author: JOSEPH H. YOUNG, District Judge.

text:
    Clifton J. McClelland, et al. v. Ruth MASSINGA, et al.
    Civ. No. Y-84-794.
    United States District Court, D. Maryland.
    Dec. 27, 1984.

      Mark J. Davis, Baltimore, Md., for plaintiff.
    Joseph B. Spillman, Baltimore, Md., for defendant.
   MEMORANDUM

JOSEPH H. YOUNG, District Judge.

Plaintiffs have filed this action seeking declaratory and injunctive relief under 42 U.S.C. § 1983, alleging that defendants’ actions in certifying child support obligations to the Comptroller of the Treasury and intercepting tax refunds to satisfy those support obligations, in accordance with the practice of the Tax Refund Interception Program of the Child Support Enforcement Administration (CSEA), have deprived them of due process of law guaranteed by the Fourteenth Amendment. Jurisdiction is conferred on this Court by 28 U.S.C. § 1343(3), which provides for original jurisdiction of all actions brought under 42 U.S.C. § 1983.

Plaintiffs are six individuals whose tax refunds have been intercepted to satisfy outstanding child support obligations under the state’s Tax Refund Interception Program (TRIP) codified in Md.Code Ann.Art. 88A § 59(e). Under the terms of that program, the CSEA may certify to the Comptroller of the Treasury the name of any person who is 60 days delinquent in child support payments as required by a court order. At the time of certification, the affected taxpayer is notified of the certification, which contains the name of the obligor, the social security number, the amount in arrears, address, case number, and the name of the obligee. COMAR 07.07.02.-02D. The notice advises the obligor of a right to request an investigation and the method of doing so. Md.Code Ann.Art. 88A § 59(e)(1). That investigation consists of a simple comparison of the taxpayer’s payment record with the terms of the latest court order in effect. If the obligor is in arrears more than 8.5 times the weekly amount, the certification is upheld. The report of the investigation must be made available to the taxpayer within 30 days. COMAR 07.07.02.04C. If the certification is incorrect, it must be withdrawn immediately. An investigator may de-certify a taxpayer’s name at any time. COMAR 07.-07.02.04D.

If the certification is upheld, the taxpayer’s refund may be intercepted. After the intercept, the taxpayer receives notice that the refund has been intercepted and is advised that a hearing may be requested to challenge the application of the refund to the child support obligation. Also after the intercept, the obligor’s spouse is notified if a portion of any refund is to be applied. Generally, if spouses file jointly, the entire refund is subject to interception; if the couple files separate or combined-separate returns, the non-obligated spouse is entitled to the portion of the refund. A couple who files jointly is informed after the intercept that they may file an amended return and the non-obligated spouse’s portion of the refund will be returned.

An obligor who wishes to appeal the interception must call the telephone number on the reverse of the intercept notice and request an appeal form. The appeal form states that an obligor may appeal only if the amount of the arrearage or the fact that there is an arrearage is contested. The notice states that appeals on grounds other than those specified will not be heard.

The appeal automatically stays the payment of the intercepted money to the requesting party. COMAR 07.07.02.05C(5). The obligor who appeals within fifteen days is entitled to a hearing before a Hearing Officer. The obligor may be represented by an attorney and may present witnesses and testimony. In the alternative, the taxpayer may ask the Hearing Officer to review the record created by documents submitted. In either case, a decision must be reached within 60 days. A taxpayer dissatisfied with the decision may seek judicial review in state circuit court and ultimately before the Maryland Court of Special Appeals. COMAR 07.07.02.05D.

Plaintiffs contest this procedure for a number of reasons. First and foremost, they assert that due process requires an opportunity for a hearing before the tax refund is intercepted. They also assert that due process is violated by the failure to provide an obligor’s spouse with pre-intercept notice of certification. Finally, they claim that the notice itself is constitutionally defective because it fails to provide information concerning the possible defenses to intercept.

Defendants have moved to dismiss, or in the alternative for summary judgment, on the grounds that some of the plaintiffs’ claims are moot, that other plaintiffs lack standing, that the Court should abstain to let the state proceed, and that the plaintiffs have failed to join necessary parties. Defendants have also moved for summary judgment on the merits, claiming that as a matter of law the process provided by the state system is sufficient to satisfy the requirements of due process. Plaintiffs have filed an opposition and cross-motion for summary judgment. The Court will address the preliminary matters before proceeding to determine the case on the merits.

I. MOOTNESS

Defendants have asserted that the claims of Joseph Pringle and Robert and Lillie Jones are moot because these plaintiffs have now received their tax refunds. Joseph Pringle received notice of certification in December, 1983, and immediately requested an investigation. Before the results of the investigation were available, he joined in filing this lawsuit. His refund was intercepted to partially offset a claimed arrearage of $i,306.38, but was returned to Pringle when the investigation revealed that the payments were less than 60 days in arrears. Robert and Lillie Jones allegedly received no notice of certification, but were notified on February 24, 1984, that their tax refund had been intercepted. The Jones’ immediately appealed, and their refund was eventually released because the child support payments were less than 60 days in arrears.

Defendants have alleged that because the refunds were returned to these three plaintiffs, they have no legally cognizable interest in the outcome of the case. Thus, they argue, the federal court lacks jurisdiction to decide the case, because it cannot grant relief or affect the rights of these litigants. DeFunis v. Odegaard, 416 U.S. 312, 94 S.Ct. 1704, 40 L.Ed.2d 164 (1974).

Plaintiffs claim that the injury inflicted on Pringle and the Jones’ is “capable of repetition, yet evading review,” Harris v. Bailey, 675 F.2d 614, 616 (4th Cir.1981), Roe v. Wade, 410 U.S. 113, 125, 93 S.Ct. 705, 713, 35 L.Ed.2d 147 (1973), and thus is not moot. Plaintiffs have referred this Court to cases which hold that the return of garnished funds did not moot a due process challenge to a state’s post-judgment attachment procedure, Harris v. Bailey, 675 F.2d at 614, Finberg v. Sullivan, 634 F.2d 50, 55-6 (3rd Cir.1980) (en banc). See also Reigh v. Schleigh, 595 F.Supp. 1535 (D.Md.1984) (Miller, J.). In fact, another case concerning a similar federal-state tax refund intercept program has held that the return of an intercepted tax overpayment did not moot plaintiffs claims for injunctive and declaratory relief, see Coughlin v. Regan, 584 F.Supp. 697 (D.Me.1984) (Cyr, J.).

It is unnecessary for this Court to decide the issue of mootness with respect to these plaintiffs, however, because the Court finds that there are other plaintiffs with live claims that must be addressed, a decision that will affect Pringle and the Jones’ regardless of the decision with respect to the mootness of their claims. The Court will therefore refrain from any decision in that regard.

II. STANDING

Defendants have also asserted that four of the plaintiffs lack standing to contest the validity of the state procedures. According to the defendants, these plaintiffs have no personal stake in the outcome, Warth v. Seldin, 422 U.S. 490, 498, 95 S.Ct. 2197, 2204, 45 L.Ed.2d 343 (1975), because they cannot point to a “distinct and palpable injury fairly traceable to the conduct challenged in the litigation,” Duke Power Co. v. Carolina Environmental Study Group, Inc., 438 U.S. 59, 98 S.Ct. 2620, 57 L.Ed.2d 595 (1978). Defendants make this claim with respect to plaintiffs June McClelland and Lillie Jones because these women allegedly would not have been entitled to a tax refund even absent the operation of the state intercept program. June McClelland apparently had no taxable income in 1983; she filed a joint tax return with her husband, however, and the two were entitled to a joint refund of $465.20 which was intercepted. Lillie Jones apparently did earn taxable income in 1983. She filed a combined-separate return with her husband which showed that while Robert Jones overpaid his taxes by $398.92 in 1983, Lillie Jones underpaid her taxes by $6.78. The Jones’ were jointly entitled to a refund despite the fact that Lillie Jones, if filing singly, would not have received a refund. Defendants assert that these two women “can, at most, request as relief any portion of a tax refund which would be due to them if they had filed separate returns.”

The fact remains, however, that these two women did not file separate returns. By combining their returns with those of their husbands, they became part of a tax-paying unit. Different tax rates may apply to those who are married filing jointly or married filing combined-separate returns than would apply to those filing separately. More importantly, the refund check would be issued to both husband and wife jointly, regardless of the type of return which is filed. Even a wife who would not be entitled to a refund in her own right may have a property interest in the refund issued to her husband and herself, jointly. These plaintiffs have been injured by the deprivation of their refund and have standing to contest the constitutionality of that deprivation.

Defendants also claim that Clifton McClelland and David Alloway have no standing to contest the state procedures because they have not alleged that the interception of their tax refunds was improper. If the plaintiffs were actually sixty days in arrears in their child support payments, the defendants argue, they have suffered no actual injury caused by the state’s procedures. Thus, because different procedures would not change the fact that their tax refunds were intercepted, and because plaintiffs do not dispute that they are indeed delinquent in child support payments, they have no personal stake in the outcome of the litigation.

