author: FARNAN, District Judge.

text:
    REVLON, INC., a Delaware corporation, Plaintiff, v. PANTRY PRIDE, INC., a Delaware corporation, MacAndrews & Forbes Holdings Inc., a Delaware corporation, MacAndrews & Forbes Group, Incorporated, a Delaware corporation, MacAndrews & Forbes Acquisition Corporation, a Delaware corporation, Nicole Acquisition Company, a Delaware corporation, Chemical New York Corporation, a Delaware corporation, and Chemical Bank, a New York corporation, Defendants.
    Civ. A. No. 85-497 JJF.
    United States District Court, D. Delaware.
    Sept. 12, 1985.

      Paul Vizcarrando (argued), of Wachtell, Lipton, Rosen & Katz, New York City, Stephen F. Black (argued), of Wilmer, Cutler & Pickering, Washington, D.C., A. Gilchrist Sparks, III, of Morris, Nichols, Arsht & Tunnell, Wilmington, Del., for plaintiff.
    Michael W. Mitchell (argued), Samuel Kadet, Rodman Ward, Jr., and Stephen P. Lamb, of Skadden, Arps, Slate, Meagher & Flom, Wilmington, Del., for defendants Pantry Pride, Inc., MacAndrews & Forbes Holdings, Inc., MacAndrews & Forbes Group, Inc., MacAndrews & Forbes Acquisition Corp., Nicole Acquisition Co.
    Douglas Broadwater (argued), of Cravath, Swaine & Moore, New York City, R. Franklin Balotti, of Richards, Layton & Finger, Wilmington, Del., for defendants Chemical New York Corp. and Chemical Bank.
   OPINION

FARNAN, District Judge.

Plaintiff, Revlon, Inc. (“Revlon”), filed a complaint pursuant to 15 U.S.C. §§ 78g, 78m, 78n and 28 U.S.C. §§ 1331 and 1337 seeking preliminary injunctive relief against defendants Pantry Pride, Inc. (“Pantry Pride”), MacAndrews & Forbes Holdings, Inc. and MacAndrews and Forbes Group, Inc. (collectively “MacAndrews & Forbes”), and Nicole Acquisitions (“Nicole”) (Pantry Pride, MacAndrews & Forbes, and Nicole will be referred to as the “Pantry Pride Group”), from commencing a tender offer by Pantry Pride for any and all of Revlon’s shares. Revlon also seeks to have defendants enjoined (a) from filing or disseminating any false or misleading Schedule 14D-1 statements, offering materials or other documents relating to purchases of Revlon shares by defendants, or (b) from using or attempting to use any shares of Revlon stock to control or affect the management of Revlon.

It appears from Revlon’s brief that Revlon also seeks an order pursuant to 28 U.S.C. §§ 2201 and 2202 declaring that Chemical New York Corporation and Chemical Bank (collectively “Chemical”) are “bidders” and part of a “group” as defined in 15 U.S.C. § 78n (1981) and, therefore, subject to the disclosure requirements of 15 U.S.C. § 78n. Revlon also seeks injunctive relief against Chemical Bank, barring them from issuing a loan to Pantry Pride, on the ground that such a loan would violate Section 7 of the Securities Exchange Act of 1934 (“Exchange Act”), 15 U.S.C. § 78g (1981), and the regulations thereunder.

Revlon, in its Second Amended and Supplemental Complaint (Docket Item 60), has alleged seven causes of action. The first and second are disclosure claims under Sections 14(d) and 14(e) of the Exchange Act. The third alleges tipping of the tender offer plans to market professionals and arbitrageurs, in violation of Section 14(e) of the Exchange Act, and Rules 14e-3(a) and 14e-3(d)(1). The fourth claims tortious interference in Revlon’s business and contractual relationships. The fifth alleges that the proposed financing for the tender offer violates the margin requirements set forth in Section 7 of the Exchange Act and Regulations G, U and X thereunder. The sixth alleges that Chemical has violated the disclosure requirements of Sections 14(d) and 14(e) of the Exchange Act and the rules and regulations thereunder. The seventh and final cause of action alleges that the Pantry Pride Group knowingly and intentionally engaged in a pattern of racketeering activity, by multiple acts of securities fraud, in violation of 18 U.S.C. § 1962. Revlon, at this time, seeks a preliminary injunction on all of the claims except the third and fourth (i.e.) the tipping violations and tortious interference claims.

I. BACKGROUND FACTS

On August 19, 1985, Pantry Pride publicly announced its intention to make a tender offer for any and all of Revlon’s shares at $47.50 per share. Pantry Pride, through its wholly-owned shell subsidiary, Nicole, commenced a cash tender offer on August 26, 1985, pursuant to an Offer to Purchase bearing the date August 23, 1985. The Offer to Purchase generally provides that if the tender offer succeeds, and if 90% of the outstanding common and preferred stock are tendered, then Pantry Pride will effectuate a short-form merger of Revlon and Nicole or an affiliate. If less than 90% are tendered, it will effectuate a statutory merger through a vote of the Board of Directors and shareholders. The Offer notes that Pantry Pride may have to replace a majority of the Board of Directors in order to consummate a statutory merger. The Offer to Purchase further advises that Pantry Pride intends to sell substantially all of Revlon’s assets, except the Beauty Group, in order to reduce the size of the merged corporation, and to service the debt it will incur in financing the tender offer. (Offer to Purchase at 18-19).

Revlon contends that the Offer to Purchase violates Sections 14(d) and (e) of the Exchange Act because it fails to disclose: (a) Pantry Pride’s fraudulent offering in July 1985; (b) the unlikelihood of Pantry Pride’s securing the financing to purchase the shares by the September 20, 1985 “Expiration Date”; (c) that the financing procured by Pantry Pride for the tender offer violates margin regulations; (d) that Chemical is a “bidder”, with substantial control over the terms of the offer, and would exercise effective control over Revlon should the tender offer succeed; and (e) material information about the finances of MacAndrews & Forbes and Ronald Perelman. Revlon also maintains that the takeover attempt violates the Racketeering Influenced and Corrupt Organizations Act, 18 U.S.C. § 1961 et seq. (1984), that the takeover is being financed in violation of Section 7 of the Exchange Act and the margin regulations promulgated by the Federal Reserve Board, and that Chemical, as a “bidder”, failed to file and make required disclosures, in violation of Section 14(d)(1) of the Exchange Act. This opinion shall constitute this Court’s Findings of Fact and Conclusions of Law as required by F.R. C.P. Rule 52(a).

The Court will review the allegations of Revlon, first as they pertain to the Pantry Pride Group and then Chemical.

II. PANTRY PRIDE GROUP

(Pantry Pride, Nicole, and MacAndrews & Forbes)

A. Disclosure Violations

The Williams Act, Sections 14(d) and 14(e) of the Exchange Act, requires disclosure of all material facts “in connection with” the sale or exchange of securities. It was adopted to “insure that public shareholders who are confronted by a cash tender offer for their stock will not be required to respond without adequate information.” Rondeau v. Mosinee Paper Corp., 422 U.S. 49, 58, 95 S.Ct. 2069, 2075, 45 L.Ed.2d 12 (1975). Rules and regulations promulgated by the Securities Exchange Commission (SEC), pursuant to Sections 14(d)(1), (d)(4), and (d)(6), specify the information that an offeror must file with the SEC, disseminate to the target company’s shareholders, and include in an “offer to purchase”. (Rules 14d-4 and 14d-6). All material information must be disclosed, whether or not specifically required by Sections 14(d) and 14(e). SEC Release No. 33-5844 [1977-78 Transfer Binder] Ped.Sec. L.Rep. (CCH) 1181,256 at 88,379 n. 22 (July 21, 1977). A material fact is a fact which “ ‘would have assumed actual significance in the deliberations of the reasonable shareholder’ considering whether to tender his shares, [TSC Industries, Inc. v. North-way, Inc.,] 426 U.S. [438] at 449, 96 S.Ct. [2126] at 2132 [48 L.Ed.2d 757 (1976) ] ...” Staffin v. Greenberg, 509 F.Supp. [825] at 835 [ (1981) ], quoted in Staffin v. Greenberg, 672 F.2d 1196, 1205 (3rd Cir.1982) (adopting this definition of materiality as the governing test in actions based on Section 14(e)). However, offerors have no duty to “publicly admit the culpability of their actions.” Warner Communications, Inc. v. Murdoch, 581 F.Supp. 1482, 1490 (D.Del.1984) (referring to) Biesenbach v. Guenther, 588 F.2d 400, 402 (3rd Cir.1978) (a complaint effectively alleging that directors failed to disclose they breached their fiduciary duty, does not state a claim under Section 10(a) of the Security Exchange Act of 1934).

1. Disclosure of Pantry Pride’s Interest in Revlon as an “Acquisition Candidate”

On July 12, 1985, Pantry Pride commenced a public offering (the July Offering) of $700 million in notes, debentures and exchangeable preferred stock (the “July Prospectus”) which advised that the proceeds of the offering would be used primarily “to finance acquisitions of new assets and business.” However, it further advised that “[n]o specific determination has been made to acquire any particular company, assets, properties or business.” Plaintiff’s Appendix at 43.

Revlon makes two arguments based on the July Offering. First, Revlon asserts that the Pantry Pride Group had definitely decided to acquire Revlon prior to the July Offering and that this material information should have been disclosed in the July Prospectus. Second, Revlon maintains that the violation of SEC disclosure requirements in the July Prospectus exposed Pantry Pride to liability for damages and/or recission by purchasers of the July Securities. According to Revlon, this potential legal liability should have been more adequately disclosed in the Offer to Purchase dated August 23, 1985.

