author: HOLDEN, Senior District Judge.

text:
    Walter G. JENNISON v. Eugene S. BIERER.
    Civ. A. No. 81-139.
    United States District Court, D. Vermont.
    Dec. 7, 1984.

      Thomas W. Costello, Brattleboro, Vt., for plaintiff.
    L. Raymond Massucco, Kissell & Massucco, Bellows Falls, Vt., for defendant.
   FINDINGS AND CONCLUSIONS

HOLDEN, Senior District Judge.

The court’s diversity jurisdiction under 28 U.S.C. § 1332 has been invoked by the plaintiff Walter G. Jennison, a citizen of Vermont, against Eugene S. Bierer of the State of New Hampshire. The action seeks equitable relief to enforce an accounting between the parties who were formerly equal partners in a real estate investment project designated as the J & B Company. The partners were also business associates and stockholders in the Thomas Turner Company, Inc., formerly a furniture manufacturing enterprise with its principal operation in the Village of Bellows Falls, Vermont, which was also the site of the partnership investment of J & B.

THE FACTS

The roots of the controversy are imbedded in the Turner Company. In the beginning the Turner Company was entirely owned by Thomas Turner and his wife Constance. The company was engaged in the woodworking industry and operated with six employees. The plaintiff initially joined that work force as a floor sweeper. The company apparently prospered and, as the number of employees grew, Jennison became superintendent in full charge of production in 1962. In 1965 Turner offered the plaintiff an opportunity to purchase 25 shares in the company’s stock, which constituted Jennison as the owner of 25% of the total common stock in the company.

By 1972 the company growth had increased to the point where its principal owner, Turner, sought the services of an experienced marketing expert to supervise the company’s expanding market. Up to that time Turner marketing was conducted by a single jobber.

The defendant Bierer’s contact with Mr. Turner ended the search. The defendant was a 1948 graduate of the United States Military Academy who had participated in graduate courses in engineering and business administration programs during his seven years of active service, which ended in 1955. Upon entering the civilian sector, the defendant acquired extensive industrial and sales experience in nationwide business organizations outside the furniture industry. By 1970 Bierer sought to become involved in his own enterprise, — in his words — “make a break for New England.”

The search led him to the Turner Company. On March 15, 1972, Thomas and Constance Turner executed an agreement which enabled the defendant Bierer to acquire 37V2 shares with a contemporaneous option to purchase 37V2 additional shares from the Turners. On the same day the defendant obtained a written irrevocable option from the plaintiff to acquire Jennison’s 25 shares in the event Bierer exercised his option with the Turners to purchase the remaining shares then held by Mr. and Mrs. Turner. Both the Turners and Jennison options were available to the defendant until January 1, 1980, a date highly significant to the present controversy.

Shortly after these transactions were completed, Mr. and Mrs. Turner departed for a vacation sojourn that extended over a period of several months. Turner’s departure left the operation of the company entirely with Jennison and Bierer. At this time the plaintiff and the defendant were mutually dependent on each other. Bierer relied entirely on Jennison for production; Jennison relied entirely on Bierer for business policy and marketing.

With Turner’s return to the scene, in late 1972, problems surfaced. The company had limited cash resources. The situation was aggravated by tax liability asserted by the Internal Revenue Service that was adjusted by a substantial compromise cash payment.

Turner was continued as an employee of the company. As a director of the company, he received a substantial bonus. This further drained the company’s cash position. More importantly, the building where the company plant was operated was not owned by the corporation. It was entirely owned by Turner and leased to the company. On January 15, 1973, Turner gave notice that the lease would be negotiated at an increased rental. When negotiations with the lessor were unavailing, Jennison and Bierer joined in exploring for a change in the location of the plant on more favorable terms. By this time the company payroll had increased to 35 employees; all were anxious to remain in the Bellows Falls area.

The search for a new location led to the acquisition of the site at the abandoned paper mill formerly used by the Moore & Thompson Paper Company on the Vermont bank of the Connecticut River. This property was highly suitable for the Turner operation. The property is served by a dominant easement in the land which provided valuable electric power rights for enjoyment by the owner of the premises if the mill property was used for manufacturing.

At this point in time, Bierer and Turner were equal stockholders. The corporate balance of power resided in the plaintiff Jennison. The defendant Bierer testified that he and Jennison had to join forces to meet the Turner problem. First and foremost was the need to acquire the Moore-Thompson plant site. To accomplish this objective, Jennison and Bierer formed a partnership which was authorized to do business under the laws of Vermont as the J & B Company. On December 13, 1973, the partnership acquired the site of the former Moore-Thompson paper mill from the Hudson Pulp and Paper Company for $66,000. The purchase price was financed by equal amounts of cash and the balance by notes executed by the partners Bierer and Jennison.

Removal to the new plant location was made in 1974. The negotiations for the acquisition of the new site were conducted principally by Bierer. The improvement of the site to afford trucking access, parking and the organization of the plant production, was done by Jennison’s direction. The lease from Turner to the Turner Company then came to an end. The J & B Company leased the Moore-Thompson property to the Turner manufacturing enterprise and the company continued its operation at the new location.

Turner subsequently sold his remaining shares in the company to Bierer in 1977. This acquisition required a waiver on the part of Jennison of his right to sell his 25% interest in the company at the same price per share. Bierer paid Turner for the acquisition of the Turner shares in the Thomas Turner Company. This realignment established Bierer the majority stockholder, with 75% of the. stock. Jennison continued as the minority owner of the remaining shares.

The Turner Company prospered with increased sales promoted by Bierer and increased production under Jennison’s direction. Despite the congenial relationship that attended Bierer’s early participation in the company, no abiding friendship was generated. Indeed, feelings of tension developed. While Jennison ably discharged his responsibility in production and employee relations, Bierer competently handled marketing and sales. The ability of the participants to communicate with each other became impaired to the point where essential dealings took the form of written memoranda. Each was interested in what his counterpart was doing, but resorted to means other than oral communication to find out.

After Turner was removed from the company, the estrangement between Jennison and Bierer worsened. The business association of Jennison and Bierer was beset by restricted cash flow, low profit margin and the heavy debt of the corporation and the partnership. Bierer testified that he and Jennison cooperated because they realized they would “go down the drain if we didn’t.” Moreover, the partners had not had a normal conversation for more than two years. The situation was aggravated by the feeling of mutual dislike that prevailed between the partners’ wives. Both Jennison and Bierer were eager to obtain a sale of the business and be relieved of their individual obligations on Turner notes. Despite this estrangement the partners were mutually dependent.

In this setting Bierer undertook to explore the possibilities of selling the Thomas Turner Company. The initial efforts failed for want of adequate financing on the part of the prospective buyers.

During the summer of 1978 the defendant Bierer was introduced to Norman Silberdick. Bierer expressed an interest in selling his plant and solicited Silberdick’s assistance to accomplish that result. During 1978 Silberdick toured the Turner plant when no one was present. He informed Bierer that if he “was involved selling his business ... [Silberdick] would expect to be compensated at a rate of 5% of the total value of what transpired in terms of the business being sold.”

At the time of this brokerage agreement Silberdick engaged an associate in his firm named Stewart W.A. Read, a 1978 graduate of Williams College. Read first engaged Silberdick as a business consultant. This connection ripened into a business partnership in the BSR Company. Silberdick’s arrangement with Read was that he would pay Read $10 an hour for his work and 25% of any contingent fees generated.

In March, 1979, Read became interested in acquiring the Thomas Turner Company. Read had the financial resources to acquire both the Turner Company and J & B real estate interests. It was Read’s earnest desire and intention to become involved in Vermont industrial enterprises. Although Read had substantial financing, he had a shortage in business experience.

In the negotiations which followed, Silberdick represented both Bierer, the seller, and Read, the prospective buyer. Several negotiating meetings were conducted at various places in the Bellows Falls area, including Silberdick’s home and the Highland Restaurant. None of the negotiations were held at the Turner plant and the plaintiff Jennison did not participate or attend the meetings. Bierer informed Silberdick that he would handle all the negotiations and pass on to Jennison information essential to the sale. At one session Bierer acknowledged to Read that he “would have to talk to Jennison to put the deal over.” Silberdick testified he was not interested in conferring with Jennison since Bierer was in control as the dominant stockholder. Bierer informed Silberdick that he would handle all negotiations in behalf of his minority shareholder and partner.

A final bargain between Bierer and Read was reached in April, 1979. The understanding was expressed in a memorandum prepared by Silberdick for submission to Read. Although Bierer was fully aware of the content of the document by having participated in all the negotiations, the memorandum was not made available to Jennison. Indeed, Jennison’s interests in the proposed acquisition are only briefly referred to, in connection with a future bonus pool and offer by the company to sell him the company automobile. This was in keeping with Silberdick’s testimony that he was not particularly interested in Jennison’s concern since he was only a minority stockholder.

