author: ORRICK, District Judge.

text:
    George CATOR, Plaintiff, v. HERRGOTT & WILSON, INC., Lawrence W. Jones and James P. Oliver, Defendants.
    No. C-83-0149 WHO.
    United States District Court, N.D. California.
    June 12, 1984.

      Michael J. Korda, Clark, Baron & Korda, San Jose, Cal., for plaintiff.
    Kenneth J. Philpot, Jackson, Tufts, Cole & Black, San Francisco, Cal., for Hergott & Wilson.
    Duane C. Musfelt, Jeffrey R. Kurtock, Lewis; D’Amato, Brisbois & Bisgaard, San Francisco, Cal., for Jones & Oliver.
   AMENDED OPINION

ORRICK, District Judge.

The question presented by the cross-motions for summary judgment in this case is whether the Pension Committee of a plan subject to the provisions of the Employee Retirement Income Security Act of 1974 (“ERISA”), 29 U.S.C. §§ 1001 et seq., violated ERISA by changing only thirty days before his retirement the valuation date of benefits paid to plaintiff. Plaintiff, George Cator (“Cator”), the former president of defendant Herrgott & Wilson, Inc. (“H & W”), a commodities brokerage firm in San Francisco, California, seeks to recover $72,-000 that he alleges was withheld in bad faith from his pension account by H & W. H & W amended the company’s pension and profit-sharing plans (the “Plan”) to provide for interim valuation dates of profits due under the Plan. The H & W Pension Administration Committee (the “Committee”) asserts that it amended the Plan in accordance with its provisions and those of ERISA and did not arbitrarily or capriciously affect Cator’s vested benefits on his retirement in October 1981. Holding that the Committee, pursuant to the Plan’s provisions empowering it to amend the Plan when advisable, reasonably exercised its authority so as to safeguard the interests of all thirteen H & W participants, the Court denies plaintiff’s motion for summary judgment and grants defendants’ motion for summary judgment.

I

From 1954 until his retirement on October 21, 1981, Cator was employed by H & W and together with twelve other H & W employees was a member of the Plan.

In October 1980, Cator informed H & W, including Committee members Lawrence Jones and James Oliver, defendants in this action, of his intention to retire a year later in October 1981. Cator and H & W executed a stock agreement whereby Cator sold his stock to the company and resigned as a director and officer of H & W. Pursuant to the agreement Cator remained employed by H & W for one year thereafter, and H & W continued to make contributions to the Plan on Cator’s behalf.

At the time Cator announced his impending retirement the Plan provided that the trustee of the pension fund determine the fair market value of the trust fund on each May 31st (i.e., the “Anniversary Date”), and notify the Committee of such value. The Committee, in accordance with the Plan, then allocated to each participant’s account its share of the net appreciation or depreciation.

As of May 31, 1981, some five months prior to Cator’s retirement, total Plan assets were valued at almost one and a half million dollars, having appreciated an unusually high amount (23 percent) during the preceding year. Cator’s portion of the benefits for that period amounted to slightly more than half a million dollars. Pursuant to the Plan’s provisions an annual statement of benefits was delivered to Ca-tor that reflected the amounts then existing in his account as of May 31, 1981.

One month before Cator’s October 1981 retirement date, on the advice of its actuarial and pension consultants, the Wyatt Company, and in accordance with the provisions of the Plan, H & W amended the Plan to provide that in addition to the annual May 3.1st valuation there could be interim valuations, thus permitting the trustee to assess the Plan’s value more frequently than on an annual basis. The purpose of the interim valuation is to provide the Committee with the “necessary flexibility” to minimize the detrimental impact of fluctuating market conditions on the Plan’s assets. Those fluctuations are best evidenced by the appreciation/depreciation figures for the five-month period between the May 31, 1981, annual valuation date and Cator’s October 1981 retirement date: as of May 31, total Plan assets had appreciated 23 percent from the previous year, whereas by October the assets had dropped approximately 14 percent.

As a result of the new interim valuation scheme, Cator’s account on his retirement in October 1981 was $72,000 less than had been reported on the preceding May 31st valuation date. Cator now asks for those $72,000 in damages, alleging the May 31st valuation date figure is a “vested” sum to which he was entitled on retirement, notwithstanding the Committee’s revisions one month prior to his retirement.

At the hearing on the summary judgment motions, all facts presented in the moving papers, affidavits, and on oral argument were stipulated to by the parties. “When parties have entered into stipulations as to material facts, those facts will be deemed to have been conclusively established.” United States v. Houston, 547 F.2d 104, 107 (9th Cir.1976); Todd Shipyards Corp. v. Secretary of Labor, 586 F.2d 683 (9th Cir.1978).

Insofar as material facts are not in dispute, the controversy at bar is ripe for summary judgment. The Court’s function then is to grant summary judgment if either party is entitled thereto as a matter of law. Federal Deposit Insurance Corp. v. First Finance Corp., 587 F.2d 1009 (9th Cir.1978); Fruehauf Corp. v. Royal Exchange Assurance of America, Inc., 704 F.2d 1168 (9th Cir.1983).

II

A

At the outset, the Court must consider Cator’s contention that the Committee acted “arbitrarily and capriciously” when it amended the Plan, to his detriment, one month prior to his retirement.

It is a well-settled rule that “those empowered with the administration of an employee pension trust shall be sustained unless arbitrary or capricious or contrary to law.” Smith v. CMTA-IAM Pension Trust, 654 F.2d 650, 654 (9th Cir.1981); Gordon v. ILWU-PMA Benefit Funds, 616 F.2d 433 (9th Cir.1980); Harm v. Bay Area Pipe Trades Pension Trust Fund, 701 F.2d 1301 (9th Cir.1983). When exercising discretion in the administration of a pension trust fund, § 404 of ERISA imposes upon the fiduciaries the duty to act in the best interest of the participants and beneficiaries under the plan. 29 U.S.C. § 1104. Section 1104 provides in pertinent part as follows:

“(a)(1) * * * a fiduciary shall discharge his duties with respect to a plan solely in the interest of the participants and beneficiaries and—
******
(D) in accordance with the documents and instruments governing the plan *

Thus, where a pension committee is empowered with discretion to amend a plan, as here, the committee’s exercise of that discretion is subject to judicial review to determine whether the discretionary act is “arbitrary and capricious” and if the Committee’s intention is to benefit the plan participants.

The 1981 Amendment to the Plan (the “Amendment”), which provides for an interim' valuation date in addition to the already existing annual valuation date of May 31, reads as follows:

“1. ‘Section I-V’ is amended to be ‘Section I-W’ ”, and a new Section I-V is added to read in full as follows:
“V. Valuation Date — The Anniversary Date and any other dates so designated by the Committee.”

2. Section V-D is amended to read in full as follows:

“D. Determination and Allocation of Income. As of each Valuation Date (and on each Anniversary Date prior to the allocations provided for in Section V-C), the Trustee shall determine the fair market value of the Trust Fund and shall notify the Committee of its determination of the net appreciation (or depreciation) in the fair market value of the Trust Fund since the last preceding Valuation Date and the amount of the net income or loss of the Trust Fund during such period, including the interest income of the savings accounts established pursuant to the provision of Section VIII-G. The Committee shall allocate to each account the net appreciation or depreciation and net income or loss (other than the interest income of such savings accounts) in proportion to the amount in such account prior to such allocation.”

Cator cannot sustain his burden of demonstrating that the Amendment is arbitrary and capricious. Although the parties concede that the action was taken in response to Cator’s retirement, the purpose in enacting the Amendment was nevertheless reasonable; i.e., the Committee came to the realization that fluctuating market conditions, changing financial conditions, and economic circumstances could result in a “windfall” to Cator at the expense of the other twelve Plan participants if an interim valuation date was not enacted. Cf. Patino v. Casey, 664 F.2d 854, 858 (1st Cir. 1981). Indeed, the parties stipulated to the fact that absent the interim valuation, Ca-tor’s additional benefits would have deprived the other twelve participants of almost 8 percent of total fund assets.

Moreover, the Committee amended the Plan on the advice of its actuarial and pension consultants; it did not undertake to amend the Plan unilaterally. In Souza v. Trustees of Western Conference of Teamsters, 663 F.2d 942, 947 (9th Cir.1981), the court held that such reliance on the advice of experts is evidence of the reasonableness of the amendment. Here, the Committee chose to accept the recommendation of its pension experts, that an interim valuation comports with the general practice of ERISA plans and would assure equitable treatment of the Plan participants. Given the reasonableness of the advice, there are no grounds for the Court to substitute its judgment for that of the trustees, nor to second-guess the technical provisions of a plan implemented on the advice of expert actuaries. See Gordon, supra, 616 F.2d at 439; Souza, supra, 663 F.2d at 947.

In Tomlin v. Board of Trustees of the Construction Laborers Pension Trust for Southern California, 586 F.2d 148, 151 (9th Cir.1978), the court likewise refused to substitute its judgment for that of the trustees where plaintiff, similar to Cator, argued for application of a different rule than that applied by the trustees:

“We must be ever mindful that it is for the Trustees, not the courts, to choose between two reasonable alternatives. As the court said in Roark v. Lewis, 130 U.S.App.D.C. 360, 364, 401 F.2d 425, 429 (1968):
‘The court is fully cognizant of the internal pressures asserted on the trustees: the size of the pie is fixed and variations can be achieved only by changing the size of the number of the slices. There is no camouflaged design on the part of the Court to second-guess the discretionary judgments of the trustees____ It is for the trustees, not judges, to choose between the various reasonable alternatives.’ ”

A further test for determining whether the Committee’s action in amending the Plan was arbitrary or capricious was set out in Harm, supra, 701 F.2d at 1305. There, the court found that if an alteration, or amendment, to a pension plan had the effect of excluding a “disproportionate” number of employees from receiving benefits, the amendment constitutes a “structural defect.” Certainly, no such defect exists here; the Amendment did not exclude even a single Plan participant.