(a) July Offering Prospectus

In its discussion of materiality, Revlon relies upon cases from other Circuits, and from Pennsylvania and Delaware District Courts, for its blanket statement that case law requires full disclosure of the purposes, plans and intentions of a tender offeror. However, in Staffin v. Greenberg, 672 F.2d 1196 (3rd Cir.1982), and Greenfield v. Heublein, Inc., 742 F.2d 751 (3rd Cir.1984), cases not addressed by Revlon, the Third Circuit dealt with the issue of the materiality of pre-tender offer plans in the context of preliminary merger regulations.

In Staffin, shareholders sued the corporation and majority shareholder for failure to disclose preliminary merger discussions. 672 F.2d at 1205. The Third Circuit held that “preliminary merger discussions are immaterial as a matter of law (because) disclosure of them may itself be misleading.” 672 F.2d at 1206. The court relied on cases from other jurisdictions, testimony before the Senate Subcommittee on Securities, and statements in the American Stock Exchange Manual, for this rationale. The Senate Subcommittee testimony quoted in Staffin addressed the effects of premature disclosure in “ ‘takeover bids’, that is, cash tender offers.” This testimony emphasized the stock market problems and the potential loss to shareholders and the offeror when information is disclosed before the tender offer, details are finalized and the offer is made. (Transcript, Hearings Before the Subcommittee on Securities of the Committee on Banking and Currency, United States Senate, 90th Congress., 1st Session, S.510, p. 72, March 22, 1967, statement of Mr. Calvin on behalf of the New York Stock Exchange, Inc.), quoted in, Staffin, 672 F.2d at 1206. The court went on to note that the Williams Act Amendment, requiring public disclosure and filing with the SEC after a tender offer commences (15 U.S.C. § 78n(d)(1)), was in response to this type of testimony.

In Staffin, the Third Circuit did recognize that “[w]here an agreement in principle has been reached a duty to disclose does exist.” 672 F.2d at 1207. In Greenfield v. Heublein, Inc., 742 F.2d 751 (3rd Cir.1984), the Third Circuit again had to decide whether an “agreement in principle” had been reached, thus triggering disclosure requirements. The court affirmed the district court’s determination that, as a matter of law, an agreement in principle to merge was “reached when the parties reached agreement on ‘price and structure’.” 742 F.2d at 757. The court reasoned that these criteria provide “concrete evidence of a mature understanding between the negotiating corporations. They constitute a useable and definite measure for determining when disclosures need to be made ...”. Greenfield, 742 F.2d at 757 (emphasis provided).

Although the Heublein and Staffin decisions involve mergers, the standard and rationale are equally applicable to tender offer disclosures. Thus, where, as in the instant case, the offeror engages in a hostile takeover, disclosure is not required until the offeror has definitely determined to acquire the target corporation and finally decided the terms of the offer. Based on this standard, Revlon has the burden of establishing that it can prevail at trial on the issue of when Pantry Pride made the final decision to acquire Revlon.

MacAndrews & Forbes first considered Revlon as a potential acquisition target in March 1985, before it held a controlling interest in Pantry Pride. Morgan Stanley & Co., Inc. (“Morgan Stanley”), the investment banking firm, brought Revlon to MacAndrews & Forbes’ attention as a possible takeover candidate. Morgan Stanley provided a written analysis of Revlon to MacAndrews & Forbes in April 1985. MacAndrews & Forbes was interested in the Beauty Group, but “uncomfortable with [its] knowledge” of the Ethical Pharmaceutical and Diagnostic Divisions. (Defendant Pantry Pride’s Appendix at 12). The April 1985 portion of the Morgan Stanley analysis, valuing the various divisions, was especially important because MacAndrews & Forbes and its sole shareholder, Ronald Perelman, knew that the acquisition of Revlon would necessitate sales of some, if not most, of its assets. (Defendant Pantry Pride’s Appendix at 48).

In May and June 1985, Ronald Goldstein, Assistant Vice President of Corporate Development for MacAndrews & Forbes, Inc. analyzed Revlon and thirteen other potential acquisition candidates (Goldstein Affidavit at 113). Goldstein also prepared several memoranda on the value of Revlon’s various divisions for MacAndrews & Forbes, Pantry Pride and/or Perelman.

In early July, MacAndrews & Forbes and Pantry Pride attempted to identify other potential acquisitions because they were not satisfied with those under consideration, including Revlon. To accomplish this identification, MacAndrews & Forbes and Pantry Pride had a series of meetings with Morgan Stanley. Both Morgan Stanley and Goldstein reviewed other companies and supplied reports on these companies to Perelman in July. Also, in late July, Perelman, still unsure of the salability and value of certain Revlon divisions, advised Morgan Stanley that he wanted to meet with possible purchasers of Revlon’s assets, particularly the Ethical Pharmaceutical Division. On August 6 and 7, 1985, meetings with two British drug companies were held in London. Both companies expressed interest, although not current interest, in purchasing Revlon’s pharmaceutical division, at prices near the higher end of Morgan Stanley’s value range for that division.

Pantry Pride has consistently asserted that this meeting was the turning point in its investigation of Revlon. Pantry Pride knew it had to sell this asset to service the acquisition debt. The valuations by Morgan Stanley, Drexel Burnham Lambert (“Drexel”) and Goldstein had various ranges, depending on when they were made. The differences in the highs and lows of those valuations was $100 million to $280 million. After meeting with the British companies, the Pantry Pride Group was more confident that it could sell the assets for a total figure adequate to service the anticipated acquisition debt.

On August 8, 1985, the Pantry Pride Group asked Chemical for a $500 million loan. Although the parties had met in July, 1985, this meeting involved a general discussion of Chemical’s willingness to lend acquisition funds to Pantry Pride. On August 1, 1985, an internal Chemical report noted that Chemical had not heard from MacAndrews & Forbes regarding a possible acquisition, even though two and one-half weeks had passed since Pantry Pride raised $700 million through its July Offering of subordinated debentures.

Also on August 8, 1985, the Pantry Pride Group contacted Drexel for the first time to inquire as to its interest in participating in raising funds to finance a Revlon stock acquisition.

On August 14, 1985, Pantry Pride, Nicole and Chemical signed a commitment letter specifying the terms and conditions of the $500 million loan to Nicole. The terms give Chemical a “perfected first priority security interest” in all of Revlon’s shares acquired by Nicole, and set forth default provisions restricting the sale, pledge or transfer of Revlon stock without Chemical’s consent. (Defendant Pantry Pride’s Appendix at 426-429). On August 19, 1985, Pantry Pride announced its intention to acquire Revlon by an all-cash tender offer.

During the same time period in which the Pantry Pride Group’s Revlon-related activity transpired, Ronald Goldstein, Assistant Vice President of Corporate Development of MacAndrews & Forbes Group, Inc., was identifying and analyzing other potential acquisition targets. This was one of Gold-stein’s responsibilities. Goldstein reports directly to Bruce Slovin, President of MacAndrews & Forbes, and of Pantry Pride. Much of the documentation of the Pantry Pride Group’s investigation and analysis of Revlon was prepared by Goldstein. Similar documentation was prepared by Goldstein on seven other companies he selected, and on one selected by Perelman. (Goldstein Affidavit at 4, 5).

On July 11, 1985, one day prior to the effective date of Pantry Pride’s July Offering, Goldstein and Slovin met with Morgan Stanley. They advised Morgan Stanley that they had not selected an acquisition candidate for Pantry Pride and asked for a screening and review of companies with a capitalization between $400 million and $3 billion. They requested identification of those companies most suitable for acquisition by Pantry Pride. (Goldstein at 5). Later that month, Goldstein requested Morgan Stanley to include the seven companies he had identified in his July 8, 1985 memorandum to Slovin. On July 12, 1985, Gold-stein performed a detailed analysis of a company previously discussed with Morgan Stanley. On July 22, 1985, Morgan Stanley presented Pantry Pride with the results of its studies. Similarly, during the third week of July, Drexel prepared an updated report on another potential acquisition candidate.

Revlon argues that these facts are insufficient to establish that the Pantry Pride Group had not settled on Revlon as its acquisition candidate prior to the July Offering. Revlon points to the specificity with which Pantry Pride Group memoranda described Revlon’s assets, financing costs and price per share. It treats the memoranda’s use of possessive pronouns, and assignment of an internal name “Nicole” to Revlon, as substantial evidence that the Pantry Pride Group decided well before the July Offering to acquire Revlon. Thus, Revlon argues there was a material omission in the July Prospectus which stated no company had been selected for acquisition. Revlon also argues that Goldstein’s Affidavit is self-serving and not supported by the type of documentation available on the Revlon investigation by Pantry Pride. Thus, Revlon concludes that it has a substantial likelihood of prevailing at trial on the issue of whether the July Prospectus had a material omission in violation of 14(d) and 14(e).

The Court disagrees with Revlon’s conclusion. Regardless of the nouns and pronouns used in the Pantry Pride memoranda, the documents as a whole evidence long-term efforts to obtain reliable financial figures on which both the Pantry Pride Group and its lenders and/or investors could base their projections of Pantry Pride’s ability to service its debt. The testimony provided by Goldstein’s Affidavit further supports the conclusion that, although Revlon might have been the front-running acquisition candidate even before the July Prospectus and Offering, its position was not assured until after the Pantry Pride Group structured the financing for the tender offer in August 1985. The fact that the hypothetical and actual cash price per share are the same is not persuasive. Even if the Pantry Pride Group had decided in May or June 1985 that in an acquisition of Revlon they would pay $47.50 per share, that decision would have been immaterial until the decision to actually acquire Revlon was made. Where large scale corporate investments are planned, it is logical that projections be based on some figure representing an approximation of the price per share to be offered. Once the projections are made, a financial package structured, and the decision to acquire finalized, it is also logical that the actual price per share offered would be the same as or close to that on which the financial analyses were based.