Defendants’ argument ignores the fact that the right to due process is “absolute” in the sense that it does not depend on the merits of a claimant’s substantive assertions. Carey v. Piphus, 435 U.S. 247, 266, 98 S.Ct. 1042, 1053, 55 L.Ed.2d 252 (1978). The Supreme Court has held that “because of the importance to organized society that procedural due process be observed, the denial of due process should be actionable for nominal damages.” Carey, 435 U.S. 266, 98 S.Ct. at 1054. And in Fuentes v. Shevin, 407 U.S. 67, 87, 92 S.Ct. 1983, 1997-98, 32 L.Ed.2d 556 (1972), the Court observed:

To one who protests against the taking of his property without due process of law, it is no answer to say that in his particular case due process of law would have led to the same result because he had no adequate defense on the merits. It is enough to invoke the procedural safeguards of the Fourteenth Amendment that a significant property interest is at stake, whatever the ultimate outcome of a hearing on the contractual right to continued possession and use of the goods.

To hold that actual monetary injury is-required before a plaintiff may have standing to challenge a state procedure would contradict the Supreme Court’s clear holding that such injury is not required to recover for a due process violation. Where due process is denied, the injury is found not only in the ultimate taking but also in the failure to provide the proper procedures.

Furthermore, both McClelland and Alloway may indeed benefit from procedures which would help to determine the accuracy of the state’s findings. McClelland has already challenged the amount of the arrearage, one of the factors which is used in the state’s decision to certify. Both McClelland and Alloway have standing to challenge the state’s procedures in taking their property, regardless of the fact that their refunds may have been legitimately subject to interception.

III. ABSTENTION

Defendants’ third claim is that this Court should abstain from any decision in this case because (1) there are ongoing state proceedings to enforce the payment of plaintiffs’ court-ordered child support obligations, (2) there are unsettled questions of law, and (3) litigation in this Court would be duplicative of state proceedings. This Court is not persuaded by these arguments.

Defendants have not pointed to any unsettled question of state law which would require abstention in favor of a state court under the Pullman doctrine, see Railroad Commission of Texas v. Pullman, 312 U.S. 496, 61 S.Ct. 643, 85 L.Ed. 971 (1941). Defendants allege only that the application of state administrative and judicial remedies may resolve the plaintiffs’ claims without the need for federal court intervention. This suggestion is tantamount to a requirement that state remedies be exhausted before a § 1983 action may be maintained. That view has been rejected by the Supreme Court. Patsy v. Florida Board of Regents, 457 U.S. 496, 102 S.Ct. 2557, 73 L.Ed.2d 172 (1982). Absent some unclear question of the interpretation of state law which requires state court resolution, Pullman abstention is not appropriate.

Nor have the defendants established the requirements for abstention under the Younger doctrine. In Younger v. Harris, 401 U.S. 37, 91 S.Ct. 746, 27 L.Ed.2d 669 (1971), the Supreme Court found that federal courts should not interfere with ongoing state criminal proceedings. That doctrine has been extended to foreclose federal intervention in other types of state enforcement proceedings, whenever a state has a strong interest in the subject of the enforcement proceedings. See Juidice v. Vail, 430 U.S. 327, 97 S.Ct. 1211, 51 L.Ed.2d 376 (1977); Trainor v. Hernandez, 431 U.S. 434, 97 S.Ct. 1911, 52 L.Ed.2d 486 (1977). However, the Supreme Court has recently indicated that abstention may not be appropriate where, as here, the ongoing state proceeding is administrative, see Hawaii Housing Authority v. Midkiff — U.S. -, 104 S.Ct. 2321, 81 L.Ed.2d 186 (1984). Furthermore, Younger abstention is only appropriate where there is an opportunity to present the federal constitutional claims in the ongoing state proceedings. Plaintiffs here would not have such an opportunity to present their constitutional claims in these state proceedings. Appeals to the Hearing Officer are allowed on only two grounds — that the arrearage does not exist, or that the arrearage does exist but in a lesser amount than is indicated. The Hearing Officer is not specifically authorized to address constitutional claims or offer relief. Under these circumstances, Younger abstention would not be appropriate.

This litigation is not duplicative of any ongoing state litigation. There are no claims pending in state court which challenge the constitutionality of this state program. Granting plaintiffs request for relief will not result in a substantial interference with the state’s strong interest in enforcing the payment of child support obligations. The only issue here is whether the state’s procedures to enforce those payments are proper, and the Court will not abstain from addressing that issue.

IV. FAILURE TO ADD NECESSARY PARTIES

As a final preliminary matter, the Court will dispense with the defendants’ argument that the plaintiffs’ case should be dismissed for failure to add necessary parties. Defendants claim that Margaret McClelland and Judith Alloway, the ex-spouses who are entitled to receive the child support payments, are indispensable parties in the present case. As the sole potential beneficiaries of the tax refund intercepts, they may have an interest in the outcome of this litigation, it is argued. For these women to be indispensable parties, their interest must be such that a final judgment would directly affect that interest and an equitable decree could not be framed in their absence. Shields v. Barrow, 17 How. 130, 139 (1854); see also Provident Tradesmens National Bank and Trust Co. v. Patterson, 390 U.S. 102, 110, 88 S.Ct. 733, 738, 19 L.Ed.2d 936 (1968) (Shields formula “still valid today”). Such is not the case here where there is a challenge to the procedural system used by the state. A final judgment in this Court may affect the notice and hearing procedures used by the state but will have no effect on whether these women are ultimately entitled to benefits. A decision by this Court will not prejudice their interest in recovering overdue child support payments. It may change the state administrative process used for that recovery, but such a change would prejudice only the state.

V. MERITS

Having dispensed with the preliminary matters raised in the defendants’ motion for summary judgment, the Court must now address the substance of the plaintiffs’ due process claims. Plaintiffs have argued (1) that the non-obligated spouse has a constitutional right to a pre-intercept notice of possible deprivation, (2) that the notice of intercept should contain a list of the possible defenses to the intercept, and (3) that a hearing should occur before the intercept actually takes place.

There is no doubt that the interception of their tax refunds deprived plaintiffs of a protected property right, and that the due process guarantees of the Fourteenth Amendment are implicated. The Court must then determine whether the state procedures satisfy those due process guarantees.

Plaintiffs have argued that the non-obligated spouse, who may file jointly with her husband and thus have her portion of any refund intercepted, is entitled to a notice of certification similar to the notice received by the obligor. While it is true that notice is mandated before property may be taken, the state would confront significant difficulties in providing non-obligated spouses with notice. The Child Support Enforcement Administration has no record of the existence of non-obligated spouses. It is virtually impossible for the CSEA to determine, before the actual filing of tax returns, which obligors have remarried and which obligors will choose to file combined returns with their spouses. Thus, it is simply not practical to require notice to be sent directly to the non-obligated spouses when their existence cannot be ascertained prior to the filing of tax returns. See Nelson v. Regan, Ruling on Remedy and Final Order, C/A No. N-82-137 (D.Conn. April 22, 1983).

Due process requires some form of notice to the non-obligated spouse whose portion of a refund may be taken. See Coughlin v. Regan, 584 F.Supp. 697 (D.Me.1984) (Cyr, J.). Notice of the possibility of interception of a spouse’s portion of a refund could easily be included in the notice given to the obligated spouse. Parties should be made aware of their opportunity to escape interception of the spouse’s refund by filing combined-separate or separate returns. Notice could then be given directly to the non-obligated spouse as soon as the CSEA becomes aware of the existence of a spouse whose refund might be affected.

Other courts have considered the necessity for notice to non-obligated spouses whose portion of a tax refund may be intercepted. In Coughlin v. Regan, the court held that despite logistical difficulties, notice should be provided to non-obligated spouses before interception. The court indicated that the requisite notice could be provided to the spouse in the notice sent to the obligor. Notice to the obligated spouse containing information about the possibility of interception of joint refunds and the method of avoiding it may satisfy the due process requirement. In Nelson v. Regan, Ruling on Remedy and Final Order at 6, another case concerning the constitutionality of a federal-state interception program, the court found that the notice to the obligated spouse should contain notice of the right of the non-obligated spouse to receive his/her portion of a tax refund by filing appropriately.

Here, the notice should state clearly that if spouses file jointly, their refund may be intercepted in its entirety. On the other hand, if the spouses file separate or combined-separate returns, the non-obligated spouse may receive his or her portion of a refund. Such notice, included with the notice of certification, would meet the constitutional requirements without imposing additional burden on the state.

