author: HADEN, Chief Judge.

text:
    James RAMEY, Jr., II, Plaintiff, v. The CHESAPEAKE AND OHIO RAILWAY COMPANY, Defendant.
    Civ. A. No. 81-3288.
    United States District Court, S.D. West Virginia, Huntington Division.
    Aug. 29, 1983.
    James Ramey Jr. II, pro se.
    William C. Beatty, Huddleston, Bolen, Beatty, Porter & Copen, Huntington, W.Va., for defendant.
   MEMORANDUM OPINION AND ORDER

HADEN, Chief Judge.

The Plaintiff brings this action against the Chesapeake and Ohio Railway Company [C & O] seeking to recover monetary damages for his alleged wrongful discharge. Currently pending before the Court is the Defendant’s motion for summary judgment, pursuant to Rule 56(b), Federal Rules of Civil Procedure. After having thoroughly considered the parties’ submissions in support of their respective positions, the Court hereby grants the aforementioned motion for the reasons set out below.

I. Factual Background

By letter dated October 23, 1979, the Plaintiff was discharged from his employment with the C & O for having operated a ballast regulator on a “live track” on August 6, 1979, notwithstanding a supervisor’s admonition to the contrary. At all times relevant hereto, the C & O was a rail carrier subject to the provisions of the Interstate Commerce Act, 49 U.S.C. § 10101, et seq., and the Railway Labor Act, 45 U.S.C. § 151, et seq. [the Act], while the Plaintiff was a member of the Brotherhood of Maintenance of Way Employees [Brotherhood]. Pursuant to Rule 21 of the collective bargaining agreement which was then in force between it and the Brotherhood, the C & O scheduled a timely disciplinary hearing for August 20, 1979. At the Brotherhood’s request, the August 20 hearing was postponed and a disciplinary hearing was eventually convened on October 4, 1979. After he was notified of his discharge on October 23, 1979, the Plaintiff exhausted his internal appeals under Rule 21(d) of the Collective Bargaining agreement and subsequently filed a wrongful discharge claim with the Third Division of the National Railroad Adjustment Board [the Board], pursuant to Rule 21(h)(1)(C) of the agreement. On August 27, 1982, the Board upheld the Plaintiffs discharge. Prior to the issuance of the Board’s decision, however, the Plaintiff instituted this action on September 24, 1981.

II. Subject Matter Jurisdiction

In affirming the district court’s order granting the Defendant’s motion for summary judgment in a similar wrongful discharge action, the Fourth Circuit stated:

“ ‘A party who has litigated an issue before the Adjustment Board on the merits may not relitigate that issue in an independent judicial proceeding.’ Since the dispute in this case was taken to the NRAB, we believe that the Railway Company could have properly defended the instant action on the grounds that an award of the NRAB would be final and could not be collaterally attacked because of 45 U.S.C. § 153, First (m) in an independent proceeding____ Such an award could be judicially reviewed only under § 153 First (q)____”

Dorsey v. Chesapeake and Ohio Ry. Co., 476 F.2d 243, 245 (4th Cir.1973), quoting Andrews v. Louisville & Nashville Railroad Co., 406 U.S. 320, 325, 92 S.Ct. 1562, 1565, 32 L.Ed.2d 95 (1972). See also Radin v. U.S., 699 F.2d 681 (4th Cir.1983) (holding that a discharged employee may not maintain an action for monetary damages against the United States for the NARB’s alleged deprivation of his right to due process).

The Supreme Court has carved out an exception to the Board’s exclusive jurisdiction over the merits of a wrongful discharge claim, however, where the employee alleges that his union, in breach of its duty of fair representation, engaged in concerted action with the employer to either bring about or sustain his discharge. See Glover v. St. Louis-San Francisco Ry. Co., 393 U.S. 324, 89 S.Ct. 548, 21 L.Ed.2d 519 (1969). Cf., Harrison v. United Transportation Union, 530 F.2d 558 (4th Cir.1975) cert. denied 425 U.S. 958, 96 S.Ct. 1739, 48 L.Ed.2d 203 (1976). In this regard, the Court notes that the Plaintiff has alleged that his union representative delayed the grievance procedures so as to enable the Defendant to better organize its case against him. The issue before the Court, therefore, is whether the Plaintiff, by having made this implicit allegation of unfair representation, can collaterally attack the Board’s adverse decision upholding his discharge, notwithstanding the fact that he has not joined the Brotherhood as a Defendant in this action.

In Riddle v. Trans-World Airlines, Inc., 512 F.Supp. 75 (W.D.Ark.1981), a discharged employee brought an action against his employer without either exhausting his administrative remedies under the Act, or joining his union as a defendant and alleging that the union and his employer acted in concert to deprive him of his right to fair representation. In granting the employer’s motion to dismiss, the court determined that its “power to grant an employee relief against his employer in a RLA case is ancillary to its power to grant the employee relief against his union for breaching its duty of fair representation” and, accordingly, held that it did not have subject matter jurisdiction, by virtue of the union’s absence from the case. Id. at 80, citing Mavis v. Brotherhood of Railway, Airline and Steamship Clerks, 585 F.2d 926 (8th Cir.1978).

Even assuming that the pro se Plaintiff at bar is alleging that he was deprived of his right to fair representation by virtue of his employer’s and union’s concerted action, the Court nonetheless finds that it does not have subject matter jurisdiction to adjudicate his wrongful discharge claim against his employer, inasmuch as he has not joined the union as a Defendant in this action. Riddle v. Trans-World Airlines, Inc., supra. Accordingly, the Court hereby grants the Defendant’s motion for summary judgment and directs the Clerk to remove this action from the Court’s docket.

      . The Court has disregarded the Plaintiffs allegations concerning his perceived "due process” violations with respect to the October 4, 1979, disciplinary hearing, inasmuch as the ‘“federal courts are not the guarantor of any rights of either labor or management at the initial hearing, either by force of the Constitution or Railway Labor Act....’ ” Dorsey v. Chesapeake and Ohio Ry. Co., 476 F.2d 243, 245 (4th Cir.1973), quoting Edwards v. St. Louis-San Francisco Railroad Co., 361 F.2d 946, 954 (7th Cir.1966).

      . "Section 153 First (i) of the Act provides that minor disputes, growing out of grievances or contract interpretation, that cannot be resolved by intra-company negotiation under the Collective Bargaining Agreement shall be referred to the National Railroad Adjustment Board (NRAB), or one of its regional boards, for arbitration. The provision for arbitration is not a voluntary undertaking, but rather is compelled by the Act; a discharge grievance is a minor dispute that must be referred to the NRAB for arbitration, and this is the exclusive means by which a railroad employee can directly challenge the validity of his discharge. Andrews v. Louisville & Nashville R.R., 406 U.S. 320, 92 S.Ct. 1562, 32 L.Ed.2d 95 ... (1972). The award of the NRAB is final and binding, § 153 First (m), but is subject to review in the district court if an employee or carrier is ‘aggrieved by the failure of ... the Adjustment Board to make an award ... or is aggrieved by any of the terms of an award of by the failure ... to include certain terms in such award____’ Section 153 First (q). The party seeking review of an award must file the action within two years after the cause of action accures under the award of the NRAB. Section 153 First (r)."

        Radin v. U.S., supra, at 683-84.

      . See, Plaintiffs amended complaint at fXII.

      . Riddle v. Trans-World Airlines, Inc., supra, at 80 n. 5.

      . The fact that the Plaintiff at bar has presented his wrongful discharge claim to the Board does not provide a basis for distinguishing Riddle, inasmuch as the Fourth Circuit has recognized that the term '“exhaustion of remedies’ is a misnomer because the federal administrative remedy is exclusive and does not allow post-exhaustion actions in another forum____’’ Radin v. U.S., supra, at 683 n. 5.

      . In dismissing this action for monetary damages, which the Court finds to be nothing more than an impermissible collateral attack of the Board’s decision of August 27, 1982, which upheld the Plaintiffs discharge, the Court is not expressing any views on the merits of any timely petition for judicial review of the Board’s adverse decision which might be forthcoming from the Plaintiff, pursuant to 45 U.S.C. § 153 First (q), (r). Cf., Radin v. U.S., supra, at 684; Gatlin v. Missouri Pacific Railroad Company, 631 F.2d 551 (8th Cir.1980).


source: Caselaw Access Project

author: VON DER HEYDT, District Judge.

license: Public Domain

text:
    Thelma COLE, Plaintiff, v. STATE OF ALASKA, DEPARTMENT OF TRANSPORTATION AND PUBLIC FACILITIES, DIVISION OF MARINE HIGHWAY SYSTEMS, Defendant.
    No. A83-087 CIV.
    United States District Court, D. Alaska.
    Aug. 20, 1984.

      Jeffrey R. Walsh, San Francisco, Cal., William G. Azar, Anchorage, Alaska, for plaintiff.
    Marilyn J. Kamm, Dept. of Justice, Anchorage, Alaska, for defendant.
   MEMORANDUM AND ORDER

VON DER HEYDT, District Judge.

