of July, 1985, for the reasons stated in the accompanying Memorandum, IT IS ORDERED as follows:

1. The motion for summary judgment filed by defendant Plaginos is granted;

2. The motion for summary judgment by defendant United States Internal Revenue Service is denied;

3. The Registry of the Court is directed to turn over the $60,000.00 fund plus accrued interest to defendants William and Maria Plaginos.

      . Paragraphs 14 and 15 of the stipulation of facts refer the court to the unpaid balance of assessments allegedly referred to in paragraph 12 of the stipulation of facts. Paragraph 12, however, merely asserted that the Plaginos filed Form UCC 3 financing statements with the Recorder of Deeds of Montgomery County, the Prothonotary of Montgomery County, and the Secretary of the Commonwealth of Pennsylvania. Nothing in paragraph 12, as far as the court can determine, refers to unpaid assessments. Nonetheless, the court must presume, for purposes of this analysis, that the parties intended that paragraphs 14 and 15 of the stipulation reference paragraph 13. Paragraph 13 614 F.Supp. — 7 refers the court to assessments made by the Commissioner of the Internal Revenue Service against Main Line for unpaid trust fund employment taxes and interest for the third and fourth quarters of 1980 and the first quarter of 1981 and for unpaid federal unemployment taxes and interest for the year 1981.

      . In May, 1983, two transactions occurred. In one, Main Line and 21 West Lancaster Corp. signed an agreement to transfer the liquor license to 21 West. In the other, Jaybee assigned its title and interest in the liquor license to the Plaginos. The parties do not stipulate, however, the order of these transactions. The court presumes, for purposes of the statement of facts, that the assignment occurred after the May agreement and prompted a supplemental agreement.

      . The court notes that Maria Plaginos signed the May agreement, the June 30th agreement, and the loan agreements, which were made part of the record, on behalf of Main Line as President of Main Line, and William Plaginos signed the loan agreements as an officer of Main Line. The parties' stipulation of facts, however, does not specify the corporate relationship between Main Line and the Plaginos.

      . The parties do not specify whether Main Line had the power to transfer the liquor license in light of the 1980 assignment to Jaybee and the May 23rd assignment to the Plaginos. The court presumes, however, that the parties intended that Main Line would have the power at the appropriate time to perform its obligation under the June agreement.

      . The inventory was not included in the record created by the parties.

      . The Plaginos claim that, in spite of the Pennsylvania Supreme Court’s 1412 Spruce decision, their interest in the liquor license was perfected. In effect, the Plaginos argue that the 1412 Spruce decision should not be applied retrospectively. The Pennsylvania Supreme Court, however, created no new law in 1412 Spruce; the court merely construed a Pennsylvania statute enacted in 1978. None of the relevant transactions in the present case occurred prior to the enactment of the statute. Thus, in brief, the Plaginos' retrospectivity argument is without merit.

      . Title 26 of U.S.C. § 6321 provides:
      If any person liable to pay any tax neglects or refuses to pay the same after demand, the amount (including any interest, additional amount, addition to tax, or assessable penalty, together with any costs that may accrue in addition thereto) shall be a lien in favor of the United States upon all property and rights to property, whether real or personal, belonging to such person.

      . Title 26 U.S.C. § 6331(a) provides in pertinent part:
      (a) Authority of Secretary or delegate. — If any person liable to pay any tax neglects or refuses to pay the same within ten days after notice and demand, it shall be lawful for the Secretary or his delegate to collect such tax (and such further sum as shall be sufficient to cover the expenses of the levy) by levy upon all property and rights to property (except such property as is exempt under section 6334) belonging to such person or on which there is a lien provided in this chapter for the payment of such tax.