Plaintiffs have also argued that the notice of interception should contain information concerning all possible defenses to the interception. At present, the certification notice says nothing about possible defenses, simply advising the obligor of the right to request an investigation and of the method of doing so. COMAR 07.07.02.02D. The second notice is sent within fifteen days of the intercept of the tax refund, and informs the obligor of the right to appeal and the method of doing so. The reverse portion of the notice advises that the obligor may appeal to the CSEA and provides a telephone number. The appeal notice is received only by those who call that number and request an appeal. The reverse portion of the notice states that “[a]n appeal may only be made on the basis that: you do not believe that you have a support obligation arrearage or you believe the amount of the arrearage is less than the amount of the tax refund intercepted by the Comptroller.” An obligor who has another objection to the intercept is discouraged from pursuing it by the final sentence on the front side: “Appeals based on other than the reasons, which are specified in the law, will be denied.”

This language is misleading. It may discourage those with valid appeals from pursuing their right to appeal. For example, Robert Jones and Joseph Pringle had their refunds returned because they were less than 60 days in arrears, an objection not listed as one of the grounds for appeal. Such a misleading form of notice violates the constitutional due process guarantee.

The need for the notice to contain a list of all possible defenses to comply with due process requirements is another question altogether. Adequate notice should be “reasonably calculated, under all the circumstances, to apprise interested parties of the pendency of the action and afford them an opportunity to present their objections.” Mullane v. Central Hanover Bank & Trust Co., 339 U.S. 306, 314, 70 S.Ct. 652, 657, 94 L.Ed. 865 (1950). Several courts in federal tax refund intercept cases have held that due process requires a pre-deprivation notice which specifies the possible defenses and the procedures for asserting those defenses. Nelson v. Regan, 560 F.Supp. 1101, 1107 (D.Conn.1983), Marcello v. Regan, 574 F.Supp. 586, 598-600 (D.R.I.1983), Coughlin, at 710-11.

Given the factual nature of the disputes which could arise concerning these arrearages, however, it would be very difficult for the state to anticipate all possible defenses and list them. Every case may be entirely different, and any list of possible defenses could fail to include some defenses. Such a list would run the risk of always being misleading to someone, and thus increasing the risk of an erroneous deprivation. The better procedure would include in the notice complete information about the fact of, and reasons for, the interception, the availability of a hearing, and the procedures which will be followed at that hearing. Enough information should be provided so that each obligor will be able to formulate defenses based on the facts of the particular case. A more detailed list may be desirable, although not constitutionally required. However, any list of suggested defenses should be framed as mere suggestions to avoid the misleading effect of an “all-inclusive” list.

The dictates of due process are determined according to the Mathews v. Eldridge, 424 U.S. 319, 96 S.Ct. 893, 47 L.Ed.2d 18 (1976), balancing test, which requires consideration of three distinct factors:

first, the private interests that will be affected by the official action; second, the risk of an erroneous deprivation of such interest through the procedures used, and the probable value, if any, of additional or substitute procedural safeguards; and finally, the government’s interest, including the function involved and the fiscal and administrative burdens that the additional or substitute procedural requirements would entail.

424 U.S. at 335, 96 S.Ct. at 903.

Applying that same test, the Court finds that the notice as it is now given violates due process because it increases the risk of erroneous deprivation by foreclosing valid appeals on grounds other than those listed. A change in the content of that notice would impose only a slight burden on the state, and thus due process requires that change. However, due process does not require the state to anticipate and list all possible defenses. It would be burdensome for the state to compile an all-inclusive list which could be misleading despite the care with which it is compiled. It is sufficient if the notice clearly states the basis for the action against the taxpayer and outlines the factors which will be considered at a hearing, allowing the taxpayer to prepare a defense and present whatever objections are available.

Plaintiffs’ final objection to the program as it now operates is that the state fails to provide a hearing before the interception takes place. Due process has generally been held to require pre-deprivation notice and hearing as a check on the possibility that a wrongful deprivation will occur. Defendants argue that the reasoning of Parratt v. Taylor, 451 U.S. 527, 101 S.Ct. 1908, 68 L.Ed.2d 420 (1981), holding that a post-deprivation hearing was sufficient to satisfy due process when a pre-deprivation hearing was impractical, should apply here. However, in Parratt the state action complained of was random, unauthorized, and not the result of an established government practice. The interception of tax refunds at issue here is not random or unauthorized; it is the result of a rather sophisticated state program. The state authorizes the taking of tax refunds and knows exactly when such taking will occur. Thus, the Parratt analysis is not applicable.

Other courts considering the federal-state tax refund intercept program have held that due process requires a hearing before intercept. See, e.g., Nelson, 560 F.Supp. at 1108, Marcello, 574 F.Supp. at 597. The Mathews language requires a pre-deprivation hearing. Taxpayers have a significant interest in their tax refunds. “Even if the burden of an unjust offset is not as great as that of the loss of welfare benefits for those on the very margin of subsistence, as in Goldberg v. Kelly, 397 U.S. 254, 90 S.Ct. 1011, 25 L.Ed.2d 287 (1970), it is significant. A temporary deprivation may create a substantial burden.” Nelson, 560 F.Supp. at 1108.

Under the current system the risk of erroneous deprivation is substantial. Examining a similar system in the Marcello case, the court noted:

The risk of erroneous deprivation through the current procedures is substantial ... The Bureau requisitioned the diversion based mainly upon evaluation of its own records — an evaluation which was, by its very nature, perfunctory. Judicial review was not available. In addition, the initial letter, while allowing room to quibble about the exact amount owed, seemed plainly to indicate that the interception of the addressee’s refund was already a foregone conclusion. Given the high risk of undeserved deprivation and the realistic potential for disruptive impact, the probable value of additional safeguards is great.

574 F.Supp. at 597. In this case the CSEA makes the decision to certify based on an examination of its own records. The entire process is apparently computerized, and involves a simple comparison of payments with the terms of the most recent court order. At that point, no review is available, although the taxpayer may request an investigation. That investigation, like the evaluation in Marcello, is rather perfunctory-

The government’s interest in enforcing the payment of child support is admittedly great, and additional procedural safeguards would probably increase the administrative costs of the state’s tax refund intercept program. Such additional safeguards are nevertheless required by the Constitution. Marcello, while admitting that the government’s interest in the federal-state tax intercept program was “undeniably significant,” and that additional safeguards would lead to increased administrative costs and burdens, held that a pre-deprivation hearing was required, noting that although “the tax return necessary to catalyze the refund apparatus cannot itself be filed until January 1,”

the procedural steps needed to eradicate the taint of unconstitutionality could, in all probability, given a reasonable degree of effort and efficiency on the State’s part, be completed before the time that the Service would normally refund or transfer overpayments.

574 F.Supp. at 597.

Nelson, 560 F.Supp. at 1108, held that a pre-deprivation hearing was required to provide due process to those whose names were certified under the federal TRIP program, noting that a pre-deprivation hearing was not impracticable and would not impose a great administrative burden on the government.

A pre-deprivation hearing in the present situation would be neither impractical nor overly costly. The state of Maryland already provides a post-deprivation hearing process which, if done earlier, would satisfy all requirements of due process. The additional cost of holding that same hearing earlier is minimal. The state may also gain in efficiency what it may lose in monetary terms. As plaintiffs point out, the earlier determination will allow the funds to be distributed to child support payees at an earlier date. Under the current system, an administrative appeal stays the distribution of intercepted refunds to the obligees. Requiring a pre-deprivation hearing will not impair the government’s function in collecting child support payments.

The state has made some effort to provide a pre-deprivation determination to reduce the possibility of error by providing that the obligor may request an investigation before the interception. Although the investigating officer does have the authority to eliminate names from the list of certified individuals when the circumstances warrant it, a fact that the Marcello and Nelson courts found crucial, the investigation simply does not eliminate the need for a hearing. The court in Marcello found specifically that a review based on written submissions was inadequate, 574 F.Supp. at 598, and this Court agrees with that conclusion. The investigation which the state provides here does not even allow for written submissions by the affected individuals. It is simply a comparison of state payment records with required payments, which does not consider the numerous factors which would contribute to an erroneous deprivation.

The fact that the taxpayer can contest the underlying child support obligation in the court which ordered the child support payments does not eliminate the need for a pre-interception hearing. The procedural protections available before certification are not a sufficient substitute for the constitutionally required procedures at the time of interception. At that point, the obligor can assert a whole new list of defenses to the interception which are irrelevant to the underlying child support order. For example, the obligor may assert that the payments are not at least sixty days in arrears, or that an error in computation has occurred. A hearing must be held before the interception in order to consider those objections, which could not be considered in contesting the underlying support obligation.

The state’s current notice and hearing procedure does not comport with the requirements of due process. Due process requires a fair notice of the possibility of interception and an opportunity to contest that interception before it occurs. Defendants’ motion to dismiss or in the alternative for summary judgment is therefore denied. Plaintiffs’ cross motion for summary judgment will be granted as indicated in this Memorandum.


source: Caselaw Access Project

author: ROVNER, District Judge.

license: Public Domain

text:
    Amos D. DAVENPORT, et al., Plaintiffs, v. V. BELL, et al., Defendants.
    No. 83 C 4695.
    United States District Court, N.D. Illinois, E.D.
    Dec. 28, 1984.

