author: LAFFITTE, District Judge.

text:
    HILTON INTERNATIONAL CO., d.b.a. Caribe Hilton Hotel, Plaintiff, v. UNION de TRABAJADORES de LA INDUSTRIA GASTRONOMICA de PUERTO RICO, LOCAL 610, etc., Defendants.
    Civ. No. 83-1083 HL.
    United States District Court, D. Puerto Rico.
    Jan. 17, 1985.

      Howard Pravda, Lespier, Muñoz, Noya & Ramirez, San Juan, P.R., for plaintiff.
    Francisco Aponte Pérez, Santurce, P.R., for defendants.
   OPINION AND ORDER

LAFFITTE, District Judge.

Plaintiff, Hilton International Co., d.b.a. Caribe Hilton Hotel, hereinafter the “employer”, has instituted this action under Section 301 of the Labor Management Relations Act, 29 U.S.C. § 185, seeking to overturn an arbitration award ordering reinstatement with back pay of a dismissed waiter at the employer’s “La Rotisserie Restaurant.”

The matter is before this Court upon defendant’s motion for summary judgment and plaintiff’s opposition thereto. The undisputed facts, as they appear from the record of the arbitration proceedings, and the award issued thereon show that Reinaldo de Jesús, the grievant, has worked at La Rotisserie Restaurant for twenty six years, four as a busboy and twenty two as a waiter. Throughout this extensive period, de Jesús was never disciplined except for a short suspension, which was pending an arbitration hearing, just prior to his discharge. On February 17, 1982, he was discharged on the grounds that he had allegedly embarrassed hotel guests by rudely pressing for higher tips.

The collective bargaining agreement states in Section 11, Article XI, that “no employee shall be discharged or disciplined without just cause.” After a full hearing where plaintiff-employer was represented by counsel, the arbitrator ruled that the evidence presented by the employer was insufficient to establish just cause. Section 7 of Article XV of the Grievance and Arbitration Procedure provides in its pertinent part that:

“The award of the arbitrator shall be final and binding on the parties provided the same conforms to law, and provided that no award of the arbitrator may vary or alter the provisions of this contract. The findings of the arbitrator with respect to questions of fact shall be conclusive ...”

An arbitrator’s award is entitled to substantial deference by a reviewing court and is normally non-reviewable. Westinghouse Elevators v. Siu De Puerto Rico, 583 F.2d 1184 (1st Cir.1978). Consequently, whenever an award draws its essence from the collective bargaining agreement, it must be enforced. United Steelworkers v. Enterprise Wheel & Car Corp., 363 U.S. 593, 597, 80 S.Ct. 1358, 1361, 4 L.Ed.2d 1424 (1960).

In W.R. Grace & Co. v. Local Union 759, 461 U.S. 757, 103 S.Ct. 2177, 76 L.Ed.2d 298 (1983), the Court explained:

“The sole issue before the Court is whether the Barrett award should be enforced. Under well established standards for review of labor arbitration awards, a federal court may not overrule an arbitrator’s decision simply because the court believes its own interpretation of the contract would be a better one. Steelworkers v. Enterprise Wheel & Car Corp., 363 U.S. 593, 596, 80 S.Ct. 1358, 1360, 4 L.Ed.2d 1424 (1960). When the parties include an arbitration clause in their collective bargaining agreement, they choose to have disputes concerning construction of the contract resolved by an arbitrator. Unless the arbitral decision does not ‘draw its essence from the collective bargaining agreement’ ... a court is bound to enforce the award and is not entitled to review the merits of the contract dispute. This remains so even though the basis for the arbitrator’s decision may be ambiguous.”

Pursuant to the submission agreement, the parties submitted for the arbitrator’s decision the following controversy:

To determine, in accordance to law, and the evidence presented, if the dismissal of Mr. Reinaldo de Jesús was justified or not; and if it was not, that the Arbiter provide the adequate remedy.

The arbitrator correctly ruled that in disciplinary cases the burden of proof lies with the employer. After carefully reviewing and analyzing the evidence adduced by the employer, the arbitrator gave it little probative value, questioned the credibility of said evidence, and found it to be insufficient to establish “just cause.” It is within the province of the arbitrator to determine the weight and relevancy of evidence, and thereby determine the truth respecting the issues in controversy.

In the instant case, the employer offered documentary evidence about the events that occurred at La Rotisserie Restaurant for the truth of the facts asserted therein. Upon the Union’s objection on hearsay, counsel for the employer urged the arbitrator to receive it anyway and give said evidence whatever credibility the arbitrator deemed it deserved. (Tr. pp. 46-47.) The arbitrator expressly received it as hearsay.

The employer argues that the arbitrator had to rule “pursuant to law.” But even if we were to apply the “substantial evidence” standard of review, the arbitrator’s findings of facts are supported by the record. An arbitrator’s decision on the merits is final as to questions of facts, particularly in this case where the arbitration clause provides that “the findings of the arbitrator with respect to questions of fact shall be conclusive.” To support de Jesús’ discharge, the employer presented in evidence logbook entries containing a description of the incident and a letter of another guest who had been offended by grievant’s alleged demand for higher tips. The arbitrator accepted the documentary evidence over the Union’s strenuous objection on hearsay grounds. The arbitrator then proceeded to analyze said evidence, found it insufficient, and gave it no probative value because, in the arbitrator’s words:

“Although admitted for the reasons previously stated, said annotations do not enjoy, in our judgment, a margin of trustworthiness sufficiently broad as to convince us of validating the dismissal of claimant. The same constitute, in our opinion, a weak evidence, which could have been or not prepared for the purpose of this case ...” Pages 18-19 of the award.

Based on the foregoing, there is no merit to the employer’s allegation that the award violated its rights to due process of law on the grounds that the arbitrator gave no credibility to the employer’s evidence. The employer bargained for the considered judgment of the arbitrator. It cannot now attack its validity because it went against the employer.

As to the arbitrator’s mandate that he must decide pursuant to law as set forth in the arbitration clause, suffice it to say that the law is satisfied if the award draws its essence from the contract and the arbitrator does not exceed the authority granted him by the parties to the collective bargaining agreement. In the case at bar, the arbitration clause of the collective bargaining agreement provides that the award must be “in accordance to law.” This simply means that the arbitrator may not rule on the merits of the case in violation of established principles of federal labor law, or conduct the proceedings in such a manner that will offend traditional notions of justice and fairness so rooted in our concept of due process of law. The record shows that this was not the case, and the employer has not shown otherwise. Hence, we find no such clear and manifest error of federal labor law as would lead us to review the arbitrator’s conclusion that the employer failed to meet its burden to sustain de Jesús’ discharge.

When the parties stipulate in a labor contract or in a submission agreement that the award must be entered “in accordance to law”, the “clearly erroneous” standard is to be applied on review as to the facts, the “harmless error” standard as to the proceedings, and the “manifest error” standard as to substantive federal labor law. Accordingly, a reviewing court must disregard any error or defect not affecting the substantial rights of the parties. But, whenever the award manifests the arbitrator’s infidelity to the contract, the courts have no choice but to refuse enforcement of the award.

The employer further claims that the arbitrator disregarded the collective bargaining agreement by not requiring a written submission agreément as required by Section 7 of Article XV of the grievance and arbitration clause of the collective bargaining agreement, which reads:

“At the commencement of the arbitration hearing, the parties shall submit in writing the question or questions to be decided by the arbitrator ...”

This contention is not supported by the record. Although the submission agreement was not reduced to writing, the transcript shows that counsel for the employer, counsel for the Union, with the arbitrator’s approval, agreed upon a submission agreement. Accordingly, we find no merit to this allegation. The controversy was well defined and the parties and the arbitrator were well and fully aware of the nature and extent of the grievance.

The employer contends that the arbitrator violated due process of law, public policy, and the employer’s right to implement corrective discipline, when the arbitrator refused to continue the hearing until another related arbitration case involving a suspension of the grievant for allegedly similar conduct was heard. The argument is frivolous. Faced with the postponement request, the arbitrator suggested a consolidated hearing on the discharge and suspension issues. The employer refused, while the Union consented. We fail to perceive any due process violation when the employer declined to accept the arbitrator's invitation to consolidate both proceedings. Contrary to the Employer’s allegation, we have been unable to discern a public policy relative to corrective discipline of employers under the Labor Management Relations Act. Although in industrial practice discipline is often progressive or corrective in nature, and is widely used, in the absence of a specific contract provision it does not need to be applied.

It is true, as alleged by the employer, that courts may not enforce a collective bargaining agreement or an award which is contrary to public policy. However, in order for public policy to preclude enforcement of an arbitration award, the public policy must be well defined and dominant and must be ascertained by reference to the laws and legal precedents and not from general considerations of supposed public interests. W.R. Grace & Co. v. Local Union 759, supra.

The employer raises the issue that the arbitrator exceeded his authority by ordering grievant’s reinstatement to his former position as waiter in La Rotisserie Restaurant. This remedy, the employer argues, does violence to the management clause set forth in Article XVI of the collective bargaining agreement. The short answer to this contention appears in the submission agreement itself. There, the employer expressly authorized the arbitrator, in the event that the grievant’s discharge was found to be not justified, “to provide the adequate remedy.” Besides, reinstatement is an inherent remedy and a traditional solution used by arbitrators and the National Labor Relations Board in wrongful discharge cases. The employer further alleges that the arbitrator acted ultra vires by evaluating the Employer’s procedure in the investigation of the grievance. As the Union correctly points out, the methods and practice of the employer in causing the discharge of an employee with 26 years of service with said employer was a proper issue raised at the hearing and a matter to be evaluated by the arbitrator.

In a last effort to challenge the award, the employer argues that the arbitrator went beyond his authority in construing the seniority clause of the collective bargaining agreement, which was not made part of the submission agreement. Section 6 of Article VIII provides that: “Seniority and employment rights shall terminate for any one of the following reasons:

(a) ...
(b) dismissal for just cause;
(c) ...
(d) Failure to work for the Hotel for a period of (8) consecutive months, with the exception of cases covered under clause ‘C’ of this Section.”