      . Bogus v. American National Bank of Cheyenne, Wyoming, 401 F.2d 458 (10th Cir.1968); Paramount Finance Company v. United States, 379 F.2d 543 (6th Cir.1967); Commonwealth of Kentucky v. United States, 77-1 USTC 86, 766 (W.D.Ky.1977); Lewis City v. City of Grand Rapids, Michigan, 222 F.Supp. 349, 384 (W.D.Mich.1963); Midwest Beverage Co. v. Gates, 61 F.Supp. 688 (W.D.Ind.1945); The Boss Co., Inc. v. Board of Commissioners of Atlantic City, 192 A.2d 584 (Sup.Ct.N.J.1963); Deitsch v. Board of Liquor License Commissioners for Baltimore City, 1 AFTR2d 1680 (Baltimore City Court 1958). Additionally, after the parties had filed their briefs in this case the United States District Court for the Eastern District of Pennsylvania characterized the federal lien as a lien upon the liquor license. JFWIRS, Ltd. v. United States, 607 F.Supp. 566 (M.D.Pa.1985). Nonetheless, in the final analysis, all of these cases recognized that the government had a right only to the proceeds arising from the sale of the license and not a right in the license itself.


author: SWEET, District Judge.

text:
    Dr. Harry THERIAULT, a/k/a Shiloh, Petitioner, v. Warden Michael QUINLAN, FCI Otisville, New York, Respondent.
    No. 84 Civ. 6007 (RWS).
    United States District Court, S.D. New York.
    July 15, 1985.
   MEMORANDUM OPINION

SWEET, District Judge.

The government has moved for reargument of this court’s May 21, 1985, 609 F.Supp. 733, opinion (“opinion”) which granted one of Dr. Harry Theriault’s (“Theriault”) claims in his petition for habeas corpus pursuant to 28 U.S.C. § 2241. This motion is granted in part and denied in part.

The opinion held that the Parole Commission’s denial of Theriault's request to call witnesses, without a contemporaneous finding and explanation of a substantial reason for not so allowing, violated 18 U.S.C. § 4214(a)(2)(D). The government, relying on Ponte v. Real, — U.S.-, 105 S.Ct. 2192, 85 L.Ed.2d 553 (1985) now argues that due process is satisfied by a subsequently provided justification.

The government’s reliance on Ponte v. Real is misplaced. In Ponte the Court found that due process was satisfied when prison officials provided reasons for refusing a prisoner’s request to call witnesses at a prison disciplinary hearing, subsequent to the hearing. The Court held that there was no requirement that the reasons for the denial be stated contemporaneously.

Theriault’s motion, however, involves a parole revocation hearing controlled by 18 U.S.C. § 4214, not a prison disciplinary hearing controlled exclusively by the requirements of Constitutional due process. The finding that § 4214 was violated provides an independent basis for relief under 28 U.S.C. § 2241 which states that the writ of habeas corpus extends to prisoners “in custody in violation of the Constitution or laws ... of the United States ...” (emphasis added). Even if the statute controlling parole revocation hearings provides greater rights than those required' by due process in other contexts, a violation of the statute governing parole revocation hearings still provides a foundation for relief. See Luther v. Molina, 627 F.2d 71 (7th Cir.1980) (habeas can be provided where some aspect of revocation procedure is attacked as contrary to statute or regulation); Silberberg v. U.S. Parole Commission, 483 F.Supp. 1280 (M.D.Pa.1980) (relief granted on habeas petition alleging parole commission’s improper use of release date guidelines, 28 C.F.R. § 2.20); United States v. Kenton, 256 F.Supp. 296 (D.Conn.1966) (writ granted where prisoner denied statutory hearing on parole revocation). See generally Parness v. United States Parole Commission, 488 F.Supp. 102 (S.D.N.Y.1980) (judicial intervention via writ of habeas corpus appropriate when Commission has exceeded its authority or abused its discretion). The holding in Ponte v. Real, supra, does not require the reversal of my prior decision that the refusal to call Theriault’s witnesses without a contemporaneous explanation violates 18 U.S.C. § 4214(a)(2)(D).

The government has also moved for reconsideration of the opinion’s remand to the Parole Commission for recalculation of Theriault’s sentence to permit an opportunity to conduct the revocation hearing on the shoplifting charge within the procedures mandated by the statute. Under Billiteri v. United States Board of Parole, 541 F.2d 938 (2d Cir.1976), the requested remand is appropriate and the Parole Commission may alternatively conduct another revocation hearing with respect to the shoplifting charge. At the hearing, the Commission is directed either to permit Theriault to call witnesses or to comply with the statutory procedure for denying his application to do so.

