author: SHADUR, District Judge.

text:
    LOCAL 705, INTERNATIONAL BROTHERHOOD OF TEAMSTERS, CHAUFFEURS, WAREHOUSEMEN & HELPERS OF AMERICA, Plaintiff, v. WILLETT, INC., et al., Defendants.
    No. 85 C 3421.
    United States District Court, N.D. Illinois, E.D.
    July 19, 1985.

      Sherman Carmell, Carmell, Charone Widmer & Mathews, Ltd., Chicago, Ill., for plaintiff.
    Harry Sangerman, McDermott, Will & Emery, Richard J. Cochran, Tenney & Bentley, Chicago, Ill., for defendants.
   MEMORANDUM OPINION AND ORDER

SHADUR, District Judge.

Local 705, International Brotherhood of Teamsters, Chauffeurs, Warehousemen & Helpers of America (“Local 705”) charges The Willett Company (“Company”), Willett, Inc. (“Willett”), Willett Interstate System, Inc. (“Interstate”) and Railhead Cartage, Inc. (“Railhead”) violated the collective bargaining agreement (“CBA”) between Local 705 and Company by subcontracting cartage work out to persons not represented by Local 705. Willett, Interstate and Railhead (collectively “Movants”) now seek to be dismissed under Fed.R.Civ.P. “Rule” 12(b)(1) and 12(b)(6). For the reasons stated in this memorandum opinion and order, their motion is denied.

Facts

Willett is the sole owner of the other defendants. All defendants are affiliated enterprises with common ownership and management, centralized control of labor relations and sharing of equipment, employees and other assets. Company and Local 705 are signatories to a CBA covering local cartage drivers, under which cartage work performed by or assigned to Company employees cannot be subcontracted out or assigned to any other drivers. None of the Movants is a CBA signatory.

In November 1984 Movants did subcontract out cartage work that belonged to Company’s employees. Some or all that work (the Complaint is unclear) was contracted out to Railhead, whose stock Willett had purchased “to circumvent or evade” the CBA.

Local 705 asserts this Court has jurisdiction under Section 301(a) of the Labor Management Relations Act (“LMRA”), 29 U.S.C. § 185(a). Complaint Count I’s prayer for relief:

requests the court to declare defendants a single employer or joint employer for purposes of this action and to grant such relief as is appropriate, including damages.

Count II’s prayer:

requests the court to declare Railhead an alter ego of The Willett Company for purposes of this action and to grant such relief as is appropriate, including damages.

Movants respond:

1. This Court has no jurisdiction over them under Section 301 because they are not signatories to the CBA.
2. All issues raised by Local 705’s Complaint are within the exclusive jurisdiction of the National Labor Relations Board (“NLRB” or simply the “Board”).

Those contentions will be dealt with in turn.

Section 301 Jurisdiction over Non-Signatories

Section 301(a) provides:

Suits for violation of contracts between an employer and a labor organization representing employees in an industry affecting commerce as defined in this chapter, or between any such labor organizations, may be brought in any district court of the United States having jurisdiction of the parties without respect to the amount in controversy or without regard to the citizenship of the parties.

Movants’ contention of a lack of Section 301 jurisdiction because they are not signatories or parties to the CBA really begs the question. Plainly the gravamen of the Complaint is that Movants are to be treated as parties to the CBA by virtue of their identity with Company.

Courts considering whether defendants are a “single employer” have regularly exercised jurisdiction over all the defendants to resolve that issue. Carpenters Lo-

cal No. 1846 of the United Brotherhood of Carpenters and Joiners of America, AFL-CIO v. Pratt-Famsworth, Inc., 690 F.2d 489 (5th Cir.1982), cert. denied, 461 U.S. 942, 103 S.Ct. 2118, 77 L.Ed.2d 1299 (1983); Brotherhood of Teamsters, Local No. 70 v. California Consolidators, Inc., 693 F.2d 81 (9th Cir.1982) (per curiam), cert. denied, — U.S.-, 105 S.Ct. 263, 83 L.Ed.2d 199 (1984). That applies to the alter ego count too. Penntech Papers, Inc. v. NLRB, 706 F.2d 18, 23-24 (1st Cir.1983). Movants have failed to cite even one single employer or alter ego case holding the contrary.

Section 301 Jurisdiction over . Representational Issues

But scotching that spurious jurisdictional issue shifts attention to a real one — that stemming from the nature of the issues raised by the Complaint:

1. Movants claim the relief sought by Local 705 requires a decision as to representational issues within NLRB’s exclusive jurisdiction.
2. Local 705 counters this Court need dispose of only the narrow single employer issue for the time being, leaving consideration of the representational issues for another day.

Evaluation of those arguments must take account of the dual nature of the prayer for relief — as already indicated, Count I asks (a) a declaratory judgment on the single employer question and (b) appropriate relief, including damages.

Conventional wisdom teaches that the Declaratory Judgment Act, 28 U.S.C. § 2201 et seq., is not itself a source of jurisdiction. But once jurisdiction has otherwise been conferred (in this case by Section 301(a)), the Declaratory Judgment Act clearly empowers this Court to adjudicate the single employer issue by a declaration on that score.

That however is only part of the story, for it is equally clear no other relief can flow simply from a determination that Movants and Company are a single employer. Before Movants can be held bound to the CBA, Local 705 must establish both the existence of that single-employer group and the propriety of a single bargaining unit comprising the employees of the same group (Movants and Company). South Prairie Construction Co. v. Local No. 627, International Union of Operating Engineers, AFL-CIO, 425 U.S. 800, 805, 96 S.Ct. 1842, 1844, 48 L.Ed.2d 382 (1976) (per curiam); Pratt-Farnsworth, 690 F.2d at 505, 507; California Consolidators, 693 F.2d at 82-84; NLRB v. Don Burgess Construction Corp., 596 F.2d 378, 386 (9th Cir.1979); Local 17, International Brotherhood of Teamsters, Chauffeurs, Warehousemen & Helpers of America v. Coast Cartage Co., 103 LRRM 3053, 3054 (D.Colo.1980). Pratt-Farnsworth, 690 F.2d at 507 explained the reason for that two-stage inquiry:

It is clear that the primary motivation of the Board in making an independent unit determination in a single employer case is to protect the rights under section 7 of the NLRA, 29 U.S.C. § 157, of the employees of each of the subentities constituting the single employer to bargain collectively with representatives of their own choosing.
Further, as will be shown in Part II.C.8 of this opinion, even the fact that the union employer and the union have stipulated in the agreement as to the appropriate unit will not preclude an inquiry by the Board into the appropriateness of the unit comprising the employees of both the union and nonunion employers.

What is really at issue here is only one of those two inquiries: the single employer question. And every reported case that has squarely addressed that subject has held a district court may resolve that question in a Section 301 suit. See, e.g., Northwest Administrators, Inc. v. Con Iverson Trucking, Inc., 749 F.2d 1338, 1340 (9th Cir.1984) and cases there cited. Where the Courts of Appeal are split is at the second level of inquiry: whether a district court has jurisdiction under Section 301 to resolve bargaining unit issues. See California Consolidators, 105 S.Ct. at 263-64 (White and O’Connor, JJ. dissenting from denial of certiorari). Our own Court of Appeals has not addressed that question.

That second-level split stems from the potentially conflicting jurisdictional allocations of the LMRA and the predecessor National Labor Relations Act (“NLRA” or simply the “Act”). NLRA §§ 7 and 8, 29 U.S.C. §§ 157 and 158 (as amended by LMRA), grant employees the right to organize and prohibit unfair labor practices. It has long been established the NLRB has exclusive original jurisdiction over cases arising under those sections. San Diego Building Trades Council v. Garmon, 359 U.S. 236, 245, 79 S.Ct. 773, 779, 3 L.Ed.2d 775 (1959). On the other hand, Section 301 conferred federal court jurisdiction for the enforcement of collective bargaining agreements.

But unfair-labor-practice cases and breach-of-collective-bargaining-agreement eases are heavily overlapping sets: Many if not most activities that constitute breaches of bargaining agreements are also unfair labor practices. Thus district courts adjudicating Section 301 claims frequently face issues normally decided by the NLRB in the NLRA §§ 7 or 8 context. Of course that fact alone does not deprive a federal court of jurisdiction. Hines v. Anchor Motor Freight, Inc., 424 U.S. 554, 562, 96 S.Ct. 1048, 1055, 47 L.Ed.2d 231 (1976). Nonetheless courts have typically declined to exercise jurisdiction (which they possess under the literal language of Section 301) as to those representational issues that most require exercise of the NLRB’s special expertise and discretion. Though such declined cases may speak in terms of want of “jurisdiction,” it is unimportant whether that characterization is conceptually accurate. What matters is that courts simply will not take and decide such cases. Northwest Administrators, 749 F.2d at 1339; Local Union 204 of the International Brotherhood of Electrical Workers, Affiliated with the AFL-CIO v. Iowa Electric Light and Power Co., 668 F.2d 413, 419 (8th Cir.1982).

Determination of appropriate bargaining units is the paradigmatic instance of such nonexercise of judicial jurisdiction. NLRA § 9(b), 29 U.S.C. § 159, delegated that issue entirely to the discretion of the Board:

The Board shall decide in each case whether, in order to assure to employees the fullest freedom in exercising the rights guaranteed by this Act, the unit appropriate for the purposes of collective bargaining shall be the employer unit, craft unit, plant unit, or subdivision thereof....

Other than the general policies animating the LMRA, the statute provides no guidelines whatever for the Board in making unit determinations.