The salient points of the Silberdick memorandum included:

Sale and purchase of 100% of stock in the Thomas Turner Company at $250,-000;
Sale and purchase of the real estate at $250,000;
Bierer was to be employed by the Turner Company for a period of 12 years; two years on a full time basis at $30,000. For the remaining 10 years Bierer or his estate were to receive $30,000 for each year with annual payments personally guaranteed by Stewart Read. In the event Bierer worked after the initial 2 year period, his compensation would be in addition to the $30,000 annual payments. If Bierer remained as a consultant during the 10 year period, he was to be paid a further allowance of $100 a day plus travel expense and be available for phone consultations.

The Silberdick memorandum was submitted to Read; it was withheld from the plaintiff Jennison. The writing made no reference to the Jennison-Bierer partnership. The plan continues:

The company has a $230,000 net worth and more importantly, leases real property of 100,000 square feet. The property included a 999 year contract from New England Power to provide 330 kilowatts of electricity each hour practically free. The real estate was appraised for Bierer at a value of $1 million including the electricity rights. The company has an option to buy the realty until 1984 for $250,000.
With energy costs an expensive fact of life, the ownership of the real property reflects a potentially great asset. With the business profitable, and growing nicely, the acquisition of Turner allows an investment in a relatively solid company, which is a major employer in Bellows Falls.
The purchase price results from several months of negotiation and is viewed as a reasonably fair deal as the price of the company equals book; the real estate at a realistic figure; and the kicker to Bier-er out of the profits of the business. The present value of Bierer’s agreement is $172,580 at a discount rate of 8%, which when viewed as an additional price to the realty values the property at $423,-000.

Initial Memorandum on the Acquisition of Thomas Turner Company dated April, 1979 (Pltf.Ex. 117) pp. 3 and 4.

Following the meeting of Silberdick, Bierer and Read that accomplished the so-called compromise, stated in the memorandum above, Read and Bierer went directly to the office of Read’s attorney, George Nostrand, Esq. Nostrand was instructed to prepare the necessary documents in accordance with the acquisition plan expressed in the Silberdick memorandum.

Despite the fact that Silberdick was the chief negotiator for both buyer and seller, he did not accompany the principals to Nostrand’s office. His absence from the initial meeting with Nostrand is understandable in the light of Silberdick’s testimony at the bench trial. Silberdick testified that he intentionally concealed from Nostrand the fact that he represented Read in the acquisition and was to receive a broker’s fee from Read, in addition to a commission from the sellers.

As reported earlier, Bierer and Jennison rarely communicated by the spoken word. Other than Bierer’s indication to Jennison that he was trying to sell the business, his first communication of the arrangement he and Silberdick had negotiated with Read was made by way of a brief typed memorandum on the “Subject: Proposed Sale,” dated April 26, 1979. In sum, the writing conveyed the following information:

Sales price of buildings $250,000
Stock $250,000

Jennison and Bierer were to be relieved of liability on notes which they had endorsed to the First Vermont Bank, the buyer to assume all liabilities on these undertakings. The employment of the partners was set forth to provide:

W.J. — Two (2) year employment contract includes current salary, current fringe benefits, .025% of Pretax end of year profits. Contract is with company and renegotiable at end of two year period.
E.B. — Consulting contract, not as employee of company and on proportionate basis, as negotiated.

This communication was followed by a second handwritten memorandum addressed to “Walter” and dated May 24, 1979, quoted below:

Subject: Special Project:
So far it looks like agreement possible on the following:
(1) Bldg — $250,000—assuming any approval comes up like ours did.
(2) Stock — $250,000—assuming any audit completed as in line.
(3) Notes due us will be paid seperately [sic].
(4) (2) yr. employment contracts for us both. I am asking for a consulting agreement in’ case I can’t work with them after ‘81. No real obligation to stay after that. Salaries continue as is — we get 10% of pre tax profits. All other existing benefits remain as is.
(5) We get cars after depreciation to “O.”
If we ever kept our shipments up, the next few months is the time to do it.

Up to this time, Bierer did not disclose to Jennison the name of the prospective purchaser. The first draft of the contract documents followed the substance of the memoranda. The draft included the provision for the employment of the partners by the Turner Company. The draft included a provision that each seller agreed not to engage or participate in any competitive business in the Turner Company’s product within a radius of 150 miles from Bellows Falls and for a restrictive period of 10 years. The restrictive covenant provision originated with Nostrand.

Neither Jennison nor Bierer expressed any dissatisfaction with the draft of the proposed contract sale. Bierer told Jennison he would have to give Read two years of employment. Jennison was not sure he wanted to work for Read more than two years. Bierer responded to the effect that if he couldn't work for Read after ’81, he would ask for a consulting agreement. Bierer had already made it clear to Read that he would not accept the proposed contract of sale unless he received adequate compensation for the ensuing ten-year period after the two-year employment contract ended. Bierer told Jennison he would discuss a consulting contract at the end of two years.

The Management Service Contract was first proposed in April, 1979. It was conceived and designed by Bierer and Silberdick to meet the Bierer objection to the restrictive covenant and secure his future annual compensation over the life of the restraint. The management service arrangement was drafted by Nostrand after extensive discussion with Silberdick and Read. At no time during the drafting of the contract documents was disclosure made to Read’s attorney, Mr. Nostrand, that Silberdick was to be paid by Read. At no time prior to July 1st did Nostrand have any discussion with the plaintiff Jennison.

The instruments drafted by Nostrand and submitted to Bierer and Jennison consisted of the options given by Jennison and Bierer for the purchase of all the Turner stock for $250,000, an option by Jennison and Bierer, doing business as the J & B Company, for sale of all the land and premises, including electric power rights and assignment of the leasehold interest in the Turner property, and the contracts for sale of the property and stock that was the subject of the options. Mr. Nostrand also prepared the Management Service Contract. The fact that Read and Bierer were to be involved in this undertaking was not disclosed to Jennison. The draft was provided only to Bierer and his advisors.

About two weeks before the date scheduled for the signing of the options and contract for sale, July 18, 1979, the latest draft of the documents for Read’s acquisition of the Turner Company was submitted by Nostrand to Bierer and Jennison. Jennison submitted the drafts to Albert Bolles, Esquire, an attorney in Bellows Falls. Bolles’ office was in the same building as that of Read’s attorney. Bolles called Nostrand to inform him that Jennison had consulted him concerning the contract documents. Bolles made a few minor suggestions. He was principally concerned with the restrictive covenant that might restrict Jennison from working in northeastern Vermont, where Jennison hoped to retire. A reduction in the radius of the restrictive covenant from 150 to 100 miles from Bellows Falls was adopted by Nostrand and included in the final contract. Bolles informed Jennison that all the requested changes were adopted.

Neither Jennison nor his attorney, Mr. Bolles, was informed that a management service contract between Read and Bierer had been negotiated. The draft of this instrument was withheld from Mr. Bolles and his client. This concealment was done despite the fact that Nostrand had told Bierer on several occasions that he should discuss his employment arrangement with Jennison.

During the weekend of July 7-8, 1979, Colonel Bierer called Norman Sturtz, Esquire, of Livingston, New Jersey.- Mr. Sturtz was a long time acquaintance with whom he had previously taken counsel. Bierer called Sturtz to inform him that the Turner acquisition was negotiated and ready for closing. A meeting was arranged at the Sturtz summer home in Monterey, Massachusetts.

Sturtz inquired of Colonel Bierer why there was no reference to Jennison in the Management Service Contract. Bierer replied that Jennison had a lawyer, although Bierer was not represented by a Vermont attorney. He indicated Jennison would make his own employment agreement with the buyer. He explained he was not aware of Jennison’s deal “because he and I are not that friendly about it.” Sturtz testified, by way of deposition, that Bierer went on to further explain:

And as a matter of fact, if I tell him [Jennison] anything with respect to this transaction as to what he should do, he will hold it against me because that’s the relationship we had. And by the same token, I have given him information as to what I am doing, and he didn’t want to be bothered with what I am doing. And as far as I am concerned, we are traveling our own record down the road. I am satisfied to negotiate my deal and he will negotiate his deal.

Mr. Sturtz was given to understand that both Bierer and Jennison were independently negotiating with Read’s lawyer. Sturtz advised that the contract instruments should make it clear that Bierer and Jennison each independently had the right at any time to enter into any employment, consultant or advisory relationship with the optionee (Read) or his company. Sturtz then drafted, in longhand for insertion in the option agreements, a clause to this effect. When Mr. Sturtz was asked if he had any discussion with Bierer concerning whether he represented Jennison in any of the negotiations, the witness responded “It was absolutely clear to me that he was not.”

