source: Caselaw Access Project

author: IRVING BEN COOPER, District Judge.

license: Public Domain

text:
    Jack C. SCHOENHOLTZ, as Administrator of the Rye Psychiatric Hospital Center, Inc., Supplemental Retirement Income Fund-Fixed and Rye Psychiatric Hospital Center, Inc., Supplemental Retirement Income Fund-Variable, Plaintiffs, v. David E. DONIGER, I. Jay Lauer and Alexander Carien, Defendants.
    No. 83 Civ. 2740 (IBC).
    United States District Court, S.D. New York.
    Feb. 14, 1986.

      Rogers, Hoge & Hills, New York City, for plaintiffs; Frederick A. Nicoll, of counsel.

      Cerrato, Sweeney, Cohn, Stahl & Vaccaro, White Plains, N.Y., for defendants; Julius W. Cohn, of counsel.
   OPINION

IRVING BEN COOPER, District Judge.

Plaintiff brings this action alleging that defendants have breached and continue to breach fiduciary duties owed to two employee retirement plans at the Rye Psychiatric Hospital Center in Rye, New York in violation of the Employee Retirement Income Security Act (“ERISA”), 29 U.S.C. § 1001, et seq. Plaintiff seeks recovery for damages to the plans, attorneys’ fees and punitive damages.

Defendants assert twelve affirmative defenses and five counterclaims generally alleging they owed no fiduciary duties with respect to the plans; that if any such duties were in fact to be undertaken by them, they did not breach any; and the impropriety on plaintiff’s part in maintaining this law suit.

Our findings of fact and conclusions of law, which are set forth below, follow a fourteen day trial to the Court at which thirteen witnesses gave sworn testimony and over one hundred trial exhibits were received into evidence.

Before setting forth our findings, we are compelled to note our unalterable impression that, for the most part, the testimony of each defendant was evasive, grossly exaggerated — totally unconvincing; we have no alternative to rejecting it in the main.

Further, we cannot refrain from revealing our astonishment upon learning, from their testimony adduced at trial, their ignorance as to the structure and operation of the retirement plans and their fiduciary obligations with respect to them — the very subject matter of this litigation.

In contrast we remain favorably impressed by the testimony of plaintiff’s witnesses; we find it persuasive.

FINDINGS OF FACT

1. The Rye Psychiatric Hospital Center, Inc. (the “Hospital”) incorporated under the laws of this State on October 18, 1973 is a private psychiatric hospital located in Rye, New York and licensed by the New York Office of Mental Health. (Tr. 713-15, 722-23) The Hospital cares for approximately 300 mentally ill persons each year. (Tr. 617, 944)

2. The voting shares of the Hospital are equally divided among Leonard J. Essman, M.D., Salvatore J. Pagliaro, M.D., Jack C. Schoenholtz, M.D., and the defendants herein: David E. Doniger, M.D., I. Jay Lauer, D.D.S., and Alexander Carien, M.D. (F. 2) These six persons comprised the board of directors (or board of governors) of the Hospital from its inception until November 12, 1982, when Drs. Schoenholtz, Essman and Pagliaro were elected the sole directors at a special meeting of shareholders unattended by the defendants. (F. 3; In the Matter of Rye Psychiatric Hospital Center, Inc., 66 N.Y.2d 333, 497 N.Y.S.2d 317, 488 N.E.2d 63 (1985)) Presently Dr. Schoenholtz is the Hospital administrator and medical director pursuant to a management contract between the Hospital and his wholly owned professional corporation. (Tr. 710)

3. On December 27, 1979, the Hospital created two pension plans for the benefit of Hospital employees pursuant to § 401(a) of the Internal Revenue Code, 26 U.S.C. § 401(a), and §§ 3(2), (34) and 402 of the Employee Retirement Income Security Act (“ERISA”), 29 U.S.C. §§ 1002(2), (34) and 1102. These pension plans are known as the Rye Psychiatric Hospital Center, Inc., Supplemental Retirement Income Fund-Fixed (the “Fixed Plan”) and the Rye Psychiatric Hospital Center, Inc., Supplemental Retirement Income Fund-Variable (the “Variable Plan”) (collectively called the “Plans”) (F. 5; Ex. 1, 2) The Variable Plan was implemented on December 27, 1979; the Fixed Plan was implemented in 1980 (exact date unspecified). (Ex. 6, 2, 12; Tr. 742-43, 751-53) The Fixed Plan provides for an annual mandatory contribution by the Hospital of ten percent of the total compensation of the participants; the Variable Plan provides for an annual voluntary contribution of up to 15 percent of the total participant compensation. Each year since the establishment of the Plans, beginning with 1979, the Hospital has made the maximum allowable contributions to the Plans. (Ex. 1, 2; Tr. 904-06)

4. At the inception of the Fixed Plan and the Variable Plan, the six shareholders and directors served as trustees of the Plans. (Ex. 1, 2; Tr. 34, 37-38, 40-41, 208, 751-52, 756-58, 1448-49, 1855, 1975, 2065, 2070) In addition, defendants Doniger and Lauer assumed the responsibility of investment manager of the Fixed Plan and the Variable Plan, respectively. Defendants Carien and Lauer accepted the duties of custodians of the Fixed Plan and the Variable Plan, respectively. Plaintiff is the administrator of both Plans. The duties of investment manager are set forth in § 8.08 of each Plan and the duties of custodian are set forth in § 8.09. The duties and responsibilities of administrator are set forth in § 8.10 of the Plans. (Ex. 1, 2)

5. It was the expressed intent when the Plans were adopted that up to 100 percent of the assets of the Plans were to be invested in Hospital securities (so stated in § 8.09 of each Plan). (Ex. 1, 2; Tr. 738-39, 787) At a meeting on August 3, 1981, the shareholders unanimously approved amendment of the Hospital Certificate of Incorporation to authorize 1,000,000 shares of non-voting Class B Common stock and 240,000 shares of Preferred Stock-Series 1981, convertible into Class B Common. (Tr. 56-57, 808-18, 1641) The sole purpose for the creation of Preferred Series 1981 and Class B Common was to sell the Preferred stock to the Plans. It was intended that each year a new Preferred series would be authorized and sold to the Plans. (Ex. 1, 2, 118; Tr. 807, 1266-72)

6. At their August 3, 1981 meeting, the Hospital directors unanimously authorized the sale by the Hospital to the Plans of 119,593 shares of Preferred-Series 1981 for $1.00 per share. The same day, the trustees of the Plans unanimously authorized the purchase of these shares. (Tr. 56-57, 808-18, 1641)

7. At a special meeting of the board of directors on November 9, 1981, Dr. Lauer proposed that a dividend of $30,000 be issued to each of the six shareholders. The proposal did not meet with approval. Dr. Doniger then moved for a $25,000 dividend payment, which also did not meet with approval. Plaintiff and Drs. Essman and Pagliaro expressed their belief that such a substantial dividend would be detrimental to the Plans. (Ex. 37; F. 11; Tr. 72-74, 564, 820-27, 1118-19, 1128-30, 1186-87, 1200-02)

8. Following failure to obtain board approval for their proposed dividends, they jointly planned and embarked upon a scheme to gain control of the Hospital by boycotting or disrupting all subsequent meetings in an effort to paralyze the Hospital operations. The scheme had two complementary objectives. One was the ouster of Dr. Schoenholtz who defendants particularly perceived as blocking the financial expectations of their investment. With control of the board, defendants believed they could obtain the level of financial reward they thought appropriate. (Tr. 93-95, 294-95, 2017-18)

9. On various occasions beginning on November 9, 1981 defendants made positive assertions to the other directors to the effect that they would deadlock all decisionmaking affecting the Hospital and prevent it from functioning unless Dr. Schoenholtz was removed and defendants were able to sell their stock to an outside purchaser. An existing shareholders’ agreement gave non-selling shareholders a right of first refusal at a stipulated price before any shareholder could dispose of his stock. (Tr. 822-28, 836, 1466-67, 1564-65)

10. In execution of their scheme, defendants intentionally disrupted the January 19, 1982 board of directors meeting by refusing to allow any business to be conducted unless they were permitted to tape record the proceedings. (Ex. 40; Tr. 79-83, 698, 832-35, 1463-64) On that occasion defendants knew full well that tape recording of meetings had previously been prohibited by vote of the board at the meeting on February 6, 1981. (Tr. 2027) By disrupting the January 19, 1982 meeting and refusing to participate therein, defendants foreclosed the possible consideration of matters concerning or of importance to the Plans, particularly the potential sale and purchase of the remaining 120,408 shares of Preferred Series 1981. Their conduct also precluded a meeting of the trustees.

11. At all relevant times, defendants knew that matters relating to the Plans frequently arose during regular board meetings and that meetings of the Plans’ trustees routinely followed meetings of the board of directors, even in the absence of specific notice of a meeting of trustees. (Tr. 48, 88-89, 470, 1252-54, 1453, 2139-40)

12. At an executive committee meeting on February 22, 1982 attended by Drs. Schoenholtz, Essman and Doniger, Dr. Doniger demanded that a stenographer record the meeting. A vote was taken which resulted in a two to one decision to prohibit the stenographer’s presence at the meeting. (Tr. 841-44, 1900-02)

13. At the February 22, 1982 executive committee meeting, Dr. Doniger raised the question of whether Dr. Essman had been elected Vice President and was properly a member of the executive committee. (Tr. 1290-91, 1578)

14. All the directors received due notice of a meeting of the Hospital board of directors scheduled to be held on April 26, 1982. (Ex. 44, 45; Tr. 85) Defendants agreed among themselves that they would boycott that particular meeting, thereby insuring that a quorum could not be obtained for the conduct of Hospital business, and so informed Dr. Schoenholtz. (Ex. 47; Tr. 85-87) Because of defendants’ failure to attend, no business relating to the Plans could be conducted and no meeting of the trustees could be held.

15. Dr. Doniger sent a letter dated April 27, 1982, with a cover letter dated May 25, 1982, to Kenneth Simon, Esq., the Hospital’s counsel. (Ex. DM) In that letter, Dr. Doniger asserted that Dr. Essman was not a member of the board of directors and raised questions concerning Dr. Essman’s true status. The letter further stated, “you may feel free to let Dr. Schoenholtz know that it will not be possible to obtain a quorum or transact Governing Board business until this information has been supplied.” (Id.)