Little wonder, then, that of all the so-called representational issues the Board decides, that of appropriate bargaining units has generated the greatest judicial deference to the Board. Local No. 3-193 International Woodworkers of America v. Ketchikan Pulp Co., 611 F.2d 1295, 1298 (9th Cir.1980). In the LMRA context the benchmark case is Packard Motor Car Co. v. NLRB, 330 U.S. 485, 67 S.Ct. 789, 91 L.Ed. 1040 (1947), which involved review of an NLRB determination that (1) foremen are protected under the NLRA and (2) their appropriate bargaining unit is the entire class of foremen working for a single employer. On the latter question the Court said (id. at 491-92, 67 S.Ct. at 793):

Section 9(b) of the Act confers upon the Board a broad discretion to determine appropriate units.
# >)< # # # *
The issue as to what unit is appropriate for bargaining is one for which no absolute rule of law is laid down by statute, and none should be by decision. It involves of necessity a large measure of informed discretion, and the decision of the Board, if not final, is rarely to be disturbed. While we do not say that a determination of a unit of representation cannot be so unreasonable and arbitrary as to exceed the Board’s power, we are clear that the decision in question does not do so. That settled, our power is at an end.

That should be contrasted with the Court’s teaching (also under the LMRA) on the single employer issue. In South Prairie the Board (sub nom. Peter Kiewit, 206 N.L.R.B. 562 (1973)) had decided that question in the negative, so it did not reach the bargaining unit issue. On review, the Court of Appeals for the District of Columbia reversed the Board on the single employer issue and then decided the proper bargaining unit as an original matter, 518 F.2d 1040 (D.C.Cir.1975). Then the Supreme Court affirmed on the first question but remanded as to the bargaining unit determination on the ground that the Court of Appeals had no power to decide that issue as an initial matter (425 U.S. at 805-06, 96 S.Ct. at 1844-45) (citations omitted):

Whether or not the Court of Appeals was correct [in its reasoning on the bargaining unit issue], we think that for it to take upon itself the initial determination of this issue was “incompatible with the orderly function of the process of judicial review.” ... Since the selection of an appropriate bargaining unit lies largely within the discretion of the Board, whose decision, “if not final, is rarely to be disturbed,” ... we think the function of the Court of Appeals ended when the Board’s error on the “employer” issue was “laid bare.”

Though South Prairie is binding precedent only in the NLRA framework, most post-South Prairie courts have understandably drawn on its declaration of policy to decline jurisdiction over bargaining unit issues in Section 301 suits. See, e.g., Iowa Electric Light, 668 F.2d at 416-20; Ketchikan Pulp, 611 F.2d at 1301; Coast Cartage, 103 LRRM at 3054. Only the Court of Appeals for the Fifth Circuit in PrattFarnsworth, 690 F.2d at 521-22 has upheld the power under Section 301 to decide the appropriate bargaining unit and other “collateral” issues subsidiary to enforcement of a collective bargaining agreement. Pratt-Farnsworth, id. at 513-17 held South Prairie (which it called by its NLRB name, Peter Kiewit) was not controlling in a Section 301 suit, taking its direction instead from:

1. Textile Workers Union of America v. Lincoln Mills of Alabama, 353 U.S. 448, 456-57, 77 S.Ct. 912, 917-18, 1 L.Ed.2d 972 (1957), which held federal courts empowered under Section 301 to create a federal common law of labor relations “which the courts must fashion from the policy of our national labor laws”;
2. Hines, 424 U.S. at 562, 96 S.Ct. at 1055, which held:
The strong policy favoring judicial enforcement of collective-bargaining contracts [is] sufficiently powerful to sustain the jurisdiction of the district courts over enforcement suits even though the conduct involved [is] arguably or would amount to an unfair labor practice within the jurisdiction of the National Labor Relations Board;

and

3. Connell Construction Co. v. Plumbers Local Union No. 100, 421 U.S. 616, 95 S.Ct. 1830, 44 L.Ed.2d 418 (1975) and Kaiser Steel Corp. v. Mullins, 455 U.S. 72, 102 S.Ct. 851, 70 L.Ed.2d 833 (1982), each of which held a district court had jurisdiction in a suit arising under independent federal laws to decide collateral issues requiring an interpretation of NLRA § 8(e).

Pratt-Farnsworth drew from those cases the conclusion that a district court may resolve the proper bargaining unit in a Section 301 suit, “at least in the absence of a previous or pending determination by the Board” (690 F.2d at 521). Though it has substantial force, the Pratt-Farnsworth analysis is not ultimately persuasive. Granted, the cases on which it relies support a district court’s Section 301 exercise of jurisdiction over a broad range of collateral issues otherwise within Board domain. Certainly Lincoln Mills and Hines emphasize the independent force of Section 301 and the importance of not allowing deference to the NLRB to swallow the federal courts’ own enforcement mission under the LMRA.

But the power of district courts to decide issues that also implicate LMRA §§ 7 and 8 does not justify the entire usurpation of Board functions. And the representational concerns inherent in bargaining unit determinations are at the very core of the Board’s own powers. Ketchikan Pulp, 611 F.2d at 1298; Iowa Electric Light, 668 F.2d at 418-20.

As Packard stressed, the Act provides no guidelines to courts for their carving out of appropriate bargaining units. Congress expressly relegated that function to the discretion and special expertise of the Board. It goes without saying one tribunal is incapable of exercising another tribunal’s discretion.

Were courts indiscriminately to determine all representational issues, they would subvert the Board’s special status under the Act. As Iowa Electric Light, 668 F.2d at 420 and even Pratt-Farnsworth, 690 F.2d at 516 n. 11 recognized, nearly any collective-bargaining related issue can be cast in terms of breach of contract as opposed to unfair labor practice. Forum-shopping litigants could thus establish the courts as primary arbiters of representational issues. Such a prospect obviously risks usurpation of the NLRB’s role. But more importantly that threat is not only structural but substantive, for it would create doctrinal chaos, as inexperienced courts decided discretionary matters for which the Act provides little or no guidance.

This Court therefore follows the Eighth and Ninth Circuits, rather than taking the Fifth. It holds no Section 301 jurisdiction exists to resolve representational issues by deciding appropriate bargaining units. That holding precludes this Court from granting the monetary and “other” relief sought in Count I.

In sum, this Court has jurisdiction to decide the threshold single employer question. It lacks power to -make an initial bargaining-unit judgment — but Local 705 has not directly asked for that in this action.

Exercise of Jurisdiction for Declaratory Relief

That set of conclusions poses a different question — not one of jurisdiction, but rather one of its possible discretionary nonexereise. In terms of Count I, the inquiry is whether this Court’s inability to confer all the relief asked there should cause a deferral of all issues to the Board. Local 705 urges a “no” answer to that question, while Movants really fail to address the possibility of resolving the single employer issue here and the bargaining unit issue elsewhere.

This Court does not draw on a clean slate in drafting its answer to that inquiry. Guidance is afforded by both Northwest Administrators and California Consolidators.

In Northwest Administrators the assignee of several employee trust funds sued an employer under Section 301 and ERISA. Liability was predicated on the employer’s being the alter ego of the signatory to a collective bargaining agreement. At the district court level the action was dismissed under the primary jurisdiction doctrine (see n. 5) because resolution of the alter ego dispute would ultimately require a determination of the appropriate bargaining unit. But the Court of Appeals reversed and ordered the district court to decide the non-representational issues (749 F.2d at 1340):

Before considering the existence of potential representational issues, the district court should have decided two potentially dispositive questions which do not concern representation. First, the court should have determined whether the Con Iverson Trucking, Inc. was in fact a successor or alter-ego which could be bound by the agreement entered by the Con Iverson sole proprietorship. District courts have jurisdiction under section 301 to make such determinations. See Roberts v. Ayala, 709 F.2d 520 (9th Cir.1983) (per curiam); California Consolidators, 693 F.2d at 83. Second, if it concluded the corporation could be bound as a successor, the court should have determined whether the corporation ever effectively repudiated the agreement. Absent an effective repudiation, the trust funds could recover even if the union did not represent a majority of the employees in an appropriate unit. Jim McNeff Inc. v. Todd [461 U.S. 260], 103 S.Ct. 1753 [75 L.Ed.2d 830 (1983)]. We remand to the district court for consideration of these issues.

California Consolidators bears even more directly on this case. There as here a union sought a Section 301 declaration an employer was bound by a collective bargaining agreement because it and the signatory company were a single employer. As in Northwest Administrators, the district court dismissed the entire action for lack of jurisdiction because of the bargaining unit issue it would ultimately have to face. There too the Court of Appeals disagreed, remanding for “further proceedings and an evidentiary hearing” as to whether the two companies were a single employer (693 F.2d at 84).

Although neither Northwest Administrators nor California Consolidators articulated reasons for their remands, their approach is preferable to shunting this entire case onto the NLRB. Any federal court considering a stay or abstention must begin from the premise that “[a]bstention from the exercise of federal jurisdictional is the exception, not the rule.” Colorado River Water Conservation District v. United States, 424 U.S. 800, 813, 96 S.Ct. 1236, 1244, 47 L.Ed.2d 483 (1976). In the same vein, Director, Office of Workers’ Compensation Programs, United States Department of Labor v. Peabody Coal Co., 554 F.2d 310, 323 (7th Cir.1977) quoted Willcox v. Consolidated Gas Co., 212 U.S. 19, 40, 29 S.Ct. 192, 195, 53 L.Ed. 382 (1909):

When a Federal court is properly appealed to in a case over which it has by law jurisdiction, it is its duty to take such jurisdiction____

In this situation, the presumption in favor of exercise rather than nonexercise of jurisdiction is reinforced by the strong congressional intent expressed in Section 301 to give the victims of labor contract breaches access to the federal courts. Though this Court cannot give full relief to Local 705, it can grant at least the declaratory judgment sought in Count I.

Two considerations are arguably countervailing. They are not (singly or in combination) strong enough to outweigh the presumption in favor of exercising jurisdiction.

First, it is true the Board may have more experience than this Court in deciding whether multiple entities are a single employer. But the cases already discussed plainly teach that issue is:

1. within the competence of district courts; and
2. not among the representational issues that call significantly on the special expertise or discretion of the Board.

Second, it is possible the adjudication of one issue here and the second issue before the NLRB could cause some overlapping. But there is no way to predict at this early stage whether resort to the Board will be necessary at all. If this Court resolves the single employer claim against Local 705, Count I will be disposed of entirely. Neither the Board nor anyone else would have to decide the appropriate bargaining unit. Any assertion at this stage that abstention in favor of the NLRB would be more economical (or how much so) is entirely speculative.