The evidence is uncontradicted that the negotiations for the sale of the Turner Company were conducted entirely by Bier-er and Silberdick. Bierer was concerned that any involvement by his partner Jennison might frustrate the sale. At the outset, Bierer assured Silberdick that he would handle all negotiations in behalf of Jennison. Nostrand understood this; he urged Bierer to inform Jennison of the separate employment arrangement. The misunderstanding by Sturtz that Bierer had not represented Jennison was Bierer’s failure to disclose all of the true facts to his New Jersey counsel.

Colonel Bierer returned to Vermont with the proposed contract agreements as supplemented by the draft of the clause as New Jersey counsel recommended. Sturtz anticipated from his discussions with his client that Bierer would arrange to have the handwritten change incorporated in the contract. He further expected that the redrafted papers would be delivered “to the attorney for Mr. Jennison” with whom Mr. Bierer had indicated that Mr. Read’s attorney was dealing. The next communication Mr. Sturtz received was a telephone call that the revised papers had been signed.

The time appointed for signing of the various documents was eleven o’clock the morning of July 18, 1979. Prior to the closing plaintiff’s attorney informed Nostrand that the latest drafts were satisfactory to Jennison. After Nostrand was notified of the clearance, and shortly before the hour appointed for the closing, the defendant hand delivered typed notes of further changes he wished to have included. One of the last minute amendments was that recommended in the longhand draft by Sturtz. The provision was incorporated in paragraph 10 of the Contract of Sale. Under the heading of Employment Contracts, it is provided that Bierer and Jennison, as the sellers,

agree with each other, and with the BUYER, that each SELLER, independently and without any responsibility to each other, has at any time the right to negotiate for or enter into any employment, consulting, advisory or other relationship with the BUYER or the COMPANY for any period beyond the two (2) year term---

specified for the employment of both Bier-er and Jennison in the new company.

The signing took place as scheduled in Nostrand’s office. Present were Bierer, Jennison, Read, Silberdick and Nostrand; Jennison’s attorney, Mr. Bolles, was absent. Jennison and Bierer signed the options for sale of the real property, the Turner stock and the Contracts of Sale. As soon as these papers were executed, Bierer, Jennison and Silberdick departed from Nostrand's office and proceeded to the vicinity of the Aberdeen Hotel in the village square. At that location Silberdick and Bierer explained to Jennison that Silberdick was entitled to a commission. Silberdick then produced agreements to accomplish this result which had been prepared on July 17, 1979. These agreements provided for the commission paid to Silberdick by Bierer and Jennison, reported in the margin above. This was the occasion of Jennison’s first meeting with Silberdick. After signing, Jennison returned to his work at the Turner plant.

Bierer and Silberdick returned to Nostrand’s office, where Read awaited to accomplish the signing of the Management Agreement. A crucial provision in this document was expressed in the ninth paragraph:

SECURITY FOR PERFORMANCE BY THE COMPANY. The COMPANY agrees to provide BIERER at the commencement of the term of employment (December 1, 1979) with an acceptable unrestricted twelve (12) year irrevocable bank letter of credit, guaranteeing for the full term of the employment period and consultive period payment by the COMPANY of all compensation of BIER-ER so as to assure BIERER that regardless of whether the COMPANY continues in existence, is merged, consolidated, dissolved and/or liquidated, that his full compensation as provided in this agreement will be paid over the twelve (12) year period contained herein.

The agreements signed on July 18, 1979 contemplated the exercise of the options by Read or his assignee by October 18, 1979. Title to all real and personal property, including the sale of the Turner stock, was transferred December 7, 1979.

Stewart W.A. Read exercised the options previously granted by Jennison and Bierer on October 5, 1979, as provided in the agreements. On December 7, 1979, the Read interests took title to all the property owned by Bierer and Jennison to complete the transfer of the Thomas Turner Company to the Read interests. Bierer and Jennison signed a new covenant not to compete with the Thomas Turner Company as provided in the Contract of Sale.

During the intervening time, through the efforts of Silberdick and Ira Marcus, an attorney associated with Bierer’s New Jersey attorney Roland Sturtz, a letter of credit was issued by the First National Bank of Boston on December 7, 1979. The letter of credit was irrevocable. It was written in the amount of $226,914.74 for the benefit of Eugene Bierer for the account of the Thomas Turner Company. The security documents included an acceleration provision in the event of Turner Company’s default in the payments to Bier-er or bankruptcy.

Later in the day on December 7, 1979, and without Jennison’s knowledge, Bierer and the Turner Company executed an Employment Contract with a different covenant not to compete. It was written according to the preceding Management Service Contract signed on July 18, 1979. As shown in the margin below, it obligated the company to pay the defendant $360,000 during the period December 7, 1979 through December 6, 1991. Bierer and Jennison continued in the employ of the Turner Company. Jennison was elected to the board of directors in June, 1980, and served in that capacity until March, 1981. During this time Jennison understood he and Bierer were working under the employment agreement as written in the Contract of Sale signed on July 18, 1979.

The letter of credit was devised to guarantee payments of future compensation to Bierer or his estate. It was secured by the company’s pledge of substantial accounts receivable and inventory. When Read declined to advance much needed additional working capital the Turner enterprise collapsed. The letter of credit combined with management deficiencies to become the prime cause of the company’s financial distress.

On March 10, 1981, the company filed a petition for bankruptcy. This event triggered the acceleration of payments due under the letter of credit. On March 26, 1981, the First National Bank of Boston issued its draft to Bierer in the amount of $215,429.16. Release from the restrictive covenant enabled Bierer and Jennison to seek and obtain employment elsewhere in the woodworking industry.

The fabric of the proof clearly demonstrates that the arrangement for Bierer’s employment, as finally spelled out in the Employment Contract signed by Bierer and Read, was an intergral part of the consideration paid for the Turner acquisition. Although the advantage it provided to the defendant was concealed from the plaintiff, Bierer testified that once the restrictive covenant was “put on him” he would not have accepted the final agreement without the consulting agreement. In the turn of events which followed, the consulting agreement resulted in an unearned windfall to the defendant alone.

CONCLUSIONS

The rules of law which follow from the facts in this controversy are written in Chief Judge Cardozo’s classic opinion in Meinhard v. Salmon, 249 N.Y. 458, 164 N.E. 545 (1928).

A trustee is held to something stricter than the morals of the market place. Not honesty alone, but the punctilio of an honor the most sensitive is then the standard of behavior.

164 N.E. at 546. See also, Woods v. City National Bank & Trust Co., 312 U.S. 262, 269, 61 S.Ct. 493, 497, 85 L.Ed. 820 (1941). The concept is part of the Uniform Partnership Law, adopted by the Vermont General Assembly, 1941, No. 146 (11 V.S.A. §§ 1241-1246).

The trust relationship that governs that standard of behavior between Bierer and Jennison had its beginning at the time of Thomas Turner’s withdrawal from active management of the company in 1972. Mr. Turner entrusted the affairs of the enterprise to the plaintiff, his superintendent and to Colonel Bierer, his recently acquired equal shareholder. Although clothed in corporate garb, in essence the operation was the joint enterprise of two stockholders with equal equity ownership by Bierer and Turner, with the balance of voting power in the hands of the minority stockholder, Jennison. In this alignment of corporate authority, each of the actors in the enterprise owed obligations of good faith, honesty and fair dealing to his business associates in the handling of the company’s business.

Whether Bierer and Jennison trenched on these precepts by “joining forces to meet the Turner problem” that developed in the plant lease arrangement is of no concern in this litigation. It is enough to say that the episode should have warned the participants of danger ahead in the affairs of the Turner Company.

Be that as it may, the keystone to the trust relationship between the parties to this action derives from the formation of the partnership known as the J & B Company and the acquisition of the former plant of the Moore-Thompson Paper Company on December 13, 1973.

It is, of course, the firmly settled law of Vermont and elsewhere that the inception of a partnership established a relationship between the partners that is highly fiduciary. Bradley v. Marshall, 129 Vt. 635, 641, 285 A.2d 745 (1971); Lyon v. Prescott, 103 Vt. 442, 446, 156 A. 679 (1931) (Powers, C.J.). The fiduciary character of the relationship continues until the partnership affairs are fully settled. Until that day each partner stands as a trustee in his dealings with partnership interests. His co-partners are the beneficiaries of the trust that is imposed on his dealings with partnership property. Id.

Many forms of conduct permissible in a workaday world for those acting at arm’s length, are forbidden to those bound by fiduciary ties.

Meinhard v. Salmon, supra, 164 N.E. at 546.