      Andrew B. Spiegel, Chicago, Ill., for plaintiffs.
    Mary A. Mason, Asst. U.S. Atty., Chicago, Ill., Robert G. Nath, Trial Atty., U.S. Dept, of Justice, Washington, D.C., for defendants.
   MEMORANDUM OPINION AND ORDER

ROVNER, District Judge.

Petitioners, Amos and Norma Davenport, brought this action to quash an Internal Revenue Service (“I.R.S.”) administrative summons issued to and served upon State Farm Insurance Company (“State Farm”) in aid of an investigation of the federal tax liabilities of the petitioners for 1980, 1981, and 1982. The summons, issued on June 22, 1983, requested certain records relating to insurance coverage of the petitioners by State Farm. After State Farm notified the petitioners of the I.R.S. summons, they filed a petition in this Court to quash the summons, purportedly pursuant to 26 U.S.C. § 7609(b)(2)(A). Petitioners also sued individually the I.R.S. agents responsible for issuing the summons and the Commissioner of the I.R.S., alleging violations of their constitutional rights, including their First Amendment rights to freedom of association and religion as to information sought concerning two organizations of which petitioners are members, the Free Church of the Creator and Citizens For Just Taxation.

On September 6, 1983, the government served its motion to dismiss the original petition, contending that this Court lacked subject matter jurisdiction because the jurisdictional basis provided for in 26 U.S.C. § 7609 applied only to summonses issued to “third-party recordkeepers.” The government reasoned that because State Farm was not a “third-party recordkeeper” within the meaning of Section 7609, this Court lacked jurisdiction to quash the summons. The government also asserted that petitioners filed this action in bad faith to delay and defeat a criminal investigation and thus requested an award of attorneys’ fees and costs.

Petitioners failed to respond to the government’s motion to dismiss and failed to adhere to two extensions of time in which to file a responsive brief. On November 15,1983, Judge Nordberg, to whom this case had then been assigned, entered an order dismissing the petitioners’ original petition but granting them to November 28, 1983 to file an amended complaint. In so doing, the Court relied upon the express promise of petitioners’ counsel that the jurisdictional defect would be cured. The petitioners’ First Amended Complaint, however, is virtually identical to the original petition, except that the petitioners have rearranged some paragraphs. The petitioners now explicitly identify themselves as members of Citizens For Just Taxation and of the Free Church Of The Creator, and the petitioners now allege, without more, that the documents sought of State Farm by the I.R.S. are “those of a third-party recordkeeper.”

Because petitioners have failed to cure the jurisdictional defect in their original petition, this Court hereby grants the government’s motion to dismiss the First Amended Complaint. Moreover, because the petitioners have managed to delay the enforcement of the I.R.S. summons at issue here for well over a year on the promise that they would “cure” a jurisdictional defect which they clearly did not cure, this Court hereby grants the government’s request for attorneys’ fees and costs as a sanction for petitioners’ filing a lawsuit without a good faith basis for jurisdiction.

Section 7609(h) of Title 26 grants federal jurisdiction to hear and determine any proceedings brought pursuant to 26 U.S.C. § 7609(b)(2). Under that subsection any person “who is entitled to notice of a summons [served after December 31, 1982] under subsection (a) shall have the right to begin a proceeding to quash such summons.” Subsection (a) provides that when a summons is served upon a “third-party recordkeeper” and requires production of records of the business transactions or affairs of a person “other than the person summoned,” that other person has the right to be notified of the issuance of the summons.

Section 7609(a)(3) defines the term “third-party recordkeeper” as meaning a bank or savings and loan association, a consumer reporting agency, any person extending credit through the use of credit cards, a broker, an attorney, an accountant, and a barter exchange. State Farm, under both the case law interpreting that section and under its legislative history, is clearly not a “third-party recordkeeper” within the meaning of 26 U.S.C. § 7609(a)(3).

United States v. White Agency, 44 A.F. T.R.2d 79-5019 (W.D.Mich.1979), is directly in point. There, the district court affirmed the holding of a magistrate that an insurance agency is not a third-party record-keeper. The magistrate ruled:

Although taxpayer’s counsel claims that the White Agency is also licensed as a securities broker, there is no evidence in the record to support such a claim. However, even assuming that the White Agency may be classified as a broker, it is clear that the statute does not make brokers or the other persons specified in the statute (such as banks, credit card issuers, attorneys, accountants, etc.) “third-party recordkeepers” for all purposes. It is not sufficient that the person summoned falls facially within the named classes. He must also have been summoned in his capacity as a custodian or stakeholder of the records summoned.
* * * * * *
In the present case, the White Agency is not summoned in its capacity as a securities broker. It is summoned in its capacity as an insurance agent. This is obvious on the face of the summons which requests only information ‘relative to all policies identified in item 1 above.’ (Government Exhibit 1) More importantly, the summons seeks insurance policies, customer ledger cards, applications for business transactions, and the like, which are records of the taxpayer's own two-party transactions with the White Agency, rather than records of a true third-party type relationships. I find that the White Agency is not a third-party record-keeper within the meaning of Section 7609(a)(3). Therefore, the taxpayer has no statutory right to intervene in this proceeding.

Id. at 79-5020-21.

The legislative history also supports this distinction between documents generated in two-party transactions, which are not within the ambit of Section 7609, and third-party records, which are within the ambit of Section 7609:

For purposes of these rules, a third-party recordkeeper is generally to be a person engaged in making or keeping the records involving transactions of other persons. For example, an administrative summons served on a partnership, with respect to records of the partnership’s own transactions, would not be subject to these rules.

S.Rep. No. 94-938, 94 Cong., 2d Sess., June 19,1976, p. 369. The rights in Section 7609 to notice of the issuance of the I.R.S. summons and the opportunity to oppose its issuance were simply not designed to apply to recordkeepers not within the definitions of Section 7609(a)(3).

Apparently recognizing that a summoned person is a third-party recordkeeper only if that person is within one of the explicitly enumerated categories of Section 7609(a)(3), petitioners argue that State Farm “extends credit through loans on its insurance policies and it is that type of financial information that the I.R.S. is seeking in this case.” Aside from the fact that petitioners’ attempt to stretch the language of Section 7609(a)(3) to fit State Farm falls far short of the mark because that section expressly applies only to “(c) any person extending credit through the use of credit cards or similar devices,” 26 U.S.C. § 7609(a)(3)(C), petitioners’ argument ignores the fact that a summoned person is a third-party recordkeeper only if two conditions are met: (1) the person facially falls within one of the enumerated categories in Section 7609(a)(3); and (2) the summons requests records kept in the person’s role as a third-party recordkeeper.

Thus, in United States v. Exxon Company, U.S.A., 450 F.Supp. 472, 477 (D.Md.1978), the court held that Exxon was summoned not in its capacity as a “person extending credit through the use of credit cards or similar devices,” but as a company with non-credit documents of its business transactions with those identified in the summons. Similarly, the court in United States v. Manchel, Lundy & Lessin, 477 F.Supp. 326 (E.D.Pa.1979), held that no notice is necessary if an I.R.S. summons issues to a law partnership for its own records, or for the employment records of an employee of the partnership, despite the fact that the summoned persons, as lawyers, fall facially within 7609(a)(3)(E). In addition, the court in United States v. Gartland, 79 F.R.D. 148 (D.Md.1978), held that banks, brokers, lawyers, and other enumerated “third-party recordkeepers” fall within § 7609(a)(3) only when they are summoned in their capacities as custodians of documents or stakeholders. As stated by the Court in United States v. Shivlock, 459 F.Supp. 1383, 1387 (D.Colo.1978), aff'd sub nom., United States v. Income Realty and Mortgage, Inc., 612 F.2d 1224 (10th Cir.1979):

The statutory history demonstrates that Section 7609 was aimed at protection from unreasonable prying in records of a taxpayer’s own personal or business transactions, and I think it clear that there was no intent of Congress to protect all third-party records just because some of them not subject to the inquiry related to another person’s investments or personal credit transactions. Not only does the statutory history so demonstrate, but on the face of the statute such is its aim. Those included are financial institutions handling a person's bank accounts, credit agencies keeping records of a person’s use of personal credit, brokers having records of personal investments, and attorneys and accountants knowing the inner workings of one’s financial life. This is what Senate Report 94-938 said about the statute:
“... a third party recordkeeper is generally to be a person engaged in making or keeping the records involving the transactions of other persons.”
The House agreed in its conference Report:
“... the agreement clarifies the definition of a third party recordkeeper, limiting this category to attorneys, accountants, banks, trust companies, credit unions, savings and loan institutions, credit reporting agencies, issuers of credit cards, and brokers in stock or other securities.”
It just wouldn’t make sense to say that employees of a company which uses credit cards or employees of a broker are immune from a tax investigation as to their earnings as employees when it would be open sesame if the employee worked for someone else.