Cator relies to a great extent on the holding in Brugg v. Pension Plan of the Carpenter’s Pension Trust Fund for Northern California, 669 F.2d 570 (9th Cir.), cert, denied, 459 U.S. 861, 103 S.Ct. 135, 74 L.Ed.2d 116 (1982), as authority for his position that the Committee acted arbitrarily in denying him vested benefits. Yet, Brugg is factually distinguishable in a significant way. There, a clerical employee entitled to pension benefits pursuant to an amendment in her pension plan was denied benefits subsequent to the recision of the amendment after she had properly filed an application at retirement. In effect, the recision deprived the pensioner of all benefits.

Cator, in comparison, is not being denied pension benefits. Rather, the Committee, in reasonably exercising its discretion, sought to equitably distribute the existing pension fund assets to all Plan participants, whether it be to the account of those still employed or those choosing, as did Cator, to retire. And, the Amendment, unlike the Brugg scenario, took effect before Cator retired and, therefore, was not applied retroactively to divest him of eligibility for benefits.

Finally, evidence that trust administrators have not acted arbitrarily is demonstrated if the administrators have consistently applied the amendment to all participants. Gordon, supra. In Gordon, the court stated that adherence to a consistent pattern of interpretation of pension plans is “significant evidence that the trustees have not acted arbitrarily,” and thus the fact that the Gordon pensioner was compelled to file proper forms to qualify for pension benefits was not arbitrary because the same rule had been applied to past pension applicants. Id. at 440. Similarly, upon adoption of the Amendment, all Plan participants were revalued in accordance with its terms and the benefits distributed to terminating employees since the date of the Amendment were calculated pursuant thereto.

Altogether, the Amendment was enacted for justifiable reasons, and its net effect, of recalculating benefits, was equitably applied to all Plan participants. Accordingly, the Committee acted neither arbitrarily nor capriciously by revising the Plan, which thereby insured disbursement of pension funds would be undertaken in a fair manner for the benefit of all thirteen H & W pension plan participants.

B

Cator’s secondary contention is that the Amendment was improper because it deprived him of an “accrued benefit” in violation of the Plan’s provisions empowering the Committee to amend the Plan if such amendment does not “adversely affect the then accrued benefits of any Participant.” That contention, based upon á misunderstanding of the Plan, is meritless.

First, the Plan provides that a participant is only entitled to receive benefits at his normal retirement age of sixty-five. When a participant retires early, as did Cator who retired at age fifty-nine, his vested interest is retained in the Trust Fund until age sixty-five. However, the Committee, in its discretion, may authorize payment before that date:

“Former participants. The distribution or the vested interest in the Trust Fund of a Participant whose employment terminates for reasons other than his retirement, death or Permanent Disability shall commence as of his Normal Retirement Date, and such vested interest shall be retained in the Trust Fund until that date; provided, however, that the balance of his interest in the Trust Fund may be paid to such former Participant prior to his Normal Retirement Date at the discretion of the Committee. The Committee may determine the method of such payment in accordance with the provisions of Section VIII-E.”

Plan § VIII-C (emphasis added).

The Plan thus comports with ERISA’s vesting provisions. ERISA gives an employee-participant no vested right to receive pension benefits until he reaches normal retirement age. 29 U.S.C. § 1053(a). Furthermore, “accrued benefit” is defined in § 1002(23) of ERISA to mean:

“[I]n the case of a defined benefit plan, the individual’s accrued benefit determined under the plan and * * * expressed in the form of an annual benefit commencing at normal retirement age * * * }}

(Emphasis added.) Cator was not vested in any particular amount as of the May 31st valuation date. The annual summaries are merely an accounting tool that cannot be construed as “vested benefits.” His benefits vest only at age sixty-five, or at the discretion of the Committee if he chooses to retire earlier.

That interpretation of the vesting provisions has been consistently upheld by the Ninth Circuit. For example, in Hernandez v. Southern Nevada Culinary & Bartenders Pension Trust, 662 F.2d 617 (9th Cir. 1981), the widow of a plan participant brought suit for benefits under a plan. At the time of his death the participant had a 100 percent vested interest in his accrued pension benefits. The claim was denied because he had not reached normal retirement age at the time of his death." The Ninth Circuit affirmed the district court’s grant of summary judgment for the plan, rejecting the widow’s claim that she was entitled to the “accrued benefits,” stating that “she misconceives the nature of the right which becomes vested.” Id. at 619. Accord, Chambless v. Masters, Mates & Pilots Pension Plan, 571 F.Supp. 1430, 1440 (S.D.N.Y.1983). In noting that ERI-SA requires no plan to “vest” benefits before normal retirement age, the Hernandez court pointed to the legislative history underpinning enactment of ERISA:

“Moreover, other provisions of ERISA and its legislative history indicate that Congress never intended to impose upon a plan a requirement that any benefits be payable before age 65. Riley v. MEBA Pension Trust, 452 F.Supp. 117, 120 (S.D.N.Y.1978), affd 586 F.2d 968 (2d Cir.1978); see § 1056(a); H.R.Conf.Rep. No. 93-1280, 93d Cong., 2d Sess., reprinted in 3 [1974] U.S.Code Cong. & Ad.News 5038, 5062.”

Hernandez, supra, 662 F.2d at 619-20.

In short, Cator’s vested benefits would arise at the age of sixty-five, normal retirement age; otherwise, his vested benefits could be distributed at the Committee’s discretion. But, to conclude, as does Cator, that on each May 31st, following the annual valuation date he was somehow “vested” in the sum reported thereto, is a mistaken understanding of the Plan’s provisions. If it were otherwise, each participant could conceivably argue that on each May 31st his benefits vested, at which point no action by the Committee could have a bearing on that vested amount.

Furthermore, Cator seems to suggest that ERISA guarantees a particular amount of benefits to be paid to a participant. However, in Alessi v. Raybestos-Manhattan, Inc., 451 U.S. 504, 101 S.Ct. 1895, 68 L.Ed.2d 402 (1981), the Court, in rejecting plaintiff’s claim that certain offset provisions with regard to state actions were invalid, held that ERISA does not require any particular level of benefits or method of calculation, but leaves this task to the parties creating the plan. Accord, Employee Benefits Committee of the Retirement System of Hawaiian Telephone Co. v. Pascoe, 679 F.2d 1319, 1321 (9th Cir.1982), citing Alessi. Alessi, supra, 451 U.S. at 511-12, 101 S.Ct. at 1900-01, states:

“[W]hat defines the content of the benefit that, once vested, cannot be forfeited? ERISA leaves this question largely to the private parties creating the plan. That the private parties, not the Government, control the level of benefits is clear from the statutory language defining nonforfeitable rights as well as from other portions of ERISA. * * * Similarly, the statutory definition of ‘nonforfeitable’ assures that an employee’s claim to the protected benefit is legally enforceable, but it does not guarantee.a particular amount or a method for calculating the benefit.”

In summation, the Court finds that the Committee properly interpreted the provisions of the Plan by denying Cator’s claim that the May 31st valuation date figures reflected his “vested benefits,” which were thereafter immune from the Committee’s actions. The provisions as to vesting of benefits at age sixty-five, or at the Committee’s discretion when an employee terminates earlier, are clear-cut and subject to particular interpretation, as discussed supra. Even if the provisions of the Plan are susceptible to more than one reasonable interpretation, the Court must give way to the trustee’s interpretation. See Gordon, supra, 616 F.2d at 439. This is particularly true, where as here, the Court is being asked to second-guess the technical provisions of a plan amendment implemented on the advice of actuarial experts. See, Souza, supra, 663 F.2d at 945.

For the foregoing reasons, the Court grants defendants’ motion for summary-judgment, and denies plaintiff’s motion for summary judgment.

      A deletion and renumbering of the footnotes requires the issuance of the Amended Opinion.

      . The H & W pension and profit-sharing plans have identical provisions, save for those dealing with characteristics particular to each type of employee benefit. Because the provisions at issue are the same for both plans, judicial economy is best served by referring to the "Plan” rather than to each plan separately, and to cite from the pension plan only.

      . Section VD of the Plan provides:

        “Determination and Allocation of Income. As of each Anniversary Date and prior to the allocations provided for in Section V-C the Trustee shall determine the fair market value of the Trust Fund and shall notify the Committee of its determination of the net appreciation (or depreciation) in the fair market value of the Trust Fund during such period, including the interest income of the savings accounts established pursuant to the provision of Section VIII-G. The Committee shall allocate to each account the net appreciation or depreciation and net income or loss (other than the interest income of such savings accounts) in proportion to the amount in such account prior to such allocation * * *.”

      . Section II-C of the Plan provides:

        “Participant Communication. The Committee shall keep on file a copy of this Agreement, and any amendments thereto, for examination by the Participants. The. Committee shall furnish a Participant each year with a statement of his interest in the Trust Fund as determined by the Committee as of the last preceding Anniversary Date.”

      . The parties concede that it was not until Ca-tor’s proposed retirement that the Committee addressed for the first time the issue of yearly versus interim valuations. Why the issue was not raised before Cator's proposed retirement is not known nor is it material or relevant to the resolution of these motions. What is dispositive is whether the Committee’s conduct in amending the Plan to protect all thirteen H & W pension accounts was reasonable.

      . In the present case, the Plan authorizes H & W to amend the Plan in its discretion as follows:

        “Amendment. The Employer expects to continue the Plan embodied herein indefinitely, but nevertheless reserves the right to amend this Agreement to any extent that it may deem advisable by delivery of a copy of said amendment executed by the authorized officers of the Employer and a certified copy of the resolution of its Board of Directors approving such amendment. Upon delivery of such copies to the Trustee, this Agreement shall be deemed to have been amended as set forth therein, and all Participants and all persons claiming any interest hereunder shall be bound thereby; provided, however, that no amendment: * * * (4) Shall adversely affect the then accrued benefits of any Participant."

      . The difference in valuation of Cator’s account between May 31 and October 31, 1981, was $72,390.14, a significant percentage of the total fund assets. If the additional $72,390.14 had been paid to Cator, the other twelve Plan participants would have suffered a loss not only of the 14 percent depreciation that might fairly be attributable to their accounts due to market fluctuations during that five month period, but would have also suffered a reduction by an additional 7.8 percent resulting from the payment to Cator. Declaration of Peter H. Zischke, page 4, lines 1-10.

      . The Amendment was unanimously approved by the Board of Directors of H & W on September 14, 1981, one month before Cator retired. He was notified promptly of the amendment before his retirement date. Declaration of Lawrence Jones, page 2, lines 17-21.

