author: ALLEN, Chief Judge.

text:
    LERCO CORPORATION, Plaintiff, v. Ernest K. HALEY and Haley’s Drills, Inc., Defendants.
    Civ. A. No. C 81-0311 L(A).
    United States District Court, W.D. Kentucky, Louisville Division.
    Jan. 25, 1983.
    Joseph E. Fineman, Louisville, Ky., for plaintiff; Robert A. Vanderhye, Washington, D.C., of counsel.
    Charles E. Ricketts, Jr., Edward M. Steutermann, Robert I. Cusick, Jr., Louisville, Ky., for defendants.
   MEMORANDUM OPINION AND ORDER

ALLEN, Chief Judge.

Lerco Corporation brings this action for patent infringement and unfair competition against Ernest K. Haley, a former employee. Jurisdiction is claimed under 28 U.S.C. Sec. 1338(a) and (b). Venue is proper under 28 U.S.C. Sec. 1400(b). There is no diversity, Lerco being a Kentucky corporation and Haley being a Kentucky resident. Lerco also asserts a claim for theft of trade secrets under Kentucky law by pendant jurisdiction. Haley denies the infringement charge, contending that Lerco is in violation of the sales agreement under which Lerco claims title to the patents. Haley counterclaims for injunctive relief and damages.

This case is currently before this Court on three (3) motions: 1) Haley’s, motion for partial summary judgment as to a particular group of patents, 2) Lerco’s motion to strike Haley’s counterclaim for damages, and 3) Lerco’s motion to stay the entire proceedings pending the outcome of two (2) related actions which the parties have- filed in state court. After long consideration, this Court denies both Haley’s motion for partial summary judgment and Lerco’s motion to strike Haley’s counterclaim. However, this Court reluctantly sustains Lerco’s motion to stay the proceedings.

This case involves a complicated and confusing sales agreement which Haley signed with his former employer, Louisville Erecting and Rigging Company, Inc., Lerco’s predecessor. On May 22, 1974, Haley and Louisville Erecting contracted for the sale of four (4) patents by Haley to Louisville Erecting. The company was designated as “Lerco” on the sales agreement. This Court will refer to these four patents as the “Group I patents.” By happy coincidence, Louisville Erecting’s representative at the signing of the contract was its president, Ernest K. Haley. Louisville Erecting and Rigging Company, Inc., a Kentucky entity, subsequently merged with Lerco, a Delaware corporation, to form Lerco Corporation, a Kentucky corporation, the current plaintiff. The merger occurred on or about May 22, 1974. In 1980, after the merger, Haley resigned from Lerco and began his own company, Haley’s Drills, Inc., a co-defendant in this case.

The sales agreement provided that Lerco was to pay Haley on the basis of the greater of two alternative payment plans, essentially developed along the lines of a royalty agreement. Also, on May 22, Haley and Lerco executed two other documents, an assignment agreement and an escrow agreement. In the assignment, Haley assigned all interest in the patents to Lerco. The escrow agreement provided that the Stockyards Bank of Louisville, Kentucky, would hold a mortgage agreement between Lerco and Haley until Lerco’s payment was complete. Upon payment, the bank would release the mortgage to Lerco. The bank accepted as escrowee on July 24, 1974.

On May 26, 1974, Haley and Louisville Erecting (Lerco) completed a mortgage agreement. Lerco, as mortgagor, assigned to Haley, the mortgagee, “the whole right, title, and interest in and to the said inventions and in the Letters Patent therefore, ----” as security for the purchase price of the May 22nd sales agreement. Upon payment of the purchase price, Lerco would have the right to extinguish Haley’s interest. Again, as on the other three documents, Haley signed in both his individual and corporate capacities — as both mortgagor and mortgagee.

Haley contends that under the mortgage agreement he had the right to use the patents. Furthermore, Haley contends that Lerco defaulted on its payments under the sales agreement and that, as a result, he (Haley) has the right to sell the patents at a “foreclosure sale.” Moreover, Haley contends that Lerco does not have standing to pursue an infringement action because of the lack of clear title. This contention is the basis of Haley’s motion for partial summary judgment with respect to the Group 1 patents.

The May 22nd agreement also contains clause number 6 which provides:

During such time as Haley shall remain an employee of Lerco, such inventions and devices as are directly attributable to him which shall have been designed and developed at the cost of Lerco and which are subject to patent, shall be patented at the cost of Lerco and shall be purchased by Lerco from Haley for five (5%) per cent of the “Sales Value” of the inventions, as “Sales Value” is defined herein and with payments to be made for the periods commencing with the sales of said inventions, with reports and times for payments and cooperation with respect to foreign patents to be as herein set forth.

Lerco contends that Haley has violated this clause by not transferring to Lerco five (5) patents which he (Haley) has obtained subsequent to the May 22nd agreement. This Court will refer to these patents as the “Group II patents.” Lerco asserts that it is the “equitable owner” of the Group II patents, while Haley asserts that Lerco breached the sales agreement by refusing to pay him royalties on these patents and for refusing to prosecute a patent application for a subsequent invention.

Finally, Lerco contends that Haley has taken customer lists and other business secrets from Lerco in order to start his new business and that he has wrongfully interfered with Lerco’s business by false advertising.

Lerco filed this action in Federal Court on May 22, 1981. On the same day, Lerco filed a companion case in Jefferson Circuit Court (court of general jurisdiction), Jefferson County, Kentucky, alleging breach of contract, tortious interference of business relationships, and theft of trade secrets. The case is numbered 81-CI-04884 and assigned to Division 10, Jefferson Circuit Court. In the suit, Lerco alleges many of the same facts which are alleged in this action and asks that the Kentucky courts direct Haley to convey the Group II patents to Lerco in accordance with the sales agreement. Haley denies the charges, asserts that Lerco has breached the agreement, and counterclaims for damages which allegedly resulted from Lerco’s refusal to pay him his rightful royalties. On May 7, 1982, Haley filed suit in Jefferson Circuit Court (No. 82-CI-06130 assigned to Division 11) against both Lerco and the Stock Yards Bank, demanding an accounting, the balance due under the contract agreement, a lien on the patents, and a judicial sale to satisfy the lien. In both cases, the pleadings are replete with answers, counterclaims, replies, etc.

At the outset, this Court has some doubts as to whether this Court has jurisdiction. Although neither party has raised the issue, this Court can always raise the issue on its own. Federal Rules of Civil Procedure 12(h)(3). This action sounds primarily in contract. Although Lerco asserts a cause of action under 28 U.S.C. Sec. 1338, and claims that Haley is developing machines to which Lerco owns or should own the patent rights, this Court notes that the primary focus of this case is upon the sales agreement of May 22nd, 1974 and the mortgage agreement of May 24, 1974. If the case is, indeed, an action upon a contract, this Court has the ability to look beyond the pleadings and dismiss the case. Ausherman v. Stump, 643 F.2d 715, 716-18 (10th Cir.1981).

The Ausherman court noted that while the plaintiff “had liberally sprinkled the word ‘infringement’ throughout his pleading, the complaint did not set forth a ‘civil action, arising under any Act of Congress relating to patents,’ as required by section 1338(a).” 643 F.2d at 718 (emphasis in original). Instead, the plaintiff’s complaint alleged breach of contract, recision and reformation of a license agreement, restraint of trade, and other related matters in addition to alleging infringement. The Ausherman court held that while the claim stated a complaint in infringement, the actual nature of the claim was in contract and fraud and dismissed the case, there being no diversity. This case bears a remarkable resemblance to the Ausherman case, i.e., a contract dispute and no diversity. Since this Court has decided to stay the proceedings in this case pending the outcome of the state court litigation, and since dismissal is an extreme step, this Court will not dismiss the action at this time. However, this Court expects the parties to address the issue before any future proceedings in this forum.

This Court now turns to the motions submitted for consideration. Haley has moved this Court for partial summary judgment on the Group I patents. Haley Contends that Lerco has defaulted on the payment of royalties under the sales agreement. Therefore, argues Haley, Lerco has no title under which to claim infringement. In the alternative, Haley argues that Lerco is a non-exclusive licensee under the sales agreement and that Lerco does not have standing to assert a patent infringement action.

This Court overrules Haley’s motion for partial summary judgment because there are material facts at issue. Rule 56(c). If for no other reason, there is no agreement as to what payments were completed or the apportionment of these payments. These questions are questions of fact which should be determined before any motion for summary judgment is granted. Rule 56(c).

Haley also contests Lerco’s standing to bring this action, contending that Lerco is a non-exclusive licensee and as such does not have the proper standing to prosecute this action. Life Time Doors, Inc. v. Walled Lake Door Company, 505 F.2d 1165, 1167 (6th Cir.1974). See, e.g., Waterman v. MacKenzie, 138 U.S. 252 (1891). Haley correctly states the Life Time rule. Lerco’s status as an assignee or a licensee does have an effect on its standing to bring an action for infringement. See, e.g. Chisum, The Allocation of Jurisdiction Between State and Federal Courts in Patent Litigation, 46 Washington Law Review 633, 644-48 (1971). However, again, since this Court is staying this action pending resolution of the state court issues, this Court need not reach this issue at this time — especially since neither party has had an adequate opportunity to brief the issue for the Court. Indeed, the state court proceeding may resolve this issue.

Next, Lerco contends that this Court must dismiss Haley’s counterclaim because the counterclaim relates to contract interpretation and this Court, according to Lerco, does not have jurisdiction to hear such a counterclaim. Lerco relies upon the Sixth Circuit’s recent decision in Combs v. Plough, Inc., 681 F.2d 469 (6th Cir.1982). This Court disagrees. In Combs, the plaintiff (Combs) sued for patent infringement, contending that although Plough had title to the patent, Plough had acquired that title fraudulently. The Sixth Circuit held that Combs was unable to bring his action in Federal Court because he did not have title at the outset. Combs needed the exercise of the Court’s “equity jurisdiction” before he (Combs) could assert valid title to the patent and thus maintain an action for patent infringement. 681 F.2d at 470-71.