Furthermore, the Court finds that Gold-stein’s failure to attach documentary evidence of the analyses of other acquisition candidates is not fatal. Although the Court did not avail itself of the opportunity to review those documents in camera, it finds that Goldstein’s Affidavit is supported by depositions taken of John W. Tarbell, Jr. and Colleen P. Quinn of Chemical, and David P. Kay of Drexel. In addition, based on the documents submitted, the analysis of Revlon continued into August, well past the issuance of the July Prospectus and commencement and closing of the July Offering. Thus, the documents submitted indicate no final decision was made until after the pertinent July dates.

Given these facts, Revlon has not demonstrated a substantial likelihood of success in its allegations that the July Prospectus violated 14(d) and 14(e) by failing to disclose its “plan” to acquire Revlon. On the contrary, the facts indicate that the Pantry Pride Group had not reached an internal decision as to “price and structure”. Greenfield, 742 F.2d at 757. As the Greenfield court stated, any disclosure prior to the July Offering “would have been subject to change at any time. As the situation evolved, successive, possibly cancelling, announcements might have been required. This would have tended to confuse and mislead, rather than enlighten, the investigating public.” Id. citing Staffin, 672 F.2d at 1206-07. Therefore, the Court concludes that Pantry Pride was under no duty to disclose its activities related to Revlon in the July Offering.

(b) Offer to Purchase Revlon Shares

Revlon asserts that the alleged disclosure defects in the July Prospectus should have been disclosed in the August 23, 1985 Offer to Purchase sent to Revlon shareholders. However, as indicated above, Revlon has not carried its burden of showing that Revlon was the only company being investigated by Pantry Pride prior to the July Offering, thus such a disclosure was not required in the Offer to Purchase. Furthermore, even if Revlon had carried this burden, the Court finds that the disclosure made in the Offer to Purchase was adequate.

In the Offer to Purchase, at page 16, Pantry Pride discloses the allegations in this complaint. It states in part:

On August 19, 1985, the Company filed an unverified complaint in the United States District Court for the District of Delaware against Pantry Pride and MacAndrews & Forbes. The unverified complaint alleges, among other things, that (a) in July 1985 Pantry Pride determined to make a public offering of $700 million of Pantry Pride Securities the proceeds of which were in substantial part to be used for a tender offer for the Company; (b) the prospectus for that offering was intentionally false and misleading in that it failed to disclose that (i) proceeds from the offering were intended to be used for the acquisition of the Company and (ii) at least $200 million of the proceeds were being raised to satisfy Drexel Burnham’s needs, not Pantry Pride’s, in that it was raised to enable Drexel Burnham to sell off at least $200 million of Drexel Burnham’s own “inventory” of “junk bonds” to Pantry Pride; and (c) as a result of the allegedly false prospectus, the sales of Pantry Pride Securities made by Pantry Pride pursuant to the offering were subject to rescission by purchasers of such securities and Pantry Pride is subject to liability for significant amounts of damages.
Pantry Pride believes these allegations to be materially false. No purchaser of any of the Pantry Pride Securities has commenced a lawsuit challenging the accuracy of the prospectus. If such a lawsuit were even brought by a party with legal standing to pursue such claim, if a trial on the merits were held, if all appeals were exhausted and if it were ever determined that there was any material false statement or omission in the prospectus, Pantry Pride might be subject to an indeterminable number of rescission demands or an indeterminate damages judgment unless the suit had previously been settled. Since no such suit has been brought, it is impossible to estimate how long the litigation of such a case might take. Pantry Pride has been advised by counsel that such a case would in all likelihood take well over a year and probably substantially longer before it would be finally decided.

(Offer to Purchase at 16).

Where there is a genuine and vigorous dispute as to the fact that illegal conduct occurred, only a good faith disclosure of the issue and the possible liability of the offeror is required by the Williams Act. Avnet, Inc. v. Scope Industries, et al., 499 F.Supp. 1121, 1124-1126 (S.D.N.Y.1980), relying on Copperweld Corp. v. Imetal, 403 F.Supp. 579, 606 (W.D.Pa.1975), and Ronson Corp. v. Liquifin Aktiengesellschaft, 370 F.Supp. 597, 608 (D.N.J.), aff'd per curiam, 497 F.2d 394 (3rd Cir.), cert. denied, 419 U.S. 870, 95 S.Ct. 129, 42 L.Ed.2d 108 (1974). In Avnet, the plaintiff corporation alleged the defendant corporation violated Rule 10b-5 by failing to disclose that it was an unregistered investment company, and thus, “in fact in violation of the Investment Company Act.” 499 F.Supp. at 1124 (emphasis by the court). The defendant disputed that it was an unregistered investment company. It had disclosed the plaintiffs allegation and possible consequences, but had denied the allegation. The court held accurate disclosure did not require admission of guilt where guilt was vigorously disputed. Id. at 1124-25. Similarly, in Copperweld, the court held that a tender offeror need only disclose the possibility of antitrust violations if the offer succeeded, not admit guilt. 402 F.Supp. at 606.

Pantry Pride’s disclosure clearly sets forth the claims made by Revlon, as well as the possibility of recission or damages should purchasers of the July Securities initiate and prevail in a lawsuit. That Pantry Pride reported that no such lawsuits were filed, and that any suit would require at least a year to litigate, are accurate statements which do not undermine the adequacy of the disclosure. As the cases indicate, Pantry Pride is not required to admit liability. Thus, the statement that “Pantry Pride believes these allegations to be materially false” does not make the disclosure inaccurate. Therefore, Revlon has not met its burden of showing that there is a substantial likelihood that it could prevail on the merits of this claim at trial.

2. Disclosure of the September 20, 1985, “Expiration Date”

Revlon argues that the Expiration Date of September 20, 1985, is unrealistic, and thus inaccurate. It further maintains that Pantry Pride’s disclosure of the conditions under which the date would be extended, do not cure this inaccuracy. This argument is premised upon the assertion by Revlon that Pantry Pride will not have all of the financing necessary to consummate the tender offer until after September 20, 1985.

On page 1, paragraph 2, of the Offer to Purchase, Pantry Pride sets forth, in bold print, the following facts: (a) shares will be purchased only if sufficient financing is in place prior to the Expiration Date to permit the purchase of all of Revlon’s shares; (b) Pantry Pride intends to register for a $900 million debt securities offering; (c) the proceeds of that future offering are required to acquire the shares and pay acquisition fees and expenses; and (d) Pantry Pride has the right to seek alternate forms of financing. Thereafter, on page 12, Section 10, “Source and Amount of-Funds”, the Offer to Purchase again sets forth in bold letters the condition that Pantry Pride obtain sufficient funding. That section discusses the various forms of financing structured into the acquisition plan. Finally, in Section 14, “Certain Conditions of the Offer”, Pantry Pride reiterates this condition and lists it as one of several conditions which could postpone the purchase of the shares. Based on these disclosures, the Court finds that the conditional nature of the “Expiration Date” of September 20, 1985, is adequately disclosed pursuant to 14(d) and 14(e).

3. Disclosure of Financial Information on MacAndrews & Forbes and Perelman

Revlon alleges that MacAndrews & Forbes and Perelman are under a duty to disclose financial information because they are in control of Pantry Pride. Perelman owns 100% of MacAndrews & Forbes, which owns approximately 38% of Pantry Pride. Pantry Pride is the parent and sole shareholder of Nicole, the acquiring corporation. In addition, Pantry Pride’s August Offer to Purchase Revlon shares discloses that MacAndrews & Forbes and Perelman are “in a position to exert substantial control over Pantry Pride, including the ability to influence Pantry Pride to undertake most corporate action.” (Offer to Purchase, at 10).

Revlon relies upon Prudent Real Estate Trust v. Johncamp Realty, Inc., 599 F.2d 1140 (2nd Cir.1979); Pabst Brewing Co. v. Kalmanovitz, 551 F.Supp. 882 (D.Del. 1982); and Riggs National Bank v. Attrition, 516 F.Supp. 164 (D.D.C.1981). However, Revlon’s reliance on these cases is misplaced. In all three cases, the decision regarding the defendant’s failure to disclose financial information was based on whether the defendant participated financially in the offer and, therefore, was a bidder. Prudent, 552 F.2d at 1142-44; Pabst, 551 F.Supp. at 892-893; Riggs, 516 F.Supp. at 171. See also Gray Drug Stores, Inc. v. Simmons, 522 F.Supp. 961, 966-968 (N.D.Ohio 1981). Such a finding is necessary here, in order for Revlon to prevail, because SEC rules require disclosure by the bidder or offeror, and the bidder’s parent if the bidding corporation was formed as an acquisition vehicle. 17 CFR § 240.14d-100, Item 9. Thus, to be subject to disclosure requirements, MacAndrews & Forbes and Perelman must be bidders, since Pantry Pride is the parent of Nicole, the acquiring corporation.

A bidder is defined as “any person who makes a tender offer or on whose behalf a tender offer is made ...”. 17 CFR § 240.14d-1(b)(1). Based on the cases relied upon by Revlon, MacAndrews & Forbes and Perelman do not satisfy this definition, since neither capitalized Nicole with their funds. Pabst, 551 F.Supp. at 892-893. Nor is there any evidence that they offered their funds to Nicole to assist in the instant purchase. Prudent, 559 F.2d at 1142. Their status as Pantry Pride’s majority shareholders (MacAndrews & Forbes directly, and Perelman beneficially), without evidence of financial participation, is insufficient to make them bidders. Thus, Revlon has not demonstrated that it has a substantial likelihood of prevailing on the merits of its claim that the Offer to Purchase failed to disclose financial information about these parties.

B. Margin Issues

Revlon alleges that the proposed financing for the Pantry Pride Group’s tender offer violates the margin regulations promulgated under Section 7 of the Exchange Act, 15 U.S.C. § 78g.

Revlon asserts that it has a private right of action for injunctive relief enforcing these margin regulations against the defendants.