The defendant urges that he was released from any fiduciary ties that restrained his dealings with the J & B partnership property by force of an inclusion in paragraph 10 of the purchase agreement signed July 18,1979. This clause was obviously designed to achieve this end.

The strength of the defendant’s argument is undermined by the underlying facts. The draft was prepared by the defendant’s counsel, Mr. Sturtz, when called upon to review the contract papers in Massachusetts shortly before the appointed time for signing. The draft was written by Sturtz with the mistaken belief that both Bierer and Jennison were separately negotiating their own employment arrangements, — that Jennison didn’t want to be bothered with what Bierer was doing,— that each partner was making his own road to future employment.

In truth, Bierer and Silberdick excluded Jennison from all of the negotiating in the Read acquisition for fear he would spoil the bargain. Indeed, Silberdick testified that at the outset of his involvement, Mr. Bierer informed him that he (Bierer) would handle all negotiations and pass on all necessary information to Jennison. The negotiations followed this pattern, except there was no transmittal of the Bierer employment deal. Even the identity of the purchaser was kept from Jennison until shortly before July 18th.

Jennison’s attorney, Albert Bolles, was not consulted until the proposed final drafts were delivered. At that point in time the Sturtz protective clause was not written. And there is no suggestion in the evidence that Mr. Bolles had the opportunity to review paragraph 10 before the signing, since he did not attend the signing and Bierer did not deliver his typed notes on the subject to Nostrand until shortly before the hour of closing.

The general rule, that failure to read or have a contract read to a party before signing it precludes the signer from complaining about the contents, does not apply where deception or artifice attend the transaction. See, Cox v. Pabst Brewing Co., 128 F.2d 468, 470 (10th Cir.1942); 3 A. Corbin, Corbin on Contracts, § 607 p. 666.

Perhaps the plaintiff should have been more watchful. Yet he had no reason to suspect that the contract had been changed after his attorney had reported to Read’s counsel that the instrument was satisfactory and cleared for signing.

The provision in the contract of sale which purports to give Bierer the liberty to make an independent employment arrangement with Read, or the new Turner Company, was induced by a lack of candor. The effort to free Bierer from liability to Jennison or Read was clothed in deception.

It is provided in the statutory law of Vermont by 11 V.S.A. § 1244 under the heading in bold type:

Partner as fiduciary
(a) Every partner must account to the partnership for any benefit, and hold as trustee for it any profits derived by him without the consent of the other partners from any transaction connected with the information, conduct, or liquidation of the partnership or from any use by him of its property.

The section which follows provides the remedy for the breach of the trust imposed by virtue of the preceding section.

§ 1245. Right to an account

Any partner shall have the right to a formal account as to partnership affairs:
(1) If he is wrongfully excluded from the partnership business or possession of its property by his copartners;
(2) If the right exists under the terms of any agreement;
(3) As provided by the preceding section;
(4) Whenever other circumstances render it just and reasonable.

The statute establishes the right and provides the remedy. Bradley v. Marshall, supra, 129 Vt. at 641, 285 A.2d 745. The plaintiff was wrongfully deprived of the opportunity to seek a more favorable employment agreement than the undertaking which Bierer testified he alone negotiated in Jennison’s behalf. Bierer’s fault is that he purposely excluded his partner and business associate from the opportunity that he concealed to his own advantage.

The price of its denial is an extension of the trust at the option and for the benefit of the one he excluded____ No answer is it to say that the chance would have been of little value even if seasonably offered.

Meinhard v. Salmon, supra, 164 N.E. at 547.

To track the language and the teaching of Meinhard further:

The very fact that [Bierer] was in control with exclusive power of direction charged him the more obviously with the duty of disclosure, since only through disclosure could opportunity be equalized.

Id.

The evidence is undisputed that Jennison’s interest as a stockholder in the Turner Company and his half interest as an equal partner in the J & B Company combined to constitute an equity of 37.5 percent in the proceeds from the sale of the Turner stock and the real property owned by the partnership. Bierer’s equity was 62.5 percent.

Applying this ratio to the proceeds of $215,429.16, which Bierer derived from the letter of credit issued by the First National Bank of Boston, establishes Jennison’s entitlement to $80,785.94 with interest from March 27, 1981. The court holds the defendant Eugene S. Bierer is liable to Walter G. Jennison in the amount of $116,-641.62.

It is SO ORDERED.

      . Silberdick received a fee of $12,000 from Read for his efforts in the acquisition of the company during the period from June, 1979 to the final closing in December, 1979. He received additional compensation from Bierer of $9,375 and $3,125 from Jennison for the sale of their respective shares of stock. Silberdick received $12,500 for sale of the real property and the appurtenance. As to this sale, Bierer and Jennison contributed equal amounts of $6,250. More than that, after the transfer of ownership of the Turner Company was accomplished, the company paid Silberdick $1,000 a month as a consultant until the company became insolvent early in 1980. It was not until bankruptcy proceedings were instituted that Read’s counsel learned of Silberdick’s dual participation in his client’s acquisition of the Thomas Turner Company.
      Silberdick's testimony at the trial exposed an additional commission of $15,000 which he received from Bierer for negotiating the management services contract as a part of Read's acquisition of the Thomas Turner Company. This commission was based on 5% of the sum of the annual compensation to be paid to Bierer during the anticipated life of the management services, for a total of $300,000. Silberdick’s gross commissions totalled $67,000. Silberdick shared $10,000 of this amount with Read in line with the employment agreement between them, referred to earlier in the court's opinion.

      . The notion that the restrictive covenant against competing with his former employer would have indentured Bierer is more fiction than fact. Bierer's experience in management was derived from sources outside the woodworking industry. It appears to have been transferable to other fields.

      . The Employment Contract, executed on December 7, 1979 by Stewart W.A. Read for the Thomas Turner Company, Inc. and Eugene S. Bierer, and witnessed by Norman Silberdick and George Nostrand, includes the following provisions:
      1. DUTIES DURING EMPLOYMENT PERIOD. The COMPANY hereby employs BIER-ER, and BIERER shall serve the COMPANY during the period, hereinafter called the EMPLOYMENT PERIOD, of two (2) years beginning December 1, 1979 and ending November 30, 1981 in an executive capacity similar to that in which he is presently employed by the COMPANY, with such duties as may reasonably be assigned to him from time to time by the Board of Directors of the COMPANY. During the EMPLOYMENT PERIOD, BIERER will devote his entire time and attention exclusively to the business of the COMPANY, except during usual vacation periods.
      2. COMPENSATION DURING EMPLOYMENT PERIOD. The COMPANY shall pay to BIERER and BIERER shall accept from the COMPANY for his services during the EMPLOYMENT PERIOD gross compensation of Thirty Thousand Dollars ($30,000.00) per annum payable monthly. In addition, the COMPANY agrees for each year of the EMPLOYMENT PERIOD and for the one-year period immediately following the EMPLOYMENT PERIOD, BIERER shall be entitled to receive, in addition to his gross compensation, Seven and Five-Tenths Percent (7.5%) of the pre-tax profits of the COMPANY____
      3. DUTIES DURING THE CONSULTIVE PERIOD. The COMPANY hereby retain BIERER to perform, and BIERER shall perform, during the period, hereinafter called the CONSULTIVE PERIOD, beginning on December 1, 1981 and ending November 30, 1991, such advisory and consultive services on a part-time basis as may, from time to time, be requested by the Board of Directors of the COMPANY....
      ******
      4. COMPENSATION DURING CONSULTIVE PERIOD. The COMPANY shall pay to BIERER and BIERER shall accept from the COMPANY for his services during the consultive period, compensation at the rate of Thirty Thousand Dollars ($30,000.00) per annum which shall be payable in equal monthly installments at the end of each month during such period.
      5. RESTRICTIVE COVENANTS. BIERER agrees that during the EMPLOYMENT PERIOD and until November 30, 1991, he will not, unless acting as an officer or employee of the COMPANY or with the COMPANY’S prior written consent, directly or indirectly own, manage, operate or control or participate in or be connected as an officer, employee, partner or otherwise with any business connected with any of the products of the COMPANY and that he will not in any manner directly or indirectly compete with or become interested in any competitor of the COMPANY____
      ******
      9. SECURITY FOR PERFORMANCE BY THE COMPANY.
      a. All unpaid compensation of Thirty Thousand Dollars ($30,000.00) due or to become due during the CONSULTING PERIOD shall immediately become due and payable at the election of BIERER upon the occurrence of an Event of Default. An Event of Default shall be any of the following:
      (i) The COMPANY fails to make any payment pursuant to this Agreement when due and such nonpayment continues for ten (10) days after written notice of such nonpayment from BIERER to the COMPANY....
      ******
      (iv) A petition in bankruptcy, or complaint in insolvency, or for an arrangement or reorganization or other relief is filed by or against the COMPANY, under any bankruptcy or insolvency act, and such petition or complaint is not dismissed within Sixty (60) days of its filing.
      b. (i) As security for the payment by the COMPANY of BIERER’s gross compensation of Thirty Thousand Dollars ($30,000.00) per year during the CONSULTING PERIOD, the COMPANY is providing BIERER with an unrestricted Twelve (12) year irrevocable letter of credit____

      . Bierer testified his agreement not to compete was in his view valued at $300,000.00. In his Memorandum to Read in April 1979, urging him to acquire the Turner enterprise, Silberdick wrote: "The present value of Bierer's agreement is $172,580 at a discount of 8%, which when viewed as an additional price to the realty values the property at $423,000" (Plaintiffs Exhibit 117). As noted in the margin above, part of Silberdick’s commission from Bierer was predicated on Bierer’s management services agreement.