In this case, Lerco comes before this Court asserting color of title. Thus, according to Lerco, this Court has initial jurisdiction to hear this case. This Court has jurisdiction to hear related state claims by pendant jurisdiction if those claims “derive from a common nucleus of operative fact.” United Mine Workers v. Gibbs, 383 U.S. 715, 725, 86 S.Ct. 1130, 1138, 16 L.Ed.2d 218 (1966).

This Court also has jurisdiction to hear compulsory counterclaims under ancillary jurisdiction even if there is no diversity. Moore v. New York Cotton-Exchange, 270 U.S. 593, 610, 46 S.Ct. 367, 371, 70 L.Ed. 750 (1926); Revere Copper and Brass, Inc. v. Aetna Casualty and Surety Company, 426 F.2d 709, 714 (5th Cir.1970). See, generally, Wright, Law of Federal Courts, 3rd Ed. at Sec. 9 (1976). A compulsory counterclaim “arises out of the transaction or occurrence that is the subject-matter of the opposing party’s claim and does not require for its adjudication the presence of their parties of whom the court cannot acquire jurisdiction.” Rule 13(a).

As the Sixth Circuit noted in Combs and in Dill Manufacturing v. Goff, 125 F.2d 676 (6th Cir.), cert. denied, 317 U.S. 672, 63 S.Ct. 77, 87 L.Ed. 540 (1942), there is a two-part test for determining patent jurisdiction:

(1), the plaintiff initially must have the right to sue for infringement even though his title is challenged and in the suit may be defeated; (2), he must plant his suit upon such right as a patent infringement suit requiring no aid of an equity court as a primary condition for the recovery of damages or the granting of an injunction.

Combs v. Plough, supra, at 471, Dill Manufacturing v. Goff, supra, at 678. See, generally, Chisum, supra.

Unlike Combs, Lerco contends that it has satisfied both prongs of the Dill test. Lerco asserts that it has the right to sue for infringement (although its title is indeed challenged and may be defeated) and Lerco does not assert the need of an equity court as a primary condition to the recovery of damages. This Court emphasized the Dill court’s statement that the plaintiff’s title can be challenged “and in the suit may be defeated.” Supra. Lerco, having brought this suit and placed its title before this Court, cannot now contend that this Court is without jurisdiction to adjudicate all relevant matters arising out of the operative facts of this case. The fact that a matter relating to a contract or a license arises in the course of a case brought under the patent laws does not defeat federal jurisdiction. Healy v. Sea Gull Specialty Company, 237 U.S. 479, 480, 35 S.Ct. 658, 659, 59 L.Ed. 1056 (1915); Excelsior Wooden Pipe Company v. Pacific Bridge Company, 185 U.S. 282, 287-88, 22 S.Ct. 681, 683, 46 L.Ed. 910 (1902); James C. Wilburn & Sons, Inc. v. Brandex Tilt Sash, Inc., 380 F.2d 44, 47-48 (7th Cir.1967); McKnight v. Akins, 192 F.2d 674, 675-76 (6th Cir.1951); Artvale, Inc. v. Rugby Fabrics Corp., 232 F.Supp. 814, 821 (S.D.N.Y.1964), aff’d 363 F.2d 1002, 1006-07 (2nd Cir.1966). 30 A.L.R.3d 1421, 1429. Cf. Aro Corp. v. Allied Witan Company, 531 F.2d 1368, 1371-72 (6th Cir.1976).

Haley’s counterclaim is a compulsory counterclaim, which “shall” be stated in the pleadings. The counterclaim is inherent in the determination of title which is. Lerco’s justification for standing and arises from the same conduct, transaction or occurrence of the claim. Rule 13(a). See, also, Rule 12(b); 35 U.S.C. 261. Haley properly included this counterclaim in his answer. While this Court has some doubt whether there is jurisdiction over Lerco’s complaint, this Court has no doubt that if the Court has jurisdiction over the complaint, the Court has jurisdiction over the counterclaim. Lerco’s motion to strike Haley’s counterclaim is overruled.

Finally, this Court turns to Lerco’s motion to stay the proceedings pending the outcome of the litigation in state court. Lerco contends that there are several aspects of this litigation which should be decided in state court before this Court considers the question of infringement. Haley asserts that prejudicial delay will result. Reluctantly, this Court grants the requested stay.

As noted, this Court has clear jurisdiction to hear the complete case concerning the Group I patents (if jurisdiction exists). Moreover, this Court is convinced that it has satisfactory pendant jurisdiction to hear the related aspects of the Group II patents under pendant jurisdiction. These issues appear to be “such that (the parties) would ordinarily be expected to try them all in one judicial proceeding ...” United Mine Workers v. Gibbs, 383 U.S. at 725, 86 S.Ct. at 1138. However, this Court notes that the Group II patents do fall under the Combs rule, i.e., Lerco needs equity jurisdiction before clear title can be asserted. There are also questions of state law involving theft of trade secrets, contract interpretation, corporate fiduciary duty and self-dealing, and secured transactions.

This Court also notes that both parties have chosen to file suit in state court and this Court has no grounds to enjoin those actions. 28 U.S.C. Sec. 2283. Atlantic Coast Line Railroad Company v. Brotherhood of Locomotive Engineers, 398 U.S. 281, 294-95, 90 S.Ct. 1739, 1746-47, 26 L.Ed.2d 234 (1970). See, generally, Chism, supra, at 667. This Court will stay this action since there is nothing in this action which must be decided before the state court can reach a decision on the merits of the actions before it. Thiokol Chemical Corporation v. Burlington Industries, Inc., 448 F.2d 1328, 1331-32 (3rd Cir.1971); Product Engineering and Manufacturing, Inc. v. Barnes, 424 F.2d 42, 43 (10th Cir.1970). Cf. Lear v. Adkins, 395 U.S. 653, 89 S.Ct. 1902, 23 L.Ed.2d 610 (1969). The stay will allow the parties to concentrate their activities in one forum of their own choosing. The state action may resolve enough issues to moot this litigation. However, this Court notes that if there is an infringement issue, this Court has exclusive jurisdiction. 28 U.S.C. Sec. 1338(a). This Court will reconsider this stay if either party unduly delays the state court proceedings.

Finally, the parties may always agree to pursue the entire action in this Court. Therefore,

IT IS ORDERED that the defendant’s motion for partial summary judgment be and the same hereby is overruled.

IT IS FURTHER ORDERED that the plaintiff’s motion to strike the defendant’s counterclaim be and the same hereby is overruled.

IT IS FURTHER ORDERED that the plaintiff’s motion to stay these proceedings pending the completion of the outcome of pending proceedings in Jefferson Circuit Court (or the agreement of the parties) be, and the same hereby is sustained.

This is not a final and appealable order.


source: Caselaw Access Project

author: FORRESTER, District Judge.

license: Public Domain

text:
    UNITED STATES of America, Plaintiff, v. REINHARDT COLLEGE, Defendant.
    Civ. A. No. C83-1476A.
    United States District Court, N.D. Georgia, Atlanta Division.
    July 13, 1983.

      Myles E. Eastwood, Asst. U.S. Atty., Atlanta, Ga., for plaintiff.
    Gerald F. Handley, Lokey & Bowden, Atlanta, Ga., for defendant.
   ORDER

FORRESTER, District Judge.

This action is before the court on plaintiff’s motion for partial summary judgment. By this motion plaintiff seeks summary judgment as to defendant’s third, seventh, eighth, ninth, tenth, eleventh, thirteenth, and fourteenth defenses. Defendant has conceded that summary judgment is appropriate as to its tenth, eleventh, and fourteenth defenses, which assert the doctrines of laches, estoppel, and waiver, respectively. Plaintiff’s motion for summary judgment as to these defenses is therefore granted. The parties are also in agreement as to the limitations of plaintiff’s ninth defense — accord and satisfaction — and plaintiff’s thirteenth defense — the doctrine of payment. Subject to the limitations discussed below, plaintiff’s motion for summary judgment as to these defenses is also granted. The only real controversy, then, concerns defendant’s third defense — whether plaintiff’s cause of action is unconstitutional; defendant’s seventh defense— whether the VA requirement at issue in this case violates “academic freedom;” and defendant’s eighth defense — whether plaintiff’s cause of action is barred by the statute of limitations. These three defenses will be dealt with below after a discussion of the relevant facts and the statutory framework.

I. STATUTORY FRAMEWORK.

This action is an effort by the government to recover from defendant overpayments made by the Veterans Administration to veterans and other eligible persons under the Educational Assistance Program, Chapters 34, 35 and 36 of Title 38, U.S.C. Under this program, the Veterans Administration provided educational assistance benefits directly to eligible veterans enrolled in approved courses at Reinhardt College. 38 U.S.C. §§ 1681-1686. In order to be entitled to these benefits the eligible veteran must be enrolled in an approved course of study and, with certain narrow exceptions, must maintain regular attendance. 38 U.S.C. §§ 1772, 1780. If the veteran drops out of the program or does not maintain regular attendance, he is no longer eligible to receive benefits and any money paid in advance must be refunded. 38 U.S.C. § 1780(e). A statutory duty is placed upon the school to report to the VA when a student ceases to maintain regular attendance:

Educational institutions shall, without delay, report to the Administrator in the form prescribed by the Administrator, the enrollment, interruption, and termination of the education of each eligible person or veteran enrolled therein under Chapter 34, 35, or 36.... 38 USC § 1784. See also 38 CFR § 21.4203, 4204.

The statute and regulations impose a clear duty upon the school to report regularly to the Veterans Administration as to the status of the veterans collecting the benefits. The purpose of the statute is clear. Congress intended that the Veterans Administration be notified quickly when any veteran collecting benefits ceased being entitled to those benefits. As compensation for these regular reports, Congress authorized the Veterans Administration to pay the schools a reporting fee. 38 U.S.C. § 1784.