See also United States v. Ohio Bell Telephone Company, 475 F.Supp. 697 (N.D.Ohio 1978).

In this case, although petitioners allege that State Farm “makes loans,” petitioners have not alleged that the I.R.S. summons at issue here is seeking records or testimony of State Farm’s activities as an “extender of credit through credit cards or similar devices.” 26 U.S.C. § 7609(a)(3)(C). Nor do they allege that they themselves have ever been the recipients of “credit” from State Farm. Moreover, the I.R.S. summons does not request records of State Farm in its stakeholder capacity; rather, it seeks records of State Farm’s own two-party business transactions with the petitioners. State Farm, therefore, neither falls facially within one of the categories specifically enumerated in Section 7609(a)(3), nor does the I.R.S. summons request third-party type records. Accordingly, this Court holds that State Farm is not a “third-party recordkeeper” within the meaning of 26 U.S.C. § 7609.

Petitioners’ constitutional claims for damages are similarly without merit. See, e.g., Provenza v. Rinaudo, et al., 586 F.Supp. 1113 (D.Md.1984) (court held that plaintiff’s allegations of violation of constitutional rights by I.R.S. agents in summoning taxpayer’s bank records failed to state a claim upon which relief could be granted); Weimer, et al. v. Internal Revenue Service, et al., Civil Action No. 83-0342-R (E.D.Va. Sept. 14, 1983) (court dismissed petition seeking to quash I.R.S. summons issued to third party and claiming constitutional violations); Schaut v. First Federal Savings and Loan Association of Chicago, 560 F.Supp. 245 at 246 (N.D.Ill.1983) (court dismissed a damage action brought for violation of petitioners’ right to privacy, stating that the I.R.S. agent was “specifically authorized by federal statute to investigate and issue I.R.S. summonses.”); Schultz v. Stark and Almond v. Stark, 554 F.Supp. 1219 (E.D.Wisc.1983) (court held that plaintiffs’ allegations of constitutional torts violating their rights to religious freedom and due process were frivolous because “the law is well settled as to the constitutionality of the withholding tax and the manner in which refunds are sought.”).

Although the Court recognizes the principle that a motion to dismiss for failure to state a claim should not be granted unless it appears to a certainty that the plaintiff is entitled to no relief under any state of facts which could support the claim, Conley v. Gibson, 355 U.S. 41, 78 S.Ct. 99, 2 L.Ed.2d 80 (1957), the First Amended Complaint is replete with vague, conclusory, and unsupported allegations of violation of petitioners’ First, Fourth, Fifth, and Ninth Amendments rights by the individual I.R.S. agents. Moreover, petitioners’ brief opposing the government’s motion to dismiss the First Amended Complaint does not assist the Court in determining the nature of the claimed violations; indeed, many of the cases cited by petitioners not only fail to support the contentions for which petitioners cite the cases, but to the contrary stand for precisely the opposite propositions.

For example, petitioners cite United States v. Grayson County Bank, 656 F.2d 1070 (5th Cir.1981), cert. denied, 455 U.S. 920, 102 S.Ct. 1276, 71 L.Ed.2d 460 (1982), for the proposition that the “chilling effect of a summons served by an IRS agent to obtain membership records of a tax protester group ... [is] READILY APPARENT ...” [sic]. The Fifth Circuit in Gray-son County Bank, however, in fact held that the I.R.S. was entitled to enforcement of administrative summons issued to secure access to certain bank records of a church as to which the taxpayer, also the minister of the church, had signature privileges. The Grayson County Bank court distinguished United States v. Citizens State Bank, 612 F.2d 1091 (8th Cir.1980), upon which petitioners here also rely, because in that case “the government issued a summons requesting all bank records relating to the taxpayer in question and of the organization of which he was president,” 656 F.2d at 1074, whereas in Grayson County State Bank, the I.R.S. summons was limited to “(1) specified types of documents, (2) in which the taxpayer-minister had signature privilege, (3) for a restricted time span.” Id. at 1074 n. 5. Here too, the scope of the I.R.S. summons to State Farm is limited to specified types of documents, relating to the petitioners-taxpayers, and for a restricted time span.

Accordingly, petitioners’ allegations of constitutional violations entitling them to damages fail to state a claim upon which relief may be granted, even under the standard enunciated in Conley v. Gibson, supra. The government’s motion to dismiss for lack of federal jurisdiction and for failure to state a claim is, therefore, granted.

The government has also requested an award of attorneys’ fees and costs pursuant to Rule 11 of the Federal Rules of Civil Procedure, pursuant to 28 U.S.C. § 1927, and pursuant to the exception to the common law rule that each party bear its own costs enunciated by the Supreme Court in Alyeska Pipelines Services Co. v. Wilderness Society, 421 U.S. 240, 258-59, 95 S.Ct. 1612, 1622-23, 44 L.Ed.2d 141 (1975) and in Christiansburg Garment Co. v. EEOC, 434 U.S. 412, 419, 98 S.Ct. 694, 699, 54 L.Ed.2d 648 (1978), for frivolous actions brought in bad faith. After an extensive review of the briefs and all of the pleadings filed in this matter, the Court agrees with the government that the petitioners’ First Amended Complaint is frivolous and appears to have been brought to delay the investigation of the two taxpayers by the Internal Revenue Service.

The government has cited ample authority for the imposition of attorneys’ fees and costs, including several cases in which fees and costs were imposed as a sanction against taxpayers who brought similar petitions to quash I.R.S. summonses pursuant to 26 U.S.C. § 7609 allegedly because the summoned party was a third-party record-keeper. See, e.g., Brownie v. United States, 51 A.F.T.R.2d 83-1088 (E.D.N.Y.1983); Costanzo v. Internal Revenue Service, Civil Action No. 83-615 (D.N.J. filed May 11, 1983); Tony’s Trailer Repairs & Sales v. Internal Revenue Service, Civil Action No. 83-616 (D.N.J. filed May 11, 1983); Danar v. United States, Civil Action 83-CV-0817DT (E.D.Mich. June 2, 1983); Foote v. United States, Civil Action No. 83-CV-6088-AA (E.D.Mich. filed June 23, 1984); Olmschenk v. United States, Civil No. 3-83-304 (D.Minn. filed June 14, 1983); Olmschenk v. United States, Civil No. 3-83-303 (D.Minn. filed July 5, 1983).

By contrast, petitioners have cited no authority for their contention that such a sanction is unwarranted here, asserting only in eonclusory terms that “[t]his action was not brought in bad faith to impede a criminal investigation of Plaintiffs.” The fact is, however, that petitioners have indeed succeeded in delaying enforcement of the I.R.S. summons for well over a year. The original petition was without jurisdictional foundation, and it was dismissed for that reason after the petitioners twice failed to file a brief responding to the government’s motion to dismiss. Moreover, the petitioners failed to cure the jurisdictional defect after having been granted the opportunity to do so in their First Amended Complaint, and the First Amended Complaint contains unsupported, conclusory allegations and advances frivolous claims which have been rejected time and again by courts across the country. Indeed, similar allegations were rejected in United States v. White, 44 A.F.T.R.2d 79-5019 (W.D.Mich.1979) where the court ruled in 1979 that an insurance agency is not a third-party recordkeeper.

This Court cannot condone the conduct of taxpayers who, desiring not to have an investigation by the Internal Revenue Service proceed, invoke the processes of this Court to delay or stop that investigation. Taking advantage of the petition to quash summons procedure provided for in 26 U.S.C. § 7609, a new procedure implemented to speed the enforcement of I.R.S. summonses, petitioners here have instead turned the statute on its head. Accordingly, this Court directs the government to submit, within ten days of the date of this Opinion, papers on which a determination may be made as to an appropriate sanction of attorneys’ fees and costs. It is so ordered.

      . The summons is issued "In the matter of Amos D. & Norma L. Davenport" and seeks the following documents:
      Original documents or photocopies thereof of applications, payments issued, dividends or interest checks issued, Forms 1099 issued, any insurance coverage, including but not limited to: life, health, home, renters, automobile, and liability, as well as any correspondence with the above, their offspring, or their agents. Also included are all claim applications, appraisals, and checks/drafts issued to or on behalf of the Davenports.
      This request relates to information and documents for the period 1979 through March, 1983.
      This request includes but is not limited to:
      AMOS D. DAVENPORT SSN: [ XXX-XX-XXXX ]
      DATE OF BIRTH: 11-12-27
      NORMA L. DAVENPORT SSN: [ XXX-XX-XXXX ]
      DATE OF BIRTH: 6-3-32
      FREE CHURCH OF THE CREATOR
      CITIZENS FOR JUST TAXATION

      . This case was randomly assigned to the calendar of this Court on November 1, 1984, when Judge liana Diamond Rovner assumed the duties of office as Judge of the United States District Court for the Northern District of Illinois.