      . Section VIII-B of the Plan provides:

        “Normal Retirement Distribution. The distribution of the interest of a Participant in the Trust Fund shall normally commence on such a Participant’s Normal Retirement Date *
      Section 10 of the Plan provides:
      "Normal Retirement Date — The Normal Date of a Participant shall be the first day of the month following the month in which such a Participant’s 65th birthday occurs."


source: Caselaw Access Project

author: SOFAER, District Judge.

license: Public Domain

text:
    WORLDWIDE SUGAR CO., Plaintiff, v. ROYAL BANK OF CANADA, Defendant.
    No. 83 Civ. 1208 (ADS)
    United States District Court, S.D. New York.
    July 6, 1984.

      Richards, O’Neil & Allegaert, New York City (Thomas Sheridan, New York City, of counsel), for plaintiff.
    Sage, Gray, Todd & Sims, New York City (William Allingham, John Hannaway, New York City, of counsel), for defendant.
   MEMORANDUM OPINION AND ORDER

SOFAER, District Judge.

This case involves an alleged breach of contract. The parties filed cross-motions for summary judgment, and an oral opinion granting judgment for the defendant was delivered on March 7, 1984. This memorandum spells out in greater detail the basis for that decision.

The plaintiff, Worldwide Sugar Corp. (“Worldwide”), is a sugar trading company located in New York. On December 18, 1981, Worldwide made a contract with Grupo Vicini (“Vicini”) to purchase 10,000 long tons of sugar and pick up that sugar from Vicini in the Dominican Republic. Plaintiff’s 3(g) Statement (No. 1); Affidavit of Jose Mari Chan, Oct. 7, 1983, at 3; Affidavit of William Allingham, Sept. 14, 1983, at 1. The December 18 contract neither included any provision for the furnishing by Worldwide of a letter of credit nor required that Vicini furnish a letter guaranteeing performance.

As, of March 31,1982, Worldwide had not yet presented a vessel to pick up the sugar. Plaintiff’s 3(g) Statement (No. 5). On March 30, 1982, and again on April 1, 1982, Vicini requested that Worldwide pay ninety-five percent of the sugar’s value. Id. (No. 6). On April 2, 1982, apparently in response to this request, Worldwide applied to the Morgan Guaranty Trust Company of New York (“Morgan”) for a letter of credit naming Vicini as the beneficiary and the Royal Bank of Canada (“Royal”) as the seller’s advising bank. On April 6, 1982, Morgan issued a letter of credit in favor of Vicini to expire on July 31, 1982. Royal received notice of the letter of credit, which included special instructions stating that payment would be made upon receipt by Morgan of the following:

1. Sellers commercial invoice for 10,-000 LT.
2. Copy of insurance policy covering mentioned quantity of sugar indicating in case of sugar damage beneficiary to reimburse buyer the equivalent amount negotiated.
3. Letter of Guarantee from beneficiary stating they will load free of charge Dominican sugar as mentioned in invoice on board vessel(s) that buyer present and to present usual shippine [sic] documents necessary.
4. Warehouse receipts covering 10,-000 LT min/max of Dominican sugar.
5. Certificate of Lloyds that there is actually sugar to cover above-mentioned Warehouse receipts.
6. All documents to be issued in favor of Morgan Guaranty Trust Co., New York for account of Worldwide Sugar Corp.

Chan Affidavit, Exh. D.

On April 12, 1982, in order to comply with the third instruction, Vicini requested Royal to issue a guarantee in favor of Morgan. Deposition of Michael Kelly, May 24, 1983, at 31; Chan Affidavit, Exh. E. Of the 10,000 long tons of sugar which Vicini had contracted to sell to Worldwide, 6,000 were actually delivered in mid-April.

Royal requested clarification of certain language in the letter of credit on April 13, 1982. Two days later, it withdrew this request and telexed Morgan that the “documents required have been presented ... in compliance with the terms and conditions of your credit.” Chan Affidavit, Exh. G. Royal then requested payment under the letter of credit, enclosing the documents. See Reply Affidavit of William Allingham, Oct. 14, 1983, Exh. W. On the same day, but in a separate letter, Royal confirmed to Morgan that the letter of guarantee had been issued. The full text of the letter of guarantee reads as follows:

The Manager
Morgan Guaranty & Trust Co.
23 Wall Street
New York, N.Y. 10015
U.S.A.
Dear Sirs:
Re: Your L/C 803254 — our OBLC 36 We hereby guarantee that beneficiaries will load free of charge Dominican Sugar as required in your above mentioned Letter of Credit.
This guarantee is issued in order to comply with agreement between buyers and sellers and will expires [sic] on July 31, 1982.

Chan Affidavit, Exh. H. The reference in the guarantee to an agreement between Worldwide and Vicini, as explained below, is not a reference to the December 18 contract, but to a later agreement between Vicini and Worldwide concerning payment by letter of credit.

On April 20, 1982, Morgan refused payment of the letter of credit, since the documents had to be presented to Morgan in New York. Chan Affidavit, Exh. J. Royal responded on April 22 by telex stating that Worldwide had “authorized payment” to the beneficiary Vicini. Id. Exh. K. On the same day, Vicini telexed Worldwide, asking Worldwide to instruct Morgan to pay Royal the full amount of the letter of credit. Id. Exh. L.

Worldwide chose, however, to abandon the letter-of-credit mechanism. On April 23, 1982, it paid two checks totalling $2,915,360 directly to Royal, representing the full amount that would have been payable under the letter of credit for the 10,-000 long tons. Id. Exh. M. On the same day, Worldwide requested Morgan to cancel the letter-of-eredit arrangement. Id. Exh. N. On April 26, 1982, Morgan telexed Royal requesting that it obtain Vicini’s agreement to cancel the letter of credit. Id. Exh. O. On April 27, four days after Worldwide had.paid for the sugar, Morgan acknowledged the “receipt of documents” necessary for payment under the letter of credit. Since payment had been made outside the letter of credit, Morgan asked Royal’s letter-of-credit collection department to “release [the] documents directly to the buyers free of payment.” Id. Exh. P. Royal granted this request on May 4, 1982. Id. Exh. Q. Vicini agreed to the cancellation of the letter of credit, Morgan was so advised, and the letter of credit was can-celled. Plaintiff’s 3(g) Statement (No. 21).

On May 5, 1982, President Reagan issued Proclamation No. 4941, 47 Fed.Reg. 19661, imposing a quota on the importation of sugar into the United States. The Proclamation placed a limit upon the amount of foreign sugar that could be brought into the country or be withdrawn from warehouses for consumption between May 11 and June 30, 1982. At the end of that period, the Secretary of Agriculture was to establish separate quotas for each quarter. Chan Affidavit, Exh. R. The New York Coffee, Sugar and Cocoa Exchange (“Exchange”) had adopted a set of rules dealing with contracts for the sale of sugar. Id. Exh. S. The rules established standard terms for sugar contracts, and Vicini and Worldwide had agreed in their December 18, 1981, contract that Rule 11 of the Exchange rules would govern their contract, except as altered by their contract’s express terms. Id. Exh. A. As a result of the President’s proclamation and a subsequent interpretation of the Exchange rules by the President of the Exchange, producers who sold sugar under Rule 11 contracts could refuse to deliver sugar it the destination was the United States, and could demand premiums from buyers who wished to bring sugar to the United States. Id. Exhs. Y & Z.

These developments occurred after Vicini was paid and after Worldwide had picked up 6,000 tons of the sugar. A second vessel, the Polyxeni, had been presented at the Dominican port on or about April 19, 1982, for the purpose of picking up the remaining 4,000 tons. On inspection, however, the Polyxeni was found unfit to receive the sugar. Plaintiff’s 3(g) Statement (Nos. 14-16). The Polyxeni was then removed from the line of vessels awaiting loading; instead of trying to clean the ship, Worldwide discharged it from its charter on April 21, 1982, and advised Vicini by telex. Chan Affidavit, Exh. I. When Worldwide finally presented a vessel, the Brava Rio, for loading on July 29, 1982, Vicini refused to load. Worldwide contends that the language of its contract with Vicini required Vicini to deliver sugar to the United States without the payment of a premium. Id. Exh. EE. Vicini has refused to deliver the sugar, however, unless the sugar is shipped to somewhere other than the United States, or a premium is paid for delivery to the United States. In this suit, Worldwide claims that the contract has been breached because it had the express right to take the sugar to the United States, and seeks to enforce the guarantee between Royal and Morgan that the sugar would be delivered to Worldwide, contending that it is a third party beneficiary of the guarantee.

I.

Summary judgment is appropriate when no material fact is genuinely in dispute, and when the controversy can be settled as a matter of law. In determining whether summary judgment is appropriate, a court must “resolve all ambiguities and draw all reasonable inferences in favor of the party against whom summary judgment is sought, with the burden on the moving party to demonstrate the absence of any material fact genuinely in dispute.” FLLI Moretti Cereali S.p.A. v. Continental Grain Co., 563 F.2d 563, 565 (2d Cir.1977) (quoting Heyman v. Commerce and Industry Ins. Co., 524 F.2d 1317, 1320 (2d Cir.1975)).

Worldwide bases its cause of action against Royal on two theories. First, it argues that Royal issued its written guarantee of Vicini’s performance to Morgan as Worldwide’s representative and in accordance with the December 15, 1981 contract between Worldwide and Vicini. Second, it claims that even if the guarantee was part of a separate contract between Morgan and Royal, it is entitled to sue as a third-party beneficiary of that contract.

Worldwide’s first argument is untenable. The letter of credit was a separate agreement between Morgan and Royal. The documents issued by Morgan approving the letter of credit, the letter from Vicini to Royal requesting issuance of the guarantee, and the letter of guarantee itself all mention that the guarantee was issued to satisfy the requirement referred to in the special instructions attached to the letter of credit. Indeed, in its July 27, 1982 telex to Royal, asking Royal to see either that the sugar was loaded or that a refund of Worldwide’s advance payment was made, Worldwide referred to Royal’s letter as “your guarantee to Morgan Guaranty Trust New York dated April 15, 1982.” Chan Affidavit, Exh. AA (emphasis added).