The issue was raised at the arbitration hearing that the eight-month provision of subsection (d) might interfere with the remedy in the event of a finding for the grievant. The grievant was discharged on February 17, 1982, the hearing was held on August 6, and the case was finally submitted on September 15, 1982. The award was rendered on March 28, 1983. Because of these circumstances it was proper for the parties to raise, and for the arbitrator to consider, the effect of Article VII, Section (6)(d) on the reinstatement remedy. The arbitrator properly and logically ruled that said clause could not prevent the grievant from being reinstated, because grievant’s failure to work for the Hotel was caused, not by him, but by the Employer’s wrongful discharge. We find no fault with this interpretation which was necessary for a proper determination of the grievance pending decision before the arbitrator.

During oral argument before this Court, the employer made a last effort to attack the award. The arbitrator awarded the employee back pay, including tips. The remedial portion of the award provided that in the event the parties were unable to agree on the amount for tips, the arbitrator was to retain jurisdiction to determine the amount of tips to be paid to the grievant. The employer asserts that the award must be set aside on the basis of incompleteness. We disagree. We start with the proposition that tips are wages, part of grievant’s compensation as a waiter, and properly included in a back pay award. Home Restaurant Drive, Inc., 46 L.R.R.M. 1065 (NLRB 1960). The arbitrator’s award does not suffer from any deficiency. It is complete. The computation of back pay and the amount for tips is a direct result flowing from the award, not an infirmity of the award. Rather than having the parties go through all the steps of the grievance procedure again to obtain a determination of this matter through another arbitration case, it was proper, for the sake of procedural economy, to retain jurisdiction for this peripheral aspect of the case. An arbitrator may properly retain jurisdiction, after ordering reinstatement and back pay, to determine the amount of earnings loss by the discharged employee. Belo Corp. v. Typographical Union No. 173, 82 L.R.R.M. 2574 (D.C.Texas 1972). Of course, the arbitrator shall be limited solely to determine the back pay liability, including tips, should there be any controversy in connection therewith. The arbitrator may look for guidance in the Labor Management Relations Act in applying the correct back pay computation. Textile Workers v. Lincoln Mills, 353 U.S. 448, 77 S.Ct. 912, 1 L.Ed.2d 972 (1957); NLRB v. Seven Up Bottling, 344 U.S. 344, 73 S.Ct. 287, 97 L.Ed. 377 (1953); Bacardi Corp. v. Con greso Uniones Industriales, 692 F.2d 210 (1st Cir.1982).

We conclude that the award in question draws its essence from the collective bargaining agreement, and is properly to be enforced.

WHEREFORE, upon consideration of the record and the transcript of the proceedings before Arbitrator E. Cruz Fortier, briefs and argument of counsel, defendant’s motion for summary judgment to dismiss the complaint and to enforce the award is hereby GRANTED.

The Clerk shall enter judgment accordingly.

IT IS SO ORDERED.

      . This has been the practice in disciplinary cases in this jurisdiction. In the instant case, the employer followed the established practice by assuming the burden to establish "just cause” at the outset of the hearing. See transcript of arbitration proceedings, pages 34-36. This is more so when the agreement is silent, as here, as to what burden of proof is required and upon whom the burden will be placed. Firemen and Oilers, Local 93513 v. Nestle Co., 100 LRRM 2927 (1978). A review of relevant case law establishes that the choice of burden of proof is within the arbitrator's discretion where the agreement fails to provide one. Amalgamated Meat Cutters v. Neuhoff Brothers Packers, Inc., 481 F.2d 817 (5th Cir.1973); General Drivers, Helpers and Truck Terminal Employees v. Sears, Roebuck & Co., 535 F.2d 1072 (8th Cir.1976).

      . The employer could not produce the complaining guests, who were mainland residents. One of them, however, could not even identify the grievant as the discourteous waiter. The employer did present other witnesses who testified as to the version of the facts narrated to them by the Hotel guests.

      . Arbitrators generally have wide discretion, as to the observance of the rules of evidence. See, Elkouri, How Arbitration Works, Third Ed., p. 252.

      . However, if the award is "unfounded in reason and fact”, Brotherhood of Railroad Trainmen v. Central Georgia Railway Co., 415 F.2d 403 (5th Cir.1969), cert. denied, 396 U.S. 1008, 90 S.Ct. 564, 24 L.Ed.2d 500 (1970), or is based on reasoning "so palpably faulty that no judge or group of judges, could even conceivably have made such a ruling”, Safeway Stores v. American Baking and Confectionery Workers, Local 111, 390 F.2d 79 (5th Cir.1968), or is mistakenly based on a crucial assumption which is "conceivably a non-fact”, Electronics Corporation of America v. IUEW, Local 272, 492 F.2d 1255, 1257 (1st Cir.1974), then the award is subject to attack. This case, however, does not fit any of the aforesaid standards. See, Bettencourt v. Boston Edison Co., 560 F.2d 1045 (1st Cir.1977).

      . In suits under Section 301 of the Labor Management Relations Act, such as this, the substantive law to be applied is federal law “which the courts must fashion from the policy of our national labor laws ... Federal interpretation of federal law will govern, not state law. But state law if compatible with the purpose of Section 301 may be resorted to in order to find the rule that will best effectuate the federal policy. Any state law applied, however, will be absorbed as federal law and will not be an independent source of private rights.” Textile Workers, Inc. v. Lincoln Mills, 353 U.S. 448, at 456-457, 77 S.Ct. 912, at 918, 1 L.Ed.2d 972 (1957). The rationale behind this expression of federalism in the field of labor law is to avoid conflicting federal and state interpretation of contract terms that may have a disruptive effect upon contract negotiations and administration. Local 174 Teamsters v. Lucas Flour Co., 369 U.S. 95, 82 S.Ct. 571, 7 L.Ed.2d 593 (1962).

      . A submission agreement confers authority on the arbitrator and defines with precision the contours of the controversy submitted for the arbitrator’s decision.

      . Cf. Rules 52 and 61 of the Federal Rules of Civil Procedure.

      . See Transcript of proceedings, pages 25-34.

      . The Employer’s contention is in contradiction with its own allegation of the complaint. In paragraph nine thereof, the employer asserts that: "The parties at the arbitration hearing submitted to the Arbitrator the following submission accord:
      To determine, in accordance to law, and the evidence presented, if the dismissal of Mr. Reynaldo de Jesús was justified or not; and if not, that the Arbiter provides the adequate remedy.”

      . Article XVI reads as follows:
      "All matters relating to the operation, control, and direction of the business of the Hotel, including the selection of personnel, controlling direction of the work force and the establishment and enforcement of the reasonable rules and regulations, are reserved to the Hotel, except as expressly provided in this Agreement.”

      . Sturtz, Arbitrators and the Remedy Power, Labor Arbitration and Industrial Change, National Academy of Arbitrators, Proceedings 16th Annual Meeting, B.N.A.1963; United Steelworkers v. Enterprise Wheel & Car, 363 U.S. 593, 80 S.Ct. 1358, 4 L.Ed.2d 1424 (1960); Sonic Knitting Industries v. ILGW, 106 DPR 557 (1977).


source: Caselaw Access Project

author: WEXLER, District Judge.

license: Public Domain

text:
    FIREMAN’S FUND INSURANCE COMPANY, Plaintiff, v. PLAZA OLDSMOBILE LTD., et al Defendants.
    No. CV 83-2213.
    United States District Court, E.D. New York.
    Jan. 18, 1985.
    See also D.C., 596 F.Supp. 657.
    Kornstein Meister & Veisz, New York City, for plaintiff.
    Mendes & Mount, Linda Kupersmith, Kupersmith & Kupersmith, New York City, for defendant Hyfin Credit Union.

      Suozzi, English & Cianciulli, P.C., Mineola, N.Y., for defendant A-Drive Corp.
    Shapiro & Mosberg, Glen Cove, N.Y., for defendant Rodgen.
    David M. Markowitz, Schwartz, Klink & Schreiber, P.C., New York City, for defendants Plaza Oldsmobile Ltd., Regency Brokerage, Inc., Rosatti and Aquilino.
    Becker, Goldstein & Graff, New York City, for defendant Jordan Wolff, d/b/a Premium Specialty Sales.
    David Louis Cohen, Kew Gardens, N.Y., for defendant D'Ambra.
    Joseph Giannini, Brooklyn, N.Y., for defendant DiMola.
    Robert Jarmel, defendant pro se.
    Glabman, Rubinstein, Reingold & Rothbart, Brooklyn, N.Y., for defendant Muratore.
    Charles L. Emma, Brooklyn, N.Y., for defendant Monzon.
    Rappaport & Frost, New York City, for defendant Siff.
    Paul S. Brenner, Office of Richard Hartman, Little Neck, N.Y., for defendants Falcone, Steven Cortapassi, d/b/a Hazard Collision, Car-Tune Collision, Critical Collision, One-Stop Collision, Clean Collision and City-Wide Collision.
   WEXLER, District Judge.

I. INTRODUCTION

In this action plaintiff contends that defendants engaged in a massive conspiracy to extract money from plaintiff by means of fraudulent automobile insurance claims. The first seven claims in the complaint are state law fraud claims, jurisdiction over which is based upon diversity of citizenship. The eighth claim is based upon the Racketeer Influenced and Corrupt Organizations Act (RICO), 18 U.S.C. §§ 1961-1968 (1982). Plaintiff contends that defendants violated § 1962(c), which provides that “[i]t shall be unlawful for any person employed by or associated with an enterprise engaged in, or the activities of which affect, interstate or foreign commerce, to conduct or participate, directly or indirectly, in the conduct of such enterprise’s affairs through a pattern of racketeering activity or collection of unlawful debt”, and violated § 1962(d) by conspiring to violate § 1962(c). “Racketeering activity” is defined to encompass a variety of acts, called “predicate acts”. § 1961(1). The “racketeering activity” which plaintiff alleges took place'includes mail fraud under 18 U.S.C. § 1341. See § 1961(1)(B). Plaintiff therefore sues for treble damages pursuant to § 1964(c).

Previously, on June 14, 1984, pursuant to Rule 54(b) of the Federal Rules of Civil Procedure, we ordered the entry of summary judgment against defendants George Siff and Steven D’Ambra, in the amount of $1,682,806.68 (three times plaintiff’s claimed actual damages) plus costs and attorney fees. The time to appeal from that judgment has expired.