The duty to report attendance is important because if the school does not report that a veteran collecting benefits is not maintaining regular attendance, the benefits may continue even though the veteran is no longer eligible to receive them. Such excess payments are classified as overpayments and are recoverable from the school pursuant to 38 USC § 1785:

Whenever the Administrator finds that an overpayment has been made to an eligible person or veteran as the result of (1) the willful or negligent failure of an educational institution to report, as required by this chapter or chapter 34 or 35 of this title and applicable regulations, to the Veterans’ Administration excessive absences from a course, or discontinuance or interruption of a course by the eligible person or veteran, or (2) false certification by an educational institution, the amount of such overpayment shall constitute a liability of such institution, and may be recovered, except as otherwise provided in section 1784(b) of this title, in the same manner as any other debt due the United States. Any amount so collected shall be reimbursed if the overpayment is recovered from the eligible person or veteran. This section shall not preclude the imposition of any civil or criminal liability under this or any other law. Nothing in this section or any other provision of this title shall be construed as requiring any institution of higher learning to maintain daily attendance records for any course leading to a standard college degree.

During the 1970’s defendant Reinhardt College had in its student body a number of veterans collecting benefits under this program. The college made the applicable reports and certifications to the VA, and the VA relied upon these reports and certifications in awarding the benefits. On July 27, 1977 the VA completed a compliance survey which disclosed that certain veterans had either withdrawn from classes or had lowered their number of hours of courses such that they were not eligible to receive benefits. Because the college had not advised the VA of these changes in the status of the students, the VA notified the college of its potential liability under 38 U.S.C. § 1785. The college raised a number of defenses which were rejected during the administrative process. The administrative process terminated on February 7, 1983 when the college declined to appeal the decision by the Regional Office Committee on School Liability. The government filed its complaint to recover the over-payments under 38 U.S.C. § 1785 on July 13, 1983.

II. THE DEFENSES OF ACCORD AND SATISFACTION AND PAYMENT.

Both sides agree that the government is not entitled to recover from defendant college any overpayment it has collected from the veterans and that the college is entitled to a setoff of any overpayments the government collects from any of the veterans in the future. This right of setoff is mandated by section 1785 itself. The common law doctrines of accord and satisfaction and payment do not give defendant any further defense. The government’s motion for summary judgment as to these defenses is GRANTED insofar as they would bar the government’s claim for amounts not recovered from the veterans. It is DENIED insofar as those doctrines are coextensive with section 1785. In the event that the government is entitled to a recovery pursuant to section 1785, the government must reimburse the college for any amounts.it has recovered, or will recover in the future, from the individual students.

III. THE STATUTE OF LIMITATIONS.

Defendant’s eighth defense is that plaintiff’s cause of action is barred by the applicable statute of limitations. The statute of limitations for actions brought by the United States is found at 28 U.S.C. § 2415. This statute provides, in relevant part:

(a) Subject to the provisions of section 2416 of this title, and except as otherwise provided by Congress, every action for money damages brought by the United States or an officer or agency thereof which is founded upon any contract express or implied in law or fact, shall be barred unless the complaint is filed within six years after the right of action accrues or within one year after final decisions have been rendered in applicable administrative proceedings required by contract or by law, whichever is later
(b) Subject to the provisions of section 1426 of this title, and except as otherwise provided by Congress, every action for money damages brought by the United States or an officer or agency thereof which is founded upon a tort shall be barred unless the complaint is filed within three years after the right of action first accrues: provided, ... an action to recover for diversion of money paid under a grant program ... may be brought within six years after the right of action accrues.

The government argues that this is an action to recover for diversion of money paid under a grant program and is therefore subject to the six-year statute of limitations provided for such actions in section 2415(b). Plaintiff disagrees that this is an action to recover for diversion of money paid under a grant program and argues that the three-year statute of limitations for normal tort actions applies. In United States v. Gray, 582 F.Supp. 1559 (N.D.Ga.1982) (Ward, J.) this court treated the government’s action for repayment of a debt as “an action to recover for diversion of money paid under a grant program” and applied the six-year statute of limitations. However, the court did not explain its decision, and it is not clear from the opinion that the government’s action was brought under 38 U.S.C. § 1785.

The parties both assume that this is an action in tort and differ only as to whether it is a particular species of tort. However, this court does not believe that this action is properly characterized as one founded upon a tort. In State of Colorado v. Veterans Administration, 430 F.Supp. 551 (D.Col.1977), aff’d, 602 F.2d 926 (1979), cert. denied, 444 U.S. 1014, 100 S.Ct. 663, 62 L.Ed.2d 643 (1980), the court treated the reporting duty of the college as contractual in nature. See 430 F.Supp. at 558. If the cause of action is founded upon “any contract express or implied in law or fact” then the six-year statute of limitations provided by subsection (a) of section 2415 applies. This court agrees with the District Court of Colorado that the cause of action here is contractual in nature. Although the statute and regulations require the school to submit reports on the status of enrolled veterans and eligible persons, the school is paid a fee for these reports. The duty owed by the college to report promptly and accurately any changes in status of the students it has certified as eligible for benefits is contractual in nature. The damages for breach of this duty are also contractual in nature.

Although Congress stopped short of imposing upon a college strict contractual liability for any breach and provided instead that the college would be liable only where its failure to report was due to willfulness or negligence or where it had reported falsely, the court does not believe that the mere use of these terms converts the action from a contract action into a tort action. The court holds, therefore, that the applicable statute of limitations in a suit by the government to recover from an educational institution overpayments of educational benefits pursuant to 38 U.S.C. § 1785, the applicable statute of limitations is the six-year statute of limitations provided by 28 U.S.C. § 2415(a).

Section 2415(a) provides that the action must be filed “within six years after the right, of action accrues or within one year after final decisions have been rendered in applicable administrative proceedings required by contract or by law, whichever is later ____” The general rule in contract actions is that the cause of action accrues at the time of the breach. United States v. Kass, 740 F.2d 1493 (11th Cir.1984). The breaches giving rise to liability in this case occurred whenever the college failed to perform its duty to report a change in status as to each student. However, section 2415(a) incorporates the tolling provision of 28 U.S.C. § 2416(c):

For the purpose of computing the limitations periods established in section 2415, there shall be excluded all periods during which—
(c) facts material to the right of action are not known and reasonably could not be known by an official of the United States charged with the responsibility to act in the circumstances____

Thus, section 2416 tolled the running of the six-year period until the material facts were known, or reasonably should have been known, by an official of the United States charged with the responsibility to act in the circumstances. This occurred when the government completed its compliance audit on July 25, 1977. Since the complaint was filed on July 13, 1983, within six years of the time the cause of action accrued, it is not barred by the statute of limitations.

The court notes that section 2415(a) provides alternate limitations periods: either six years from the time the cause of action accrued or one year from the time final decisions have been rendered in applicable administrative proceedings required by contract of law, whichever is later. The Regional Office Committee on School Liability issued its decision imposing liability on defendant college on January 7, 1983. This decision became the final agency decision when the college waived its right of administrative appeal on February 7, 1983. The government had one year from that date in which to file suit. This action was filed well within that period and is therefore timely.

Because this action was filed within the applicable statute of limitations, plaintiffs motion for summary judgment as to defendant’s statute of limitations defense is GRANTED.

IV. THE CONSTITUTIONALITY OF 38 U.S.C. § 1785.

Defendant has challenged in its correspondence, its answer to the complaint, its responses to plaintiff’s interrogatories, and in its response to plaintiff’s summary judgment motion, the constitutionality of 38 U.S.C. § 1785. Defendant has yet, however, to explain to the government or to this court why it believes the statute is unconstitutional. A party opposing a motion for summary judgment “may not rest upon the mere allégations or denials of his pleading, but his response, by affidavits or as otherwise provided in this rule, must set forth specific facts showing there is a genuine issue for trial.” Fed.R.Civ.P. 56(e). This applies as much to arguments of law as it does to assertions of fact. Defendant cannot wait until trial to ambush the government with a surprise argument as to the constitutionality of the statute. Defendant placed the constitutionality of the statute in issue in its pleadings, and the government has moved for summary judgment' thereon. The government has produced case authority .supporting the constitutionality of the very statute in issue. The burden is on the defendant to produce at least an argument challenging the constitutionality of the statute. This the . defendant has not done. In the absence of any argument by defendant setting forth grounds why the statute should be declared unconstitutional, this court finds, in accordance with State of Colorado v. Veterans Administration, 430 F.Supp. 551 (D.Col.1977), aff'd, 602 F.2d 926 (1979), cert. denied, 444 U.S. 1014, 100 S.Ct. 663, 62 L.Ed.2d 643 (1980), that 38 U.S.C. § 1785 is constitutional. As the court in that case stated:

Placing monetary liability for illegal payments on a party who holds the duty to monitor and report changes in student status — and thereby prevent overpayments — is rationally related to a legitimate government function. Plaintiffs assume the obligation to monitor and report on student status when they participate in the VA educational benefits program. As a simple matter of contractual duty flowing from the school to the state certifying agency to the VA, the schools can be held liable for overpayments. Under the terms of § 1785 plaintiffs will be held liable only when the overpayments are found to be the result of negligence or willfulness in reporting changes in status, or false certification of eligibility. There exists no constitutional infirmity in such a regulation.
Congress clearly has the right to establish a procedure for disbursement of benefits to veterans and others through its enumerated power to raise and maintain an army and navy. The VA Educational Benefit Program was thought necessary to encourage enlistments. Requiring those who voluntarily participate in the program to be responsible for the funds they cause to be disbursed is legitimate. Under the spending power itself, Congress has the authority to place limitations and liabilities on those who have a duty to prevent unauthorized payments and who, through negligence, allow illegal payments to be made. 430 F.Supp. at 558-59.

Since this court finds that 38 U.S.C. § 1785 is constitutional, the government’s motion for summary judgment as to the college’s defense that the statute is unconstitutional is GRANTED.