Worldwide relies on arguably ambiguous language in the letter of guarantee itself— the reference to the “agreement between buyers and sellers” — and states conclusorily that this language “reflects Royal’s understanding that Worldwide had requested the guarantee and Vicini had agreed with Worldwide to provide one.” Plaintiff’s Memorandum of Law In Opposition to Defendant’s Motion for Summary Judgment at 7. Worldwide attempts to corroborate its position by relying upon the deposition testimony of Robert Siebel, a vice president of Morgan. See id. The full text of the Siebel deposition makes clear, however, that the guarantee, although “separate” from the letter of credit, was definitely viewed as part of the arrangements surrounding the issuance of the letter. Deposition of Robert L. Siebel, Aug. 29, 1983, at 39-40. Morgan insisted on the letter of guarantee because of its hesitancy to finance a letter-of-credit transaction using warehouse receipts as the only collateral in a situation it perceived as “lacking warehouse discipline.” Id. at 40.

Prior to the completion of discovery, some ambiguity existed concerning the reference to an “agreement” in the letter of guarantee. It is now clear, however, that the original agreement contained no requirement for payment by letter of credit or for a guarantee, and that to the extent that Vicini and Worldwide made an additional agreement after their December 18, 1981 contract for the purchase of sugar, that later contract concerned the way in which payment was to be made under the December 18 contract — i.e., by letter of credit. Allingham Reply Affidavit at 7. Michael Kelly, the assistant manager of Royal’s Santo Domingo branch, who signed the letter of guarantee, testified without contradiction that he had been informed by one of the officers of Vicini that Worldwide and Vicini had reached a second agreement supplementing their original contract, “as a result of which Morgan Guaranty Trust Company issued a letter of credit in their favor.” Kelly Deposition at 41; see id. at 39. Thus, if Worldwide has a cause of action against Royal as the guarantor of Vicini’s performance, that right must be based upon its position as a third-party beneficiary of the Morgan-Royal contract.

II.

Letters of credit are contracts, and as such are governed by general principles of contract law. J. Zeevi & Sons, Ltd. v. Grindlays Bank (Uganda) Ltd., 37 N.Y.2d 220, 225, 333 N.E.2d 168, 172, 371 N.Y.S.2d 892, 897, cert, denied, 423 U.S. 866, 96 S.Ct. 126, 46 L.Ed.2d 95 (1975); accord Venizelos, S.A. v. Chase Manhattan Bank, 425 F.2d 461, 465-466 (2d Cir. 1970). The longstanding New York rule is that a third party may recover “only by establishing (1) the existence of a valid and binding contract between other parties, (2) that the contract was intended for his benefit and (3) that the benefit to him is sufficiently immediate, rather than incidental, to indicate the assumption by the contracting parties of a duty to compensate him if the benefit is lost.” Burns Jackson Miller Summit & Spitzer v. Lindner, 59 N.Y.2d 314, 336, 451 N.E.2d 459, 469, 464 N.Y.S.2d 712, 722 (1983). In this case, Worldwide’s claim satisfies none of these criteria.

A. Enforceability of the Morgan-Royal Contract

Morgan and Royal rescinded the underlying contract of which Royal’s letter of guarantee was a part. The contract involving a letter of credit is “entirely separate and distinct from the underlying sales contract.” H. Harfield, Bank Credits and Acceptances 72 (5th ed. 1974); see Venizelos, S.A., 425 F.2d at 465. Therefore, the continued existence of the Worldwide-Vicini contract is irrelevant to Worldwide’s claim of standing under the letter-of-credit arrangement between Morgan and Royal. The rescission destroyed any rights Worldwide might have had:

Parties to a contract entered into for the benefit of a third person may rescind the contract as they see fit without the assent of the third person at any time before the contract is accepted, adopted or acted upon by him and such rescission deprives the third person of any rights under or because of such contract.

Weissman v. Blue Cross of Western New York, 116 Misc.2d 1063, 1066, 457 N.Y.S.2d 392, 395 (City Ct. Buffalo 1982) (quoting Dyer v. Great Eastern Ins. Co., 71 Misc.2d 89, 93, 335 N.Y.S.2d 771, 776 (Sup.Ct. 1972)); see Moore v. Ryder, 65 N.Y. 438, 442-43 (1875); accord McCulloch v. Canadian Pacific Ry. Co., 53 F.Supp. 534, 544-45 (D.Minn.1943) (interpreting New York rule). Moreover, a guarantor “should not be bound beyond the express terms of his guaranty [and that] ... guaranty will be limited to the transaction for which it was given, unless its terms clearly import a continuing liability.” Central Trust Co. v. J. Gottermeier Development Co., 65 Misc.2d 676, 678, 319 N.Y.S.2d 25, 27 (Sup. Ct.1971).

In this case, Worldwide manifested no acceptance of or reliance on the Royal guarantee. Indeed, Worldwide circumvented the entire letter-of-credit arrangment by paying Vicini directly, rather than leaving Morgan to pay for the sugar. As the chronology of communications presented above demonstrates, Worldwide not only paid Vicini outside the letter-of-credit arrangment, but also paid Vicini before it or Morgan had received the letter of guarantee written by Royal pursuant to the letter of credit. On April 23, Worldwide directed Morgan to cancel the Morgan-Royal letter of credit, presumably to avoid Royal’s drawing on the letter after Vicini had already been paid. The guarantee was a condition of that letter of credit, so Worldwide cannot now claim the benefits which it would have accrued had it paid Vicini by means of an instrument whose cancellation it expressly instructed. Once the underlying claim to which the guarantee pertained was extinguished — and that underlying claim here relates to the Morgan letter of credit, not to Vicini’s obligation to perform its contract with Worldwide — the guarantee too was extinguished and no suit can be brought upon it. See John Berger & Son Co. v. Duys, 174 Misc. 976, 977-78, 22 N.Y.S.2d 470, 471 (Sup.Ct.1940), affd, 261 A.D. 961, 26 N.Y.S.2d 503 (1941); cf. Dumbadze v. Agency of Canadian Car & Foundry Co., 38 N.Y.S.2d 991, 1004 (Sup. Ct.Spec.Term 1942) (plaintiff who settled claim against principal could not sue surety), affd, 267 A.D. 782, 45 N.Y.S.2d 955 (1943).

Worldwide’s contention that Royal’s guarantee somehow survived cancellation of the letter of credit is similarly unpersuasive. Worldwide bases this claim on Morgan’s April 27, 1982 telex to Royal, requesting Royal to permit it to release “all documents” to Worldwide free of payment. Worldwide contends that Royal’s May 4 assent to this request effectively transformed the letter of guarantee which Royal gave to Morgan into a guarantee from Royal to Worldwide. The letter of guarantee, however, does not fall within the category of “documents” to which the April 27 telex referred. Those documents are properly understood as the incidents of title to the sugar, to which Royal referred in its April 15 telex to Morgan. These documents served a dual purpose, both communicating information about the sugar involved in the Worldwide-Vicini transaction and serving to trigger Morgan’s obligation to pay under the Morgan-Royal agreement. Thus, their usefulness survived the death of the Morgan-Royal letter of credit.

The guarantee itself, however, cannot be viewed as one of these “dual purpose” documents. First, although Royal wrote the letter of guarantee on the same day that it complied with the other conditions of the letter of credit, it sent the guarantee to Morgan separately. By its very manner of presentation, then, the guarantee was treated as special. Second, Worldwide provided no consideration for the Royal guarantee. While no consideration on the part of Royal or Vicini would have been necessary to induce Morgan to establish or modify its letter of credit, see N.Y.U.C.C. § 5-105 (McKinney 1964), the converse is not true. For Royal’s guarantee to be valid and enforceable, Royal must have received some consideration, either from Worldwide or from Morgan. See Central Trust Co., 65 Misc.2d at 678, 319 N.Y.S.2d at 27. But Royal received no consideration for making its guarantee. Worldwide’s payment, standing alone, did not furnish any additional consideration, since that payment was due under the December 18,1981 Worldwide-Vicini contract. Worldwide’s claim that its decision to make that payment in advance of lifting all .the sugar furnished such consideration is also unavailing. Worldwide made the payment before it ever saw the terms of Royal’s guarantee. Worldwide’s claim that it relied on Royal and Vicini’s “representations” that a guarantee was forthcoming suggests more that the guarantee induced Worldwide to accelerate payment than that Worldwide had done anything beyond arranging for the letter of credit to induce Vicini to arrange for a guarantee. In rescinding the letter of credit, Worldwide rescinded the only consideration involved in the letter of guarantee. Worldwide’s alleged reliance on the letter of guarantee — even had it occurred — would have been unreasonable, because it should have realized that the guarantee was void once the letter-of-credit arrangement between Morgan and Royal had been extinguished.

B. Intention To Benefit Worldwide

To recover as a third-party beneficiary to the Morgan-Royal contract, Worldwide must be “the real promisee,” that is, “the promise must [have been] made to [it] in fact although not in form. It is not enough that the contract may operate to [Worldwide’s] benefit. It must appear that the parties intended] to recognize [Worldwide] as the primary party in interest and as privy to the promise.” Rey v. Penn Shipping Co., 277 F.2d 905, 906-07 (2d Cir.) (quoting Pennsylvania Steel Co. v. New York City Ry., 198 Fed. 721, 749 (2d Cir.1912)), cert, denied, 364 U.S. 829, 81 S.Ct. 68, 5 L.Ed.2d 56 (1960); see Port Chester Electrical Construction Corp. v. Atlas, 40 N.Y.2d 652, 655, 357 N.E.2d 983, 986, 389 N.Y.S.2d 327, 330 (1976).

The Morgan-Royal contract evidences no intent to benefit Worldwide. To the extent that the circumstances underlying the letter-of-credit arrangement manifest any intent to benefit any third party, that party is Vicini. Worldwide asked Morgan to issue the letter of credit of which the guarantee was a condition expressly for the benefit of Vicini, because Vicini was uneasy about Worldwide’s failure to pick up the sugar as of March 31, 1982. The essence of the Morgan letter of credit was “the substitution of a bank’s credit for that of a less credible obligor.” H. Harfield at 29; see Venizelos, 425 F.2d at 464-65. Additional arrangements were made solely for Vicini’s benefit, ostensibly to replace the means of payment contemplated by the December 18, 1981 contract.