THIS CAUSE comes before the court on defendant State of Alaska’s motion to dismiss the complaint for lack of subject matter jurisdiction. Defendant’s request for oral argument is denied in order to expedite the business of the court,

a. BACKGROUND

Plaintiff alleges she was injured while on board the M/V Matanuska and in the employment of the State of Alaska. She seeks money damages against the state, alleging jurisdiction and substantive rights under the Jones Act, 46 U.S.C. § 688 and the general maritime law of unseaworthiness. The state argues that it has immunity to both the Jones Act and unseaworthiness claims under the Eleventh Amendment. The plaintiff argues that Alaska has either expressly or constructively waived its immunity to suit as to both claims.

b. CONSTRUCTIVE WAIVER OF IMMUNITY TO JONES ACT

A state may waive its immunity by engaging in an activity regulated by Congress when Congress has constitutional authority to enact the regulatory statute and that statute authorizes suits against the state. Department of Educ., State of Hawaii v. Katherine D., 727 F.2d 809 (9th Cir.1983) citing Parden v. Terminal Ry. of Alabama State Docks Dept., 377 U.S. 184, 84 S.Ct. 1207, 12 L.Ed.2d 233 (1964) (state consents to waive immunity by operating a railroad as a common carrier subject to FELA). In Cocherl v. Alaska, 246 F.Supp. 328 (D.Alaska 1965), this court, applying Parden, held that Alaska had waived its Eleventh Amendment immunity to suit under the Jones Act by operating a ferry as a common carrier in interstate commerce on navigable waters. Id. at 330. In Cocherl, the court noted the express linkage of the Jones Act to the Federal Employers’ Liability Act. See also Mitchell v. Trawler Racer, Inc., 362 U.S. 539, 546-47, 80 S.Ct. 926, 930-31, 4 L.Ed.2d 941 cited in In re Holoholo, 512 F.Supp. 889, 902-03 (D.Hawaii 1981). For the purposes of this motion to dismiss, the facts in Cocherl are indistinguishable from those claimed here. Eight years after Cocherl, the Supreme Court was presented with a claim of constructive waiver by the state of Missouri as a result of Congress’ inclusion of the state as employer within the coverage of the Fair Labor Standards Act. The Supreme Court declined to find a Congressional abrogation of immunity by the mere amendment of the FLSA to include certain state employers. See Employees of Dept. of Public Health and Welfare v. Missouri, 411 U.S. 279, 284-88, 93 S.Ct. 1614, 1617-19, 36 L.Ed.2d 251 (1973).

The question presented is the effect of the subsequent Supreme Court decisions and this circuit’s interpretations on the holding in Parden. According to Justice Douglas in Employees, Parden could be put aside because it involved a rather isolated state activity — the operation of a railroad as a common carrier for profit. With respect to state institutions not operated for profit, Congress would not abrogate immunity “without indicating in some way by clear language that the constitutional immunity was swept away.” In Edelman v. Jordan, 415 U.S. 651, 94 S.Ct. 1347, 39 L.Ed.2d 662 (1974) Justice Rehnquist reconciled Parden and Employees as “cases involving a congressional enactment which by its terms authorized suit by designated plaintiffs against a class of defendants which literally includes states____ The question of waiver or consent under the eleventh amendment was found in those cases to turn on whether Congress had intended to abrogate the immunity in question and whether the state by its participation in the program authorized by Congress had in effect consented to the abrogation of the immunity.”

Presumably, the difference in final results in the cases is explained by the presence in Parden of a Congressional intent to abrogate and the State’s consent by participating as a proprietary common carrier by rail and by the absence of the same in Employees. In any event, nothing presented to the court suggests that Parden is no longer good law on its facts. Cf. Scanlon v. Atascadero State Hosp., 735 F.2d 359, 361, (9th Cir.1984) (following Parden’s use of broad statutory definition). Because Cocherl was grounded not on any extension of the facts in Parden but rather rested squarely on (1) the expressed extension of FELA to seamen in the Jones Act and (2) on analogous proprietary activity by the state as a common carrier, the court considers its holding in Cocherl undisturbed. Accord, In re Holoholo, 512 F.Supp. at 889-903; Brody v. North Carolina, 557 F.Supp. 184 (E.D.N.C.1983); but cf. Sullivan v. Georgia, 724 F.2d 1478 at 1481-82 (11th Cir.1984) (finding no clear statement in Jones Act of intent to abrogate immunity for non-profit research activity); Faust v. South Carolina State Highway Department, 721 F.2d 934 (4th Cir.), cert. denied, — U.S. -, 104 S.Ct. 2678, 81 L.Ed.2d 874 (1984) (no federal statute created private cause of action for pleasure boaters against state).

The court is aware of subsequent circuit court decision which have appended a strict “clear statement” test onto the Parden test for constructive waiver of immunity. See, e.g., Intracoastal Transportation, Inc. v. Decatur County, Georgia, 482 F.2d 361, 365 (5th Cir.1973) (drawbridge); Riggle v. State of Calif, 577 F.2d 579, 584 (9th Cir.1978) (citing Intracoastal with approval) (state operated bridge); see also Sullivan v. Georgia, 724 F.2d 1478, 1480-81 (11th Cir.1984) (reviewing decisions) (nonprofit research). The Ninth Circuit has adopted the following test for establishing a waiver of immunity: “Eleventh Amendment immunity will be waived when [1] Congress has authorized suit against a class of defendants that includes states, and [2] the state enters into the activity regulated by federal law.” Mills Music, Inc. v. Arizona, 591 F.2d 1278, 1285 (9th Cir.1979); see also Department of Education, State of Hawaii v. Katherine D, 727 F.2d 809 (9th Cir.1983); Scanlon v. Atascadero State Hosp., 735 F.2d 359 (9th Cir.1984) (applying Mills test). In reviewing the precedent for finding Congressional intent to abrogate immunity in broad statutory definitions of defendant classes, this circuit cited the FELA and the Jones Act, as was applied to an interstate compact in Petty v. Tennessee-Missouri Bridge Commission, 359 U.S. 275, 79 S.Ct. 785, 3 L.Ed.2d 804 (1959), as examples of a state’s inclusion within broadly defined defendant classes. The court considers these references by example to the FELA and the Jones Act indicative of the continuing validity of the major holding in Cocherl.

Express Waiver

Because the court considers the doctrine of constructive waiver applicable and satisfied here, it declines to address plaintiff’s argument that the state has expressly waived immunity to suits under the Jones Act in its Attorney General Opinion No. 28.

Count II — State’s Liability for Unseaworthiness

In Cocherl, the court dismissed plaintiff’s claims for unseaworthiness on the grounds that defendant’s consent to suit under the Jones Act did not extend to consent to a claim based on general maritime law for unseaworthiness. See Cocherl v. State of Alaska, 246 F.Supp. at 330. Defendants move to dismiss the unseaworthiness claim on the basis of that authority. Plaintiffs argue that Alaska has by statute waived its Eleventh Amendment immunity from suit in federal court.

Alaska Stat. 09.50.250 provides, in pertinent part: “A person or corporation having a contract, quasi-contract or tort claim against the state may bring an action against the state in the superior court.” Plaintiff analogizes this statute to Washington’s general waiver of sovereign immunity at Wash.Rev.Code § 4.92.090 (Supp. 1982). Plaintiff then argues that the court in Metz v. State of Washington, 558 F.Supp. 17, 19 (W.D.Wash.1982) found that this waiver of sovereign immunity “constituted a specific waiver of Eleventh Amendment immunity from suits under the general maritime law for ‘unseaworthiness.’ ” Plaintiff has incorrectly represented the reliance which Metz places upon Wash.Rev. Code § 4.92.090. As Judge Beeks noted, a state may waive immunity from suit in its own courts without thereby waiving its Eleventh Amendment immunity from suits in federal court. Metz, 558 F.Supp. at 19 citing Riggle v. California, 577 F.2d at 585. In finding a waiver of eleventh amendment immunity for unseaworthiness, Judge Beeks relied on Washington’s express determination to operate its ferry as a common carrier and to be subject to a common carrier’s liability for, inter alia, personal injury. Wash.Rev.Code 47.60.220 (1970); see Metz, 558 F.Supp. at 19. While the significance of Wash.Rev.Code 4.92.090 in Judge Beek’s finding of a waiver of eleventh amendment immunity is not fully explained, it is clear that § 4.92.090 alone did not express the state’s consent to suit in federal court. See generally Great Northern Ins. Co. v. Read, 322 U.S. 47, 54, 64 S.Ct. 873, 876, 88 L.Ed. 1121 (1944).

Plaintiff has cited Alaska Atty.Gen. Op.No. 28, August 28, 1963 in support of its argument that Alas.Stat. 09.50.250 is a waiver of eleventh amendment immunity. In that opinion, the attorney general concluded that the above cited statute permitted the state to be sued for negligent torts which arise under the Jones Act. Id. at 12. The opinion is silent, however, with respect to a waiver of eleventh amendment immunity to suits for unseaworthiness.

While it is apparent that Alaska Stat. 09.50.250 is not, in itself, a waiver of eleventh amendment immunity, this state’s department of transportation has promulgated regulations governing the operation of the marine highway system which are in certain particulars comparable to Washington’s common carrier statute, Wash. Rev.Code, 47.60.220, relied upon by Judge Beeks as evidencing a waiver of eleventh amendment immunity. Specifically, both ferry systems operate upon navigable waters of the United States and Canada and are subject to Coast Guard’s jurisdiction. 17 AAC 70.070.

Both ferry systems have subjected themselves to liability. Defendants suggest great significance may be found in the fact the state, by regulation, has attempted to limit its liability for personal injury to acts of gross negligence. See 17 AAC 70.-090(a)(7); but see 17 AAC 70.090(b) (ferry system otherwise subject to common law). In so doing, the Alaska ferry system, it is argued, has not assumed the liability of a common carrier and therefore, apparently, not waived immunity. Even assuming (1) that the regulation in question is properly construed to limit the ferry’s liability for personal injury to acts of gross negligence and (2) that the regulation is enforceable as an exculpation of ordinary negligence, see Alaska Stat. 09.50.250 (general waiver of immunity), the court finds little evidence therein that the ferry system lacks the status of a common carrier. To the contrary, the Alaska Legislature has defined its ferries as vessels “used in the common carnage of passengers and self-propelled vehicles in intrastate commerce.” Alaska Stat. 19.60.070(2) (1983 Supp.).

As in Metz, this court concludes that the express entry of Alaska into the common carriage of passengers on navigable United States and international waters, its express submission to Coast Guard regulation and jurisdiction, its consent to suit for personal injury (regardless of how limited) taken together evidence of waiver of eleventh amendment immunity for suits in federal court for recovery for personal injury based on unseaworthiness. In this aspect, the decision in Cocherl v. Alaska is overruled.