V. ACADEMIC FREEDOM.

The college has argued that the reporting requirements of section 1784 and the regulations promulgated thereunder somehow violate the principle of academic freedom. The college does not argue that the statute regulates course content or restricts free speech. Rather, the college’s argument is that in order to obtain the information necessary for the reports, the college would have to require its professors to take daily attendance in their classes. Since some professors prefer not to take attendance, a requirement that they do so would violate their academic freedom. As a former Chief Justice of the Georgia Supreme Court long ago said, “[T]he suggestion is pregnant with innovation but barren of law.” Minor v. State, 63 Ga. 318, 321 (1879). For one thing, the statute does not require that the college take daily attendance of its students. In fact, section 1785 provides quite the contrary: “Nothing in this section or any other provision of this title shall be construed as requiring any institution of higher learning to maintain daily attendance records for any course leading to a standard college degree.” What the statute does require is that the college keep track of any student it has certified to the government as being eligible to receive educational benefits under the program and report to the government promptly any interruption or termination of the education of such persons. How the school chooses to collect such information is left up to the school.

Congress has a right to make sure that the persons collecting educational benefits under the program are actually entitled to receive such benefits. Congress can also legitimately require that a college which participates in the program maintain adequate procedures for verifying the continued-eligibility of the students to receive benefits.. In fact, in order to obtain approval of its courses for inclusion in the program, a college must satisfy the state approving agency that it can keep track of attendance. 38 U.S.C. § 1775, which provides for approval of accredited courses, requires that:

(b) As a condition to approval under this section, the State approving agency must find that adequate records are kept by the educational institution to show the progress of each eligible person or veteran and must include as a minimum (except for attendance) the requirements set forth in section 1776(c)(7) of this title.

38 U.S.C. § 1776, which provide for approval of non-accredited courses, provides:

(c) The appropriate State approving agency may approve the application of such institution when the institution and its nónaccredited courses are found upon investigation to have met the following criteria:
(7) Adequate records as prescribed by the State approving agency are kept to show attendance and progress or grades, and satisfactory standards relating to attendance,, progress, and conduct are enforced.

In order to have its course of study approved, the college had to make the showing required by 38 U.S.C. §§ 1775 and 1776. The college warranted to the state approving agency that it could provide the information required by 38 U.S.C. §§ 1775 and 1776. The college cannot now claim that providing such information would violate some principle of academic freedom. If the college feels strongly enough about this supposed academic freedom of not keeping track of its students, it can always decline to participate in the program in the future. But it cannot avoid the responsibilities it has incurred for its participation in the program in the past. The court finds that the requirements at issue in this case do not violate the college’s academic freedom. The government’s motion for summary judgment as to defendant’s defense of academic freedom is GRANTED.

VI. CONCLUSION.

In sum, the government’s motion for partial summary judgment as to defendant’s third, seventh, eighth, tenth, eleventh, and fourteenth defenses is GRANTED. The motion is GRANTED IN PART and DENIED IN PART as to defendant’s ninth and thirteenth defenses.

      . Plaintiff’s brief states that the college waived its right of appeal on February 3, 1983, but the letter to which plaintiff apparently refers is dated February 7, 1983. The court assumes that the latter date is the correct date for the termination of the administrative review process.

      . The court’s conclusion is bolstered by United States v. Kass, 740 F.2d 1493 (11th Cir.1984), in which the court applied section 2415(a) to an action to recover from a doctor overpayments of Medicare benefits. Although there are differences between an action to recover from a doctor overpayments of Medicare benefits and an action to recover from a school overpayments of educational benefits, the court finds the actions sufficiently analogous to support its conclusion that section 2415(a) should apply to this case.

      . In the event that this court has erred in applying 28 U.S.C. § 2415(a), the court holds in the alternative that this action is a suit to recover for diversion of money paid under a grant program and was therefore timely filed within the six-year statute of limitations provided by section 2415(b).


author: HARDY, District Judge.

text:
    Charles T. DRANEY, individually and as representative of a bondholder class, Plaintiff, v. WILSON, MORTON, ASSAF & McELLIGOTT, et al., Defendants.
    No. CIV 79-1029 PHX CLH.
    United States District Court, D. Arizona.
    Aug. 17, 1983.

      F. Pendleton Gaines, III, Alvin H. Shrago, Katherine M. Harmeyer, Evans, Kitchel & Jenckes, P.C., Phoenix, Ariz., R. Alan Stotsenburg, David C. Harrison, R. Alan Stotsenburg, P.C., New York City, for plaintiff and the Bondholder Class.
    Rogers & Wells, Mitchell L. Lathrop, Terrence L. Bingman, San Diego, Cal., Jennings, Strouss & Salmon, John G. Sestak, Jr., Phoenix, Ariz., for defendants Wilson, Morton, Assaf & McElligott; Wilson, Jones, Morton & Lynch; Ernest A. Wilson and Marjorie Wilson; Gerald A. Laster and Jo Laster; Kenneth I. Jones and Judy Jones; James T. Morton; Andrew C. Hall and Katherine S. Hall; Nancy J. Roth and Harry A. Mooney.
    O’Connor, Cavanagh, Anderson, West-over, Killingsworth & Beshears, Donald E. Dyekman, Scottsdale, Ariz., for Jerry and Gudrun Tokoph, IPI of Arizona, Inc., and IPI Community Builders, Inc.
    David S. Shughart, II, Phoenix, Ariz., for defendants Pinal County, Mountainview Estates County Improvement District and Jay and Mary Bateman.
    Gallagher & Kennedy, Michael L. Gallagher, Kevin E. O’Malley, Phoenix, Ariz., for defendants Thomas A. and Josephine McCarville; Stanfield McCarville Coxon Cole & Fitzgibbons; and Stanfield McCarville, Coxon & Cole.
    Brown & Bain, P.A., George E. Hilty, C. Randall Bain, Phoenix, Ariz., for defendant TES Farms and David and Edna Rich.
   MEMORANDUM OPINION AND ORDER

HARDY, District Judge.

This is a class action brought by a bondholder Charles Draney and other absent members of the class of bondholders against 27 defendants, alleging that each violated section 17 of the Securities Act of 1933, 15 U.S.C. § 77q, section 10 of the Securities Exchange Act of 1934, 15 U.S.C. § 78j, and the Arizona Sales of Securities Act, A.R.S. § 44-1991 et seq. In June of 1982, defendant Pinal County moved to dismiss all claims against it. By minute entry of July 21, 1982, the Court granted the motion as to counts 1 and 2 insofar as these counts concerned bonds issued in 1974. The motion was otherwise denied. Pinal County now moves for summary judgment. Based upon the facts and reasoning to follow, this motion will be denied.

FACTUAL BACKGROUND

Summary judgment is proper only when there is no genuine issue of material fact or, viewing the evidence most favorably to the adverse party, the movant is entitled to prevail as a matter of law. Stansifer v. Chrysler Motors Corp., 487 F.2d 59, 63 (9th Cir.1973). The plaintiff and the defendant Pinal County (County) present statements of fact indicating that numerous questions of fact remain concerning the role of this defendant in the creation of the Mountain View Estates County Improvement District and the issuance of the District’s improvement bonds. Accordingly, the undisputed facts and the facts averred by the plaintiff and supported by affidavits, transcripts, and other evidence will be assumed to be true for the purposes of this motion for summary judgment. These facts may be very briefly summarized as follows:

The County is a political subdivision of the State of Arizona, A.R.S. § 11-113, and is governed by the Board of Supervisors, A.R.S. § 11-201, 11-251. On April 16, 1973, the County Board of Supervisors created the Mountain View Estates County Improvement District pursuant to Article 1, Chapter 5 of Title 11, Arizona Revised Stab utes. An improvement district is a municipal corporation. A.R.S. § 11-706(A). By law the Board of Supervisors of the County govern the District and serve as the District’s Board of Directors. A.R.S. § 11-708.

The Board of Directors approved the issuance of improvement bonds for the purpose of financing public facilities such as roads and sewers benefiting lots within the District. These bonds were issued at closings occurring on June 3, 1974, December 16, 1974, June 9; 1976, July 15, 1976, and February 16, 1977.

When the 1976 bonds were issued, the Board of Directors of the District knew that the bond purchasers would not be informed that the owner of most of the lots of the District was insolvent, that foreclosure proceedings had been filed against the owner, that the owner had been unable to sell any lots in the District within the past year, that the cost of the improvements exceeded the value of the lots to be assessed, and that the state statute authorizing the issuance of the bonds was technically unconstitutional when the bonds were issued. Thereby, the Board of Directors and the District violated the federal securities laws by issuing the bonds as a scheme to defraud and by making false and misleading statements or omissions of material fact.

BASES OF THE MOTION

The County bases its motion for summary judgment upon the following grounds:

First, liability under the federal securities laws cannot be imposed on the County where the County’s only involvement in the violations was the creation of the District and the District is an independent municipal corporation.

Second, imposing liability against the County under the federal securities laws would violate the Tenth Amendment of the Constitution; and

Third, assuming that all federal claims are dismissed, then the remaining issue of state law must be dismissed for lack of subject matter jurisdiction.

DISCUSSION

1. County’s liability under federal securities laws

The first issue of the County’s motion for partial summary judgment is whether the County can be found liable under the federal securities laws, given the County’s relationship to the District and the alleged actions and omissions of the County. In his response memorandum, the plaintiff appears to confine the basis for finding liability against the County to “controlling persons” liability, section 20 of the Securities Exchange Act of 1934, 15 U.S.C. § 78t. This section provides that

(a) Every person who, directly or indirectly, controls any person liable under any provision of this chapter or of any rule or regulation thereunder shall also be liable jointly and severally with and to the same extent as such controlled person to any person whom such controlled person is liable, unless the controlling person acted in good faith and did not directly or indirectly induce the act or acts constituting the violation of cause of action.

The Ninth Circuit has interpreted this term “controlling person” to require proof of (1) a “power to influence” the controlled person and (2) participation, perhaps even “culpable participation,” by the controlling person in the securities violation. Christoffel v. E.F. Hutton & Co., Inc., 588 F.2d 665, 668-69 (9th Cir.1979). Upon establishing prima facie proof of the defendant’s status as a controlling person, the. burden shifts to the defendant to come forward with evidence that its actions were taken in good faith. Id.