Revlon also contends that Pantry Pride’s failure to disclose margin violations of itself and others violates § 14(e) of the Williams Act. Although the nature of the alleged violations differ, Revlon contends violations of Regulations G, U and X, which will be discussed hereafter.

1. Standing — Private Right of Action

It is settled in this circuit that there is no private right of action under Section 7 of the Exchange Act or the regulations thereunder. Walck v. American Stock Exchange Inc., 687 F.2d 778, 788 (3rd Cir. 1982).

Although Revlon cannot maintain a private action on the margin regulations directly, it does have standing to allege failure to disclose margin violations. Alaska Interstate Co. v. McMillian, 402 F.Supp. 532, 554 n. 28 (D.Del.1975); Pabst Brewing Co. v. Kalmanovitz, 551 F.Supp. 882, 885 (D.Del.1982). Thus, the court must determine whether these regulations were in fact violated.

2. Regulation G

Regulation G, promulgated by the Federal Reserve Board under Section 7 of the Exchange Act, provides in pertinent part:

No lender ... shall extend any purpose credit, secured directly or indirectly by margin stock in an amount that exceeds the maximum loan value of the collateral securing the credit ...

12 CFR § 207.3(b) (1985). The maximum loan value of any margin stock is set at 50% of its current market value. 12 CFR § 207.7. Therefore, in order for the September Securities Offering to violate Regulation G, (1) the purchasers of the securities must be “lenders” within the Board’s definition, (2) the purpose of the offering must be to buy Revlon stock, (3) the debt must be secured directly or indirectly by Revlon stock, and (4) the amount of the debt must exceed 50% of the market value of the Revlon stock. The disputed issues between the parties are, first, whether the purchasers of the September securities are “lenders”, and second, whether the securities are directly or indirectly secured by Revlon stock.

Regulation G defines “lender” to include every person who, in the ordinary course of business, extends credit secured directly or indirectly by margin stock in the amount of $200,000 or more in any calendar quarter. 12 CFR §§ 207.2(h), 207.3(a). However, the Federal Reserve Board staff has explicitly exempted purchasers of public offerings of debt securities from the definition of “lender” under Regulation G. See, e.g., 2 Fed.Res.Reg.Serv. 5-993 (October 12, 1979); 2 Fed.Res.Reg.Serv. 5-927 (October 18, 1978); 2 Fed.Res.Reg.Serv. 5-372 (March 26, 1974). Such public debt offerings have been construed not to involve the kind of extension of credit intended to be regulated by Section 7 of the Exchange Act, regardless of the purpose of that debt. See, 2 Fed.Res.Reg.Serv. 5-591 (March 24, 1978).

Revlon does not dispute the Board’s interpretation. Rather it asserts that the public offering exception does not apply to the September Securities Offering, because Pantry Pride has imposed a minimum purchase requirement of $2.5 million on the offering. It asserts that this high minimum purchase requirement will assure that the $200,000 quarterly minimum will be met, thus all buyers would be within the definition of “lender” in the absence of the public offering exception. It asserts, that the staff opinions contemplate “true” public offerings, and not the “nominal” public offering at issue here.

The Court believes, as a matter of public policy, there is much to commend Revlon’s position. It is apparent that the' Pantry Pride Group has taken advantage of a possible oversight on the part of the Board in formulating the public offering exception to the margin regulations. However, it is not the role of this Court to engage in the rulemaking activities delegated by Congress to the Federal Reserve Board. The Board and its staff bear primary responsibility for interpreting the Exchange Act, and this Court will accord substantial weight to the staff’s opinions. Ford Motor Credit Co. v. Milhollin, 444 U.S. 555, 100 S.Ct. 790, 63 L.Ed.2d 22 (1980); Pabst Brewing Co. v. Kalmanovitz, 551 F.Supp. 882, 889 (D.Del.1982). Therefore, the Court finds that the Pantry Pride Group’s September Securities Offering does not violate Regulation G, because it is a public debt offering exempt from the margin regulations.

3. Regulation U

Revlon asserts the Chemical loan to Pantry Pride violates Regulation U, 12 CFR § 221 et seq. Any duty of Pantry Pride to disclose a violation of Regulation U must be predicated upon a finding that the Chemical loan in fact was violative of Regulation U.

The Court fully discusses the Chemical loan, infra, and concludes there is no violation of Regulation U. Therefore, Pantry Pride had no duty to disclose.

4. Regulation X

Regulation X provides:

Any borrower who wilfully causes credit to be extended in controvention of Regulation G, T, or U ... must conform the credit to the margin regulation that applies to the lender.

12 CFR § 224.3(b).

In order to find that the Pantry Pride Group violated Regulation X, the Court must find that credit was extended in violation of Regulations G or U. Since the Court has found no violations of those Regulations, the Pantry Pride Group cannot be found to have violated Regulation X.

C. RICO Violation

Revlon claims that the Pantry Pride Group’s alleged acts of securities fraud constitute a violation of §§ 1962(b) and (d) of the Racketeer Influenced and Corrupt Organizations Act (RICO), 18 U.S.C. § 1961 et seq., and that Revlon is entitled to an injunction as an injured party under § 1964(c). See, Aetna Casualty and Surety Co. v. Liebowitz, 570 F.Supp. 908, 909-911 (E.D.N.Y.1983).

Section 1962(b) of RICO provides that: It shall be unlawful for any person through a pattern of racketeering activity or through collection of an unlawful debt to acquire ... directly or indirectly, any interest in or control of any enterprise which is engaged in, or the activities of which affect, interstate or foreign commerce.

Section 1961(1) includes “fraud in the sale of securities” among the acts that constitute “racketeering activity”. Section 1961(5) defines “pattern of racketeering activity” as the commitment of two or more racketeering acts within a ten year period. Section 1962(d) makes it unlawful for any person to conspire to violate Section 1962(b).

Revlon’s RICO claim is substantially identical to its claims under the Williams Act disclosure requirements and the Exchange Act margin regulations. Since the Court can find no probability of success on those claims, Revlon can show no probability of success under RICO. Thus, the Court need not reach the issues of whether Revlon can maintain a private action for injunctive relief under Section 1964(c), or whether the Pantry Pride Group’s alleged securities violations rise above a “garden variety” fraud claim to state a viable claim under RICO. See, Warner Communications, Inc. v. Murdoch, 581 F.Supp. 1482, 1497-98 (D.Del.1984).

III. CHEMICAL — MARGIN ISSUES

A. Regulation U

Revlon has alleged that the Chemical loan in the amount of $500 million will violate Regulation U and that Chemical has “arranged” the Pantry Pride Group’s financing, in further violation of Regulation U.

Regulation U provides, in pertinent part:

No bank shall extend any purpose credit, secured directly or indirectly by margin stock, in an amount that exceeds the maximum loan value of the collateral securing the credit ...

12 CFR § 221.3a (1985).

It is undisputed that Chemical Bank’s loan to Pantry Pride will be directly secured by any Revlon stock that the Pantry Pride Group purchases. Revlon concedes that the Chemical loan, standing alone, is adequately margined. However, Revlon asserts that the loan value of the Revlon stock Pantry Pride seeks to acquire must be shared with the $900 million of debt Pantry Pride anticipates from the September Securities Offering, since the September Offering is also indirectly secured by the Revlon stock. Thus, when these two debts are combined, the Chemical loan violates the margin requirements of Regulation U.

For this claim to succeed, the Court must find that the September Offering is indirectly secured by Revlon stock. However, the September Offering, as a public offering, is exempt from the margin regulations and, thus, it cannot be directly or indirectly secured by Revlon stock within the requirements of Regulation U. See 2 Fed.Res. Reg.Serv. 5-993; 2 Fed.Res.Reg.Serv. 5-927; 2 Fed.Res.Reg.Serv. 5-372.

B. Chemical as a “Bidder”

Revlon alleges that Chemical bank is a “bidder” in the tender offer for Revlon’s stock, and has thus violated the filing and disclosure requirements of Section 14(d)(1) of the Exchange Act.

Section 14(d)(1) of the Exchange Act provides in pertinent part:

It shall be unlawful for any person directly or indirectly, ... to make a tender offer for ... any class of any equity security ... if after consummation thereof such person would, directly or indirectly, be the beneficial owner of more than five percentum of such class, unless ... such person has filed with the Commission a [Schedule 14d — 1] statement ...

15 U.S.C. § 78n(d)(1).

A “bidder”, for purposes of this disclosure requirement, is defined as “any person who makes a tender offer or on whose behalf a tender offer is made ... ”. 17 CFR § 240.14d-1(b)(1). Revlon asserts that the provisions of Chemical Bank’s loan to Pantry Pride will give Chemical Bank control over the terms of Pantry Pride’s tender offer, as well as a direct interest in the Revlon stock tendered in the form of a perfected first priority security interest. Revlon also asserts that Chemical Bank, in conjunction with the Pantry Pride defendants, constitutes a “group” formed for the purpose of making a tender offer, within the provisions of Section 14(d)(2).

Revlon has shown no probability of success on this claim. According to Revlon’s own assertions, the only direct interest Chemical Bank has in the Revlon stock is its perfected security interest. Chemical has no right to act upon this interest until such time as a default occurs by Pantry Pride pursuant to the loan agreement. Even in that event, its interest in the Rev-, Ion stock is limited to recovering the amount of its loan. Also, Chemical cannot be considered part of a “group” formed for the purpose of acquiring Revlon stock, since it would not be the “beneficial owner” of any such stock within the meaning of Section 14(d)(1).