Accordingly, IT IS ORDERED:

THAT defendant’s motion to dismiss is denied.

      . The defendant in reply has offered an affidavit evidencing subsidies and the lack of profitability of the Alaska Marine Highway System in an effort to characterize the ferry system as a governmental rather than proprietary activity. The court declines at this juncture and given the lack of notice to permit the conversion of this motion to dismiss into one for summary judgment by considering factual matters outside the pleadings.

      . Wash.Rev.Code § 4.92.090 provides:
      The state of Washington, whether acting in its governmental or proprietary capacity, shall be liable for damages arising out of its tortious conduct to the same extent as if it were a private person.

      . Wash.Rev.Code § 47.60.220 (1970) provides:
      The authority shall have all the obligations, duties and rights of a common carrier of persons and property in its operation of ferries, terminals or other facilities used in its ferry operations, including the right to participate in joint rates and through routes, agreements, and divisions of through and joint rates with railroads and other common carriers and the right to make any filings with the interstate commerce commission, the United States maritime commission or any other state or federal regulatory or governmental body and to comply with the lawful rules and regulations and requirements of any such body, and shall be subject to laws relating to carrier's liability for loss or damage to property transported, and for personal injury or death of persons transported.

      . Unlike Washington, Alaska has not broadly subjected itself to ICC regulations. 17 AAC 70.-010 provides, in part:
      The ferry system has been classified by the U.S. Court of Appeals, Ninth Circuit, as a marine highway. Regulation of the Interstate Commerce Commission, United States Department of Transportation and/or Alaska Transportation Commission are not applicable____
      The reference is apparently to Alaska Steamship Company v. FMC, 399 F.2d 623, 627 (9th Cir. 1968).


text:
    Tim JONES; Stan Stephens; Nancy & James Lethcoe; Wendy Simpson; Alaska Wilderness Sailing Safaris; Stan Stephens Charters; The Whale Center; Simpson’s Marine Charters; Sierra Club; Greenpeace U.S.A.; Greenpeace Canada; and Southeast Alaska Conservation Council, Inc., Plaintiffs, and State of Alaska, Intervenor-Plaintiff, v. William G. GORDON, Assistant Administrator of Fisheries, National Marine Fisheries Service; John V. Byrne, Administrator of National Oceanic and Atmospheric Administration; Malcolm Baldridge, Secretary for the United States Department of Commerce; and the United States Department of Commerce, Defendants, and Sea World, Inc., Intervenor-Defendant.
    No. J84-011 CIV.
    United States District Court, D. Alaska.
    Jan. 16, 1985.

      Lauri J. Adams, Laurie L. Davis, Atty. Gen.’s Office, Juneau, Alaska, for plaintiffs.
    Eileen Sobeck, Dept. of Justice, Washington, D.C., Mark Davis, Asst. U.S. Atty., Michael T. Thomas, Anchorage, Alaska, for defendants.
   MEMORANDUM AND ORDER

VON DER HEYDT, District Judge.

THIS CAUSE comes before the court on the parties’ cross-motions for summary judgment. Although the parties’ briefs are exceptionally lengthy, the issue to be decided is a simple one: Did the federal government violate NEPA, 42 U.S.C. § 4321 et seq., in failing to prepare an Environmental Impact Statement (EIS) prior to issuing a permit to Sea World, Inc. for the taking of up to 100 orea whales and the permanent retention of 10 such animals?

I. Background

Under the Marine Mammal Protection Act, 16 U.S.C. § 1361 et seq. (MMPA), it is illegal to capture marine mammals, including killer whales or oreas (species Oricinus orea), for scientific or display purposes unless the Secretary of Commerce has authorized the taking by issuing a permit. Procedures for the issue of permits are contained in 16 U.S.C. § 1374. Sea World applied for a permit to temporarily capture, primarily off the coast of southeast Alaska, up to 100 oreas and to retain 10 of those whales for display in their aquatic zoological parks. In the permit application, Sea World also requested to perform certain allegedly non-harmful scientific tests on all the captured animals.

Sea World submitted a revised application to the National Marine Fisheries Service (NMFS) on March 9, 1983. Notice of receipt of this application was published in the Federal Register March 17, 1983, as required by 16 U.S.C. § 1374(d)(2). Public hearings on the permit were held in Seattle August 16 and 17. The public comment period was extended several times, finally closing August 26. The NMFS received voluminous comments, both favoring and opposing the permit. In particular, the NMFS received detailed comments and suggestions from the Marine Mammal Commission (MMC). NMFS issued Sea World a permit November 1, 1983 and attached a number of conditions to the permit that attempted to alleviate many of the major concerns of the public and the MMC. In effect, the NMFS conditioned most of the requested activities upon Sea World conducting preliminary research in areas of concern, reporting this research to NMFS, and receiving specific subsequent authorization from it.

The total resident orea population of Southeast Alaska is estimated at 300, although scientists are unsure of the exact number since no comprehensive census has ever been taken. The permit allows Sea World to temporarily capture 100 oreas, and any animal previously captured may be recaptured up to two times during the five-year term of the permit. However, no more than 30 animals may be captured or recaptured in any one year in Alaska. Further, no more than 2% of the minimum population estimate for an area may be taken over a two year period.

II. 60-Day Statute of Limitations

Defendants initially argue that this suit is barred by the venue and statute of limitation requirements contained in 16 U.S.C. § 1374(d). This section states:

(6) Any applicant for a permit, or any party opposed to such permit, may obtain judicial review of the terms and conditions of any permit issued by the Secretary under this section or of his refusal to issue such a permit. Such review, which shall be pursuant to chapter 7 of Title 5, may be initiated by filing a petition for review in the United States district court for the district wherein the applicant for a permit resides, or has his principal place of business, or in the United States District Court for the District of Columbia, within sixty days after the date on which such permit is issued or denied.

NEPA does not contain a statute of limitations, but rather courts have relied on the doctrine of laches to bar stale suits. Given that this suit was filed more than 60 days after permit issuance, the issue is whether Congress intended the 60-day statute of limitations in § 1374(d) to bar NEPA challenges as well as challenges to whether the Secretary complied with MMPA in issuing or denying the permit.

The court finds that the above section does not bar NEPA claims filed after 60 days. Such a limit on judicial review in a “permit” statute does not deprive a district court of jurisdiction to review a NEPA claim. This is because NEPA itself provides an independent source of jurisdiction for the district court. See, e.g., People of the State of California ex rel. Younger v. Andrus, 608 F.2d 1247, 1249 (9th Cir.1979); Wyoming v. Hathaway, 525 F.2d 66, 69 (10th Cir.1975) cert. denied, 426 U.S. 906, 96 S.Ct. 2226, 48 L.Ed.2d 830 (1976); Get Oil Out, Inc. v. Andrus, 477 F.Supp. 40, 42-43 (C.D.Cal.1979). Rather, courts have limited such statutory restrictions on judicial review to review of compliance with the statute under which the permit was issued.

This same result is reached when the language of § 1374(d) is examined. Under that section, the 60-day limit only applies to judicial review “of the terms and conditions of any permit issued by the Secretary.” (emphasis added) Plaintiffs do not challenge the terms and conditions of the permit here. Rather, they challenge the initial legality of the permit based on the failure of the Secretary to comply with a separate statute. If the language of § 1374(d) is given its plain meaning, plaintiffs’ challenge falls outside its language.

III. Statutory Conflict Between MMPA and NEPA

Sea World argues next that there is a statutory conflict between the terms of § 1374 and NEPA. Under the Flint Ridge doctrine, where there is a clear and unavoidable conflict between the statutory language of NEPA and another statute, NEPA must give way. See Flint Ridge Development Co. v. Scenic Rivers Ass’n of Oklahoma, 426 U.S. 776, 788, 96 S.Ct. 2430, 2438, 49 L.Ed.2d 205 (1976); Alaska v. Carter, 462 F.Supp. 1155, 1161 (D.Alaska 1978). However, before the court can hold that NEPA does not apply, it must find “an irreconcilable and fundamental conflict” between the Secretary’s duties under NEPA and MMPA. Flint Ridge Development Co., 426 U.S. at 788, 96 S.Ct. at 2438.

The basis of this alleged statutory conflict is the time limits for issuing permits located in 16 U.S.C. § 1374(d). Under these time limits, the Secretary must issue a permit within 90 days after initial publication of notice of the application in the Federal Register. The presence of these deadlines, Sea World argues, makes compliance with NEPA impossible in that no EIS can be prepared within 90 days.

NMFS’s position, however, has always been that NEPA applies to § 1374 MMPA permits, but that because issuance of a permit normally does not represent a “major federal action” they are subject to a categorical exclusion and the agency is not required to prepare an EIS. See Federal Defendants’ Response to Plaintiffs’ Combined Requests for Admission and Interrogatories, Exhibit 2, Plaintiffs’ Opposition to Sea World’s Motion for Summary Judgment, Docket #26; Revised NO A A Directive 02-10, 45 Fed.Reg. 49312 (July 24, 1980).

This court must give deference to the agency’s determination that no irreconcilable conflict exists between the statute it has been entrusted to administer, MMPA, and NEPA. So long as the agency’s choice “represents a reasonable accommodation of conflicting policies that were committed to the agency’s care by statute, we should not disturb it unless it appears from the statute or its legislative history that the accommodation is not one that Congress would have sanctioned.” Chevron, U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837, 104 S.Ct. 2778, 2783, 81 L.Ed.2d 694 (1984).