IT IS SO ORDERED.


author: GETZENDANNER, District Judge:

text:
    Allison SCHOMBER, a minor, by her parents & next friend, Aaron SCHOMBER and Patricia Schomber, and individually and on behalf of all others similarly situated, Plaintiffs, v. JEWEL COMPANIES, INC., Defendant.
    No. 85 C 4404.
    United States District Court, N.D. Illinois, E.D.
    July 11, 1985.

      Robert M. Hess, Sachs & Hess, P.C., Hammond, Ind., Marvin A. Miller, Wash-low, Cher tow & Miller, Michael J. Freed, Much, Shelist Freed Dennenberg Ament & Eiger, Chicago, Ill, for plaintiffs and intervenors.
    Fredric J. Grossman, Thomas H. Ryerson, Kevin J. Glenn, Clausen, Miller, Gorman, Caffrey & Witous, P.C., Chicago, Ill, for defendant.
    William J. Harte, Kevin M. Forde, Lawrence W. Leek, Joseph S. Witkowski, Chicago, Ill., amici curiae on behalf of State Court Litigants.
   MEMORANDUM OPINION AND ORDER

GETZENDANNER, District Judge:

This class action complaint for personal injuries arises out of the 1985 salmonellosis outbreak in the greater Chicago metrópolitan area. Plaintiff and named class representative Allison Schomber is an Indiana resident. Defendant Jewel Companies, Inc. (“Jewel”) is a New York corporation with its principal place of business in Illinois. Jurisdiction is predicated on diversity of citizenship, 28 U.S.C. § 1332, and the amount in controversy exceeds $10,000 exclusive of interest and costs. The matter is currently before the court on the motion of defendants to dismiss, or alternatively, to stay the action, and the motion of numerous putative class members to intervene as co-plaintiffs.

Facts

Defendant Jewel is engaged in the processing, manufacture, and distribution of food products for resale, including the sale of milk under the brand names Hillfarm and Bluebrook. In 1985, a substantial amount of Hillfarm and Bluebrook 2% Low-Fat Milk was discovered to be contaminated by salmonella bacteria. Plaintiff and other class members are individuals who drank the contaminated milk or are members of the household of those who contracted salmonellosis from drinking the contaminated milk.

The present complaint was filed on May 3, 1985. By that time, approximately 143 individual lawsuits had been filed in the Circuit Court of Cook County, Illinois, and other state courts in both Indiana and Illinois, including a number of putative class actions. All of the Cook County cases have been “consolidated” for pre-trial and discovery purposes before Judge William Quinlan in In re Salmonella Litigation, Master File No. 85 L 000000, with all discovery and other pretrial matters to be handled by a Committee of plaintiffs’ attorneys. A motion for class certification is also pending before Judge Quinlan. While the present motions were being briefed, the Illinois Supreme Court further consolidated all state cases for discovery purposes, thus in effect “multi-districting” the Illinois cases.

Subject Matter Jurisdiction

Defendants have challenged plaintiff’s allegations of diversity on the grounds that the complaint states that Schomber is a resident of Indiana, but nowhere states her domicile or citizenship. Plaintiff argues that this mistake is technical only, but has offered no amendment to cure the problem. The court concludes that it has jurisdiction, but nonetheless finds that plaintiff should file an amended complaint. Failure to file an amended complaint by July 30,1985 will be deemed as an admission that Schomber is domiciled elsewhere than in Indiana, and the complaint will be dismissed for lack of subject-matter jurisdiction.

Motion to Intervene

Intervenors Erica Barajas et al. are Illinois and Indiana residents who also suffered personal injuries from the drinking of contaminated milk processed or sold by defendant Jewel. These parties seek leave to intervene as co-plaintiffs under Rule 24(b) to assert claims for breach of implied warranty under the Magnuson-Moss Warranty Act, 15 U.S.C. § 2310(d)(1)(B) and (3)(C), and pendent state law claims which are otherwise identical to the class claims of plaintiff Schomber. The intervenors are represented by Schomber’s counsel, and are not parties (except putatively) to any of the state court actions against defendant.

