author: PECKHAM, Chief Judge.

text:
    In re DIASONICS SECURITIES LITIGATION. This document relates to: ALL ACTIONS.
    No. C-83-4584 RFP.
    United States District Court, N.D. California.
    Sept. 21, 1984.

      David B. Gold, Paul F. Bennett, John W. Allured, Law Offices of David B. Gold, P.C., William S. Lerach, Keith F. Park, Margaret G. Dobies, Milberg, Weiss, Bershad, Specthrie & Lerach, San Diego, Cal., Arthur N. Abbey, Ralph L. Ellis, Abbey & Ellis, New York City, for plaintiffs.
    William I. Edlund, Parker A. Maddux, Karen J. Wegner, Pillsbury, Madison & Sutro, San Francisco, Cal., for defendants.
    Michael F. Perlis, Pamela J. Kreuzberger, Pettit & Martin, San Francisco, Cal., for defendants Arthur Rock and Robert Noyce.
    M. Laurence Popofsky, Michael L. Ru-gen, Heller, Ehrman, White & McAuliffe, San Francisco, Cal., for defendant underwriters L.F. Rothschild, Unterberg, Tow-bin, F. Eberstadt & Co., Inc. and Hambrecht & Quist, Inc.
    William I. Edlund, Parker A. Maddux, Karen J. Wegner, Pillsbury, Madison & Sutro, San Francisco, Cal., for defendants Diasonics, Inc., Albert Waxman, Walter Stafford, Leonard Perrone and Anthony DePalma.
   OPINION

PECKHAM, Chief Judge.

This complex securities action involves numerous claims raised by various plaintiffs against Diasonics, Inc. (“Diasonics”), certain of its officers and directors (“individual defendants”), and the co-lead underwriters (F. Eberstadt & Co., Inc.; L.F. Rothschild, Unterberg, Towbin; and Hambrecht & Quist, Inc.) (“underwriters”). All defendants are alleged to have participated in the issuance of a materially misleading Registration Statement and Prospectus. The plaintiffs allege that as a result of materially misleading statements and omissions in these documents, Diasonics’ common stock was traded at artificially high prices and that the plaintiffs were consequently damaged.

Both the plaintiffs and the defendants raise various motions. They are:

(1) plaintiffs’ motion to certify a plaintiff class;

(2) plaintiff Rothenberg’s motion to certify a separate section 10(b) class;

(3) plaintiffs’ motion to certify a defendant underwriter class; and

(4) defendants’ motions for partial dismissal (which includes several sub-motions).

FACTUAL BACKGROUND

Diasonics, a California corporation with its principal place of business in Milpitas, California, develops, manufactures, markets, and services medical diagnostic imaging systems. These sophisticated computer-based X-ray and ultrasound systems are used by physicians in hospitals, clinics, and private practice.

On February 23, 1983, Diasonics commenced its initial public offering of 5,588,-000 shares of common stock at an offering price of $22.00 per share. This public offering was made pursuant to a Registration Statement and Prospectus filed with the Securities and Exchange Commission, effective February 23, 1983. Plaintiffs allege that this Registration Statement and Prospectus were materially false and misleading. Specifically, plaintiffs contend that these documents overvalued Diasonics’ assets and understated certain delivery and sales problems.

On September 22, 1983, Diasonics first revealed through a press release that it expected a pre-tax loss of $10-14 million for the third quarter of 1983. This expected loss was attributed to a decline in the profitability of its ultrasound and digital X-ray business. On January 31, 1984, Diasonics revealed that it expected a total pretax loss of between $60-65 million for the year ending December 31, 1983.

Following these two disclosures, the value of Diasonics’ stock declined precipitously. By late September, 1983, following the first press release, the price of a share of Diasonics’ common was $9Vs bid; by February, 1984, the price had declined to between $4-5 per share.

The plaintiffs have now filed the instant action and allege various statutory and common law claims. In specific, the plaintiffs seek relief under: section 11 of the Securities Act of 1933, 15 U.S.C. § 77k; section 12(2) of the Securities Act of 1933, 15 U.S.C. § 111; sections 17(a)(2) and (a)(3) of the Securities Act of 1933, 15 U.S.C. § 77q; section 10(b) of the Securities Act of 1934 and Rule 10b-5, 15 U.S.C. § 78j(b); section 25400 et seq. of the California Corporations Code; and common law theories of fraud, deceit, and negligent misrepresentation.

DISCUSSION

I. Plaintiffs’ Motion to Certify a Plaintiff Class

The plaintiffs seek the certification under Fed.R.Civ.P. 23(b)(3) of the following plaintiff class:

All persons and entities, other than defendants, who purchased the common stock of defendant Diasonics, Inc. from February 23, 1983 through January 31, 1984, inclusive.

Certification of a class under rule 23 requires that the putative class meet the four requirements of rule 23(a) and that it qualify under one of the three subdivisions of rule 23(b).

A. Prerequisites under rule 23(a)

Rule 23(a) sets out the first aspect of class certification:

One or more members of a class may sue or be sued as representative parties on behalf of all only if (1) the class is so numerous that joinder of all members is impracticable, (2) there are questions of law or fact common to the class, (3) the claims or defenses of the representative parties are typical of the claims or defenses of the class, and (4) the representative parties will fairly and adequately protect the interests of the class.

The defendants do not dispute that rule 23(a)’s requirement of numerosity has been met here. As this securities action involves, potentially, hundreds of class members, the court finds that the numerosity requirement has been satisfied.

Similarly, the defendants do not challenge the “commonality” requirement of rule 23(a). The misrepresentations alleged by the plaintiffs fit within a common course of conduct. See Harris v. Palm Springs Alpine Estates, Inc., 329 F.2d 909, 914 (9th Cir.1964); Blackie v. Barrack, 524 F.2d 891, 902 (9th Cir.1975), cert. denied, 429 U.S. 816, 97 S.Ct. 57, 50 L.Ed.2d 75 (1976). The court finds that the “common questions of law or fact” requirement has been satisfied.

The defendants do not concede, however, that the remaining two requirements of “typicality” and “adequacy of representation” have been met by all of the named representatives. Specifically, the defendants contend that the claims of various named plaintiffs are not typical of the other class members. Significantly, the defendants do not maintain that all named representatives are inadequate under the rule; they merely contend that seven of the thirteen named plaintiffs have atypical claims and cannot serve as class representatives.

There are two possible responses to this allegation. First, the court could merely accept at face value the defendants’ contentions and certify the class using only the unchallenged class representatives. Second, the court could review the challenges to each of the seven named class members. In terms of the overall certification motion, it matters little which course the court chooses; the outcome on the underlying plaintiff class certification will remain the same. Even if the court were to strike some or all of the seven challenged class representatives, certification of the plaintiff class would still be proper. However, it may be that the defendants’ challenges, if legitimate, could affect the management of this action and hence the court deems it appropriate to consider each of the defendants’ challenges.

These challenges to the seven named representatives fall into three generic areas. First, the defendants claim that the putative class representatives cannot establish that they “relied” upon any material misrepresentation and are therefore distinguishable from other members of the class who allegedly did rely. This is a “typicality” challenge. Second, the defendants contend that certain of the named representatives appear to be uninformed about the intricacies and implications of their action. Finally, the defendants argue that certain of the named representatives reside in districts (or countries) far from the locus of this action and will therefore be unable to monitor this litigation on behalf of the class. These last two challenges raise issues of “adequacy.”

Before addressing each of these contentions, it is worth noting that the defendants’ concern over the typicality and adequacy of the plaintiffs’ class representatives is somewhat problematic. As the Seventh Circuit has stated:

it is often the defendant, preferring not to be successfully sued by anyone, who supposedly undertakes to assist the court in determining whether a putative class should be certified. When it comes, for instance, to determining whether the “representative parties will fairly and adequately protect the interests of the class,” ... it is a bit like permitting a fox, although with a pious countenance, to take charge of the chicken house.

Eggleston v. Chicago Journeymen Plumbers’ Local Union No. 130, 657 F.2d 890, 895 (7th Cir.1981), cert. denied sub nom. Chicago Journeymen Plumbers’ Local Union No. 130 v. Plummer, 455 U.S. 1017, 102 S.Ct. 1710, 72 L.Ed.2d 134 (1982). See also Umbriac v. American Snacks, Inc., 388 F.Supp. 265, 275 (E.D.Pa.1975). Nevertheless, the special supervisory role that a court plays in class actions requires this court to scrutinize carefully the ability of named representatives to mount typical claims and to represent the interests of the class adequately and fairly; “it is an essential prerequisite to the right to maintain an action under Rule 23 that the court be certain the representatives will adequately protect the interests of all class members.” 7 C. Wright & A. Miller, Federal Practice and Procedure § 1764 at 620 (1972).

The first challenge presented by the defendants is that certain of the named plaintiffs did not rely upon the material misrepresentations allegedly made in Diasonics’ Registration Statement and Prospectus when they purchased their Diasonics stock. This allegation of a disabling non-reliance apparently applies to both the section 11 and the section 12(2) claims made under the Securities Acts of 1933, 15 U.S.C. §§ 77k, 771(2), and the section 10(b) claim made under the Securities Act of 1934, 15 U.S.C. § 78j(b). In essence, the defendants contend that these named class representatives will become involved in a peripheral dispute defending against their alleged non-reliance and will fail to prosecute the underlying action with appropriate vigor.

The defendants’ concern for the success of the silent majority of the class, while perhaps noble, is misplaced. There is no requirement in the Ninth Circuit that a plaintiff’s reliance must be established for either a section 11 claim or a section 12(2) claim, see, e.g. In re Gap Stores Securities Litigation, 79 F.R.D. 283, 297, 306 (N.D. Cal.1978), or a section 10(b) claim, see Affiliated Ute Citizens v. United States, 406 U.S. 128, 153-54, 92 S.Ct. 1456, 1472, 31 L.Ed.2d 741 (1972); Bell v. Cameron Meadows Land Co., 669 F.2d 1278, 1283-84 (9th Cir.1982); Arthur Young & Co. v. United States District Court, 549 F.2d 686, 694-95 (9th Cir.), cert. denied, 434 U.S. 829, 98 S.Ct. 109, 54 L.Ed.2d 88 (1977).

As there is no reliance requirement in the Ninth Circuit, the defendants’ contention that the named representatives are atypical because they did not rely is unavailing. The putative class representatives cannot be disqualified on this ground.

As a second ground for challenging the typicality and adequacy of the named plaintiffs, the defendants contend that certain representatives are too unfamiliar with the content of the litigation to supervise the action properly. In specific, the defendants contend that Bernard Frankel, William Weinberger, Richard and Phyllis DeVilla, Arnold and Marilyn Mitchell, Jerome and Marilyn Silverman, Tilly Gaillard and Louis Berg all failed to perform a personal investigation into the allegations of material misrepresentation contained in the complaint. However, the defendants have cited no Ninth Circuit case law holding that such an investigation is mandatory before an individual can assume the role of class representative. Although some of the named representatives conceded during their depositions that they did not understand all of the intricacies of this action, all have demonstrated a familiarity with its outlines. The certification of the class with these individuals as the named representatives cannot be denied on this ground.