The court finds that the agency’s position, that both NEPA and MMPA apply to § 1374 permit applications, is reasonable. First, for the vast majority of permit applications, no EIS will be required and no conflict will exist between statutes. Although NMFS has issued over 400 MMPA permits, the Sea World permit is the first instance in which the need for an EIS has been suggested. Second, in the rare case where an EIS may be required, the NMFS can create time in the application process by delaying initial publication of the notice of application in the Federal Register. Alternatively, it can do what it did in this case, extend the hearing and comment times by publishing further notices in the Federal Register. Last, the court notes that an agency is permitted some flexibility with respect to the timing of the preparation of EIS’s. Hovson’s, Inc. v. Secretary of Interior, 519 F.Supp. 434, 445 (D.N.J. 1981), aff'd on other grounds, 711 F.2d 1208 (3d Cir.1983).

The court has reviewed the cases relying on the Flint Ridge doctrine cited by Sea World and finds them distinguishable. In each of the cases in which it was held that no EIS was required, the conflict between NEPA and the opposing statute was of far greater magnitude. The conflict between statutes here is minor. Given that NEPA directs NMFS to comply with the EIS requirement “to the fullest extent possible,” the agency was reasonable in determining that a conciliation between NEPA and § 1374 was possible.

IV. Failure to Raise EIS Issue Before Agency

Sea World’s argument that plaintiffs are barred from raising the EIS issue

before this court because they failed to raise the issue below is without merit. A party is not required to raise the EIS issue before the agency before raising it in court. In this case, the statements of Senator Slade Gordon’s representative at the Seattle hearing gave NMFS sufficient notice that an EIS potentially was required. See Memorandum from R.B. Brumsted to William G. Gordon, October 12, 1983 at 5, 20 (Decision memorandum summarizing administrative proceedings) (Appendix 4, Federal Defendants’ Motion for Summary Judgment). The agency’s decision not to prepare an EIS was a conscious one. Plaintiffs cannot be faulted because they did not raise the issue before the agency. See Environmental Defense Fund, Inc. v. EPA, 489 F.2d 1247, 1256 n. 57 (D.C.Cir. 1973).

V. NOAA Directive 02-10 Requires EIS

As was established above, NEPA’s EIS requirement applies to the MMPA permit application process. NOAA Revised Directive 02-10 implements NEPA within NOAA and was the applicable directive at the time Sea World applied for a MMPA permit. See 45 Fed.Reg. 49312 (July 24, 1980). Section 6(c)(5) of that directive creates a categorical exclusion for scientific research and display permits under the MMPA. Id. at 49316. Section 6(c)(7) sets forth the exceptions to the categorical exclusion.

(7) Exceptions. The preparation of an EA or EIS is required for actions described in subsections (l)-(6) above if they:
(a) Are likely to result in significant environmental impacts as defined in Sec. 1508.27, or
(b) Involve a geographic area with unique characteristics, are the subject of public controversy based on potential environmental consequences, have uncertain environmental impacts or unique or unknown risks, establish a precedent or a decision in principle about future proposals, may result in cumulatively significant impacts, or may have any adverse effects upon endangered or threatened species or their habitats.

Id. It is plaintiffs’ position that NMFS’s issuance of the Sea World permit was an action that fell within the exceptions to the categorical exclusion.

“[A]n agency’s determination that a particular [action] does not require the preparation of an EIS is to be upheld unless unreasonable.” Foundation for North American Wild Sheep v. United States Dept. of Agriculture, 681 F.2d 1172, 1177 (9th Cir.1982). In this instance, NMFS erred in its decision not to prepare an EIS because its determination that the issuance of the Sea World permit did not fall within exception (7)(b) was unreasonable. This same result is reached whether the court follows the language of the NOAA directive or CEQ regulations. See 40 C.F.R. § 1508.27 (1983).

Initially, the court finds that the permit was the “subject of public controversy based on potential environmental consequences.” See id. The term “controversial” as found here refers to cases “where a substantial dispute exists as to the size, nature, or effect ” of the action. Wild Sheep, 681 F.2d at 1182. Evidencing this dispute, Senator Henry Jackson (D-Washington) noted in his comments to NMFS that “the potential effects of taking 100 whales is unknown.” See Brumsted Memorandum, supra, at 6. NMFS also received numerous other comments questioning the effect of the taking on the pod structure, reproductive capacity, and overall population of oreas in Southeast Alaska. Based on these comments, the court finds potential uncertainty exists over the effect of the capture on the native orea population, and controversy over what that effect may be.

For the reasons listed above, the court also finds that the permit will have “uncertain environmental impacts” or pose “unknown risks.” 40 C.F.R. § 1508.-27(b)(5). The extent of this uncertainty is best reflected in the comments of the Marine Mammal Commission on the permit.

The possible adverse effects of the proposed capture, holding, and removal of killer whales cannot be assessed reliably without better information on the population^) and the number, size, age/sex composition, and productivity of killer whale pods that could be affected by the proposed taking. Therefore, no general authorization should be issued, until the population parameters and the identity, number, size, and composition of killer whale pods in the proposed collection areas have been determined more precisely, or adequate provision has been made to obtain such information and factor it into the process leading to determination of when, where, and how many killer whales can be taken (captured, held, and removed) without having a significant adverse effect on any population or pod.

Plaintiffs’ Motion for Summary Judgment, Exhibit 4, at 30. Plaintiffs’ memorandum in support of its summary judgment motion documents the uncertain environmental impact of the permit in considerable additional detail. Id. at 23-35.

Defendants argue that, because the permit is conditioned on Sea World initially performing population and other preliminary studies, the permit as issued contains mitigating measures that will prevent the action from having “significant” effects. In other words, because the agency retained the discretion to prevent the capture of whales, they argue that NMFS will assure that no major effect on the orea population will occur.

The court finds that argument unpersuasive. To allow an agency to avoid NEPA by making decisions conditional on future studies unallowably permits the agency to avoid the public discussion of effects and alternatives NEPA requires. Persons in plaintiffs’ position would be excluded from participation in critical stages of the decision-making process in that they would be unable to comment on those studies. To the contrary, the fact there are such uncertainties about the effect of the permit that the agency required future studies evidences the propriety and necessity of an EIS.

VI. Functional Equivalent of EIS

The defendants also argue that the agency did not violate NEPA because the agency’s evaluation of the permit application amounted to the functional equivalent of an EIS. The “functional equivalent” rule has to date been limited to the EPA, whose sole responsibility is to protect the environment. See, e.g., Texas Committee on Natural Resources v. Bergland, 573 F.2d 201, 208 (5th Cir.), cert. denied, 439 U.S. 966, 99 S.Ct. 455, 58 L.Ed.2d 425 (1978); Wyoming v. Hathaway, 525 F.2d 66, 71 (10th Cir.1975), cert. denied, 426 U.S. 906, 96 S.Ct. 2226, 48 L.Ed.2d 830 (1976). The EIS exception found in this rule is extremely narrow and has no application in the NMFS, an agency with a far different mandate than the EPA. See Portland Cement Ass’n v. Ruckelshaus, 486 F.2d 375, 387 (D.C.Cir.1973), cert. denied, 417 U.S. 921, 94 S.Ct. 2628, 41 L.Ed.2d 226 (1974).

The mere fact an agency has been given the role of implementing an environmental statute is insufficient to invoke the “functional equivalent” exception. To extend the doctrine to all cases in which a federal agency administers a statute which was designed to preserve the environment would considerably weaken NEPA, rendering it inapplicable in many situations. Given that NEPA requires that “all agencies of the Federal Government” shall “to the fullest extent possible” incorporate the EIS into their decision making, it is clear Congress did not intend this result. See 42 U.S.C. § 4332. (emphasis added).

Accordingly, IT IS ORDERED:

(1) THAT plaintiffs’ motion for summary judgment is granted;

(2) THAT defendant Sea World’s and the federal defendants’ motions for summary judgment are denied;

(3) THAT the U.S. Department of Commerce Permit to Take Marine Mammals, Permit No. 439, issued to Sea World, Inc. is declared invalid and void in that it was issued without observance of procedure required by law, namely the preparation of an Environmental Impact Statement as required by 42 U.S.C. § 4332;

(4) THAT Sea World, Inc. is enjoined from taking oreas pursuant to Permit No. 439;

(5) THAT the clerk prepare a final judgment incorporating items (1), (3) and (4) above.

      . See 16 U.S.C. § 1362(13) (definition of to "take”).

      . The exception in § 6(c)(7)(b) merely restates the Council on Environmental Quality (CEQ) regulation found in 40 C.F.R. § 1508.27 (1983). Based on the above, the court finds that the purpose of exception 7(b) is to require an EIS whenever the CEQ regulations would require one.


author: JAMES McGIRR KELLY, District Judge.

text:
    UNITY MUTUAL LIFE INSURANCE CO. v. Susan S. MOSES, Ind. & as Executrix of the Estate of Stephen D. Moses and Continental Bank.
    Civ. A. No. 83-5905.
    United States District Court, E.D. Pennsylvania.
    March 20, 1985.

      Stephen S. Phillips, Philadelphia, Pa., for plaintiff.
    Eugene M. Schloss, Elkins Park, Pa., for defendant — Susan S. Moses.
    Victor A. Young, Philadelphia, Pa., for defendant — Continental Bank.
   MEMORANDUM AND ORDER

JAMES McGIRR KELLY, District Judge.

The parties to this action have filed cross-motions for summary judgment. The facts pertinent to this matter have been stipulated to by the parties. The plaintiff, Unity Mutual Life Insurance Company, is a New York corporation. Susan Moses is a citizen and resident of Pennsylvania. Continental Bank is a Pennsylvania corporation. The court has jurisdiction over this matter pursuant to 28 U.S.C. § 1332(a)(1).

Unity Mutual is seeking to rescind a life insurance policy that Dr. Stephen Moses, the late husband of defendant Susan Moses, had purchased approximately two years before his death in 1982.' Dr. Moses had assigned the proceeds of the policy to Continental Bank. Pennsylvania law will be applied when necessary.