Alter Ego Issue

No difficulty is posed by Count II in jurisdictional terms. This Court unquestionably has jurisdiction to resolve the alter ego count in its entirety. Northwest Administrators, 749 F.2d at 1340; Local Union No. 59, International Brotherhood of Electrical Workers, ALF-CIO v. Namco Electric, Inc., 653 F.2d 143, 146-47 (5th Cir.1981).

Unlike single employer cases, alter ego cases generally do not require a separate determination of the appropriate bargaining unit. Finding one company to be the alter ego of a labor contract signatory is alone sufficient in most cases to bind that company to the agreement. Penntech Papers, 706 F.2d at 24; Pratt-Farnsworth, 690 F.2d at 508-09. At most the only additional inquiry that might be made is the “far more limited determination whether the stipulated unit is repugnant to any policy embodied in the NLRA” (id. at 509).

No reason has been suggested, and this Court is aware of none, for nonexercise of its jurisdiction over the alter ego claim in all its aspects. And that in turn fortifies the conclusion already reached as to Count I. Because:

1. this Court may (and should) adjudicate the alter ego count and grant any requested relief; and
2. the alter ego inquiry overlaps materially with the inquiry whether Movants and Company are a single employer,

judicial economy will be well served by adjudication of the single employer issue as well in this Court.

Conclusion

This Court has, and will exercise, its jurisdiction over both counts of the Complaint. Only if and when Local 705 obtains a favorable determination on the single employer issue need this Court face the issue whether to leave determination of the bargaining unit issue to the NLRB. Movants’ motion to dismiss is denied, and they are ordered to answer the Complaint on or before July 31, 1985.

      . As always on a Rule 12(b)(6) motion, the well-pleaded factual allegations of the Complaint are accepted as true, with all reasonable inferences drawn in Local 705’s favor. Wolfolk v. Rivera, 729 F.2d 1114, 1116 (7th Cir.1984). Absent any added factual submissions, the same assumptions will be made for Rule 12(b)(1) purposes as well.

      . Throughout the rest of this opinion the term "single employer” (even though it is of course used as a term of art and not literally), as well as the term "alter ego,” will be used without quotation marks.

      . Movants do point to two decisions by our Court of Appeals, Loss v. Blankenship, 673 F.2d 942 (7th Cir.1982) and Baker v. Fleet Maintenance, Inc., 409 F.2d 551 (7th Cir.1969). But those cases simply insist that Section 301 enforcement run against an "employer” (as the statute itself reads), while this case inquires into the substantive content of that term. Indeed Baker, 409 F.2d at 554, as adhered to in Loss, 673 F.2d at 946, actually suggests the propriety of such an inquiry. Baker speaks not only of "a party to the collective bargaining agreement” but also to "participation in the collective bargaining agreement.” Essentially the "single employer” and "alter ego” contentions advanced by Local 705 are that the corporations that have not put pen to paper and signed the CBA are nonetheless participants in it under all the circumstances.

      . This opinion will treat with Count I at length before turning to Count II, which requires much shorter discussion.

      . Pratt-Farnsworth, 690 F.2d at 515-16 n. 11 did acknowledge the doctrine of primary jurisdiction, under which a court with jurisdiction over a dispute may nevertheless defer that issue to an administrative agency with special expertise and a special stake in the issues. Because the parties had not raised that issue, Pratt-Farnsworth declined to decide whether it should apply that doctrine.


source: Caselaw Access Project

author: GONZALEZ, District Judge.

license: Public Domain

text:
    Selma BOYD, Plaintiff, v. MERRILL LYNCH, PIERCE, FENNER & SMITH, INC. and James B. Davis, Defendants.
    No. 84-6735-CIV.
    United States District Court, S.D. Florida, N.D.
    July 25, 1985.
    Russell Forkey, Ft. Lauderdale, Fla., for plaintiff.
    Patricia Cowart, Miami, Fla., for defendants.
   ORDER

GONZALEZ, District Judge.

On June 18, 1985, 611 F.Supp. 218, the court denied defendants’ motion to dismiss the amended complaint, and reserved ruling on defendants’ motion to compel arbitration pending the submission of documentary evidence by the parties regarding fraudulent inducement, unconscionability or lack of mutuality of the arbitration agreement, (docket #34) The court instructed plaintiff to file any additional affidavits or other proof in support of its position with regard to arbitration, and then accorded defendants time to file a legal response of their own.

Plaintiff and her physician subsequently filed affidavits (docket # 35), whereupon defendants moved for a rehearing of the June 18th order and also filed their legal response as required by that order (docket #36).

Defendants argue in their motion for rehearing that the court need not entertain additional evidence because the issues of fraudulent inducement, unconscionability and lack of mutuality should be determined by the arbitrator. The defendants are of course correct to the extent that any of these issues do not go to the validity of the arbitration clause. The law is reasonably clear, however, that in reviewing a motion to compel arbitration, a trial court must distinguish between the validity of the overall agreement and the arbitration provision.

The Fifth Circuit recognized this distinction in Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Haydu, 637 F.2d 391 (5th Cir.1981). The plaintiff there argued that the district court denied her due process when it ordered arbitration of the securities claims despite plaintiffs allegations that the customer agreement was unconscionable and that she had signed it under duress. The court of appeals rejected plaintiffs argument, reasoning that “[h]er claims regarding duress and unconscionability are ones that, in the event of arbitration, would be decided by an arbitrator, not the district court, since they go to the formation of the entire contract rather than to the issue of misrepresentation in the signing of the arbitration agreement.” Id. at 398 (citing Prima Paint Corp. v. Flood & Conklin, 388 U.S. 395, 406, 87 S.Ct. 1801, 1807, 18 L.Ed.2d 1270 (1967)) (e.s.). Footnote 11 of the court’s decision is equally revealing:

[Plaintiffs] allegations that she signed the stock option agreements under circumstances of coercion, confusion, undue influence and duress are related to her reasons for signing the contract as a whole, but are not directly related to the signing of the arbitration clauses per se.

637 F.2d at 398 n. 11 (emphasis added). See also Wick v. Atlantic Marine, Inc., 605 F.2d 166, 168 (5th Cir.1979) (“If, in fact, the arbitration clause was induced by fraud, there can be no arbitration____”).

True to this legal precept, the court’s June 18th order offered plaintiff an opportunity to demonstrate fraud in the inducement of the arbitration clause. Plaintiff introduces her own affidavit along with that of her physician in support of her claim that defendants fraudulently induced her into agreeing to the arbitration provision. See Plaintiff’s Affidavits, Appendix A, attached. After reviewing those affidavits, the court finds that they fail to state a claim for fraudulent inducement.

The gravamen of a fraudulent inducement claim is that the person on whom one relies causes another to consent to a contract or a particular provision therein by some affirmative act of deceit. That deceit may take the form of material misrepresentations of fact with respect to the subject provision, or failure to state facts whose omission makes the statements made misleading.

Plaintiff does not allege that defendants made any misrepresentations of fact with respect to the arbitration clause. Rather, she asserts that defendants omitted to tell her about the existence and effect of the arbitration provision. Viewed in isolation, this omission does not rise to the level of fraudulent inducement, because each party to a contract bears responsibility for inquiring about any provision not understood pri- or to executing the agreement. Fraudulent inducement requires by definition that one party induce another to do something or forebear from doing something. A party’s failure to explain a contractual provision to another does not invalidate the clause unless the relying party can demonstrate that the other’s silence is misleading in view of his statements and actions.

Plaintiff’s proofs, however, cannot be viewed “in isolation,” for her affidavits suggest that she could not have inquired about the arbitration clause, or was tricked into agreeing to its inclusion in the account agreement, because she “was taking certain hypnotic drug(s) for chronic insomnia.” These drugs, explains plaintiff’s physician could possibly have impaired her memory, caused her confusion, and enabled others to easily manipulate or induce her to commit an act since her inhibitions were reduced. Despite plaintiff’s condition, however, she offers not a shred of evidence to prove that defendants knew or should have known of her condition. Plaintiff also fails to allege or provide affidavits to prove that defendants failure to explain the arbitration clause was misleading in view of defendants other statements about the account agreement. There is, therefore, no reason to believe that defendants had a duty to explain the account agreement chapter and verse.

The court’s interpretation of the facts herein is consistent with general legal principles. One’s failure to read a contract before signing it does not render the instrument unenforceable unless the complaining party can demonstrate that he either is prevented from reading the document, or is induced by statements of the other party to refrain from reading it. See Allied Van Lines v. Bratton, 351 So.2d 344, 347-48 (Fla.1977); All Florida Surety Co. v. Coker, 88 So.2d 508, 510-11 (Fla.1956); Alejano v. Hartford Accident & Indemnity Co., 378 So.2d 104, 105 (Fla. 3rd Dist.Ct.App.1979).

In the final analysis, plaintiff’s failure to read the arbitration clause was not due to defendants’ misrepresentations. There simply is no evidence to support that position. The court is left with a customer who did not examine the arbitration clause because she did not want to or did not know better. Under these circumstances, the plaintiff cannot be heard to complain about the arbitration provision. The law is clear that a party cannot be excused from a contract that she has signed simply because she failed to read or understand its terms by her own doing. See St. Petersburg Bank Trust & Co. v. Boutin, 445 F.2d 1028, 1032 (5th Cir.1971). What contracts could withstand judicial scrutiny if that were not the standard?

The Fifth Circuit confirmed this view in Smoky Greenhaw Cotton Co. v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 720 F.2d 1446 (5th Cir.1983). The plaintiff there was a Merrill Lynch customer who sued the brokerage house and one of its agents for violations of the securities laws. The district court subsequently ordered arbitration, and plaintiff appealed, arguing, inter alia, that arbitration was not available because a Merrill Lynch representative fraudulently induced Greenhaw to sign the arbitration agreement. The appellate court categorically rejected plaintiff’s argument.

[Greenhaw’s] argument is spurious. [The company] asserts that Merrill Lynch marked with an “X” the line on which to sign this agreement, thus preventing Greenhaw from discovering that the arbitration agreement was voluntary and was not a condition of opening a commodity account with Merrill Lynch.
... If Greenhaw signed the arbitration agreement without reading it, that careless act does not make the agreement any less binding. Merrill Lynch’s act of placing an “X” next to the place where the customer was to sign does not rise to the level of coercive conduct required to invalidate a contract.