16. Dr. Carien testified that if it were proven that Dr. Essman was not a director, defendants would have had a majority of votes. (Tr. 91) He also admitted that defendants discussed Dr. Essman’s removal as a means of obtaining the dividends they desired, and, equally important, to get rid of Dr. Schoenholtz. (Tr. 159, 93)

17. On July 2, 1982, defendants demanded a special meeting of the board of directors to consider Dr. Essman’s status as a board member and a demand for Dr. Schoenholtz’s immediate resignation. (Ex. 54) Shortly thereafter, defendants received due notice of a regular meeting of the board of directors to be held on July 12, 1982, when defendants’ items of business were to be considered together with regular Hospital affairs. (Ex. 56; Tr. 856-57) Pursuant to their scheme, defendants agreed that they would not attend the July 12, 1982 meeting; they absented themselves. It was defendants’ position that Dr. Schoenholtz had not appropriately responded to their demand for a special meeting. (Ex. 58) By reason of defendants’ failure to attend, no action could be taken at the regular meeting of the board of directors held on July 12, 1982. Plaintiff had intended that Plan business be considered at that meeting. (Tr. 857)

18. Dr. Lauer testified that since defendants requested the special meeting before the board meeting was scheduled, the former, with its specific agenda, should have taken precedence to the exclusion of any other Hospital or Plan business. (Tr. 2146)

19. In accordance with defendants’ demand, they received due notice of a special meeting of the board of directors to be held on July 26, 1982. (Ex. 60) At the July 26, 1982 meeting, defendants made a motion to tape record the proceedings. The motion failed to carry and, pursuant to the agreement among themselves, defendants intentionally disrupted the meeting and refused to participate further. (Ex. 113; Tr. 101-07, 860-65, 1917-19)

20. In August, 1982, as part of their plan to gain control of the board, defendants commenced a proceeding in the Supreme Court of the State of New York, County of Westchester, pursuant to Article 78 of the New York Civil Practice Law and Rules seeking a declaration that Dr. Essman was not a director of the Hospital corporation and that it had been improper to refuse to permit tape recording of the July 26, 1982 meeting. (Ex. 113) On March 26, 1983, defendants withdrew their claim as to Dr. Essman’s status and acknowledged that he was a director. By decision dated May 12, 1983, the Honorable Abraham Isseks held that defendants had disrupted the July 26, 1982 meeting, that a tape recording was correctly not permitted and that Dr. Schoenholtz had properly conducted the meeting. (Ex. 77)

21. Defendants also commenced a shareholders’ derivative action in New York State Supreme Court, County of Westchester, against plaintiff in August, 1982. That action is still pending. (Tr. 114, 866)

22. Defendants received notice dated September 14,1982 of a regular meeting of the board of directors to be held on October 25,1982 and to be followed by a meeting of trustees of the Plans. (Ex. 64, BD; Tr. 866-69) The directors were specifically informed that, among other items of business, the 1982 Hospital evaluation would be presented and that they would consider the proposed new issue of Preferred Stock-Series 1982. (F. 12) On October 22, 1982, defendants moved for an order enjoining the meeting until determination of their Article 78 proceeding; they obtained an order temporarily enjoining the directors’ meeting and a special shareholders’ meeting scheduled for November 12, 1982, which had been called for the election of directors. No injunction of the meeting of trustees was requested or issued. (F. 15; Tr. 117)

23. On or about October 22, 1982, defendants received notice that, pending a decision on their motion for an injunction, the board of directors meeting originally scheduled for October 25, 1982 was rescheduled for November 1, 1982, to be followed by a meeting of the trustees. (Ex. 65; Tr. 117-18) However, the administrative assistant to Dr. Schoenholtz, Amy Schoen, telephoned each director on October 25th to remind him that the trustees would meet as scheduled that evening. (Tr. 311-13, 869, 1330) Defendants failed to attend the meeting of the Plans’ trustees on October 25, 1982 and, as a result of the absence of a quorum, the trustees were unable to conduct any Plan business. Dr. Doniger testified that he did not intend that the trustees’ meeting be enjoined. (Tr. 2015) Dr. Lauer, on the other hand, testified that the defendants agreed not to attend. (Tr. 2135-36)

24. On October 25, 1982, Dr. Schoenholtz wrote to defendants expressing his concern over their failure to attend the board of trustees’ meeting that evening and noted that they would be violating their fiduciary responsibilities as trustees, custodians and investment managers of the Plans if they continued to treat the Plans as a mere appendage of the board of directors of the Hospital corporation. (Ex. 66)

25. Defendants received notice that the meeting of the Hospital board of directors to be held on November 1, 1982 was rescheduled for November 22, 1982. (Ex. 68; Tr. 1595-98, 1615)

26. On or about September 11, 1982, defendants received notice of the special meeting of shareholders to be held on November 12,1982 for the purpose of electing directors. On October 27,1982, defendants withdrew the temporary restraining order against the November 12, 1982 special meeting of shareholders, which had been in effect since October 22, 1982. Nonetheless, defendants failed to attend the special meeting (held November 12, 1982). At that special meeting, Drs. Schoenholtz, Essman and Pagliaro were elected as the sole directors. The meetings of directors and trustees previously scheduled for November 22, 1982 were cancelled. (F. 19; Ex. 69, 70; Tr. 124)

27. On November 19, 1982, defendants commenced a special proceeding in the Supreme Court of the State of New York, County of Westchester, seeking to set aside the election of directors and officers held November 12, 1982. (F. 20; Tr. 124) The Supreme Court, Special Term, granted defendants’ petition and held that the three shareholders present at the meeting — Drs. Essman, Pagliaro and plaintiff — failed to elect a full complement of six directors, that they had no authority to reduce that number and, therefore, that they failed to fulfill the sole purpose for which the special meeting had been called. The court adhered to its original decision on reargument.

On appeal, the Appellate Division modified the order of Special Term and held that proper notice of the special meeting had been given to all parties and that the three shareholders present at the meeting had the necessary quorum to elect themselves directors. However, the Appellate Division also ruled that the size of the board of directors had been established as six by the parties’ prior course of dealings and that the three defendants herein — Drs. Doniger, Carien and Lauer — remained as holdover directors.

By a decision dated November 19, 1985, the New York State Court of Appeals reversed the Order of the Appellate Division and determined that the special meeting of shareholders and the election of Drs. Schoenholtz, Essman and Pagliaro as directors and officers of the Hospital were properly held. The Court of Appeals held that “[pursuant to the unambiguous and unequivocal language of [the Business Corporation Law § 702(a)], where, as here, the corporate by-laws make no provision whatsoever for the size of the board of directors, ‘the number shall be three.’ ” In the Matter of Rye Psychiatric Hospital Center, Inc., 66 N.Y.2d 333, 337, 497 N.Y.S.2d 317, 318, 488 N.E.2d 63, 65 (1985) (quoting New York Business Corporation Law § 702(a))

28. As part of the special proceeding to set aside the election of Drs. Schoenholtz, Essman and Pagliaro as directors, at the special meeting of shareholders held November 12, 1982, defendants obtained an injunction against any further meetings of the board of directors; the injunction was in effect between November 22, 1982 and May 1, 1983. However, Dr. Schoenholtz was authorized by Court order to continue to manage the Hospital. (Tr. 1401)

29. On March 25, 1983 an action based upon 29 U.S.C. § 1132(d)(1) was commenced against these defendants in the name of the Plans — so much thereof which provides that “[a]n employee benefit plan may sue or be sued under this subchapter as an entity.” When plaintiff learned that five weeks earlier our Circuit had held that section did not provide standing to the Plans to bring an action for civil enforcement of ERISA’s fiduciary provisions, Pressroom Unions-Printers League Income Security Fund v. Continental Assurance Co., 700 F.2d 889 (2d Cir.1983), the action was voluntarily dismissed pursuant to Fed.R.Civ.P. 41(a)(1)(i). The action now before us was then brought on April 8, 1983 by Dr. Schoenholtz in his fiduciary, representative capacity as Administrator of the Plans. (Ex. DT)

30. In response to defendants’ efforts to find a purchaser for the Hospital, Robert Bardey, Esq., conveyed an offer to purchase the stock of the Hospital for a total value of about $4.3 million. (Ex. 80; Tr. 889) (“the Bardey offer”) The offer was made in a letter addressed to Dr. Lauer, dated May 25,1983, but sent to counsel for defendants with a cover letter from Mr. Bardey. (Ex. 79)

31. On May 27, 1983, defendants requested a special meeting of the board of directors to consider the Bardey offer. (Ex. 81) However, since defendants on May 26, 1983 had made application to the Supreme Court of New York, Westchester County, for an injunction against any further meetings of the Hospital boards, Dr. Schoenholtz declined to schedule the special meeting. He also pointed out to defendants that consideration of the Bardey offer was properly a matter for the shareholders. (Ex. 82)

32. Dr. Schoenholtz scheduled a meeting of Plan trustees for June 13, 1983 to once again consider the Plans’ purchase of the remaining 120,408 shares of Preferred Series 1981 in light of the Bardey offer, which amounted to approximately $1.1 million more than the most recent Hospital evaluation at that time. (Ex. 84; Tr. 890-93, 896-98)

33. Defendants attended the June 13, 1983 meeting accompanied by personal counsel who refused to leave, despite the fact that the majority of members did not favor his attendance. Once again, no action was taken and nothing accomplished at that meeting. (Tr. 898-902, 1810-16)

34. On July 26, 1983, defendants resigned as trustees, custodians and investment managers of the Plans. The resignations were effective on August 26, 1983. (Ex. 86; Tr. 145) Between November 9, 1981 and the date of their resignations, defendants did not attend and participate in any meetings of the trustees of the Plans.

35. Between November 9, 1981 and August 29, 1983, defendants did not attend and participate in any meetings of the Hospital board of directors.