Plaintiff has now moved for summary judgment against defendants Cohen, Cortopassi, Jarmel, Monzon, Boutelle, and O’Ma-honey (who have defaulted by not answering the complaint), and defendants Rodgen, Wolf, Muratore, and Falcone (who have appeared in this action). The motion has been stayed as against Jarmel so that he may obtain counsel, and as against Muratore because he has died. Defendant Hyfin Credit Union has moved to dismiss the RICO claim, or in the alternative to dismiss the RICO claim as against Hyfin Credit Union only. Defendant Falcone has moved to dismiss the RICO claim as against himself. Defendant Plaza Oldsmobile has moved for leave to amend its answer.

II. THE HYFIN MOTION

A. ABSENCE OF TARGET ENTERPRISE

Hyfin contends that dismissal of the RICO claim is required because the alleged conspiracy did not aim at the takeover of an enterprise. However, the Supreme Court has held that a violation of § 1962(c) can be made out by knowing participation in a criminal enterprise engaging in racketeering activities, and that there is no need for a “target enterprise”. United States v. Turkette, 452 U.S. 576, 101 S.Ct. 2524, 69 L.Ed.2d 246 (1981). But see United States v. Ruggiero, 726 F.2d 913, 921 (2d Cir.1984) (discussing extent of participation required). Hyfin’s argument is therefore invalid.

B. ABSENCE OF CONVICTION

Hyfin’s motion is based in part upon the fact that neither Hyfin nor any of its directors or officers have been indicted or convicted for any crime relevant to the complaint (though several other defendants have been convicted of crimes relevant or arguably relevant to the complaint). Defendant Falcone makes a similar argument.

In Sedima, S.P.R.L. v. Imrex Co., Inc., 741 F.2d 482 (2d Cir.1984), the Second Circuit stated that “a prior criminal conviction is a prerequisite to a civil RICO action.” Id., at 496. The Court also stated that the plaintiff in a civil RICO suit must demonstrate a special type of injury, called a “racketeering injury”. Id. The Court affirmed a lower court decision dismissing certain civil RICO claims. Either of the Court’s two statements standing alone would have been sufficient to support the affirmance of the dismissal.

For reasons set forth below, we need not address the “absence of conviction” issue.

C. RACKETEERING INJURY

Hyfin also contends that plaintiff has not properly alleged a “racketeering injury”. Hyfin relies upon three Second Circuit cases issued last July.

1. CASE LAW

In Sedima, supra, at 496-96, the Court made the following statements:

The legislative history [of RICO] suggests that it would ... be inappropriate to carry over wholesale all of the elaborate antitrust standing case law onto RICO. It would no doubt violate both the congressional purpose and common sense to require RICO plaintiffs to allege an injury of the type the antitrust laws were designed to prevent to maintain a RICO suit.
On the other hand, there is nothing in the legislative history which suggests that Congress did not intend to create analogous standing barriers ... [I]t is reasonable to believe that Congress indicated a desire to have an analogous standing limitation imposed on RICO.
The question then becomes what kind of injury is a “racketeering injury”? As has been said, RICO was intended to “address the infiltration of legitimate business by organized crime.” United States v. Turkette, 452 U.S. 576, 591 [101 S.Ct. 2524, 2532, 69 L.Ed.2d 246] (1981). According to the congressional statement of findings and purpose, the Act was to seek to eradicate organized crime because “organized crime activities in the United States weaken the stability of the Nation’s economic system, harm innocent investors and competing organizations, interfere with free competition, seriously burden interstate and foreign commerce, threaten the domestic security, and undermine the general welfare of the Nation and its citizens” ... RICO was not enacted merely because criminals break laws, but because mobsters, either through the infiltration of legitimate enterprises or through the activities of illegitimate enterprises, cause systematic harm to competition and the market, and thereby injure investors and competitors ____ It is only when injury caused by this kind of harm can be shown, therefore, that we believe that Congress intended that standing to sue civilly should bé granted.
This is, we repeat, by no means to say that standing to sue under RICO should be limited only to people who have standing to sue for a competitive injury under the antitrust laws. This is so because Congress in promulgating RICO was addressing the kind of economic injury which has an effect on competition, but nowhere suggested that actual anticompetitive effect is required for suits under the statute. For purposes of clarity, it is better to identify the RICO standing requirement as a “racketeering injury” requirement rather than a “competitive injury” requirement, as the latter term may incorrectly suggest that all of the details of the antitrust law standing requirement are being incorporated by reference. This carries with it at least, as the trial judge found, the obligation that the plaintiff show injury different in kind from that occurring as a result of the predicate acts themselves, or not simply caused by the predicate acts, but also caused by an activity which RICO was designed to deter.
The Court further stated, id. at 496 n. 41: ... claims alleging the kinds of business fraud which often affect competition should go forward under RICO even if in the particular case no harm to competition results, as, for example, when all competitors are being extorted from equally. For example, in Hellenic Lines, Ltd. v. O’Hearn, 523 F.Supp. 244 (S.D.N.Y.1981), a company was forced to pay kickbacks to an illegal enterprise for required services. A RICO claim was allowed even though defendant claimed that the inflated price was still reasonable so that no injury to competition had occurred. It was enough that the plaintiff’s alleged injury was the kind of injury which Congress identified as threatening competition.

In Bankers Trust Co. v. Rhoades, 741 F.2d 511 (2d Cir.1984), in affirming the dismissal of a civil RICO claim, the Second Circuit stated that “if a complaint alleges an injury that is caused by the defendant’s predicate acts, rather than by its use of a pattern of racketeering activity in connection with a RICO enterprise” then a civil RICO claim will not lie. Id. at 516. In dictum, the Court stated that a civil RICO claim does not require injury to plaintiff’s ability to compete or an impact on competition as such. Id. at note 6. The Court, id. at 517, gave two examples of situations in which plaintiff’s injury would be attributable to a pattern of racketeering activity rather than attributable to individual predicate acts:

For example, a plaintiff who is victimized by a defendant enterprise’s multiple acts of arson may thereafter be denied fire insurance as a result of his fire history; such a plaintiff whose property subsequently suffers innocent fire damage would be unable to obtain reimbursement for the damage ____ Or, a plaintiff might be forced to incur an unwanted debt or to take on an unwanted business partner because an enterprise has placed his business in jeopardy by using felonious means to cause a number of his customers to withhold their custom.

In Furman v. Cirrito, 741 F.2d 524 (2d Cir.1984), the Court, in affirming the dismissal of a civil RICO suit, stated, id. at 525:

... the district court concluded that no “separate, distinct racketeering enterprise injury” had been alleged, that the RICO claim was therefore legally deficient, and, there being no other basis for federal jurisdiction, that the complaint should be dismissed. Although this panel concludes that neither the language of the statute nor its legislative history imposes such a requirement, we are compelled to affirm the district court’s judgment based on the two recently filed, controlling opinions in this court [Sedima, supra, and Bankers Trust, supra ].

The Court stated that the sole issue in the case before it was whether a plaintiff in a civil RICO suit must allege “a separate, distinct racketeering enterprise injury”, id. at 526, which injury must be “above and beyond the injury caused by the predicate acts of racketeering activity”, id. at 525.

2. THE INSTANT CASE

The complaint alleges a massive conspiracy to extract money from plaintiff by means of fraudulent automobile insurance claims. The defendants include adjusters and appraisers employed by plaintiff, insurance brokers, automobile dealers, automobile body shop operators, an employee of the New York Automobile Insurance Plan, and persons alleged to have submitted fraudulent claims or to have knowingly negotiated checks issued on the basis of such claims.

In contending that the “racketeering injury” requirement of Sedima, supra, and Bankers Trust, supra, is satisfied here, plaintiff lays great emphasis upon the fact that plaintiff’s complaint and other papers contain allegations that bribery and kickbacks were used to induce plaintiff’s own employees to participate in the conspiracy, and that in one instance the conspirators intimidated an appraiser unwilling to accept kickbacks by firing a bullet over his head.

As we read the Bankers Trust decision, the decision stands for the proposition that the plaintiff in a civil RICO case must show that the injury plaintiff suffered as a result of a set of acts is greater than the sum total of the injuries which plaintiff would have suffered from each individual act had such act occurred in isolation. In the instant case, the racketeering activity which plaintiff alleges took place consists primarily of acts of mail fraud. Specifically, some of the defendants are alleged to have submitted fraudulent insurance claims to plaintiff through the mails, and to have received from plaintiff through the mails checks issued by plaintiff on the basis of such claims. If we treat each instance in which a fraudulent claim was submitted and a check received on the basis of such claim as constituting a single act of mail fraud, then the injury to plaintiff resulting from the set of acts of mail fraud is simply the sum total of the injuries resulting from each individual act of mail fraud. Put another way, the injury to plaintiff in this case is simply the sum total of the amounts of the individual checks. Consequently, it would appear that if Bankers Trust is controlling here then the RICO claim must be dismissed.

It may be objected that the alleged racketeering activity in the instant case is not limited to mail fraud. For example, plaintiff alleges that in one instance a conspirator intimidated an appraiser who refused to participate in the conspiracy by firing a bullet over the appraiser’s head. This act would constitute an “act or threat involving murder” and hence a “racketeering activity.” 18 U.S.C. § 1961(1)(A). However, racketeering activity other than mail fraud injured plaintiff only insofar as such racketeering activity facilitated mail fraud. In other words, such racketeering activity may have made the mail fraud possible, but did not cause any injury over and above that caused by the individual acts of mail fraud, assuming once again that the mailing in of a fraudulent claim and the receipt of a check issued on the basis of such claim constitutes a single act of mail fraud.

It may also be objected that the act of mailing in a fraudulent claim and the act of receiving a check issued on the basis of such claim should be treated as separate acts of mail fraud. However, we seriously doubt that the panel which decided Bankers Trust would so treat them.

For the above reasons, we believe that if Bankers Trust is controlling here then the RICO claim should be dismissed.