It is apparent that Chemical’s interest in this matter is solely that of a commercial lender providing funds to finance Pantry Pride’s tender offer. Nicole, not Chemical, is the sole purchasing entity of all Revlon stock. See Gray Drug Stores, Inc. v. Simmons, 522 F.Supp. 961, 967 (N.D.Ohio 1981). Pantry Pride also assumes all responsibility for repayment of the Chemical loan. See Riggs National Bank v. Allbritton, 516 F.Supp. 164, 171 (D.D.C.1981). In these circumstances, the Court cannot find that Chemical could be considered a “bidder”.

C. Arranging Credit

Section 221.3(a)(3) of Regulation U provides:

No bank may arrange for the extension or maintenance of any purpose credit, except upon the same terms and conditions under which the bank itself may extend or maintain purpose credit under this part.

12 CFR § 221.3(a)(3).

Revlon asserts that Chemical Bank has “arranged” the September Securities Offering in violation of Regulation U. However, since public offerings are exempt from the margin regulations, the September Offering cannot constitute an “extension of credit” within Regulation U.

IV. SUMMARY

The Court of Appeals for the Third Circuit has consistently identified four factors which must be established in ascertaining the propriety of injunctive relief:

(1) a reasonable probability of eventual success in the litigation and (2) that the movant will be irreparably injured pendente lite if relief is not granted ... Moreover, while the burden rests upon the moving party to make these requisite showings, the district court ‘should take into account when they are relevant, (3) the possibility of harm to other interested persons from the grant or denial of the injunction, and (4) the public interest’
... While these factors structure the inquiry, however, no one aspect will necessarily determine its outcome. Rather, proper judgment entails a ‘delicate balancing’ of all elements.

Eli Lilly and Co. v. Premo Pharmaceutical Laboratories, Inc., 630 F.2d 120, 136 (3d Cir), cert. denied, 449 U.S. 1014, 101 S.Ct. 573, 66 L.Ed.2d 473 (1980) (quoting Constructors Association of Western Pennsylvania v. Kreps, 573 F.2d 811, 814-15 (3d Cir.1978)); A.O. Smith v. FTC, 530 F.2d 515 (3d Cir.1976).

Applying these factors to the instant ease, Revlon has not shown, as previously discussed, that there is a reasonable probability that the Pantry Pride Group has violated Sections 14(d) and 14(e) of the Exchange Act, Section 7 of the Exchange Act and Regulations G, U and X thereunder, or 18 U.S.C. § 1962 (RICO).

Further, Revlon has not shown, as previously discussed, that there is a reasonable probability that Chemical has violated Section 7 of the Exchange Act and Regulation U thereunder.

Therefore, Revlon’s Motion for a Preliminary Injunction is denied.

      . Ronald O. Perelman is the sole stockholder of MacAndrews & Forbes, and is chairman of the board and chief executive officer of both Pantry Pride and MacAndrews & Forbes.

      . On September 10, 1985, Chemical filed a Motion to Dismiss, which the Court does not address in this Opinion.

      . During this same time period, March 1985 to June 1985, MacAndrews & Forbes entered a Preferred Stock Purchase Agreement with Pantry Pride, through which MacAndrews & Forbes increased its holdings in Pantry Pride from approximately 20% to approximately 38% of all outstanding Pantry Pride shares. The stock purchase was for the purpose of using Pantry Pride as an acquisition vehicle. Thereafter, MacAndrews & Forbes held the largest block of Pantry Pride voting shares.

      . Morgan Stanley is the investment banking firm engaged by Pantry Pride to assist in determining an aquisition candidate. Drexel is the investment banking firm through which Pantry Pride’s July 1985 debt offering was made, and through which its September 1985 debt offering is being made.

      . This document was initially submitted by Revlon under seal. However, Revlon introduced the document at argument without objection, and therefore it shall be treated as ordered unsealed.

      . Drexel had underwritten the July Securities Offering and had no knowledge at that time of any decision by the Pantry Pride Group to acquire Revlon. According to Drexel, when approached by MacAndrews & Forbes in May 1985, Drexel was advised that the funds were to enaljle Pantry Pride to engage in “one or more substantial acquisitions." (Abecassis Deposition at 47, 57; Slovin Deposition at 81). Ten to fifteen potential acquisition targets were mentioned by MacAndrews & Forbes. Based on this information, the size of the offering was limited to $700 million (a figure not based on the full cost of a Revlon acquisition) and no vigorous investigation of any of the listed companies was undertaken by Drexel. (Abecassis Deposition at 41, 66).

      . August 28, 1985, Pantry Pride filed a registration statement with the SEC for a September public offering of debt securities (hereinafter September Securities Offering).

      . In light of this finding, the Court need not reach Revlon’s claim that the offering is directly or indirectly secured by Revlon stock.

      . Chemical Bank is committed to loan the principle sum of $500 million to Nicole. The acquisition plan calls for the purchase of $1.85 billion worth of Revlon stock. Thus, the maximum loan value of this stock under the margin regulations is 50% of $1.85 billion, or $925 million.


source: Caselaw Access Project

author: COFFRIN, Chief Judge:

license: Public Domain

text:
    Richard L. NOREAULT, Plaintiff v. U.S., Defendant.
    Civ. A. No. 85-182.
    United States District Court, D. Vermont.
    Sept. 13, 1985.
    Robert B. Hemley, Gravel & Shea, Burlington, Vt., for plaintiff.
    Robert F. O’Neill, Asst. U.S. Atty., Burlington, Vt., and Christopher Klieforth, Dept. of Justice, Washington, D.C., for defendant.
   COFFRIN, Chief Judge:

Opinion and Order

Plaintiff, Richard L. Noreault, seeks judicial review of a termination assessment made against him on June 3, 1985 by the Internal Revenue Service (“IRS”) pursuant to 26 U.S.C. § 6851. Plaintiff initiated this action by filing a complaint in this court on June 15, 1985 in accordance with 26 U.S.C. § 7429(b). At plaintiff/taxpayer’s request and for reasonable grounds, the court extended its summary determination by forty days as provided by 26 U.S.C. § 7429(c).

This court held hearings concerning (1) the reasonableness of the termination assessment and (2) the reasonableness of the assessment amount under the circumstances. In its de novo review of the assessment, the court concludes that the government sustained its burden of proof that the imposition of the assessment was reasonable. 26 U.S.C. § 7429(g)(1). The court also concludes that the taxpayer met his burden of proof that the amount of the assessment was unreasonable. 26 U.S.C. § 7429(g)(2). For reasons stated below, this court denies plaintiffs petition regarding the reasonableness of the termination, but grants the petition regarding reasonableness of the amount of assessment.

Findings of Fact

On May 2, 1985, Richard L. Noreault, the plaintiff in this action, was arrested and charged with distribution of cocaine. He was convicted of the charge on September 12, 1985 after a jury trial. Noreault has been continuously incarcerated since his arrest.

On June 3, 1985, pursuant to 26 U.S.C. § 6851, the IRS made a termination assessment against Richard L. Noreault for the first four months of 1985. The assessment indicated a taxable income for that period of $78,211.69 and a resulting tax of $33,-930.75. On June 4, 1985, the IRS issued a Notice of Termination Assessment with accompanying worksheets, giving plaintiff notice of the assessment.

According to the testimony of Kathryn Rusiecki, the revenue agent who recommended the termination assessment, the IRS found collection of plaintiffs 1985 taxes imperiled because the taxpayer “appeared] to be designing quickly to place his ... property beyond the reach of the government ... by concealing it, by dissipating it, or by transferring it to other persons.” Treas.Reg. § l^Sl-Ra).

Plaintiff followed appropriate procedures in exhausting his administrative remedies and then sought review in this court. 26 U.S.C. § 7429(a). Testimony at the July 25, 28 and 29, 1985 hearings demonstrated that plaintiff had on several occasions, as stated below, concealed assets from the government:

(1) At a post arrest detention hearing, the court ordered plaintiff to reveal all assets from which he could raise bail money. Noreault failed to disclose that he had approximately $34,000 cash in a safe deposit box and that he owned a partnership interest in property in Elmore, Vermont.

(2) Testimony from several witnesses demonstrates that the plaintiff conducted his alleged illegal narcotics sales on a cash basis.

(3) A real estate broker through whom plaintiff purchased three different properties during- 1984, testified that Noreault paid cash for two of the properties; one property was purchased for approximately $18,000 and another for approximately $40,000. The third purchase was the partnership interest in the aforementioned Elmore, Vermont property for which Noreault and his wife contributed $8,000 cash.

(4) Upon review of the plaintiffs tax returns for years prior to 1983, the IRS had adequate reason to believe that the value of assets acquired, including those described above, exceeded reported income.

(5) Although plaintiff formally requested an extension of time for filing his 1983 tax returns, he failed to file both his 1983 and 1984 returns.

(6) In explaining the sources of his income, plaintiff misrepresented that he derived income from certain stock transactions and through an automobile sales business. In fact, the evidence indicates that Noreault suffered losses through his stock transactions and investigation failed to reveal any tangible evidence of car sales.

At the time of his arrest on narcotics charges, the plaintiff possessed a gun collection, which included 55 weapons, and a substantial coin collection. The IRS valued the gun collection and accompanying ammunition at $16,787.50 and the coin collection at $4,428.88. Evidence reveals that Noreault began both of these collections many years ago and continued to supplement them until his arrest.

In determining the taxable income that Noreault received in the first four months of 1985, the IRS used a method approved by the Internal Revenue Manual. This method, called the Source and Application of Funds Method is intended to produce an amount equal to the profits that the taxpayer received through his alleged narcotic sales. Basically, the Source and Application of Funds Method traces all net income that the taxpayer receives into either bank accounts, investments, or newly acquired assets. Unless these sources can be attributed to income non-taxable in 1985, the IRS assumes the taxpayer acquired the funds in a taxable manner.