Third, the defendants also contend that Gaillard and Berg would be inadequate class representatives because they reside outside the United States. (Gaillard apparently resides in France; Berg resides in Israel.) This alleged inadequacy is phrased in general terms; the defendants have pointed to no specific acts or omissions on the part of these individuals that suggest an inability to perform as class representatives. And as the court noted in Wofford v. Safeway Stores, Inc., 78 F.R.D. 460, 487 (N.D.Cal.1978), “[i]t is entirely possible that an enthusiastic plaintiff residing at some distance from the other class members and from the forum could, by letter, telephone, or personal visit participate in the conduct of the litigation to an equal or greater extent than a local plaintiff.” In the absence of evidence demonstrating an inability to serve as competent class counsel, the court will not exclude either Gail-lard or Berg on this ground.

As a final matter, the defendants note that two of the named representatives cannot serve as class representatives because they purchased Diasonics stock in some capacity other than as an individual. This issue, to the extent that it is a disabling defect, can be remedied by an amendment to the complaint that clarifies who the purchasing party actually was and in what capacity they were acting. This objection is not sufficient to warrant a denial of class certification, provided that the appropriate amendment is made.

Thus, the court finds that the claims of the seven challenged class representatives are typical and that their representation of the class will be adequate. Furthermore, the court finds that the counsel for the putative class can competently undertake this litigation and that no disabling conflicts exist among either class members or counsel. Bogosian v. Gulf Oil Corp., 561 F.2d 434, 449 (3d Cir.1977), cert. denied, 434 U.S. 1086, 98 S.Ct. 1280, 55 L.Ed.2d 791 (1978).

In conclusion, the court finds that all four of the rule 23(a) requirements have been met. It is conceded by the defendants that the class in general meets the requirements; the only objections raised by the defendants concerns seven of the thirteen named representatives. The court finds these objections without merit.

B. Prerequisites under rule 23(b)

Under rule 23, once the four prerequisites of 23(a) have been satisfied, the putative class must also qualify under one of the three provisions of rule 23(b). In this action, the plaintiffs seek certification under rule 23(b)(3). The defendants do not oppose certification under rule 23(b)(3).

After reviewing all of the documents submitted by counsel, the court concludes that certification under rule 23(b)(3) is proper because common questions of law and fact predominate over any questions affecting individual class members. See Blackie v. Barrack, 524 F.2d at 905-8. Furthermore, the court concludes that the class action format represents the most efficient means of litigating and adjudicating this dispute. Maintenance and management of this action in the class action format appears desirable.

Accordingly, the court will certify the plaintiff class under rule 23(b)(3) with the following individuals as class representatives, provided the necessary amendments are made to reflect the actual capacity of each representative: Harold Zarowitz; William B. Weinberger; Jerome Silverman and Melvin Silverman, Co-Trustees of the Morton’s Jemel Corp. Pension & Fund; Nessim Husni; Arnold and Marilyn Mitchell; Richard and Phyllis De Villa; Bernard Frankel; Tilly Gaillard; Louis L. Berg; Steven Rubin; David Niroo; Elizabeth Bennett; and Julius Levine.

II. Plaintiff Rothenberg’s Motion to Certify Separate § 10(b) Class

Plaintiff Rothenberg seeks to certify a separate § 10(b) class with himself as lead plaintiff. Both the other plaintiffs and the defendants oppose Rothenberg’s motion. The merits of this motion are straightforward and the court denies Rothenberg’s motion.

Rothenberg seeks to certify a plaintiff class on the limited issue of § 10(b) liability on behalf of individuals who purchased Diasonics during a specific period of time: September 21, 1983 to January 31, 1984; This is a period of time shorter than that covered by the general plaintiffs’ class discussed above, although it is completely subsumed within that larger class. Rothenberg contends, without delineating specific facts, that there is a conflict between those plaintiffs who purchased Diasonics stock after September 21, 1983 and those who purchased the stock before that date.

The purported conflict arises, according to Rothenberg, because those who purchased after September 21 will somehow have an easier time of proving scienter and thus will be more interested in pursuing the § 10(b) claim (of which scienter is a required element). Rothenberg implies, as a corollary, that those who purchased before September 21 will not be able to prove scienter and thus will concentrate their efforts exclusively, or predominately, on the § 11 and § 12(2) claims that do not require proof of scienter. Rothenberg concludes that a separate class is necessary to protect the § 10(b) claims of the later purchasers.

Rothenberg’s argument is specious. The Ninth Circuit has explicitly rejected the suggestion that there is an incipient conflict between early purchasers and later purchasers in a stock offering. Blackie v. Barrack, supra, 524 F.2d at 908-10. See also Dura-Bilt Corp. v. Chase Manhattan Corp., 89 F.R.D. 87, 100 (S.D.N.Y.1981); In re United States Financial Securities Litigation, 64 F.R.D. 443, 452 (S.D.Cal.1974).

There is no need to certify an additional plaintiff class to protect the interests of the later purchasers. “[I]t is unrealistic to think that the common lawyer for both classes will forget the fee implications of a greater recovery. While lawyers in these class suits are earning their keep as private Attorneys General, they are not seeking to minimize the recoveries which measure their fees.” Wolfson v. Solomon, 54 F.R.D. 584, 589 (S.D.N.Y.1971). Rothenberg’s hypothesis that the counsel for the general plaintiffs’ class (the class covering the February 21, 1983 to January 31, 1984 period) will decide not to pursue a § 10(b) recovery is without foundation and cannot be the basis for certifying a supplementary class.

Finally, if additional reasons are necessary, Rothenberg does not appear to be an appropriate named representative for this proposed § 10(b) class. Rothenberg himself purchased stock both before and after September 21. Therefore, he would be a member of both the general plaintiff class certified above and the supplementary § 10(b) class that he proposes. To the extent that a conflict between these two classes actually exists, he himself would be subject to it. Thus, he would not be a proper named representative for this proposed class.

Thus, for all of these reasons, the court denies plaintiff Rothenberg’s motion for certification of a separate § 10(b) class.

III. Plaintiffs’ Motion to Certify a Defendant Underwriter Class

The plaintiffs move to certify two separate defendant underwriter classes. Both classes consist of all underwriters who participated in the February 23, 1983 public offering of Diasonics, Inc. common stock.

The plaintiffs move, under Fed.R.Civ.P. 23(b)(3), for certification of the first class for the purpose of litigating all issues arising under the plaintiffs’ section 11 claims. The second class, which the plaintiffs seek to certify under either Fed.R.Civ.P. 23(b)(1) or (b)(3), is for the purpose of litigating a single issue in their claim under section 12(2): whether the statements contained within the Diasonics Registration Statement and Prospectus were materially false and misleading.

These precise issues were exhaustively examined by this court in In re Victor Technologies Securities Litigation, 102 F.R.D. 53 [Current Binder] (CCH) Fed.Sec. L.Rep. ¶ 91,433 (N.D.Cal.1984). Both parties concede that the issues raised in the instant case parallel exactly those raised in Victor Technologies. Neither side advances any new case law or even makes a new argument; both sides concur that the certification of the defendant underwriter class is controlled by the court’s decision in Victor Technologies.

Thus, for the reasons set out at length in Victor Technologies, the court will certify, under rule 23(b)(3), both the general section 11 defendant underwriter class and the section 12(2) class that is limited to the single issue of false or misleading statements in the Registration Statements and Prospectus. The court finds, for both classes, that all four prerequisites of rule 23(a) have been met. Furthermore, the court finds, for both classes, that common questions of law and fact predominate over individual issues and that the class action format represents the superior method for litigating and adjudicating this dispute. All of the requirements of this rule have been met and certification of the two classes under rule 23(b)(3) is proper.

IV. Defendants’ Motions for Partial Dismissal

The defendants make various motions for dismissal on different aspects of the case. Each of the motions to dismiss is discussed below.

A. § 12(2) Claims

The defendants move to dismiss various aspects of the § 12(2) claims, 15 U.S.C. § 77i(2), brought by the plaintiffs against various defendants. The relevant language of this statute concerns the buy-sell relationship that must exist before liability attaches; it provides that any person who “offers or sells” a security “shall be liable to the person purchasing such security from him.” Id. The dispute on this matter concerns the plaintiffs’ purported failure to allege the proper degree of privity between the plaintiffs and various defendants. These purported failures are discussed below, according to the defendants against whom the § 12(2) claims have been raised.

1. Plaintiffs who did not allege from whom they purchased

Four named plaintiffs did not identify the seller of the stock at all. Thus, it is impossible to determine from the face of the complaint who the seller was or what the buy-sell relationship was. As Judge Patel noted in Hudson v. Capital Management International, Inc., 1982-1983 (CCH) Fed.Sec.L.Rep. ¶ 99,222 at 95,903 (N.D.Cal.1982), “[p]laintiffs must also allege who they purchased from, or who had direct connection with the sale to them, in order to pursue their § 12 claims.”

Thus, because four of the named plaintiffs have failed to allege exactly what the buy-sell relationship was with sufficient specificity, the court will dismiss their claims but grant them leave to amend to make the proper allegations, if possible.

2. Claims raised against individual defendants

Here the defendants move to dismiss, claiming that the plaintiffs have again failed to allege the requisite degree of privity between the plaintiffs and the individual defendants.

The law concerning the requisite degree of privity between buyer and seller is somewhat in flux and courts have taken two different approaches. The Third and Seventh Circuits require strict privity between buyer and seller; in such a case, title must pass directly from the putative defendant to the plaintiff before the § 12(2) claim can stand. See, e.g., Collins v. Signetics Corp., 605 F.2d 110, 113 (3d Cir.1979); Sanders v. John Nuveen & Co., Inc., 619 F.2d 1222, 1226 (7th Cir.1980), cert. denied, 450 U.S. 1005, 101 S.Ct. 1719, 68 L.Ed.2d 210 (1981). The second view is broader and permits a § 12(2) claim to stand whenever the defendant, even if not the immediate seller, has been a “significant participant” in inducing the sale. See, e.g., Hill York Corp. v. American International Franchises, Inc., 448 F.2d 680, 692-93 (5th Cir. 1971).

The Ninth Circuit has, with some reservations, adopted the broader approach urged by Hill York. In SEC v. Seaboard Corp., 677 F.2d 1289 (9th Cir.1982) (“Admiralty Fund ”), the court stated:

The meaning of ‘seller’ for purposes of § 12 has been judicially expanded beyond the person who transfers title to ‘participants’ in the transaction. The test is whether the injury to the defendant flowed directly and proximately from the action of the defendant.