      . See also Weimer v. IRS, Civil Action No. 83-0342-R (E.D.Va.1983); Brownie v. United States, 51 A.F.T.R.2d 83-1088 (E.D.N.Y.1983); United States v. Connecticut Motor Club, 43 A.F.T.R.2d 79-460 (D.Conn.1978).

      . See n. 1 for the text of the summons at issue here. Petitioners’ assertion that this request seeks all State Farm documents relating to the Free Church Of The Creator and to Citizens For Just Taxation is groundless in light of the fact that it is limited by the specific context in which the summons is issued, i.e., “In the matter of Amos P. & Norma L. Davenport.”


author: EDWARD C. REED, District Judge.

text:
    Larry F. WOODS, Plaintiff, v. RENO COMMODITIES, INC., and Chicago Grain and Financial Futures Company, Defendants.
    No. CV-R-84-115-ECR.
    United States District Court, D. Nevada.
    Dec. 28, 1984.

      Roger W. Jeppson, Woodburn, Wedge, Blakey & Jeppson, Reno, Nev., for plaintiff.
    Frank N. Masino, David J. Hodge, James McNab III, San Francisco, Cal. and Vargas & Bartlett, by Albert F. Pagni, Reno, Nev., for Chicago Grain & Financial Futures Co.
    Echeverría & Osborne, Reno, Nev., for Reno Commodities, Inc.
   MEMORANDUM DECISION AND ORDER

EDWARD C. REED, District Judge.

The two defendants have filed individual motions to dismiss the First, Second and Fourth Claims for Relief for failure to state claims upon which relief can be granted, Fed.R.Civ.P. 12(b)(6), and for more definite statements, Fed.R.Civ.P. 12(e), as to all five claims for relief contained in the plaintiffs Complaint. The points and arguments made in the memoranda of points and authorities filed by the respective defendants are virtually identical, therefore both motions will be discussed and decided herein.

The First Claim for Relief contends that the wrongful liquidation by the defendants of the plaintiffs commodity futures positions constituted an attempt to defraud him within the intendment of the Commodity Exchange Act, 7 U.S.C. § 1 et seq., and particularly 7 U.S.C. § 6b. The Second Claim for Relief alleges that the willful liquidation of the plaintiffs positions constituted a tortious interference with contractual relations between the plaintiff and certain traders he represented in his account with defendant Reno Commodities, Inc. (Reno). The common law tort of negligence is the basis for the Third Claim for Relief, which asserts that the defendants’ acts were negligent and in reckless disregard of the rights of the plaintiff. The record keeping requirements of 7 U.S.C. § 6g serve as the ground for the Fourth Claim for Relief. It alleges that the defendants’ failure to keep such records caused the plaintiff’s losses. Finally, the Fifth Claim for Relief contends that the defendants’ actions were fraudulent and malicious, thus entitling the plaintiff to exemplary damages.

The pertinent allegations of the First Claim for relief are as follows: Defendant Reno is engaged in the business of soliciting and accepting orders for the purchase and sale of commodities for future delivery. It is a futures commission merchant, as defined under the Act. Further, Reno is the expressly authorized agent of defendant Chicago Grain and Financial Futures Company (Chicago). Chicago is in the business of buying and selling commodities for future delivery in contract markets, so that its activities also are covered by the Act. The plaintiff opened an account with Reno on May 17, 1983, and thereafter conducted a continuous and substantial commodity trading business with that defendant. Reno conducts its business through, and is an authorized agent of, Chicago. On September 19, 1983, a computer print-out of the plaintiff’s account with Reno showed a substantial deficit, whereas the plaintiff’s own records reflected an equally substantial credit in the account. The plaintiff was informed that Reno had no written records of its commodities transactions, therefore the plaintiff’s personal records couldn’t be verified. Upon information and belief, subsequent communications between Reno and Chicago failed to correct the improper accounting. As a result, the defendants improperly liquidated the plaintiff’s positions. The liquidation caused a substantial financial loss to the plaintiff. Subsequently, Reno’s computer showed a credit in the plaintiff’s account which confirmed the accuracy of his own records. Nevertheless, both defendants have refused the plaintiff’s demand for reimbursement. At the time of these occurrences, the plaintiff represented several traders in his account with Reno. Because of what happened, however, they have taken their trading business directly to Reno, thus bypassing the plaintiff, to his loss. The willful actions of both defendants, and each of them, in liquidating, the plaintiff’s positions constituted an attempt by them to defraud the plaintiff. He has suffered financial losses from the liquidation itself and from the defection of his traders. The defendants’ actions violated 7 U.S.C. § 6b.

The defendants, in support of their motions, argue that sufficient facts are not alleged in the Complaint to state a claim for relief sounding in fraud. No scienter has been alleged, nor has there been sufficient specification of the relationship between the traders and the plaintiff. Also, there is no contention in the Complaint that either of the defendants knew of that purported relationship. Therefore, a nexus or causal connection between the allegedly fraudulent actions and the plaintiff’s damages has not been set forth. Defection of the traders was not foreseeable. In addition, it is contended by the defendants that there is no allegation that either of them knew that their records as to the status of the plaintiff's account were inaccurate. They had the right to liquidate his positions in the event of a continuing deficit. A mere error or negligence in accounting will not give rise to the fraud or attempted fraud proscribed by § 6b. Further, the defendants argue that the Complaint doesn’t distinguish between them as to the allegedly wrongful activities and the damages resulting therefrom.

A commodities futures commission merchant stands in a fiduciary relationship with its client. Commodity Futures Trading Com’n v. Savage, 611 F.2d 270, 285 (9th Cir.1979); Marchese v. Shearson Hayden Stone, Inc., 734 F.2d 414, 418 (9th Cir.1984). This status imposes on the merchant an affirmative duty of utmost good faith and full and fair disclosure of all material facts. Ibid.

The primary focus of § 6b is to protect buyers and sellers of futures contracts from fraud practiced by their brokers. Merrill Lynch, Pierce, Fenner & Smith v. Curran, 456 U.S. 353, 389, 102 S.Ct. 1825, 1844, 72 L.Ed.2d 182 (1982); Merrill Lynch Futures Inc. v. Kelly, 585 F.Supp. 1245, 1251 (S.D.N.Y.1984). An arbitrary, unreasonable or otherwise wrongful liquidation of a customer’s account can serve as the basis for a § 6b fraud action. See Markowitz v. Merrill Lynch, Pierce, Fenner & Smith, 579 F.Supp. 124, 127-9 (S.D.N.Y.1984); Crabtree Investments v. Merrill Lynch, 577 F.Supp. 1466, 1472, 1474 (M.D.La.1984). In order to violate the Act, it is not necessary that the defendants specifically intended to injure the plaintiff; it must appear, however, that the wrongful acts were intentional and that the defendants knew or recognized their fraudulent character. Merrill Lynch Futures Inc. v. Kelly, supra at 1252; McIlroy v. Dittmer, 732 F.2d 98, 101 (8th Cir.1984); see also Commodity Futures Trading Com’n v. Savage, supra at 283.

Privity or personal contact between the plaintiff and a defendant is not an essential element of a § 6 action. Merrill Lynch, Pierce, Fenner & Smith v. Curran, supra, 456 U.S. at 394, 102 S.Ct. at 1847. The fraudulent actions of an agent are imputed to his principal. 7 U.S.C. § 4; Commodities Fut. Trad. v. Commodities Fluctuations, 583 F.Supp. 1382, 1384 (S.D.N.Y.1984). Agency may be found where the purported agent’s activities benefited, even in part, the principal. Ibid.

Fed.R.Civ.P. 8(a)(2) requires a complaint to contain “a short and plain statement of the claim showing that the pleader is entitled to relief.” It is succinctly explained in 5 Wright & Miller, Fed.Prac. and Proc. § 1216, at pp. 120-123: All elements that give rise to a legal basis for recovery need not be stated precisely, so long as fair notice of the nature of the action is provided. Nevertheless, either a direct allegation as to every material point must be found in the complaint or else there must be allegations from which an inference may be drawn that evidence on these points will be introduced at trial. The opinion in Sherwin v. Oil City National Bank, 18 F.R.D. 188, 191 (W.D.Pa.1955), aff'd 229 F.2d 835 (3rd Cir.1956), quotes from Professor Moore that “... it is not enough to indicate merely that the plaintiff has a grievance, but sufficient detail must be given so that the defendant, and the court, can obtain a fair idea of what the plaintiff is complaining, and can see that there is some legal basis for recovery.” The First Claim for Relief herein meets these tests, but the defendants urge that it fails to comply with Fed.R.Civ.P. 9(b), which directs that, when fraud is averred, the circumstances constituting the fraud shall be stated with particularity.