36. After either refusing to attend or disrupting every meeting of the Hospital board of directors and trustees since November 9, 1981, defendants on August 12, 1983 demanded another special meeting of the board of directors to consider, inter alia, the non-renewal of Dr. Schoenholtz’s management contract; the resignations of Drs. Schoenholtz, Essman and Pagliaro as trustees of the Plans; and holding Dr. Schoenholtz liable for the 1982 contribution to the Variable Plan which they claimed he had caused to be made without a majority vote of the directors. (Ex. 78) We note that Dr. Schoenholtz also caused the contribution to the Variable Plan to be made for 1983. (Tr. 574-76, 695, 904-06)

37. On August 29, 1983, three days after the resignations by defendants as trustees, investment managers and custodians became effective, the special meeting demanded by defendants was held. (Ex. 88) Although defendants were again accompanied by personal counsel, he withdrew when his presence was objected to. All of the matters raised by defendants failed to command a majority except one — to consider a different accounting firm for the Hospital. (Ex. 115; Tr. 906-09)

38. On August 26, 1983, the effective date of the resignations of defendants as trustees, the remaining trustees, Drs. Schoenholtz, Essman and Pagliaro, met and resolved to request the directors to sell the remaining 120,408 shares of Preferred Series 1981 to the Plans. (Tr. 99, 914)

39. Dr. Schoenholtz duly scheduled a directors’ meeting to consider this request; it was held on September 26, 1983. (Ex. 94; Tr. 914) Defendants attended this meeting and voted against the sale; Drs. Schoenholtz, Essman and Pagliaro voted in favor. (Ex. 91; Tr. 915-25) Assigning as a reason for their vote, defendants took the position that it was imprudent for the Plans to purchase Hospital stock because the value of that stock was impaired by the existing shareholders’ agreement granting a right of first refusal in the event of a sale of stock, which agreement was executed by the shareholders a year and a half before the Plans were adopted and three years before the design for the securities to be sold to the Plans was accepted by the directors. (Ex. 91; Tr. 1525, 2036-37)

40. In view of the conduct of defendants, including their refusal to attend the special meeting of shareholders in November, 1982, their boycott of all other Hospital and Plan meetings, their repeated refusal to permit the sale of the remaining shares of Preferred Series 1981 to the Plans and their announced opposition to the sale of Hospital stock to the Plans, it would have been futile for plaintiff to attempt to obtain authorization of the shareholders to create and issue Preferred stock in 1982 and 1983.

41. The willful acts by defendants and their omissions prevented the Plans’ investment of contributions in Hospital securities for the years 1980, 1981, 1982 and 1983.

42. Defendants acted with wanton indifference to the rights of the participants and beneficiaries. They knew or should have known that their conduct was injurious to the laudable objectives of the Plans and the beneficiaries to whom they owed the plain and obvious duty to protect. CONCLUSIONS OF LAW

A. This Court has jurisdiction of this action pursuant to 29 U.S.C. § 1132(e)(1).

B. Section 404 of ERISA, 29 U.S.C. § 1104, codifies fiduciary duties as follows:

(a)(1) ... a fiduciary shall discharge his duties with respect to a plan solely in the interest of the participants and beneficiaries and—
(A) for the exclusive purpose of:
(i) providing benefits to participants and their beneficiaries; and
(ii) defraying reasonable expenses of administering the Plan;
(B) with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims____
(D) in accordance with the documents and instruments governing the plan insofar as such documents and instruments are consistent with the provisions of this subchapter.

C. With respect to § 1104(a)(l)(A)(i), we find that defendants failed to act exclusively for the benefit of the participants and beneficiaries of the Plans. Indeed, the evidence clearly demonstrates that defendants acted solely to further their personal interests by allowing their disagreements with Dr. Schoenholtz on corporate matters and hospital business to prevent any action in favor of the Plans for a period of almost two years.

D. Focusing on § 1104(a)(1)(B), we emphasize that ERISA imposes an affirmative duty to act with prudence and diligence. Donovan v. Bierwirth, 538 F.Supp. 463, 470 (E.D.N.Y.1981), mod. on other grounds, 680 F.2d 263 (2d Cir.1982), cert. denied, 459 U.S. 1069, 103 S.Ct. 488, 74 L.Ed.2d 631 (1983). The duty of fiduciaries of a plan under ERISA is the same as that historically imposed on trustees under the common law. Marshall v. Teamsters Local 282 Pension Fund, 458 F.Supp. 986 (E.D.N.Y.1978). The test of prudence

is one of conduct, and not a test of the result of performance of the investment. The focus of the inquiry is how the fiduciary acted in his selection of the investment, and not in whether his investments succeeded or failed. 19B Business Organizations, S. Young, Pension and Profit-Sharing Plans § 17.02[3] at 17-29.

Donovan v. Cunningham, 716 F.2d 1455, 1467 (5th Cir.1983). On all the proceedings heretofore had, we are compelled to conclude that defendants failed to act with the appropriate care, skill, prudence and diligence required under this section of ERISA.

E. Section 1104(a)(1)(D) requires fiduciaries to act in accordance with the instructions governing a plan. The trustees have a “statutory fiduciary duty to uphold the purpose of the plan.” Fine v. Semet, 514 F.Supp. 34 (S.D.Fla.1981), aff’d, 699 F.2d 1091 (1983).

The purpose of both of the instant Plans, as described in § 1.03 of each of them, is to provide retirement benefits to eligible employees. In addition, the Plans provide in § 8.09 of each that it is “expressly intended that up to one hundred percent (100%) of the funds of the Trust may be invested in Qualifying Employer Securities and/or qualifying Employer Real Property.”

Further, § 2.04 of each Plan enumerates the duties of a fiduciary which are identical with those under ERISA, 29 U.S.C. § 1104 (set forth hereinabove).

Based on the facts heretofore enumerated, we find that defendants failed to fulfill their obligations as trustees in accordance with the general goal, intent and specific instructions of the Plans.

F. Section 8.08 of each Plan defines the duties of a custodian as follows:

The Custodian shall have the responsibility and authority, subject to appropriate written instructions, to
(a) Establish a separate and distinct account in the name of the Plan ... for the purpose of retention of Plan assets.
(b) Receive and hold cash, or other property approved for acceptance in the Trust.
(c) Make payments from the account for periodic investments into insurance or annuity contracts, securities, funds and other authorized investments____
(d) Make payments from the account to terminated, deceased, disabled or retired Participants in amounts as specified____
(e) Make purchases or sales of assets from the account.
(f) Receive and distribute to the appropriate party, on a timely basis, all notices, confirmations of purchases, options and warrants, including notification of maturity dates of bonds and certificates.
(g) Prepare annually or upon request, a valuation, at current market value, of the Plan assets held in the account, including a balance sheet and detailed statement of cash receipts and disbursements.
Any of the foregoing actions taken pursuant to subsections (a) to (g), both inclusive, must be undertaken in a prudent manner and be consistent with the objectives of the Plan and made within the intent of Section 2.04.

G. Section 8.09 of each Plan defines the duties of the investment manager as follows:

The Investment Manager shall have the responsibility and authority to purchase, sell, invest and reinvest all or part of the Trust Fund in such property, ... or other investments of any and every nature permissible under applicable laws and regulations____
It is expressly intended that up to one hundred percent (100%) of the funds of the Trust may be invested in Qualifying Employer Securities and/or qualifying Employer Real Property. Employer contributions in cash and other cash received by the Trust may be applied to purchase additional shares of Employer Securities from current shareholders or shares from the Employer. All purchases of Employer Securities shall be made at prices which, in the judgment of the Trustees, do not exceed the fair market of such shares.
In addition the Investment Manager may:
(a) Borrow, lend, or raise money for the purpose of the Trust____
(b) Retain such portion of the Trust Fund in cash balances as may, ... be deemed to be in the best interests of the Trust....
(c) Acquire real estate____
(d) Invest Trust Funds in an Insurance
or Annuity Contract____
(e) Make, execute, acknowledge, and deliver any and all documents of transfer and conveyance and any and all other instruments that may be necessary or appropriate to carry out the powers herein granted.
(f) Employ one or more persons____
(g) Not cause the Plan to engage in a transaction which is knowingly prohibited under ... the Internal Revenue Code or adverse to the interest of Participants or their Beneficiaries.
Any of the foregoing actions taken, pursuant to subsections (a) to (g), both inclusive, must be undertaken in a prudent manner and be consistent with the objectives of the Plan and made within the intent of Section 2.04.

H. We find that Dr. Doniger willfully and intentionally failed to carry out his fiduciary duty under § 404(a) of ERISA, 29 U.S.C. § 1104(a), and under § 2.04 of each Plan (set forth hereinabove); he also willfully and intentionally failed to carry out his fiduciary duty as investment manager of the Fixed Plan, pursuant to § 8.09 of the Fixed Plan, from January, 1982 until August 26, 1983. (Ex. 1)

I. We further find that Dr. Carien willfully and intentionally failed to carry out his fiduciary duty under § 404(a) of ERISA, 29 U.S.C. § 1104(a), and under § 2.04 of each Plan; he also willfully and intentionally failed to carry out his fiduciary duty as custodian of the Fixed Plan, pursuant to § 8.Ó8 of the Fixed Plan, from January, 1982 until August 26, 1983. (Ex. 2)

J. We also find that Dr. Lauer willfully and intentionally failed to carry out his fiduciary duty under § 404(a) of ERISA, 29 U.S.C. § 1104(a), and under § 2.04 of each Plan; he also willfully and intentionally failed to carry out his fiduciary duty as custodian of the Variable Plan and as investment manager of the Fixed Plan, pursuant to § 8.08 of the Variable Plan and § 8.09 of the Fixed Plan, from January, 1982 until August 26, 1983. (Ex. 1, 2)

K. A shareholder or director of a corporation may be considered a fiduciary with respect to a plan. ERISA, 29 U.S.C. § 1002(21)(A), provides, in pertinent part:

a person is a fiduciary with respect to a plan to the extent (i) he exercises any discretionary authority or discretionary control respecting management of such plan or exercises any authority or control respecting management or disposition of its assets.

Each of the six directors discussed herein also acted as trustees of the Plans as well as shareholders and directors of the Hospital. The objective of the Plans to invest the assets in Hospital securities could not be met unless the shareholders issued the necessary Hospital stock and the board of directors authorized its sale to the Plans. As shareholders and directors of the Hospital, defendants exercised direct control over the disposition of Plan assets. Consequently, we find that from January, 1982 until the present defendants willfully and intentionally failed to carry out their fiduciary responsibilities to the Plans as shareholders and directors of the Hospital in distinct violation of the imperatives set forth in § 404(a) of ERISA, 29 U.S.C. § 1104(a).