Id. at 1294, citing SEC v. Murphy, 626 F.2d 633, 650 (9th Cir.1980); Pharo v. Smith, 621 F.2d 656 (5th Cir.1980), Hill York, supra, at 692-93.

But in a footnote to this langauge, the Ninth Circuit stated that “the broad reading of ‘seller’ may be in some doubt in light of recent Supreme Court cases that prescribe a strict statutory construction approach to the securities acts and reject their expansion with tort and criminal theories. See Admiralty Fund v. Hugh Johnson & Co., 677 F.2d 1301, 1311 n. 12 (9th Cir.1982).” 677 F.2d at 1294 n. 3. See also id. at n. 4. But notwithstanding this apparent reservation about the continued vitality of the “significant participation” test, the Ninth Circuit did apply this standard in Admiralty Fund, signalling that the test survives. See also McFarland v. Memorex Corp., 581 F.Supp. 878, 880 (N.D.Cal. 1984).

The court notes that if the “significant participant” test is no longer applicable, this issue loses its complexity. If strict privity is required, the plaintiffs’ claim must be dismissed because no such relationship has been alleged. But assuming that the court must analyze the problem under the Hill York — Admiralty Fund approach, it becomes necessary to inquire as to the level of participation alleged.

There is no doubt that the individual defendants, all of whom were officers or directors of Diasonics, were alleged to have substantially participated in various aspects of preparing the Registration Statement and Prospectus. But courts in this district have recently found this level of alleged participation insufficient to support a § 12(2) claim under Admiralty Fund. In Hudson v. Capital Management International, Inc., 1982-1983 (CCH) Fed.Sec.L. Rep. 1199, 222 (N.D.Cal.1982), Judge Patel dismissed § 12 claims against defendants when the plaintiffs failed to allege actual involvement in the sales of the securities. She observed that

seller status had to be predicated on actual participation in the selling process. Plaintiffs second amended complaint basically alleges that defendants participated in the operations of [the issuer], or opined in circulars, and that the plaintiffs relied on their participation when plaintiffs decided to buy. This is the same type of complaint the court found inadequate in the previous complaint.

Id. at 95,904.

Judge Patel made her position even clearer in Deneau v. Walker, No. C 82-3132 MHP, slip op. (N.D.Cal. Sept. 30, 1983) where she stated that courts have imposed “participant liability only on those persons who have played a substantial role in the process leading to the sales transactions at issue.” Id. at 3. Relying upon this test, she dismissed the plaintiffs’ section 12(2) claims against individual defendants who were alleged to have: (1) created the securities and created the plan for their issuance; (2) arranged for the listing on the New York Stock Exchange and made all the necessary filings with the SEC; (3) supplied the public (through the SEC materials) with the factual data necessary to establish the legitimacy of the new securities; and (4) arranged the mechanism for the transfer of the deposit receipts. Id. “To find defendants liable for having participated in this sale would be tantamount to holding that a corporation participates for purposes of § 12 in every open-market transaction in its shares. This would completely undermine the privity requirement which all courts have found implicit in § 12.” Id.

As Judge Patel suggests, even the courts that have moved away from a strict privity requirement still require significant participation in either the sale itself or in the arrangements for the sale. See, e.g. Pharo v. Smith, 621 F.2d 656, 667 (5th Cir.1980); Lawler v. Gilliam, 569 F.2d 1283, 1288 (4th Cir.1978) (“Liability [under § 12] may be imposed on any person who actively solicits an order, participates in the negotiations, or arranges the sale.”)

Judge Orrick of this district has recently followed Judge Patel’s reasoning. In In re Fortune Systems, No. C-83-3348(A) WHO, (N.D.Cal.1983), he dismissed a claim where the individual defendants were alleged to have been substantial, necessary participants and factors in the sale of the issuer’s common stock to the public. He noted that the level of participation alleged was actually only participation in the preparation of the registration statement and that this was not the type of “substantial participation” required for a § 12(2) claim under Admiralty Fund. See also Mendelsohn v. Capital Underwriters, Inc., 490 F.Supp. 1069, 1087-88 (N.D.Cal.1979) (Orrick, J.) Accord Hokama v. E.F. Hutton & Co., Inc., 566 F.Supp. 636, 641 (C.D.Cal.1983) (Pfaelzer, J.) (“[i]f the defendant is not in literal privity with the plaintiff, his conduct must cause the sale, or he must be a motivating force behind the sale. Mere participation in the events leading up to the sale is not sufficient.”)

The court is persuaded by the approach outlined by Judge Patel in Hudson and Daneau. Although the Ninth Circuit has been somewhat cryptic about how to define the requisite level of defendant participation, a requirement that the defendants play a substantial role in the process leading to the specific sales transaction in issue is reasonable and comports with the overall statutory scheme. The plaintiffs here merely allege that the individual defendants participated in preparing the Registration Statement and Prospectus and certain financing mechanisms; they do not allege any substantial participation by the individual defendants in the particular sales transactions. On this ground, the court will grant the defendants’ motion to dismiss the plaintiffs’ § 12(2) claims against the individual defendants.

As an alternative argument, the plaintiffs contend that even if the court finds no substantial participation in the actual sales process by the individual defendants, the court can still allow the § 12 claim to stand under an “aiding and abetting” theory. Such a contention has little force. The “aiding and abetting” theory has largely been discredited; as this court noted in Wright v. Schock, 571 F.Supp. 642 (N.D.Cal.1983):

[t]here is considerable doubt that aiding and abetting liability exists at all as to section 12 violations. See McFarland v. Memorex Corp., 493 F.Supp. 631, 647 (N.D.Cal.1980). The courts that have discussed aiding and abetting liability have assumed that it could not extend liability any more broadly than does the “substantial factor” test, and so have not considered it separately. See Admiralty Fund v. Jones, 677 F.2d at 1294 n. 4; Stokes v. Lokken, 644 F.2d [779] at 784-85 [ (8th Cir.1981) ]; Pharo v. Smith, 621 F.2d 656, 669 (5th Cir.1980).

Id. at 658. See also In re Fortune Systems, supra; Hudson v. Capital Management International, supra; Hokama v. E.F. Hutton & Co., Inc., supra. Were “aiding and abetting” claims to be allowed, it would eviscerate the “substantial participation” theory set out by the Ninth Circuit in Admiralty Fund. Accordingly, the court rejects the plaintiffs’ argument that the § 12(2) claims can be salvaged on an “aiding and abetting” theory.

Thus, the court will dismiss the plaintiffs’ § 12(2) claims against the individual defendants on the grounds that: (1) the defendants were alleged to have participated in the preparation of the SEC materials and financing decisions but were not alleged to have played a substantial role in the actual sales process itself; and (2) there is no aiding and abetting liability available on this claim as currently pleaded. The court will dismiss the plaintiffs’ § 12(2) claim against the individual defendants, but will grant leave to amend to allege any facts that can correct this pleading inadequacy.

3. § 12(2) claims against the corporation

The plaintiffs have also alleged a § 12(2) claim against the corporation. Again, the plaintiffs have not alleged that the corporation actually sold stock to any of the plaintiffs directly or that it participated substantially in the sales process itself. For all of the reasons outlined above in the discussion of § 12(2) liability for the individual defendants, the court concludes that there can be no § 12(2) liability against the corporation under this complaint as currently pleaded.

Accordingly the court will dismiss this claim, but will grant leave to amend to allege any facts that will bring the claim against the corporation within the ambit of this opinion.

B. Plaintiffs’ Claims under Section 25401 of the California Corporations Code

The plaintiffs also allege that each defendant violated section 25401 of the California Corporations Code. Under section 25501 of the Code, “[a]ny person who violates Section 25401 shall be liable to the person who purchases a security from him or sells a security to him.” The Ninth Circuit has ruled that this statute requires strict privity; “liability [is] limited to actual sellers.” Admiralty Fund v. Jones, 677 F.2d at 1296. Lacking an allegation of such privity, the plaintiffs claim under section 25401 must be dismissed.

The plaintiffs attempt to argue that their claim survives by virtue of section 25504 (joint and several liability of principals and agent) and section 25504.1 (joint and several liability of persons who assist in violations). The plaintiffs’ use of this statute is unavailing. Section 25504, by its terms, applies to violations of section 25501. Hence, strict privity is still required. The complaint does not make clear what either the privity or control relationships were. A blanket allegation that all defendants were agents of each other does not satisfy the strict privity requirement of the statute. The attempt to rely upon section 25504.1 is equally unavailing to the plaintiffs because their complaint fails to allege an intent to deceive or defraud as is required under the statute.

Consequently, the court will dismiss the § 25401 claim against all defendants, but will grant leave to amend to allege strict privity and/or the requisite degree of control in appropriate cases.

C. Plaintiffs’ Section 11 Claim against Defendant De Palma

Both the plaintiffs and the defendants raise numerous issues concerning De Palma’s susceptibility to suit under section 11 of the Securities Act. There is no need to discuss all of these arguments because the plaintiffs have stated at least one valid claim when they alleged that De Palma was a “controlling person,” liable under §§11 and 15.

Section 15 of the Securities Act of 1933 provides for “secondary liability” for “every person who, by or through stock ownership, agency, or otherwise, ..., controls any person liable under [§ 11] or [§ 12]____” 15 U.S.C. § 77o. Control has been defined as the “possession, direct or indirect, of the power to direct or cause the direction of the management and policies of a person, whether through the ownership of voting securities, by contract, or otherwise.” 17 C.F.R. § 240.12b-2. See Safeway Portland Employees’ Federal Credit Union v. C.H. Wagner & Co., Inc., 501 F.2d 1120, 1124 & n. 17 (9th Cir.1974). In this action, the basis for such a finding of De Palma’s “control” over the corporate defendant must be his corporate office, as he has never been a director and his stock holdings represent only a small portion of the total outstanding stock.

But the extent of De Palma’s “control” appears to be a factual question that cannot be resolved at this stage of the litigation. See, e.g., Hill York Corp. v. American International Franchises, 448 F.2d at 694 n. 20 (“the issue of ‘control’ is a complex fact question which requires an examination of the relationships of the various alleged ‘controlling persons’ to the person or entity which transacted the sale of securities alleged to have violated the Act”), quoting from Klapmeier v. Telecheck Intetnational, Inc., 315 F.Supp. 1360, 1361 (D.Minn.1970), rev’d on other grounds, 482 F.2d 247 (8th Cir.1973). As Senior Vice President and Chief Operating Officer, De Palma conceivably enjoyed the requisite level of control. Thus, the court concludes that De Palma’s liability under sections 11 and 15 cannot be dismissed at this preliminary stage in the litigation. It may develop that De Palma is not covered by the secondary liability theory, but that is a factual matter that must await further discovery and resolution at another point.