      . The ratio is derived by computing the respective interests of the parties in the Turner stock and the J & B Co. real property as established in the contract of sale of July 18, 1979 excluding debts assumed by purchaser.
      Jennison Turner Stock 25% of $250,000 $ 62,500
      J & B Co. 50% of 250,000 125>QQ0
      $187,500
      percent of combined sale price = 37.5%
      Bierer Turner Stock 75% of $250,000 $187,500
      J & B Co. 50% of 250,000 125-000
      $312,000
      percent of combined sale price = 62.5%


source: Caselaw Access Project

author: KEVIN THOMAS DUFFY, District Judge:

license: Public Domain

text:
    CONAN PROPERTIES, INC., Plaintiff, v. MATTEL, INC., Defendant.
    No. 84 Civ. 5799 (KTD).
    United States District Court, S.D. New York.
    Dec. 11, 1984.

      Hopgood, Calimafde, Kalil, Blaustein & Judlowe, New York City, for plaintiff; Stephen B. Judlowe, Francis J. Murphy, Arthur M. Lieberman, David A. Kalow, New York City, of counsel.
    Reavis & McGrath, New York City, for defendant; Stephen R. Steinberg, New York City, of counsel.
    Welsh & Katz, Ltd., Chicago, 111., for defendant; Ralph C. Dawson, New York City, A. Sidney Katz, Eric C. Cohen, Jacqueline A. Leimer, Chicago, 111., of counsel.
   MEMORANDUM & ORDER

KEVIN THOMAS DUFFY, District Judge:

Plaintiff, Conan Properties, Inc. (“CPI”), brings this action against defendant, Mattel, Inc. (“Mattel”), alleging copyright infringement, Lanham Act violations, unfair competition, dilution, breach of contract, and fraud and misrepresentation. Mattel moves pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure to dismiss plaintiff’s amended complaint on several grounds, including (1) failure to plead compliance with statutory prerequisites of the 1976 Copyright Act; (2) failure to plead fully a cause of action under the Lanham Act; and (3) absence of jurisdiction over the state law claims.

The facts pertinent to the instant motion, as set forth in plaintiff’s amended complaint, are as follows:

Robert E. Howard created the fictitious character CONAN THE BARBARIAN (“CONAN”) sometime in the 1930’s. The CONAN character is a fantasy figure with the ultimate body builder’s body who lives in an imaginary place and time. CONAN was licensed to Lancer Books and Marvel Comics in the 1960’s and 1970’s. In 1977, CPI was formed and became “the owner of all rights in CONAN, including all trademarks, copyrights, registered copyrights, characters and stories.” Amended Complaint, 11 6. Since the formation of CPI, CONAN has become increasingly popular and been the subject of comics, books, and movies.

In 1980, CPI, through its agent, Conan Licensing Company (“CLC”), began negotiations with Mattel regarding the possible licensing to Mattel of certain toy rights in CONAN. During this time, Mattel received a substantial quantity of material on the CONAN character. On July 31, 1981, CPI and Mattel executed a License Agreement whereby Mattel was granted “the right to make and sell certain plastic action figures of CONAN and ancillary characters as depicted in the CONAN movie.” Amended Complaint, 1112. The Agreement provided, however, “that nothing in the License should be construed as an assignment or grant to Mattel of any right, title or interest in or to CONAN, and that all rights relating thereto were reserved by CPI (except only for the license to use the property as specifically agreed to).” Amended Complaint, 1114. It was also agreed that, after the termination of the License Agreement, Mattel would not make or sell any CONAN toys.

In January 1982, Mattel requested that the License Agreement be terminated. On April 14, 1982, CPI and Mattel entered into a termination agreement which provided that “all materials created and or developed by Mattel for use in connection with products under the CONAN License” would be delivered to CPI’s agent, CPC, which would have “the exclusive right to use such material.” Amended Complaint, 1117.

In February 1982, Mattel introduced a fantasy character, “He-Man,” as part of its new “Masters of the Universe” toy line of action figures. Since that time, Mattel has also featured He-Man and the other Masters of the Universe characters in, inter alia, a television series, comic books, and video tapes. Thereafter, CPI commenced this action asserting that these figures are copies of CONAN, were created under the License, and are CPI’s property. Amended Complaint, MI 20, 21.

DISCUSSION

I.

In its first cause of action, CPI claims that Mattel has infringed plaintiff’s copyrights in violation of 17 U.S.C. § 101 et seq. Defendant, however, contends that CPI is claiming ownership of copyrights by reason of a transfer and that proof of recordation of such a transfer is a jurisdictional prerequisite to a copyright infringement action. Defendant argues that because CPI has failed to provide proof of recordation of the transfer, the court does not have subject matter jurisdiction over plaintiff’s copyright claim and must therefore dismiss it.

The statute defendants rely on in making the above argument is 17 U.S.C. § 205(d) which provides:

Recordation as Prerequisite to Infringement Suit. — No person claiming by virtue of a transfer to be the owner of copyright or of any exclusive right under a copyright is entitled to institute an infringement action under this title until the instrument of transfer under which such person claims has been recorded in the Copyright Office, but suit may be instituted after such recordation on a cause of action.

The language of section 205(d) makes clear that if CPI were claiming to be the owner of the copyrights by virtue of a transfer, it would have to have recorded the transfer prior to instituting this action. CPI states, however, that it is not claiming by virtue of a transfer, but rather, on the basis of its own authorship and in fact, nowhere in plaintiffs Amended Complaint does it state that it is claiming by virtue of a transfer. Consequently, section 205(d) is inapplicable to plaintiffs copyright claim and defendant’s argument that this court does not have subject matter jurisdiction over that claim is without merit. The issue arises, however, whether plaintiff’s copyrights are derivative works and thus only warranting limited protection. Defendant contends that because the CONAN character was originated by Robert Howard in the 1930’s, CPI’s copyrights are derivative works. I agree.

The statutory definition of “derivative work” is unambiguous. “A ‘derivative work’ is a work based upon one or more preexisting works____” 17 U.S.C. § 101. As CPI’s copyrights are works which are based upon the preexisting work of Robert Howard, they are unquestionably derivative. Indeed, in its papers, CPI does not challenge the classification of its copyrights as “derivative works.” CPI asserts, however, that even if the copyrights are derivative, it is the author of the copyrights and, as the author, it has, at least, “exclusive rights to the material contributions it made” to the works. Plaintiff’s Memorandum In Opposition To Defendant’s Motion To Dismiss Amended Complaint, 3.

The relevant statutory section, provides in part:

The copyright in a ... derivative work extends only to the material contributed by the author of such work, as distinguished from the preexisting material employed in the work, and does not imply any exclusive right in the preexisting material.

17 U.S.C. § 103(b). Thus, CPI’s copyrights in their derivative works may not be protected beyond the extent of CPI’s own material contributions. Any preexisting material CPI used in the works is unprotected. The issue of what portion of the copyrighted works is CPI’s own contribution and what portion is preexisting material is, however, a question of fact to be resolved at trial.

II.

In order to proceed in its copyright infringement action, plaintiff is required to comply with the statutory requirement that all copyrights be registered. See 17 U.S.C. § 411(a) (no action shall be instituted until registration of the copyright claim has been made in accordance with this title). Without registration of the copyrights the suit is barred and absent an allegation that the copyrights have been registered the complaint is defective. See Charron v. Meaux, et al., 60 F.R.D. 619, 624 (S.D.N.Y. 1973).

Defendant asserts that, although CPI has attached copies of eight copyright registrations to its Amended Complaint, these are all copyrights for comic books. CPI has not alleged that it owns registered copyrights for books or films or comic books (in addition to the eight registrations attached to the Amended Complaint). Thus, defendant argues, CPI’s claims of infringement of copyrights, other than the claims relating to the attached registrations, should be dismissed.