As we read the Sedima decision, the decision stands for the proposition that the plaintiff in a civil RICO case must show that it has suffered an injury of the kind likely to harm competition, irrespective of whether the particular injury did in fact harm competition. We are uncertain as to what kinds of injury the Sedima Court would regard as likely to harm competition. It would appear that any kind of injury which a business is capable of suffering has a strong potential for harming competition. The court in Sedima stated, 741 F.2d at 496, that the plaintiff must show “injury different in kind from that occurring as a result of the predicate acts themselves, or not simply caused by the predicate acts, but also caused by an activity which RICO was designed to deter.” In the instant case, plaintiff has certainly not suffered “injury different in kind from that occurring as a result of the predicate acts themselves”. Plaintiffs injury is that it has been defrauded; the predicate acts consist primarily of mail fraud. We are also at a loss to determine whether plaintiff's injury was “caused by an activity which RICO was designed to deter”, as we are uncertain as to the meaning of this phrase. We are therefore unable to determine with certainty the proper effect of the Sedima decision upon the disposition of this case.

In Furman, the court, relying upon Sedima and Bankers Trust, felt compelled to rule that the plaintiff in a civil RICO case must show injury “above and beyond the injury caused by the predicate acts of racketeering activity”. The court did not elaborate on this requirement. We are therefore unable to determine with certainty the proper effect of the Furman decision upon the disposition of this case.

We have stated our belief that if Bankers Trust is controlling here the RICO claim should be dismissed. Since we are uncertain as to the effect of the Sedima decision, we will assume that Sedima is consistent with Bankers Trust. Further, if there is a conflict between Sedima and Bankers Trust, then Bankers Trust must prevail because it is the more recent decision. Further, since the court in Furman felt compelled to follow Bankers Trust and did not expressly limit the holding in Bankers Trust, we feel compelled to follow Bankers Trust.

For the above reasons, the RICO claim should be dismissed. It is therefore unnecessary for us to consider the issue of the “conviction requirement”, which has been raised by Hyfin and also by Falcone. For the record, however, we would like to express our complete agreement with the opposition to the “conviction requirement” expressed in Judge Cardamone’s dissent in Sedima, as well as our general agreement with the opposition to the “racketeering injury requirement” expressed in Judge Cardamone’s dissents in Sedima and Bankers Trust and in Judge Pratt’s opinion in Furman. While we sympathize with the desire to place limits upon a statute which, in our opinion, has been extended far beyond its intended scope, we believe that, barring reconsideration of United States v. Turkette, supra (holding that infiltration of legitimate enterprise is not required for violation of § 1962(c)), the remedy should come from Congress rather than the courts.

III. CONCLUSION

It is hereby ORDERED that:

1. The Clerk shall not enter judgment at this time;

2. Defendant Hyfin’s motion to dismiss the Eighth (RICO) cause of action is granted, but this order shall not affect the validity of the judgment previously entered against defendants Siff and D’Ambra;

3. Defendant Falcone’s motion for partial summary judgment is deemed moot;

4. Decision is reserved on plaintiff’s motion for summary judgment against ten defendants;

5. The Plaza defendants’ motion for leave to amend their answer is granted, but this order shall not be construed as determining the validity of any claims asserted therein, or as altering whatever legal consequences would otherwise flow from the judgment previously entered against defendants Siff and D’Ambra and from the post-judgment settlement agreement between plaintiff and Siff approved by the Court after notice to all parties;

6. It appearing that the order dismissing the RICO cause of action involves a •controlling question of law as to which there is substantial ground for difference of opinion, i.e. “Do the facts alleged in the complaint and other papers make out a claim for relief against any defendant under 18 U.S.C. § 1964(c)?”, and that an immediate appeal from that order may materially advance the ultimate termination of this litigation, that order is hereby certified as being appropriate for an interlocutory appeal pursuant to 28 U.S.C. § 1292(b).

SO ORDERED.

      . Section 1962 reads in pertinent part:
      (c) It shall be unlawful for any person employed by or associated with an enterprise engaged in, or the activities of which affect, interstate or foreign commerce, to conduct or participate, directly or indirectly, in the conduct of such enterprise’s affairs through a pattern of racketeering activity or collection of unlawful debt.
      (d) It shall be unlawful for any person to conspire to violate any of the provisions of subsections (a), (b) or (c) of this section. Section 1961 reads in pertinent part:
      (1) "racketeering activity" means (A) any act or threat involving murder, kidnapping, gambling, arson, robbery, bribery, extortion, or dealing in narcotic or other dangerous drugs, which is chargeable under State law and punishable by imprisonment for more than one year; (B) any act which is indictable under any of the following provisions of title 18, United States Code: Section 201 (relating to bribery); section 224 (relating to sports bribery), sections 471, 472 and 473 (relating to counterfeiting), section 659 (relating to theft from interstate shipment) if the act indictable under section 659 is felonious, section 664 (relating to embezzlement from pension and' welfare funds), sections 891-894 (relating to extortionate credit transactions), section 1084 (relating to the transmission of gambling information), section 1341 (relating to mail fraud), section 1343 (relating to wire fraud), section 1503 (relating to obstruction of justice), section 1510 (relating to obstruction of criminal investigations), section 1511 (relating to the obstruction of State or local law enforcement), section 1951 (relating to interference with commerce, robbery, or extortion), section 1952 (relating to racketeering), section 1953 (relating to interstate transportation of wagering paraphernalia), section 1954 (relating to unlawful welfare fund payments), section 1955 (relating to the prohibition of illegal gambling businesses), section 2314 and 2315 (relating to interstate transportation of stolen property), sections 2341-2346 (relating to trafficking in contraband cigarettes), section 2421-24 (relating to white slave traffic), (C) any act which is indictable under title 29, United States Code, section 196 (dealing with restrictions of payments and loans to labor organizations) or section 501(c) (relating to embezzlement from union funds), or (D) any offense involving fraud connected with a case under title 11, fraud in the sale of securities, or the felonious manufacture, importation, receiving, concealment, buying, selling, or otherwise dealing in narcotic or other dangerous drugs, punishable under any law of the United States ____
      (4) “enterprise” includes any individual, partnership, corporation, association, or other legal entity, and any union or group of individuals associated in fact although not a legal entity;
      (5) "pattern of racketeering activity" requires at least two acts of racketeering activity, one of which occurred after the effective date of this chapter and the last of which occurred within ten years (excluding any period of imprisonment) after the commission of a prior act of racketeering activity; ____
      Section 1964 reads in pertinent part:
      (c) any person injured in his business or property by reason of a violation of section 1962 of this chapter may sue therefor in any appropriate United States district court and shall recover threefold the damages he sustains and the cost of the suit, including a reasonable attorney's fee.

      . Of course, plaintiff does not allege that each and every one of the defendants personally performed the physical acts of submitting fraudulent claims through the mails and receiving checks issued on the basis of such claims through the mails.
      In United States v. Ruggiero, 726 F.2d 913 (2d Cir.1984), the court stated that "for the government to convict on a RICO conspiracy it must prove that defendant himself at least agreed to commit two or more predicate crimes.” Id. at 921. However, the court also stated that the act of conspiring to commit a predicate act may itself be a predicate act in certain cases. Id. at 918-19. Specifically, the court explained, the act of conspiring to commit any substantive offense enumerated in 18 U.S.C. § 1961(1)(A) would constitute an "act or threat involving” such offense, and would (if chargeable under state law and punishable by imprisonment for more than one year) itself constitute a predicate act under § 1961(1)(A). Similarly, the court explained, the act of conspiring to commit any substantive offense enumerated in § 1961(1)(D) would constitute an "offense involving" such offense, and would itself constitute a predicate act under § 196(1)(D). By contrast, the court explained, the act of conspiring to commit a crime indictable under any of the U.S.Code sections enumerated in § 1961(1)(B) and § 1961(1)(C) would not constitute an "act which is indictable under” such enumerated sections (although such act would be indictable under the conspiracy statute, 18 U.S.C. § 371), and would not itself constitute a predicate act under § 1961(1)(B) or § 1961(1)(C). The court thus implied that a participant in a criminal enterprise may under some circumstances be convicted under § 1962(c) or § 1962(d) even if he did not agree to personally perform any substantive offense.
      Applying the above reasoning, it is clear that conspiracy to commit mail fraud is not itself indictable under 18 U.S.C. § 1341 (the mail fraud statute), and so is not itself a predicate act under § 1961(1)(B). However, aiding and abetting mail fraud would, pursuant to 18 U.S.C. § 2, be indictable under 18 U.S.C. § 1341, and hence would be a predicate act under § 1961(1)(B).
      For reasons which will become clear, it is unnecessary for us to determine whether plaintiffs allegations concerning the conduct of any given defendant involved in the instant motions would, if true, make out a violation of § 1962(c) or § 1962(d) by such defendant.
      We would note in passing that RICO, as interpreted by case law, appears extremely complex. The concept of conspiracy appears in RICO on at least three levels. First, a conspiracy to commit certain types of racketeering activity may itself constitute "racketeering activity” under § 1961(1)(A) and § 1961(1)(D). Second, participation in a criminal enterprise (i.e. a conspiracy) affecting commerce, where the participant engages in or agrees to engage in a pattern of racketeering activity, is a violation of § 1962(c). Third, a conspiracy to violate § 1962(c) is itself a violation of § 1962(d).


text:
    Berrill G. GOODKIN and Phyllis Goodkin, Plaintiffs, v. UNITED STATES of America, the State of New York, the City of New York, William G. Reichert, John O’Connor, Jules Aaron and Carol Aaron, Defendants. UNITED STATES of America, Defendant & Third-Party Plaintiff, v. STATE OF NEW YORK, Third-Party Defendant.
    No. 79 C-0136.
    United States District Court, E.D. New York.
    Jan. 18, 1985.

      Fuchsberg & Fuchsberg, by Edwin Weidman, New York City, for plaintiffs.
    Raymond J. Dearie, U.S. Atty., by Patrick B. Northup, Asst. U.S. Atty., Brooklyn, N.Y., for defendant U.S.
    Robert Abrams, Atty. Gen. of N.Y., New York City, for defendant State of N.Y.
    Frederick A.O. Schwarz, Jr., Corp. Counsel, by Marie Ng, New York City, for defendant City of N.Y.
    Dwyer, Peltz & Walker, New York City, for defendants Jules & Carol Aaron.
   WEXLER, District Judge.

I. PRIOR PROCEEDINGS

This is an automobile accident case. Plaintiffs, who rode in one vehicle, collided with a vehicle owned by defendant USA and operated by its agent. Plaintiffs and defendant USA are “covered persons” within the meaning of New York’s Comprehensive Motor Vehicle Insurance Reparations Act (popularly called the “no-fault” law), N.Y. Insurance Law §§ 5101-5108 (formerly §§ 670-678). See § 5102(j) (formerly § 671(10)). Plaintiffs contend that defendant City of New York (“NYC”) was negligent in its maintenance of the highway. Defendant NYC is not a “covered person”.