Id. at 1450-51.

Two points about Smoky Greenhaw should be noted. First, although the court writes in terms of an “arbitration agreement,” when read in context it is clear that its discussion pertains to the arbitration clause. See 720 F.2d at 1450 n. 8 and accompanying text. Second, the court emphasized that the arbitration clause conformed with federal regulations and was sufficiently obvious as to put a reader on notice of its existence and terms. The arbitration clause in this case, Appendix B, attached, like that in Smoky Greenhaw, passes regulatory muster and also is sufficiently conspicuous as to put a customer on notice of its content.

Based on the foregoing, the court concludes that defendants did not fraudulently induce plaintiff into agreeing to the arbitration clause. Accordingly, it is ORDERED AND ADJUDGED that Counts II (§ 10(b) of Exchange Act) and III (breach of fiduciary duty) be subject to arbitration immediately. The court requests that the parties advise it whether they intend to litigate simultaneously Count I (§ 12(2) of the Securities Act) or stay that aspect of this proceeding pending the outcome of the arbitration.

APPENDIX A

AFFIDAVIT

BEFORE ME, the undersigned authority personally appeared SELMA BOYD, who after being duly sworn deposes and states as follows:

1. I am the Plaintiff in the above-styled cause of action.

2. I opened the account with the Defendant, MERRILL LYNCH, at the recommendation of my bank manager at Flagship Bank, with whom I had established a long-term relationship of trust and confidence. At his suggestion, I contacted the Defendant, DAVIS, who subsequently became my account executive. I relied upon the expertise of the Defendant, DAVIS, and trusted him especially since he was recommended to me by my bank manager.

3. Prior to signing the subject account Agreement, the Defendant, DAVIS, individually and as an employee of the Defendant, MERRILL LYNCH, did not advise me that said agreement contained a “boiler plate” arbitration clause.

4. At the time that I executed the account Agreement, I merely believed that I was signing a document which enabled me to open an account with the defendant, MERRILL LYNCH.

5. The Defendant, DAVIS, individually and as an employee of the Defendant, MERRILL LYNCH, also did not advise me that by consenting to submit all controversies to arbitration, I was waiving: (1) all legal rights to resolve any dispute or controversy arising out of my account through trial by jury; (2) all legal rights to obtain punitive damages in the event that any dispute was submitted to arbitration; and (3) my legal rights to appeal and to conduct extensive discovery since these rights are severely limited in an arbitration proceeding.

6. The Defendant, DAVIS, individually and as an employee of the Defendant MERRILL LYNCH, did not provide me with any literature regarding arbitration and waiver of judicial remedies either prior to or subsequent to obtaining my signature on the account Agreement.

7. I would not have signed the form account Agreement had I known the true nature and content of the arbitration provision contained in that agreement.

8. I did not receive any additional consideration or benefit from the Defendants in exchange for my signature and assent to the arbitration clause.

FURTHER AFFIANT SAYETH NOT.

SELMA BOYD

SWORN TO and subscribed before me this 27 day of June, 1985.

AFFIDAVIT

BEFORE ME, the undersigned authority personally appeared DR. KENNETH BLAZE, who after being duly sworn deposes and states as follows:

1. I was the Plaintiff, SELMA BOYD’S, physician during 1979 to 1984.

2. Throughout said time period, the Plaintiff was taking certain hypnotic drug(s) for chronic insomnia.

3. The possible side-effects of the medication, which the Plaintiff was taking, were impairment of memory and confusion. In that state, the Plaintiff could have been easily manipulated or induced to commit an act since her inhibitions were reduced.

FURTHER AFFIANT SAYETH NOT.

APPENDIX B

APPENDIX C

§ 240.15c2-2 Disclosure regarding recourse to the courts notwithstanding arbitration clauses in broker-dealer customer agreements.

(a) It shall be a fraudulent, manipulative or deceptive act or practice for a broker or dealer to enter into an agreement with any public customer which purports to bind the customer to the arbitration of future disputes between them arising under the Federal securities laws, or to have in effect such an agreement, pursuant to which it effects transactions with or for a customer.

(b) Notwithstanding paragraph (a) of this section, until December 31, 1984 a broker or dealer may use existing supplies of customer agreement forms if all such agreements entered into with public customers after December 28, 1983 are accompanied by the separate written disclosure:

Although you have signed a customer agreement form with FIRM NAME that states that you are required to arbitrate any future dispute or controversy that may arise between us, you are not required to arbitrate any dispute or controversy that arises under the federal securities laws but instead can resolve any such dispute or controversy through litigation in the courts.

(c) A broker or dealer shall not be in violation of paragraph (a) of this section with respect to any agreement entered into with a public customer prior to December 28, 1983 if:

(1) Any such public customer for whom the broker or dealer has after July 1, 1983 (i) carried a free credit balance, or (ii) held securities for safekeeping or as collateral, or (iii) effected a securities transaction is sent, no later than December 31, 1984, the disclosure prescribed in paragraph (b) of this section; or

(2) Any other public customer is sent upon the completion of his next transaction pursuant to such agreement, the disclosure prescribed in paragraph (b) of this section. (Secs. 2,10,15, 23 and 29 thereof (15 U.S.C. 78b, 78j, 78o, 78w and 78cc) [48 FR 53406, Nov. 28, 1983]

      . Defendant is correct that plaintiff cannot prevent arbitration by demonstrating lack of mutuality or unconscionability of the account agreement. Prima Paint Corp. and its progeny, including Mercury Construction, all recognize that the decision whether a contract is invalid due to lack of mutuality or unconscionability is to be made by the arbitrator and not the court. Defendant’s motion for rehearing on the June 18th order is thus granted to the extent indicated above. See Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Haydu, 637 F.2d 391, 398 (5th Cir.1981).

      . The account agreement containing the arbitration clause does not violate 17 C.F.R. § 240.-15c2-2, Appendix C, attached, because it was executed before December 28, 1983 and is otherwise consistent with that section.

      . The arbitration clauses are not hidden in the documents; indeed, they are but one of only ten or twelve short paragraphs in the agreements.


author: GENE CARTER, District Judge.

text:
    Richard MILLER and Scott Hilliard, Plaintiffs, v. UNITED STATES of America, Defendant.
    Civ. No. 83-0037-P.
    United States District Court, D. Maine.
    July 25, 1985.

      Martin R. Johnson, Lang, Johnson, Huston & Boutin, Portland, Me., for plaintiffs.
    Paula D. Silsby, Asst. U.S. Atty., Richard S. Cohen, U.S. Atty., Portland, Me., for defendant.
   FINDINGS OF FACT, CONCLUSIONS OF LAW & OPINION

GENE CARTER, District Judge.

I. FINDINGS OF FACT

A. The Voyage of ENDURANCE

Richard Miller and Scott Hilliard became friends while attending college together in the State of Washington. They both enjoyed sailing on the waters of Puget Sound. Miller had spent four years in the Navy on ships, but had no navigational experience, nor any experience in open ocean sailing. The younger Hilliard had taken a correspondence course in celestial navigation. In September of 1977, he crewed on a forty-one foot sailboat that made the crossing from Hawaii to the continental United States. At some time in 1979, the two young men resolved to sail a boat from the northeastern part of the United States southward, through the Panama Canal, then north again to their home in the northwest.

Hilliard and Miller worked for two years to save money for the voyage and, in February of 1981, they found the boat they hoped would take them around North America. ENDURANCE was a thirty-three foot, wood-hulled yacht, built in Germany in 1926. ENDURANCE’S prior owner was keeping her in the water at a marina in York Harbor when Hilliard and Miller first saw her in February of 1981. They paid $15,500 in cash for the boat. Miller and Hilliard spent the next six weeks making repairs and improvements to prepare ENDURANCE for their voyage. They set sail on March 30, 1981.

Early in their voyage, they discovered a leak in their fresh water tank. They stopped a fishing boat to replenish their fresh water supply and to ascertain their precise location. They had no modern navigational devices; Hilliard navigated by the heavenly bodies and dead reckoning. They exhausted their water supply on April 14, 1981, while anchored off Oracoke Island, North Carolina. Rather than making a landfall immediately to obtain water, however, they continued to sail in a southerly direction.

On April 15, sailing in ten- to twelve-foot seas blown up by a northeasterly wind, Hilliard and Miller lowered the sails on ENDURANCE and proceeded under “bare poles.” They averaged about three knots with the wind pushing only the masts, rigging and hull surfaces of the vessel. At dusk, Miller attempted to signal a vessel in order to obtain water and a position fix. The boat still sailed under bare poles; her running lights were shut off. Miller flashed a spotlight intermittently at a passing vessel, which made no response. It became darker. The winds blew at about twenty-five knots and seas were six to eight feet. Miller sighted a second vessel and continued to signal. The vessel turned toward ENDURANCE, and Miller pulled out the empty water jugs and set them in the cockpit.

The following is Hilliard’s and Miller’s version of what happened when they made contact with the ship.

The ship set a motor whaleboat in the water, which motored over to ENDURANCE. An officer aboard the whaleboat asked, “What do you want?” Miller responded, “We would like water and a position fix.” The officer then asked if anyone on board ENDURANCE needed medical attention and whether there were any mechanical difficulties. Miller responded in the negative to both questions. After speaking by radio to someone aboard the ship, the officer told Miller that he was to take ENDURANCE into tow. Neither Miller nor Hilliard made any response. One of the men on the whaleboat tossed a line to Hilliard at the bow of ENDURANCE. Hilliard fastened the line to ENDURANCE, leaving about ten feet of scope.