Our inquiry therefore is confined to two questions: (1) did the County possess power to influence the District and (2) did the County participate in the violation? Upon its creation pursuant to A.R.S. § 11-706(A), the District becomes a “body corporate with the powers of a municipal corporation.” Despite the legal Separation from the County, however, the County maintains a close relationship to the District by a very firm legal nexus. Section 11-708 of the Arizona Revised Statutes states that “districts organized under this article shall be governed by the board of supervisors of the county in which the district is situated and the board of supervisors shall be deemed to be the board of directors of the district.” The County’s position of governance via its Board of Supervisors establishes a power to influence the District, for the District is “an agency of [the County’s] own creation.” Paradise Valley Water Co. v. Hart, 96 Ariz. 361, 365, 395 P.2d 716, 719 (1964). Furthermore, the plaintiff’s allegations concerning the actions of the Board of Supervisors while acting as directors of the District is sufficient to create a question of material fact concerning the County’s participation in this alleged securities violation. Under the plaintiff’s statement of facts, therefore, the County could be liable as a controlling person under section 20 of the Securities Exchange Act of 1934.

2. Applicability of Tenth Amendment

The County also contends that the Tenth Amendment precludes the imposition of liability against the County under the federal securities laws. The genesis of this argument is found in National League of Cities v. Usery, 426 U.S. 833, 96 S.Ct. 2465, 49 L.Ed.2d 245 (1976), when the Supreme Court held that the Tenth Amendment prohibited the federal government from establishing minimum wages for state employees. In the Court’s view, the Tenth Amendment is a bar to federal legislation that “operate[s] directly to displace the state’s freedom to structure integral operations in areas of traditional government function.” 426 U.S. at 852, 96 S.Ct. at 2474.

The Tenth Amendment, however, is not a bar in this case. Assuming arguendo that public financing through improvement districts are a traditional government function, the federal securities laws do not directly hinder the freedom of the state government to structure and carry out this function. Arizona itself has counterpart securities laws which apply to its departments, political subdivisions and municipal corporation. See State v. Superior Court, 123 Ariz. 324, 599 P.2d 777 (1979). Given that the State regulates itself to the same extent as the federal securities laws, the federal securities laws impose no additional burden which would run afoul of the Tenth Amendment.

IT IS ORDERED denying the defendant Pinal County’s motion for summary judgment.


text:
    UNITED STATES of America, Plaintiff, v. 1967 MOONEY M20-F AIRCRAFT, FAA #N9588M, SERIAL NO. 670165, Together with its Avionics, Apparel and Equipment, Defendant.
    Civ. A. No. C82-2268A.
    United States District Court, N.D. Georgia, Atlanta Division.
    Sept. 30, 1983.

      Barbara V. Tinsley, Asst. U.S. Atty., At-, lanta, Ga., for plaintiff.
    Thomas J. Casurella, Barnes & Browning, P.C., Marietta, Ga., for defendant.'
   ORDER

FORRESTER, District Judge.

This action is before the court on motion by the United States to have the answer of Clifford Doyle stricken because of his failure to file a claim to the defendant property. Rule C(6), Supplemental Rules of Certain Admiralty and Maritime Claims, Federal Rules of Civil Procedure, provides that a claimant is required to “file his claim within ten days after process has been executed, or within such additional time as may be allowed by the court, and shall serve his answer within twenty days after filing of the claim.” Plaintiff shows that at the time Clifford Doyle filed his answer to the complaint of the United States against the defendant airplane, he had not filed in the district court his claim to the property. It is well established that the filing of such a claim is an essential element of standing to contest a forfeiture. See United States v. $364,960.00, 661 F.2d 319 (5th Cir.1981). However, Clifford Doyle shows that he received a letter from the Drug Enforcement Administration informing him of the seizure of the defendant airplane. That letter said: “If you intend to place the matter in the United States District Court to contest the probable cause for this seizure, a claim and cost bond of $250 must be filed with this office ____” Doyle timely filed with the Drug Enforcement Administration documents and affidavits asserting his claim to the defendant airplane. He did not, however, file his claim with the district court.

Since Doyle appears to have made a good faith effort to assert his claim to the airplane, the court is willing to grant him additional time to satisfy the requirements of Rule C. Mr. Doyle is granted an additional ten (10) days to file with the Clerk of Court all documents and affidavits supporting his claim to the airplane. If such claim is not received within ten days, the motion by the United States to strike his answer will be granted.


author: DECKER, District Judge.

text:
    Jerome ABELES, et al., Plaintiffs, v. OPPENHEIMER & CO., INC., et al., Defendants.
    No. 83 C 1468.
    United States District Court, N.D. Illinois, E.D.
    Nov. 7, 1983.

      Roger B. Harris, David C. Roston, Altheimer & Gray, Chicago, 111., for plaintiffs; Perry Goldberg, Specks & Goldberg, Ltd., Chicago, 111., of counsel.
    James E. Beckley, J. David Montague, Richard S. Schultz, James E. Beckley & Associates, Chicago, 111., for defendants.
   MEMORANDUM OPINION AND ORDER

DECKER, District Judge.

I. Introduction.

This is a suit for damages and other relief with respect to two contracts for the sale of Government National Mortgage Association (“GNMA”) certificates. Plaintiffs, Jerome and Betty Abeles (“the Abeleses”), and members of the class they seek to represent, allegedly contracted with defendants, Oppenheimer & Co., Inc., and Oppenheimer Government Securities, Inc. (collectively “Oppenheimer”), to buy GNMA certificates. For reasons discussed in more detail below, the parties did not perform in accordance with those contracts. The case is before the court on defendants’ motion to dismiss pursuant to Fed.R.Civ.P. 12(b)(6) for failure to state a claim upon which relief can be granted.

II. Factual Background.

A GNMA certificate represents an interest in a pool of mortgage loans. In that sense, it is like a share in a mutual fund, which represents an interest in a stock portfolio. The GNMA, an agency of the federal government, guarantees the timely payment of the principal and interest payments on the loans. The issuers are usually mortgage bankers who earn their compensation by organizing the pools. The purpose of the pooling is to make individual long-term mortgages more marketable.-

GNMA certificates pay a fixed interest rate. Consequently, when the market interest rate increases, the market price drops because the bond pays less relative to the market interest rate. Because it may take issuers several months to assemble a pool of loans, the issuers are subject to the risk that the market interest rate could rise and the market value of the loans could fall before the pool is organized. To avoid this risk, issuers sell “forward”: they contract to deliver GNMA certificates on a future date (the “settlement” date) at a price fixed on the date of the contract (the “trade” date). Typically, the issuer sells to a dealer or broker who in turn finds a buyer. The buyer gambles that before the settlement date the price of the certificates will rise.

In addition to this market risk, the sellers and buyers face the risk that the other party to the contract will not perform on the settlement date. If the price of the certificate falls in the interim period, the buyer may refuse to pay the contract price and accept delivery. Conversely, the seller might refuse to deliver the certificates at the contract price if the certificates have risen in value in the interim.

One way to ensure against this risk is to have one or both of the parties deposit with the other or a third party a sum of money to be forfeited if performance is not forthcoming. SEC regulations require such a deposit from the dealer to the issuer in forward sales of GNMA certificates. 24 C.F.R. § 390.52(a)(1). The amount of the deposit may vary as price changes indicate that a greater or lesser sum is necessary to ensure performance. The same device is used to secure performance of commodities futures contracts traded on commodities exchanges; in that situation, the commodities exchanges set the minimum deposit requirements. See Johnson, Commodities Regulation § 1.10, p. 32.

Some GNMA certificates with future delivery dates are traded on organized commodity exchanges and are thus subject to their deposit rules. Bache Halsey Stuart, Inc. v. Affiliated Mortgage Investments, Inc., 445 F.Supp. 644, 646 (N.D.Ga.1977). Many, including those at issue in this case, are not. Because these are contracts between dealers and buyers, rather than issuers and dealers, the SEC regulations which require deposits in GNMA transactions do not apply. Since they occur off the exchanges, the exchange rules also are inapplicable. These dealer-buyer transactions are, however, individually negotiated, id., and the parties may use contract terms to protect themselves from the risk that on the settlement date the other party will refuse to perform.

III. The Complaint.

In ruling on a motion to dismiss, the court must “take [the plaintiffs] allegations to be true, and view them, together with reasonable inferences to be drawn therefrom, in the light most favorable to the plaintiff.” Powe v. City of Chicago, 664 F.2d 639, 642 (7th Cir.1981). The parties join issue in their briefs as to the precise nature of the contracts between them, but these factual disputes are inappropriate when the case is before the court on a motion to dismiss. The facts as outlined below are those which the plaintiffs allege in their complaint.

The Abeleses “purchased” GNMA certificates from Oppenheimer, and the parties agreed that Oppenheimer would deliver the certificates at a later date. Complaint ¶ 15. From the use of the word “purchase,” the court infers that the plaintiffs allege that the parties intended to transfer title to the certificates to the Abeleses as of the trade date, or as soon thereafter as Oppenheimer acquired the certificates. The contracts provided that if the price of the certificates rose before the delivery date, the Abeleses would sell them back to Oppenheimer at a profit. Complaint ¶ 12(d).

The contracts required the buyers to deposit on the trade date cash or securities equal to 10% of the face value of the certificates, on which Oppenheimer would pay interest. Complaint ¶ 12(b), (c). Oppenheimer retained the right to require additional deposits if it deemed its security insufficient in light of changed market conditions. Complaint ¶ 12(e). A failure to provide such additional security would constitute a repudiation of the contract and give Oppenheimer the right to dispose of the certificates on the buyer’s account. Complaint ¶ 12(f). Plaintiffs were not informed that additional security could be. required or that a failure to provide it would result in the sale of the certificates. Complaint ¶ 20.

The price of the certificates purchased by the plaintiffs decreased between the trade date and the delivery date. Complaint ¶ 16. Oppenheimer called for additional security, which was not forthcoming, and Oppenheimer disposed of the certificates at a loss. Complaint ¶ 17.