To the extent that a beneficiary of the guarantee itself can be isolated, that beneficiary was Morgan. Although the contractual relationship between Worldwide and Morgan is not at issue in this suit, see. Venizelos, 425 F.2d at 465 (contract between issuing bank and its customer is separate contract), Morgan's willingness to issue a letter of credit for Worldwide’s account depended on its assessment of Worldwide’s overall financial position. That position, and therefore Worldwide’s ability to reimburse Morgan, would have been injured if Worldwide had been unable to obtain and sell the Vicini sugar. Mr. Siebel of Morgan made clear that this concern lay at the heart of Morgan’s request for a guarantee as a condition of the letter of credit: the bank was “concerned about the financial viability of our client since we would have an outstanding line of credit available for their use.” Siebel Deposition at 71. The only way that Morgan could protect itself was to make sure that Vicini would deliver the sugar to Worldwide, which would sell it and deposit the proceeds in its account at Morgan. Therefore, the benefit to Worldwide from Vicini’s guarantee can only be described as incidental, since, under the letter-of-credit transaction (of which the guarantee was an inseparable part) Worldwide was simply a conduit to funnel back to Morgan the funds which Morgan had advanced. Cf John Berger & Son Co., 174 Misc, at 977-78, 22 N.Y.S.2d at 471 (guarantee whose purpose was to induce buyer to assume bonds as part of sale not made for benefit of bondholders). The fact that funds were to pass through Worldwide’s hands on their way to Morgan cannot transform Worldwide into an intended beneficiary of the Morgan-Royal contract.

C. Immediacy of the Benefit to Worldwide

Worldwide relies upon its banker’s testimony that “since Morgan acts for the buyer, it was for the buyer’s ultimate benefit” that Morgan demanded a guarantee from Royal. Plaintiff’s Memorandum at 7-8; Siebel Deposition at 78-79. It claims that this language proves — or is sufficient to raise as issue of fact concerning — intent to benefit a third party, since the benefit to that party is “the direct result of performance and so within the contemplation of the parties.” E.g., Goodman-Marks Associates v. Westbury Post Associates, 70 A.D.2d 145, 148, 420 N.Y.S.2d 26, 28-29 (1979). But this testimony and the line of authority referred to by plaintiff fail as a matter of law. Even if we assume — as we must — that a benefit to Worldwide was sufficiently within the contemplation of Morgan and Royal to make that benefit intentional, that benefit was not “sufficiently immediate ... to indicate the assumption by the contracting parties of a duty to compensate [it] if the benefit is lost.” Burns Jackson Miller Summit & Spitzer, 59 N.Y. at 336, 451 N.E.2d at 469, 464 N.Y.S.2d at 722.

The cases employing the presumption that the fact that a benefit was furnished directly to the third party — in this case, that the sugar was to be loaded onto Worldwide’s vessels — indicates an intention to benefit simply do not answer the question whether the contracting parties intend for the third party to have an action for breach of the contract. In this case, no evidence indicates that the contracting parties intended that Worldwide obtain through the guarantee an additional party against whom it might bring suit if Vicini were to violate its December 18 agreement. Because Royal’s guarantee was an integral part of the letter-of-credit transaction, it was only intended to come into play if Vicini sought payment for the sugar under the letter of credit. There is no reason why Vicini, which already was worried about Worldwide’s performance under the December 18 contract, would ask its bank to provide Worldwide with a guarantee. Vicini could not have wanted Worldwide to receive additional rights when it had not performed its duties under the existing contract. Nor is any reason or evidence offered why Royal would extend its guarantee after the termination of the arrangement under which it would at least have obtained its fees as advising bank. To permit recovery from an advising bank on the basis of a terminated letter-of-credit arrangement would impose an unacceptable burden on such banks, since they are in no sense involved in the underlying contract which survives the end of their role. Even to allow cases based on claims against such non-involved banks to proceed to trial would create unwarranted uncertainty which ultimately would both impair bank financing and increase the costs of obtaining such financing.

Finally, no breach of the Morgan-Royal contract occurred. That contract contemplated the following general course of events: (1) Royal would issue a guarantee; (2) Morgan would issue a letter of credit; (3) Vicini would draw upon the letter; (4) Vicini would load the sugar on Worldwide’s ships when they arrived in the Dominican Republic. If Vicini had performed step 3, but refused to perform step 4, then Vicini would have breached the Morgan-Royal contract. But Morgan never performed the second step and Vicini never performed the third. Thus, it cannot be said that Vicini’s refusal to load the ship sent in late July was a breach of the Morgan-Royal contract, of which the guarantee was a part. If anything, Vicini’s refusal was a breach of the Worldwide-Vicini contract, and Worldwide’s remedy lies against Vicini alone. Having short-circuited the Morgan-Royal agreement, Worldwide cannot sue Royal for its non-breach.


text:
    COVENANT MUTUAL INSURANCE COMPANY, Plaintiff, v. ABLE CONCRETE PUMP, et al., Defendants.
    No. C-83-0986 WHO.
    United States District Court, N.D. California.
    July 25, 1984.

      Mark O. Rorem, E.S. Wilson, Maloney, Chase, Fisher & Hurst, San Francisco, Cal., for plaintiff.
    Maurice Trad, San Francisco, Cal., for John A. Ferrera, dba John Ferrera Painting Co.
    Aaronson, Dickerson & Lanzone, P.C., San Carlos, Cal., for Pacific Ready-Mix Inc.
    Foley & Foley, San Jose, Cal., for Nestor Insulation, Inc.
    Hugh P. Gallagher, Berkeley, Cal., for Pacific Tel. & Tel. Co.
    George E. Couper, Inc., A Law Corp., Sacramento, Cal., for L.E. Boyd Roof Structures.
    Joseph H. Inglese, P.C., San Francisco, Cal., for Wesco.
    John K. Van de Kemp, Atty. Gen., of Cal., Randall P. Borcherding, Deputy Atty. Gen., San Francisco, Cal., for Franchise Tax- Bd. of the State of Cal.
    Raymond J. Davilla, Jr., Kelly, Leal & Olimpia, P.C., Sunnyvale, Cal., for Gerry Wilkinson Corp.
    Stimmel & Stimmel, P.C., Lee D. Stimmel, Patricia Nichols, San Francisco, Cal., for Alameda Elec. Distributors, Inc.
    Robert L. Randall, San Jose, Cal., for Independent Scissors Lifts, Inc.
    Law Offices of Edward D. Schwartz, David L. Samuelson, San Jose, Cal., for Space Designs, Inc.
    Burriss, Lowman & Rice, P.C., Mountain View, Cal., for Neu Bros. Grading & Paving, Inc.
    Auerbach & Dauphin, Inc., Harold B. Auerbach, San Francisco, Cal., for Creditors American Steel & Gulf Western Mfg. Co., Bohn Heat Transfer Div.
    Stimmel & Stimmel, Patricia Nichols, Stephen V. O’Neal, Claude M. Stern, Horwich & Warner, Michael Kissinger, San Francisco, Cal., for The Creditors Committee.
    Gregory D. Walker, Oakland, Cal., for Frank A. Diamantine dba Jackson Street -Lumber Sales.
   OPINION AND ORDER

ORRICK, District Judge.

The sole issue left to be decided in this action is whether a surety for both payment and performance bonds on a government contract who completes performance for the defaulting contractor and also deposits the full amount of the payment bond with the court is entitled to sums retained by the government from the original contractor’s progress payments even though the payment bond does not fully compensate that contractor’s subcontractors. For the reasons set forth herein, plaintiff surety in this case is a subrogee of the government and has an equitable right to the retainages.

I

On November 16, 1981, Joel-Li Construction Company (“Joel-Li”) entered into a contract with the United States government to construct a research facility for

NASA at the Ames Research Center in Mountain View, California. The total contract price of $1,312,000 was amended by change orders to $1,334,285. Payment and performance bonds, as required by the Miller Act, 40 U.S.C. § 270a , were executed by Joel-Li as principal and plaintiff, Covenant Mutual Insurance Company (“Covenant”), as surety. The liability limit on the payment bond was $524,800. The liability limit on the performance bond was $1,180,-000. The contract between the government and Joel-Li provided that 10 percent of each progress payment be retained by the government. This is a standard provision in government contracts. The sums retained are commonly referred to as “contract retainages”.

Joel-Li defaulted on January 19, 1983, having completed work with a value of $1,246,165. To that date, the government had paid $1,180,565 to Joel-Li and had retained the balance of $65,600. Pursuant to a Takeover Agreement, dated February 2, 1983, Covenant completed the contract, which it had the option to do under its performance bond. After Covenant took over, additional change items were issued totalling $45,374.99, increasing the total contract price to $1,379,659.99. Subtracting the amount previously paid to Joel-Li, this left $199,094.99 to cover the cost of the work: $133,494.99 as the balance of the contract and $65,600 in prior retainages. Covenant spent $238,548.03 to complete the project. Thus, Covenant suffered financial losses, even if it is entitled to the retainages.

On March 2, 1983, Covenant filed an interpleader action and paid $524,800, the full sum of its obligations under the payment bond, into the Court. The defendants are creditors of the contractor, Joel-Li, i.e., subcontractors who have not been paid. The payment bond is designed to pay them. During the first hearing the creditors organized themselves. A Creditors’ Committee was formed to oversee their interests and to accept and review claims on the payment bond. On April 20, 1983, an Order re Interpleader submitted by the Creditors’ Committee was filed.

Paragraph 8 of that Order provided that the preliminary report of the Committee would contain a recommendation as to whether plaintiff should be discharged from further liability. The Court approved the preliminary report of the Committee at a December 2,1983, hearing. At that time, the parties suggested that the Court postpone ruling on the issue of who is entitled to retainages until it could be determined whether the interpleaded payment bond fund would be sufficient to satisfy all bona fide claims. Unfortunately, it was not sufficient to cover all claims approved for disbursement by the Committee. After a pro rata distribution among approved claims, each claimant will recover approximately 67 percent of its claim.