PACTS

In November, 1979, Dr. Stephen Moses was diagnosed as having a metastatic malignant melanoma, an often fatal form of skin cancer, which would later claim his life. Although inflicted with this deadly disease, the doctor continued to perform his normal work routine. In addition to building a private practice, the doctor worked part-time for a small community health center (“health center”) located in Philadelphia. Approximately three months after he was diagnosed as suffering from cancer, Dr. Moses and his wife Susan decided to purchase the health center. As part of securing financial backing for this deal, Continental Bank required that the doctor purchase at least an additional $100,000 worth of life insurance over and above what he was carrying at that time. The doctor contacted a local insurance broker, whom he had conducted business with previously, and purchased the necessary insurance. This transaction occurred in April, 1980, approximately a month and a half after the purchase of the health center.

As with all underwritten life insurance policies, the doctor was required to answer a number of questions on the current status of his health. The answers are used to determine if the applicant is an acceptable risk for coverage. The information the doctor provided the insurance company was less than truthful in that he stated that he was in good health, that at his last yearly check-up he was “within normal limits” and he specifically denied ever having consulted a physician for cancer. The application also requested that the insured provide the name and address of his personal physician, ostensibly for the purpose of corroborating the medical history of the applicant.

The doctor listed his personal physician as Doctor James Lewis and gave the health center he had recently purchased as Dr. Lewis’ address. It is admitted by all parties that Dr. Lewis was not Dr. Moses’ personal physician nor had he ever examined him. Dr. Lewis had been employed at the health center but prior to the Moses’ purchase of it, he had ceased working there and relocated his practice elsewhere.

Upon receipt of the insured’s application, Unity Mutual sent a medical questionnaire, commonly referred to as an Attending Physician’s Statement (“APS”), to Dr. Lewis at the health center’s address. The purpose of the APS was to confirm the medical history as furnished by Dr. Moses. The APS that was returned to Unity Mutual represented that Dr. Moses was seen for routine matters and that his present health condition was excellent. The statement was dated May 10, 1980 and carried a signature purporting to be that of Dr. Lewis. In fact, Dr. Lewis did not sign the APS nor does he have knowledge of who it was that signed his name. On December 23, 1980 Dr. Moses assigned the benefits of his life insurance policy to Continental Bank. On September 1, 1982, more than two years after the effective date of the life insurance policy, the doctor succumbed to cancer. Continental Bank, as beneficiary, supplied Unity Mutual with the necessary papers for processing the claim. The death certificate listed the cause of death as metastatic malignant melanoma. Due to the nature of the death and the lack of any information indicating such a condition existed, Unity Mutual began an investigation into the circumstances under which the policy was issued. As part of the investigation a handwriting expert was hired to compare the signature of Dr. Moses along with that contained on the APS. This expert concluded that the signature of Dr. Lewis was that of Dr. Moses. At that point further information was obtained by Unity Mutual and the true condition of the doctor in 1980 became known. The insurance company then filed suit seeking to rescind the life insurance policy.

If this was a case where the court was asked to decide whether fraud was committed our task would be straight forward and simple, for it is well settled that fraud taints with illegality and invalidity anything its evil shadow darkens. Iacoponi v. Plisko, 412 Pa. 576, 195 A.2d 362, 365 (1963). But this is not such a case, for Pennsylvania, like most other states, has passed a law which mandates that any life insurance policy delivered in the Commonwealth contain a provision that the policy shall be incontestable after it has been in force two years from its date of issuance. 40 Pa.C.S.A. § 510(c). The policy in question satisfies the two year time requirement.

In accordance with the Pennsylvania statute the policy delivered to Dr. Moses contained the following clause:

This policy shall be incontestable after it has been in force during the lifetime of the insured for two years from its effective date except for nonpayment of. premiums and except as to any provision for disability or accidental death benefits.

The plaintiff believes that the manner in which this fraud was perpetrated allows them to void the insurance contract in spite of the clear wording of the incontestability clause. The defendants counter that the provision is absolute in its terms and that the plaintiff may not, as a matter of law, contest the validity of the life insurance policy.

DISCUSSION

Historically, the incontestability clause was an early insurance company response to the well-founded public perception that the life insurance contract could be voided, almost at will, by the insurer’s discovery of the slightest discrepancy on the policy application. The typical situation involved an insured who made a material misrepresentation about his health. If this fraud or misrepresentation was discovered subsequent to the insured’s death, the insurer could resist payment of the claim since fraud is a complete defense to the formulation of the contract. Since the insurer was not barred by the passage of time in asserting this defense, a tremendous burden was placed on the aggrieved beneficiary since the alleged misrepresentation may have occurred many years before and evidence which may have been favorable to the claim might only be known by the deceased.

This situation gave rise to a wide spread public belief that the contract was skewed in favor of the insurance company and that the protection intended for the beneficiaries was illusory. Many insurance companies responded to this by incorporating an incontestability clause into the life insurance policy. In Pennsylvania, the state legislature in 1921, formalized the practice by passing into law a two year incontestability limitation.

One effect of an incontestability clause is to permit recovery in cases where an insured purposely commits fraud. Balanced against this undesirable result, however, is the social desirability of assuring a beneficiary that the proceeds of the policy would not be challenged at some remote point in time when the insured was dead and those who may testify in his favor are deceased or otherwise unknown or unable.

The effect of this clause is to provide a two year period in which the company may ascertain whether the insured has perpetrated any type of fraud in obtaining the coverage. If the company cannot detect any falsity or fraud, then they are obligated to make no further inquiry and assert no defenses on the claim. Central Trust Company v. Fidelity Mutual Life Insurance Co., 45 Pa.Super. 313, 314, 315 (1911).

Pennsylvania tribunals have long interpreted the meaning of the incontestability clause to be absolute. In Feierman v. Eureka Life Insurance Company, 279 Pa. 507, 124 A. 171 (1924) the Pennsylvania Supreme Court stated that “the clause means precisely what its language states: the policy will not be challenged, opposed or litigated, and is indisputable after two years.” Id. at 509, 124 A. 171.

If the fraud or material misrepresentation is not uncovered within two years from the policy effective date, the life insurance contract will be held to be valid and binding on the insurance company. Brady v. Prudential Insurance Co., 168 Pa. 645, 32 A. 102 (1895); Lawler v. Home Life Insurance Company of America, 59 Pa.Super. 409 (1915); Feierman v. Eureka Life Insurance Co., supra; Gorski v. Metropolitan Life Ins. Co., 88 Pa.Super. 326 (1926).

Pennsylvania courts have recognized only one exception to the incontestability defense, and that is where the insurance company can prove that an imposter was used to deceive the insurance company into issuing the policy. This exception was first reported in the case of Ludwinska v. John Hancock Mutual Life Insurance Company, 317 Pa. 577, 178 A. 28 (1935). Victoria Ludwinska was an infirm adolescent who had been committed to an asylum. Her sister Bertha applied for a life insurance policy and represented herself as Victoria, signing the application in that capacity. As a precondition to placing the policy in force, a medical exam was required of the applicant. Bertha, posing as Victoria, submitted to the physical examination. The policy containéd a two year incontestability clause and Victoria died more than two years after the policy was issued. The insurance company discovered the fraud and sought to rescind the policy. The beneficiary asserted that the insurer was es-topped from contesting the validity of the policy due to the incontestability provision. The Ludwinska court held that where one contracts with an individual face to face and intends the contract to be operational to that person, regardless of the name she has adopted, then the contract applies to those parties only. No contract existed because the essential condition that the minds of the parties must agree to the particulars had never occurred. When a life insurance policy is procured by impersonating the party to be insured, no contract will exist and thus the incontestability clause is inapplicable. Id., 178 A. at 30.

The Ludwinska decision was followed by the court in Petaccio v. N. Y. Life Ins. Co., 125 Pa.Super. 15, 189 A. 697 (1939). That case involved a situation in which a son substituted an imposter for his father to take a medical examination required by New York Life Insurance Co. The imposter signed the application and presented himself for a physical examination. The court held that since the contract was between the insurance company and a person other than the named insured, no contract was ever formed and the incontestability clause was not applicable. Id. at 28, 189 A. 697.

Plaintiff believes that the unique nature of this fraud is akin to the legal principals which voided ab initio the life insurance policies in Ludwinska and Petaccio. Dr. Moses not only committed fraud in his initial application for insurance, but he continued his fraudulent scheme by circumventing the reasonable investigatory measures the insurance company undertook to verify the truthfulness of his statements. His fraud was designed to thwart the inquiry necessary to uncover the truth, as such there was never any meeting of the minds. As with the factual situation in Petaccio and Ludwinska, the policy could not have been issued but for Dr. Moses’ impersonation of Dr. Lewis. I agree with this characterization and wish to add these additional observations. Fraud is an abhorrent act. The judiciary should work to eradicate the unfavorable effects that frauds wreak on society at large. My research, which examined all the jurisdictions of the United States, has not uncovered even one reported case similar in nature to the facts as represented here. The normal business practice of a life insurance company is designed to uncover false statements made on an application. Simply by corresponding to the doctor of record and receiving a signed report verifying the truth of his patient’s health can reliable information be obtained. It’s a simple yet effective means, available without distinction to the financial resources that a company has, to ascertain the truth. Both the largest and the smallest companies employ this method with, undoubtedly, great success. Yet, normal business practices would not suffice to uncover the fraud committed here.

The legislative enactment of the incontestability clause did not eliminate the basic proposition that underlies it, namely, that insurance companies would not be injured by the clause since they possess the means, through normal business practices, to uncover fraud in an application. Nothing I can imagine is more basic and trustworthy than a signed statement from a treating physician as to the health of his or her patient. The signed statement, which included the proper medical terms, would not raise the suspicion of any underwriter who reviewed it. Even the most ardent skeptic would believe the truth of a signed statement from a doctor knowing that the letter was mailed to the doctor and not transmitted by the applicant as an intermediary; the letter was addressed to a community hospital; it was promptly returned and signed. I cannot in good conscience say that a company which goes to such a thorough extent to verify the truth only to find itself fooled by the grand illusion of the one person who possessed the knowledge, skills and opportunity to orchestrate this charade, should be the party penalized.