The court will deny the defendants’ motion to dismiss the section 11 claim against De Palma.

D. § 17(a) claims against all defendants

Lastly, the defendants move to dismiss the plaintiffs’ § 17(a) claims, 15 U.S.C. § 77q, arguing that there is no private right of action under this statute.

In one sense, this is an easy motion. Although there are splits within the circuits, the Ninth Circuit appears to have explicitly ruled that a private right of action exists under § 17(a). Stephenson v. Calpine Conifers II, Ltd., 652 F.2d 808, 815 (9th Cir.1981). In its discussion of the issue, the Stephenson court stated:

Before disposing of the fourth cause of action, however, one issue not raised by the parties must be resolved. Neither the Supreme Court nor this circuit has held that a private right of action exists under § 17(a) of the 1933 Act. Aaron v. SEC, 446 U.S. 680, 689, 100 S.Ct. 1945, 1951, 64 L.Ed.2d 611 (1980), Bosse v. Crowell, Collier and MacMillan, 565 F.2d 602, 610 n. 12 (9th Cir.1977). The Second Circuit in Kirschner v. United States, 603 F.2d 234 (2d Cir.1978), [cert. denied, 442 U.S. 909, 99 S.Ct. 2821, 61 L.Ed.2d 274 (1979)], however, has found such a right of action. Agreeing with Judge Friendly’s comments in SEC v. Texas Gulf Sulphur, Inc., 401 F.2d 833, 867 (2nd Cir.1968), [cert. denied, 394 U.S. 976, 89 S.Ct. 1454, 22 L.Ed.2d 756 (1969) ], the Kirschner court said: “there (is) little practical point in denying the existence of a right under § 17 once it is established that an aggrieved buyer has a private action under § 10(b) of the 1934 Act.” 603 F.2d at 241.
In light of the minimal differences between § 17(a) of the 1933 Act and § 10(b) of the 1934 Act, we think the reasoning of the Second Circuit is persuasive and find that a private right of action exists under § 17(a).

Id. at 815.

As is evident from the quoted language, the Ninth Circuit’s discussion of the issue is sparse. Under the controlling Supreme Court precedent, the analysis of the private right of action is problematic. Under Cort v. Ash, 422 U.S. 66, 95 S.Ct. 2080, 45 L.Ed.2d 26 (1975), a court should assess the statutory language, Congressional intent, underlying legislative scheme, and federalism concerns before determining that a statute creates a private right of action. See Transamerica Mortgage Advisors, Inc. v. Lewis, 444 U.S. 11, 100 S.Ct. 242, 62 L.Ed.2d 146 (1979); Touche Ross & Co. v. Redington, 442 U.S. 560, 99 S.Ct. 2479, 61 L.Ed.2d 82 (1979). The Stephenson court did none of this.

Although it would be easy for this court to follow Stephenson blindly and conclude, without any independent consideration, that a private right of action exists for all three provisions of § 17(a), such a result would be unsatisfactory. If Stephenson is read as creating a private right of action for all § 17(a) claims, including (a)(2) and (a)(3) claims, it would drastically alter the current balance between the various securities statutes. In particular, reading § 17(a) as broadly as the naked language of Stephenson seems to imply would undermine the vitality of § 10(b), a result which appears to be without support in the legislative history and with consequences that the Ninth Circuit could not have intended.

This incongruous result would occur, under the broad reading of Stephenson, because of recent case law interpreting §§ 17(a)(2) and (a)(3). In Aaron v. SEC, 446 U.S. 680, 100 S.Ct. 1945, 64 L.Ed.2d 611 (1980), the Supreme Court held that in an SEC proceeding, there is no need to prove scienter under either (a)(2) or (a)(3). Id. at 695-97, 100 S.Ct. at 1954-57. Thus, if the broad Stephenson holding (creating an unqualified right of action under (a)(1), (a)(2) and (a)(3)) is combined with Aaron, plaintiffs can bring a private securities action without having to prove scienter.

Such a result would be irreconcilable with § 10(b), which does require scienter. See Ernst & Ernst v. Hochfelder, 425 U.S. 185, 201, 96 S.Ct. 1375, 47 L.Ed.2d 668 (1976). Indeed, the combined effect of Stephenson and Aaron would be to render § 10(b) nugatory. See Roskos v. Shearson/American Express, Inc., 589 F.Supp. 627 (E.D.Wisc., 1984) (available August 15, 1985 on WESTLAW, allfeds library, dct file) (“to permit a private right of action under § 17(a) would cause the statutory and judicially-crafted restriction on § 10(b) of the 1934 Act and §§ 11 and 12 of the 1933 Act to atrophy and fall away as securities fraud cases hustled in the back door of § 17(a)”); Hudson v. Capital Management International, Inc., 565 F.Supp. at 626; Malik v. Universal Resources Corp., 425 F.Supp. 350, 363 (1976). In essence, private actions not maintainable under §§ 10(b), 11 or 12 could suddenly become viable under § 17(a).

One possible interpretation of these cases which could avoid this result is to conclude that Aaron was only interpreting the language of § 17(a) in the context of an SEC proceeding. Under this interpretation, it would only be the SEC that does not have to prove scienter under (a)(2) and (a)(3). Such an interpretation, however, could not withstand close scrutiny. While it may be theoretically possible to limit Aaron to its specific factual setting, there is nothing in the case itself that suggests that the Supreme Court intended to limit its holding in such a fashion. Aaron’s conclusion that (a)(2) and (a)(3) do not require an allegation of fraud or scienter was based upon an analysis of the statute; there is no suggestion that the statute could or should be interpreted differently when a private party attempts to sue under its provisions. Thus, this means of reconciling the cases with the statutory construct is unavailing.

The alternative approach — which this court finds persuasive — is to read Stephenson as only creating a private right of action under (a)(1) where fraud is alleged. Admittedly, the language of Stephenson does not, on its face, compel this limited reading; the words actually used in the Stephenson opinion do not mandate a restrictive interpretation. However, a careful reading of the Ninth Circuit’s opinion suggests that this narrow application accords with the analysis implicitly adopted by the Stephenson court.

In reaching its decision, Stephenson quoted from Judge Friendly’s concurring opinion in Texas Gulf Sulphur and stated that “we think the reasoning of the Second Circuit is persuasive.” 652 F.2d at 815. But in adopting the reasoning of the Second Circuit, the Stephenson court used language that failed to acknowledge or apply Judge Friendly’s cautionary language. When Judge Friendly conceded the existence of a private right of action, he did so “with the important provision that fraud, as distinct from negligence, must be alleged.” 401 F.2d at 867. In Stephenson, the Ninth Circuit omitted this limitation.

The explicit language of Stephenson —“a private right of action exists under § 17(a)” — does not expressly state the more limited analysis of the Second Circuit. Although purporting to follow the Second Circuit because of its “persuasive reasoning,” Stephenson’s broad language actually contradicts the logic implicit in Judge Friendly’s Texas Gulf Sulphur opinion. Texas Gulf Sulphur acknowledged that if fraud was alleged, there was no difference between a private right of action under § 17(a) and an action under § 10(b). But by creating a private right of action for (a)(2) and (a)(3) — causes of action not requiring an allegation of fraud — Stephenson went beyond the limits carefully circumscribed by Judge Friendly.

This court concludes that the intent of the Stephenson panel, by citing to and purporting to follow the Second Circuit, was to acknowledge a private right of action under § 17(a) only when fraud is alleged. See Hudson v. Capital Management International, Inc., 565 F.Supp. at 627. Although the language of Stephenson may seem broader, the internal logic of the decision compels this conclusion. It is this court’s conclusion that had the Stephenson court explicitly considered the conundrum discussed here, it would have explicitly limited the scope of its holding concerning a private right of action.

Thus, under the analysis set out above, this court will not entertain a private right of action under § 17(a) of the 1933 Act unless scienter is alleged. As scienter has not been alleged by the plaintiffs here, the court will dismiss the § 17(a) claim.

CONCLUSION

The court certifies the plaintiff class under rule 23(b)(3).

The court denies the motion to certify a separate § 10(b) plaintiff class.

The court certifies the two defendant classes under rule 23(b)(3).

The court dismisses the § 12(2) claims of all plaintiffs who did not allege from whom they purchased their shares.

The court dismisses all § 12(2) claims against the individual defendants.

The court dismisses the § 12(2) claim against the corporation.

The court dismisses the § 25400 et seq. claim under the California Corporations Code against all defendants.

The court denies the motion to dismiss the § 11 against De Palma.

The court dismisses the § 17(a) claim against all defendants.

Leave to amend will be granted to allege facts in accordance with this opinion.

IT IS SO ORDERED.

      . The defendants have had an opportunity to review the ''typicality" and "adequacy" of the six named class representatives who have not been challenged. All of the six have answered two sets of interrogatories; at least three of the six have been deposed by the defendants.

      . The court expresses no opinion on the defendants' opportunity to prove non-reliance through a rebuttal argument, i.e., by demonstrating that a particular investor would not have acted differently had he known of the alleged misrepresentation or omission. See Bell v. Cameron Meadows Land Co., 669 F.2d at 1284 n. 11; Blackie v. Barrack, 524 F.2d at 906-7 n. 22. Such a showing, if made, would in fact serve as a defense to the § 10(b) claim. No such evidence has been suggested to date in either the defendants’ moving papers or the voluminous declarations simultaneously submitted.

      . If it develops during the course of this litigation that the defendants’ rebuttal argument appears to be grounded in something more than speculation, see supra, note 2, it may be appropriate at that time to create a subclass consisting of those plaintiffs who must confront this rebuttal argument. Fed.R.Civ.P. 23(c)(1). Any discussion of subclasses remains, however, speculative at this time.

      . The court offers no opinion on what type of investigation is required by counsel under the new terms of Fed.R.Civ.P. 11. That issue, not presently before this court, is distinguishable from the question of what type of investigation a putative class representative must conduct before serving as class representative.

      . This ruling applies to plaintiffs Bernard Frankel and Jerome Silverman.

      . Since the conclusion of oral argument, the court has received several written submissions from counsel for plaintiff Richard Rothenberg, counsel for the other named plaintiffs and counsel for the defendants. This correspondence concerned Rothenberg’s tardy application to be named a class representative. Although it is not clear that Rothenberg ever made a formal motion to be deemed a class representative for the general class, as distinguished from his motion to be named the class representative for a distinct subclass, see § II, infra, the court has considered this issue nonetheless.
      The court concludes that Rothenberg should not be included in the list of class representatives for the general plaintiff class. Given the number of the representatives already selected and the expected adequacy of their representation, there appears to be no good reason to add to what is already a lengthy list of named representatives.
      Accordingly, the court will not name Rothenberg a class representative at this time.