II

Contracts for construction of a government building are subject to the provisions of the Miller Act, 40 U.S.C. §§ 270a-270d. This Act requires parties contracting with the government to secure two bonds: a performance bond and a payment bond. If the original bonded contractor fails to complete performance, the performance bond surety must either complete performance or reimburse the government for its completion costs, minus retainages. A payment bond surety must pay laborers and materialmen whom the bonded contractor failed to pay. The issue in this case is whether a surety for both performance and payment, who has completed performance at a cost greater than the balance owing on the contract and who has deposited the full amount of the payment bond with the court, is entitled to retainages even though the laborers and materialmen will not be fully reimbursed by the amount of the payment bond.

The defendant subcontractors attempt to characterize the bonds in this case as one bond. But the Miller Act was enacted to provide a separate bond for laborers and materialmen. United States v. Munsey Trust Co., 332 U.S. 234, 243, 67 S.Ct. 1599, 1603, 91 L.Ed. 2022 (1947). See also United States ex rel. James E. Simon Co. v. Ardelt-Hom Construction Co., 446 F.2d 820, 821 (8th Cir.1971) (“[T]he Miller Act by its clear language, which is fully supported by the legislative history, provides for a payment bond for protection of those providing labor and material on government projects and a performance bond for the protection of the United States”). Furthermore, the defendants agreed to discharge plaintiff from its obligations under the payment bond, implicitly recognizing that the two are separate.

Several parties may be entitled to assert equitable liens against sums retained by the government during the course of performance. The priority of rights to such retainages has been adjudicated in a variety of contexts, but the Court is aware of no authority that squarely addresses the issue presented by this case. In all the reported cases, a surety has performed on one bond or the other; in this case the plaintiff has performed on both.

Covenant claims entitlement to the retainages because it completed the contract under its performance bond. Under the theory of equitable subrogation, one who pays the debts or fulfills the duties of another steps into the shoes of that party and is entitled to the securities and remedies of that party. Defendants contend that unpaid laborers and materialmen have a prior equitable claim, and argue that a surety is not entitled to equitable subrogation unless and until the laborers and materialmen are paid in full. • '

A surety who completes performance has an “equitable right” to indemnification out of a retained fund superior to the right of a bank that loaned the defaulting contractor money. Prairie State Bank v. United States, 164 U.S. 227, 17 S.Ct. 142, 41 L.Ed.2d 412 (1896). A surety is also entitled to retainages when it pays laborers and materialmen although the contractor has completed the contract. Hen ningsen v. United States Fidelity & Guaranty Co., 208 U.S. 404, 28 S.Ct. 389, 52 L.Ed. 547 (1908). However, a surety who does not complete the contract but who pays the full amount of the payment bond is not entitled to retainages ahead of the laborers and materialmen when the payment bond does not fully compensate them. American Surety Co. v. Westinghouse Electric Manufacturing Co., 296 U.S. 133, 56 S.Ct. 9, 80 L.Ed. 105 (1935). But the government would be entitled to payment ahead of the laborers and materialmen if it had unpaid claims against the contractor. Id. The government is also entitled to set off claims it has against the original contractor before the surety who has fully paid laborers and materialmen may recover retainages. Munsey, supra, 332 U.S. at 234, 67 S.Ct. at 1599.

The reported opinions reflect some confusion about the purpose of retainages. The Munsey court noted that “[i]f the money is retained only to assure performance of the work, then the contractor might compel payment when the work is accepted. In that case, the surety’s argument falls, since obviously, before paying, the government might set off claims against the contractor.” Id. at 241, n. 4, 67 S.Ct. at 1603, n. 4. Later in the same opinion, the court states: “But although we have assumed, for the purposes of another argument, that assurances that laborers and materialmen will be paid is one of the reasons for retaining the money, it seems more likely that completion of the work on time is the only motive.” Id. at 243, 67 S.Ct. at 1603.

The government clearly can use retained funds to complete the contract itself. Pearlman v. Reliance Insurance Co., 371 U.S. 132, 141, 83 S.Ct. 232, 237, 9 L.Ed.2d 190 (1962). It is equally clear that the laborers and materialmen have no rights against the government. Munsey, supra, 332 U.S. at 241, 67 S.Ct. at 1602. The question in this case then becomes whether the surety is a subrogee of the government and therefore entitled to the retainages (which were insufficient to cover the cost of completing the contract), or is a subrogee of the contractor and therefore obligated to pay the claims of the defendant laborers and materialmen.

Although the question is close, this Court holds that under the circumstances of this case, the surety is entitled to the retainages as the subrogee of the government. By full satisfaction of its payment bond, the surety plaintiff has fulfilled its obligation to pay the laborers and material-men.

The obligation of the surety, however, unlike that of the contractor was created solely by the bond and is limited thereby and by the equities growing out of the suretyship relation. In any suit upon the bond, at least against the surety the nominated penalty was to be the limit of recovery.

American Surety, supra, 296 U.S. at 136-137, 56 S.Ct. at 10-11. Accord Pennsylvania Fire Insurance Co. v. American Airlines, Inc., 180 F.Supp. 239, 241 (E.D.N.Y. 1960).

Paragraph 3 of the Takeover Agreement executed by Covenant and the government provides:

Any unpaid earnings of the defaulting contractor, including retained percentages and progress estimates for work accomplished prior to termination, shall be subject to claims by the Government against the contractor, except to the extent that such unpaid earnings may be required to permit payment to the completing surety of its actual costs and expenses incurred in the completion of the work, exclusive of its payments and obligations under the payment bond given in connection with the contract.

This language is identical to the wording in 41 C.F.R. § 1-18.803-6, “Dealings with surety-takeover agreements.” The government had the right to use the retained earnings to complete the contract and it specifically delegated this right to plaintiff, in it’s role of completing the contract under the performance bond. Aetna Casualty & Surety Co. v. United States, 435 F.2d 1082 (5th Cir.1970); Trinity Universal Insurance Co. v. United States, 382 F.2d 317, 320 (5th Cir.1967) (“The surety who undertakes to complete the project is entitled to the funds in the hands of the government not as a creditor and subject to set-off, but as a subrogee having the same rights to the funds as the government.”); Royal Indemnity Co. v. United States, 93 F.Supp. 891, 896 (Ct.C1.1950) (“[S]hould a surety step in and complete its performance bond, it becomes subrogated to the Government’s claim against the retained percentages.”). But cf. Munsey, supra, 332 U.S. at 234, 67 S.Ct. at 1599 (government is entitled to set off claims it has against the original contractor before a surety who has fully paid laborers and materialmen on a payment bond may recover retainages).

The defendants rely principally on American Surety, supra, 296 U.S. at 133, 56 S.Ct. at 9. American Surety does hold that a surety may not recover retainages until laborers and materialmen have been paid in full but in that case the surety did not complete performance of the contract. Furthermore, the court noted that the government has priority for payment over the laborers and materialmen. Thus, as a subrogee of the government, the plaintiff is entitled to payment ahead of the defendants. As noted above, the American Surety court also stated that the obligation of the surety on the payment bond was limited to the amount of the bond. Finally, that case explicitly limited its holding to a surety whose equitable rights are derived from paying laborers and materialmen.

A surety who has undertaken to. pay creditors of the principal, though not beyond a stated limit, may not share in the assets of the principal by reason of such payment until the debts thus partially protected have been satisfied in full.

Id. at 137, 56 S.Ct. at 11 (emphasis added). The plaintiff in the instant case claims equitable subrogation by virtue of its completing performance, not by virtue of paying the defendants.

Covenant argues that a surety would never complete a contract but would always leave performance to the- government if it is not entitled to retainages when it performs but is entitled to deduct the retained amount from the cost of completion if the government performs. See Security Insurance Co. of Hartford v. United States, 428 F.2d 838, 842-843 (Ct.C1.1970) (“[I]t would defeat the purpose of the retainages — to assure completion of the contract — to permit setoff against the claims of the completing performance bond surety”). This compelling policy argument is further highlighted by the observation in Munsey: “[T]he statutory provisions requiring a separate bond for payment of laborers and materialmen were enacted for their benefit, not to the detriment of the government.” 332 U.S. at 243-244, 67 S.Ct. at 1603-1604.

The defendant laborers and materialmen have been paid a pro rata share of the payment bond required by the Miller Act. They agree that plaintiff should be released from its obligations under that bond. Although some of the disputed retainages were accumulated when defendants were performing on the contract and plaintiff was not, the government would be entitled to all retained sums if the plaintiff had elected to pay on its performance bond rather than to perform. In the instant situation, where the cost of completion exceeded the contract price, including retain-ages, the surety is entitled to the entire retained sums.

Accordingly,

IT IS HEREBY ORDERED that:

1. Plaintiff is hereby discharged from liability under the payment bond.

2. In light of the competing equities and the fact that the bond is insufficient to fully compensate defendants, plaintiff’s request for attorney’s fees is denied.

      . The relevant part of the Miller Act, 40 U.S.C. § 270a provides:
      (a) Before any contract, exceeding $25,000 in amount, for the construction, alteration, or repair of any public building or public work of the United States is awarded to any person, such person shall furnish to the United States the following bonds, which shall become binding upon the award of the contract to such person, who is hereinafter designated as "contractor":
      (1) A performance bond with a surety or sureties satisfactory to the officer awarding such contract, and in such amount as he shall deem adequate, for the protection of the United States.
      (2) A payment bond with a surety or sureties satisfactory to such officer for the protection of all persons supplying labor and material in the prosecution of the work provided for in said contract for the use of each such person.

       40 U.S.C. § 270a(a)(2) provides a specific formula for determining the penal amount of a Miller Act payment bond:
      Whenever the total amount payable by the terms of the contract shall be not more than $1,000,000 the said payment bond shall be in a sum of one-half the total amount payable by the terms of the contract. Whenever the total amount payable by the terms of the contract shall be more than $1,000,000 and not more than $5,000,000, the said payment bond shall be in a sum of 40 per centum of the total amount payable by the terms of the contract. Whenever the total amount payable by the terms of the contract shall be more than $5,000,000 the said payment bond shall be in the sum of $2,500,000.

      . The Act defines the rights of persons furnishing labor or material:
      Every person who has furnished labor or material in the prosecution of the work provided for in such contract, in respect of which a payment bond is furnished under section 270a of this title and who has not been paid in full therefor ... shall have the right to sue on such payment bond ...

      40 U.S.C. § 270b(a) (emphasis added). In this case, the surety recognized the rights of unpaid laborers and materialmen to sue on the payment bond and brought an interpleader action.