IV. Discussion.

The plaintiffs bring this suit under Rule 10b-16 (“the Rule”) of the Securities and Exchange Commission (“SEC”), which states in relevant part:

“(a) It shall be unlawful for any broker or dealer to extend credit, directly or indirectly, to any customer in connection with any securities transaction unless such broker or dealer has established procedures to assure that each customer
(i) Is given or sent at the time of opening the account, a written statement or statements disclosing ... (vii) ... the conditions under which additional collateral can be required.”

17 C.F.R. § 240.10b-16. The SEC issued the Rule pursuant to § 10(b) of the Securities Exchange Act of 1934. 15 U.S.C. § 78j(b). The Rule is the SEC’s response to an exemption granted to securities dealers from the requirements of the Truth in Lending Act (“the TILA”), 15 U.S.C. § 1601 et seq. The Senate Report on that legislation stated that:

“The Committee has been informed by the Securities and Exchange Commission that the Commission has adequate regulatory authority under the Securities Exchange Act of 1934 to require adequate disclosure of the cost of such credit [extended on margin transactions]. The Committee has been informed in a letter from the SEC that ‘the Commission is prepared to adopt its own rules to whatever extent may be necessary.’
“In recommending an exemption for stockbroker margin loans in the bill, the committee intends for the SEC to require substantially similar disclosure by regulation as soon as it is possible to issue such regulations.”

S.Rep. No. 392, 90th Cong., 1st Sess. 9 (1967). The Commission adopted the rule on December 1, 1969. Securities Exchange Act Release No. 8733, 34 F.R. 19717.

The defendants raise three arguments in their motion to dismiss: (1) that there is no private right of action under Rule 10b — 16; (2) that Oppenheimer did not “extend credit” to the buyers; (3) that their contracts with the plaintiffs were not “in connection with a securities transaction.” The last two arguments depend upon the nature of the transaction between Oppenheimer and the Abeleses.

A. Private Right of Action.

There is no explicit private right of action in Rule 10b-16. In deciding whether to imply one, the court must determine whether Congress intended for there to be one. Transamerica Mortgage Advisors v. Lewis, 444 U.S. 11, 100 S.Ct. 242, 62 L.Ed.2d 146 (1979). Whether private parties may sue under Rule 10b-16 is unsettled. Two district courts have refused to imply a private right of action. Furer v. Paine Weber, [1982 Transfer Binder] Fed.Sec.L.Rep. (CCH) ¶ 98,701, at 93,493 (C.D.Ca. April 20, 1982); Establissement Tomis v. Shearson Hayden Stone, 459 F.Supp. 1355, 1361 (S.D.N.Y.1978). The United States Court of Appeals for the District of Columbia Circuit and one district court have implied one. Liang v. Dean Witter & Co., 540 F.2d 1107, 1113 n. 25 (D.C.Cir.1976); Haynes v. Anderson & Strudwick, 508 F.Supp. 1303 (E.D.Va.1981).

Neither the Establissement nor the Liang court discussed the question in detail. In Establissement, the court denied a private right of action merely by noting that the plaintiff had “cited no case (and the court is aware of none) holding that a plaintiff may possess a private cause of action for damages under Rule 10b-16.” 459 F.Supp. at 1361. The Liang court was similarly cursory. It concluded in a footnote that there is a private right of action under Rule 10b-16 because it is similar to Rule 10b-5, under which private plaintiffs can sue. 540 F.2d at 1113 n. 25.

The courts in Furer and Haynes discussed the issue in more detail but reached opposite results. Both focused on the relationship of the Rule to the Truth in Lending Act and noted that the impetus for the promulgation of the Rule was Congress’ exemption of securities from the reporting requirements of that statute. Fed.Sec.L.Rep. [1982 Transfer Binder] at 93,495; 508 F.Supp. at 1320. From this the Haynes court inferred that Congress must have intended securities dealers to be subject to the same remedies as are in the TILA, which has an explicit private right of action. That court accordingly implied a private right to sue. Id. The Furer court chose the opposite inference, that Congress may have chosen to require disclosure from dealers by SEC rule rather than the TILA precisely because it did not wish to subject them to private suits. Fed.Sec.L.Rep. [1982 Transfer Binder] at 93,495.

The Furer court was correct that the basis for Congress’ decision to exempt brokers is, in itself, unclear. It may have intended for brokers to be subject solely to administrative enforcement, or it may have exempted them for some other reason. The legislative history says nothing about enforcement with respect to brokers, and the court is thus left without a determinate guide from the TILA as to whether Congress intended for brokers to be subject to private suits.

The courts’ focus on the TILA is not only unproductive; it also seems somewhat misplaced. The language from which the court is asked to imply a private right of action is not in the TILA. It is in a rule promulgated pursuant to an entirely different statute. Congress’ intent with respect to that statute is more relevant, and fortunately more discernible, than its intent with respect to the TILA exemption.

Section 10(b) is an anti-fraud provision which Congress intended to have implemented via SEC rulemaking:

“It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce or of the mails, or of any facility of any national securities exchange—
(b) To use or employ, in connection with the purchase or sale of any security ... any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors.”

15 U.S.C. § 78j(b).

The United States Supreme Court has held that “[i]t is now established that a private right of action is implied under § 10(b).” Superintendent of Insurance v. Bankers Life & Casualty Co., 404 U.S. 6, 13 n. 9, 92 S.Ct. 165, 169 n. 9, 30 L.Ed.2d 128 (1971). The statute by its own terms is to be implemented by rulemaking, and courts have implied a private right of action under at least one of the rules, Rule 10b-5, promulgated pursuant to the section. Id. Rule 10b-5, of course, is a broad anti-fraud provision which closely tracks the language of § 10(b).

Rule 10b-16, like Rule 10b-5, directly advances the purpose of § 10(b). It makes unlawful a particular “manipulative or deceptive device” — the extension of credit with undisclosed terms and conditions. In light of the Supreme Court’s holding in Superintendent of Insurance, it is no longer open to question that Congress intended for there to be a private right of action under § 10(b). Congress designed the statute to be implemented with rules, and Rule 10b-16 is consonant with its purpose. The court concludes, therefore, that a private right of action exists under Rule 10b-16.

B. Nature of the Transaction.

The defendants also base their motion to dismiss on their assertions that Oppenheimer did not “extend credit” to the Abeleses and that their dealings were not in connection with a. securities transaction. If either proposition is true, Rule 10b-16 by its own terms does not apply.

These arguments arise from the parties’ fundamental disagreement as to the nature of the transactions which generated this suit. The Abeleses allege that Oppenheimer sold them GNMA certificates and agreed to deliver them at a later date. The defendants maintain that they did not sell the certificates but rather agreed to consummate a sale at a fixed price at a later date.

If the Abeleses’ allegation that they purchased the certificates is true, the defendants extended credit to them in connection with a securities transaction. If the plaintiffs acquired title to the certificates at any time before payment was due, they owned certificates for which Oppenheimer had paid. They would have owed Oppenheimer money, and that is an extension of credit. In addition, any sale of GNMA certificates is in connection with a securities transaction because it is a security transaction: GNMA certificates are themselves securities. Board of Trade v. Securities and Exchange Commission, 677 F.2d 1137, 1142 (7th Cir.1982).

The court must accept the allegation that the Abeleses purchased the certificates as true for the purposes of a motion to dismiss. Powe v. City of Chicago, 664 F.2d at 642. Oppenheimer makes much of their contention that usually GNMA contracts contemplate neither delivery nor transfer of title. The “usual” way in which forwards are traded is not, however, an issue in this case. The Abeleses and Oppenheimer did not trade standardized contracts in a structured environment such as an exchange. These were individually negotiated contracts. The parties now disagree over the meaning of their contracts; but resolution of their factual issue is inappropriate on a motion to dismiss.

IV. Conclusion.

For the reasons stated above, the court denies the defendants’ motions to dismiss.


author: HOBBS, District Judge.

text:
    Timothy L. JOYNER, Plaintiff, v. AAA COOPER TRANSPORTATION, Defendant.
    Civ. A. No. 82-884-N.
    United States District Court, M.D. Alabama, N.D.
    Nov. 18, 1983.

      L. Gilbert Kendrick, R.B. Moore, Montgomery, Ala., for plaintiff.
    Lange, Simpson, Robinson & Somerville, Peyton Lacy, Jr. and Harry L. Hopkins, Birmingham, Ala., for defendant.
   MEMORANDUM OPINION

HOBBS, District Judge.

Plaintiff, a former employee of defendant, brought this action under 42 U.S.C. § 2000e-2 for alleged sexual harassment during his employment with defendant. Plaintiff contends that this condition caused plaintiff’s layoff and subsequent termination from employment. This Court has jurisdiction by virtue of 28 U.S.C. § 1343. This matter was tried before the Court without a jury on September 14, 1983. The Court, having considered the evidence presented at trial, and the arguments of the parties as reflected in their post-trial briefs, now enters this memorandum opinion pursuant to Rule 52 of the Federal Rules of Civil Procedure, reflecting its findings of fact and conclusions of law. For the reasons stated herein, the Court finds for the plaintiff.

FINDINGS OF FACT

AAA Cooper Transportation, defendant in this cause, is a motor carrier operating in interstate commerce. It operates terminals in various states, and during the time in question, operated a freight terminal in Montgomery, Alabama. Plaintiff began employment with defendant in March 1980 as a shop mechanic. At that time the wage rate for mechanics was $7.45 per hour. Sometime thereafter, plaintiff requested a transfer from shop mechanic to the employment classification known as P & D driver. The job functions of a P & D driver include loading and unloading freight at the terminal as well as delivering freight to and from destinations within the city and its immediate surroundings.

Approximately six or seven months after plaintiff had first begun his employment with defendant, while he was still employed as a shop mechanic, plaintiff was approached by the terminal manager at a local drive-in restaurant. Plaintiff testified at trial that the terminal manager invited him to enter his automobile. While inside the automobile, the terminal manager allegedly placed his hands on plaintiffs private parts and asked plaintiff to engage in homosexual activities. Plaintiff emphatically refused to accede to the requests and left the automobile.