      . The September 21, 1983 date is significant because that is when Diasonics issued its first press release. This statement predicted a 3rd quarter loss of $5-7 million. The same press release also predicted a return to profitability during the 4th quarter of 1984.

      . This statute reads, in relevant part, "Any person who ... (2) offers or sells a security ..., by the use of any means or instruments of transportation or communication in interstate commerce or of the mails, by means of a prospectus or oral communication, which includes an untrue statement of a material fact or omits to state a material fact necessary in order to make the statements, in the light of the circumstances under which they were made, not misleading (the purchaser not knowing of such untruth or omission), and who shall not sustain the burden of proof that he did not know, and in the exercise of reasonable care could not have known, of such untruth or omission, shall be liable to the person purchasing such security from him____"

        . The defendants contend that the Ninth Circuit definitively rejected the "substantial participation” standard in Feldman v. Simkins Industries, Inc., 679 F.2d 1299 (9th Cir.1982). The case does not bear such a reading. Feldman never discusses the substantial participation test- and never cites Admiralty Fund. Furthermore, the facts of Feldman are readily distinguishable as the case there involved open market sales, not an initial public offering.

      . This statute provides: "It is unlawful for any person to offer or sell a security in this state or buy or offer to buy a security in this state by means of any written or oral communication which includes an untrue statement of a material fact or omits to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading."

      . This statute provides: "Every person who directly or indirectly controls a person liable under Section 25501 or 25503, every partner in a firm so liable, every principal executive officer or director of a corporation so liable, every person occupying a similar status or performing similar functions, every employee of a person so liable who materially aids in the act or transaction constituting the violation, and every broker-dealer or agent who materially aids in the act or transaction constituting the violation, are also liable jointly and severally with and to the same extent as such person, unless the other • person who is so liable had no knowledge of or reasonable grounds to believe in the existence of the facts by reason of which the liability is alleged to exist.”

      . This statute provides, in relevant part: “Any person who materially assists in any violation of Section 25110, 25120, 25130, 25133, or 25401, ..., with intent to deceive or defraud, is jointly and severally liable with any other person liable under this chapter for such violation.”

      . The court expresses no opinion as to whether an amendment would be possible under § 25504.1 but notes that this statute explicitly requires proof of "intent to deceive or defraud.”

      . The defendants initially moved to dismiss the § 11 claim alleged against defendant Perrone as well. But in a letter to the court dated April 17, 1984, Parker Maddux, Esq., counsel to the corporate defendant as well as to the individual defendants, withdrew this objection on behalf of Perrone. The defendants concede that Perrone did sign the registration statement.

      . This statute reads:
      (a) It shall be unlawful for any person in the offer or sale of any securities by the use of any means or instruments of transportation or communication in interstate commerce or by the use of the mails, directly or indirectly—
      (1) to employ any device, scheme or artifice to defraud, or
      (2) to obtain money or property by means of any untrue statement of a material fact or any omission to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or
      (3) to engage in any transaction, practice, or course of business which operates or would operate as a fraud or deceit upon the purchaser.

      . Of the other circuits that have spoken to this issue, two have implied a private right of action, see Kirschner v. United States, 603 F.2d 234, 241 (2d Cir.1978), cert. denied sub nom. Goldberg v. Kirschner, 444 U.S. 995, 100 S.Ct. 531, 62 L.Ed.2d 426 (1979); and Newman v. Prior, 518 F.2d 97, 99 (4th Cir.1975), and two have refused to imply a private cause of action, see Landry v. All American Assurance Co., 688 F.2d 381, 391 (5th Cir.1982); and Shull v. Dain, Kalman & Quail, Inc., 561 F.2d 152, 159 (8th Cir.1977), cert. denied, 434 U.S. 1086, 98 S.Ct. 1281, 55 L.Ed.2d 792 (1978). The Seventh Circuit considers the issue an "open question." Peoria Union Stock Yards Co. Retirement Plan v. Penn Mutual Life Insurance Co., 698 F.2d 320, 323 (7th Cir.1983). Significantly, the Peoria Union court also stated that the existence of a private right of action under § 17(a) was "not a terribly important question” because all of the relief obtainable under § 17(a) was also available under § 10(b). Id.

      The Supreme Court refuses to resolve the issue. See Herman & MacLean v. Huddleston, 459 U.S. 375, 378 n. 2, 103 S.Ct. 683, 685 n. 2, 74 L.Ed.2d 548 (1983). In January of this year. Judge Friendly of the Second Circuit again referred to "the much debated question of the existence of an implied private cause of action for damages under § 17(a) ...” Chemical Bank v. Arthur Andersen & Co., 726 F.2d 930, 941-42 (2d Cir.1984).

      . By way of contrast, in Landy v. All American Assurance Co., 688 F.2d 381, 384-91 (5th Cir. 1982), the Fifth Circuit engaged in a very careful and detailed analysis of the Cort v. Ash factors. After reviewing all four elements laid out in Cort v. Ash, the Landry court concluded that no private right of action exists at all under § 17(a).


source: Caselaw Access Project

author: ROBERT H. HALL, District Judge.

license: Public Domain

text:
    Thomas T. IRVIN, Commissioner of Agriculture, State of Georgia, Trustee, Plaintiff, v. UNITED STATES FIDELITY & GUARANTY COMPANY, Defendant and Third-Party Plaintiff, v. Howard E. HENRY, Third-Party Defendant.
    Civ. A. No. CV 383-07.
    United States District Court, S.D. Georgia, Dublin Division.
    Sept. 26, 1984.
    Gregory W. Blount, Asst. Atty. Gen., Michael J. Bowers, Atty. Gen. of Ga., Ga., for plaintiff.
    J. Alexander Porter, John 0. Moore, Atlanta, Ga., Joe W. Rowland, Wrightsville, Ga., for defendant.
   ORDER

ROBERT H. HALL, District Judge.

This case is presently before the court on the third-party defendant’s motion for summary judgment. Federal jurisdiction is predicated on the fact that this is an action upon a federal bond. 28 U.S.C. § 1352 (1976).

FACTS

Howard E. Henry (“Henry”), the third-party defendant in this action, is registered with the United States Department of Agriculture, Packers and Stockyards Administration, as a livestock dealer and is licensed by the Georgia Department of Agriculture as a livestock dealer. On or about April 10, 1974, defendant United States Fidelity and Guaranty Company (“USF & G”), as surety, and Henry, as principal, executed a bond required of livestock dealers under the Packers and Stockyards Act of 1921, as amended, 7 U.S.C. § 181 et seq. (1980). On or about April 4, 1979, these parties executed a rider reducing the penal sum of the bond from $20,000 to $10,000. Such bond was accepted by plaintiff, the Georgia Commissioner of Agriculture, as trustee on the bond.

In July of 1981 Henry purchased livestock from three sellers. The full purchase price of the livestock has not been paid to the sellers. In all the transactions Henry was acting as an agent for B & M Livestock Co., Inc. (“B & M Livestock”); this fact was known by the sellers and had been approved and accepted by them.

Prior to filing claims against Henry’s bond, the sellers filed claims against the statutory bond of B & M Livestock, filed proofs of claim in the voluntary bankruptcy proceeding filed by B & M Livestock, and swore out and filed criminal warrants against the officers of B & M Livestock, charging them with failure and refusal to pay for the livestock. Partial recovery was made on the claims filed against B & M Livestock’s bond and the bankruptcy proceeding has not yet been concluded.

The sellers then filed claims against Henry’s bond. The Georgia Commissioner of Agriculture, in his capacity as trustee on the bonds, made an official demand upon defendant USF & G for payment. Defendant failed to make payment to the plaintiff. Plaintiff then instituted this action. Defendant answered the complaint and filed a third-party complaint against Henry. Henry has now moved for summary judgment. Further facts will be disclosed as necessary for the discussion of the motion.

DISCUSSION

Third-party defendant Henry argues two bases for summary judgment: (1) that the sellers, having elected to proceed against B & M Livestock Co., are now barred from proceeding against Henry, the agent; and (2) that Henry represented a disclosed principal and that it was the intention of the sellers and Henry that only the principal should be held liable on the transactions. The court will address each argument separately.

A) Bar

In support of his theory that the sellers are barred from proceeding against his bond, Henry cites the general principle of agency law which holds that the contractual liability of a principal and his/her agent is not joint, and after election to proceed against one, the other cannot be held. This court agrees with plaintiff that this general state law agency principle is inapplicable to liability under the federal bond because the bond creates an independent contractual liability for the dealer/agent which is in addition to the obligation of the buyer/principal to pay the purchase price of the livestock. United States Fidelity and Guaranty v. Clover Creek Cattle Co., 92 Idaho 889, 452 P.2d 993 (1969).

In further support of his election theory, Henry argues that the bond does not create joint liability. Under 9 C.F.R. § 201.31 a dealer is required to post a bond covering “all livestock purchased for his account and for the account of others.” According to Henry there can only be one “purchaser” and because the sellers have previously contended that B & M Livestock was the purchaser, they cannot now argue that Henry is a purchaser. The court disagrees with this narrow interpretation. Purchasing livestock “for the accounts of others” clearly indicates an agency relationship whereby the “other” is billed for the livestock. See Arnold Livestock Sales Co. v. Pearson, 383 F.Supp. 1319 (D.Neb. 1974), and Clover Creek, supra. By virtue of Henry’s bidding on livestock to be billed to the account of B & M Livestock, Henry “purchased” for the account of another within the meaning of his bond.

B) Disclosed Principal

Henry bases his second argument on the principle of agency law whereby an agent representing a disclosed principal cannot be liable unless s/he is a party to the contract. Again the court finds that general agency law is inapplicable to liability on the federal bond. The court agrees with the Clover Creek court, supra, that Henry’s bond “constitutes an independent promise by him to guarantee payment to the extent of his bond for all ... [livestock] ... purchased by him for himself or for disclosed or undisclosed principals.” Id. at 897, 452 P.2d at 1001. The federal policy underlying the Packers and Stockyards Act is an attempt to safeguard the business transactions of the livestock industry. The existence of the dealer’s bond is the “only reliable guarantee that the livestock producer will be paid.” Id.

In addition, third-party defendant Henry states in his undisputed facts and brief that it is undisputed that the sellers did not expect to hold Henry responsible for the purchase price. While it is undisputed that B & M Livestock was to buy the livestock and pay the purchase price, there appears to be a dispute as to whether the sellers agreed to exclusively hold B & M Livestock responsible to the exclusion of their rights under this bond.

For the reasons stated herein the court disagrees with third-party defendant Henry’s interpretation of the federal law involved in the present case. Henry’s motion for summary judgment is therefore DENIED.