The Ninth Circuit repeatedly has held that Rule 9(b) does not require any particularity as to intent or knowledge; it only calls for the identification of the circumstances constituting the fraud so that a defendant can prepare an adequate answer from the allegations. Walling v. Beverly Enterprises, 476 F.2d 393, 397 (9th Cir.1973); Gottreich v. San Francisco Inv. Co., 552 F.2d 866 (9th Cir.1977). Both Walling and Gottreich declare that allegations indicating the time, place and nature of the fraudulent activities satisfy the directive of Rule 9(b). Also, causation must be shown. J.E. Hoetger & Co. v. Ascencio, 572 F.Supp. 814, 820 (E.D.Mich.1983). The Complaint herein alleges that the two defendants, after being advised that their accounting of the plaintiff’s account was in error, improperly liquidated his positions; as a result he suffered direct financial loss and the defection of traders who had dealt through him. Even after the defendants realized their error, they refused to reimburse the plaintiff, according to the Complaint. These allegations sufficiently identify the circumstances of the purported fraud so that the defendants can prepare an adequate answer.

It is preferable that a complaint set forth the nature of each defendant’s participation in the fraud, Bruns v. Ledbetter, 583 F.Supp. 1050, 1052 (S.D.Cal.1984), especially where there are issues of primary and secondary liability, Hokama v. E.F. Hutton & Co., Inc., 566 F.Supp. 636, 646 (C.D.Cal.1983). The Complaint herein alleges a principal-agent relationship between the two defendants, which could result in either or both being held liable. The prayer of that pleading asks the Court to apportion liability and damages between the two defendants. Thus, a reasonable attempt appears to have been made by the plaintiff to be specific in light of his limited knowledge at the time. This seems sufficient. See Zatkin v. Primuth, 551 F.Supp. 39, 42 (S.D.Cal.1982); In re Equity Funding Corp. of Amer. Sec. Litigation, 416 F.Supp. 161, 181 (C.D.Cal.1976).

The allegation in the Complaint that communications between the two defendants failed to correct the improper accounting, is made on information and belief. Such a contention should be accompanied by a statement of the facts upon which the belief is based. Zatkin v. Primuth, supra at 42. However, the absence of such a statement is not fatal where, as here, the facts that have been pleaded enable the defendants to frame adequate answers. See Lewis v. Berry, 101 F.R.D. 706, 709 (W.D.Wash.1984). Further information can be gleaned by the defendants from discovery, see Hagstrom v. Breutman, 572 F.Supp. 692, 698 (N.D.Ill.1983) which, in turn, might then make a motion for summary judgment appropriate, Johnson v. Arthur Espey, Shearson, Hammill & Co., 341 F.Supp. 764, 766 (S.D.N.Y.1972). The Rule 12(b)(6) motions to dismiss the First Claim for Relief must be denied.

The Second Claim for Relief incorporates all the allegations of the First Claim and, in addition, contends that the willful acts of the defendants in liquidating the plaintiff’s positions constituted intentional interference with his contractual relations. The defendants' motions to dismiss emphasize that: No valid contracts have been alleged between the plaintiff and the traders who dealt through his account; no knowledge of the relationships on the part of the defendants has been alleged; and there is no indication that any interference was motivated by a wrongful purpose.

Tortious interference with contractual relations is recognized in Nevada. Local Joint Exec. Bd. of Las Vegas v. Stern, 98 Nev. 409, 651 P.2d 637, 638 (1982). Among the essential elements of the tort are: (1) a valid contract, (2) knowledge by the defendants of the contract, and (3) intent to induce its breach. JBL Enterprises, Inc. v. Jhirmack Enterprises, Inc., 698 F.2d 1011, 1019 (9th Cir.1983).

The Complaint herein doesn’t sufficiently allege facts or circumstances to establish any of these material points, nor is there any inference that evidence to establish the elements of the tort would be introduced at trial. The defendants’ Rule 12(b)(6) motions to dismiss the Second Claim for Relief must be granted.

The Third Claim for Relief incorporates all the allegations of the First and Second Claims, and further asserts that the defendants acted negligently, contrary to the custom and practice of the commodities trading industry, and with reckless disregard for the rights of the plaintiff in causing the liquidation of the plaintiff’s positions. The defendants’ motions ask for a more definite statement, Fed.R.Civ.P. 12(e), as to this Claim.

Rule 12(e) is designed to strike at unintelligibility, rather than want of detail. 2A Moore’s Fed.Prac., ¶ 12.18 at p. 2389. The Complaint herein is not so vague or ambiguous that the defendants cannot reasonably respond. A motion for more definite statement should not be granted to require evidentiary detail that may be the subject of discovery. Wishnick v. One Stop Food & Liquor Store, Inc., 60 F.R.D. 496, 498 (N.D.Ill.1973); see also CMAX, Inc. v. Hall, 290 F.2d 736, 738 (9th Cir.1961).

The defendants seek more specific details as to their knowledge that the plaintiff represented traders and any contractual relations between them, and as to which defendant performed each act of which the plaintiff complains. This information, to the extent possessed by the plaintiff, may be obtained through discovery. The Complaint is not unintelligible as it stands. The motions for more definite statements must be denied as to all five claims for relief.

The Fourth Claim for Relief incorporates the allegations of the first three claims, and further asserts that the defendants’ failure to maintain adequate records of the plaintiff’s account violates 7 U.S.C. § 6g, that their failure resulted in losses to the plaintiff that would not otherwise have occurred, and that Chicago, as principal, is responsible for the failure of its agent, Reno, to maintain adequate records.

The defendants argue that there is no private right of action for violation of the record keeping requirements of the Act. Although no case has been found on point, it seems clear that the Act, as amended, does not eliminate previously recognized private rights of action. Kotz v. Bashe Halsey Stuart, Inc., 685 F.2d 1204, 1207-8 (9th Cir.1982). Failure to maintain adequate records, as required by federal statute and regulations promulgated thereunder, certainly would be actionable if it were proved, as alleged in the Complaint, that the failure was the proximate cause of damages to the plaintiff. Cf. Hofmayer v. Dean Witter & Co. Inc., 459 F.Supp. 733, 740 (N.D.Cal.1978); Serpa v. Madda Trading Company, 503 F.Supp. 178, 179 (E.D.Cal.1980). The defendants’ Rule 12(b)(6) motions to dismiss the Fourth Claim for Relief must be denied.

IT IS, THEREFORE, HEREBY ORDERED as follows:

(a) The defendants’ motions to dismiss the First Claim for Relief are DENIED;
(b) The defendants’ motions to dismiss the Second Claim for Relief are GRANTED without prejudice;
(c) The defendants’ motions to dismiss the Fourth Claim for Relief are DENIED; and
(d) The defendants’ motions for more definite statements are DENIED as to all five claims for relief.


author: PANNER, Chief Judge.

text:
    UNITED STATES of America, Plaintiff, v. Roy J. BUTLER, Defendant.
    No. Cr. 84-117-PA.
    United States District Court, D. Oregon.
    Dec. 28, 1984.

      Charles H. Turner, U.S. Atty., Lance A. Caldwell, Asst. U.S. Atty., Portland, Or., for plaintiff.
    David Lowell Slader, Portland, Or., for defendant.
   OPINION

PANNER, Chief Judge.

Defendant is charged with two counts of misapplying funds of a federally insured savings and loan association in violation of 18 U.S.C. § 657. He moves for judgment of acquittal, pursuant to Fed.R.Crim.P. 29, on the ground that the government has failed to prove the elements necessary to constitute a violation of section 657. I grant the motion, and find the defendant not guilty on both counts.

FACTS

This case is before me on stipulated facts. The charges arise out of defendant’s activities while he was vice-president of Ward Cook, Inc. (Ward Cook). Ward Cook is an Oregon Corporation engaged in mortgage banking and escrow services and is the wholly-owned subsidiary of Oregon Pioneer Savings and Loan Association (Oregon Pioneer). Oregon Pioneer’s deposits are insured by the Federal Savings and Loan Insurance Corporation.

All of Ward Cook’s stock is owned by Oregon Pioneer. According to an affidavit of Charles J. Strader, attorney for Oregon Pioneer and Ward Cook, there is no direct involvement by Oregon Pioneer in the credit lines of Ward Cook. Oregon Pioneer has written “take-out” loans for some Ward Cook financed construction projects. Takeout loans are mortgage loans providing permanent financing on homes constructed with the aid of Ward Cook construction loans. Take-out loans are provided by Oregon Pioneer and other financial institutions.

The operations and personnel of Oregon Pioneer and Ward Cook are separate, with the exception of the mortgage servicing department. The mortgage servicing department conducts a joint clerical function for both companies which consists of the receipt of mortgage payments and allocation of those payments to individual accounts. Employees from both companies work in this department.

The defendant was an officer of Oregon Pioneer from November, 1962 to September, 1964, immediately prior to taking over his responsibilities at Ward Cook. Once he began working at Ward Cook, defendant did not have any direct role in the operations of Oregon Pioneer.