In the instant case the agent first reviewed Noreault’s bank accounts for the purpose of detecting all unidentified deposits. Unidentified deposits are those deposits that do not appear to be assets transferred from other sources within the taxpayer’s control. The revenue agent determined this amount to be $15,808.57. To this amount the revenue agent added the $57,474.38 value of all guns and currency seized, including the coin collection. Next, the revenue agent included a $2,822.74 bank deposit which occurred on January 9, 1985, and the $546.00 value of a Sanyo product which Noreault purchased with cash on January 16, 1985. Lastly, the revenue agent used the Internal Revenue Manual estimate of $13.00 per day living expenses for the first four months of 1985 to add $1,560.00 to the total of funds applied. In sum, the IRS calculated that Noreault had received $78,211.69 in net profit from the alleged sale of narcotics. Using this amount, the IRS made a termination assessment against plaintiff in the amount of $33,930.75 for the first four months of 1985.

Plaintiff offered evidence to the effect that if this $78,211.69 of alleged income were derived from illegal narcotics sales, then the amount of profit should be reduced by the cost of goods sold. The IRS maintains, and this court agrees, that the “Net Profit” method that Revenue Agent Rusiecki used to calculate Noreault’s income already accounted for alleged expenditures for narcotics. If the IRS followed the plaintiff’s procedure, the income would have cost of goods sold deducted from it twice.

Discussion

The court’s jurisdiction over this action lies in 28 U.S.C. § 1346(a)(1) and 26 U.S.C. § 7429(b). Section 1346(a)(1) provides that the United States District Court shall have original jurisdiction over any civil action against the United States that alleges wrongful tax assessment by the IRS. Section 7429(b) provides taxpayers with judicial review of IRS assessments made pursuant to sections 6851, 6861 or 6862 of Title 26 of the Internal Revenue Code of 1954. Section 6851 provides for the termination assessment that the IRS exercised in the instant case.

Congress provided clear guidelines pertaining to the scope of review by the district court under Section 7429. The statute provides that:

The district court shall determine whether or not—
(A) The making of the assessment under. Sections 6851, 6861, or 6862, as the case may be, is reasonable under the circumstances, and
(B) The amount so assessed or demanded as a result of the action taken under Section 6851, 6861, or 6862, is appropriate under the circumstances.

Congress, however, left it to the courts to determine what “reasonable (or appropriate) under the circumstances” means in each of the two tests. After a thorough examination of the “reasonable” standard, in the absence of any illuminating legislative history, the court in Loretto v. United States, 440 F.Supp. 1168 [41 AFTR2d 78-301] (E.D.Pa.1977) concluded “that ‘reasonable under the circumstances’ means something more than ‘not arbitrary or capricious,’ and something less than ‘supported by substantial evidence.’ ” Id. at 1172. See also Penner v. United States, 582 F.Supp. 432, 434 [54 AFTR2d 84-5598] (S.D.Fla.1984) (agreeing with Loretto).

The court’s review of the termination assessment pursuant to Section 7429(b) is de novo and allows no presumption of correctness to either the district director’s or the Secretary of the Treasury’s determination. Loretto, 440 F.Supp. at 1171-72. See also Johnson v. Commissioner, 468 F.Supp. 461, 464 [43 AFTR2d 79-861; 44 AFTR2d 79-5159] (M.D.Fla. 1979). In conducting this review, the court may consider not only evidence that was available to the IRS at the time of the termination assessment, but also evidence which has come to light since that time. See Penner, 582 F.Supp. at 434; Johnson, 468 F.Supp. at 464; Lace v. United States, 45 AFTR2d 80-367 (D.Vt.1979).

Section 7429(g)(1) plainly places the burden of proving reasonableness of the termination assessment upon the government. In contrast, the burden of proving the inappropriateness of the amount of the assessment falls on the plaintiff/taxpayer. 26 U.S.C. § 7429(g)(2). To trigger the taxpayer’s burden, section 7429(g)(2) places upon the government the burden of producing “a written statement which contains any information with respect to which [the Secretary’s] determination of the amount assessed was based.” 26 U.S.C. § 7429(g)(2). Thereafter it becomes the taxpayer’s burden to prove the appropriateness of the amount. Id.

In applying the law as outlined above, this court finds the government has met its burden of proving that the making of the termination assessment was reasonable. The court also concludes that the taxpayer has carried his burden of proving that the amount of the assessment was inappropriate and orders that the assessment be abated in part. 26 U.S.C. § 7429(b)(3); Penner, 582 F.Supp. at 436.

a. Termination Assessment

The termination assessment provides the IRS with a mechanism to protect revenues believed due from a taxpayer with “designs to do an act which would tend to prejudice proceedings to collect the income tax for ... [the current year] ... unless such proceedings are brought without delay.” Treas.Reg. § 1.6851-l(a)(l). The IRS may make the termination if any of the following three criteria are met:

(i) The taxpayer is or appears to be designing quickly to depart from the United States or to conceal himself or herself.
(ii) The taxpayer is or appears to be designing quickly to place his, her, or its property beyond the reach of the government either by removing it from the United States, by concealing it, by dissipating it, or by transferring it to other persons.
(iii) The taxpayer’s financial solvency is or appears to be imperiled.

Treas.Reg. § 1.6851-1(a)(1). See Penner, 582 F.Supp. at 434.

The government bases its grounds for the termination assessment on the second criterion; the taxpayer’s apparent designs to conceal assets from the government. This court finds that the government acted reasonably under the circumstances in issuing the notice of termination assessment. Testimony reveals that Noreault had been indicted for narcotics distribution and dealt with cash in his alleged narcotics activities. He also invested large amounts of cash in real estate. In addition, the taxpayer willfully concealed the existence of approximately $34,000 in the safe deposit box, as well as his ownership of a partnership interest in property in Elmore, Vermont. Noreault also failed to file income tax returns reporting any income for the tax years 1983 and 1984. Moreover, he misrepresented that the true sources of his income were from a car business and the stock market.

All these factors make the government’s action more than reasonable under the circumstances. Noreault’s actions indicate not only a willingness to conceal assets from the government but also a practice of having done so. This gives the IRS sufficient reason to find that Noreault “designed] quickly to place his ... property beyond the reach of the government.” 26 U.S.C. § 6851(a)(1).

Noreault contends that because he recorded nearly all his assets under his own name he demonstrates a lack of concealment. Noreault’s deliberate failure to provide the court at the detention hearing with knowledge of his $34,000 cash “nest egg” belies this assertion.

The court finds that the government satisfied its burden of proving that the termination assessment was “reasonable under the circumstances.” 26 U.S.C. § 7429(g).

b. Amount of Assessment

Our conclusion that the termination assessment was reasonable under the circumstances leads the court to the second issue: the reasonableness of the amount of the assessment. In examining the amount of the assessment, this court does

not decide the ultimate tax liability for the taxpayer. Penner, 582 F.Supp. at 434; Johnson, 468 F.Supp. at 464. Instead, the court must decide whether the amount assessed is reasonable under the circumstances. 26 U.S.C. § 7429(b). In attempting to meet his burden of proof that the amount of the assessment was inappropriate, the plaintiff offers two tenable arguments.

First, he contends that several of the unidentified deposits in his bank accounts were actually identifiable from non-taxable sources. Therefore, he alleges that those amounts should not be included in the net profit as derived by the Source and Application Funds Method. This court disagrees. Plaintiff’s accountant reviewed plaintiff’s bank accounts and merely arrived at a different result than Revenue Agent Rusiecki. This evidence fails to convince the court that the government’s calculation of plaintiff’s net profit for the first four months of 1985 was unreasonable. Because this argument fails to establish that the government’s result was unreasonable under the circumstances, 29 U.S.C. § 7429(b), plaintiff falls short of his burden of proof on this ground. See 29 U.S.C. § 7429(g)(2).

Second, plaintiff alleges that the assessment unreasonably included the coin and gun collections as assets derived from 1985 income. Section 6851(a) provides for an assessment based on income earned in the current (1985) tax year only. 26 U.S.C. § 6851(a). If plaintiff purchases the items in the gun and coin collections prior to 1985, then clearly he did not purchase them with 1985 income. Plaintiff offered convincing testimony that he had accumulated both these collections over a period of several years. Furthermore, it is the nature of collections that the objects which make them up are frequently acquired over substantial periods of time. It is more reasonable to assume that this was so in this instance than that the collection was purchased intact or over just a few months. The court may consider evidence revealed after the assessment in evaluating the reasonableness of the assessment even if the IRS did not use such information in making its assessment. See Penner, 582 F.Supp. at 934; Johnson, 468 F.Supp. at 434. We have no hesitancy in agreeing with plain: tiffs position that he purchased the items in the collections with pre-1985 income.

Therefore, this court finds that the government acted unreasonably in including the gun and coin collections in the value of net income for 1985. The $16,-787.50 value of the guns and ammunition and the $4,428.88 value of the coin collection shall be deducted from $78,211.69 income upon which the government calculated the $33,930.75 termination assessment.

Conclusion

In sum, this court concludes that the government has satisfied its burden of proof that the termination assessment is “reasonable under the circumstances.” The court, however, also concludes that the taxpayer has met his burden of proof that the amount is inappropriate.

The court Orders that the Secretary of the Treasury redetermine plaintiffs income for the first four months of 1985 consistent with this Opinion and recompute the termination assessment accordingly.

      . Revenue Agent Rusiecki testified that on one occasion she considered plaintiffs insolvency a factor in recommending the termination assessment. This court however, finds that this bald assertion did not present a sound basis for action under § 6851. Moreover, this court does not find that the revenue agent actually based her opinion on that factor.

      . The evidence left the court unclear about whether the Sanyo product was a television or stereo.

      . See supra note 1.

      . As the court discussed above, plaintiff also alleges that cost of goods sold, i.e. narcotics, should be deducted from the net profit. As this court already stated, the government’s calculation method already accounts for cost of goods sold. Therefore, the argument bears no further consideration.