B. Aboard the GUADALCANAL

At approximately 6:45 p.m. on April 15, 1981, the U.S.S. GUADALCANAL, a 602-foot Navy amphibious landing vessel, steamed northeasterly at a speed of twelve knots approximately 24.5 miles off Cape Lookout, North Carolina. The weather was clear. The wind blew from the northeast at twenty-six knots, and seas had a combined height of about six feet. The junior officer of the deck, Lieutenant J/G Jeffrey Wayne Immel, spotted a high-intensity light at an unknown distance. The light drifted to starboard. Lieutenant Immel could see no navigation lights. The light shone directly at the GUADALCANAL, and Lieutenant Immel had a feeling that there was a problem. He informed the officer of the deck, Lieutenant Alan Hynes. The light became intermittent and less intense.

The signal bridge flashed a searchlight at the boat, and it appeared to respond. The signal bridge reported that the boat appeared to be trying to. attract the attention of GUADALCANAL; it was identified as a small, two-masted sailboat. Lieutenant Hynes attempted to contact the sailboat by radio, but had no success.

Captain T.J. Johnson, the commanding officer of the GUADALCANAL, was having dinner with Navy guests when he was informed by the navigator that the bridge watch team had detected an intermittent white light coming from a small boat. Captain Johnson went to the bridge to take a look for himself. Deciding that the small boat might be in distress, Captain Johnson ordered the ship be turned to starboard, in the direction of the small craft. The light was still visible intermittently, but at longer intervals.

As the GUADALCANAL approached the small craft, it illuminated the sailboat with signal lamps from the signal bridge. Captain Johnson saw two persons aboard the boat, one on the bow and one amidships. No sails were rigged, and no other means of propulsion was discernible. Captain Johnson determined at that time that the two individuals were in distress and had to be rescued.

Captain Johnson ordered one of the ship’s two twent-six-foot motor whaleboats manned and dispatched to the sailboat. The whaleboat was set in the water under the command of Lieutenant Immel. Lieutenant Immel communicated with Captain Johnson by means of a hand-held “walkietalkie” radio. Lieutenant Immel was under orders to go out to the sailboat and find out what was needed. As the whaleboat came within thirty feet of the sailboat, Lieutenant Immel asked, “Are you okay?” The response was, “Yes.” Lieutenant Immel was directed to find out the names of the men on the sailboat, and he did so. He asked how many were aboard and where they were from. Lieutenant Immel directed the whaleboat to come around to the port side of the sailboat. The sailboat crew asked whether there were any fenders aboard the whaleboat to protect the hull of the sailboat from pounding against the whaleboat. There were none, but Lieutenant Immel directed his crew to use their hands to fend off the sailboat.

Lieutenant Immel then asked, “What can we do for you?” The reply Lieutenant Immel heard was that the crew of ENDURANCE had been withoút food and water for three days. Lieutenant Immel reported this response to the Captain. One of the men aboard the sailboat then asked what their location was, and Lieutenant Immel obtained a position fix from the ship by radio. Lieutenant Immel asked if they had a light to help in maneuvering; he was told that the batteries aboard ENDURANCE had been exhausted from attempts to signal GUADALCANAL. Lieutenant Immel also recalls being told that ENDURANCE’S sails were damaged and could not be raised for repair due to the wind.

Upon hearing that the sailboat crew had been without food and water for three days and was uncertain of its location, Captain Johnson decided he was in a “life salvage” situation and that he had to rescue them. He believed the occupants of the sailboat were in extremis. He directed Lieutenant Immel to tow the yacht to the ship. He intended to take the crew off, secure the yacht to the ship, then call the Coast Guard to determine what to do next. He was aware that the wind was setting GUADALCANAL down on the sailboat.

C. The Rescue

An unfortunate series of events followed. The recollections of the participants differ in some details, but there are no significant material discrepancies.

After taking the stern line from the whaleboat, Hilliard secured it to the bow of ENDURANCE. Within moments after the line was secured, as the stern of the whaleboat rose up on a swell, the short, taut line snapped off the bowsprit on ENDURANCE. The whaleboat then proceeded into the lee created by the GUADALCANAL, towing ENDURANCE. From each side of the GUADALCANAL protrude aircraft elevators, which extend thirty-four feet from the hull of the ship, and catwalks. As the whaleboat approached the starboard side of the GUADALCANAL with the sailboat in tow, Hilliard and Lieutenant Immel realized that the yacht’s forty-four-foot mainmast was in danger of striking the elevator. The whaleboat pulled away from the ship, but did so too late. The mainmast struck the elevator, and the top six feet were snapped off.

After ENDURANCE was pulled clear of the elevator, Miller asked the crew of the whaleboat to tow ENDURANCE away from the ship, cut it adrift, and call the Coast Guard. He recalls making such a request two or three times, but it was “never heeded or responded to.”

Captain Johnson then decided to make a second attempt to secure the sailboat to GUADALCANAL. He ordered that a line be passed down from the starboard elevator to the whaleboat so that ENDURANCE could be secured and its crew removed. Captain Johnson believed that the elevator was the only place on the GUADALCANAL to which a small craft could be secured.

On the second pass, the sailboat became lodged in the steel structure supporting the elevator. The elevator snapped off all but four feet of the mainmast. Hilliard quickly secured a line passed down from the elevator, leaped to a Jacob’s ladder hanging down the side of GUADALCANAL and climbed aboard in order to try to talk to someone.

Meanwhile, the ship drifted down onto the yacht. As the ship rolled back and forth in the seas, the lower part of the elevator pounded the deck of ENDURANCE. Miller, still aboard ENDURANCE, lay flat in the cockpit to avoid being struck by the elevator. Water gushed from an “educator” in the hull of the ship onto the deck of ENDURANCE, threatening to fill her with water. The sailboat then floated free of the elevator. The whaleboat approached ENDURANCE and took Miller aboard.

The whaleboat again approached ENDURANCE to fasten a line and attempt a third pass at GUADALCANAL. A crew member aboard the whaleboat attached a line to the base of what was remaining of the mainmast. They towed the sailboat away from the GUADALCANAL and around to the elevator. They attached the towline from the mast to a line dropped down from the elevator. The stub of the mainmast pulled free of its step, and it and all the boat’s rigging, secured to ENDURANCE only by the stays, fell into the water alongside. The whaleboat, its crew, and Miller were then hoisted aboard GUADALCANAL. At some point during the second or third pass, ENDURANCE also lost her mizzenmast.

By this time, Captain Johnson had decided that using GUADALCANAL to tow ENDURANCE was not a good idea, but he was reluctant to leave the sailboat drifting in a heavily-trafficked sea-lane. With the line from GUADALCANAL still apparently secured to the stub of the mainmast, which was in turn secured to ENDURANCE by its fallen rigging, the crew of GUADAL CANAL worked ENDURANCE around toward the stern of GUADALCANAL. The ship was started forward, and ENDURANCE was towed for about twenty-eight minutes before the tow was lost.

GUADALCANAL then turned about to find the sailboat and took her close aboard on the GUADALCANAL’S port side. Captain Johnson’s intention was to drop the port whaleboat to retrieve the sailboat. Before he had a chance to do so, the sailboat drifted under the fantail of GUADAL CANAL, the ship came up, then down again, and crushed ENDURANCE. ENDURANCE splintered into small pieces and sunk immediately.

D. The Legal Claims

Miller and Hilliard brought this action against the United States under 46 U.S.C. § 781 to recover damages for the loss of their boat and personal property. Plaintiffs allege that the Navy was negligent, first, in undertaking to rescue them when they neither asked for rescue nor needed it, and, second, by the manner in which the crew of GUADALCANAL attempted to bring ENDURANCE alongside GUADAL CANAL and to secure her to the larger Navy vessel. The action was tried to the Court, without jury, on June 10 and 11, 1985.

E. Disputed Facts

Plaintiffs contend that the crew of GUADALCANAL never should have undertaken the rescue. They insist that they had been out of water for only one day and had ample food. Miller asked only for water, a navigational fix, and that a message be sent to their families.

Lieutenant Immel testified that he was told upon first contact with the sailboat that the crew had been out of food and water for three days. He relayed this message to Captain Johnson, who confirmed in his testimony that this was the message he received from the whaleboat. Any physical evidence of whether Miller and Hilliard had any food remaining has been lost at sea. The Court finds the testimony of Hilliard and Miller, however, to be credible. In a statement prepared just six days after the incident, before there was any indication that he was contemplating litigation, Hilliard wrote:

My feelings after-the-fact? Hmmmmmm ... We did signal for assistance. We were not disabled, in fact, we were making a good course for our destination. We did need water and a position fix is always helpful. We knew we were close to our destination but, not knowing the whims of the wind, thought it best to take on some water. I have not read any reports or news articles concerning the incident. That which I have gathered from others who have related such accounts speak of the ENDURANCE as “disabled” and that we had been'without food, fuel and water for three days. We had plenty of food and fuel and had been out of water for a day.

(Emphasis added.) Defendant’s Exhibit G. This statement, given just shortly after the incident, strongly corroborates the testimony of Hilliard and Miller. Their version is also supported by the fact that, when they encountered GUADALCANAL, their empty water bottles were in the cockpit of the boat. These are clearly visible in a photograph admitted as Plaintiffs’ Exhibit 11. The photograph also demonstrates that the cockpit of the vessel is small; it is unlikely that its crew members would have cluttered it with several gallon jugs unless they intended to put them to imminent use. The presence of these jugs supports the Plaintiffs’ testimony that they intended to obtain water and a navigational fix and to be on their way.

The Court finds, therefore, that neither Hilliard nor Miller ever stated that they had been out of food and water for three days. Lieutenant Immel obtained a mistaken understanding of the situation of ENDURANCE and her crew, and he relayed this incorrect information to Captain Johnson, who relied upon it.

It would be difficult to assign fault for this error in communications to one party or the other. It is not necessary to do so, however, in order to determine whether Captain Johnson acted reasonably in determining that Hilliard and Miller required rescue. Even assuming that Captain Johnson had known that Miller and Hilliard had food and had been out of water for only one day, under all the circumstances, he acted reasonably in determining that he should take them aboard GUADALCANAL.

It was Miller and Hilliard who first suggested that they were in distress by attempting to signal GUADALCANAL. They had no running lights on, a violation of international regulations. Their sails were down. As far as Captain Johnson could tell, they had no apparent means of propulsion. They had been out of water for a day, and they asked where they were located. When offered a tow, they did not refuse it. These circumstances, objectively viewed, would support a reasonable officer in believing that the sailboat was lost, without water, and perhaps, without any means of propulsion. Captain Johnson acted reasonably in the existing conditions of sea and wind when he determined that rescue of the crew was necessary.