Although recitation of the fact that copyrights have been registered appears to be a mere technicality, it is a prerequisite to this court’s jurisdiction. Accordingly, the motion to dismiss plaintiff’s copyright infringement claims with respect to books, films, and comic books, other than those which are the subject of the registrations attached to the Amended Complaint, is granted without prejudice to plaintiff’s filing a second amended complaint within twenty days of the filing of this order. If, in fact, the copyrights have been registered, the defect in the Amended Complaint can be cured simply by filing a second amended complaint, which relates back to the commencement of the action, and which includes a recitation that the registration requirement has been satisfied. See Roth Greeting Cards v. United Card Co., 429 F.2d 1106, 1109 (9th Cir.1970); Charron v. Meaux, et al., 60 F.R.D. at 624. This second amended complaint should include, at the least, the registration numbers of all copyrights allegedly infringed.

III.

Defendant also seeks dismissal of CPI’s copyright infringement, Lanham Act, unfair competition, and dilution claims on the grounds that the Amended Complaint is vague and indefinite and fails to allege that defendant’s goods affect interstate commerce. I find no merit to either of these allegations. Defendant has attempted to create ambiguities where none exist. Plaintiff’s Amended Complaint clearly sets forth the challenged claims and provides fair notice of what they entail. In addition, paragraphs 18 and 19 of the Amended Complaint contain sufficient facts from which an interstate effect can readily be inferred. The Supreme Court stated in Conley v. Gibson:

[T]he Federal Rules of Civil Procedure do not require a claimant to set out in detail the facts upon which he bases his claim. To the contrary, all the Rules require is “a short and plain statement of the claim” that will give the defendant fair notice of what the plaintiff’s claim is and the grounds upon which it rests____ The Federal Rules reject the approach that pleading is a game of skill in which one misstep by counsel may be decisive to the outcome and accept the principle that the purpose of pleading is to facilitate a proper decision on the merits.

355 U.S. 41, 47-48, 78 S.Ct. 99, 102-03, 2 L.Ed.2d 80 (1957). Thus, defendant’s motion to dismiss CPI’s Amended Complaint for failure to adequately plead copyright infringement, violation of the Lanham Act, unfair competition, and dillution is denied.

IV.

Defendant next argues that CPI has failed to plead its fraud and misrepresentation claim with sufficient particularity. I agree. Rule 9(b) of the Federal Rules of Civil Procedure provides that “[i]n all averments of fraud or mistake, the circumstances constituting fraud or mistake shall be stated with particularity.” In essence, CPI’s Amended Complaint merely states in conclusory fashion that Mattel’s termination of the License Agreement shortly after the Toy Fair indicates that Mattel must have acted in bad faith when it entered the Agreement. No details are provided regarding the substance or circumstances of the misrepresentations. Plaintiff fails to allege what the misrepresentations were, who made them, or when and where they were made.

A complaint will satisfy the requirements of Rule 9(b) if it specifies the following:

(1) precisely what statements were made in what documents or oral representations or what omissions were made, and (2) the time and place of each such statement and the person responsible for making (or, in the case of omissions, not making) the same, (3) the content of such statements and the manner in which they misled the plaintiff, and (4) what the defendants “obtained as a consequence of the fraud.”

Todd v. Oppenheimer & Co., Inc., et al., 78 F.R.D. 415, 420-21 (S.D.N.Y.1978) (quoting Gross v. Diversified Mortgage Investors, 431 F.Supp. 1080, 1088 (S.D.N.Y. 1977)). Simply concluding, as CPI has done, that Mattel must have made misrepresentations at some time given its eventual actions of terminating the License Agreement is clearly insufficient under Rule 9(b). Accordingly, plaintiff’s fraud and misrepresentation claim is dismissed without prejudice to plaintiff’s filing a properly pleaded second amended complaint within twenty days of the filing of this order.

Finally, as federal claims against defendant still remain, this court has pendant jurisdiction over CPI’s remaining re-lated state law claims of unfair competition, dilution, and breach of contract. See United Mine Workers of America v. Gibbs, 383 U.S. 715, 725, 86 S.Ct. 1130, 1138, 16 L.Ed.2d 218 (1966).

In sum, defendant’s motion to dismiss plaintiff’s copyright infringement claims, other than those claims for infringement of the eight registered copyrights attached to the Amended Complaint, is granted without prejudice to plaintiff’s filing a second amended complaint within twenty days of the filing of this order. Similarly, defendant’s motion to dismiss plaintiff’s fraud and misrepresentation claim is also granted without prejudice to a second amended complaint being filed within twenty days of this order’s filing. Defendant’s remaining motions to dismiss are denied.

SO ORDERED.

      . It should be noted that CPI does not explain how it came to acquire these rights. Nowhere in its Amended Complaint does CPI refer to a transfer from either Howard or Lancer Books and Marvel Comics. There is, however, a vague reference to CPI’s "predecessors,” but no indication as to who they might be. More significantly, there is no statement to the effect that a transfer of this type has been recorded in the Copyright Office.

      . For example, plaintiff alleges that “[a]t the Toy Fair in February 1982, Mattel introduced the ‘Masters of the Universe’ line of action figures,____” Amended Complaint, ¶ 18. The Toy Fair is "the major national toy show of the year.” Plaintiffs Memorandum In Opposition To Defendant’s Motion To Dismiss Amended Complaint at 7, (emphasis added). Thus, it cannot be disputed that defendant’s goods affect interstate commerce.


author: McMILLAN, District Judge.

text:
    Mamie B. MORRIS, by her guardian ad litem, Rosa M. SIMPSON; Lucy R. Dellinger, by her guardian ad litem, Arah L. Rozzelle, and Pearl S. Cordell, by her guardian ad litem, Bill D. Cordell, Plaintiffs, v. Sarah MORROW, individually and in her official capacity as Secretary of the North Carolina Department of Human Resources, Barbara D. Matula, individually and in her official capacity as Director of the Division of Medical Assistance of the North Carolina Department of Human Resources, Defendants.
    No. C-C-84-216-M.
    United States District Court, W.D. North Carolina, Charlotte Division.
    Dec. 20, 1984.

      Charles E. Johnson, Moore, Van Allen, Allen & Thigpen, Charlotte, N.C., and Pamela C. Silberman, North Carolina Legal Services Resource Center, Inc., Raleigh, N.C., for plaintiffs.
    Steven Shaber, Asst. Atty. Gen., North Carolina Dept, of Justice, Raleigh, N.C., for defendants.
   MEMORANDUM OF DECISION

McMILLAN, District Judge.

This case comes before the court on the parties’ cross-motions for summary judgment. Suit was filed on April 25, 1984, by plaintiff Mamie B. Morris under 42 U.S.C. § 1983 alleging that defendants Sarah Morrow and Barbara Matula had acted under color of state law in attempting to deprive her of her right to receive Medical Assistance (Medicaid) benefits pursuant to § 209(b) of Pub.L. No. 92-603, codified at 42 U.S.C. § 1396a(f). The court issued a temporary restraining order against defendants on April 30,1984, to prevent them from changing the benefits paid to plaintiff Morris. On June 21, 1984, the court issued a preliminary injunction against defendants to prevent them from terminating plaintiff Morris’ Medicaid benefits pending the final outcome of this case, 594 F.Supp. 112 (1984). On July 31, 1984, the court certified a class action in this case and extended the preliminary injunction to class members and named plaintiffs Lucy R. Dellinger and Pearl S. Cordell.

Both plaintiffs and defendants have moved for summary judgment. As there are no material facts in dispute, this case is ripe for determination at this time.

I.

No material fact in this case is in dispute. The parties disagree about legal conclusions, but not about the relevant facts.

Defendant Sarah Morrow is Secretary of the North Carolina Department of Human Resources and is charged with the overall responsibility of administering the statewide Medicaid program.

Defendant Barbara D. Matula is the director of the Division of Medical Assistance of the North Carolina Department of Human Resources and has immediate supervisory responsibility for the Medicaid program, including the duty to insure that the program complies with federal law.

Both defendants are sued individually and in their official capacities. At all times material to this action, they have acted under color of law, custom and usage of the State of North Carolina.

Plaintiff Mamie B. Morris is a 93-year-old widow who currently resides at Providence Convalescent Residence, a skilled care nursing home in Charlotte, North Carolina. Plaintiff Morris entered the nursing home in January 1983 after suffering several heart attacks. She is confined to a bed or wheelchair and is in need of twenty-four-hour skilled nursing care. Her monthly charge for care at the nursing home is about $1,600.00. Her income is $409.00 per month from Social Security Disability Insurance Benefits, Supplemental Security Income (SSI), and rent that she receives for her house at 651 Louise Avenue, Charlotte, North Carolina. Her daughter and son-in-law pay her $75.00 per month in rent for the house. The total assessed value of the house and lot is $37,190.00. Both plaintiff Morris’ daughter and son-in-law are disabled, unemployed, and dependent upon Social Security benefits.