      . The court sees no inconsistency in allowing the sellers to proceed against both the principal and the agent. Henry seems to suggest that this theory will allow a double recovery. While no authority is cited for the proposition, the court is convinced that plaintiff is correct in the assertion that "any claims submitted under the bond are adjusted to represent only the actual loss experienced by the claimant [seller] by the breach of the condition to pay for livestock.” (Plaintiff’s Brief in Opposition to Henry’s Motion for Summary Judgment, p. 4). Henry is invited to inform the court if plaintiffs assertion is incorrect.


author: SPIEGEL, District Judge.

text:
    Emmett BANKS, et al., Plaintiff, v. CITY OF FOREST PARK, Defendant.
    No. C-1-84-213.
    United States District Court, S.D. Ohio, W.D.
    Oct. 9, 1984.

      C. Gregory Schmidt, Norman F. Hoover, Cincinnati, Ohio, for plaintiff.
    Thomas R. Yocum (Trial Attorney), Ralph Crisci, Cincinnati, Ohio, for defendant.
   MEMORANDUM AND ORDER GRANTING IN PART, DENYING IN PART AND NOT RULING IN PART ON DEFENDANTS’ MOTION TO DISMISS

SPIEGEL, District Judge.

This matter is before the Court on defendants’ motion to dismiss (doc. 5), plaintiffs’ memorandum in opposition (doc. 7), and defendants’ reply (doc. 10). This case is premised on plaintiffs’ contentions that they have been deprived of constitutional rights in violation of 42 U.S.C. § 1983 and the First, Fourth, Fifth, Sixth, Eighth and Fourteenth Amendments to the United States Constitution. Plaintiffs also seek redress for violations of state law under the theory of pendent jurisdiction.

I. Facts

Plaintiff Emmett Banks is the owner of real property and the residence constructed thereon at 1338 Waycross Road, Forest Park, Hamilton County, Ohio. Plaintiff Bernice Banks is Mr. Banks’ wife. The couple have resided at the above-mentioned address for the past seven years. In their complaint, the plaintiffs allege that several officials of the City of Forest Park have maintained a systematic campaign of discriminatory enforcement of local ordinances against plaintiffs because of their race. Defendants deny any such discriminatory treatment. Furthermore, defendants contend that plaintiffs’ action is barred by the applicable statutes of limitations, that certain of the defendants are immune from suit, that plaintiff Bernice Banks states no actionable claim of constitutional deprivations, and that the claims brought by plaintiff directly under the constitution are merely redundant and should therefore be dismissed.

Plaintiffs allege that local officials denied them equal protection of the laws through a racially discriminatory plan to drive them from the community. The specific allegations lodged by the plaintiffs in their complaint are as follows:

On October 31, 1978, plaintiff Emmett Banks was cited for violation of § 150.19 of Forest Park’s Zoning Code for having a truck with a rated weight of greater than V2 ton parked in his driveway. Plaintiffs’ contend that white neighbors and residents of Forest Park are permitted to park such vehicles in their driveways.

On October 31, 1979, plaintiff Emmett Banks was cited for violation of §§ 155.05 and 155.06(A) of Forest Park’s Zoning Code, relating presumably to a prohibition against open foundations and safety hazards. Plaintiffs deny any violation of these codes, and contend that white residents are freely permitted to violate such sections.

From 1979-82, while plaintiffs attempted construction of an in-ground swimming pool, they were continually cited for violations of Forest Park’s building code, required to obtain building permits and perform work not required by the ordinances of Forest Park and not demanded of white residents. As a result, plaintiff Emmett Banks was “cited to Court, fined, and imprisoned.” (doc. 1, p. 10, 11 C).

In June of 1979 plaintiffs replaced their front porch with a wooden deck without first obtaining a building permit. ■ Plaintiffs allege that city officials were aware of the construction, yet waited sixteen months before citing plaintiff Emmett Banks, required his appearance in Mayor’s Court, and demanded the submission of plans and purchase of a building permit after the work was completed. Plaintiffs contend that similarly situated white residents of Forest Park are not so treated.

Pursuant to orders of the Forest Park Building Inspector, plaintiffs constructed a fence around their swimming pool. This fence was allegedly inspected and approved by the building inspector on September 3, 1981. On October 15, 1981 a writ of capias was issued by the Forest Park Mayor’s Court for the arrest of Emmett Banks. Although the complaint is unclear at this point, the writ of capias was presumably based upon a violation of the city ordinances relating to the adequacy of the fence. Seven months after the writ was issued, Emmett Banks was arrested by a Forest Park police officer, and detained pending his posting of $113.00 bond, while the Forest Park Building Inspector drafted and served upon Emmett Banks three citations for the very violation for which plaintiff was arrested. When Emmett Banks subsequently appeared in Forest Park May- or’s Court, he was served with three additional citations for violations of the same ordinance.

During these proceedings in the Forest Park’s Mayor’s Court Emmett Banks was not represented by counsel, nor did he waive such right. Similarly, during these proceedings, in which he faced maximum penalties of $800.00, Emmett Banks did not waive his right to a jury trial in writing as he contends is required by Ohio Rev.Code §§ 2938.04, 2937.08, 2945.17. Mr. Banks was found guilty on all eight charges, fined $100.00 on each charge with $90.00 suspended on each charge, and was granted a stay of execution of approximately five months. Thereafter, Emmett Banks was arrested on December 16, 1982 for failure to comply with the order of the Mayor’s Court notwithstanding his earlier compliance with that order.

After Emmett Banks appealed his convictions to Hamilton County Municipal Court, the City of Forest Park dropped all charges.

When passing on a mption to dismiss the court must determine whether it appears beyond doubt that plaintiffs can prove no set of facts in support of their • claim which would entitle them to relief. Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 101-02, 2 L.Ed.2d 80 (1957). When the motion to dismiss raises an affirmative defense, the question is whether the affirmative defense is clearly presented by the allegations of fact in the complaint. McNally v. America States Insurance Co., 382 F.2d 748 (6th Cir.1967); 5 C. Wright & A. Miller Federal Practice & Procedure Civil § 1357. However, for the purposes of passing on a motion to dismiss under Rule 12(b), Fed.R.Civ. P., the factual allegations in the complaint should be considered as true and the court should consider all reasonable inferences therefrom. Kugler v. Helfant, 421 U.S. 117, 95 S.Ct. 1524, 44 L.Ed.2d 15 (1975). In the context of this § 1983 action, what we must consider in determining the adequacy of plaintiff’s claim is

(1) whether the conduct complained of was committed by a person acting under color of state law; and
(2) whether this conduct deprived a person of rights, privileges, or immunities secured by the Constitution or laws of the United States.

Parratt v. Taylor, 451 U.S. 527, 535, 101 S.Ct. 1908, 1912, 68 L.Ed.2d 420 (1981).

II. Statute of Limitations

It is now well-settled, since Congress has not established a uniform statute of limitations for actions under the Civil Rights Acts, that the appropriate statute of limitations should be borrowed from state law. Burnett v. Grattan, — U.S. -, 104 S.Ct. 2924, 82 L.Ed.2d 36 (1984); Board of Regents v. Tomanio, 446 U.S. 478, 100 S.Ct. 1790, 64 L.Ed.2d 440 (1980); Johnson v. Railway Express Agency, 421 U.S. 454, 95 S.Ct. 1716, 44 L.Ed.2d 295 (1975). The parties to this action do not deny that the applicable statute of limitations must be drawn from Ohio law; they do, however, disagree as to which Ohio statute of limitations should govern.

Defendants contend that the operation of two Ohio statutes of limitations bars plaintiffs’ action in its entirety. Specifically, defendants urge application of the 180 day statute of limitations, relevant to causes of action under Ohio’s Fair Housing Act (Ohio Rev.Code §§ 4112.02(H), 4112.05(A)), to all plaintiffs’ claims associated with their residence and the alleged scheme to induce them to abandon their dwelling. Defendants contend that the remainder of plaintiffs’ claims, i.e., those relating to proceedings in Forest Park Mayor’s Court, are barred by application of the one-year period of limitations designated for actions founded on false arrest and false imprisonment. Ohio Rev.Code § 2305.11. Plaintiffs contend that the constitutional deprivations here involved are necessarily broader than the state causes of action alluded to above, and hence, the applicable statute is Ohio’s four-year statute of limitations for injuries to rights of plaintiffs not otherwise enumerated in other statutes of limitations. In advancing this assertion, plaintiffs rely heavily on the earlier decision of this Court in Schorle v. City of Greenhills, 524 F.Supp. 821 (S.D.Ohio 1981).

There are four Ohio statutes of limitations arguably applicable to this action. First, there are the two statutes advanced by defendants as discussed above (Ohio Rev.Code § 4112.02(H), 180 days for actions under Ohio’s Fair Housing Act; Ohio Rev.Code § 2305.11, one-year for actions for false imprisonment, including false arrest). In addition, Ohio Rev.Code § 2305.-09 provides four years in which to bring actions on rights not otherwise enumerated in Ohio’s statute of limitations scheme. Finally, Ohio Rev.Code § 2305.07 provides six years in which to bring an action on liability created by statute, other than a forfeiture or penalty. As the last incident in the alleged scheme to deprive plaintiffs of their constitutional rights occurred on December 16, 1982 (doc. 1, p. 14, ¶ 20(K)), and this action was filed on February 6, 1984, application of the 180 day and one-year statute would bar this action, while application of either the four-year or the six-year statute would allow plaintiffs to proceed.

Although it is clear that the governing statute of limitations must come from Ohio law, the methodology by which the choice is made bears repeating. The three-step process by which federal courts borrow a state rule of decision under the Civil Rights Act is contained in 42 U.S.C. § 1988. This process was recently summarized by Justice Marshall, writing for the Court, as follows:

First, courts are to look to the laws of the United States “so far as such laws are suitable to carry [the civil and criminal civil rights statutes] into effect.” If no suitable federal rule exists, courts undertake the second step by considering application of state “common law, as modified and changed by the Constitution and statutes” of the forum state. A third step asserts the predominance of the federal interest: courts are to apply state law only if it is not “inconsistent with the Constitution and laws of the United States.”

104 S.Ct. at 2928-29 (quoting 42 U.S.C. § 1988) (citations omitted).

As this methodology has been applied, several touchstones have emerged. The Supreme Court has described the federal court’s task as one of choosing the “most appropriate” state statute of limitations. Johnson v. Railway Express Agency, 421 U.S. 454, 462, 95 S.Ct. 1716, 1721, 44 L.Ed.2d 295 (1975); later in the same opinion, the Court less directly characterized the task as searching for the statute of limitations governing a “closely analogous claim.” Id. at 464, 95 S.Ct. at 1722. More recently, the Court elaborated on the second characterization and defined the inquiry as a search for “the state law of limitations governing an analogous state cause of action.” Board of Regents v. Tomanio, 446 U.S. 478, 483-84, 100 S.Ct. 1790, 1794-95, 64 L.Ed.2d 440 (1980) (citing Johnson, 421 U.S. 454, 462, 95 S.Ct. 1716, 1721). Most recently, the Court indicated its preference for focusing the inquiry on the “most appropriate” state statute of limitations in Burnett v. Grattan, — U.S. -, 104 S.Ct. 2924 (1984).