II. CONCLUSIONS OF LAW

A. The Applicable Law

When the Coast Guard volunteers to render assistance to a distressed vessel, it may be held liable in an action for negligence if it fails to proceed with reasonable care and if that lack of care is the proximate cause of injury to persons or property. United States v. Sandra & Dennis Fishing Corp., 372 F.2d 189 (1st Cir.1967); Wellington Transportation Co. v. United States, 481 F.2d 108, 110-11 (6th Cir.1973); see Indian Towing Co., Inc. v. United States, 350 U.S. 61, 69, 76 S.Ct. 122, 126-27, 100 L.Ed. 48 (1955). There is no suggestion here that the Navy should be held to any different standard of care than the Coast Guard. The United States argues, however, that negligence in the immediate course of a salvage service should not impose liability on the salvor unless the negligence is so glaring that it manifests a callous disregard for the lives or property being rescued.

The First Circuit expressly rejected this position in the case of United States v. Sandra & Dennis Fishing Corp., supra. The Court stated:

In seeking exoneration, the government makes much of the principle that a salvor who is a “good Samaritan” is not held to ordinary standards of care. Whatever may be the limits of this principle with respect to volunteered salvage, we believe that if the Coast Guard accepts a mission it should conduct its share of the proceedings with acceptable seamanship. We refuse to take the government’s view, and be party to adding to the honored motto, “Semper Paratas,” [Always Ready] the words “Interdum Prudens” [Sometimes Careful].

372 F.2d at 197 (citations omitted). There being no principled ground to distinguish the Navy from the Coast Guard under these circumstances, and no suggestion that the Court should do so, it is clear that the Navy had a duty to undertake the rescue in this case with reasonable care.

The Court has found that Captain Johnson acted reasonably in determining that the crew of ENDURANCE required rescue. The next question to be determined is whether the crew of the GUADALCANAL exercised reasonable care with respect to the manner in which they undertook the rescue. There is near unanimity of opinion among witnesses for both parties that the decision to attempt to secure the small sailboat to the 602-foot Navy ship was ill-advised. James Soland, a licensed naval architect and marine engineer who testified as an expert for the Plaintiffs, testified that what the Navy did was “foolhardy to say the least.” He noted that the GUADALCANAL, with the large surface area it presents to the wind, would drift considerably faster than would the much smaller ENDURANCE, and thus would be likely to drift down upon the ENDURANCE. He testified that the mere act of bringing the smaller boat alongside a ship of that size was likely to cause damage to the smaller boat and that the risk of damage was compounded by the presence of the elevator and catwalk overhanging the starboard side of the ship. He also testified that attempting to tow the sailboat with the rigging in the water was poor seamanship. The prudent course of action, Soland testified, would have been to remove the crew of ENDURANCE to the whaleboat and to have left the ENDURANCE adrift, to be salvaged by a more appropriate vessel.

Norman DeWeir, a second expert testifying for the Plaintiffs, agreed with Soland. He said, “I would never attempt to bring a small boat against an aircraft carrier.”

Testifying for the United States, Captain Johnson forthrightly admitted that he would do things differently if he had another opportunity. He said he now would take the crew off the sailboat and would not attempt to tow it. He would leave the boat adrift, keep it in sight, and wait for the Coast Guard to arrive.

The Navy’s own expert delivered the knockout blow to the Navy’s claim that it acted prudently. Joseph Madeo, Jr., an independent consultant with vast experience in marine salvage, testified that it was not prudent seamanship to bring the yacht alongside GUADALCANAL. He noted that the lives were rescued, but at a considerable risk, and that the property could have been saved by leaving the boat at sea.

All of this testimony clearly proves that it was imprudent to even attempt to bring the ENDURANCE alongside the GUADALCANAL. Although further errors in judgment were made, it is clear that this initial error in judgment, uncorrected even after repeated attempts failed, was a proximate cause of the damage and subsequent destruction of ENDURANCE.

That the decision to undertake a rescue was a reasonable one is no defense to this action for property damage. All expert testimony and facts adduced at trial prove that it was entirely unnecessary to attempt to secure ENDURANCE to the GUADALCANAL in order to save its crew. In fact, it was demonstrated at trial that the method employed by the Navy actually increased the risk of injury both to the crew of ENDURANCE and to the crew of the motor whaleboat. In this case, none of the considerations giving rise to the life rescue justified the conduct which damaged the sailboat.

B. Contributory Negligence

In actions under 46 U.S.C. § 781, fault is to be apportioned among the parties in proportion to the comparative degree of their fault. United States v. Reliable Transfer Co., 421 U.S. 397, 411, 95 S.Ct. 1708, 1715, 44 L.Ed.2d 251 (1975). Plaintiffs had a duty to watch out for the safety of their vessel and themselves. United States v. Sandra & Dennis Fishing Corp., supra, 372 F.2d at 198; MBL, Inc. v. United States of America, Civil No. 78-52P (D.Me. July 28, 1981) (unpublished Opinion and Order of Timbers, S.J.).

In this case, the Plaintiffs passively acquiesced in the first instance to the Navy’s conduct. They had an opportunity to inquire as to what the Navy’s plan was when it connected a towline to their boat. They testified that they assumed that they were going to be towed into the lee of GUADALCANAL in order to effect a water transfer. Even if this assumption is reasonable, still they made no protest when then were towed in close to GUADALCANAL. It was their duty, and it was in their interest, to look to the safety of their vessel. They should have attempted to suggest to the Navy that it was engaging in a procedure contrary to prudent seamanship. See Basic Boats, Inc. v. United States, 352 F.Supp. 44 (E.D.Va.1972); MBL, Inc., supra, at 14.

Miller testified, however, that after the top six feet of the mast were broken off during the first pass, he asked the crew of the whaleboat, “two or three times,” to tow ENDURANCE clear of the ship, set it adrift and call the Coast Guard. He received no response. Hilliard testified that he heard Miller make such a request. Lieutenant Immel was not asked during direct or cross-examination whether he heard Miller’s request. The Court finds that Miller did in fact ask that ENDURANCE be set adrift and thus made some attempt to watch out for the safety of his boat. The Plaintiffs did not, however, make any further protests to the Navy’s actions, and they did not follow up to ensure that Miller’s requests were heard. In addition, in a statement given six days after the incident, Hilliard admitted:

From the very outset, both Dick and I knew better than to [tow] a rigged vessel alongside a ship, especially to windward. We should have refused the tow and offered a better suggestion.

Defendant’s Exhibit G.

The Court concludes that the Plaintiffs were partially at fault for the loss of their vessel because they failed to protest the Navy’s actions initially and made no further protest after Miller’s requests to be set adrift were either unheeded or unheard. Plaintiffs missed several opportunities to cut short the misguided salvage attempt and thereby prevent the loss of their boat.

One method of apportioning fault in this case would be to attempt to itemize negligent acts or failures to act of each party, assign a percentage of the causal fault to each act, then determine the total proportional fault of each party. Such an analysis, however, would be, to a certain degree, specious. The primary cause of the series of blunders that occurred was ignorance of the consequences of attempting to secure a small sailboat to a large ship in the open ocean under adverse weather conditions. This ignorance was shared by both parties. The Court finds the Navy’s fault to be significantly greater, however, because, first, Miller did at one point attempt to stop the salvage attempt and, second, Miller and Hilliard had no opportunity to take part in the decision to attempt to secure the ENDURANCE to the GUADALCANAL that ultimately led to her sinking. Accordingly, the Court finds the causal fault of the Navy to be 75% and that of the Plaintiffs to be 25%.

C. Damages

The measure of damages for the total loss of a vessel is fair market value, defined as “the sum which, considering all the circumstances, probably could have been obtained for her on the date of the collision; that is, the sum that in all probability would result from fair negotiations between an owner willing to sell and a purchaser desiring to buy.” Standard Oil Co. v. South Pacific Co., 268 U.S. 146, 155-56, 45 S.Ct. 465, 466-67, 69 L.Ed. 890 (1925). The best evidence of fair market value is the price obtained for similar vessels on the open market at the time of the loss. Texas Co. v. R. O’Brien & Co., 242 F.2d 526-27 (1st Cir.1957). Courts not furnished with evidence of contemporaneous sales may rely upon the cost of the vessel to the owner, plus the cost of modifications — both costs depreciated. See Greer v. United States, 505 F.2d 90, 93 (5th Cir.1974); Texas Company v. R. O’Brien & Co., 242 F.2d 526, 527 (1st Cir.1957).

Plaintiffs paid fifteen thousand five hundred dollars ($15,500) for ENDURANCE. They testified that they spent six weeks working on the boat to prepare it for the voyage. As a matter of law, compensation for their labor may be a proper element of damages. See Greer, supra, 505 F.2d at 93. But they presented no specific evidence as to the amount, if any, that the value of the boat was increased by their work. Plaintiffs’ counsel suggested that they should be compensated for their labor at the rate of seven dollars and fifty cents ($7.50) per hour. Plaintiffs offered no evidence as to the reasonableness of this figure, either as a going market rate for such labor or as properly reflecting the skill and efficiency of the Plaintiffs. At trial, Plaintiffs called Jeffrey Edwards, who was General Manager at York Harbor Marina at the time Plaintiffs worked on the boat at that marina. Plaintiffs elicited no testimony from him, however, as to the market rate for the labor they performed or as to the market value of improvements they made. The Court, therefore, does not have an adequate basis to award damages for the work performed by Plaintiffs. The Court finds the market value of the boat at the time of its sinking to be fifteen thousand five hundred dollars ($15,500).