The facts of plaintiffs case against defendant NYC were tried by jury. Following a trial on liability, the jury returned a special verdict, finding that the relative culpability of the defendants was 30% for the USA and 70% for NYC. Following a trial on damages, the jury returned a special verdict, finding that plaintiff Berrill Goodkin sustained $425,000 damages and that plaintiff Phyllis Goodkin sustained $75,000 damages.

II. PRELIMINARY FINDINGS OF FACT BY THE COURT

With respect to plaintiffs’ claim against defendant USA and with respect to the defendants’ cross claims for contribution, the Court, without regarding itself as being bound by the jury verdicts, makes the following findings of fact:

1. Plaintiffs sustained injury due to the negligence of defendant NYC and of the agent of defendant USA.

2. The relative culpability of the defendants is 30% for the USA and 70% for NYC.

3. Plaintiff Berrill Goodkin sustained $425,000 damages.

4. Plaintiff Phyllis Goodkin sustained $75,000 damages.

III. LEGAL CONSEQUENCES OF FINDING OF SPECIAL DAMAGES

Insurance Law § 5104(a) (formerly § 673(1)) provides in part: “in any action by or on behalf of a covered person against another covered person for personal injuries arising out of negligence in the use or operation of a motor vehicle in this state, there shall be no right of recovery for ... basic economic loss.”

Insurance Law § 5102(a) (formerly § 671(1)) provides in part:

(a) “Basic economis loss” means, up to fifty thousand dollars per person of the following combined items, subject to the limitations of section five thousand one hundred eight of this article:
(1) All necessary expenses incurred for: (i) medical, hospital, surgical, nursing, dental, ambulance, x-ray, prescription drug and prosthetic services: (ii) psychiatric, physical and occupational therapy and rehabilitation: (iii) any non-medical remedial care and treatment rendered in accordance with a religious method of healing recognized by the laws of this state: and (iv) any other professional health services: all without limitation as to time, provided that within one year after the date of the accident causing the injury it is ascertainable that further expenses may be incurred as a result of the injury. For the purpose of determining basic economic loss, the expenses incurred under this paragraph shall be in accordance with the limitations of section five thousand one hundred eight of this article.
(2) Loss of earnings from work which the person would have performed had he not been injured, and reasonable and necessary expenses incurred by such person in obtaining services in lieu of those that he would have performed for income, up to one thousand dollars per month for not more than three years from the date of the accident causing the injury. An employee who is entitled to receive monetary payments, pursuant to statute or contract with the employer, or who receives voluntary monetary .benefits paid for by the employer, by reason of the employee’s inability to work because of personal injury arising out of the use or operation of a motor vehicle, is not entitled to receive first party benefits for “loss of earnings from work” to the extent that such monetary payments or benefits from the employer do not result in the employee suffering a reduction in income or a reduction in the employee’s level of future benefits arising from a subsequent illness or injury.
(3) All other reasonable and necessary expenses incurred, up to twenty-five dollars per day for not more than one year from the date of the accident causing injury.

Under C.P.L.R. § 1401, “two or more persons who are subject to liability for damages for the same personal injury ... may claim contribution among them ...”

Under C.P.L.R. § 1402, “[t]he amount of contribution to which a person is entitled shall be the excess paid by him over and above his equitable share of the judgment recovered by the injured party; but no person shall be required to contribute an amount greater than his equitable share. The equitable shares shall be determined in accordance with the relative culpability of each person liable for contribution.”

Under C.P.L.R. § 1404(a), contribution has no effect upon the rights of a plaintiff.

From the foregoing it is clear that plaintiffs have a theoretical right to recover up to the full amount of their damages from NYC. It is also clear that plaintiffs have a theoretical right to recover up to the full amount of their damages less the portion of the damages constituting “basic economic loss” from the USA. Of course, plaintiffs' total recovery cannot exceed the full amount of their damages. Consequently, plaintiffs will recover the full amount of their damages, irrespective of the amount of basic economic loss.

In practical terms, the amount which each defendant will actually pay is dependent upon application of the “no-fault” law and the law of contribution. The question therefore arises: what effect, if any, would a factual finding regarding the amount of basic economic loss have upon the distribution of the burden of payment between NYC and the USA?

The answer to the question is fairly clear. Since under Insurance Law § 5104(a) (formerly § 673(1)) plaintiffs cannot recover basic economic loss from a covered person such as the USA, the non-covered defendant NYC must pay 100% of the basic economic loss. Since plaintiffs have a right to recover damages other than basic economic loss from both defendants, both defendants are “subject to liability” for such damages within the meaning of C.P.L.R. § 1401, and contribution will result in NYC paying 70% and the USA paying 30% of such damages, pursuant to C.P. L.R. § 1402. This reasoning was adopted in Seward v. Northrup, 123 Misc.2d 420, 473 N.Y.S.2d 754 (Sup.Ct.1984).

It should be noted that there is one case in which a somewhat different reasoning was adopted, Cole v. Lord, 91 Misc.2d 178, 397 N.Y.S.2d 537 (Sup.Ct.1977). In that case, plaintiff Cole, a motorcycle passenger, sued Cronk, the motorcycle operator, and Lord, an automobile driver. The jury found that plaintiff sustained $75,000 non-economic loss and $17,625 economic loss, and that the relative culpability was 60% for Lord and 40% for Cronk. Plaintiff collected “no-fault” benefits from Lord’s insurer. Plaintiff and Lord were covered persons. The court held that Cronk was not a “covered person” within the meaning of Insurance Law § 673(1) (which has since been amended and recodified as § 5104(a)) as it then stood and so was not immune from suit for basic economic loss. Lord’s insurer desired that the Court hold Cronk solely liable for 100% of the economic loss. Lord’s insurer knew that under Insurance Law § 673(2) (now § 5104(b)) in an action by a covered person against a non-eovered person, “an insurer which paid or is liable for first party benefits ... shall have a lien against any recovery to the extent of benefits paid or payable by it to the covered person.” The court thought that it would be inequitable to make Cronk pay 100% of the economic loss and to give Lord’s insurer a lien upon such recovery, since Lord bore 60% of the fault. The court ordered that Lord and Cronk be jointly liable for the non-economic loss, that Cronk be solely liable for 40% of the economic loss, and that neither defendant be liable for the remaining 60% of the economic loss.

We disagree with the Cole decision. C.P. L.R. § 1404(a) clearly provides that the apportionment of fault between two liable defendants has no effect upon plaintiff’s right of recovery. Consequently, we believe that the court erred in .limiting plaintiff’s right of recovery against Cronk. Insurance Law § 5104(b) (formerly § 673(2)) clearly provides for the shifting of loss from an insurer to a liable non-covered defendant. Consequently, we believe that the court erred in restricting the insurer’s attempt to shift its losses to Cronk.

The facts in the instant case and in Seward differ somewhat from those in Cole. In Cole, first-party benefits were payed to plaintiff by the insurer of a negligent covered defendant. The court sought to avoid what it considered the unjust result of the insurer being completely reimbursed for payments arising from the negligence of its insured. While we disagree with the court’s position, we do see some arguments in its favor. The obligation of the insurer to pay first-party benefits, while not constituting liability on the part of the insured, is in some respects analogous to liability on the part of the insured. Thus, it could be argued that the insured negligent covered defendant was “subject to liability for damages” for economic loss along with the non-covered defendant for the purposes of C.P.L.R. § 1401, and that the non-covered defendant therefore had a right under C.P. L.R. § 1402 to demand that the covered defendant’s insurer bear part of such loss. In the instant case and Seward, by contrast, plaintiffs’ own insurer paid first-party benefits, so that the covered defendant cannot in any sense be said to be “subject to liability for damages” for basic economic loss. Further, in the instant case there is no insurer claiming complete reimbursement for payments for basic economic loss caused by its insured’s negligence.

Since Seward is more recent than Cole, since in our opinion Seward is the better reasoned of the two, and since the facts in the instant case are closer to those in Seward than those in Cole, we will apply the Seward rule.

IV. DEFINITION OF BASIC ECONOMIC LOSS

Plaintiffs and defendant NYC argue that basic economic loss should be defined as the amount plaintiffs received from their insurer. It should be noted that although no evidence of such insurance payments was introduced at trial, plaintiff has now submitted records of payments of $18,-567.15 to Berrill Goodkin and $3,472.67 to Phyllis Goodkin, for a total of $22,039.82. Defendant USA argues that the amount of insurance payments is irrelevant to a determination of basic economic loss, and that the amount of basic economic loss herein is much greater than the payments made by plaintiffs’ insurer.

We see no basis for plaintiffs’ and defendant NYC’s position. “Basic economic loss” is fairly clearly defined in Insurance Law § 5102(a) (formerly § 671(1)). Nothing in the definition remotely suggests that the amount of basic economic loss is in any way dependent upon amounts payed by an insurer. Basic economic loss consists of certain expenses and losses incurred or sustained by an injured person, regardless of whether such expenses and losses have been or will be compensated by an insurer. The amount of past and expected future basic economic loss is for purposes of Insurance Law § 5104(a) (formerly § 673(1)) a question to be determined by the trier of fact on the basis of the evidence, and is in no way dependent upon the amount of payments by an insurer. Of course, the lien of plaintiffs’ insurer is limited to amounts paid or payable by it to plaintiffs, Insurance Law § 5104(b) (formerly § 673(2)), but this fact has no bearing upon the definition of basic economic loss, the rights of plaintiffs against defendants, or the rights of defendants against each other.

Plaintiffs and defendant NYC protest that, in a suit (unlike the instant suit) in which all defendants are covered persons, a finding that basic economic loss exceeds payments by plaintiff’s insurer would result in plaintiff not recovering the full amount of his damages from his insurer and the defendants. There are a number of answers to this argument.