L. Defendants’ first counterclaim is that plaintiff has acted outside the scope of his authority in maintaining the present action, that the action was not brought solely in the interest of the participants and beneficiaries of the Plans, and that plaintiff has not acted with the required degree of care, skill, prudence and diligence in bringing the action. We find that Dr. Schoenholtz acted prudently, properly and in accordance with the requirements of law in every respect by commencing this action for the benefit of the Plan participants and beneficiaries. Accordingly, the first counterclaim is dismissed.

M. The second counterclaim alleges that plaintiff breached his fiduciary duties by failing to deliver copies of the 1982 Neuberger and Berman financial evaluation of the Hospital to defendants. The failure of defendants to receive a copy of this document was the result of their own refusal to attend the specific meeting called to deal with that problem among others, of which meeting they had been duly notified. (Ex. BD, 64; Tr. 118-20, 869-72, 1335-37) There has been no evidence indicating that defendants requested copies of the evaluation at any time prior to the commencement of this action. By reason of the persistent course of conduct resorted to by each defendant, Dr. Schoenholtz had no duty to force upon defendants information which was readily available to them in any event. Accordingly, the second counterclaim is dismissed.

N. The third counterclaim is a conglomeration of grievances lodged by defendants against plaintiff regarding allegations of receiving excessive remuneration under his management contract and dereliction of duties as an officer and director of the Hospital in maintaining two alleged sets of by-laws. These allegations are the subject matter of the shareholders’ derivative action brought by defendants in New York State Supreme Court and have no place here. In addition, these claims made by defendants are totally unsupported by the trial record.

It is further alleged by defendants that the instant action was commenced in an effort to diminish defendants’ enthusiasm for the continuation of the shareholders’ action. In view of our finding that this action was properly brought to protect the interests of participants and beneficiaries of the Plans, the third counterclaim is dismissed.

O. Defendants admit they have failed to prove the fifth counterclaim (there is no fourth) and it is dismissed. (Defendants’ Post-Trial Proposed Findings of Fact and Conclusions of Law, ¶ 131, at 60)

P. The sixth counterclaim alleges that for all of the reasons previously alleged, plaintiff failed to properly perform his duties as administrator as described in the Plan agreements. In view of our finding that Dr. Schoenholtz has in all respects acted properly in performing his duties under the Plans, we find no merit to this counterclaim. Accordingly, the sixth counterclaim is dismissed.

CONCLUSION

In accordance with the foregoing, we are constrained to, and do, grant judgment on the issue of liability in favor of plaintiff and against each defendant.

Insufficient material has been submitted to enable us to determine the reasonable value of damages herein, especially in light of the recent determination by the New York Court of Appeals in In the Matter of Rye Psychiatric Hospital Center, Inc., supra. Accordingly, we follow a practice our Court has successfully employed for a long time: We direct the parties to endeavor to agree on a reasonable and proper amount of damages, then to provide us with a proposed form of judgment, including such amount agreed upon. If no agreement hereon is arrived at within 60 days from the filing date of this opinion, the parties are directed to serve and file comprehensive and meticulously prepared memoranda of law on the issue of damages, including attorneys’ fees and punitive damages.

SO ORDERED.

      . Throughout this opinion, the letters "Tr.” followed by a number in parentheses indicates a particular page number in the trial transcript. The letter "F" followed by a number in parentheses indicates a particular paragraph number in Plaintiffs and Defendants’ Statement of Undisputed Facts in the Joint Pre-Trial Order. The same applies to an “Ex.” which refers to a specific trial exhibit.


author: SAFFELS, District Judge.

text:
    The ATCHISON, TOPEKA AND SANTA FE RAILWAY COMPANY, Plaintiff, v. UNITED STATES of America, Defendant. The ATCHISON, TOPEKA AND SANTA FE RAILWAY COMPANY, Plaintiff, v. UNITED STATES of America, Defendant.
    Civ. A. Nos. 81-2219-S, 84-2193-S.
    United States District Court, D. Kansas.
    Feb. 14, 1986.

      Gary L. Crosby, Orval M. Adam, Gus Svolos, Daniel J. Westerbeck, Brian J. McKenna, Chicago, 111., Laurence E. Garrett, J.B. Reeves, Topeka, Kan., Weeks, Thomas & Lysaught, J. Donald Lysaught, Kansas City, Kan., for plaintiff.
    Benjamin L. Burgess, Jr., U.S. Atty., D. Kan., David Gustafson, Robert L. Baker, James P. Sites, George L. Squires, Trial Attys., Tax Div., Dept, of Justice, Washington, D.C., Janice Miller Karlin, Asst. U.S. Atty., Kansas City, Kan., for defendant.
    Highsaw & Mahoney, P.C., William G. Mahoney, William J. Birney, Washington, D.C., Robert D. Loughbom, Kansas City, Kan., for Railway Labor Executives’ Assn.
   MEMORANDUM AND ORDER

SAFFELS, District Judge.

This matter is before the court on defendant’s motion for summary judgment and plaintiff’s motion for partial summary judgment. The court heard oral argument on these motions on January 3, 1986. This is a civil tax refund suit brought by plaintiff to recover railroad retirement taxes paid pursuant to provisions of the Railroad Retirement Tax Act of the Internal Revenue Code of 1954. These consolidated cases involve the identical issue of whether the amount of compensation subject to taxation under the Railroad Retirement Tax Act is determined by the amount of compensation paid or earned in any calendar month.

To rule favorably on a motion for summary judgment, the court must first determine that the matters considered in connection with the motion disclose “that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law.” Rule 56(c), Federal Rules of Civil Procedure. The principal inquiry is therefore whether a genuine issue of material fact exists. Dalke v. The Upjohn Co., 555 F.2d 245 (9th Cir.1977); Hanke v. Global Van Lines, Inc., 533 F.2d 396 (8th Cir.1976). A motion under Rule 56 will be denied unless the movant demonstrates beyond doubt that he is entitled to a favorable ruling. Madison v. Deseret Livestock Co., 574 F.2d 1027 (10th Cir.1978); Mustang Fuel Corp. v. Youngstown Sheet & Tube Co., 516 F.2d 33 (10th Cir.1975). Pleadings and documentary evidence are to be construed liberally in favor of a party opposing a Rule 56 motion. Harman v. Diversified Medical Investments Corp., 488 F.2d 111 (10th Cir.1973), cert. denied 425 U.S. 951, 96 S.Ct. 1727, 48 L.Ed.2d 195 (1976). However, once a summary judgment motion has been properly supported, the opposing party may not rest on the allegations of the complaint, but must respond with specific facts showing the existence of a genuine factual issue to be tried. Coleman v. Darden, 595 F.2d 533, 536 (10th Cir.), cert. denied 444 U.S. 927, 100 S.Ct. 267, 62 L.Ed.2d 184 (1979). A party with evidence tending to create a factual issue must present that evidence to the trial judge or summary judgment is proper. Otteson v. United States, 622 F.2d 516, 520 (10th Cir.1980).

The uncontroverted facts for the purposes of these motions are as follows. Plaintiff initiated these suits after its refund claims for employer railroad retirement taxes and employee railroad retirement taxes were denied by the Internal Revenue Service [hereinafter IRS], The Railroad Retirement Tax Act is a federal employment tax statute which imposes an excise tax on railroad employers and employees. Taxes collected under the Railroad Retirement Tax Act are appropriated to fund the benefits payable to railroad employees pursuant to the Railroad Retirement Act, 45 U.S.C. 231, et seq. The Railroad Retirement Tax Act and Railroad Retirement Act statutes provide a social security system for railroad employees.

Railroad retirement taxes are computed by applying a statutory tax rate to the amount of an employee’s taxable compensation. For the period of time at issue here, taxable compensation was an employee’s total monthly compensation that was not in excess of the monthly base. Plaintiff is an employer subject to the Railroad Retirement Tax Act, § 3231(a) and § 3231(g), and all its employees are employees subject to the Railroad Retirement Tax Act, § 3231(b).

During 1972, the IRS examined plaintiff’s Railroad Retirement Tax Act tax returns for each of the calendar quarters for the years 1969 through 1971. The IRS Agent determined an additional amount in Railroad Retirement Tax Act taxes was owed on retroactive compensation. Plaintiff had reported compensation as taxable in the month the payment was recorded on its payroll records regardless of when the compensation was earned or paid. The IRS Agent contended that compensation was taxable only in the months in which it was earned. The issue was subsequently referred to the IRS National Office For Technical Advice. The IRS held, in Revenue Ruling 75-266, 1975-2 C.B. 408, that railroad employees’ lump sum back pay is subject to Railroad Retirement Tax Act taxes to the extent and at the rate of tax applicable when it was earned.

On August 9, 1975, the Railroad Retirement Tax Act was retroactively amended by Public Law 94-93, 89 Stat. 466. The IRS subsequently revoked Revenue Ruling 75-266 and issued Revenue Ruling 75-565, 1975-2 C.B. 410, which held that lump sum back pay is subject to Railroad Retirement Tax Act taxes to the extent and at the rate of tax applicable when it was actually paid unless the employee requests that these determinations be made on the basis of when the compensation was actually earned. The IRS Agent thereafter agreed that plaintiff did not owe an additional amount in Railroad Retirement Tax Act taxes.

Thereafter, plaintiff recalculated its Railroad Retirement Tax Act liability, as well as that of its employees, for all tax years not previously closed under the applicable statute of limitations and determined that it had overpaid its employer tax and over-withheld the employee tax for the years 1969 through 1974. Plaintiff subsequently filed its claim for refund. The provisions at issue in this case provide, in pertinent part:

In addition to other taxes, there is hereby imposed on the income of every employee a tax equal to the rate of a tax imposed with respect to wages ... of so much of the compensation paid in any calendar month to such employee for services rendered by him ...

26 U.S.C. 3201.

In addition to other taxes, there is hereby imposed on every employer an excise tax, ... of so much of the compensation paid in any calendar month by such employer for services rendered to him as is, with respect to any employee for any calendar month ...