Plaintiffs also lost the property they had stowed aboard ENDURANCE. Plaintiffs are entitled to recover the market value of the property they lost. See Chevron Chemical Co. v. Streett Industries, Inc., 534 F.Supp. 801 (D.Mo.1982). Plaintiffs compiled a list of all items lost, and they alleged that the cost of replacing these items was seven thousand three hundred dollars and one cent ($7,300.01). Since most, if not all, of these items were of a used condition, this figure must be reduced by an amount reflecting the reduction in market value occasioned by their prior use. No such evidence of the present market value of these items was offered. The Court accordingly finds that Plaintiffs have failed to meet their burden of proving the market value of their personal property, and can recover nothing for its loss.

The damages in this case total fifteen thousand five hundred dollars ($15,500.00). Based on the foregoing, Plaintiffs are entitled to recover eleven thousand six hundred twenty-five dollars ($11,625.00).

Accordingly, it is ORDERED that judgment be entered in Plaintiffs’ favor in the amount of eleven thousand six hundred twenty-five dollars ($11,625.00).

So ORDERED.

      . This section sets forth the Navy's version of the events leading up to the failed rescue of the sailboat.

      . The term used by the witnesses but more likely an "eductor."


text:
    UNITED STATES of America, Plaintiff, v. Bayard C. DAVIS, Defendant.
    No. 84 C 7535.
    United States District Court, N.D. Illinois, E.D.
    July 25, 1985.
    D. Patrick Mullarkey, Marilla Lane Ross, U.S. Dept, of Justice, Tax Div., Washington, D.C., Mary Rigdon, Asst. U.S. Atty., Chicago, for plaintiff.
    Michael J. Higgins, Stone, McGuire & Benjamin, Chicago, for defendant.
   MEMORANDUM OPINION AND ORDER

SHADUR, District Judge.

Bayard Davis (“Davis”), president and treasurer of Sensor Dynamics (“Sensor”), has moved to dismiss the First Amended Complaint (the “Amended Complaint”) filed by the United States in this withholding tax penalty assessment action under 26 U.S.C. § 6672(a) (all sections of Title 26, the Internal Revenue Code (“Code”), will be cited “Section — ”). For the reasons stated in this memorandum opinion and order, Davis’ motion is denied.

Facts

During each of seven calendar quarters between 1973 and 1977, Sensor withheld taxes from its employees’ wages and failed to deposit those funds with the Internal Revenue Service (“IRS”). Because the IRS viewed Davis as a “person” responsible for paying over those taxes under Section 6672(a), it wrote him December 14, 1977 proposing to assess against him individually the 100% statutory penalty — an amount equal to Sensor’s withholding tax liability (Ex. 1 to Declaration of Marilla Lane Ross) (App. A to this Opinion). That proposal of assessment informed Davis:

1. Sensor was delinquent in taxes in specified amounts for seven specified quarters, the last of which had ended September 30, 1977.
2. Unpaid taxes for those quarters gave rise to an aggregate penalty of $86,056.19, the amount proposed to be assessed against Davis.

IRS records show Davis received the letter and discussed it with IRS personnel (Ross Ex. 2). On September 4, 1978 the IRS billed Davis for the amount of the proposed assessment for all seven quarters. Exactly what form that billing took, a matter on which the current motion turns, is no longer really ascertainable — a subject discussed later in this opinion. On October 1, 1979 the IRS assessed Davis for an additional quarter ended December 31, 1977. Davis made no payment on either assessment, and the United States filed this action August 31, 1984.

Paragraph 5 of the United States’ original Complaint (the “Complaint”) alleged:

5. A delegate of the Secretary of the Treasury made assessments against the defendant, Bayard C. Davis, as a responsible person of Sensor Dynamics, Incorporated, and gave notice and demand for payment of said assessments, for the taxable periods and for the amounts shown in the following table:
TYPE OF TAX
TAXABLE PERIOD ENDING
DATE OF ASSESSMENT AND NOTICE AND DEMAND
AMOUNT OF ASSESSMENT
UNPAID ASSESSED BALANCE
IRC §6672
09/30/77
09/04/78
$158,352.89
$158,352.89
IRC §6672
12/31/77
10/01/79
5,720.80
5,720.80

Davis’ Answer responded to that allegation as though it had covered only the single calendar quarters ended September 30, 1977 and December 31, 1977. That triggered the United States’ March 18, 1985 filing of the Amended Complaint, in which Paragraph 5(a) referred to each of the seven quarters embraced in the September 4, 1978 assessment and (b) stated a smaller aggregate assessment amount:

5. A delegate of the Secretary of the Treasury made assessments against the defendant, Bayard C. Davis, in the total amount of $86,056.19, as a responsible person of Sensor Dynamics, Inc. The taxable periods and dates of assessments and notice and demand for payment of said assessments, are set forth below:

Taxable Period Ending Date of Assessment & Notice and Demand Assessed Amount
09/30/73 09/04/78 $ 7,197.46
03/31/74 09/04/78 14,937.42
06/30/74 09/04/78 17,677.90
06/30/76 09/04/78 12,158.81
12/31/76 09/04/78 11,051.02
06/30/77 09/04/78 11,637.61
09/30/77 09/04/78 11,395.97
12/31/77 10/01/79 3,244.06
UNPAID ASSESSED BALANCE $89,300.25

It is undisputed that for each tax quarter included in the September 4, 1978 assessment the statute of limitations ran September 4, 1984 (Section 6502(a)(1)). Davis argues the first six quarters specified in Amended Complaint 115 are new claims barred by the statute of limitations. In response the United States urges the Complaint put Davis on notice of its claims for all eight quarters, so the Amended Complaint relates back under Fed.R.Civ.P. (“Rule”) 15(c) to the date of the original Complaint as merely a “clarification” of that Complaint.

Relation Back Under Rule 15(c)

Rule 15(c) provides in pertinent part: Whenever the claim or defense asserted in the amended pleading arose out of the conduct, transaction or occurrence set forth or attempted to be set forth in the original pleading, the amendment relates back to the date of the original pleading.

Staren v. American National Bank & Trust Co. of Chicago, 529 F.2d 1257, 1263 (7th Cir.1976) teaches amendments under Rule 15(c) should be allowed freely when a complaint has put the defendant on notice of the claim. Solo Cup Co. v. Paper Machinery Corp., 359 F.2d 754, 758 (7th Cir.1966) and 3 Moore, Moore’s Federal Practice ¶ 15.15[2], at 15-190 to -191 stress the defendant need be put on “fair notice” of only the “general fact situation” out of which the claim arises. 6 Wright & Miller, Federal Practice and Procedure: Civil § 1497, at 489-92 makes out the dividing line for limitations purposes:

When plaintiff attempts to allege an entirely different transaction by amendment, as, for example, the separate publication of a libelous statement or the breach of an independent contract, the new claim will be subject to the defense of statute of limitations.
On the other hand, amendments that merely correct technical deficiencies or expand or modify the facts alleged in the earlier pleading meet the Rule 15(c) test and will relate back. Thus, amendments that do no more than restate the original claim with greater particularity or amplify the details of the transaction alleged in the preceding pleading fall within Rule 15(c). But if the alteration of the original statement is so substantial that it cannot be said that defendant was given adequate notice of the conduct, transaction, or occurrence that forms the basis of the claim or defense, then the amendment will not relate back and will be time barred if the limitations period has expired.

Accordingly the Rule 15(c) analysis of the Amended Complaint must focus on the “transaction or occurrence” (or the plural version of those terms) giving rise to this lawsuit. And that is where Davis has gone astray: He focuses on the several quarterly assessments against Sensor as though they, and not the assessment against Davis, were the operative events triggering this action against Davis. But because this action seeks to collect the penalty assessment against Davis and not a direct tax liability against Sensor, the “transaction or occurrence” on which the present suit is based — and, in Rule 15 terms, out of which the claim arose — is the assessment against Davis rather than Sensor’s initial failure to pay taxes. See Section 6502(a).

That being the case, the manner in which Davis was assessed is therefore crucial. Had there been seven separate assessments against Davis, one for each of the seven quarters of Sensor’s delinquency, there would be at least a serious question whether the original Complaint put Davis on notice as to each of those “transactions.” After all, the $158,352.89 “amount of assessment” figure in the Complaint seems on its face arbitrary, bearing no immediately ascertainable relation to either the Sensor assessment for any single quarter or the $86,019.54 total Sensor assessment for all seven quarters. Given that uncertainty, the most relevant clue to what was being sued upon was the Complaint’s reference to “Taxable Period Ending 09/30/77.” And that phrase might reasonably be viewed in terms of the assessment against Davis:

1. If he had been separately assessed for each quarter of Sensor’s delinquency, the logical reading of “Taxable Period Ending 09/30/77” would be the calendar quarter ended that date. At least Davis could argue to that effect, though that would leave wholly unexplained the enormous disparity between the assessment for that quarter ($11,395.97) and the $158,352.89 alleged for that assessment in original Complaint H 5.
2. If on the other hand Davis had been sent a single assessment listing the correct total of $86,019.54 and referring as the Complaint does only to “Taxable Period Ending 09/30/77,” the latter phrase would obviously refer simply to the latest date covered by the assessment. Certainly Davis would then be hard pressed to argue the Complaint did not put him on notice he was being sued for a penalty covering all seven quarters of Sensor’s liability.

Unfortunately the parties have been unable to tender the document that would provide the pivotal information. In their initial submissions on this motion, the parties furnished a copy only of the “Proposed Assessment of 100 Percent Penalty” (the “Proposed Assessment”) (Ross Ex. 1, App. A to this opinion) sent to Davis. When this Court then requested a copy of the actual assessment or assessments, neither party could produce it or them. As the government explained in its July 11, 1985 letter (the “Letter”):

Counsel for the United States attempted to obtain such notices, but the Internal Revenue Service has advised that other then [sic] the Proposed Assessment Form 2751, (as attached to the Government’s Brief in Opposition to the Defendant’s Motion to Dismiss previously filed with the Court), the only notice which would have been mailed to the taxpayer is a bill, requesting payment for the total amount of the taxes involved. Counsel for the Government requested that the Internal Revenue Service send a copy of the bill as sent to the taxpayer, but the Internal Revenue Service has advised that copies of the bill are not retained by the Internal Revenue Service.
Counsel for the Government then requested that a sample bill be forwarded, but the Internal Revenue Service informed that the Bill forms have been revised since 1978, which is the year in which the assessment was made. The Internal Revenue Service further informed that the form which would have been sent to the taxpayer is not now available.