Sometime after this incident, plaintiff had an encounter with Earl Dove, chairman of the board at AAA. When Mr. Dove asked plaintiff about his employment, plaintiff told him about the occurrence with the terminal manager. Mr. Dove expressed his shock and disbelief concerning this matter, and assured plaintiff that he would investigate further. Promptly upon Mr. Dove’s return to company headquarters in Dothan, Alabama, he called Mr. William Buntin, general manager for the company, and relayed to him the information he had received from plaintiff’s accusations, and the terminal manager denied that it had ever occurred. Mr. Buntin testified that he did not believe plaintiff’s allegations, but nevertheless warned the terminal manager that the allegation made by plaintiff was a serious matter in violation of company policy and that if there were any future allegations, he would be immediately suspended pending investigation by company officials. Mr. Buntin later telephoned plaintiff that the problem had been resolved, and it would not recur.

Shortly after his conversation with Mr. Buntin, the terminal manager approached plaintiff and told him that he knew plaintiff had complained to officials at the Dothan headquarters about the homosexual advance. In his direct testimony plaintiff stated that the terminal manager told him during this meeting that if he could find a reason to fire plaintiff he would. However, on cross-examination, plaintiff recanted and testified that although the terminal manager never made exactly that statement, he interpreted the statement to indicate such an intention.

On October 19, 1981, plaintiff transferred from the shop mechanic classification to the pickup and delivery driver classification when a position became vacant in the latter classification. Although this transfer resulted in a wage increase from $7.45 per hour to $9.30 per hour, plaintiff testified at trial that he strenuously objected to the transfer to Everett Norris, the assistant terminal manager, because he feared retribution from the terminal manager, who would be his direct supervisor at this new job. However, Mr. Norris testified that plaintiff never expressed to him any reluctance to assuming this new position as a P & D driver. As a result of the transfer; plaintiff, pursuant to company policy, relinquished all seniority he had acquired while working as a shop mechanic and became the lowest in terms of seniority of the P & D drivers.

Plaintiff continued working as a P & D driver until December 18, 1981, at which time plaintiff was laid off because of a slowdown in business. On this same date, three and possibly four other P & D drivers with more seniority than plaintiff were laid off for the same reason. Testimony offered by several witnesses at trial indicated that layoffs during this time of the year were common in the trucking industry generally and at AAA. Plaintiff at no time was recalled to work, and on January 29, 1982, plaintiff lost his “regular status” as an employee and was terminated.

After his layoff on December 18, 1981, plaintiff made several inquiries about reemployment. First, plaintiff asked Mr. Norris whether he could reacquire his former position as a mechanic in the shop department. He was correctly told by Mr. Norris that under company policy this would be impossible because another man had been hired as a mechanic and plaintiff had lost his seniority as a mechanic and hence could not “bump” the new employee and reacquire his old job. Next, plaintiff testified that he called the terminal manager several times to find out when he could return to work, and, during their last conversation, the terminal manager emphatically told plaintiff that there was no work available for him. Plaintiff told the terminal manager that he had talked with other drivers of AAA, and they had advised him that business had increased at AAA sufficiently so that work was available for plaintiff. The terminal manager told plaintiff that he could not come back to work and that he did not owe him “a damn thing.” Finally, plaintiff contacted Mr. Buntin about the possibility of employment with the company as a line haul driver; however, Mr. Buntin told plaintiff that his personnel file indicated that he was not qualified to work as a line haul driver. Despite these and other efforts by plaintiff to return to work, the terminal manager refused to recall plaintiff, Citing a depressed demand for trucking services as the basis for this refusal. Yet, shortly after plaintiff lost his regular status on January 29, 1982, Gaylan Grant and Ernest Battle were recalled to work. In fact, the personnel records of the company indicate that plaintiff was the only full-time P & D driver at the Montgomery terminal who was not recalled from layoff. More significantly, a new employee, Donald Webb, was hired as a P & D driver on March 15, 1982.

Discouraged about his future with defendant, plaintiff sought work elsewhere. On April 28, 1982, plaintiff, while employed at Flavorich, Inc., filed a charge of sex discrimination against AAA with the EEOC. After an administrative investigation, the EEOC issued its determination finding no probable cause to believe plaintiffs allegations were true. After receiving his. right to sue letter from the EEOC, plaintiff timely filed suit in this Court on December 20, 1982.

CONCLUSIONS OF LAW

Title VII of the Civil Rights Act prohibits discrimination on the basis of sex. Although the language of Title VII does not specifically address the issue of whether sexual harassment constitutes discrimination on the basis of sex, it is now well established that Title VII does proscribe such conduct. See, e.g., Henson v. City of Dundee, 682 F.2d 897 (11th Cir.1982); Bundy v. Jackson, 641 F.2d 934 (D.C.Cir.1981); Tomkins v. Public Service Electric & Gas Co., 568 F.2d 1044 (D.C.Cir.1977). See generally, Note, Sexual Harassment and Title VII: The Foundation for Elimination of Sexual Cooperation as an Employment Condition, 76 Mich.L.Rev. 1007 (1978). Perhaps prompted by the judicial adoption of sexual harassment as a theory of recovery for sex discrimination, the EEOC Guidelines, 29 C.F.R. § 1604.11 (1982), take the position that sexual harassment is a violation of Section 703 of Title VII. While the decisions holding that unwelcomed sexual harassment violates Section 703 have dealt with harassment in the heterosexual context, this Court determines that unwelcomed homosexual harassment also states a violation of Title VII.

As in all Title VII disparate treatment cases, the Court must apply a three-part analysis to the evidence presented. Texas Department of Community Affairs v. Burdine, 450 U.S. 248, 101 S.Ct. 1089, 67 L.Ed.2d 207 (1981). In Burdine, the Supreme Court summarized this three-part analysis of the burdens and order of proof as follows:

First, the plaintiff has the burden of proving by the preponderance of the evidence a prima facie case of discrimination. Second, if the plaintiff succeeds in proving the prima facie case, the burden shifts to the defendant “to articulate some legitimate, non-discriminatory reason for the employee’s rejection.” Third, should the defendant carry this burden, the plaintiff must then have an opportunity to prove by a preponderance of the evidence that the legitimate reasons offered by the defendant were not its true reasons, but were a pretext for discrimination.

Id. 450 U.S. at 252-53, 101 S.Ct. at 1093. Additionally, Burdine teaches that the burden of persuasion remains at all times with the plaintiff. With this in mind, the Court proceeds to analyze the prima facie case in Title VII sexual harassment claims.

I. THE PRIMA FACIE CASE.

In Henson v. City of Dundee, 682 F.2d 897 (11th Cir.1982), the court established the essential elements of the prima facie case of sex discrimination based upon unwelcomed sexual harassment. In determining that unwelcomed sexual harassment in the workplace violates Title VII, the court established two branches of this cause of action. First, sexual harassment which creates a “hostile or offensive work environment” is actionable under Title VII. Under this branch, an employee need not prove the loss of a tangible job benefit in order to recover.

A pattern of sexual harassment inflicted upon an employee because of [his or] her sex is a pattern of behavior that inflicts disparate treatment upon a member of one sex with respect to terms, conditions, or privileges of employment. There is no requirement that an employee subjected to such disparate treatment prove in addition that [he or] she has suffered tangible job detriment.

Id. at 902. The second branch of sexual harassment which gives rise to a cause of action under Title VII for sex discrimination is commonly known as quid pro quo sexual harassment. Under this branch, an employee must demonstrate a loss of tangible job benefits due to his or her refusal to succumb to a supervisor’s demand for sexual consideration in exchange for those job benefits. Because there was evidence of only one incident of unwelcome and unsolicited sexual harassment involving plaintiff, the Court considers the evidence solely on the issue of quid pro quo sexual harassment. The Court does not agree with plaintiff’s contention that as to him there existed an abusive working environment created by severe and persistent sexual harassment.

In order to establish a violation of Title VII on the grounds of quid pro quo sexual harassment, the Court must consider whether the evidence satisfied the five requisite elements of quid , pro quo harassment. See Henson v. City of Dundee, 682 F.2d at 909.

Unquestionably, plaintiff satisfied the first three elements; viz., he was a male, he was .subjected to unwelcome sexual harassment, and since the evidence established the terminal manager’s homosexual proclivities, the harassment to which plaintiff complained was based upon sex. The Court also finds that plaintiff satisfied the fourth element in that the evidence was sufficient to show that plaintiff’s rejection of the homosexual overtures ultimately caused a tangible job detriment. Finally, employer liability by virtue of respondeat superior naturally follows from a finding that the other four elements are present.

The Henson court further refined the prima face case for quid pro quo sexual harassment by adjusting the five elements and formulating a test which more closely tracks the language of McDonnell Douglas v. Green, 411 U.S. 792, 802-04, 93 S.Ct. 1817, 1824-25, 36 L.Ed.2d 668 (1973). See Henson v. City of Dundee, 682 F.2d at 911, n. 22. However, plaintiff’s injury in Henson — the denial of an opportunity to attend the police academy — is different from plaintiff’s injury here — failure to be recalled from economic layoff when a position became available. Consequently, the test elicited in Henson needs slight modification here. To establish a prima facie case of illegal refusal to recall plaintiff from layoff in retaliation against plaintiff’s refusal of sexual advances, plaintiff must show (1) he is a member of the protected class; (2) he was subjected to unwelcome sexual harassment to which members of the opposite sex had not been subjected; (3) after layoff, he requested to return to work for which he was qualified; (4) that despite his qualifications he was rejected; (5) after his layoff a position became available and the employer filled the position with another employee who possessed plaintiff’s qualifications, despite plaintiff’s expressed desire to return to his former position. After considering the evidence presented at trial, the Court concludes that plaintiff has met his McDonnel Douglas burden of proving a prima facie case. First, plaintiff is a member of the protected class (males). Second, the evidence is clear that plaintiff did not solicit or incite the homosexual overtures of the terminal manager; rather, plaintiff repulsed the terminal manager and stated that he would resign before submitting to the homosexual advances. Third, the evidence is uncontroverted that plaintiff made several requests to return to work after his layoff on December 18,1981. Fourth, it is equally clear that plaintiff has never been recalled to work. Fifth, the evidence disclosed that despite plaintiff’s continued requests to return to work, part-time employee Ruben Rogers was recalled on March 1, 1982, and a new employee, Donald Webb, was hired on March 15, 1982 to fill plaintiff’s former position. There was no evidence presented that Rogers or Webb was more qualified than plaintiff or that plaintiff’s prior work performance as a P & D driver was inadequate.