Unlike an intervention as of right under 24(a), permissive intervention is not within a federal court’s ancillary jurisdiction and must generally be supported by an independent jurisdictional basis. See 3 J. Moore, Moore’s Federal Practice ¶ 24.-18[3]. Because many of the intervenors are Illinois residents, their complaint lacks diversity, and the intervenors therefore rely on the existence of a Magnuson-Moss claim to support federal jurisdiction. Defendants argue that the intervenors’ Magnuson-Moss claims are insufficient as a matter of law, and therefore that the motion to intervene should be denied for lack of an independent jurisdictional basis. The court agrees.

Section 2310(d) of the Magnuson-Moss Warranty Act creates a private cause of action, to be brought in state court, for consumers who are damaged by the failure of a “warrantor” or “supplier” to “comply with any obligation under this chapter, or under a written warranty, implied warranty, or service contract.” 15 U.S.C. § 2310(d)(1). To bring such an action in federal district court, further jurisdictional requirements (which are not at issue here) must also be met. 15 U.S.C. § 2310(d)(3).

The literal language of § 2310(d) would indeed appear at first blush to create a cause of action for any party injured by a breach of implied or express warranty. However, the three reported decisions reaching the issue have all held that the Magnuson-Moss Act does not have so broad a reach. In Gorman v. Saf-T-Mate, Inc., 513 F.Supp. 1028 (N.D.Ind.1981), then District Court Judge Jesse Eschbach examined the legislative history and statutory language of the Act to conclude that § 2310(d) is limited to claims for direct damages, as opposed to claims for consequential damages such as personal injuries. Gorman was then followed in Bush v. American Motors Sales Corp., 575 F.Supp. 1581, 1582 (D.Colo.1984) and Boelens v. Redman Homes, Inc., 748 F.2d 1058, 1064-68 (5th Cir.1984).

Because plaintiff does not make any serious argument to discredit the extensive analyses in Gorman and Boelens, but instead attempts to distinguish them, the court will only briefly summarize the bases for those decisions. Both opinions stressed the proposition that federal legislation should not be construed to effect a major expansion of federal jurisdiction absent a clear legislative intent. Gorman, 513 F.Supp. at 1030, Boelens, 748 F.2d at 1067. In Gorman, Judge Eschbach found that the central purpose of the Magnuson-Moss Act — “to create a new and more effective procedural mechanism for consumer claims involving comparatively small amounts of damages” — was not implicated by the typical personal injury suit. 513 F.Supp. at 1033. The Boelens panel, engaging in an independent analysis of the legislative history, similarly concluded that the Act was intended to encompass only “claims for which a remedy would be otherwise unavailable.” 748 F.2d at 1067.

Both opinions also laid particular stress on the express language of § 2311(b)(2):

Nothing in this title (other than sections 2308 and 2304(a)(2) and (4)) shall (A) affect the liability of, or impose liability on, any person for personal injury, or (B) supersede any provision of State Law regarding consequential damages for injury to the person or other injury.

(Emphasis added). As noted in Boelens, this section “sets up a dichotomy between personal injury claims based on a breach of the substantive provisions of §§ 2308 and 2304, which are cognizable under the MMWA, and personal injury claims based only on a breach of warranty, which are not ....” 748 F.2d at 1065-66 (emphasis in original). Thus, to allow a federal claim for personal injury damages based solely on a breach of warranty would be to swallow up the rule by its exceptions.

The court finds the reasoning of these cases persuasive and applicable to the present case. As the intervenors freely admit, the complaint in intervention involves only implied warranties which arise under state law and no substantive claims under federal law. Since the complaint in intervention seeks damages for personal injury only, § 2311(b)(2) squarely excludes any right of recovery under MagnusonMoss, and hence there is no federal question jurisdiction which would allow this court to adjudicate these state claims if brought as an independent action. The intervenors’ citations of Walsh v. Ford Motor Co., 588 F.Supp. 1513 (D.D.C.1984) and Feinstein v. Firestone Tire and Rubber Co., 535 F.Supp. 595 (S.D.N.Y.1982) are irrelevant: neither of those cases involved a claim for personal injury damages which would require determining the applicability of § 2311(b)(2).