First, the no-fault law simply does not provide that plaintiffs in general recover the full amount of their damages. Insurance Law § 5102(b) (formerly § 671(2)) provides that an insurer need not pay no-fault first party benefits for the full amount of basic economic loss, but may make certain deductions. Insurance Law § 5104(a) (formerly § 673(1)), however, provides that a covered defendant is not liable for any portion of the basic economic loss of a covered plaintiff. Consequently, the no-fault law contemplates that when all defendants are covered, a covered plaintiff will not recover the full amount of his basic economic loss. Incidentally, the fact that an insurer must make deductions from basic economic loss in order to determine the amount of first party benefits proves conclusively that (1) “basic economic loss” and payments by an insurer are two different things, and (2) so far from basic economic loss being dependent upon amounts paid by an insurer, the amount paid by an insurer is dependent upon basic economic loss.

Second, the no-fault law permits inconsistent determinations regarding the amount of basic economic loss. A potential plaintiff who desires to obtain a determination of the amount of his basic economic loss binding upon his insurer for the purpose of assessing first party benefits under Insurance Law § 5102(b) (formerly § 671(2)) (which, it will be recalled, equal basic economic loss less certain deductions) can employ a number of methods: (1) settlement with the insurer; (2) arbitration with the insurer pursuant to Insurance Law § 5106(b) (formerly § 675(2)); (3) a separate lawsuit against the insurer; (4) an action against the insurer joined in a single lawsuit with plaintiffs negligence actions against others. If any of the first three methods are used, plaintiff runs the risk that the figure for basic economic loss binding upon the insurer will be less than the figure for basic economic loss determined in plaintiffs negligence action. There is nothing unjust in this procedure. To say that the result is an inadequate recovery by plaintiff is to arbitrarily presuppose that the total amount of damages determined in the negligence action (including both basic economic loss and other damages) is the “true” total amount of damages. In reality, it is just as likely that the amount of basic economic loss assessed outside of the negligence action is the “true” amount of basic economic loss and that the “true” total amount of damages is the sum of the basic economic loss assessed outside of the negligence action and the “other damages” assessed in the negligence action. What plaintiffs and defendant NYC are effectively suggesting is that a court should make its own determination based on evidence presented at trial of the total amount of damages (including basic economic loss), but that the court should then proceed to treat as basic economic loss not the amount of basic economic loss which the court itself finds but rather the amount of basic economic loss assessed outside of the negligence action by a procedure which the covered defendant(s) did not participate in, and that the court should treat the remainder of the total damages as “other damages”. This procedure would be the height of injustice. The plaintiff would be permitted to present evidence at trial of high basic economic loss to bolster the total damages, but would then be permitted to rely upon a low basic economic loss figure to limit the exemption of the covered defendant(s). The covered defendant would be bound by a procedure which it did not participate in.

Third, it must be borne in mind that an insurer ordinarily makes first party benefit payments for basic economic loss less certain deductions periodically, as such loss is sustained. Insurance Law § 5106(a) (formerly § 675(1)). By contrast, a court in a negligence action will ordinarily make a lump-sum determination of basic economic loss, representing not only loss already sustained but also loss expected to be sustained. Hence, the gap between the amount of basic economic loss ascertained by a court (but unrecoverable from a covered defendant) and the amount of money received from an insurer will often be in part illusory, because the insurer will make further payments in the future.

V. FINDINGS OF FACT BY COURT REGARDING BASIC ECONOMIC LOSS

The Court makes the following additional findings of fact:

1. Plaintiff Berrill Goodkin’s damages, previously ascertained by the Court as $425,000, included the following:

a. $13,067 in medical expenses;

b. $36,000 in lost earnings and in payment to an employee hired by plaintiff as a substitute, counting only the first $1,000 per month of losses of these types, and counting only the first three years after the accident (in making this determination, we are cognizant that had the accident not occurred plaintiff’s income could have been expected to increase from year to year due ■ to inflation and other factors);

c. $375,933 in damages other than those listed above, including over $14,000 in lost earnings not counted above but occurring within three years of the accident.

2. Plaintiff Phyllis Goodkin’s damages, previously ascertained by the court as $75,-000, included the following:

a. $3,454 in medical expenses;

b. $19 in other cash expenses, counting only the first year after the accident;

c. $12,000 in expected future medical expenses discounted to present value (in making this determination, we are cognizant that medical costs will increase due to inflation.)

d. $59,527 in damages other than those listed above.

VI. CONCLUSIONS OF LAW REGARDING AMOUNT OF BASIC ECONOMIC LOSS

Given the foregoing findings of fact, we make the following conclusions of law:

1. Plaintiff Berrill Goodkin’s damages of $425,000 included $49,067 “basic economic loss” and $375,933 other damages.

2. Plaintiff Phyllis Goodkin’s damages of $75,000 included $15,473 past and expected future basic economic loss, and $59,-527 other damages.

VII. INTEREST

Under 28 U.S.C. § 1961(b) a federal district court’s money judgment ordinarily bears interest. However, under 31 U.S.C. § 1304(b)(1)(A), the federal government is liable for such interest “only when the judgment becomes final after review on appeal or petition by the United States Government, and then only from the date of filing of the transcript of the judgment with the Comptroller General through the day before the date of the mandate of affirmance”. Accordingly, defendant NYC will initially bear sole liability for all interest accruing on the judgment. However, if the USA takes an appeal and loses, the USA shall then become jointly liable with defendant NYC for all interest which (1) accrued on a. principal for which the defendants were jointly liable, and (2) accrued during the period that interest may accrue against the United States under 31 U.S.C. § 1304(b)(1)(A). For purposes of contribution, such interest shall be deemed to have accrued upon the defendants’ respective unpaid balances of their respective equitable shares of such principal as such balances stood on the date of accrual.

VIII. COSTS

Costs will be awarded under Rule 54(d) and 28 U.S.C. § 2412(a). We will not award attorney fees. For purposes of liability and contribution, costs will be allocated in the same manner as the rest of the principal amount.

IX. CONCLUSION

The practical effect of the judgment will be as follows:

NYC pays:
Husband’s basic economic loss $ 49,067
Wife’s basic economic loss $ 15,473
70% of husband’s remainder (375.933) $263,153
70% of wife’s remainder (59,527) $ 41,669
NYC TOTAL $369,362
USA pays:
30% of husband’s remainder (375.933) $112,780
30% of wife’s remainder (59,527) $ 17,858
USA TOTAL $130,638
GRAND TOTAL: $500,000

X. ORDER

The Court will prepare a judgment. The Clerk shall insert the appropriate rate of interest in the final paragraph of such judgment, and enter such judgment.

SO ORDERED.

      . The deductions include not only certain collateral sources (such as social security disability benefits), but also "amounts deductible under the applicable insurance policy”, and 20% of lost earnings computed pursuant to Insurance Law § 5102(a)(2) (formerly § 671(1)(b)). In a somewhat surprising opinion (which is nevertheless binding upon this Court), it was held that where lost earnings exceed $1,000 per month, the insurer must pay the lesser of 80% of such lost earnings or $1,000 per month. Kurcsics v. Merchants Mutual Insurance Co., 49 N.Y.2d 451, 403 N.E.2d 159, 426 N.Y.S.2d 454 (1980). The opinion is surprising because Insurance Law § 5102(a)(2) (formerly § 671(1)(b)) appears by its terms to limit lost earnings includable in basic economic loss to $1,000 per month, so that application of the 20% deduction should result in an insurer’s payments for lost earnings being limited to $800 per month rather than $1,000 per month. The opinion in effect provides that the insurer will pay 80% of the first $1,250 per month of lost earnings. Despite the Kurcsics opinion, a covered defendant’s exemption from liability for lost earnings is limited to $1,000 per month rather than $1,250 per month. Pascente v. Stoyle, 116 Misc.2d 641, 456 N.Y.S.2d 633 (City Ct.1982); Barnhart v. Branch Motor Lines, Inc., 107 Misc.2d 47, 433 N.Y.S.2d 370 (Sup.Ct.1980). Although there is some authority for the proposition that a covered defendant cannot be held liable for any portion of loss of earnings sustained during the first three years following an accident unless basic economic loss reaches $50,000, Barnhart, supra, we disagree. Lost earnings, to the extent that they exceed $1,000 per month, do not constitute basic economic loss, and may always be recovered from a negligent covered defendant. Pascente, supra.


author: ROVNER, District Judge.

text:
    Anne BANOWITZ, et al., Plaintiffs, v. The STATE EXCHANGE BANK, et al., Defendants.
    No. 84 C 2818.
    United States District Court, N.D. Illinois, E.D.
    Jan. 18, 1985.

      Susan M. Keegan, Much, Shelist, Freed, Denenberg, Ament & Eiger, P.C., Chicago, Ill., for plaintiffs.
    Paul E. Freehling, Pope, Ballard, Shepard & Fowle, Ltd., Walter M. Jones, McDermott, Will & Emery, Chicago, Ill., for defendants.
   MEMORANDUM OPINION AND ORDER

ROVNER, District Judge.

Eight individual investors (collectively “plaintiffs”) sued the State Exchange Bank (“Bank”) and certain officers, directors and owners of both the Bank and the now bankrupt State Exchange Finance Company (“SEFCO”) (collectively “defendants”) in a six-count Amended Complaint alleging the following violations by defendants: (1) the Racketeer Influenced and Corrupt Organization Act (“RICO”), 18 U.S.C. §§ 1961-68 (Count One); (2) Securities Exchange Act of 1934 (“1934 Act”) § 10(b), 15 U.S.C. § 78j (“Section 10(b)”) and related SEC Rule 10b-5 (Count Two); (3) Securities Act of 1933 (“1933 Act”) § 17(a), 15 U.S.C. § 77q (“Section 17(a)”) (Count Three); (4) the Indiana Securities Regulation Act (“Indiana Act”) § 23-2-1-3, 23 Ind.Code § 23-2-1-3 (“Section 23-2-1-3”) (Count Four); (5) common law fraud (Count Five); and (6) common law breach of fiduciary duty (Count Six). Defendants now move to dismiss the Amended Complaint under Fed.R. Civ.P. 12(b)(6). For the reasons stated in this Memorandum Opinion and Order, defendants’ motion is denied.

FACTS

On various dates beginning July 7, 1982 and continuing until December 18, 1982, officers and employees of the Bank sold to the individual plaintiffs investment notes issued by SEFCO, totalling $790,826. At the time of these sales, plaintiffs were told that SEFCO was a financially sound and profitable company and that SEFCO investment notes were safe, high quality investments. Beginning in approximately August, 1982, however, SEFCO became insolvent, and on December 30, 1982, SEFCO filed a petition under Chapter 11 of the Bankruptcy Code, 11 U.S.C. § 101, et seq., in the United States Bankruptcy Court for the Northern District of Indiana.