II. DEFENDANT’S BURDEN OF PRODUCTION

Having determined that plaintiff has established a prima facie violation of Title VII, the burden of production now shifts to defendant to articulate a legitimate, nondiscriminatory reason for its refusal to recall plaintiff from layoff. This burden requires defendant to articulate a reason that “raises a genuine issue of fact as to whether it discriminated against plaintiff.” Lincoln v. Board of Regents of The University System of Georgia, 697 F.2d 928, 937 (11th Cir.1983), quoting, Texas Department of Community Affairs v. Burdine, 450 U.S. 248, 254, 101 S.Ct. 1089, 1094, 67 L.Ed.2d 207 (1981).

Defendant introduced evidence that the company suffered a decline in business in mid-December of 1981. Due to this business decline, officials at the Montgomery terminal felt that a reduction in force was necessary. Pursuant to company policy as reflected in the rules concerning seniority, four employees — Gaylan Grant, Ernest-Battle, Ruben Rogers, and plaintiff — were laid off from work because they were the lowest employees in terms of accumulated seniority in the P & D driver classification. Business remained depressed for a period exceeding six weeks and these four employees remained unemployed.

Defendant also introduced evidence that the company had adopted a rule which provided that an employee who worked less than thirty-five productive hours for eight consecutive weeks lost his “regular status” as an employee and was then subject to termination. The evidence clearly established that for two weeks prior to his layoff, plaintiff had failed to work thirty-five productive hours. These two weeks, coupled with six weeks of unemployment with the company due to economic layoff, resulted in eight consecutive weeks in which plaintiff failed to work for more than the required thirty-five hours. Consequently, and in accordance with this company policy, plaintiff lost his regular status as an employee with the company and was terminated.

Having heard the evidence introduced by defendant, and mindful that defendant carries only the burden of production and not the burden of persuasion at this stage, the Court concludes that defendant has succeeded at step two, i.e., it has rebutted the presumption of discrimination that arose when plaintiff established its prima facie case by articulating a legitimate, nondiscriminatory reason for its actions. Therefore, the burden of production is merged with the burden of persuasion and both now rest with the plaintiff to prove that defendant’s articulated reasons were pretextual.

III. PLAINTIFF’S BURDEN OF PROVING PRETEXT

The burden now rests with plaintiff to prove by a preponderance of the evidence that the reasons proffered by defendant for not recalling him from layoff were pretextual and not the true reasons for the employment decision. See, e.g., Lincoln v. Board of Regents of the University System of Georgia, 697 F.2d 928, 938 (11th Cir.1983); Pittman v. Hattiesburg Municipal Separate School District, 644 F.2d 1071, 1076 (5th Cir.1982). Title VII is violated if plaintiff can prove at this stage that an impermissible factor played a significant role in defendant’s employment decision. Whiting v. Jackson State University, 616 F.2d 116, 121 (5th Cir.1980). After considering the evidence introduced at trial, the Court concludes that plaintiff has carried this burden and defendant’s decision not to reinstate plaintiff to his former position when it became available violated Section 703 of Title VII.

The Court does not attach any improper discriminatory intent on the part of defendant to reduce its work force on December 18, 1981, by laying off plaintiff and the other employees. A significant decline in business, coupled with the documented company policy that employees with the least unit seniority are the first to be laid off in an economic decline fully warranted this employment decision. Nor does the Court attach any discriminatory intent to the fact that Grant and Battle were recalled from layoff before plaintiff in that the personnel records indicate that both were senior to plaintiff. However, the Court does find a violation of Section 703 when defendant recalled Ruben Rogers on March 1, 1982, when a position became available, despite the fact that plaintiff had continually expressed his desire to be reinstated once an opening occurred.

Mr. Norris testified at trial that while the dispatcher was primarily responsible for deciding when an additional P & D driver was needed to meet expanding demands for business, the final decision to recall someone from layoff or to hire a new employee to meet the company’s needs rested with the terminal manager. The testimony revealed that plaintiff expressed to the terminal manager his desire to return to work on several occasions, and on each occasion, plaintiff was told no work was available. In his last conversation with plaintiff, the terminal manager told plaintiff that he could not return to work and that he did not owe plaintiff “a damn thing.” The Court finds that this refusal to recall plaintiff when a position became available on March 1, 1982, was contaminated by plaintiff’s earlier refusal to succumb to the terminal manager’s homosexual advances and by the terminal manager’s anger at plaintiff’s report of that incident to the president of the company. The terminal manager’s homosexual overtures to plaintiff and his angry reaction to plaintiff’s reporting the encounter were significant factors in the decision of the terminal manager not to recall plaintiff from layoff. In the view of this Court, plaintiff’s bid to return to work would not have been rejected but for plaintiff’s refusal to cooperate with the terminal manager’s homosexual demands and his action of reporting the incident to Mr. Dove. In other words, in the Court’s opinion there is a clear nexus- between the rejection of the sexual harassment and the tangible job detriment.

Defendant did not introduce any evidence at trial that plaintiff's work performance as a P & D driver was unsatisfactory nor does it assert this in its post-trial brief. Rather, defendant justified its refusal to recall plaintiff solely on the basis that plaintiff had lost his “regular status” and was terminated. However, the personnel records introduced at trial clearly show that Ruben Rogers, a part-time employee who had never even obtained “regular status” was recalled to work on March 1, 1982. Consequently, the Court finds that the reason articulated by defendant for failing to recall plaintiff, i.e., that he had lost his regular status, is mere pretext.

The Court cannot understand why AAA would fail to recall an experienced employee whose work had always been satisfactory and who had made it abundantly clear that he desired re-employment. While plaintiff’s loss of regular status afforded AAA an apparent nondiscriminatory excuse not to recall plaintiff, the evidence introduced at trial clearly demonstrates that this excuse is pretextual.

IV. RELIEF

Having found that a violation of Title VII occurred when defendant failed to recall plaintiff from layoff on March 1, 1982, and, instead recalled Ruben Rogers as the new P & D driver, the Court concludes that plaintiff is entitled to reinstatement to his former position with defendant as well as back wages lost by virtue of defendant’s discriminatory act. In light of the conflicting evidence concerning the average number of hours plaintiff worked as a P & D driver, the Court determines that forty hours per week is appropriate. Therefore, plaintiff's weekly salary was approximately $372.00. Since plaintiff missed eighty-nine weeks of employment with defendant (measured from March 1, 1982 to November 4, 1983), he lost $33,-108.00 in wages. Recognizing that plaintiff has a- duty to mitigate his damages under Title VII, Bourque v. Powell Electrical Manufacturing Co., 617 F.2d 61, 65-66 (5th Cir.1980), the Court will deduct from plaintiff's recovery of back wages the amount of $28,161.61, which represents plaintiff’s interim earnings since the date of his termination. Therefore, plaintiff shall recover the sum of $4,947.39 from defendant as back wages.

A separate judgment will be entered in accordance with this memorandum opinion.

      . Actually, during the time in question, the freight terminal where plaintiff was employed was owned and operated by AAA Motor Lines. Prior to trial, AAA Motor Lines merged with another company to form AAA Cooper Transportation. Defendant does not contest its liability as a successor corporation.

      . Plaintiffs testimony concerning this event was buttressed by the testimony of Danny Wyatt and Thomas Earl Hall, both of whom related similar accounts of homosexual encounters with the terminal manager. Because the Court finds plaintiffs allegations concerning these homosexual advances toward plaintiff to be uncontested for purposes of this trial, there is no compelling reason to set out in detail the relationships Wyatt and Hall allegedly developed with the terminal manager.

      . The defendant’s seniority rule is found at page 15 of the Employee Handbook. This rule provides, inter alia, the following: "[U]nit seniority exists as a basis for unit layoffs and work assignments. Economic layoffs are based on seniority only ... When an employee transfers from one unit to another or one terminal to another, [he] will be placed on the bottom of the seniority list of that unit.”

      . The testimony at trial concerning the number and identity of employees laid off at this time was disputed. Witnesses for the defendant testified that three P & D drivers, other than plaintiff, were laid off on December 18, 1981, namely, Gaylan Grant, Ernest Battle, and Ruben Rogers. Plaintiff testified that in addition to these three employees, Thomas Hurley was also laid off from work as a P & D driver.

      . The following company rule appears at page 14 of the Employee's Handbook:
      A regular employee is one who has received productive pay for 35 or more hours in each week for eight consecutive weeks ... Loss of regular status occurs when an employee receives productive pay for less than 35 hours in each week for eight consecutive weeks due to economic layoff, sickness, or injury.
      The testimony at trial was undisputed that for the week ending December 11, 1981, plaintiff worked 33.1 hours and for the week ending December 18, 1981, plaintiff worked only 28.5 hours. On December 18, 1981, plaintiff, the junior employee working on the dock, was laid off from work because of a slowdown in business. For the next six weeks, plaintiff did not work. Consequently, on January 29, 1982, plaintiff lost his "regular status" and was terminated.

      . Moreover, the personnel records indicate that Ruben Rogers, a part-time P & D driver laid off at the same time as plaintiff, was recalled on March 1, 1982, even though he had never obtained regular status and thus had no seniority.

      . Section 703 of Title VII, 42 U.S.C. § 2000e-2 provides:
      (a) It shall be an unlawful employment practice for an employer—
      (1) to fail or refuse to hire or to discharge any individual, or otherwise to discriminate against any individual with respect to his compensation, terms, conditions, or privileges of employment because of such individual’s race, color, religion, sex, or national origin.

      . But see Wright v. Methodist Youth Services, Inc., 511 F.Supp. 307 (N.D.Ill.1981).

      . The evidence indicated that Ruben Rogers was a part-time employee who had never enjoyed "regular status" and therefore had never accumulated any seniority.