The intervenors have suggested that the merits of the Magnuson-Moss claim cannot be finally adjudicated unless they are first allowed to intervene. This argument is without merit. Federal courts typically examine the merits of complaints in order to decide whether leave to amend under Rule 15(a) would be futile, or whether leave to file in forma pauperis should be granted. It would ill serve judicial economy to allow permissive intervention solely for the purpose of dismissing the intervenors’ complaint.

On the facts of the present case, the lack of an independent jurisdictional basis is sufficient grounds in and of itself to deny intervention. The intervenors suggest that, since they are already putative class members, allowing intervention would not destroy diversity jurisdiction, which in this case is determined by the citizenship of the named class representative Allison Schomber. Snyder v. Harris, 394 U.S. 332, 340, 89 S.Ct. 1053, 1058, 22 L.Ed.2d 319 (1969); Supreme Tribe of Ben-Hur v. Cauble, 255 U.S. 356, 366, 41 S.Ct. 338, 342, 65 L.Ed. 673 (1921). The apparent implication of this argument is that intervention should be allowed in order to save time and expense to the plaintiff-litigants. Even accepting the dubious proposition that joinder of the intervenors as named parties would not destroy diversity jurisdiction, allowing such intervention would serve little purpose, since the intervenors are already putative class members and are not complaining of inadequate representation. Indeed, such a complaint could not be made since the intervenors and plaintiff share the same counsel. The purpose of requiring an independent jurisdictional basis for permissive intervention is to ensure that federal courts not surreptitiously expand the scope of their jurisdiction through the operation of Rule 24. If the present class action cannot be adequately maintained absent the joinder of non-diverse class members, the solution lies in denying class certification rather than allowing intervention.

Motion to Dismiss or Stay

Defendant argues that this court should abstain from deciding this case, or at least plaintiff Schomber’s class claims, out of deference to the pending proceedings in the Illinois state courts. This motion depends for its support on the principles developed in Colorado River Water Conservation District v. United States, 424 U.S. 800, 96 S.Ct. 1236, 47 L.Ed.2d 483 (1976), and its progeny. In Colorado River, the Supreme Court noted that, despite the “virtually unflagging obligation of the federal courts to exercise the jurisdiction given them,” 424 U.S. at 817, 96 S.Ct. at 1246, considerations of judicial economy and federal-state comity may justify abstention in situations involving the contemporaneous exercise of jurisdiction by state and federal courts. Id. Although the Court stated that only “exceptional circumstances” would justify a stay of jurisdiction, id., the court upheld the stay in the case at bar, and identified the considerations relevant to such decisions. Those considerations include the desirability of avoiding piecemeal adjudication, the inconvenience of the federal forum, and the order in which jurisdiction was obtained by the respective forums. Id. at 818, 96 S.Ct. at 1246. In Moses H. Cone Memorial Hospital v. Mercury Construction Corp., 460 U.S. 1, 103 S.Ct. 927, 74 L.Ed.2d 765 (1983), the Court additionally stressed the presence or absence of federal law issues and the adequacy of the parallel state court litigation as other factors to be weighed. 460 U.S. at 23, 26, 103 S.Ct. at 941.

As explained in Moses H. Cone, a decision to abstain on the basis of parallel state proceedings “does not rest on a mechanical checklist [of the factors identified in Colorado River ] but on a careful balancing of the important factors as they apply in a given case with the balance heavily weighted in favor of the exercise of jurisdiction.” 460 U.S. at 16, 103 S.Ct. at 937. The Moses H. Cone Court further stressed that the weight to be given any one factor may vary greatly, depending on the particular factual or legal setting of the action. Id. The decision to abstain is within the discretion of the district court. Will v. Calvert Fire Insurance Co., 437 U.S. 655, 663, 98 S.Ct. 2552, 2557, 57 L.Ed.2d 504 (1978).

The balancing encompassed by these two decisions can be best summarized by noting the different results of the two cases. In Colorado River, a suit involving federal government claims to water rights, the Court upheld a federal court’s deference to state judicial proceedings based on the peculiarly local nature of the matters at stake, and on federal policy, as expressed in the McCarran Amendments, in favor of state court adjudication under such circumstances. In Moses H Cone, by contrast, the Court held it error to stay an action to compel arbitration in deference to a state court contract suit. The court noted that the case involved federal law, that the federal suit had been promptly filed despite the prior initiation of the state court litigation, and that the issue to be decided in federal court — arbitrability—was severable from the larger dispute.