      . The Heard Act, which governed government contracts prior to 1935, required only one bond but it covered both performance and payment. 28 Stat. 278 (1894), amended 33 Stat. 811 (1905). The slight change created by the Miller Act did not affect the equitable principles announced in earlier cases. Pearlman v. Reliance Insurance Co., 371 U.S. 132, 140, 83 S.Ct. 232, 236, 9 L.Ed.2d 190 (1962).

      . Joel-Li defaulted on January 19, 1983. The first manned flight simulator was scheduled for delivery to the job site in early February 1983; twenty NASA personnel and their families were due to accompany it. Covenant exercised its option to undertake completion under the performance bond, in part, because of the critical time element and the inconvenience to NASA if the work was not completed prior to installation of the simulator.


author: BUA, District Judge.

text:
    UNITED NATIONAL RECORDS, INC., et al., Plaintiffs, v. MCA, INC., et al., Defendants.
    No. 82 C 7589.
    United States District Court, N.D. Illinois, E.D.
    Nov. 9, 1984.
    See also, 101 F.R.D. 323.
   ORDER

BUA, District Judge.

Before the Court are certain defendants’ motions for partial summary judgment and defendant United Artists Corporation’s motion for summary judgment. For the reasons stated below, certain defendants’ motions for partial summary judgment are denied, and United Artists’ motion for summary judgment is entered and continued pursuant to Fed.R.Civ.P. 56(f) pending completion of discovery.

I. Certain Defendants’ Motions for Partial Summary Judgment

All defendants except United Artists Corporation move for partial summary judgment on plaintiffs’ claims arising before December 13, 1978. Defendants argue that the applicable four-year statute of limitations, 15 U.S.C. § 15b, bars any preDecember 13, 1978 claims. Plaintiffs argue that the limitations period should be tolled due to defendants’ fraudulent concealment of the cause of action and plaintiffs’ failure to discover defendants’ alleged wrongdoing despite the exercise of due diligence.

In this circuit, at least two types of fraudulent behavior toll a statutory limitations period. First, the “equitable tolling doctrine” will toll the limitations period if the defendant’s wrongdoing is undiscovered and the plaintiff has diligently inquired into its circumstances. Tomera v. Galt, 511 F.2d 504, 510 (7th Cir.1975). Although the plaintiff need not allege specific acts of concealment on the part of the defendant, the plaintiff must establish due diligence in order to toll the limitations period under the equitable tolling doctrine. The second type of fraudulent behavior which tolls the limitations period is generally referred to as the “fraudulent concealment doctrine.” See generally The Seventh Circuit’s Reformation of the Equitable Tolling Doctrine, 1982 U.Ill.L.Rev. 565, 568 (1982). Under this doctrine, the plaintiff must allege that the defendant has taken “positive steps after commission of the fraud to keep it concealed.” Id. Although the plaintiff need not establish due diligence, the plaintiff must specifically allege fraudulent action “subsequent to the initial wrong.” Gieringer v. Silverman, 731 F.2d 1272, 1278 (7th Cir.1984). In this case, plaintiffs have raised triable issues of fact Under either doctrine.

A. The Fraudulent Concealment Allegations

Plaintiffs allege that defendants, beginning at least as early as January 1, 1971, conspired and agreed to fix prices and impose industrywide conditions upon members of the class in violation of Section 1 of the Sherman Act, 15 U.S.C. § 1. Plaintiffs further allege that defendants affirmatively and fraudulently concealed their wrongdoing and that class members were without knowledge of the cause of action despite the exercise of due diligence.

Under the fraudulent concealment doctrine, the statute of limitations is tolled until actual discovery of the underlying wrong when the concealment is accomplished by affirmative acts designed to prevent discovery of the facts comprising the cause of action. Tomera v. Galt, 511 F.2d 504, 510 (7th Cir.1975). The affirmative acts of concealment must occur after the original wrongdoing. Id. Generally, the mere denial of any wrongdoing on the part of a defendant is insufficient to constitute affirmative acts of concealment under this doctrine. E.g., Rutledge v. Boston Woven Hose & Rubber Co., 576 F.2d 248, 250 (9th Cir.1978). “Hiding” the wrongdoing, “throwing up a smokescreen” or “misrepresentation” concerning the facts constituting the wrong, on the other hand, are sufficient allegations to toll the limitations period. Trecker v. Scag, 679 F.2d 703, 708 (7th Cir.1982).

Plaintiffs point to several press releases and other statements issued by defendants to the media as affirmative acts of concealment during the 1970s. Plaintiffs argue that these statements were designed to conceal the original wrong, defendants’ conspiracy to fix prices and imposed industrywide conditions. While many of defendants’ statements are merely denial of price fixing allegations, several statements go beyond the mere denial of wrongdoing. In fact, several statements offer alternative explanations for the apparent parallel prices of records and tapes during the 1970s. For example, in 1977 an official of defendant Warner Brothers allegedly denied allegations of price fixing and further explained that recent parallel price increases were “merely a case of other companies following the lead of their competitors.” Defendants' Exhibit B-97. Also in 1977, an official of defendant Capital allegedly explained that the recent price increases were due to the “pressures of inflation and shrinking margins.” Defendants’ Exhibit B-108. CBS allegedly explained that its price increases were due to “increased costs in many areas, including recording, raw materials, manufacturing, promotion, sales and distribution.” Defendants’ Exhibit B-19. Defendants RCA and Columbia allegedly offered similar explanations for their price increases. Defendants’ Exhibits B-28, B-79. In 1978, defendant Capital allegedly stated that its pricing structure “is always determined in the context of competitive considerations.” Defendants’ Exhibit B-172. All of these statements, allegedly attributable to defendants, go beyond mere denial of wrongdoing. Each statement offers an alternative reason for the apparent parallel price increases throughout the 1970s. These statements, among others contained in Defendants’ Exhibit B, create triable issues of fact as to whether defendants affirmatively concealed their alleged agreement to fix prices and impose industrywide conditions during the 1970s.

In addition to the various statements allegedly attributable to defendants in Defendants’ Exhibit B, plaintiffs point to allegedly secret meetings between defendants and confidential memoranda issued by defendants urging secrecy as further evidence of defendants’ fraudulent concealment. For example, plaintiffs allege that representatives of CBS and Warner (Atlantic) met secretly on March 25, 1974, for the purpose of concealing an alleged pricing agreement. See Exhibit C to plaintiffs’ Surreply. In addition, plaintiffs point to two “confidential” memoranda and one “confidential” letter allegedly discussing defendants’ future pricing plans. See Exhibits D, E and F to plaintiffs’ Surreply. Such conduct generally is sufficient to create a question of fact regarding a fraudulent concealment claim. See generally R. Marcus, Fraudulent Concealment in Federal Court: Toward a More Disparate Standard, 71 Geo.L.Rev. 829, 859 (1983), and cases cited therein.

B. The Due Diligence Allegations

Under the equitable tolling doctrine, when the wrongdoing “has been concealed or is of such a nature as to conceal itself, the statute of limitations is tolled until the plaintiff has obtained knowledge of the fraud or in the exercise of due care should have obtained knowledge of the fraud.” Sperry v. Barggren, 523 F.2d 708, 710 (7th Cir.1975) (citations omitted) (emphasis supplied). Although the plaintiff need not allege affirmative acts of concealment under this doctrine, the plaintiff must establish due diligence in inquiring into the circumstances surrounding the alleged wrongdoing. Tomera v. Galt, 511 F.2d 504, 510 (7th Cir.1975). Conspiracies to violate the antitrust laws are generally self-concealing. See, e.g., Greenshaw v. Lubbock County Beverage Assoc., 721 F.2d 1019, 1030 (5th Cir.1983).

Defendants argue that plaintiffs knew, or should have known, of their antitrust claims no later than 1978. Defendants point to several articles printed in trade publications which reported defendants’ announced price changes. See Defendants’ Exhibit B. Defendants, however, misconstrue the nature of the alleged wrongdoing. Defendants’ price increases, and even their apparent parallel price increases, do not constitute violations of the antitrust laws. See, e.g., Theatre Enterprises, Inc. v. Paramount Film Distributing Corp., 346 U.S. 537, 74 S.Ct. 257, 98 L.Ed. 273 (1954); Quality Auto Body, Inc. v. Allstate Ins. Co., 660 F.2d 1195 (7th Cir.1981). Mere knowledge that defendants were raising prices throughout the 1970s does not mean the plaintiffs knew or should have known that defendants were allegedly agreeing to fix prices. King & King Enterprises v. Champlin Petroleum Co., 657 F.2d 1147, 1156 (10th Cir.1981).

Defendants also argue that the existence of prior antitrust litigation against defendants should have put all plaintiffs on notice of the existence of a horizontal price fixing conspiracy. Defendants point specifically to a suit brought in 1976 by Dean Stamatopoulos, owner of plaintiff GHII, Inc. Although the Stamatopoulos litigation included allegations of price fixing, Stamatopoulos’ knowledge, in 1976, of the facts giving rise to his suit appear to be nothing more than assumptions based upon his observation of the parallel price structure of the industry. Stamatopoulos testified regarding the facts he knew in support of his 1976 lawsuit as follows:

After 21 years in the record business, I assumed something was going on fishy when everything was escalating at the same time. There was a définite pattern. Price raises, introduction of new midline products; it was too coincidental.

Stamatopoulos Dep. p. 201, reprinted at Defendants’ Exhibit F-77.

Class members cannot be charged with knowledge of a potential claim “unless they are aware of some evidence tending to support it.” In re Beef Industry Antitrust Litigation, 600 F.2d 1148, 1171 (5th Cir.1979) (emphasis supplied). The mere filing of a lawsuit “is not as a matter of law tantamount to actual or constructive known of their claim.” Id. (emphasis in original). Defendants have failed to establish that class members should be charged with knowledge of the alleged price fixing conspiracy merely because Stamatopoulos filed a similar lawsuit in 1976.

Defendants next argue that a federal grand jury investigation regarding possible antitrust violations within the record industry during the 1970s should have put plaintiffs on notice of their claims. Defendants point to several newspaper and trade publication articles reporting on the grand jury investigation. See Defendants’ Exhibit D. Several plaintiffs admit that they were aware of the grand jury investigation as early as 1977.