Lacking the actual assessments, this Court is left to deduce its form from the various other IRS documents the parties have provided: two dated before the assessment (or bill) was sent to Davis and three dated afterwards. And those documents indicate (as the United States claims in the Letter) it is far more likely than not that:

1. Davis received a single assessment for $86,056.19 covering all seven quarters.
2. That assessment tracked the “Period Ending 9/30/77” language of the Complaint.

1. Pre-Assessment Documents

Two pre-assessment forms have been furnished this Court:

1. Form 2751, the “Proposed Assessment” sent to Davis; and
2. Form 2749, “Request for 100 Percent Penalty Assessment” (the “Request,” App. B to this opinion), which is an internal IRS form obviously prepared for use in determining whether to assess an individual responsible person and which, in addition to listing $86,056.19 as the total amount to be assessed, specifies (a) each of the seven quarters for which Sensor was delinquent and (b) the dollar amount owed by Sensor for each of those quarters.

Almost certainly those two documents prompted Davis to assert (R.Mem. 2, emphasis in original):

[F]rom the documents the Plaintiff has turned over to the Defendant in discovery, it is clear that there were seven separate assessments for each of the quarters in question. They all merely happened on the same day, September 4, 1978.

But those forms do not propose seven separate assessments against Davis. Rather their specification of the seven quarters was merely an elaboration of Sensor’s delinquency. Its purpose was to indicate to Davis only the basis of the possible assessment against him.

Indeed the forms themselves make that point explicit. Thus the elaboration of the seven quarters in the Request followed this legend on the form itself:

The penalty to be assessed is equal to the unpaid trust fund portion of the outstanding tax assessment(s) described below.

What the form calls for in the boxes beneath that legend are the “name, address and identification number of employer or collecting agency” and a “description of liability” of that entity. Because this Court must perforce rely on inference, it is significant to note the form’s legend speaks of the employer’s existing liability as possibly encompassing more than one taxable period (“assessments),” followed by a blank space large enough to list a number of periods), while the proposed penalty assessment against the responsible individual is spoken of only in the singular (“penalty”). That usage is consistent with the IRS’ internal document (the Request), in which the portion of the Proposed Assessment specifying the seven quarters is headed “Report of Corporation’s Unpaid Tax Liability.”

2. Post-Assessment Documents

Davis has offered no reason to suggest the United States did not (as the pre-assessment documents indicate) make a single assessment against Davis in the amount of $86,056.19, the total amount of Sensor’s outstanding tax liability. In fact the post-assessment documents tendered to this Court by Davis himself confirm the strong likelihood only one assessment was made for all seven quarters.

(a) Tax Liens

Two tax liens were filed with the Recorder of Deeds for DuPage County. One (App. C to this opinion) was in the amount of $86,056.19 for “Tax Period Ended 9/30/77,” with the “Date of Assessment 9/4/78.” As for the second lien (App. D to this opinion), it was for $3,234.06 for “Tax Period Ended 12/31/77,” with the “Date of Assessment 10/01/79.” Those liens are significant for two reasons.

First, the phrase “Tax Period Ended 09/30/77” in the first lien clearly refers to all seven quarters. That conforms directly to the usage, and supports the government’s interpretation, of the same phrase in the Complaint — which is, after all, the key document for Rule 15(c) purposes. Because the government used that phrase in both the lien and the Complaint (the only two post-assessment documents that employ it) to refer to all seven quarters, it would be odd indeed had the government used the phrase in a different way in the assessment bill.

Second, the lien form itself is set up in columns to allow the government to list as many as 12 to 15 separate unpaid assessments. That fact, together with the reference to the plural “taxes” in the textual legend at the top of the form, clearly indicates each assessment is to be listed separately. In the same way, the set-up of the form’s right-hand column also calls for the separate listing of individual assessments. Hence the fact that only one assessment was listed on the form supports the government’s contention only a single assessment against Davis had been made.

(b) Internal IRS Recommendation

Finally, this Court has been furnished an internal IRS document captioned “Civil Suit Recommendation” and listing only two assessments: an $86,056.19 assessment on “09-04-78” and a $3,244.06 assessment on “10-01-79” (Form 4477 Appendix E to this opinion). That usage too is strongly supportive of there having been just one assessment, rather than seven, against Davis for the first seven calendar quarters of Sensor’s unpaid tax liability.

In sum, both the pre-assessment and post-assessment documents create the inescapable conclusion that, though the United States properly specified the seven separate quarters when it spoke of Sensor’s tax liability, it consistently adverted to and treated the total assessment against Davis, based on those seven quarters’ delinquency, as a single liability for the “Tax Period Ended 09/30/77.” Davis has offered no reason to think the government departed from that consistent usage in the bill it sent Davis September 4, 1978 — the bill that was sandwiched between the pre-assessment and post-assessment documents, with their consistent usage.

Consequently the Complaint’s reference to an assessment against Davis for the “Taxable Period Ending 09/30/77” must be deemed to have been based on that same “transaction”: the assessment dated September 4, 1978 for the “taxable period” comprising seven calendar quarters, the last of which had ended September 30, 1977. Although the amount stated in the Complaint did not jibe with the assessment figure, it surely put Davis on notice he was being sued to collect the penalty assessment previously asserted against him, which covered all seven quarters of Sensor’s delinquency — and it was certainly large enough to suggest that total assessment was involved. That permitted the United States to correct the error in amount by a Rule 15(c) amendment relating back to the date suit was filed.

Conclusion

Based on the extended analysis in this opinion, the Amended Complaint relates back to the date of the Complaint under Rule 15(c) as a mere clarification. Davis’ motion to dismiss is denied, and he is ordered to answer the Amended Complaint on or before August 5, 1985.

APPENDIX A

APPENDIX B

APPENDIX C

APPENDIX D

_36013l»26_

APPENDIX E

Bayard C. Davis

425 South Grace

Lombard, Illinois

1) This report requests that the federal tax claim against Bayard C. Davis be reduced to judgment.

2) Tax liabilities of approximately $164,-073.17 are outstanding, covering assessments for withholding and Federal Insurance Contributions Act Taxes for calendar quarters ending September 30, 1977, and December 31,1977. These liabilities resulted from unpaid taxes by Sensor Dynamics, Incorporated. Details of the accounts involved are shown on Form 4477, Civil Suit Recommendation.

3) The statutory period for collection for the calendar quarter ending September 30, 1977, expires on September 4, 1984. For the calendar quarter ending December 31, 1977, the statutory period for collection expires on October 1, 1985.

4) Mr. Bayard C. Davis has been self-employed in the past as a consultant and as an inventor (Thermo-coupling and heat conduction). All efforts to contact Mr. Davis for signing a waiver extending the period of collection have been unsuccessful. He has not responded to these attempts. All administrative remedies have been exhausted in attempting to collect the tax. Searches for assets have been unsuccessful. There are no other cases pending at the present time.

5) Mr. Bayard C. Davis is approximately 64 years old and is apparently in good health except for a chronic back problem. He is married and lives at home with his wife Louise, who is approximately 65 years old. A collection information statement submitted by Richard A. Gaydos (Power of Attorney) on August 2, 1983, showed no assets for Mr. Davis and no income. The source of the taxpayer’s income is unknown.

6) No levy sources have been located and there is no record of the taxpayer’s present employment. Therefore, the usual methods of collection do not apply.

7) Mr. Davis has earned substantial income in the past as a business consultant and inventor and may do so again. However, it is very unlikely that the Service will be able to collect his liability within the statutory period for collection. In view of Mr. Davis’ lack of response and cooperation, I believe that taking legal action to permit collection after expiration of the statutory period is necessary and will eventually result in partial or full payment of this tax liability.

8)

9) This case is considered a No Settlement Option Procedure case based upon the taxpayer’s lack of cooperation and the amount of money involved.

Conclusion and Recommendation

10) I recommend that suit be instituted without delay to reduce the tax claim to judgment.

      . Section 6672(a) provides:
      Any person required to collect, truthfully account for, and pay over any tax imposed by this title who willfully fails to collect such tax, or truthfully account for and pay over such tax, or willfully attempts in any manner to evade or defeat any such tax or the payment thereof, shall, in addition to other penalties provided by law, be liable to a penalty equal to the total amount of the tax evaded, or not collected, or not accounted for and paid over. No penalty shall be imposed under section 6653 for any offense to which this section is applicable.

      . Although Davis characterizes his motion as a Fed.R.Civ.P. ("Rule") 12(b)(6) motion to dismiss the Amended Complaint, it is mislabeled: It does not challenge the United States’ having stated a cause of action. Instead Davis argues a portion of what is in suit, though admittedly a good cause of action by its own terms, is barred by limitations — really an affirmative defense under Rule 8(c).

      Plus statutory additions

      . That and other exhibits to the Ross Declaration will be cited simply "Ross Ex. — .”

      . True enough, there must be a withholding tax assessment against the employer before there can be a penalty assessment against a responsible “person" under the statute. And under the withholding sections of the Code the "taxable period” is indeed a calendar quarter. But the withholding assessment is simply a necessary, but not a sufficient, condition for the penalty assessment. And it is the latter that is a precondition to — -and the basis for — this suit.

      . It appears the IRS arrived at the $158,352.89 figure by adding interest to the underlying penalty assessment. But the IRS had not previously mentioned interest to Davis, and the Complaint’s enigmatic reference to “statutory additions” could have been any of a number of things unknown to him. Moreover, the "Amount of Assessment,” which differed dramatically from the assessment of which he had been previously notified, did not purport to include “statutory additions.”

      . "Clarification” is employed here as a term of art rather than as a literal description of Amended Complaint ¶ 5. In its zeal to stress it intended to collect from Davis the deficiencies for all seven quarters, the United States unintentionally rendered Paragraph 5 ambiguous and subject to the possible interpretation that seven separate assessments had been made September 4, 1978. However, that ambiguity has no consequence in the face of the government’s otherwise consistent assertions that only one assessment had been made.