26 U.S.C. 3221(a).

(1) The term “compensation” means any form of money remuneration paid to an individual for services rendered as an employee to one or more employers----

26 U.S.C. 3231(e).

These statutes have been subsequently amended; however, it is the above-quoted language which is in issue here.

Plaintiff asserts that the Railroad Retirement Tax Act as amended by Public Law 94-93 imposes the employer tax and employee tax on compensation to the extent and at the rate applicable when it is actually paid. Plaintiff argues that the clear meaning of the language of these statutes supports that assertion. Defendant counters that the scope of Public Law 94-93 has been limited to situations involving retroactive wage payments leaving current compensation untouched. Defendant contends that the above-cited language is ambiguous and that the phrase “compensation paid in any calendar month” means compensation reflected on the payroll for that month.

The Carriers Taxing Act of 1937, Public Law 75-174, 50 Stat. 435, was the predecessor of the Railroad Retirement Tax Act. That act clearly imposed taxes on employers and employees on an earned basis. Section 2(a) imposed taxes on an employee for “compensation ... for any calendar month, earned by him.” Section 3(a) required employers to pay a tax for a certain percentage of compensation paid to an employee for services rendered. Compensation was defined in section 1(e) as “any form of money remuneration earned by an individual for services rendered ...”

The Carriers Taxing Act of 1937 was amended in 1946 by Public Law 79-572, 60 Stat. 722. Section 1500 of the Internal Revenue Code was amended to read as follows, “there shall be levied ... upon the income of every employee a tax equal to the following percentages of so much of the compensation, paid to such employee ... for services rendered by him after such date, as is not in excess of $300 for any calendar month ...” Section 1520 was amended to state, “every employer shall pay an excise tax, with respect to having individuals in his employ, equal to the following percentages of so much of the compensation, paid by such employer after December 31, 1946, for services rendered to him after December 31, 1936, as is, with respect to any employee for any calendar month, not in excess of $300 ...”

With respect to the 1946 amendment, House Report 1362 initially included a section, 4(f), which provided:

Effective January 1, 1946, sections 1500 to 1530, inclusive, and section 1536 of the Internal Revenue Code are removed from the Internal Revenue Code and shall constitute title II of the Railroad Retirement Act of 1937, ... said title to be in the words and marks: “Carriers Taxing Act of 1945” ...

The Senate report defined this section as follows:

Section 4(f): This subsection codifies the Carriers Taxing Act as title II of the Railroad Retirement Act. In this way all the definitions of the Retirement Act, some of which are amended by this bill become automatically applicable to the Carriers Taxing Act and in the future if there is any occasion to amend definitions a single amendment will suffice____

Senate Report 1710, Part 2, 79th Cong., 2d Sess., p. 9 (1946).

House Report 1362 was amended on the floor of the Senate [see 92 Cong.Reeord 10160-10172 (1946)] and section 4(f) was not enacted, leaving an ambiguity as to whether the definitions applicable to the Railroad Retirement Act were to also be applied for taxation purposes. When discussing the significance of the amendment to the Railroad Retirement Tax Act at a time when section 4(f) was still part of the Bill, the Senate Report described the changes as “necessary to change the computation of benefits and taxes from a ‘compensation earned’ basis to a ‘compensation paid’ basis.” SuppLSenate Report 1710, Part II, 79th Cong., 2d Sess., p. 7 (1946). As a rationale for this change, the Senate Report stated:

Under present law, compensation is credited to the month in which it was earned even though in the case of pay for time lost, adjustment board awards, retroactive wage increases, etc., the amount earned is not ascertained until some time later when the reports for the period in which compensation was earned have already been made. This brings about heavy administrative burdens both on the Board and on the employers to make thousands of corrections in reports previously filed. These are useless operations since in most cases it makes little or no difference to the employee’s annuity whether the compensation is credited at the time it is paid or at the time it is earned.

Id. After the 1946 amendments, it was unclear whether compensation was to be taxed on an “as earned” or an “as paid” basis, but defendant contends that the IRS routinely taxed on an “as earned” basis.

The next relevant amendment to the Railroad Retirement Tax Act is the one in issue here. In 1975, Public Law 94-93 was enacted and the pertinent changes were as follows:

Sec. 201. Section 3201 of the Railroad Retirement Tax Act is amended by striking out “compensation paid to such employee” and inserting in lieu thereof “compensation paid in any calendar month to such employee.”
Sec. 203. Section 3221(a) of the Railroad Retirement Tax Act is amended by striking out “compensation paid by such employer” and inserting in lieu thereof “compensation paid in any calendar month by such employer.”
Sec. 204. Section 3231(e)(1) of the Railroad Retirement Tax Act is amended by striking out the first sentence and inserting in lieu thereof:
“The term ‘compensation’ means any form of money remuneration paid to an individual for services rendered as an employee to one or more employers.”

Public Law 94-93 was a response to Revenue Ruling 75-266, which found that railroad employees’ lump sum back pay was subject to Railroad Retirement Tax Act taxes to the extent and at the rate of tax applicable when it was earned. Defendant contends that the scope of Public Law 94-93 was limited to retroactive compensation and does not apply to current compensation. The court notes, however, that the language contained within Public Law 94-93 specifies no such restriction.

When the proposed amendment was introduced, it was described by Congressman Staggers (D.W.Va.) as follows:

[T]he Railroad Retirement Tax Act was amended in 1946 in part for the purpose of imposing the tax on a “paid” rather than an “earned” basis____ The Senate Commerce Committee report that accompanied the bill stated that the amendments “are necessary to change the computation of benefits and taxed [sic] from a ‘compensation earned’ basis to a ‘compensation paid’ basis,” and that existing law “brings about heavy administrative burdens both on the Railroad Retirement Board and on the employers to make thousands of corrections in report [sic] previously filed” which are “useless operations.” ... Since 1946, the Railroad Retirement Board has permitted carriers to report compensation on an as paid basis, and the Board has recently confirmed the legal propriety of this procedure.
Nonetheless, the Internal Revenue Service has ruled in Revenue Ruling 75-226 (IRB 1975-27, p. 33) that compensation is to be taxed under the Railroad Retirement Tax Act as of the period when earned irrespective of when it was paid. The bill would amend the Railroad Retirement Act to clarify the intention originally expressed in 1946, that compensation is to be taxed only on an “as paid” basis. Because these amendments are clarifications of existing law they are to apply to all taxable years not yet closed as well as those in the future.

121-19 Cong.Record 24479 (July 24, 1975).

Senator Williams (D.N.J.) described the amendment as follows:

Finally, there is an amendment to the Railroad Retirement Tax Act in this bill that was added on in the House and appears in the measure as title III. This amendment relates to the way in which retroactive wage payments under a collective-bargaining contract such as that recently negotiated with the Brotherhood of Railway and Airline Clerks are reported for railroad retirement tax purposes.

121 Cong.Record 25603 (July 29, 1975).

A further explanation came from Senator Long (D.La.), Chairman of the Senate Finance Committee:

The amendment deals with the method of assessing railroad retirement payroll taxes. It essentially restores the practice existing up until this year when a new revenue ruling interpreted the law to require that these taxes be assessed as of the period when the wages were actually earned. This revenue ruling creates an administrative burden on railroad employers and provides a taxing basis which is inconsistent with the basis under which the Railroad Retirement Board credits wages to employee accounts for benefit computation purposes. This amendment will make the two procedures consistent in that for both tax assessment and benefit computation purposes wages will be considered to be earned as of the period when they are actually paid except that the employee may, at his option, request that these determinations be made on the basis of when the wages were actually earned.

121-21 Cong.Record 26759 (Aug. 1, 1975).

Congressman Corman (D.Cal.), in discussing Public Law 94-93, stated:

It essentially restores the practice existing up until the year when the Internal Revenue Service issued a new revenue ruling which interpreted the existing law to require that these taxes be assessed as of the period when the wages were actually earned rather when actually paid. This revenue ruling creates an administrative burden on railroad employers and provides a taxing basis which is inconsistent with the “as paid” basis under which the Railroad Retirement Board allows an employer to report wages and under which the Board then credits wages to employee accounts for benefit computation purposes. This amendment will make the two procedures consistent in that for both tax assessment and benefit computation purposes wages will be considered to be earned as of the period when they are actually paid except that the employee may, at his option, request that these determinations be made on the basis of when the wages were actually earned____

121 Cong.Record 27014 (Aug. 1, 1975).

Congressman Steiger (R.Ariz.) added:

The change is one in which it will be easier for the railroads to keep their books, in terms of retroactive payments made to the retirees on Railroad Retirement benefits. The issue is one as to whether or not the tax shall be paid when the benefits are paid or, as IRS ruled, when the benefits were earned.
On the basis of retroactive benefits, if we do not get the change proposed in the Senate amendment, we will seriously hamper railroad bookkeeping____ The estimated revenue loss is something in the range of $10,000. There is a substantial bookkeeping saving to railroad management if a change is made.

Id.

Defendant asserts that its interpretation of Public Law 94-93, that “compensation paid in any calendar month” means compensation reflected on the payroll for that month, best effectuates legislative intent and that Congressman Staggers, a sponsor of the 1975 amendment, incorrectly believed the 1946 amendments had changed the Railroad Retirement Tax Act from an “earned” to a “paid” basis. Defendant also asserts that Public Law 94-93 was intended to be limited to retroactive compensation as the government and railroads both interpreted current compensation to be taxed when earned. Defendant asserts that plaintiff’s interpretation of the 1975 amendment would reverse Revenue Ruling 75-266 as Congress intended, but this interpretation would also contradict Congress’ intent to leave existing practices alone, therefore plaintiff’s interpretation is inconsistent with the purpose of the statute. Defendant also asserts that its own interpretation coincides with the de minimis revenue impact which the amendment was intended to have.

When considering the statutory language and pertinent legislative history surrounding Public Law 94-93, it is apparent that the intent of the amendment was to clearly place Railroad Retirement Tax Act taxes on an “as paid” basis. Although the impetus for the amendment was Revenue Ruling 75-266, which concerned retroactive compensation, the language of Public Law 94-93 contains no limitations on its application. Had Congress intended to limit the application of Public Law 94-93 to cases involving only retroactive compensation, it could clearly have done so.