The Seventh Circuit has had numerous opportunities since Colorado River to define the scope of the “exceptional circumstances” which justify federal court deference to parallel state proceedings. In Illinois Bell Telephone Co. v. Illinois Commerce Commission, 740 F.2d 566 (7th Cir.1984), the Court affirmed a district court decision not to abstain where the suit involved federal law issues and the state court suit, although initiated first, was no closer to resolution than the federal action. In Microsoftware Computer Systems v. Ontel Corp., 686 F.2d 531 (7th Cir.1982), by contrast, the Court held that the district court abused discretion in not staying suit where the defendant in a New York state court action filed an identical diversity suit in the Northern District of Illinois more than one year after the state court suit was underway. The Court stressed the absence of federal questions and the grand waste of effort that would come from parallel suits in geographically distinct fora. The Court also noted that the New York defendant could have removed the state court suit to federal court, and therefore that granting the stay would cause no diminishment of that' party’s right to a federal forum. In Board of Education v. Bosworth, 713 F.2d 1316 (7th Cir.1983), the Court upheld abstention where the state court suit was well underway, and the rights to be enforced were local in nature, even though no factor of geographic inconvenience was at stake.

These cases, while adhering to the language of Colorado River requiring “exceptional circumstances,” indicate that the matter of abstention is largely within the district court’s discretion. Microsoft-ware Computer Systems, 686 F.2d at 537. The underlying inquiry is intended to “prevent duplication of judicial effort in two separate court systems and to confine the litigation to the forum able to make the most comprehensive disposition.” Calvert Fire Insurance Co. v. American Mutual Reinsurance Co., 600 F.2d 1228 (7th Cir.1979). Accordingly, the courts have implicitly required a finding that the state court is better equipped to deal with the matter at hand, usually because of the extent of progress before granting a stay in deference to state proceedings. For example, where a diversity suit involved special problems in supervising international discovery, the Court upheld the district court decision not to abstain despite the absence of federal issues. Voktas, Inc. v. Central Soya Co., Inc., 689 F.2d 103 (7th Cir.1982). Not always, however, is an implicit finding of state court expertise required. In Calvert Fire Insurance Co., the Court noted that the “vexatious nature of the federal suit” may be properly relied on as a factor compelling deference, despite the presence of securities law claims which were within the exclusive jurisdiction of the federal court. 600 F.2d at 1234.

Plaintiff argues that the above line of cases are irrelevant since neither Schomber herself nor the intervenors are presently parties to the state court litigation. According to plaintiff, the cases are therefore not “parallel” for the doctrine of Colorado River to apply. While this argument has some force with respect to Schomber’s individual claim, the class allegations in this suit are identical to those pending in state court except for the names of the class representatives. Moreover, in Colorado River the federal court plaintiff had only been joined as a party to the state court after its lawsuit had been filed. In this case, plaintiff may herself become bound by the state court class and seeks to represent litigants who are presently before Judge Quinlan. The doctrine of Colorado River is therefore fully applicable to plaintiffs action.

Having surveyed the case law, and having found the state and federal suits to be “parallel”, the court now applies the factors of Colorado River and Moses H. Cone to the present case. First is the avoidance of piecemeal litigation. Plaintiff’s counsel seeks to certify a class of all consumers injured by the presence of salmonella in defendant’s milk products, despite the pendency of similar class proceedings in the Illinois state courts and around 200 individual lawsuits in Illinois and two other states brought by putative class members. The burden imposed on defendant in litigating this class action in two fora would be great; indeed, the very arguments plaintiff makes for class certification support defendant’s argument that the claims should be confined to a single forum as far as possible.

The second factor, inconvenience of the federal forum, is not an issue here, as the state and federal courthouses in Chicago are only a few blocks away from each other. See Arkwright-Boston Manufacturers Mutual Insurance Co. v. City of New York, 762 F.2d 205, 210 (2d Cir.1985). The court will therefore turn to the third factor, namely the order in which jurisdiction was obtained. As noted in Moses H. Cone, this factor should not be determined by a race to the courthouse but instead by the extent of progress in the respective forums. 460 U.S. at 21, 103 S.Ct. at 940.