In order to understand the involvement of the various defendants, it is necessary to understand the relationship between SEF-CO and the Bank. SEFCO is an Indiana corporation incorporated in 1923 by certain owners of the Bank. Prior to its bankruptcy, SEFCO was in the business of making commercial loans to persons and corporations in Northern Indiana. At all relevant times, the shareholders of the Bank were also shareholders of SEFCO, and SEFCO and the Bank shared common officers and directors. All of SEFCO’s business was conducted by employees of the Bank, and SEFCO’s principal place of business was located in the Bank’s main office building in Culver, Indiana.

Beginning sometime in January 1979, the Bank, under the direction of defendants Adams and Deery, allegedly engaged in the following conduct: the Bank caused SEF-CO to make numerous loans to various officers and directors and related persons or businesses, without adequate documentation or collateral and at lower than market interest rates; the Bank caused SEFCO to pay various personal expenses of defendants Adams, Deery, and other Bank/SEF-CO officers and directors; the Bank authorized the transfer of unduly risky or defaulted loans from the Bank to SEFCO; and the Bank caused SEFCO to acquire for cash certain real estate owned or held for collateral by the Bank at greater than fair market value. The officer and director defendants either authorized, permitted, or recklessly disregarded the above actions.

By approximately January 1, 1982, the above conduct had caused a significant drain on SEFCO’s cash and had left SEF-CO with a large number of nonperforming loans with inadequate or non-existent collateral. The officer and director defendants became aware of SEFCO’s condition, and various defendants, along with their relatives and business interests, began to further drain SEFCO of cash Ay secretly redeeming their investment notes, totalling approximately $6,200,000, during 1982. Also during 1982, defendants caused SEF-CO to prepare and disseminate quarterly financial statements and one annual report which materially misrepresented SEFCO’s financial condition. No defendant ever disclosed to plaintiffs any facts regarding the above-stated conduct or the fact that SEF-CO was insolvent beginning in at least August, 1982 and thus would not be able to redeem its investment notes in the ordinary course of business. Indeed, all but one of the investment notes held by the various plaintiffs were issued between August and December of 1982, at which time the Bank and its employees misrepresented to plaintiffs the financial condition of SEFCO and the security of the notes. All of the director, officer, and shareholder defendants either engaged in, knew of, or recklessly disregarded the above conduct. Because of these misrepresentations and omissions, plaintiffs purchased SEFCO investment notes which have not been redeemed since their dates of maturity, causing them to suffer $790,826.11 in damages.

Rule 9(b) Requirements

Defendants first argue that Counts One, • Two, Three and Five of the Amended Complaint fail to plead fraud with the specificity required by Fed.R.Civ.P. 9(b) and thus should be dismissed. Rule 9(b) of the Federal Rules of Civil Procedure states:

In all averments of fraud or mistake, the circumstances constituting fraud or mistake shall be stated with particularity. Malice, intent, knowledge, and other conditions of mind of a person may be averred generally.

The Seventh Circuit has interpreted Rule 9(b) liberally, stating that it must be read in conjunction with the notice pleading standard of Rule 8. Tomera v. Galt, 511 F.2d 504 (7th Cir.1975). The Court in Tomera held that Rule 9(b) was satisfied by a “brief sketch of how the fraudulent scheme operated, when and where it occurred, and the participants.” Id. at 509.

This Court finds that plaintiffs have satisfied the requirements of Rule 9(b): the Amended Complaint specifically describes the alleged misrepresentations and non-disclosures of material information as well as the alleged self-dealing of SEF-CO insiders. Defendants have been given notice of the alleged fraud sufficient to allow adequate responsive pleading. See Adair v. Hunt International Resources Corp., 526 F.Supp. 736 (N.D.Ill.1981). It is not necessary for plaintiffs to allege evidentiary details that will be used to support the claim of fraud at a later date. Caliber Partners, Ltd. v. Affeld, 583 F.Supp. 1308 (N.D.Ill.1984). In a securities fraud case, plaintiffs are not required “... to set forth facts which, because no discovery has yet occurred, are in the exclusive possession of defendants.” Merrit v. Libby, McNeill & Libby, 510 F.Supp. 366, 373 (S.D.N.Y.1981). Plaintiffs here have alleged specific facts where available. For example, plaintiffs have set forth the specific list of notes redeemed by insiders, and they have specified the exact contents of the misstatements about the SEFCO notes made to them.

Defendants also contend, however, that even if the fraudulent conduct was alleged in sufficient detail, the Amended Complaint is still inadequate in one important respect. Defendants argue that where, as here, multiple defendants are involved, the complaint must provide reasonable notice of the part each defendant allegedly played in the scheme. Lincoln National Bank v. Lampe, 414 F.Supp. 1270, 1278 (N.D.Ill.1976); Adair, 526 F.Supp. at 744. That rule is modified, however, where the multiple defendants are all corporate insiders. Numerous courts have held that the conduct of such individuals need not be specified and the fraudulent acts complained of need not be attributed to certain persons if the complaint sufficiently describes the fraudulent acts and provides the individuals with sufficient information to answer the allegations. See, e.g., Pellman v. Cinerama, Inc., 503 F.Supp. 107, 111 (S.D.N.Y.1980) (and cases cited therein).

A recent Northern District of Illinois case supports this conclusion. In Swanson v. Wabash, Inc., 577 F.Supp. 1308 (N.D.Ill.1983), plaintiff sued a corporation and certain of its former officers and directors alleging fraud and self-dealing in connection with a tender offer. Similarly to the instant case, the complaint in Swanson specified the fraudulent acts in which all the defendants allegedly were engaged, including the misstatements and omissions of material fact, and alleged that “all the defendants knowingly ‘participated or substantially aided and abetted consummation of the Offer through the dissemination of false and misleading statements.’ ” Id. at 1321. The Swanson court stated: “ ‘This is enough. More information can be gathered through discovery.’ ” Id. (quoting Tomera v. Galt, 511 F.2d at 509).

Because the Amended Complaint satisfies the pleading standard for fraud, defendants’ motion to dismiss Counts One, Two, Three, and Five for failure to satisfy the requirements of Rule 9(b) is denied.

The RICO Count

The elements of a civil RICO claim are set forth in 18 U.S.C. §§ 1962 and 1964. Under Section 1964, a plaintiff must allege injury to his “business or property,” and that injury must be “by reason of violation of § 1962.” To allege a violation of Section 1962(c), a plaintiff must allege that the defendant was employed by or associated with an enterprise engaged in, or the activities of which affected, interstate or foreign commerce, and that the person conducted or participated in the conduct of the enterprise’s affairs through a pattern of racketeering activity. Haroco, Inc. v. American National Bank and Trust Co. of Chicago, 747 F.2d 384, 387 (7th Cir.1984); Alcorn County v. U.S. Interstate Supplies, Inc., 731 F.2d 1160, 1167-68 (5th Cir.1984). Defendants contend first that Count I does not allege a “pattern of racketeering activity” because it does not adequately plead mail, wire, or securities fraud, and second, that plaintiffs have failed to allege a “racketeering injury” as required by RICO.

The recent decision of the Seventh Circuit in Haroco, supra, definitively refutes both of the arguments. The Seventh Circuit observed that RICO’s terms are very broad. For example, where plaintiffs in commercial fraud cases allege only two acts of mail fraud, that constitutes a “pattern of racketeering activity,” and mail fraud consists of using the mails for the purpose of executing a scheme or artifice to defraud. Haroco, at 386-387. Plaintiffs’ allegations of defendants’ scheme to defraud plaintiffs by, inter alia, selling them investment notes in an insolvent company by use of the wires or mails to accomplish their fraudulent scheme clearly are sufficient to allege a “pattern of raeketeering” under the Seventh Circuit’s broad construction of that RICO term.

Defendants also assert that Count I must be dismissed because the Amended Complaint fails to allege a “racketeering injury.” Defendants rely on a trilogy of Second Circuit cases, Sedina, S.P.R.L. v. Imrex Co., 741 F.2d 482 (2d Cir.1984); Bankers Trust Co. v. Rhoades, 741 F.2d 511 (2d Cir.1984); and Furman v. Cirrito, 741 F.2d 524 (2d Cir.1984), to assert that the requirement that injury be “by reason of” the alleged racketeering activity is not satisfied by damages allegedly resulting from the claimed predicate offenses of mail, wire and securities fraud. The Seventh Circuit in Haroco, however, specifically rejected the Second Circuit’s imposition of a racketeering injury requirement. The court held that a civil RICO plaintiff need not allege injury beyond any injury resulting to business or property from the underlying acts of racketeering. Haroco, at 398-399. Plaintiffs in the instant case satisfactorily plead “racketeering injury” by alleging that defendants’ RICO violation caused them $790,826.11 in damages.

Because the Amended Complaint contains sufficient allegations of a “pattern of racketeering activity” and of “racketeering injury” to state a RICO claim, defendants’ motion to dismiss Count One is denied.

The 10b-5 Claim — The Definition of “Security"

Count Two of the Amended Complaint is based on the Securities Exchange Act of 1934, 15 U.S.C. § 78a, et seq. (the “1934 Act”), and alleges that defendants violated Section 10(b) of the 1934 Act and Rule 10b-5 promulgated thereunder. Defendants contend that Count Two fails to state a claim because the SEFCO investment notes are not “securities” within the meaning of the 1934 Act. This argument is based upon the exception, contained only in the 1934 Act, to the definition of a “security”: “The term ‘security’ ... shall not include ... any note ... which has a maturity at the time of issuance of not exceeding nine months____” Because plaintiffs’ notes matured in less than nine months, defendants claim that there can be no cause of action under Rule 10b-5.