Defendant asserts that the term “paid” is capable of different meanings and is a term of art as used in this statute. The court notes that the term “paid” is not defined within the Railroad Retirement Tax Act. Unless the contrary appears, statutory words are presumed to be used in their ordinary and usual sense and with the meaning commonly attributed to them. Caminetti v. United States, 242 U.S. 470, 485, 37 S.Ct. 192, 194, 61 L.Ed.2d 442 (1917). See also, Crane v. Commissioner, 331 U.S. 1, 6, 67 S.Ct. 1047, 1050-51, 91 L.Ed. 1301 (1947). Common definitions which are attributed to the word “pay” include:

a. “to make due return to for services rendered ... ”;

b. “to give in return for goods or service”; and

c. “to make a disposal or transfer of (money).”

Webster’s New Collegiate Dictionary, p. 835 (1979). In the absence of contrary intention, the court must interpret the word “paid” as used in Public Law 94-93 in light of its ordinary meaning.

Even if the term “paid” were capable of a more technical meaning, such term should be construed most favorably to the taxpayer. Tax laws are made to be obeyed and should therefore be intelligible to those who are expected to obey them. White v. Aronson, 302 U.S. 16, 20-21, 58 S.Ct. 95, 97, 82 L.Ed.. 20 (1937).

The court’s function is to construe statutory language to give effect to the intent of Congress. United States v. American Trucking Associations, 310 U.S. 534, 60 S.Ct. 1059, 84 L.Ed. 1345 (1940). The most persuasive evidence of the purpose of a statute is the words chosen by the legislature to give expression to its wishes and such words are given their plain meaning. Id. If the plain meaning leads to absurd, futile or unreasonable results, the court may look beyond the words to the purposes of the act. Id.

In the instant case, Congress has chosen words which give effect to its intended purpose of Public Law 94-93. Further, legislative history surrounding the 1975 amendment indicates Congress intended to have Railroad Retirement Tax Act taxes as a whole imposed on a compensation paid basis. The court cannot restrict its interpretation of Public Law 94-93 simply because Congress did not correctly realize the revenue impact of this amendment. See Eastern Air Lines, Inc. v. C.A.B., 354 F.2d 507 (D.C. Cir.1965).

Elected representatives are presumed to know the law. Director, OWCP v. Perini North River Associates, 459 U.S. 297, 103 S.Ct. 634, 74 L.Ed.2d 465 (1983). Even if the court were to agree with defendant’s assertion that Congressman Staggers misinterpreted the effect of the 1946 amendment, the court would still be inclined to believe that the overwhelming evidence and the legislative history indicate that Congress had the intent to tax compensation under the Railroad Retirement Tax Act on a paid basis. The court must give effect to Congress’ intent.

The court has considered defendant’s arguments regarding the deemed paid rule [§ 3231(e) ] and the multiple employer rule [§ 3211(a)] but does not find these arguments to be persuasive in light of the above discussion. The court hereby finds that Public Law 94-93 must be interpreted in accordance with its plain meaning in light of the legislative history surrounding its enactment. Under Public Law 94-93, Railroad Retirement Tax Act taxes are to be imposed to the extent and at the rate of tax applicable when compensation is paid.

IT IS BY THE COURT THEREFORE ORDERED that defendant’s motion for summary judgment is hereby denied. IT IS FURTHER ORDERED that plaintiff’s motion for partial summary judgment in Case No. 84-2193 is hereby granted. IT IS FURTHER ORDERED that summary judgment is hereby granted in plaintiff’s favor in Case No. 81-2219. Plaintiff is directed to prepare, within twenty (20) days from the date this memorandum and order is filed, a journal entry of judgment in an amount to which both parties agree in that case.


author: JOYCE HENS GREEN, District Judge.

text:
    SECURITIES INDUSTRY ASSOCIATION, Plaintiff, v. BOARD OF GOVERNORS OF the FEDERAL RESERVE SYSTEM, et al., Defendants, Bankers Trust Company, Defendant-Intervenor.
    Civ. A. No. 80-2730.
    United States District Court, District of Columbia.
    Feb. 18, 1986.

      John M. Liftin, James B. Weidner, David A. Schulz, Alejandro E. Camacho, Rogers & Wells, Washington, D.C., for plaintiff.
    Michael Bradfield, Gen. Counsel, Richard M. Ashton, Associate Gen. Counsel, Kay E. Bondehagen, Bd. of Governors of the Federal Reserve System, Washington, D.C., for defendants.
    John W. Barnum, Laura B. Hoguet, W. Michael Tupman, Craig Alan Wilson, White & Case, Washington, D.C., for defendantintervenor.
    G. Duane Vieth, Leonard H. Becker, Daniel I. Prywes, Peter K. Kautsky, Arnold & Porter, Washington, D.C., for Goldman, Sachs & Co.
    Harvey L. Pitt, Henry A. Hubschman, David M. Miles, Fried, Frank, Harris, Shriver & Jacobson, Washington, D.C., for Investment Co. Institute.
    Michael S. Heifer, Russell J. Bruemmer, Wilmer, Cutler & Pickering, Washington, D.C., for America N.T. & S.A., Citibank, N. A., First Nat. Bank of Boston, First Nat. Bank of Minneapolis, NCNB Nat. Bank of North Carolina, Security Pacific Nat. Bank, and Sovran Bank, N.A.
   OPINION AND ORDER

JOYCE HENS GREEN, District Judge.

Before the Court is plaintiff Securities Industry Association’s (“SIA’s”) motion to enjoin defendant-intervenor Bankers Trust Company from further sales of commercial paper on behalf of third-party issuers. On February 4, 1986, 627 F.Supp. 695, this Court issued a Memorandum Opinion and Order (“February 4 Opinion”) holding that such sales violated the Glass-Steagall Act. SIA filed this motion on February 6, following public statements by Bankers Trust that it intended to continue its placement services while it appealed the decision. See Wall St.J., Feb. 5, 1986, at 2, col. 2. Bankers Trust filed its opposition and a cross-motion for a stay of the February 4 Opinion on February 10. The Court heard oral arguments on the motions on February 12. For the reasons set forth below, the Court grants plaintiff’s motion for an injunction, but stays its effect until March 1,1986, and denies Bankers Trust’s motion for a stay of the February 4 Opinion.

At the outset, Bankers Trust raises a jurisdictional objection to the issuance of an injunction, which merits little discussion. The bank contends that this Court lacks personal jurisdiction over it because it intervened only for the limited purpose of defending the legality of defendant Federal Reserve Board’s June 4, 1985 Statement, and for no other purpose. Bankers Trust’s Opposition at 10. This argument is incorrect both as a matter of fact and law. In its motion to intervene, Bankers Trust did not limit its participation to the academic exercise of defending the Board’s June 4, 1985 Statement. The bank stated that its intervention in the case was necessary “[i]n order to defend the legality of its service Motion of Bankers Trust Company for Leave to Intervene as of Right at 2 (emphasis supplied), and noted that “[t]he controversy between the Board and the securities industry is based on the activities of Bankers Trust ... and thus directly and substantially affects [its] business. Bankers Trust stands to gain or lose from this Court’s decision.” Id. at 3 (emphasis supplied). Moreover, the bank simply could not have limited this Court’s jurisdiction over it in the manner it suggests. As an intervenor of right, Bankers Trust became “a full participant in the lawsuit and is [to be] treated just as if it were an original party.” Schneider v. Dumbarton Developers, Inc., 767 F.2d 1007, 1017 (D.C.Cir.1985). It assumed the risk that it would not prevail and that an order adverse to its interests would be entered. Id.; 7A C. Wright & A. Miller, Federal Practice & Procedure § 1920 at 611 (1972). Indeed, the possibility that plaintiff would obtain relief against it was the price Bankers Trust paid for its intervention. District of Columbia v. Merit Systems Protection Board, 762 F.2d 129, 132 (D.C.Cir.1985). The Court, therefore, concludes that it has personal jurisdiction over Bankers Trust sufficient to enjoin its commercial paper sales activities.

Bankers Trust next argues that use of Rule 59(e) is an improper procedural device to expand the scope of relief sought in SIA’s original complaint. The bank cites White v. New Hampshire Department of Employment Security, 455 U.S. 445, 450-51, 102 S.Ct. 1162, 1165-66, 71 L.Ed.2d 325 (1982), a case in which the Supreme Court stated that Rule 59(e) only permits courts to rectify mistakes or reconsider matters properly encompassed in a decision on the merits, and argues that SIA, in moving for an injunction, is seeking something entirely new. White, however, involved a motion under Rule 59(e) for an award of attorney’s fees — a matter clearly beyond those encompassed in the decision on the merits. Here, SIA seeks an injunction to give effect to the Court’s February 4 ruling that Bankers Trust’s commercial paper activities violate federal law. A court’s authority to issue injunctions in aid of its decrees is unquestioned. See United States v. New York Telephone Co., 434 U.S. 159, 172-73, 98 S.Ct. 364, 372, 54 L.Ed.2d 376 (1977); Dugas v. American Surety Co., 300 U.S. 414, 428, 57 S.Ct. 515, 521, 81 L.Ed. 720 (1937); Marshall v. Local Union No. 639, International Brotherhood of Teamsters, 593 F.2d 1297, 1302 (D.C.Cir.1979). Courts necessarily have the power to enter “such orders as’may be necessary to enforce and effectuate their lawful orders and judgments, and to prevent them from being thwarted and interfered with by force, guile, or otherwise.” Mississippi Valley Barge Line Co. v. United States, 273 F.Supp. 1, 6 (E.D.Mo.1967), aff'd sub nom. Osbourne v. Mississippi Valley Barge Line Co., 389 U.S. 579, 88 S.Ct. 692, 19 L.Ed.2d 779 (1968). Bankers Trust has made clear its intent to continue to sell commercial paper, notwithstanding this Court’s ruling that those sales are illegal under the Glass-Steagall Act. An order enjoining further sales is obviously in aid of the Court’s February 4 judgment and is accordingly proper under Rule 59(e).