Plaintiff Morris depends on Medicaid benefits in order to pay her medical expenses. Only by evicting her daughter and her daughter’s husband, and then selling the house, could plaintiff pay for more than a few days’ stay at the nursing home.

In October, 1983, plaintiff Morris received a letter from the Mecklenburg County Department of Social Services, the administrator of the Medicaid program in that county, which stated that unless she made a good faith effort to sell her house by April 30, 1984, her Medicaid benefits would be terminated. Plaintiff has not made an attempt to sell the house.

Plaintiff Lucy R. Dellinger is an 82-year-old widow who has resided at Randolph Manor Nursing Home in Charlotte, North Carolina, since November 1982. She owns a house at Route 6, Box 812 J-7 in Mecklenburg County, North Carolina. The house and lot have an assessed value of $36,340.00. Ms. Dellinger suffered a stroke in 1982. Her right side is now paralyzed, and she is incontinent and needs help in many daily activities. She is in need of twenty-four-hour nursing care. Her monthly income is $435.00 from Social Security and rent of her house. Her medical bills at the nursing home are about $1,600.00 per month. Medicaid pays the majority of this bill. Ms. Dellinger could not afford to remain in the nursing home without Medicaid benefits.

In January, 1984, Ms. Dellinger received a letter from the Mecklenburg County Department of Social Services that stated that unless she made a good faith effort to sell her house by July 31, 1984, her Medicaid benefits would be terminated. Ms. Dellinger’s house is currently occupied by her son who pays as rent the taxes, the insurance, and the maintenance on the house, plus $50.00 per month.

Plaintiff Pearl S. Cordell is an 89-year-old widow who has been at the United Church Retirement Home in Newton, North Carolina, since November 1981. She owned a house at that time assessed at $20,600.00 as well as surrounding property assessed at $37,600.00. She was admitted to the nursing home after one of her legs was amputated. After admission, her other leg was amputated. She currently does not recognize anyone and cannot care for her personal needs. She requires twenty-four-hour nursing care.

Ms. Cordell’s income is now $549.00 per month from Social Security and rent for the residential and nonresidential property. Her medical bills at the nursing home are more than $1,600.00 per month, most of which is paid by Medicaid.

In October, 1983, Ms. Cordell received a letter from the Catawba County Department of Social Services which stated that unless she made a good faith effort to sell her house and property by April 1, 1984, her Medicaid benefits would be terminated. Later it was determined that the house and $12,000.00 worth of surrounding property were exempt from this requirement because they were occupied by her dependent adult child. This son pays Ms. Cordell $60.00 a month in rent; other family members pay her $75.00 a month for use of the house and property.

Efforts were made to sell all but the house and one acre of property. As a result Ms. Cordell’s benefits were extended until the end of June, 1984. However, she received an additional notice on June 8, 1984, informing her that her benefits would be terminated after June 30, 1984, because of her ownership of the non-exempt property-

The class members in this suit are all persons in situations legally similar to those of plaintiffs, i.e. those persons otherwise eligible for Medicaid benefits as medically needy recipients to whom benefits have been denied or threatened to be terminated because of ownership of property in excess of the reserve amount defined by defendants’ “$6000/6% rule,” as explained below.

Defendants have established guidelines for the determination of eligibility of medically needy applicants for Medicaid benefits. These guidelines exist in state regulations, the Medicaid Manual, and instructions and memoranda. According to N.C. Medicaid Manual § 3300, a single applicant is not eligible for Medicaid if he or she owns more than $1,000.00 worth of “reserve,” which is generally liquid assets and real property other than a homesite or income-producing property.

From January 1, 1972, to September 1, 1983, real property that was not a homesite was “excluded from consideration in determining eligibility” if it produced income. N.C. Welfare Programs Manual § 2326 (1971). The established practice was to treat property as income-producing “if it generated any annual income over and above its expenses, such as taxes, maintenance, and mortgage payments.” Affidavit of Aleñe Matthews, § 11. As a result of instructions received from the United States Department of Health and Human Services (HHS), defendant Matula altered this test on August 26, 1983, in a document labeled DMA Administrative Letter No. 02-84. Under the new regulations, property would be exempt from the reserve amount only if there was equity of less than $6,000.00 and the property produced at least 6% of the equity in annual income. This “$6,000/6% rule” changed the requirement that property only be “income-producing” in order to be exempt from reserve. The property owned by the named plaintiffs is all income-producing under the test as it existed on January 1, 1972, because the income received exceeded the annual expenses. However, this same property is not exempt from reserve under the “$6,000/6% rule” that defendants now seek to apply. It is on this basis that defendants intend to terminate Medicaid benefits to plaintiffs and the class.

Effective January 1, 1974, certain states, including North Carolina, were given the option by Congress of determining eligibility requirements for Medicaid for aged, blind, and disabled persons either by the federally promulgated SSI standards or by using the state’s own eligibility standards in effect on January 1, 1972. Section 209(b) of Pub.L. No. 92-603, codified at 42 U.S.C. § 1396a(f). North Carolina chose to continue using its January 1, 1972, standards rather than adopt the SSI standards. Thus, North Carolina became a so-called “209(b)” state.

II.

The principal legal point of contention is whether North Carolina’s decision to become a “209(b)” state has barred it from implementing a more restrictive test for exempt property than it used on January 1, 1972. Plaintiffs contend that until Section 209(b) has been specifically altered by statute, defendants are bound by the eligibility requirements in effect on January 1, 1972. Thus, the only permissible standard for income-producing property is the test used at that time or a less restrictive one. This would bar defendants from implementing the “$6,000/6% rule.”

The relevant portion of Section 209(b) of Pub.L. No. 92-603, at 42 U.S.C. § 1396a(f) provides:

Notwithstanding any other provision of this subchapter (Subchapter XIX— Grants to States for Medical Assistance Programs) ... no State ... shall' be required to provide medical assistance to any aged, blind, or disabled individual (within the meaning of subchapter XVI of this chapter) for any month unless such State would be (or would have been) required to provide medical assistance to such individual for such month had its plan for medical assistance approved under this subchapter and in effect on January 1, 1972, been in effect in such month ...

Defendants argue that Section 209(b) does not prevent them from using the “$6,000/6% rule.” Furthermore, they argue that they were required to enforce this more restrictive test because of instructions from administrators of HHS and because of provisions relating to Medicaid contained in the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA):

[T]he single standard to be employed in determining income and resource eligibility for all such groups, and the methodology to be employed in determining such eligibility, which shall be the same methodology which would be employed under the supplemental security income program in the case of groups consisting of aged, blind, or disabled individuals in a state in which such program is in effect____

42 U.S.C. § 1396a(a)(10)(C)(i)(III). Defendants argue that this provision requires North Carolina to use the “$6,000/6% rule” because it is a methodology employed under the SSI program.

The court has previously addressed most of the legal issues now before it in the orders of June 21, 1984, and July 31, 1984, enjoining defendants from use of the “$6,000/6% rule.” The court now adopts in full the legal conclusions contained in those orders. In this memorandum, the court will only summarize those past legal conclusions and then will address the matters that were not dealt with in the past orders.

The court has previously rejected the defendants’ argument that Section 209(b) does not require North Carolina to apply eligibility rules no more restrictive than its January 1, 1972, eligibility rules for medically needy aged, blind or disabled Medicaid recipients. The court’s interpretation of Section 209(b) is that while it allows a “209(b)” state to use eligibility requirements stricter than those under the SSI program, it requires those states electing the Section 209(b) option to apply eligibility rules for these recipients that are no more restrictive than its January 1, 1972, rules. See e.g., Winter v. Miller, 676 F.2d 276 (7th Cir.1982).

The court has also rejected defendants’ interpretation of the TEFRA provision. Defendants assert that the passage of TE-FRA repealed or limited Section 209(b) by implication and that since the “$6,000/6% rule” is a methodology and not a standard, TEFRA required that the methodology used by the SSI program, including the “$6,000/6% rule,” be used in all state Medicaid programs, including those of “209(b)” states.

The court rejected this interpretation of TEFRA because the provision in question contained no language expressly repealing Section 209(b), while Section 209(b) prohibits repeal by implication with its beginning statement: “Notwithstanding any other provision of this subchapter____” The court also found that the “$6,000/6% rule” was a standard and not a methodology. Thus, TEFRA does not require the defendants to adopt that standard.