The earliest of the state court suits predates Schomber’s complaint by approximately one month. Although the state case has not advanced very far and no class has yet been certified, the state court has undertaken complex administrative procedures to oversee the action. All state court complaints have been consolidated under one number and assigned to one judge, who will oversee all pretrial matters on a consolidated basis. At present, according to the amicus brief of the state court litigants, over 200 lawsuits, including twelve class actions, have been filed. A committee of plaintiffs’ attorneys has been elected to effectuate the organization and accomodation of all discovery and other pretrial matters.

Although both cases are in early stages of discovery, the state court litigation is significantly further along in this respect than the proceedings in this court. Extensive protective orders were entered in early April (before this suit was filed) to ensure the retention of milk samples and documents regarding the salmonella outbreak. Several contested hearings have been held relative to these orders, and sanctions have been obtained against defendant for the alleged failure to preserve contaminated milk in violation of the protective order.

Other discovery matters are also well underway in the state court litigation. The state court attorneys for plaintiffs have undertaken searches at defendant’s Hill-farm Dairy with microbiologists to obtain samples of the contaminated milk and have visited Silliker Laboratories, a private lab retained by defendant for the purpose of analyzing those samples. The state attorneys have met with Silliker’s counsel several times, have obtained document production from defendant, Silliker, and the Illinois Department of Public Health, and have filed Freedom of Information Act requests with the Food and Drug Administration and the Center for Disease Control. Finally, the Supreme Court of Illinois on June 27 ordered that the depositions of Jewel employees, witnesses and experts on the liability issue be telecast and videotaped, at Jewel’s expense, to one location in each of the circuits in which such cases are pending. By contrast, almost no pretrial discovery — in terms of content or procedures — has been initiated in this court.

With respect to the issue of class certification, the difference between the two fora is less substantial. The state court plaintiffs recently filed a consolidated class action complaint. Defendants filed an answer on July 5,1985, and a motion to strike the class allegations on July 8th. Depositions of thirty potential class representatives are scheduled to commence this month and to conclude in early August. While some of this activity appears to have been prompted by the threat of parallel federal proceedings, and is therefore tainted by an arguably improper motive, the fact remains that early class certification is more likely to occur in the state court than here. Therefore, despite the limited gap of time between the filing of the two lawsuits, the greater progress in the state court, combined with the fact that most of the litigants are currently proceeding before Judge Quinlan, make that court a “distinctly more convenient and competent forum” for resolving the present dispute. In re Special March, 1981 Grand Jury, 753 F.2d 575, 580 (7th Cir.1985).

The next factor is the absence of federal law issues. This factor does not weigh in favor of abstention, but is nonetheless important since “the presence of federal-law issues must always be a major consideration weighing against surrender.” Moses H. Cone, 103 S.Ct. at 942. In a similar vein, the Seventh Circuit has admonished that the diversity litigant is entitled to a federal forum and therefore cannot be relegated to state court on a lesser showing of judicial economy than would be required in a federal question case. Evans Transportation Co. v. Scullin Steel Co., 693 F.2d 715, 717 (7th Cir.1982). Having determined that the Magnuson-Moss claims asserted by the intervenors are without merit, the court finds that the absence of federal law issues removes one countervailing factor which might otherwise override the concerns of avoiding piecemeal litigation.

The final factor articulated in Moses H. Cone — adequacy of the state forum — similarly presents no reason to weigh against abstention. The Illinois class action statute allows for certification over out of state plaintiffs, Miner v. Gillette Co., 87 Ill.2d 7, 428 N.E.2d 478 (1981), cert. dismissed, 459 U.S. 86, 103 S.Ct. 484, 74 L.Ed.2d 249 (1982), and the Supreme Court just recently upheld the constitutionality of such a procedure. Phillips Petroleum Co. v. Shutts, — U.S. -, 105 S.Ct. 2965, 86 L.Ed.2d 628 (1985). Plaintiff suggests that only this court can provide “total oversight and judicial relief for all of the class members” but fails to identify any particulars in which the Illinois state courts are deficient. The plaintiff also suggests that only this court can preclude parallel class action certifications in other states, in disregard of the fact that this court has no power to enjoin state court litigation except under limited circumstances which would not be applicable here.