Bankers Trust’s final procedural objection to issuance of an injunction is that the Glass-Steagall Act does not create a private cause of action and thus a private party such as SIA cannot use it to enjoin the bank. The Court, however, need not reach the question of whether the Act creates an implied right of action, as its authority to issue an injunction does not derive from that statute, but rather from its inherent power to enter orders in aid of its decree. Moreover, this action was brought under the Declaratory Judgment Act, 28 U.S.C. §§ 2201 and 2202. Section 2202 of that Act “empower[s] ... district court[s] to grant supplemental relief, including injunctive relief.” 28 U.S.C. § 2202; see also Edward B. Marks Music Corp. v. Charles K. Harris Music Pub. Co., 255 F.2d 518, 522 (2d Cir.), cert. denied, 358 U.S. 831, 79 S.Ct. 51, 3 L.Ed.2d 69 (1958). Whether or not the Glass-Steagall Act creates a private cause of action, therefore, is simply irrelevant for purposes of determining whether this Court may enjoin Bankers Trust’s sales activities.

Turning then to the appropriateness of an injunction, the Court is aided by its earlier conclusion that Bankers Trust’s activities violate the Glass-Steagall Act. See February 4 Opinion. That Act embodies Congress’ determination that a complete separation of commercial from investment banking necessarily inures to the benefit of the public. See Securities Industries Association v. Board of Governors, 468 U.S. 137, -, 104 S.Ct. 2979, 2985, 82 L.Ed.2d 107 (1984). The Court, of course, is not to second-guess the wisdom of that judgment. Having found that Bankers Trust’s sales of third-party commercial paper contravene the flat prohibitions of the Act, it follows that these sales are detrimental to the public good. Against this presumption of public harm, the bank offers essentially two arguments as to why an injunction should not issue, or, if one does, why it should be stayed: (1) that an injunction would cause even greater harm by disrupting the financial markets; and (2) that an injunction would cause irreparable harm to the bank itself. With respect to the first of these contentions, the bank has offered little evidence to support its prediction that far-reaching turmoil will issue if its activities are enjoined, and indeed, some of the bank’s own statements belie such an assertion. Bankers Trust submitted the affidavit of Kevin F. Burke, Vice President of its Commercial Paper Group, who stated that all of the approximately 50 commercial paper issuers that the bank serves have expressed concern about the disruption to the commercial paper market posed by the Court’s February 4 Opinion. Burke Affidavit at 114. Attached to the affidavit, however, are five presumably representative letters from the bank’s commercial paper clients, not one of which contains any prediction of dire consequences for the commercial paper market generally. More importantly, in arguing that its activities pose little harm to the interests of SIA, Bankers Trust concedes that it accounts for only 2.5 percent of the commercial paper market. Burke Affidavit ¶9. It is difficult to see how an injunction against the bank would “create undesirable turmoil in the market for commercial paper” with “far-reaching repercussions,” given its small share of the market. In addition, nearly half of Bankers Trust’s clients already use more than one commercial paper dealer, Weidner Affidavit, Exh. B, and thus could transfer their business without excessive disruption of their short-term financing needs.

The bank’s second argument is that it will be irreparably harmed if this Court enjoins its activities. An injunction, it contends, will destroy the client base it has built up over the past seven years, since its present customers will not return to it even if the Court of Appeals subsequently finds its services to be legal under the Glass-Steagall Act. In short, the bank claims that an injunction will effectively strip it of its right to an appeal. In advancing this argument, both in opposition to the injunction and in support of its motion for a stay, Bankers Trust relies extensively on Washington Metropolitan Area Transit Commission v. Holiday Tours, Inc., 559 F.2d 841 (D.C.Cir.1977), a case in which the Court of Appeals emphasized that a stay may be appropriate even where the district court finds that the movant has little likelihood of success on the merits. Injunctive relief pending appeal, the Court stated, is appropriate in order to maintain the status quo where serious legal issues are presented, little if any harm would befall the public in the interim, and denial of such relief would cause irreparable harm to the movant. Id. at 844. These same factors are present here, Bankers Trust claims, and counsel against an injunction, or in favor of a stay, while an orderly appeal is taken.

In Holiday Tours, however, the Court noted that the case before it was not one “where the Commission has ruled that the service prformed by appellant is contrary to the public interest.” Id. at 843. That is decidedly not the situation here. Bankers Trust’s activities have been found to violate federal law, and thus are most definitely contrary to the public interest. At bottom, the bank is making the extraordinary request that this Court maintain a status quo that the Court has concluded is illegal. Under these circumstances, Bankers Trust’s showing of irreparable harm would have to be overwhelming indeed in order to justify a stay.

To be sure, Bankers Trust will suffer considerable harm if its placement services are enjoined; at present, it has outstanding over $4 billion of commercial paper that it has placed on behalf of issuers. However, the bank has not demonstrated that the harm it will suffer if an injunction issues will be irreparable. It does not indicate how much income it stands to lose if enjoined from further sales, or what the effect of such a loss of revenues would have on its overall net worth. It is clear, however, that an injunction would not put Bankers Trust out of business. Accordingly, the bank could resume its services if the Court of Appeals ultimately decides they are legal. While this would no doubt entail certain start-up costs, the mere existence of such expenses hardly justifies allowing the bank to engage in activities that this Court has concluded violate federal law. In addition, Bankers Trust’s placement services have been the subject of legal challenge almost since their inception. The bank has forged ahead, however, despite the very real possibility that its activities might be barred under the Glass-Steagall Act, and has generated revenues over a seven-year period from placement services that have now been judged illegal. The bank attempts to portray itself as an innocent victim about to suffer irreparable injury, but it made a conscious choice to engage in business the legality of which was strongly questioned, and has profited for seven years as the Federal Reserve Board and the courts have sought to resolve that question. Bankers Trust cannot now argue that past illegal activities, albeit undertaken in good faith, somehow justify future violations of law.

In short, the bank has failed to demonstrate that the injury it will suffer if a stay is not granted, or if an injunction issues, is so great that this Court must permit it to undertake activities this Court has found to be illegal.

Finally, Bankers Trust argues that injunctions should not issue as a matter of course in every case where a court finds a violation of federal law, and that the application of traditional equitable principles in this case — namely, the balancing of hardships to the parties and the availability of legal remedies — militate against an injunction here. The bank is correct that a finding of a statutory violation does not lead automatically to the issuance of an injunction. Weinberger v. Romero-Barcelo, 456 U.S. 305, 313, 102 S.Ct. 1798, 1803-04, 72 L.Ed.2d 91 (1982). It is also true, however, that in a number of cases courts have found it unnecessary to inquire into the traditional requirements for injunctive relief when statutory violations are involved. See United States v. City of San Francisco, 310 U.S. 16, 31, 60 S.Ct. 749, 757, 84 L.Ed. 1050 (1940) (equitable doctrines do not deprive courts of power to enforce declared congressional policy); National Wildlife Federation v. Andrus, 440 F.Supp. 1245, 1256 (D.D.C.1977) (clear and substantial violation of statute lessens need to balance other equitable factors); Community Nutrition Institute v. Butz, 420 F.Supp. 751, 754 (D.D.C.1976) (where federal statute violated, court need not inquire into traditional requirements for equitable relief); Sierra Club v. Coleman, 405 F.Supp. 53, 54 (D.D.C.1975) (same). A review of the various cases makes clear that, where federal statutes are violated, the guiding principle for determining the propriety of equitable relief is whether an injunction is necessary to effectuate the congressional purpose behind the statute. Put another way, in such cases, the equities to be balanced are not simply those of the private litigants, but also the interests of the public as defined by Congress. Thus, in Weinberger v. Romero-Barcelo, the Supreme Court ruled that the Federal Water Pollution Control Act did not mandate an injunction against naval activities undertaken without compliance with certain permit requirements, since the district court had found that the activities in question did not pollute the waters. The purpose of the statute, the Court stated, was to maintain “[t]he integrity of the Nation’s waters, ... not the permit process.” 456 U.S. at 314, 102 S.Ct. at 1804. Similarly, in Realty Income Trust v. Eckerd, 564 F.2d 447 (D.C.Cir.1977), the Court of Appeals for this circuit refused to enjoin construction of certain buildings where the agency had failed to file an environmental impact statement (EIS) within the time periods prescribed by the National Environmental Protection Act. An injunction would serve no remedial purpose, the court concluded, since a final EIS had been submitted and evaluated before any construction had begun. 564 F.2d at 456-57. Conversely, in Tennessee Valley Authority v. Hill, 437 U.S. 153, 98 S.Ct. 2279, 57 L.Ed.2d 117 (1978), the Supreme Court declined to balance the equities and hardships of an injunction issued against completion of the multi-million dollar Tellico Dam, where operation of the dam would bring about the extinction of the Snail Darter fish, in violation of the Endangered Species Act. Effectuation of Congress’ clear intent, the court found, required issuance of the injunction, regardless of the costs involved. Id. at 193-94, 98 S.Ct. at 2301. So also in United States v. City of San Francisco, the Court refused to weigh the hardships to the parties and affirmed a district court’s injunction against the city’s sales of electric power to a private utility. In granting San Francisco certain lands and rights-of-way in order to enable it to generate hydroelectric power, Congress had expressly prohibited the city from transferring the right to sell the power to a private corporation. “[EJquitable doctrines,” the Court stated, “do not militate against the capacity of a court of equity ... to make a declared policy of Congress effective.” Id., 310 U.S. at 31, 60 S.Ct. at 757.

As discussed at length in the February 4 Opinion, the statute involved here, the Glass-Steagall Act, lays down a series of flat prohibitions designed to forestall a host of “subtle hazards” and to eliminate potential conflicts of interest that Congress believed might arise if commercial banks underwrite or otherwise promote the sale of securities. This Court has found that Bankers Trust’s activities contravene those prohibitions and that precisely those promotional pressures that Congress sought to root out of the commercial banking industry inhere in its sales of commercial paper. This is not a case, therefore, where the violation at issue does not implicate the core concerns underlying the statute, or where alternative regulatory measures are available to protect the public interest. Here an injunction is essential “to make a declared policy of Congress effective.” In other words, Congress has dictated the balance of equities by determining that the public interest requires a complete separation of commercial and investment banking. This Court need not look further.

Accordingly, for all the foregoing reasons, it is hereby

ORDERED that Bankers Trust Company be and it hereby is permanently enjoined from sales of third-party commercial paper in the manner described in the June 4,1985 Statement issued by defendant Board of Governors of the Federal Reserve System.