Dr. Moses committed more than simple fraud, he also undertook a criminal act of intercepting mail which was earmarked for another person. This fraudulent act was a cold calculation to circumvent a system that contained reasonable and workable safeguards to verify his health condition.

The insurer should not be put in the position where not only must they examine the truth of the application, but also the truth of the physicians’ statements. There is no method short of hiring a private detective to delve into the entire history of the life insurance applicant that could be more effective in uncovering lies. The law does not require absurdity to displace common sense. Both the Ludwinska and Petaccio decisions share in common with these facts the important and practical concept that the type of fraud that was committed was simply not capable of detection absent extraordinary measures. Normal business practices would not uncover an artful substitution of a treating physician at a verification examination.

The eloquence of Justice Musmanno is worthwhile repeating, “fraud taints with illegality and invalidity anything its evil shadow darkens.” Iacopani v. Pliska, supra. The insurance carrier’s bright light in search of truth was not powerful enough to penetrate the dark shadows cast by this fraudulent and criminal act. This court will not uphold such an abhorrent scheme merely because the insurance industry practice failed to uncover the truth prior to Dr. Moses’ death. The truth was not discovered in the Ludwinska and Petaccio cases until after the death, yet the policies were rescinded. The scheme Dr. Moses developed was devious and unique in that he, and he alone, possessed the ability to continue the fraud at each stage without further assistance of any party.

I find that the protection of the incontestability clause does not extend to a wrongdoer who thwarts the investigation into the truth of his statements by posing as the independent verifier of the accuracy of the applicant’s health. I will grant plaintiff’s summary judgment motion and enter final judgment in their favor.

      . The additional insurance policy was to cover the mortgage that secured the health center.

      . The insurance broker was without knowledge of the condition of the doctor.

      . The policy was issued on April 11, 1980. Dr. Moses died approximately two (2) years and five (5) months later on September 1, 1982.


author: DITTER, District Judge.

text:
    LEXINGTON INSURANCE COMPANY, Plaintiff v. The ABINGTON CO., et al.
    Civ. A. No. 81-0043.
    United States District Court, E.D. Pennsylvania.
    March 21, 1985.
    John Justin McCarthy, Norristown, Pa., for plaintiff.
    John S. Kokonos, Philadelphia, Pa., for defendants.
   MEMORANDUM AND ORDER

DITTER, District Judge.

In 1974, the parties entered into a contract under which the defendants, insurance brokers, agreed to write insurance and obtain reinsurance as agents for plaintiff Lexington Insurance Company (Lexington). Lexington’s complaint alleged that defendants failed to remit to Lexington certain premiums they received from persons for whom they had written Lexington insurance policies. Lexington also alleges that defendants failed to procure policies of reinsurance. Default was entered, and, after protracted litigation, the parties eventually stipulated as to the principal amount of damages. Presently before the court is plaintiff’s motion for “prejudgment interest” at the market rate. For reasons that follow, this motion will be granted.

The law of Pennsylvania with respect to “prejudgment interest” is, as Judge Adams stated, “far from perspicuous.” Peterson v. Crown Financial Corp., 661 F.2d 287, 293 (3d Cir.1981). The confusion appears to stem from the fact that Pennsylvania limits an award of interest as such to specified cases involving breach of contract, but allows for an interest-type remedy for delay in certain other cases. See Hussey Metals Division v. Lectromelt Furnace Division, 417 F.Supp. 964, 968-69 (W.D.Pa.1976), aff'd, 556 F.2d 566 (3d Cir.1977); Comment, Allowance of “Interest” on Unliquidated Tort Damages in Pennsylvania, 75 Dick.L.Rev. 79 (1970).

Interest, as such, must be awarded at the statutory rate in cases of breach of contract, where the plaintiff has established that the defendant defaulted on a promise to pay a definite sum of money or render performance the value of which is ascertainable with exactitude. See Miller v. City of Reading, 369 Pa. 471, 87 A.2d 223 (1952); Nagle Engine & Boiler Works v. City of Erie, 350 Pa. 158, 38 A.2d 225 (1944). See also Black Gold Coal Corp. v. Shawville Coal Co., 730 F.2d 941 (3d Cir.1984); Sun Shipbuilding & Dry Dock Co. v. United States Lines, Inc., 439 F.Supp. 671 (E.D.Pa.1977), aff'd, 582 F.2d 1276 (3d Cir.1978), cert. denied, 439 U.S. 1073, 99 S.Ct. 846, 59 L.Ed.2d 40 (1979); Restatement (Second) Contracts § 354 (1982).

While interest, as such, is not available in other actions, three “interest-type” remedies have developed to provide redress for delay or detention. See Hussey Metals Division, 417 F.Supp. at 968-69; Comment, supra. First, Pa.R.Civ.P. 238 provides a formula for calculating delay damages in cases in which the underlying claim was one for bodily injury, death, or property damage.

Second, a judicially-created rule to compensate for delay has been developed for certain unintentional tort cases falling outside the ambit of Rule 238. See Citizens Natural Gas Co. v. Richards, 130 Pa. 37, 18 A. 600 (1889). See also American Enka Co. v. Wicaco Machine Corp., 686 F.2d 1050 (3d Cir.1982). In Richards, the court noted that interest cannot be recovered in tort actions, but recognized,

[T]here are cases sounding in tort, and cases of unliquidated damages where not only the principle on which the recovery is to be had is compensation, but where, also, the compensation can be measured by the market value or other definite standard. Such are cases of the unintentional conversion or destruction of property, etc. Into these cases the element of time may enter as an important factor, and the plaintiff will not be fully compensated unless he receive not only the value of his property, but receive it, as nearly as may be, as of the date of his loss____ It is never interest as such, nor as a matter of right, but compensation for delay, of which the rate of interest affords a fair legal measure.

Id. at 600. The Third Circuit has held that these common law damages for delay are measured by reference to the statutory rate of interest. See American Enka, 686 F.2d at 1057.

Finally, the Third Circuit has held that Pennsylvania law affords á plaintiff damages for delay for “wrongful detention” of money. See Peterson, 661 F.2d at 287. Based on a theory of precluding unjust enrichment, this approach provides a court with discretion to award damages at a rate in excess of the statutory rate. See id. at 297. See also American Enka, 686 F.2d at 1057 n. 5.

In determining which of the four approaches governs this case, I will refer first to the substantive nature of plaintiffs action. Plaintiffs complaint sets forth claims arising from breach of contract, negligence, and fraud. When defendants moved to set aside the default judgment, I ruled that they could establish no meritorious defense to plaintiffs claims, Lexington Insurance Co. v. Abington Co. No. 81-43, slip op. at 10-11 (E.D.Pa. Jan. 15, 1982), and the Third Circuit affirmed this aspect of my decision. See Lexington Insurance Co. v. Abington Co., 688 F.2d 822, slip op. at 3-4 (3d Cir.1982). Thus, for purposes of this case, liability has been established on counts sounding in contract, negligence, and fraud. See generally 6 J. Moore, W. Taggart & J. Wicker, Moore’s Federal Practice ¶ 55.03[2], at 32 n. 2 (1983).

Reference to the underlying causes of action demonstrates that each of the “prejudgment interest” approaches, except that provided in Rule 238, is implicated in this case. Plaintiffs first claim sets forth a cause of action for breach of a contract to pay a sum of money, and, standing alone, would call for an award at the statutory rate. Plaintiffs negligence claim would trigger the approach to damages outlined by the Richards court, and would also call for an award measured by the statutory rate. Plaintiffs fraud claim, however, would not call for the Richards approach because, as I read dicta in the Third Circuit’s decision in American Enka, cases involving intentional conduct and in which a plaintiff seeks restoration of wrongfully withheld funds are governed by Peterson, and not Richards. See American Enka, 686 F.2d at 1057 n. 5. Consequently, with regard to the fraud claim, I would not be limited in my award by the statutory rate.

Having found that reference to the established causes of action yields a conflict in the approaches to “prejudgment interest,” I will look beyond the characterizations of the substantive dispute and focus on the nature of the remedy that plaintiff seeks. This form of scrutiny appears consistent with Judge Adams’ approach in Peterson, where he found it unnecessary to determine whether the defendant had committed a particular tort and instead stressed the equitable nature of the remedy which the plaintiff sought. “Our holding is based not on our characterization of the substantive dispute, but rather on the equitable nature of the remedy the plaintiff seeks — restitution of money unjustly received.” 661 F.2d at 295.

In this case, plaintiff seeks from defendants those funds that were improperly and intentionally withheld. Plaintiff does not seek expectancy damages. It simply seeks to recover the funds which it had delivered to the defendants to procure reinsurance and which third parties had delivered to defendants as agents of plaintiff. As such, the damages appear to be restitory in nature. Consequently, I believe that application of the market rate of interest is proper. See Peterson, 661 F.2d at 297.

The intentional nature of defendants’ conduct factors significantly in my decision to apply the market rate. Damages for delay or detention serve the two-fold purpose of affording full compensation to an injured plaintiff and providing a disincentive for a defendant to delay and defend a clearly meritorious lawsuit. See Peterson v. Crown Financial Corp., 553 F.Supp. 114, 116 (E.D.Pa.1982). In this case, I believe those objectives will only be fulfilled by application of the market rate of interest as the basis for calculating a delay award. Only by reference to that standard will plaintiff be fully compensated and the defendant fully dispossessed. To apply the statutory rate would be to allow the defendants, who had full use of the funds for the entire period, to have invested the wrongfully-detained funds at the market rate of interest and be required to pay back the principal and only six percent interest.