Defendants further argue that HHS instructed them to adopt the “$6,000/6% rule” and that HHS’s interpretation of TE-FRA is entitled to great deference. The court previously rejected this claim because HHS’s position is clearly inconsistent with the plain meaning of Section 209(b). As such, HHS’s interpretations and instructions are not entitled to any deference and provide no basis for defendants’ change in the Medicaid eligibility standards regarding income-producing property.

Defendants have made several new arguments not addressed before by the court. However, none of them justify any change in the court’s previous conclusions of law in this matter.

First, defendants have pointed to regulations, which they claim support their interpretation of Section 209(b). According to defendants, 42 C.F.R. § 435.121 allows a state to use SSI criteria or more restrictive criteria in determining resource levels. Thus, under the regulations, North Carolina can adopt the “$6,000/6% rule” that is part of the SSI standards. Defendants claim that the regulations show that the federal government has interpreted Section 209(b) consistent with defendants’ interpretation.

This regulation might be helpful in interpreting legislation. However, it is inapplicable here. The regulation cited by defendants, 42 C.F.R. § 435.121, applies only to categorically needy Medicaid recipients, not to medically needy recipients such as plaintiffs. The applicable regulation is 42 C.F.R. § 435.841, which provides that resource standards for medically needy recipients established by states be “at least equal to the higher of” resource standards used under the Aid to Families with Dependent Children (AFDC) or SSI plans. This regulation, which applies to the standard in question, allows the state to adopt less restrictive standards than those used under SSI.

Congressional action during the summer has supported the court’s reasoning in its June 24,1984, order. In the Deficit Reduction Act of 1984, Congress directed that there would be an 18-month moratorium against any penalty or regulatory action by HHS against a state because the state used less restrictive resource standards or methodologies than under SSI. Section 2373(c) of Pub.L. No. 98-369, 98 Stat. 494, 130 Cong.Rec. 6545 (June 22, 1984). The House-Senate Conference Report clearly shows that Congress through TEFRA did not intend to change “the policies governing income and resource standards and methodologies for determining eligibility of the medically needy” that were previously in effect. H.R.Rep. No. 98-861, 130 Cong. Rec. 6741. The report stated that “states may use less restrictive standards and methodologies in their noncash programs [such as for medically needy Medicaid recipients], although they are still foreclosed from being more restrictive than the relevant cash assistance programs [such as SSI or ADFC].” H.R.Rep. No. 98-861, 130 Cong.Rec. 6742.

The report criticized the Secretary of HHS for her interpretation of TEFRA, which ignored the intent of its provisions concerning Medicaid. One example cited was the Secretary’s treatment of “certain income and resource rules as ‘methodology’ that must strictly follow AFDC or SSI rules, even though all States with medically needy programs have traditionally been permitted to use less restrictive rules” than those used in SSI. H.R.Rep. No. 98-861, 130 Cong.Rec. 6741. This supports the court’s decision that the “$6,000/6% rule” is a standard, not a methodology.

The court previously has ruled that TE-FRA did not affect North Carolina’s obligation under Section 209(b) to use eligibility requirements no more restrictive than those in effect on January 1, 1972. The congressional intent as clarified this summer shows that this is the correct interpretation. The Secretary’s instructions to defendants are not supported either by the language of TEFRA, nor by the Congressional intent.

Defendants now argue that the test used in determining income-producing property in 1972 was not that stated as the generation of “any annual income over and above its [the house’s] expenses, such as taxes, maintenance, and mortgage payments.” Affidavit of Arlene Matthews, ¶ 11. Instead the test was simply that of whether the property is producing a “reasonable income.” N.C. Medicaid Manual § 2327 (1971). Defendants argue that while the test identified by Ms. Matthews of income over costs was reasonable in 1972, it is not reasonable in the 1980’s. Thus, defendants claim that the 1972 standard is still in effect under any requirement that property produce “reasonable income,” such as a newly proposed requirement by North Carolina that property produce 6% in annual income before being exempt from resource calculations. Second Affidavit of Aleñe Matthews.

Such an interpretation of the 1972 standards would allow defendants to escape their clear obligation under Section 209(b). The record shows that in 1972 the test used by North Carolina for exempting real property not used as a homesite was whether it produced income over costs. Affidavit of Aleñe Matthews § 11, N.C. Medicaid Manual § 2826 (1971) exempts “real property producing income (income included in budget).” The “reasonable income” language is just a description of this same standard. Section 209(b) requires the defendants to use the same eligibility requirements now as in 1972. It does not allow new standards on the basis of a change in what defendants feel is “reasonable.”

Finally, defendants argue that the proposed 6% income test should satisfy all demands of plaintiffs, especially in view of the increasing financial demands on the Medicaid program. Second Affidavit of Aleñe Matthews. While the defendants’ concerns about the financing of Medicaid are real, the expected difficulties do not justify defendants’ ignoring the state’s obligations under Section 209(b).

The proposed 6% income test may be more or less restrictive than the 1972 standards, depending on the total costs of upkeep of the house. However, if real property produces total income, but annual income less than 6%, the proposed test would not exempt the property from resource calculations, while it would be exempt under the 1972 standards. To this extent, the proposed rule violates Section 209(b), and can not be adopted consistently with the requirements of Section 209(b).

III.

In conclusion, defendants have violated Section 209(b) through their application of the “$6,000/6% rule.” The preliminary injunction restraining defendants from terminating or denying Medicaid benefits on the basis of the “$6,000/6% rule” will now be made permanent. Defendants are still under an obligation to pay all benefits to named plaintiffs and class members that were denied on the basis of the “$6,000/6% rule” after June 21, 1984. As the court ruled on July 31, 1984, this order does not require the payment of retroactive benefits in violation of the Eleventh Amendment because the required payments do not begin until after the court’s preliminary injunction on June 21, 1984, at which time defendants were in clear notice that failure to follow the standards as sét by the court would be a violation of the law for which they would be answerable to the court.

The court also enjoins defendants and their successors in office from adopting or employing an eligibility standard for medically needy Medicaid applicants and recipients who own income-producing property that is more restrictive than the eligibility standard in effect on January 1, 1972. Defendants’ proposed 6% income test, which in cases will be more restrictive than the January 1, 1972, test, shows the need for this injunction.

The court will also require that defendants notify each class member in writing of his or her right to receive Medicaid benefits after June 21, 1984, if they were denied because of the “$6,000/6% rule.” The notice will inform class members that there may be administrative or judicial remedies available for the recovery of Medicaid benefits prior to June 21, 1984, provided that all other eligibility standards are met. Such notice does not require payments in violation of the Eleventh Amendment. Quern v. Jordan, 440 U.S. 332, 346-49, 99 S.Ct. 1139, 1147-49, 59 L.Ed.2d 358 (1979).

FINAL JUDGMENT

For the reasons stated in the accompanying memorandum of decision, filed this day,

IT IS HEREBY ORDERED, ADJUDGED AND DECREED, that:

1. Defendants must adopt and.employ a standard for determining the eligibility of medically needy applicants for and recipients of Medicaid who own income-producing property that is no more restrictive than the eligibility standard in effect on January 1, 1972, that real property not used as a homesite is excluded from consideration in determining eligibility if it generated any annual income over and above its expenses. The standard enforced by defendants in the “$6,000/6% rule” violates 42 U.S.C. § 1396a(f) by implementing more restrictive standards than those in effect on January 1, 1972.

2. Defendants, their successors in office, agents, employees, and all persons acting with them are permanently enjoined from denying or terminating Medicaid benefits for the medically needy pursuant to the “$6,000/6% rule” when all other eligibility factors are met. Defendants are to provide immediately Medicaid to all class members who have been denied benefits on the basis of the “$6,000/6% rule.”

3. Defendants are permanently enjoined from adopting or enforcing an eligibility standard for medically needy Medicaid applicants and recipients who own income-producing property that is more restrictive than the eligibility standard in effect on January 1, 1972.

4. Defendants shall send notice to all class members informing them of their right to receive Medicaid benefits wrongfully denied after June 21, 1984, as ordered by the court on July 31, 1984, and informing them of possible administrative and judicial remedies for benefits denied before June 21, 1984. Plaintiffs have already submitted a draft notice. Defendants shall file a draft notice or comments on plaintiffs’ proposed notice within ten (10) days of the filing of this judgment.

5. Defendants shall provide plaintiffs’ counsel with sufficient information to allow them to monitor the implementation of this order.

6. As prevailing parties, plaintiffs shall recover from defendants attorney fees in accordance with 42 U.S.C. § 1988. Plaintiffs shall submit a petition for fees within thirty (30) days of the filing of this judgment.

7. The court shall retain jurisdiction over this case. The parties shall report to the court on the implementation of this judgment at least every third month, beginning in March, 1985. If there is any legislative action that might affect the permanent injunctions in this judgment, the parties should so inform the court immediately.