IT IS FURTHER ORDERED that the effect of this Opinion and Order be and it hereby is stayed until March 1, 1986, in order to allow the bank a reasonable amount of time to discontinue its commercial paper placement services in an orderly fashion and to apply to the Court of Appeals for a stay of the injunction and the February 4, 1986 Opinion pending appeal.

IT IS FURTHER ORDERED that plaintiff Securities Industry Association shall post with the Clerk of the Court a bond of one hundred thousand dollars ($100,000), in cash or surety, within 48 hours of issuance of this injunction, failing which the injunction shall stand immediately dissolved.

IT IS FURTHER ORDERED that Bankers Trust Company shall post with the Clerk of the Court a bond of one hundred thousand dollars ($100,000), in cash or surety, within 48 hours of issuance of this Order, failing which the stay shall stand immediately dissolved.

It is, this 18th day of February, 1986 at 3:40 p.m.

SO ORDERED.

      . Bankers Trust also filed a notice of appeal on February 10, 1986. While a notice of an appeal ordinarily divests a district court of jurisdiction and confers it on the court of appeal, see Griggs v. Provident Consumer Discount Co., 459 U.S. 56, 58, 103 S.Ct. 400, 401-02, 74 L.Ed.2d 225 (1982), that rule does not obtain in a case such as this one, where a party has filed a timely motion under Rule 59 to amend a judgment. See Fed.R.App.P. 4(a); 9 J. Moore’s, Moore’s Federal Practice ¶ 203.11 (1985). In addition, district courts retain jurisdiction to issue orders regarding bonds, or to modify, restore or grant injunctions. Venen v. Sweet, 758 F.2d 117, 120 n. 2; Fed.R.App.P. 7 and 8. Accordingly, Bankers Trust’s notice of an appeal in no way undermines this Court’s jurisdiction to act on plaintiffs motion for an injunction, and it is therefore unnecessary to rule on plaintiffs motion to declare Bankers Trust’s filing of the appeal null and void.

      . The letters, although written by five different companies, state in virtually identical language that each company would be forced to switch to another commercial paper placement agent if Bankers Trust is enjoined, and that each would be unlikely to return to the bank’s services in the event the Court of Appeals upholds the legality of the bank's activities. The letters appear to reflect more the concerns of the bank itself than those of its clients.

      . Bankers Trust earns a commission on the paper it places, and thus the $4 billion of commercial paper it has outstanding does not translate into an equivalent amount of income.


author: BIGGERS, District Judge.

text:
    UNITED STATES of America, Plaintiff, v. James R. BRYANT and Janis B. Bryant, Defendants.
    No. DC85-49-NB-O.
    United States District Court, N.D. Mississippi, Delta Division.
    Feb. 18, 1986.

      Robert P. Crutcher, Oxford, Miss., for plaintiff.
    John W. Whitten, Jr., Sumner, Miss., for defendants.
   MEMORANDUM OPINION

BIGGERS, District Judge.

This cause came before the court on the motion of the defendants (the Bryants) for summary judgment and the cross-motion of the plaintiff (the USA) for summary judgment. Being fully advised in the premises, the court is now in a position to rule on these motions.

This cause involves liability on a promissory note evidencing a loan to the defendants from the Farmers Home Administration (FHA) in the principal amount of $19,-870.00. The defendants personally signed this note as co-obligors with Larry and Jimmy Cook and B & C Farms, Inc. Although the Bryants and the Cooks were sole shareholders in B & C Farms, Inc. at the time of the loan, the Bryants later sold their stock to the Cooks and have no present interest in B & C Farms, Inc. The note in issue, as well as three subsequent notes upon which the Cooks and B & C Farms, Inc. were obligated, were placed in default by the FHA in early 1982. Thereafter, certain farm equipment pledged as security on the $19,870.00 note was sold by public auction. An outstanding balance remains on the note after application of the sale proceeds; thus, the USA seeks a deficiency judgment on behalf of the FHA against the Bryants. The Bryants allege that they were not given proper notice of the sale and that this failure bars or offsets any deficiency. Furthermore, the Bryants contend that several payments by the Cooks and/or B & C Farms, Inc. should be applied to the oldest note, i.e., the $19,-870.00 note in issue, rather than to subsequent notes, and that such application extinguishes the outstanding balance on the note. Thus, the Bryants assert that they are not liable for a deficiency as a matter of law. The USA, in its cross-motion for summary judgment, contends that the Bryants are liable for the full deficiency.

1. Necessity of Notice

The Bryants allege that they had no notice or knowledge of default in payment of the note, of repossession of the collateral, or of the sale until more than four months after the public auction. The USA admits that the Bryants were not given notice of the sale, but contend that notice was unnecessary in the present case.

Miss.Code Ann. § 75-9-504(3) (1972) requires that a secured party give notice to a debtor of a sale of collateral, with certain exceptions not applicable herein. Miss. Code Ann. § 75-9-105(d) (1972) defines “debtor” as including one “who owes payment or other performance of the obligation secured, whether or not he owns or has rights in the collateral____” Id. Thus, the subsequent sale of stock by the Bryants, and their resulting lack of ownership in the collateral, does not affect their right to notice under Miss.Code Ann. § 75-9-504(3). Furthermore, the court finds that the context of Miss.Code Ann. § 75-9-504(3) requires that “debtor” be construed to include, at a minimum, all obligors. See Miss.Code Ann. § 75-9-105(d) (construction of “debtor” to include both owner and obligor where statutory context requires). Accordingly, the Bryants were entitled to notice of the sale.

2. Effect of Lack of Notice

Inasmuch as the Bryants were not given the notice of sale to which they were entitled, the court must determine the effect of this omission.

The Uniform Commercial Code, which has been adopted in Mississippi, does not specifically address the effect of a creditor’s failure to comply with the notice provisions of Miss.Code Ann. § 75-9-504(3). Furthermore, this question has not been specifically considered by the courts of the State of Mississippi. However, this court is aided by Walker v. V.M. Box Motor Co., 325 So.2d 905 (Miss.1976), construed with opinions of other courts which have addressed this issue.

Case law reveals two conflicting doctrines regarding the failure of a secured party to give notice. See generally Annot., 59 A.L.R.3d 401 (1974). One line holds that a secured party may not recover a deficiency judgment when notice provisions are not followed. See, e.g., Skeels v. Universal Credit Corp., 222 F.Supp. 696, 702 (W.D.Pa.1963), vacated on other grounds, 335 F.2d 846 (3rd Cir.1964); Turk v. St. Petersburg Bank & Trust Co., 281 So.2d 534, 536 (Fla.Dist.Ct.App.1973). A conflicting view holds that non-compliance with notice requirements does not bar a deficiency judgment but creates at most a rebuttable presumption that the value of the collateral equals the value of the debt; accordingly, the secured party bears the burden of proving that the fair market value of the goods sold was less than this amount. See, e.g., United States v. Whitehouse Plastics, 501 F.2d 692, 695 (5th Cir.1974); Leasing Associates v. Slaughter & Son, Inc., 450 F.2d 174, 177 (8th Cir.1971). Cf. United States v. Whitehouse Plastics, 501 F.2d at 695 (compliance encouraged under either doctrine).

Although Mississippi case law does not address the effect of failure to given notice in all cases, lack of notice undoubtedly does not bar a deficiency judgment when, as in the present case, the security agreement provides that the obligor shall be liable for any deficiency after application of the proceeds of the sale. Walker v. V.M. Box Motor Co., 325 So.2d at 906. However, failure to give the required statutory notice shifts the burden to the creditor to establish that the sale conformed with “reasonable commercial practices.” In meeting this burden, the erditor may not rely upon the statutory presumption that certain sales are deemed “commercially reasonable,” see Miss.Code Ann. § 75-9-507(2) (1972), since the creditor’s failure to give the required notice renders this presumption inapplicable. Furthermore, the creditor must also assume the burden of proving that the sum received for the property represents its fair market value. 325 So.2d at 906. In the present case, evidence conflicts both as to whether the sale was in accordance with “reasonable commercial practices,” and as to whether the amount received at auction was the fair market value. Accordingly, summary judgment is not appropriate on this issue.

3. Application of Payments

Finally, the defendants argue that certain payments by the Cooks and B & C Farms, Inc. to the FHA were improperly applied to subsequent notes taken out by the Cooks and B & C Farms, Inc., rather than to the oldest note upon which the Bryants were liable. The defendants argue that application of these payments to the oldest note, i.e., the note in issue, extinguishes their liability.

Under Mississippi law, payments first made should be applied to debits first incurred, in the absence of evidence to the contrary. See, e.g., National Surety Corp. v. Jackson Ready-Mix Concrete, 222 So.2d 119, 125 (Miss.1969); Anderson v. Laurel Oil & Fertilizer Co., 228 Miss. 95, 100, 87 So.2d 556, 557 (1956). Exceptions to this rule include that a payee must apply a payment to the debt to which the payor directs, see, e.g., J.R. Watkins Co. v. Buchanan, 149 Miss. 483, 487-89, 115 So. 773, 773-74 (1928); M.G. Travis & Co. v. Mosley, 148 Miss. 368, 374, 114 So. 628, 630 (1927), and that payments derived from a particular source or fund must be applied to the relief of that source or fund unless the parties otherwise agree, see McElwrath & Rogers v. Kimmons & Sons, 146 Miss. 775, 792-94, 112 So. 680, 680-81 (1927).

In the present case, the promissory note signed by the Bryants, as well as by the Cooks and B & C Farms, Inc., provides that the note is “subject to the present regulations of the Farmers Home Administration and to its future regulations not inconsistent with the express provisions hereof.” The Bryants therefore consented that payments would be governed by FHA regulations, and the parties agree that the payments were correctly applied under such regulations. Coincidentally, the FHA regulations appear to cause at least some of the payments in issue to be applied as they would under Mississippi law. Accordingly, the court determines that subsequent payments by the Cooks and/or B & C Farms, Inc. were properly applied under the controlling FHA regulations, and that a balance remains on the $19,870.00 note in issue.

Conclusion

Genuine issues of material fact exist regarding whether the public auction was in accordance with “reasonable commercial practices” and whether the amount received was the fair market value of the property. Accordingly, both the motion of the defendants for summary judgment and the cross-motion of the plaintiff for summary judgment are not well taken and shall be denied. The plaintiff shall bear the burden of proof on both these issues.

Let an order issue accordingly.