      . Revenue Agent Rusiecki testified that if plaintiff purchased the items in the gun and coin collections prior to 1985, then the value of such items was not properly included in calculating the termination assessment.


author: ROVNER, District Judge.

text:
    Jerome ELLIS, Plaintiff, v. Margaret M. HECKLER, Defendant.
    No. 84 C 2805.
    United States District Court, N.D. Illinois, E.D.
    Sept. 16, 1985.
   MEMORANDUM OPINION AND ORDER

ROVNER, District Judge.

Presently pending before this Court are the parties’ cross-motions for summary judgment. This case is an appeal from an adverse determination by the Secretary of Health and Human Services (“the Secretary”) denying the plaintiff’s claim for Social Security disability benefits. Following a hearing before the Administrative Law Judge (“AU”), the plaintiff was awarded benefits on July 28, 1983. The AU found that plaintiff was entitled to a period of disability commencing May 27, 1981. The Appeals Council, however, reviewed the matter on its own motion and reversed the ALT, finding plaintiff not disabled until May 18, 1982 and thus not eligible for benefits on the pending application. The only issue presented here is the onset date of plaintiffs disability.

Plaintiff died following the filing of this case, and his estate has been substituted as the plaintiff. Plaintiff contends that the decision of the Secretary denying benefits “lacks substantial evidence in the record to support it” and that “said evidence is in favor of disability.”

Where, as here, the Appeals Council has reversed the decision of the ALT granting benefits, the Seventh Circuit has recently held that the reviewing court has “an obligation to determine whether the own motion review conducted by the Appeals Council was in fact justified under the standard by which the Council justified it in theory.” Scott v. Heckler, 768 F.2d 172, 178 (7th Cir.1985). Here, the Appeals Council decided that the ALJ’s decision was not supported by substantial evidence. Thus, this Court must determine whether the Secretary’s decision to conduct own motion review based on the condition that the ALJ’s award was not supported by substantial evidence was correct.

On January 9, 1985, the Secretary submitted a “motion to affirm the decision of Secretary” in which the Secretary waived the filing of a brief in response to plaintiff’s memorandum in support of his motion for summary judgment. The Secretary stated, “In support of this motion defendant relies on the record previously filed in this case.”

After a de novo review of the entire record, this Court finds that the record before the AU constituted substantial evidence to support the ALJ’s finding that the plaintiff in this case was disabled as of May 27, 1981. The Appeals Council concluded that “the evidence fails to reveal the presence of any significant cardiac or physical impairment prior to May 18, 1982, when the claimant was hospitalized for a heart attack.” But the ALT himself recognized that there was no objective medical evidence of any significant cardiac or physical impairment when he stated:

The extent of that period is not clearly defined by the medical records. However, the totality of the evidence clearly allows the Administrative Law Judge to infer that had the claimant undergone a physical examination in May, 1981 as well as a psychiatric evaluation, findings supportive of the generalized cardiac damage would have been reported. The Administrative Law Judge further bases this inference on the cited physician’s report of May, 1982 indicating that the claimant’s condition had been present for at least 12 months. Accordingly, the combination of the claimant’s physical and mental impairments would have limited the claimant to performing less than the full range of sedentary work on May 27, 1981. The claimant’s condition prior to that date cannot be documented or inferred and the claimant must be found to have retained the ability to perform simple unskilled repetitive tasks prior to May 27, 1981.

Given the fact that two of the physicians who examined the plaintiff concluded that his condition began long before May, 1981, and given the fact that there were no conflicting opinion regarding the probable duration of the plaintiff’s physical impairments, this Court concludes that the ALJ’s decision as to the onset date of disability was supported by substantial evidence. Thus, it was error for the Appeals Council to review the ALJ’s decision pursuant to 20 C.F.R. §§ 404.970 and 416.1470.

Accordingly, the decision of the Secretary is reversed, and the Secretary is ordered to award disability benefits to plaintiff’s estate as of May 27, 1981. It is so ordered.


author: EGINTON, District Judge.

text:
    Louis GIANNATTASIO and Michael Giannattasio, Plaintiffs, v. STAMFORD YOUTH HOCKEY ASSOCIATION, INC., Frank L. Carlucci, William Malloy, James Malloy, William J. Amone, and Bruno Giordano, Defendants.
    Civ. No. B-85-438(WWE).
    United States District Court, D. Connecticut.
    Sept. 17, 1985.

      Philip M. French, Stamford, Conn., for plaintiffs.
    Stamford Youth Hockey Association, Inc., Frank L. Carlucci, William Malloy, James Malloy, William Arnone, Charles A. DeLuca, Stamford, Conn., for defendants.
    Eric L. Reinken, Asst. Corp. Counsel, City of Stamford Law Dept., Stamford Conn., for defendant Bruno Giordano.
   RULING ON DEFENDANTS’ MOTIONS TO DISMISS

EGINTON, District Judge.

Defendants, Stamford Youth Hockey Association, Inc. (hereinafter “SYHA”), Frank L. Carlucci, William Malloy, James Malloy, William J. Arnone and Bruno Giordano have moved the court to dismiss this case pursuant to Fed.R.Civ.P. 12(b)(1) for lack of jurisdiction over the subject matter and Fed.R.Civ.P. 12(b)(6) for failure to- state a claim upon which relief can be granted. Plaintiffs claim that this case arises under 42 U.S.C. Sec. 1983 of the Civil Rights Act and that jurisdiction is based upon 28 U.S.C. Sec. 1343 and 28 U.S.C. Sec. 1331. Plaintiffs further claim injunctive and declaratory relief pursuant to 28 U.S.C. Sec. 2201 and 2202 as authorized by 42 U.S.C. Sec. 1983.

Plaintiffs are Michael and Louis Giannattasio who are suing both in their own right and as best friends in the names and rights of their minor sons, Michael, Jr. and Louis, Jr. Defendant SYHA is a non-stock corporation of the State of Connecticut. Defendant Carlucci is President of SYHA, a Director of SYHA and a member of the Rules and Discipline Committee of SYHA. Defendant William Malloy is Vice-President, a Director and a member of the Rules and Discipline Committee of SYHA. Defendant James Malloy is Secretary, a Director and a member of the Rules and Discipline Committee of SYHA. Defendant Arnone is Treasurer, a Director and a member of the Rules and Discipline Committee of SYHA. Defendant Giordano is Superintendent of the Board of Recreation of the City of Stamford.

The facts of this case as enunciated in the plaintiffs’ complaint establish that this controversy involves the suspension of the plaintiffs from all participation in the SYHA programs due to a series of altercations between the plaintiffs and the SYHA coaches. The defendants have moved to dismiss the complaint, asserting that the court has no jurisdiction in that the plaintiffs have failed to show the existence of either state action or a substantial federal question.

DISCUSSION

State action is the jurisdictional cornerstone to the granting of relief under 42 U.S.C. Sec. 1983. State action is at its core a unitary concept. Under this concept the only issue is whether sufficient state contacts do, or do not, exist. If the court finds a sufficient quantum of state connections to a particular activity, then that activity will be subject to the strictures of the Fourteenth Amendment, even though performed by a private party. Several tests have been devised by the Supreme Court to determine whether a defendant’s actions constitute “state” action of a type regulated by the Fourteenth Amendment.

The “public function” doctrine holds that when private persons are en-gaged in the exercise of governmental functions their activities are subject to similar constitutional restrictions. In other words, the state cannot free itself from the limitations of the Constitution in the operation of its governmental functions merely by delegating certain functions to otherwise private individuals. See, e.g., Smith v. Allwright, 321 U.S. 649, 64 S.Ct. 757, 88 L.Ed. 987 (1944) (electoral process public function); Terry v. Adams, 345 U.S. 461, 73 S.Ct. 809, 97 L.Ed. 1152 (1953) (same); Marsh v. Alabama, 326 U.S. 501, 66 S.Ct. 276, 90 L.Ed. 265 (1946) (corporation which wholly owned and operated town served public function). The public function concept has, however, been very narrowly construed. In four recent Supreme Court decisions it has been held that the function must be one which has traditionally been exclusively the domain of the state. “The required nexus may be present if the private entity has exercised powers that are ‘traditionally the exclusive prerogative of the state.’ ” Blum v. Yaretsky, 457 U.S. 991, 1005, 102 S.Ct. 2777, 2786, 73 L.Ed.2d 534 (1982) (quoting Jackson v. Metropolitan Edison Co., 419 U.S. 345, 95 S.Ct. 449, 42 L.Ed.2d 477 (1974)). This exclusivity requirement was not met by a privately-owned utility licensed and regulated by the state, Jackson; a warehouseman’s sale regulated by state statute, Flagg Brothers, Inc. v. Brooks, 436 U.S. 149, 98 S.Ct. 1729, 56 L.Ed.2d 185 (1978); a private school which received most of its funding from state sources, Rendell-Baker v. Kohn, 457 U.S. 830, 102 S.Ct. 2764, 73 L.Ed.2d 418 (1981); and a nursing home funded through state monies, Blum. The majorities of Jackson and Blum seem to impose still another requirement for application of the public function doctrine: that the activity be one which the state is required to provide by statute or by state constitution. Jackson, 419 U.S. at 353, 95 S.Ct. at 454 (“But while the Pennsylvania statute imposes an obligation to furnish service on regulated utilities, it imposes no such obligation on the State.”); Blum, 457 U.S. at 1011, 102 S.Ct. at 2789 (“The state constitutional provisions ... do no more than au-

thorize the legislature to provide funds for the care of the needy____ They do not mandate the provision of any particular care____ [The medicaid statute] does not require that the States provide the services themselves.”). Thus no private sector agency should be subject to constitutional limitations of its autonomy unless it performs an exclusive governmental function, non-discretionary in nature, and is taking action under the direction of statutory or constitutional authority. Analyzed in light of these principles, plaintiffs’ assertions of state action cannot be maintained. It is beyond dispute that the operation of a youth hockey organization is not a delegated governmental function. Further, such an organization is not mandated by the City Charter of Stamford. Defendants’ actions do not constitute state action under the public function doctrine.