There is more at stake here than a semantic tug-of-war. For as the facts of both Burnett and the instant case indicate, the subtle shift in focus from the most appropriate statute of limitations to the statute of limitations of the most analogous state cause of action may result in a disregard for the peculiarly federal or constitutional aspects of a given § 1983 action. In Burnett, plaintiffs brought employment discrimination claims against administrators of a state university under 42 U.S.C. §§ 1981 and 1983. Although the state provided avenues for redress of employment discrimination claims, those avenues contemplated administrative remedies rather than civil actions. Commenting that the goals served by the administrative procedure were not the goals served by the Civil Rights Acts, and cautioning that the most ■ appropriate statute of limitations is one responsive to the peculiar nature of causes of action under the constitution or federal statutes, the Court held that borrowing the statute of limitations from the state administrative procedures was inappropriate. Burnett, 104 S.Ct. at 2923.

The danger of concentrating on the period of limitations governing the most analogous state cause of action is even greater under the facts of the instant case. Plaintiffs here allege facts which arguably support claims for housing discrimination, false arrest and false imprisonment under Ohio law. However, the factual allegations also present colorable claims for redress for distinctively federal claims and constitutional deprivations. Specifically, plaintiffs allege a denial of equal protection, a denial of the right to assistance of counsel, a denial of the right to a jury trial, and what is essentially a denial of the substantive due process right to enjoy one’s liberty. It is readily apparent that these claims are not coterminous with state law causes of action which would assume federal dimensions only due to the involvement of one acting under color of state law (such as a § 1983 claim based upon a simple assault by a police officer). Instead, here the equal protection claim, in particular, is born of the individual actions which would support state tort claims, but represents a claim that is different in nature from, and therefore necessarily broader than the sum of its parts. Herein lies the problem. If emphasis is placed upon selecting the statute of limitations applicable to analogous state causes of action, then, due to the similarity of some elements of plaintiffs’ claims to state claims for housing discrimination and false arrest, .the state claims are presumed to be appropriate analogues for the entire action. The end result is that the constitutional claims based upon equal protection, substantive due process,, right to a jury trial and assistance of counsel are regarded as mere appendages to the state claims, and are pared away and disregarded. In contrast, emphasis on determining the most appropriate statute of limitations acknowledges the presence of constitutional claims for which there are no well-defined analogous state causes of action and permits application of a statute of limitations that regards the entire action and all claims therein with equal dignity.

The wisdom of the approach taken here is that it entails an independent evaluation of the appropriateness of various statutes of limitation as applied to a cause of action that is both independent from, and of different nature, than the state claims with which it is associated. As the Supreme Court has recognized,

[tjhese causes of action [arising under the Constitution and federal statutes] exist independently of any other legal or administrative relief that may be available as a matter of federal or state law. They are enforceable in the first instance.

Burnett, 104 S.Ct. at 2930; see also Board of Regents v. Tomanio, 446 U.S. at 491, 100 S.Ct. at 1798. ([T]here is no question that respondent’s § 1983 action was ‘separate and independent’ from the state judicial remedy pursued in state court.”). Within the same paragraph as the quoted language above, the Burnett court instructs that

an appropriate limitations period must be responsive to these characteristics of litigation under the federal statutes. A state law is not “appropriate” if it fails to take into account practicalities that are involved in litigating federal civil rights claims and policies that are analogous to the goals of the Civil Rights Act.

104 S.Ct. at 2930.

In light of this clear instruction, we conclude that, upon the facts of this case, Ohio’s statutes of limitations governing housing discrimination claims and false imprisonment claims are not appropriate statutes of limitations for this § 1983 action. If a state statute of limitations is inappropriate in a § 1983 action due to its design for administrative application, a state statute is certainly inappropriate if its application ignores plaintiffs’ independent federal cause of action merely due to its coincidental coexistence with the state causes of action contemplated by the statute. In this sense, both the method and scope of analysis as well as the application of the particular statute chosen must recognize the predominance of the federal interest and should be “not inconsistent with the Constitution and the laws of the United States.” 42 U.S.C. § 1988.

The approach taken here is consistent with recent Sixth Circuit authority. Defendants, in urging application of the 180 day housing discrimination statute of limitations, contend that Sutton v. Bloom, 710 F.2d 1188 (6th Cir.1983), cert. denied, 104 S.Ct. 985, 79 L.Ed.2d 221 (1984), requires such a result. We disagree. Upon our reading of Sutton, that case countenances both the method of analysis suggested above as well as the rejection of the 180 day statute on the facts presented here.

First, in Sutton the court speaks in terms of the most analogous state statute of limitations. This defines the objective as one of determining the appropriateness of the statute of limitations and not one of merely finding a superficially similar state cause of action. Second, the Sutton court emphasized that the proper approach is to determine the essence of plaintiffs’ claim in choosing an appropriate statute. Id. at 1191. Implicit in this emphasis is the suggestion that a case-by-case analysis is most useful in choosing a state statute of limitations for a § 1983 action. Finally, an examination of the facts as alleged in Sutton demonstrates the inappropriateness of the 180 day statute in the instant case. In Sutton plaintiffs brought suit under 42 U.S.C. §§ 1981, 1982 and 1985 to combat a particularly zealous and protracted campaign undertaken by private landowners to prevent plaintiffs from purchasing adjacent real property. It was in this factual context that the court concluded that:

The Ohio Fair Housing Act applies to the factual circumstances of this case. It seeks to protect against the same injustices which the federal Civil Rights Act of 1866 sought to combat.

Id. at 1190. Under the factual circumstances of this case, we cannot say that the Ohio Fair Housing Act seeks to afford plaintiffs the same protection sought by § 1983, viz: to protect them from an alleged systematic and concerted effort by local officials to deny them equal protection of the laws.

By limiting our holding to these facts, we stop short of holding that a constitutional violation or a § 1983 action always states a cause of action broader than a common law tort action. The point here is that when a constitutional claim or a § 1983 claim is necessarily broader than coincidental state claims due to the absence of any truly analogous state cause of action, the district court should, in addition to examining the statutes of limitations applicable to any coincidental state claims, conduct an independent inquiry to determine which statute of limitations, within a state’s statutory scheme, is most appropriate for the federal claim.

Our inquiry as to the appropriateness of the remaining two state statutes of limitations is abbreviated by the temporal context of this case. Application of either the four-year statute “for injury to the rights of the plaintiff not arising on contract nor enumerated in [Ohio’s limitations of actions statutory scheme],” Ohio Rev. Code § 2305.09 (Pages 1981), or the six-year period applicable to “liability created by statute other than a forfeiture or penalty.” Ohio Rev.Code § 2305.07 (Pages 1981) will permit this action to proceed. We need not decide between the two.

III. Immunity of Local Officials

Defendants contend that several of their number are immune from suit for damages under .§ 1983. Specifically, defendants contend that prosecutorial immunity insulates Forest Park City Solicitor Ralph F. Crisci, and that judicial immunity protects Mayor Brandon H. Wiers, First Vice-Mayor Harold Smith, and Second Vice-Mayor George Fraley from suit.

The Supreme Court has held that a prosecutor is absolutely immune from a civil suit for damages under § 1983, for actions taken in the initiation and prosecution of the state’s case. Imbler v. Pachtman, 424 U.S. 409, 96 S.Ct. 984, 47 L.Ed.2d 128 (1976). However, the Court specifically declined to rule that a prosecutor’s absolute immunity extends to actions not connected with the judicial phase of the proceedings. Id. at 430, 96 S.Ct. at 994. The Sixth Circuit has suggested, in Windsor v. The Tennessean, 719 F.2d 155 (6th Cir.1983), that a prosecutor should enjoy only a qualified immunity for all acts administrative in nature, or in other words, acts outside the prosecutor’s quasijudicial function. Id. at 164. As the Supreme Court noted, the procedural distinction between qualified and absolute immunity is significant as the latter defeats the lawsuit at the outset, while application of the former must await a factual determination. Imbler, 424 U.S. at 419 n. 13, 96 S.Ct. at 989.

Applying these principles to the instant case, we conclude that Forest Park City Solicitor Ralph F. Crisci should be dismissed as a defendant in this case. Plaintiffs make no specific allegations against Crisci, and consequently, plaintiffs have not asserted that Crisci committed improprieties outside his quasi-judicial function. Under these circumstances, the absolute immunity articulated in Imbler, 424 U.S. 409, 96 S.Ct. 984, governs, and requires dismissal.

We decline to rule at this time as to the judicial immunity, if any, to be afforded defendants Wiers, Smith and Fraley for their actions relating to proceedings in Forest Park Mayor’s Court. Judicial immunity is not absolute and does not extend to instances in which a judge acts “in clear absence of all jurisdiction.” Stump v. Sparkman, 435 U.S. 349, 356-57, 98 S.Ct. 1099, 1104-05, 55 L.Ed.2d 331 (1978), (quoting Bradley v. Fisher, 80 U.S. 335, 13 Wall. 335, 351, 20 L.Ed. 646 (1872)). As noted by the Court, the existence of state statutes or case law defining an absence of jurisdiction is a significant factor in assessing a question of judicial immunity. Stump, 435 U.S. at 358, 98 S.Ct. at 1105. The limitations placed upon a Mayor’s Court’s exercise of jurisdiction by Ohio Rev.Code §§ 2937.08, 2938.04 may define a clear absence of jurisdiction. However, these statutory sections define jurisdiction in terms of maximum penalties for offenses. The complaint is sufficiently ambiguous concerning the maximum penalties for the offenses involved and the cumulative effect of those penalties, to warrant postponement of a ruling on the issue of judicial immunity. In addition, the Sixth Circuit has held that judicial immunity from suits for damages does not extend to acts not normally performed by a judicial officer. Sevier v. Turner, 742 F.2d 262 at 271-72 (6th Cir. Aug. 8, 1984). For these reasons we therefore reserve judgment on whether defendants Wiers, Smith and Fraley are entitled to a cloak of judicial immunity.

Likewise, we cannot, at this embryonic stage in this lawsuit rule on the issues of any immunity that might be afforded Police Chief James A. Nienam, or whether his dismissal would be proper for other reasons. Although defendants correctly cite Hays v. Jefferson County, Kentucky, 668 F.2d 869 (6th Cir.1983), for the proposition that Nienam’s liability cannot rest solely on the doctrine of respondeat superior, plaintiffs allege that Nienam was personally involved in the alleged scheme to deny them equal protection of the laws. This obvious factual issue precludes the dismissal of Nienam as a defendant.