In Murray Hills Estates v. Bastin, 442 Pa. 405, 276 A.2d 542 (1971), the Pennsylvania Supreme Court stated,

The decided trend of courts of law and courts of equity has been “to break away from hard and fast rules and charge and allow interest in accordance with principles of equity, in order to accomplish justice in each particular case”____ Unless a case be found, which is a conclusive precedent, the safest and at the same time the fairest way for a court is to decide questions pertaining to interest according to a plain and simple consideration of justice and fair dealing.

Id. at 410, 276 A.2d at 545 (quoting McDermott v. McDermott, 130 Pa.Super. 127, 130, 196 A. 889 (1938)). In this case, equity and justice compel me to refer to the market rate in determining the appropriate amount of “interest” to be applied.

Neither the plaintiff nor defendants address in their briefs the question of whether to compound interest. The table appended to plaintiff’s brief calculates interest on a simple basis. Plaintiff subsequently asked the court to compound any market-rate award it might make. See letter from Michael C. McBratnie, Esquire, to the court (March 4, 1985). Counsel for the defendants was given an opportunity to respond to plaintiff’s asserted right to compound interest, and argued that if the court were to decide to apply the market rate, then the court should exercise its discretion and award only simple interest. See letter from John S. Kokonos, Esquire, to the court (March 14, 1985).

Defense counsel, however, offered no reason why the discretion-influencing factors favor an award of simple interest. To the contrary, the factors which led me to apply the market rate — in particular the intentional nature of defendants’ conduct— compel me to conclude that interest should be compound rather than simple. In Sack v. Feinman, 489 Pa. 152, 413 A.2d 1059 (1980), a breach of fiduciary duty case, the Pennsylvania Supreme Court stated,

[T]he principle in such cases is the prevention of unjust enrichment. If the fiduciary makes profits, or gets interest on the money he wrongly takes from the beneficiary, he must be held not only for the profits or interest he makes on such funds, but also for interest on those profits or the interest itself. In no other way can his enrichment be taken from him. Hence, any claim based upon unjust enrichment or restitution, rather than upon compensation or damages, not only permits pre-judgment interest, but also permits an award of compound interest.
... Whenever the defendant holds money or property that belongs in good conscience to the plaintiff, and the objective of the court is to force disgorgement of his unjust enrichment, interest upon the funds or property so held may be necessary to force complete restitution. This may be true in law as well as in equity.

Id. at 163-64, 413 A.2d at 1068 (quoting D. Dobbs, Remedies 170 (1973)). In this case, prevention of unjust enrichment can only be ensured by requiring defendants to account for the amounts they could have realized through investment at the market rate. To realize this objective, compounding is indeed appropriate. Cf. Restatement of Restitution § 156 comment b (1937); D. Dobbs, Remedies 170 & n. 24 (1973).

      . After defendants failed to answer or appear within the 20-day period prescribed in the Federal Rules of Civil Procedure, plaintiff moved the Clerk to enter a default and default judgment. Both were granted. Defendants thereafter moved the court to set aside the default judgment pursuant to Fed.R.Civ.P. 60(b). I denied this motion. Lexington Ins. Co. v. Abington Co., No. 81-43 (E.D.Pa. Jan. 15, 1982). On appeal, the Third Circuit remanded the case with instructions to take an itemization of plaintiffs damages. Lexington Ins. Co. v. Abington Co., 688 F.2d 822 (3d Cir.1982). Much factual controversy and uncertainty surrounded plaintiffs itemization and defendants’ response thereto. This controversy was resolved by the parties’ agreeing to the amount that was improperly withheld and the date from which an interest calculation would be appropriate.

      . The parties agreed that the principal amount of judgment was to be $250,000 and that prejudgment interest would accrue from April 15, 1977 to the date on which the principal amount was entered.

      . In a diversity action, the question of whether to award prejudgment interest is one of state law. See Jarvis v. Johnson, 668 F.2d 740 (3d Cir.1982). Both parties agree that Pennsylvania provides the appropriate state law.

      . Pa.Stat.Ann. Tit. 41, § 202 (Purdon Supp. 1984-1985). The legal rate of interest in Pennsylvania is six percent. Id.

      . Appended to plaintiffs brief is a table, setting forth the average commercial prime rates of interest for April, 1977 — December, 1983. Plaintiff also sets forth the average rate for January — September of 1984. By letter, dated March 4, 1985, plaintiff amended the 1984 figure to reflect activity in the last quarter of that year. Because defendants have not objected to these figures as being inaccurate, I will accept them as the proper measure of the market rate.
      In its March 4, 1985, letter, plaintiff also sets forth the average rate of interest for January and February, 1985. I decline to rely on that figure because judgment on the principal amount of damages was entered on January 28, 1985. Based on figures for the daily bank prime loan rate set forth in the Statistical Releases of the Federal Reserve, I calculated the average daily prime rate for January 1, 1985— January 28, 1985 to be 10.63%. See Federal Reserve Statistical Release (released Jan. 7, 14, 22 & 28, 1985 & Feb. 4, 1985).
      The table set forth below represents my calculation of interest. Interest has been compounded. See discussion infra.


author: HORTON, District Judge.

text:
    Ford B. FORD, Under Secretary of Labor, United States Department of Labor, Plaintiff, v. ELY GROUP, INC., Rockford Textile Mills, Inc., Ely & Walker, Inc., and Citicorp Industrial Credit, Inc., Defendants.
    No. 85-2276H.
    United States District Court, W.D. Tennessee W.D.
    March 28, 1985.

      Theresa Ball, U.S. Dept. of Labor, Solicitors Office, Nashville, Tenn., for plaintiff.
    Mark I. Wallach, Thomas A. Cicarella, Mitchell G. Blair, Calfee, Halter & Gris-wold, Cleveland, Ohio, Ellen B. Vergos, David J. Sneed, Waring, Cox, Memphis, Tenn., Thornton W. Morris, Atlanta, Ga., Cornelia A. Clark, Farris, Warfield & Kanady, Nashville, Tenn., for defendants.
   ORDER GRANTING PRELIMINARY INJUNCTION

HORTON, District Judge.

On March 21, 1985, this Court entered a temporary restraining order, upon application of the Under Secretary of Labor, United States Department of Labor, enjoining the defendants, Ely Group, Inc., Rockford Textile Mills, Inc., Ely & Walker, Inc., and Citicorp Industrial Credit, Inc., from transferring, releasing, disposing of or attempting to dispose of, liquidating, divesting, moving, allowing the removal of or attempt to remove from defendants’ establishment in Memphis, Tennessee, or elsewhere, any raw products, materials, supplies, partially completed goods, finished goods, fixtures, machinery or other goods (as defined by Section 3(i) of the FLSA) then on said premises or elsewhere, and from disposing of or attempting to dispose of any other assets pending a hearing on plaintiff’s application for a preliminary injunction.

The Court conducted a hearing for a preliminary injunction, upon notice, on March 26, 1985, as specified in the temporary restraining order.

After a full hearing, the Court finds the following facts:

1) Ely Group Inc., a corporation doing business in Memphis, Tennessee, has been engaged in the manufacture, warehousing and distribution of hosiery, apparel, and other textiles and goods through its subsidiaries Rockford Textiles, Inc., and Ely & Walker, Inc.

2) Citicorp Industrial Credit, Inc. (Citicorp) has been engaged in the business of funding the operational needs of Ely Group, Inc. and its subsidiaries, pursuant to a Financing Agreement, as amended, dated December 14, 1983 (Ex. 2).

3) Citicorp funded on a daily basis a zero balance bank account for Ely Group, Inc. Ely Group, Inc., (Ely) was requested to notify Citicorp each day as they obtained information from the banks that checks had cleared and Citicorp transferred funds by wire daily to meet the banking needs of Ely Group, Inc. Payments by customers of Ely Group, Inc., were made to Citicorp through a lock box system, a control system insuring that the money owed by Ely Group would flow back to the creditor Citicorp. While there is no evidence of collusion between officials of Citicorp and Ely Group, Inc., the evidence does show that Citicorp knew it was funding the payroll of Ely Group, Inc., and when this funding ceased Ely could not meet its payroll obligations to its employees.

4) Citicorp perfected its security interest in all inventory, accounts receivable, and other assets of Ely Group, Inc. by filing for recordation all appropriate documents in the proper counties of Tennessee and with the Secretary of State for the State of Tennessee. Citicorp is a secured creditor of Ely Group, Inc., and is fully perfected upon the assets of Ely Group, Inc., (Ex. 4).

5) Citicorp conducted an ongoing monitoring system through auditors and/or field examiners who verified collateral upon which it made cash advances to Ely Group, Inc. These representatives of Citicorp conducted this monitoring on the premises of Ely Group, Inc., and its subsidiaries. They checked inventory, sales, credits and purchases to see if they were consistent with figures supplied to it by Ely Group, Inc. While these representatives did not verify wages paid to employees, they did check to see if Ely Group, Inc. paid all employee taxes.

6) During the Fall of 1984, Ely Group, Inc., started missing its sales projections. In February of 1985, the loan balance was about $9,500,000 and Ely Group, Inc., was losing money. Citicorp was concerned with why the inventory of Ely Group, Inc., was dropping precipitously while no sales were occurring.

7) On February 8, 1985, Citicorp delivered a letter to Ely Group, Inc., informing Ely it would no longer make cash advances and all loans due Citicorp by Ely Group, Inc., were due and payable.

8) On February 11, 1985, Ely Group, Inc., requested time to consult with a crisis management firm. This approach to the problems of Ely Group, Inc., did not prove worthwhile. Ely Group, Inc., was not generating cash but was actually consuming cash at the rate of $500,000.00 per week.

9) On February 19, 1985, Citicorp took possession of all assets of Ely Group, Inc., and the company ceased doing business on that date. Citicorp claims it is in a deficit position of $1,500,000 and is paying for warehousing of inventory it seized, guard service, insurance and utility bills. Citicorp has collected $1,200,000 in receivables at the Memphis location.