Plaintiff finally suggests that what is needed for the putative class is prompt certification, and that a class certified by the state court may be substantially different from the class which plaintiff seeks to certify in this case. For the reasons stated earlier, however, the possibility of prompt certification is greater in the state court than here. Moreover, the class which the state court litigants seeks to certify is in all material respects identical to the class described in plaintiff’s complaint, except that this court only has jurisdiction over class members whose claims exceed $10,000. Zahn v. International Paper Co., 414 U.S. 291, 301, 94 S.Ct. 505, 512, 38 L.Ed.2d 511 (1973); Snyder v. Harris, 394 U.S. 332, 340, 89 S.Ct. 1053, 1058, 22 L.Ed.2d 319 (1969). Obviously, the chief beneficiaries of class certification in this action would be plaintiff’s counsel, and not the putative class, whose interests would be more expeditiously served by certification in the litigation which is more advanced.

Given the complexity of this litigation and of the extraordinary steps already taken by the state court to supervise the consolidated cases, “exceptional circumstances” exist so as to justify federal court abstention. The court takes special note that the Second Circuit recently affirmed a decision to abstain under similar but even less compelling facts. Arkwright-Boston Manufacturers Mutual Insurance Co. v. City of New York, 762 F.2d 205 (2d Cir.1985). That case arose out of the electrical blackout occurring in midtown Manhattan in 1983 and in particular involved business losses suffered by Gimbel Brothers, Inc. On the same day that Gimbel filed a state court suit for its uninsured losses, Gimbel’s insurers, who had become subrogated to Gimbel’s rights in the amount of covered losses, filed a diversity action raising identical allegations. Like the case at bar, Arkwright involved hundreds of claims and numerous parties; the case concerned significant local interests; and the state litigation had been consolidated and assigned to a single state court judge. The case is significant since, at the time of the abstention decision, the motion for consolidation of the state court actions was only pending and almost no discovery had been undertaken. The Second Circuit nonetheless held the abstention proper based almost solely on considerations of avoiding piecemeal litigation. 762 F.2d at 211.

Having determined that abstention is appropriate, the court now addresses the question of relief. Defendant argues that dismissal is appropriate since the difference between stay and dismissal would be “academic” under the facts of the case. In the Matter of Special March, 1981 Grand Jury, 753 F.2d 575, 581 (7th Cir.1985). The Seventh Circuit has repeatedly held, however, that a federal court which declines to exercise jurisdiction because of the pendency of parallel state proceedings should stay rather than dismiss the case because of the possible collateral consequences of characterizing the action as a dismissal. Failure to do so is reversible error. Ohio River Co. v. Carrillo, 754 F.2d 236, 238 (7th Cir.1985); Board of Education v. Bosworth, 713 F.2d 1316, 1322 (7th Cir.1983); Evans Transportation Co.v. Scullin Steel Co., 693 F.2d 715, 717-18 (7th Cir.1982). A stay rather than dismissal is especially appropriate in the present case since plaintiff Schomber is at present only a putative party to the state court proceeding, may never become a party if class certification is denied or limited to in-state parties, and may in any event have the right to opt out of state class action proceedings to pursue her individual diversity claim here.

Accordingly, the court concludes that abstention is appropriate, but that it would be an abuse of discretion to dismiss the present case. The court therefore stays the present action pending resolution of the state court suit. This decision is, of course, subject to reconsideration if the state court denies class certification or certifies a class which would exclude Schomber. Since defendant has not filed an answer, plaintiff remains free to file a voluntary dismissal under Rule 41(a)(1) and refile in state court if she wishes.

CONCLUSION

Defendant’s motion to dismiss is denied, but the motion to stay the proceedings is granted. The motion to intervene is denied. The plaintiff should file an amended complaint by July 30, 1985 to correct her allegations of diversity or the lawsuit will be dismissed for lack of subject matter jurisdiction. The case is set for status on September 26, 1985, at which time the parties should report on what progress has been made in the state court litigation on the issue of class certification.

It is so ordered.