The second general test of state action doctrine relates not to the type of activity carried out by the private actor, but to the conduct of the government. If the government is sufficiently involved in the private actor’s conduct, or encourages that conduct or benefits-from it, the private party’s acts will be deemed state action and subject to constitutional review. A common denomination of this second test is the “state entanglement” or “state nexus” theory of state action. Huff v. Notre Dame High School of West Haven, 456 F.Supp. 1145, 1147 (D.Conn.1978) (“The ‘state entanglement' theory provides that ‘state action’ is present when the state is entangled with the operations of a private enterprise.”). One way in which the state can become responsible for the conduct of a private party is by commanding or enforcing that conduct. See, e.g. Shelley v. Kraemer, 334 U.S. 1, 68 S.Ct. 836, 92 L.Ed. 1161 (1948) (judicial enforcement of a racially restrictive covenant would constitute state action and would violate the Fourteenth Amendment). The City of Stamford does not participate in the decision-making process of the SYHA and the decision to suspend the plaintiffs from the SYHA was made entirely by the Rules and Discipline Committee of the Association. Defendants’ Memorandum of Law in Support of Motion to Dismiss, Affidavit of William Malloy, (Exhibit “A”), at paragraphs 7, 23. There is quite clearly no type of Shelley -type commandment or enforcement in the present case.

State action will be found if the state encourages the private party to act in a manner violative of the Fourteenth Amendment. In Reitman v. Mulkey, 387 U.S. 369, 87 S.Ct. 1627, 18 L.Ed.2d 830 (1967), the Supreme Court found state action where California voters amended their constitution to prohibit the government from interfering with any private individual’s right to discriminate in the sale or lease of residential real estate. The Court held that the amendment encouraged private discrimination. In this instance the City of Stamford took no action whatsoever in the suspension of the plaintiffs from the SYHA. SYHA received no guidance or recommendations from the City concerning its conduct. The suspensions were the decision of the Rule and Discipline Committee acting autonomously. Affidavit of William Malloy at paragraphs 7, 16, 18. The plaintiffs find no support in the Reitman decision for their assertions of state action.

Where the private actor and government can be said to be in a “symbiotic relationship” the private actor will be subject to the Fourteenth Amendment constraints. The classic symbiotic relationship was found in Burton v. Wilmington Parking Authority, 365 U.S. 715, 81 S.Ct. 856, 6 L.Ed.2d 45 (1961), where the Supreme Court held that a privately owned restaurant which leased space in a government parking facility could not refuse service to members of racial minorities. The Court applied a totality of the circumstances test to the contacts between the government and the private actor. While there was no single factor which indicated the presence of state action, under the totality test the restaurant’s activities were subjected to constitutional review. Plaintiffs cannot succeed in their allegations of a Burton -type relationship between the City of Stamford and SYHA. Firstly, the propriety of using this test is limited for the most part to cases involving racial discrimination. Arredondo v. Laredo Municipal Transit System, 581 F.Supp. 868, 871 (S.D. Texas 1984) (“[T]he key to Burton was the fact that the state was profiting financially as a result of the racial discrimination of which that plaintiff complained.”); Lubin v. Crittenden Hospital Association, 713 F.2d 414, 416 (8th Cir.1983) (“Use of the symbiotic relationship test is limited generally to cases involving racial discrimination.”); Briscoe v. Bock, 540 F.2d 392, 396 n. 3 (8th Cir.1976). However, even if Burton were the appropriate test, the SYHA cannot be said to have “so far insinuated itself into a position of interdependence” with the City of Stamford “that it must be recognized as a joint participant in the challenged activity.” Burton, 365 U.S. at 725, 81 S.Ct. at 862. SYHA is not an agency, department or association of the City of Stamford nor does the City provide any funding to the SYHA. Defendant Giordano’s Memorandum of Law in Support of Motion to Dismiss, Affidavit of Bruno Giordano, (Exhibit A), at paragraphs 4, 9. The City’s only involvement with the SYHA is that the SYHA uses the City’s ice skating rink and is given a twenty per cent reduction in hourly rate. Affidavit, William Malloy, at paragraph 19. The City also permits all associations and groups, public and private, to skate at a reduced rate at the City’s skating rink. Affidavit, Bruno Giordano, at paragraph 13. The City does not supervise, oversee or regulate the SYHA, does not participate in any of the SYHA decision making processes or have any representation on the Board of SYHA Directors. Affidavit, William Malloy, at paragraphs 6-9.

Thus, under all traditional state action tests the ultimate issue of determining whether these defendants are subject to suit must be answered in the negative; the alleged infringements of plaintiffs’ federal rights are not fairly attributable to any form of state action. A review of the suspensions ordered by SYHA is therefore not subject to the jurisdiction of this court.

Even if the plaintiffs could have surmounted this jurisdictional barrier the federal court still could not redress their grievance. For sake of judicial economy the court will briefly explain its reasoning.

Plaintiffs assert that the defendants violated their procedural and substantive due process rights and violated their rights to equal protection under the Fourteenth Amendment. The court will discuss each assertion in turn.

A primary determination which must be made in a case such as this is whether the plaintiff has been deprived of an interest encompassed by the Fourteenth Amendment’s protection of liberty and property. “... [T]he range of interests protected by procedural due process is not infinite.” Board of Regents v. Roth, 408 U.S. 564, 570, 92 S.Ct. 2701, 2705, 33 L.Ed.2d 548 (1972). One must look to the nature of the interest at stake. In the present case the court finds persuasive arguments set forth in a line of cases which have found that the privilege of participating in intercollegiate and interscholastic sports competition is without constitutional protection. See, e.g., Davenport v. Randolph County Board of Education, 730 F.2d 1395 (11th Cir.1984); Walsh v. Louisiana High School Athletic Association, 616 F.2d 152 (5th Cir.1980); Parish v. N.C. A.A., 506 F.2d 1028 (5th Cir.1975); Williams v. Hamilton, 497 F.Supp. 641 (D.N. H.1980). As the Fifth Circuit succinctly stated while expressly reaffirming its holding in Mitchell v. Louisiana High School Athletic Association, 430 F.2d 1155, 1158 (5th Cir.1970):

The due process clause of the fourteenth amendment extends constitutional protection to those fundamental aspects of life, liberty, and property that rise to the level of a ‘legitimate claim of entitlement’ but does not protect lesser interests or ‘mere expectations.’ (Citations omitted.) A student’s interest in participating in a single year of interscholastic athletics amounts to a mere expectation rather than a constitutionally protected claim of entitlement.

Walsh, 616 F.2d at 159 (emphasis added). Plaintiffs stand in no different light from the athletes in these cases. Indeed, their position is likely to be more tenuous. Participation in interscholastic athletics on a high school or college level often holds open future possibilities of both scholarships and professional athletic careers. If the privilege of participation on such levels is not a property interest rising to a level of due process protection, then it is clear that to play in a youth hockey association is likewise unprotected. Accordingly, plaintiffs’ due process claim is without merit.

The plaintiffs fare no better in their claim that they have been deprived of equal protection under the law based upon the suspension being of an entire, and therefore inherently suspect, class composed of members of each “Giannattasio family”. Plaintiffs' Memorandum in Support of Motion for Temporary Restraining Order and Preliminary Injunction, at 6. Plaintiff cites no authority for this proposition nor has this court’s research uncovered any. The purposes behind the Fourteenth Amendment would indicate that only laws classifying individuals on the basis of either their status as a member of a racial minority, their national origin, or their lack of U.S. citizenship are viewed as suspect, worthy of the most strict judicial scrutiny. Where, however, as here, the classification created by the suspension neither trammels fundamental rights or interests nor burdens an inherently suspect class, equal protection analysis requires only that the classification be rationally related to a legitimate state interest. See, e.g. City of New Orleans v. Dukes, 427 U.S. 297, 303, 96 S.Ct. 2513, 2516-17, 49 L.Ed.2d 511 (1976). The classification in the instant case meets this standard. The plaintiffs were suspended from the SYHA following a verbal and physical altercation between the plaintiffs and the SYHA coaches. Plaintiffs were put on notice by the Handbook of the SYHA that the Rules and Discipline Committee had the authority to evaluate on and off ice conduct by spectators, players and/or coaches that was considered detrimental to the League. The SYHA has a legitimate interest in promoting sportsmanship, positive group experiences and camaraderie among its young players. It has a further interest in its legitimate expectation that the parents of the players will serve as positive role models which will benefit all program participants. The disciplinary rules therefore adopted by the SYHA, together with the classification that results from their enforcement, are rationally and logically related to the SYHA’s valid and legitimate interest. The plaintiffs’ equal protection argument must therefore fail.

ORDER

The court finds that the plaintiffs are not entitled to relief herein. The defendants’ Motions to Dismiss for lack of jurisdiction over the subject matter and for failure to state a claim upon which relief could be granted are hereby GRANTED.

      . 42 U.S.C. Sec. 1983 provides:
      Every person who, under color of any statute, ordinance, regulation, custom, or usage, of any State or Territory, subjects, or causes to be subjected, any citizen of the United States or other person within the jurisdiction thereof to the deprivation of any rights, privileges, or immunities secured by the Constitution and laws shall be liable to the party injured in an action at law, suit in equity, or other proper proceeding for redress.

      . It is well established that the "under color of state law” requirement in 42 U.S.C. Sec. 1983 is equivalent to the constitutional state action required under the Fourteenth Amendment. United States v. Price, 383 U.S. 787, 794, n. 7, 86 S.Ct. 1152, 1157, n. 7, 16 L.Ed.2d 267 (1966).