IV. Punitive Damages

Defendants seek dismissal of claims for punitive damages against the City of Forest Park. As plaintiffs agree, under the reasoning in City of Newport v. Fact Concerts, Inc., 453 U.S. 247, 101 S.Ct. 2748, 69 L.Ed.2d 616 (1980), that no claim for punitive damages lies against the municipality, there is no issue requiring resolution.

V. Claims of Plaintiff Bernice Banks

Defendants seek dismissal of the claims of plaintiff Bernice Banks, and advance the contention that she has not pleaded any deprivation of her constitutional rights. Under the reasoning of this Court in Sell v. Price, 527 F.Supp. 114 (S.D. Ohio 1981) (Rice, J.), we agree that the claims of plaintiff Bernice Banks must be dismissed. Although the facts alleged would have necessarily caused Mrs. Banks no small degree of vexation, the complaint clearly alleges that it was Mr. Banks who was subject to the alleged constitutional deprivations.

VI. Plaintiffs Constitutional Claims

Finally, defendants seek dismissal of the constitutional claims which plaintiffs seek to enforce directly under the First, Fourth, Fifth, Sixth, Eighth and Fourteenth Amendments. Defendants object to these claims in large part due to their redundancy. Absent countervailing concerns, plaintiffs should be permitted to proceed on dual theories of recovery. Therefore, insofar as redundancy is the sole objection, we will permit plaintiff to proceed on the constitutional claims as well as the § 1983 claim.

Defendants admit that the Sixth Circuit has not ruled on the issue of parallel § 1983 and implied constitutional claims. However, defendants assert that the Sixth Circuit has intimated its disapproval of concomitant constitutional claims in a § 1983 action in Harris v. City of Canton, 725 F.2d 371, 374 n. 3 (6th Cir.1984). However, as we read that footnote, the Court declined to decide the issue, and merely related the reasoning of those courts which disallow parallel constitutional claims. At this point, we are more inclined to follow the lead of Judge Rice, who, in Smith v. Jordan, 527 F.Supp. 167 (S.D.Ohio 1981), recognized the redundancy of implied causes of action under the Constitution in a § 1983 action, but nevertheless permitted a claim based on the Fourth Amendment to proceed. Id. at 172-73.

While we will permit plaintiff to proceed under implied constitutional causes of action, we conclude that plaintiffs’ First Amendment claim, resting presumably on rights of privacy must be dismissed. As recognized in Smith, 527 F.Supp. at 172,

[t]he right of privacy recognized in the Constitution is a relatively narrow one, limited to protection against government interference in matters relating to marriage, procreation, contraception, child rearing and education.

Id. (citing Paul v. Davis, 424 U.S. 693, 96 S.Ct. 1155, 47 L.Ed.2d 405, reh’g denied, 425 U.S. 985, 96 S.Ct. 2194, 48 L.Ed.2d 811 (1976)). While the Banks might argue that the actions taken against Mr. Banks adversely affected their marriage, we would perceive such an allegation as too attenuated to afford relief under the First Amendment.

The last matter for our consideration is whether plaintiffs’ procedural due process claim for deprivation of a property interest is barred by a failure to plead inadequacy of state remedies. See Parratt v. Taylor, 451 U.S. 527, 101 S.Ct. 1908, 68 L.Ed.2d 420 (1981); Vicory v. Walton, 721 F.2d 1062 (6th Cir.1983). First, we resist the temptation to characterize plaintiffs’ due process claim as procedural in nature. Plaintiff alleges that he was arrested and incarcerated. He therefore asserts a deprivation of a liberty interest more appropriately categorized under the constitutional protection of substantive due process. As the Sixth Circuit recently noted, where a liberty interest is involved, the requirement of Parratt, 451 U.S. at 527, 101 S.Ct. at 1908, that plaintiff plead and prove the inadequacy of state processes is inapplicable. Wilson v. Beebe, 743 F.2d 342 (6th Cir.1984). The court’s reasoning is sound, because where a liberty interest is concerned, state processes are inherently inadequate. “Sections 1983’s purpose is to ensue the vindication of constitutional rights [and] state tort remedies do not serve that function. Id. Second, insofar as plaintiffs assert deprivation of a property interest, we are of the opinion that plaintiffs’ claim is not barred by failure to plead the inadequacy of state processes in compliance with this requirement. On the facts alleged in the complaint, defendants’ suggestion that the City of Forest Park building and zoning codes contain numerous procedures for obtaining variances and similar relief begs the question of the adequacy of state remedies. Implicit in plaintiffs’ contention that these laws were enforced in a discriminatory manner is the allegation of the inadequacy of any remedies thereunder. Furthermore, when plaintiffs pursued state processes by appealing the Mayor’s Court decision, defendants dropped the charges, and plaintiffs’ constitutional claims have never been addressed. We therefore conclude that plaintiffs have met the burden of pleading an inadequacy of state remedies. We therefore refuse to dismiss any claim alleging interference with a property interest without procedural due process.

In accordance with the foregoing, it is hereby ordered that plaintiffs’ federal claims are not time-barred; that defendant Ralph F. Crisci shall be dismissed as party defendant to this action; that plaintiff Bernice Banks’ claims shall be dismissed, and that plaintiffs’ First Amendment claim for invasion of privacy shall be dismissed. It should also be understood that, due to factual ambiguities, this Court expressly reserves judgment on the issues of the judicial immunity claims of defendants Wiers, Smith and Fraley.

SO ORDERED.

      . Although the facts in Schorle, 524 F.Supp. at 822, are similar to those alleged in this case, we do not think a routine application of our earlier decision is appropriate. As developed below, the recent decisions of the United States Supreme Court as well as those of the Sixth Circuit have subtly refined the analysis appropriate to cases of this nature, and have rendered a case-by-case analysis the most prudent approach.

      . The § 1983 claims and the implied constitutional causes of action may or may not be governed by the same statute of limitations. See Harris v. City of Canton, 725 F.2d at 374 n. 3. As this action is timely brought under either the six- or the four-year statutes we need not distinguish between the two types of claims.


author: NORMAN W. BLACK, District Judge.

text:
    John L. DIAL, Plaintiff, v. UNITED STATES of America, Defendant.
    Civ. A. No. H-84-2555.
    United States District Court, S.D. Texas, Houston Division.
    Oct. 15, 1984.
    John L. Dial, pro se.
    Louise P. Hytken, Joe A. Pitzinger, III, Attys., Tax Div., Dept, of Justice, Dallas, Tex., for defendant.
   MEMORANDUM AND ORDER:

NORMAN W. BLACK, District Judge.

Came on to be heard the petition of Plaintiff John L. Dial to quash four (4) Internal Revenue summonses issued to third-party recordkeepers on the ground that his Fifth Amendment privilege against self-incrimination protects him from being compelled to produce the records sought. The United States has moved to dismiss the petition based on a lack of subject matter jurisdiction of the Court over three (3) of the four (4) summonses and failure to state a claim upon which relief can be granted in regards to Plaintiffs Fifth Amendment allegations. The United States is also seeking the enforcement of the summons over which the Court allegedly has subject matter jurisdiction.

The Internal Revenue Service (IRS) is reviewing Plaintiffs income tax liability for the years 1980 through 1983. As part of this examination, four (4) summonses were issued on May 23, 1984, June 18, 1984, and July 18, 1984, respectively, to third-party recordkeepers. Three (3) of the summonses were issued to financial institutions in San Antonio, Texas: Kelly Field National Bank, Travis Savings and Loan Association, and the Government Employees Credit Union. One (1) summons was issued to First National Bank of Alvin in Alvin, Texas. All summonses seek typical bank records such as deposit slips, signature cards, loan applications, and photocopies of cancelled checks deposited into Plaintiffs account.

Plaintiff seeks to quash the IRS summonses under 26 U.S.C. § 7609(b)(2). However, 26 U.S.C. § 7609(h)(1) provides that “the United States District Court for the district within which the person to be summoned resides or is found shall have jurisdiction to hear and determine any proceeding brought under subsection (b)(2) ...” Three of the four persons summoned reside in San Antonio, Texas. The Court notes that San Antonio,. Texas is located in the Western District of Texas. See 28 U.S.C. § 124(d).

No suit may be maintained against the United States in any court except when and where the sovereign has consented to suit. Affiliated Ute Citizens of Utah v. United States, 406 U.S. 128, 141-142, 92 S.Ct. 1456, 1466, 31 L.Ed.2d 741 (1972); Malone v. Bowdoin, 369 U.S. 643, 82 S.Ct. 980, 8 L.Ed.2d 168 (1962). When Congress consents to suit, it can define the conditions for bringing suit and such limitations should be strictly enforced. United States v. Testan, 424 U.S. 392, 399, 96 S.Ct. 948, 953, 47 L.Ed.2d 114 (1976); United States v. Sherwood, 312 U.S. 584, 586, 61 S.Ct. 767, 769, 85 L.Ed. 1058 (1941). The United States has consented to jurisdiction in this case in the Western District of Texas. This Court is in the Southern District of Texas and lacks subject matter jurisdiction over the three (3) summonses issued to San Antonio financial institutions. Smith v. United States, 84-1 U.S.T.C. para. 9504 (M.D.Pa.1984); Cook v. United States, 84-1 U.S.T.C. para. 9436 (S.D.Miss. 1984).

The Court does have subject matter jurisdiction over the IRS summons issued to the First National Bank in Alvin, Texas. The United States has made out a prima facie case for enforcement. United States v. Powell, 379 U.S. 48, 56-58, 85 S.Ct. 248, 254-255, 13 L.Ed.2d 112 (1964). The IRS issued the summonses as part of a good faith inquiry undertaken to further the goals of 26 U.S.C. § 7602. United States v. LaSalle Nat’l Bank, 437 U.S. 298, 316, 98 S.Ct. 2357, 2367, 57 L.Ed.2d 221 (1978). Plaintiff has not shown that enforcement of the summonses would be an abuse of the judicial process or otherwise improper. United States v. Davis, 636 F.2d 1028, 1034 (5th Cir.1981).

Plaintiffs reliance on the Fifth Amendment is misplaced. Plaintiffs Fifth Amendment claim lacks substance where it is the bank, not the depositor, who has actual possession of the records sought by the IRS. The Fifth Amendment does not protect the Plaintiff from incriminating himself, only from being compelled to do so. This Court is of the opinion that the Fifth Amendment does not prevent the production of financial records where the Plaintiff has not been forced to divulge such information in response to a summons. See United States v. Jones, 630 F.2d 1073, 1079 (5th Cir.1980); United States v. Kashmir, 499 F.2d 444, 447 (5th Cir.1974); United States v. White, 477 F.2d 757, 762 (5th Cir.1973). It is therefore,

ORDERED, ADJUDGED and DECREED that Plaintiffs petition to quash is DENIED. Defendant’s motion to dismiss is GRANTED.

The summons issued to the First National Bank of Alvin in Alvin, Texas, shall be enforced and obeyed without delay.