Defendants rely primarily on Dayco Corp. v. Goodyear Tire & Rubber Co., 523 F.2d 389 (6th Cir.1975) in support of their argument that the grand jury investigation should have put plaintiffs on notice of their antitrust claims in 1976. In Dayco Corp., the court held that widespread publicity regarding the defendants’ alleged illegal conduct should have put the plaintiffs on notice of their claims. Furthermore, the court held that the defendants’ denials of wrongdoing could not be considered affirmative acts of concealment. Accordingly, the court affirmed the district court’s grant of defendants’ motion for summary judgment on the statute of limitations.

Dayco Corp., however, is distinguishable from this case. In Dayco Corp., a public Congressional investigation was conducted regarding the defendants’ alleged wrongdoing. In addition, the Federal Trade Commission brought suit further exposing the defendants’ conduct. In this case, a federal grand jury conducted a secret investigation into defendants’ practices for about two years. Unlike Dayco Corp., the information presented to the grand jury was not available to plaintiffs. See Fed.R.Crim.P. 6(e). In addition, Dayco Corp. is not persuasive in light of the Sixth Circuit’s articulation of the elements of the fraudulent concealment doctrine. Unlike the Seventh Circuit, the Sixth Circuit apparently does not recognize the fraudulent concealment and equitable tolling doctrines as alternative means for a plaintiff to toll the limitations period. Instead, the Sixth Circuit requires a plaintiff to establish both affirmative concealment and due diligence before prevailing on a fraudulent concealment claim. See Dayco Corp. v. Goodyear Tire & Rubber Co., 523 F.2d 389, 394 (6th Cir. 1975). The Seventh Circuit requires that a plaintiff establish affirmative concealment or due diligence. Tomera v. Galt, 511 F.2d 504, -510 (7th Cir.1975).

In this case, even assuming plaintiffs could be charged with knowledge of the grand jury’s investigation, defendants’ emphatic denials of wrongdoing and alternative explanations for the apparent parallel price increases (See Defendants’ Exhibit B) may have caused plaintiffs to abstain from further investigation of their claims at that time. Although defendants’ “mere denials” do not constitute affirmative acts of concealment under the fraudulent concealment doctrine (see discussion supra at 36-37), defendants’ “mere denials” and alternative explanations may have reasonably caused plaintiffs to end their investigation into the true cause of the apparent parallel price structure of the record industry. See Mt. Hood Stages, Inc. v. Greyhound Corp., 555 F.2d 687, 698 (9th Cir. 1977). In any event, in light of defendants’ denials and alternative explanations, plaintiffs have raised a question of fact as to whether they should have disregarded defendants’ statements and inquired further into possible antitrust violations. See Sperry v. Barggren, 523 F.2d 708, 711 (7th Cir.1975) (admissions of plaintiffs’ knowledge concerning defendants’ conduct prior to limitations period admissible against plaintiffs at trial but not conclusive on motion for summary judgment).

The remaining argument advanced by defendants in support of their motion is without merit. Defendants argue that plaintiffs' allegations of fraudulent concealment should be stricken from the complaint for failure to allege the particularity required by Fed.R.Civ.P. 9(b). At a minimum, defendants request that the fraudulent concealment allegations be stricken without prejudice.

The specificity requirements of Fed.R. Civ.P. 9(b) have been imposed to ensure that a defendant is apprised of the fraud claimed in a manner sufficient to permit the framing of an adequate responsive pleading. Baselski v. Paine, Webber, Jackson & Curtis, Inc., 514 F.Supp. 535, 540 (N.D.Ill.1981). A party who fails to raise a Rule 9(b) objection normally waives the requirement. 2A J. Moore, Moore’s Federal Practice ¶ 9.03 (2d ed. 1984), at 9-35, and cases cited therein. The time limits applicable to Rule 12(b) motions may be applied by analogy to objections to the sufficiency of a pleading under Rule 9(b). Stonehill v. Security National Bank, 68 F.R.D. 24, 44 n. 38 (S.D.N.Y.1975).

The most analogous time limitation under Rule 12(b) is Rule 12(h)(1) regarding defenses under Rule 12(b)(1) through (5). Rule 12(h)(1) defenses are waived if not made as a motion under Rule 12. Furthermore, since defendants’ request that the fraudulent allegations be stricken from plaintiffs’ complaint, defendants’ request is also analogous to a Rule 12(f) motion to strike. A Rule 12(f) motion must be made within 20 days after service of the complaint. Defendants, however, chose to answer plaintiffs’ complaint and, therefore, cannot now complain that the complaint fails to plead fraud with sufficient particularity. The factual record before the Court contains specific evidence of defendants’ alleged fraudulent concealment. Defendants have had a sufficient opportunity to respond to plaintiffs’ charges as contemplated by Rule 9(b). Accordingly, _defendants’ contentions regarding plaintiffs’ failure to comply with Rule 9(b) have been waived. ~ ~ ~ ' ’

II. Defendant United Artists Corporation’s Motion for Summary Judgment

Defendant United Artists Corporation (“United Artists”) moves for summary judgment on the grounds that it has been improperly named as a defendant in this case. United Artists claims that it has never been a producer of records or tapes. Although United Artists admits that before May 5, 1978, it owned the outstanding shares of stock in a subsidiary record company, United Artists argues that: (1) it is not liable for the conduct of its former record company subsidiary; and (2) if any liability is found, plaintiffs’ claims are barred by the four-year limitations period. Plaintiffs argue that: (1) questions of fact exist as to whether United Artists is liable for the conduct of its subsidiary record company; and (2) questions of fact exist as to whether the limitations period should be tolled due to defendants’ fraudulent concealment of the cause of action. Alternatively, plaintiffs argue that defendants’ motion is premature pending the completion of discovery. Accordingly, plaintiffs have filed an affidavit under Fed.R.Civ.P. 56(f) requesting the Court to enter and continue defendant’s motion.

United Artists is principally engaged in the business of distributing motion pictures and is not engaged in the phonograph record industry. Before May 5, 1978, United Artists owned the outstanding stock of United Artists Music and Records Group, Inc. (“UAM”), a California corporation engaged in the record business. On May 5, 1978, United Artists sold its UAM. stock to the M & R Music Corporation.

In order for United Artists to be held liable for conduct attributable to its subsidiary, UAM, three elements must be proved:

(1) control by United Artists to such a degree that UAM has become its mere instrumentality;
(2) fraud or wrong by United Artists through its subsidiary, UAM; and
(3) unjust loss or injury to the-claimant, such as insolvency of UAM.

Steven v. Roscoe Turner Aeronautical Corporation, 324 F.2d 157, 160 (7th Cir. 1963). As to the first element, control, courts have considered a number of factors, including whether:

(a) the parent corporation owns all or most of the capital stock of the subsidiary;
(b) the parent and subsidiary corporations have common directors or officers;
(c) the parent corporation finances the subsidiary;
(d) the parent corporation subscribed to all the capital stock of the subsidiary or otherwise causes its incorporation;
(e) the subsidiary has a grossly inadequate capital;
(f) the parent corporation pays the salaries and other expenses or losses of the subsidiary;
(g) the subsidiary has no assets except those conveyed to it by the parent corporation;
(h) the parent corporation uses the property of the subsidiary as its own;
(i) the directors or executives of the subsidiary do not act independently in the interest of the subsidiary but take their orders from the parent corporation in the latter’s interest; and
(j) the formal legal requirements of the subsidiary are not observed.

Steven, supra, 324 F.2d at 161. See also Allegheny Airlines, Inc. v. United States, 504 F.2d 104, 112-113 (7th Cir.1974). While stock-control and common directors and officers are generally prerequisites for finding an instrumentality, they are not sufficient by themselves to bring the rule into operation. Steven, supra, 324 F.2d at 161.

Plaintiffs’ exhibits indicate that two officers of UAM, L.G. Bos and Michael Stewart, also served as officers of United Artists between 1975 and 1977. Plaintiffs’ exhibits further indicate that United Artists guaranteed several million dollars in loans made by various banks to UAM. United Artists admits that prior to May 5, 1978, it owned the outstanding stock of UAM. Plaintiffs, therefore, at best, have created questions of fact on only three factors listed in Steven. (Factors (a), (b) and (c)). Even assuming the truth of these allegations, however, there would be insufficient evidence to create a triable issue on whether UAM is a mere instrumentality of United Artists.

The Court, however, will enter and continue United Artists’ motion for summary judgment pursuant to Fed.R.Civ.P. 56(f). Plaintiffs should be given an opportunity to continue discovery on the issue of whether UAM was a mere instrumentality of United Artists as outlined in Steven. Accordingly, plaintiffs are ordered to file additional materials opposing United Artists’ motion no later than one week after the discovery cutoff date, February 11, 1985. United Artists may respond by February 18, 1985. If plaintiffs fail to file additional supporting materials, United Artists’ motion for summary judgment will be granted.

CONCLUSION

Certain defendants’ motions for partial summary judgment are denied. Defendant United Artists Corporation’s motion for summary judgment is entered and continued pursuant to Fed.R.Civ.P. 56(f) pending completion of discovery. Plaintiffs are to file additional materials in opposition to defendant United Artists’ motion no later than February 11, 1985, one week after the discovery cutoff date. Defendant United Artists to reply by February 18, 1985.

IT IS SO ORDERED.

      . Since the Court has denied defendants' motions for partial summary judgment, plaintiffs’ argument that the motions are premature under Fed.R.Civ.P. 56(f) is moot.

      . If plaintiffs convince the Court that factual questions exist regarding the three Stevens elements (control, wrongdoing and tinjust loss), United Artists’ motion will be denied. The Court has already decided that factual questions exist on the issue of whether plaintiffs may toll the limitations period under the equitable estoppel doctrine. See discussion supra at 36-39. Plaintiffs, however, may present evidence of affirmative acts of concealment on the part of United Artists in their February 11, 1985 materials if plaintiffs desire to utilize the fraudulent concealment doctrine against United Artists' at trial. See discussion supra at 36-37. Plaintiffs are entitled to conduct "merits discovery,” as well as discovery regarding the Stevens elements, pending determination of United Artists' motion for summary judgment.