10) Hourly, bi-weekly and monthly employees have not been paid for their work which went into the manufacture and production of goods seized by Citicorp.

11) Approximately 300 hourly pay and bi-weekly pay employees at the Paragould, Arkansas, plant have not been paid for their work for a period of two to three weeks. Approximately 300 employees at the Rockford Textile Mills plant have not been paid for their work. In addition hourly, bi-weekly, monthly pay and executive employees who worked in the Memphis offices and warehouse remain unpaid.

12) While Citicorp argued that the entry of a preliminary injunction in this case will affect employment opportunities for Memphis workers at Ely Group, Inc., the evidence shows no future employment opportunities are contemplated for the Memphis operations of Ely Group, Inc. Instead, the proof shows Citicorp has negotiated a possible sale of a major part of the assets of Ely Group, Inc., and plans to transfer inventory it has foreclosed upon from the Memphis warehouse facilities to Nashville, Tennessee and that transfer is imminent.

13) Representatives of the United States Department of Labor informed an attorney for Citicorp that goods had been produced by employees of Ely Group, Inc., and its subsidiaries, in violation of the Fair Labor Standards Act. Specifically, the Labor Department took the position these employees had not been paid according to the Act and the goods manufactured and produced during the period when employees were not paid could not be introduced into interstate commerce. The evidence is that Citicorp has shipped goods in interstate commerce since the facilities and subsidiaries of Ely Group, Inc., ceased operations and did so with knowledge that employees of the various entities had not been paid. Specifically there have been shipments to Walmart and Sears Roebuck & Company stores since February 19, 1985, of 1800 dozen shirts valued in excess of $100,000 and 2000 dozen shirts valued at about $7.60 per shirt.

14) Citicorp released a news item from its New York offices stating the inventory it had foreclosed upon pursuant to its perfected security interest would be sold to recoup some of its losses in its dealings with Ely Group, Inc., and subsidiaries.

The central issue in this case as stated by Citicorp is whether Section 15(a)(1) of the Fair Labor Standards Act applies to a secured creditor in possession who is fully perfected with top lien rights under state law. Can that secured creditor be forced by the Fair Labor Standards Act to take a back seat to unpaid workers despite its secured status? Stated another way, the issue is whether Citicorp, a secured creditor, who has forclosed upon the assets of its debtor, Ely Group, Inc. and its subsidiaries, and is in possession of those assets, a substantial part of which were produced by unpaid workers allegedly in violation of the Fair Labor Standards Act, can be enjoined pursuant to Section 217, Title 29, United States Code from violating Section 215, Title 29, United States Code.

This Court rules Citicorp is subject to be enjoined and the Court finds it should grant a preliminary injunction enjoining Citicorp from disposing of any assets in its possession which were manufactured or produced by employees of Ely Group, Inc., and its subsidiaries, or any receivables collected for the sale of goods manufactured, produced or processed during the time workers were unpaid in violation of the Fair Labor Standards Act (FLSA).

Citicorp relies upon Wirtz v. Powell Knitting Mills Co., 360 F.2d 730 (2d Cir. 1966), Schultz v. Factors, Inc., 65 CCH Lab.Cas. 32, 487 (4th Cir.1971, and Dunlop v Sports-Master, Inc., 77 Lab.Cas. 33, 293 (E.D.Tenn.1975). These cases hold the “hot goods” provision of FLSA does not apply to a secured creditor in possession of the assets of a debtor resulting from default of payment of loans previously advanced.

The Under Secretary of Labor maintains these cases apply an exception to the Fair Labor Standards Act (FLSA) which is not consistent with that Act as interpreted by the Supreme Court of the United States. The position of the Department of Labor, as stated in its brief filed March 21, 1985, is as follows:

The so-called “hot goods” provision of the Fair Labor Standards Act, 29 U.S.C. § 201, et seq., is contained in § 15(a)(1) of the Act, 29 U.S.C. § 215(a)(1):

After the expiration of one hundred and twenty days from the date of enactment of this Act, it shall be unlawful for any person—
(1) to transport, offer for transportation, ship, deliver, or sell in commerce, or to ship, deliver, or sell with knowledge that shipment or delivery or sale thereof in commerce is intended, any goods in the production of which any employee was employed in violation of section 6 or section 7, or in violation of any regualtion or order of the Secretary of Labor issued under section 14; except that no provision of this Act shall impose any liability upon any common carrier for the transportation in commerce in the regular course of its business of any goods not produced by such common carrier, and no provision of this Act shall excuse any common carrier from its obligation to accept any. goods, for transportation; and except that any such transportation, offer, shipment, delivery, or sale of such goods by a purchaser who acquired them in good faith in reliance on written assurance from the producer that the goods were produced in compliance with the requirements of the Act, and who acquired such goods for value without notice of any such violation, shall not be deemed lawful.

The basic purpose of the § 15(a)(1) prohibition, as the Supreme Court pointed out in United States v. Darby, 312 U.S. 100, 109-110, 61 S.Ct. 451, 454-55, 85 L.Ed. 609, “is to exclude from interstate commerce” goods produced under substandard labor conditions, which would compete unfairly with goods produced by complying employers, and which in their total effect might force complying employers out of business {id., at 122, 61 S.Ct. at 461). This “evil” is the same whether the goods are sold and shipped in commerce by the manufacturer or by a foreclosing creditor. It is also immaterial that the tainted or “hot goods” held by the creditor are limited to the quantity in being at the time of the foreclosure. Thus, as the Supreme Court also pointed out in Darby, supra, “competition by a small part may affect the whole and ... the total effect of the competition of many small producers may be great” Id. at 123, 61 S.Ct. at 461. An action to enforce the § 15(a)(1) prohibition is brought, not to compel the foreclosing creditor to pay the statutory wages or to put pressure on the defaulting producer to pay such wages, but to keep tainted goods from entering the channels of interstate commerce in competition with goods produced under the Act’s standards.

Moreover, if foreclosing creditors are free to ship and sell tainted goods across state lines, the temptation to overextend credit to marginal producers is strong, as is the likelihood that such producers will become unable to meet their payrolls. The reason for this is that finance companies and institutions stand to reap financial gain by keeping- such producers in business. A holding by this Court that creditors may not ship and sell in interstate commerce goods produced in violation of the Act will not only protect complying manufacturers from the unfair competition of such tainted goods, but, we submit, it will also discourage the type of commercial financing which leads to minimum wage and overtime violations.

This Court agrees with the position taken by the Department of Labor.

Section 15(a)(1) provides only two exceptions:

no provision of this chapter shall impose any liability upon any common carrier for the transportation in commerce in the regular course of its business of any goods not produced by such common carrier, and no provision of this chapter shall excuse any common carrier from its obligation to accept any goods for transportation; and ... any such transportation, offer, shipment, delivery, or sale of such goods by a purchaser who acquired them in good faith in reliance on written assurance from the producer that the goods were produced in compliance with the requirements of this chapter, and who acquired such goods for value without notice of any such violation, shall not be deemed unlawful

The Court finds neither applicable in the present case.

Further this Court concurs in the opinion of the United States District Court, Eastern District of Tennessee, Winchester Division, filed March 22, 1985. In that opinion, Judge Thomas G. Hull stated:

“No exception was specifically made by Congress in 29 U.S.C. § 215(a)(1) for a foreclosing creditor, and this Court refuses to read such an exception into the Act.

Secured creditors such as Citicorp take their security subject to the laws of the land. If such creditors have a security interest in property which was produced in violation of the provisions of the Fair Labor Standards Act, they retain their security interest, however, that interest is subject to the provisions of the Act. The Fair Labor Standards Act was enacted for the benefit and protection of the laborers and for the benefit and protection of employers who comply with the Act. As previously noted, goods produced in violation of the Act would compete unfairly with goods produced by complying employers. The market should not be flooded with goods produced in violation of the Act. In this instance, both the employees and the secured creditor are innocent parties, the culprit being the manufacturer. However, in light of the purposes of the Act, it would be an unjust and harsh result for the creditor to get the benefit of the labor of the employees during the period of time they produced goods and were not paid as provided by the Act; a benefit which the creditor would not have without the employees labor.”

Based upon all the evidence in the entire record in this case, the Court finds Citicorp Industrial Credit, Inc., a secured creditor in possession, imminently plans to ship goods in interstate commerce which were produced by employees of Ely Group, Inc., and its subsidiaries, Rockford Textile Mills, Inc., and Ely & Walker, Inc., and/or others, which were produced in violation of the Fair Labor Standards Act, 29 U.S.C. § 206, as amended, and the movement of these goods will result in the immediate and irreparable injury or damage to plaintiff and the public interest in that such shipment and movement of goods will make use of the channels and instrumentalities of interstate commerce to spread and perpetuate an unfair method of competition and interfere with the orderly and fair marketing of goods in commerce.

Plaintiffs application for a Preliminary Injunction is hereby ORDERED granted. It is further

ORDERED that defendants, their officers, agents, servants, employees and all persons in active concert or participation with them and all other persons who receive actual notice of this order by personal service or otherwise be, and they hereby are, enjoined from transferring, releasing, disposing of or attempting to dispose of, liquidating, divesting, moving, allowing the removal of or attempt to remove from defendants’ establishment in Memphis, Tennessee, or elsewhere, any raw products, materials, supplies, partially completed goods, finished goods, or other goods now on said premises or elsewhere, and from disposing of or attempting to dispose of any other assets which were produced during the period of time when employees of Ely Group, Inc., and its subsidiaries, were not paid for their labor as required by the Fair Labor Standards Act, specifically February 3, 1985, through February 19, 1985. It is further

ORDERED that this injunction covers accounts receivable collected by defendant Citicorp, and or any other defendant, on any goods produced by Ely Group, Inc., and its subsidiaries, during the same period of time, February 3, 1985, through February 19, 1985.

This order granting Preliminary Injunction shall remain in effect pending further orders of this Court or until the final disposition of this case.