Count I of the information filed in this case charges the defendant with misapplication of funds of Oregon Pioneer in connection with loans made to Herb Morrisette Builders, Inc. On October 1, 1979, defendant approved Ward Cook construction loans C-34 and C-35 for $200,000 each to Herb Morrissette Builders, Inc. The loans were for the purpose of making improvements on several residential lots. Although defendant was aware that no construction was ever completed by the borrower, he approved all draws and disbursements. Defendant also received a portion of the loan proceeds himself.

Count II of the information charges defendant with misapplication of funds of Oregon Pioneer in connection with a loan made to Rod Sauer. On August 7, 1979, defendant approved Ward Cook construction loan C-26 to Sauer, for the purpose of purchasing and making improvements on several residential building lots. On September 14, 1979, defendant approved a draw of $30,000 on the loan. This money was loaned by Sauer to the defendant, but was never repaid.

DISCUSSION

In order to show a violation of 18 U.S.C. § 657, the government must prove (1) that the defendant be an “employee of or connected in any capacity with,” and (2) that the misappropriated funds be funds “belonging to,” a federally insured savings and loan association. The stipulated facts submitted by the parties contains a statement which could be interpreted as eliminating from consideration the issue of whether the defendant was “connected in any capacity with” Oregon Pioneer. However, both parties have addressed this issue in their briefs, and it is properly before me at this time.

Defendant’s primary argument for judgment of acquittal is that he was an officer of Ward Cook, and that the funds he misapplied belonged to Ward Cook, not Oregon Pioneer. Therefore, defendant asserts that there can be no violation of section 657 because he was not “connected in any capacity with” and did not misapply funds “belonging to” a federally insured savings and loan institution. In support of this argument, defendant relies on United States v. Fulton, 640 F.2d 1104 (9th Cir.1981).

The defendant in Fulton was convicted of aiding and abetting an embezzlement in violation of 18 U.S.C. § 656 and § 2. The defendant had received and endorsed checks embezzled by an employee of a bank’s wholly-owned subsidiary, a mortgage company. On appeal, defendant argued that there could be no violation of section 656 because the employee worked for a subsidiary of the bank rather than for the bank itself. The court noted that when a defendant is not directly employed by the insured bank, courts have focused on the relationship between the subsidiary and the bank’s business in determining whether the defendant is “connected in any capacity with” the insured bank for purposes of the statute. United States v. Fulton, 640 F.2d at 1106. Using this analysis, the court examined the relationship between the mortgage company and the parent bank. The court noted that the mortgage company handled all real estate functions traditionally handled by the bank’s escrow department, such as receiving payments and disbursing funds when necessary. Id. Furthermore, the mortgage company employee handled the escrow accounts and was placed in a position of trust which enabled her to gain access to bank funds.

The court affirmed the defendant’s conviction on two grounds: (1) the close connection between the subsidiary and the insured bank, such that the subsidiary performed functions traditionally handled by the bank itself, and (2) the close connection between the mortgage company employee and the bank’s business arising out of her responsibility for handling the bank’s escrow accounts. Id.

In order to determine whether defendant is “connected in any capacity with” Oregon Pioneer, my analysis begins with an examination of the factors identified in Fulton: (1) the relationship between the subsidiary and the parent institution, and (2) the connection between the employee of the subsidiary and the business of the parent institution.

In Fulton, the relationship between the subsidiary and the parent institution was quite close. The mortgage company was acting as a service agent for some eighty escrow accounts which were opened through the bank. The mortgage company handled all real estate functions traditionally performed by the bank’s escrow department. In the present case, Ward Cook and Oregon Pioneer are separate entities as far as operations are concerned. The only connection between the two companies is a shared clerical function in the mortgage servicing department. There is no evidence in the record to indicate that Ward Cook performs some function for Oregon Pioneer which was “traditionally handled by” the savings and loan itself.

Fulton also requires examination of the connection between the employee of the subsidiary and the business of the parent institution. The mortgage company employee in Fulton was in charge of the parent bank’s escrow accounts. Her position gave her access to bank funds. The defendant in the present case was a vice-president at Ward Cook. He had no direct role in the operations of Oregon Pioneer, nor did he have access to the savings and loan’s funds.

Based on the analysis employed in Fulton, I find that defendant was not “connected in any capacity with” Oregon Pioneer, and therefore his misapplication of funds was not in violation of section 657.

The government relies heavily on the reasoning of the Fifth Circuit in United States v. Cartwright, 632 F.2d 1290 (5th Cir.1980). That case is inapplicable to the present situation. The court in Cartwright did not address the issue of whether the defendant was “connected in any capacity with” the insured institution. There was no need for the court to do so, since the defendant’s status as president and chief shareholder of a savings and loan clearly brought him within the language of the statute in that regard.

CONCLUSION

Based on my review of the record in this case, I find that the government has failed to show that defendant is “connected in any capacity with” Oregon Pioneer. I grant defendant’s motion for judgment of acquittal, and find defendant not guilty on both counts of misapplication of funds of a federally insured savings and loan institution in violation of 18 U.S.C. § 657.

This opinion constitutes findings of fact and conclusions of law pursuant to Fed.R. Crim.P. 23(c).

      . 18 U.S.C. § 657 provides in part:
      Whoever, being an officer, agent or employee of or connected in any capacity with ... any ... savings and loan corporation or association ... the accounts of which are insured by the Federal Savings and Loan Insurance Corporation ... willfully misapplies ... funds ... belonging to such institution, or pledged or otherwise entrusted to its care, shall be fined not more than $5,000 or imprisoned not more than five years, or both____

      . Section 656 applies to the misapplication of funds from federally insured banks. Its language is nearly identical to that of section 657.


author: SHADUR, District Judge.

text:
    Sandra J. CARTER, Plaintiff, v. ILLINOIS DEPARTMENT OF COMMERCE AND COMMUNITY AFFAIRS, Defendant.
    No. 84 C 8169.
    United States District Court, N.D. Illinois, E.D.
    Dec. 28, 1984.

      Laurie E. Leader, Michael Lee Tinaglia, Leader & Tinaglia, Chicago, Ill., for plaintiff.
    Gladys M. Stevens, Asst. Ill. Atty. Gen., Chicago, Ill., for defendant.
   MEMORANDUM OPINION AND ORDER

SHADUR, District Judge.

Sandra Carter (“Carter”) has sued her employer, Illinois Department of Commerce and Community Affairs (“Department”), charging race-discriminatory employment practices in violation of both Title VII of the Civil Rights Act of 1964 as amended, 42 U.S.C. §§ 2000e to 2000e-17 (Count I) and 42 U.S.C. § 1981 (“Section 1981”) (Count II). Department has moved to dismiss Count II on sovereign immunity grounds. For the reasons stated in this memorandum opinion and order, Department’s motion is granted.

Department is an agency of the State of Illinois, so that a suit against Department stands in the same position as a suit against the State itself for Eleventh Amendment purposes. Though the Supreme Court has squarely decided the Eleventh Amendment bars suit under 42 U.S.C. § 1983, Quern v. Jordan, 440 U.S. 332, 338-45, 99 S.Ct. 1139, 1143-47, 59 L.Ed.2d 358 (1979), it has not addressed the identical question as to Section 1981. See the Court’s most recent excursion into Eleventh Amendment analysis in Pennhurst State School & Hospital v. Halderman, — U.S. -, 104 S.Ct. 900, 906-09, 79 L.Ed.2d 67 (1984).

But for a District Court the Supreme Court is not the only source of controlling law. In a pre-Pennhurst but (more importantly) post-Quern v. Jordan decision, Rucker v. Higher Educational Aids Board, 669 F.2d 1179, 1184 (7th Cir.1982) our Court of Appeals held:

[I]t is undisputed that the Board — the only defendant in this case — is a state agency. As such, it is immune from federal damages liability by virtue of the Eleventh Amendment. See Alabama v. Pugh, 438 U.S. 781, 98 S.Ct. 3057, 57 L.Ed.2d 1114 (1978); Quern v. Jordan, 440 U.S. 332, 99 S.Ct. 1139, 59 L.Ed.2d 358 (1979). Rucker’s section 1981 and section 1985 claims fail on the same ground.

As to Rucker Carter’s counsel respond (Mem. 6):

Indeed, some federal courts have mistakenly done so [“extended” the authorities on which Quern v. Jordan relied in part] to conclude that the Eleventh Amendment similarly bars Section 1981 claims. See, e.g., Rucker v. Higher Educational Aids Bd., 669 F.2d 1179 (7th Cir.1982). The fallacy of such argument is based upon the differences in origin of Section 1981 and Section 1983.

It is of course possible for a Court of Appeals to be mistaken, but arguments against a square holding by that court must be addressed to it and not to a District Court in the same Circuit. Orderly jurisprudence compels that such a direct precedent be followed by this Court.

This Court therefore will not indulge the historical excursion invited by Carter. Count II is dismissed on the controlling authority of Rucker.