The real issue here is whether the notes in this case are “commercial promissory notes” or “investment securities.” In Sanders v. John Nuveen & Co., 463 F.2d 1075 (7th Cir.), cert. denied, 409 U.S. 1009, 93 S.Ct. 443, 34 L.Ed.2d 302.(1972), the Seventh Circuit held that short term notes with maturities of less than nine months were “securities” protected by Section 10(b) of the 1934 Act and Rule 10b-5. The Seventh Circuit explained the meaning of the statutory exception as follows: Id. at 1080. The court further implied that where the purchasers of notes are individual members of the public, an inference is raised that the notes are investment securities. Id. at 1080 n. 18. In C.N.S. Enterprises, Inc. v. G. & G. Enterprises, Inc., 508 F.2d 1354 (7th Cir.) cert. denied, 423 U.S. 825, 96 S.Ct. 38, 46 L.Ed.2d 40 (1975), the Seventh Circuit reiterated its holding in Sanders and again embraced what is often referred to as the “commercial-investment dichotomy.” The court stated that in determining whether a note was a “security”: “The ultimate question is whether the plaintiffs are simply borrowers in a commercial transaction who are not protected by the 1934 Act or investors in a securities transaction who are protected.” Id. at 1359.

... when Congress spoke of notes with a maturity not exceeding nine months, it meant commercial paper, not investment securities. When a prospective borrower approaches a bank for a loan and gives his note in consideration for it, the bank has purchased commercial paper. But a person who seeks to invest his money and receives a note in return for it has not purchased commercial paper in the usual sense. He has purchased a security investment.

Defendants’ central argument against following the established Seventh Circuit approach to determining whether a promissory note is a “security” within the meaning of the 1934 Act is that the Supreme Court’s opinion in Marine Bank v. Weaver, 455 U.S. 551,102 S.Ct. 1220, 71 L.Ed.2d 409 (1982), renders earlier contrary rulings moot. This argument, however, stems from a misinterpretation of the Court’s decision in that case.

Indeed, Marine Bank v. Weaver actually lends support to the Seventh Circuit’s approach to the status of short-term notes as “securities.” In Marine Bank, the Court endorsed the approach to the statutory definition which originated in the promissory note cases by relying on the qualifying statement which precedes the listed instruments in the definition: “... unless the context otherwise requires ...” Id., 102 S.Ct. at 1223. The Court held that although “certificates of deposit” are specifically listed in the definition as a type of “security,” the certificate of deposit purchased by respondents was not a “security” because the holders of bank certificates of deposit are adequately protected by the federal banking laws, and thus, the protection of the antifraud provisions of the federal securities laws was unnecessary in that “context.” Id. at 1224-45. Although it is true that the Court did note that “[t]he statutory definition excludes only currency and notes with a maturity of less than nine months,” that statement was made simply to illustrate the great breadth of the definition. Id., 455 U.S. at 555-56, 102 S.Ct. at 1223-24. Both the analysis and the holding of the Supreme Court in Marine Bank refute the implication that a note with a maturity of less than nine months can in no circumstances be a “security” within the 1934 Act. Thus, Marine Bank v. Weaver supports the Seventh Circuit’s focus on the context of the transaction rather than on the literal meaning of the statutory words.

In this case, plaintiffs’ allegations clearly demonstrate that plaintiffs did not borrow money from SEFCO in return for a commercial promissory note, but rather that they gave their money to the finance company in return for investment securities. This court therefore holds that the SEFCO investment notes purchased by plaintiffs are “securities” within the meaning of the 1934 Act and the protection of Rule 10b-5.

Finally, defendants ask that Count Two be dismissed for plaintiffs’ failure to adequately plead the interstate commerce element. In their Amended Complaint, plaintiffs simply allege that defendants used the means and instrumentalities of interstate commerce and the mails in connection with their fraudulent conduct. In support of their claim that a complaint alleging violation of Section 10(b) and Rule 10b-5 must state specific facts showing that interstate commerce or the mails were used, defendants cite only the case of Gordon v. Lipoff, 320 F.Supp. 905, 914 (W.D.Mo.1970). Defendants inexplicably disregard the holding of the Seventh Circuit that averments describing the “bare bones of a fraudulent scheme” coupled with plaintiffs’ allegations that defendants used the mails and other instruments of transportation in interstate commerce were sufficient to state a claim under Rule 10b-5. Tomera v. Galt, 511 F.2d 504, 506 (7th Cir. 1975).

Defendants’ motion to dismiss Count Two of the Amended Complaint is therefore denied.

The Section 17(a) Claim — Private Right of Action

Defendants make three separate attacks on Count Three of the Amended Complaint: (1) they assert that plaintiffs have not pled fraud with sufficient specificity; (2) they assert that plaintiffs have not adequately alleged the interstate commerce element; and (3) they assert that no private right of action exists under Section 17(a) of the 1933 Act. Their first two objections have already been addressed, and the third is addressed below.

The Courts of Appeals are sharply divided as to whether there exists an implied private right of action for damages under Section 17(a) of the Securities Act, and the Supreme Court has consistently reserved opinion on the issue. This Circuit has sided with the majority in implying a private right in earlier holdings which are directly applicable here. E.g., Daniel v. International Brotherhood of Teamsters, 561 F.2d 1223, 1246 (7th Cir.1977), rev’d on other grounds, 439 U.S. 551, 99 S.Ct. 790, 58 L.Ed.2d 808 (1979). Significantly, in each of the Seventh Circuit cases where the court implied a private right of action under Section 17(a), a Rule 10b-5 claim was also alleged. The Seventh Circuit’s position was recently articulated in Peoria Union Stock Yards Co. v. Penn Mutual Life Insurance Co., 698 F.2d 320, 323 (7th Cir. 1983). In Peoria Union, Judge Posner declared that under the prevailing view, Section 17(a) can be enforced by private damage suits, but he added that “it is not a terribly important question” because Section 17(a) is so similar to Rule 10b-5, where a private right of action is well-established. Id.

In this case, too, plaintiffs allege a Rule 10b-5 claim as well as a Section 17(a) count. Thus, this Court, following the path forged by the Seventh Circuit, holds that there is no need to decide whether Section 17(a), standing alone, may give rise to a private cause of action. Accordingly, the motion to dismiss Count Three of the Amended Complaint is denied.

Pendent State Law Counts

Defendants also move to dismiss Counts Four, Five, and Six, the pendent counts based on state law. Count Four alleges a violation of the Indiana Securities Regulation Act; Count Five is grounded in common law fraud; and Count Six asserts breach of fiduciary duty. Because this Court has declined to dismiss plaintiffs’ federal claims, there is no reason to dismiss the state claims for lack of pendent jurisdiction. See United Mine Workers v. Gibbs, 383 U.S. 715, 726, 86 S.Ct. 1130, 1139, 16 L.Ed.2d 218 (1966). Further, defendants’ charge that plaintiffs have failed to adequately plead Counts Five and Six has been addressed above. Accordingly, the motion of certain defendants to dismiss the Amended Complaint is denied in full. Defendants are granted thirty days to file an answer to the Amended Complaint.

      . Namely, Anne Banowitz; Fred Faser; Mary K. Faser; Wayne T. Hittle; Ida A. Hittle; Bernard Warner; Rachel Warner; and Vivian Borne-man.

      . Namely, Marsha E. Adams, as Executor of the Estate of Fred E. Adams; Charlotte Jung; Ron-aid A. McKee; John J. Deery; Allen H. Cummins; Jack Carpenter; Bryce Burton; Robert Koch; Bill Annis; Margaret Swanson; Richard P. Smith; Glenn Overmyer; William F. Laramor; Robert E. Grossman; Herschel J. Umbaugh; John R. Mars; Vivian A. Bush; David Kesling; and Peter Kesling.

      . On a motion to dismiss, all well-pleaded allegations of the complaint are taken as true, and all reasonable factual inferences are drawn in the opponent’s favor. Mathers Fund, Inc. v. Colwell Co., 564 F.2d 780, 783 (7th Cir.1977). Accordingly, here the facts pleaded by plaintiffs are assumed to be true.

      . An example given by defendants in their Memorandum in Support best illustrates the concept of "racketeering injury”:
      For example, if a retail clothing store competes unfairly by charging lower prices because it is subsidized with the proceeds of multiple interstate shipments of stolen property, a competing retail store could sue under RICO because it has been injured in its business by the other store's pattern of racketeering. By contrast, the victim of the thefts of multiple interstate shipments, whose property is stolen and transported, cannot sue under RICO, although the victim has a state law claim arising from the theft.
      Memorandum at 9.

      . 15 U.S.C. § 78c. -The complete definition reads:
      (a) When used in this chapter, unless the context otherwise requires (10) The term "security" means any note, stock, treasury stock, bond, debenture, certificate of interest or participation in any profit-sharing agreement or in any oil, gas, or other mineral royalty or lease, any collateral-trust certificate, preorganization certificate or subscription, transferable share, investment contract, voting-trust certificate, certificate of deposit, for a security or in general, any instrument commonly known as a “security”; or any certificate of interest or participation in, temporary or interim certificate for, receipt for, or warrant or right to subscribe to or to purchase, any of the foregoing; but shall not include currency or any note, draft, bill of exchange, or banker’s acceptance which has a maturity at the time of issuance of not exceeding nine months, exclusive of days of grace, or any renewal thereof the maturity of which is likewise limited.

        Id.

      . According to the Amended Complaint, each of the instruments on which plaintiff Banowitz bases her claim had a maturity date of only three months after issuance. Although the maturity dates of the notes purchased by the other plaintiffs are not stated, this information is not necessary in light of our disposition of this issue.

      . The situation in C.N.S. Enterprises was just the reverse of that in Sanders v. John Nuveen & Co., 463 F.2d 1075 (7th Cir. 1972). In C.N.S. Enterprises, the Seventh Circuit used a similar "context-over-text” analysis to determine that a long-term note, although within the literal definition of "security,” was outside the intended protection of the securities laws.

      . Defendants’ attempt to show that post-Marine Bank, the Seventh Circuit has reversed its earlier stance, is also unfounded. The court in Hunssinger v. Rockford Business Credits, Inc., 745 F.2d 484, 492, n. 1 (7th Cir.1984), did not "... observe, without qualification that short-term notes are not securities....” Defendants’ Reply Memorandum at 9 n. 5. In fact, the court in Hunssinger actually noted that the short-term note exception can only apply to "prime quality commercial paper." Id. (emphasis added).

      . In their Amended Complaint, plaintiffs further allege that at the time of purchase, certain defendants promised them that the SEFCO notes were “safe, high quality investments.” This case thus differs from a case cited by defendants, Lincoln National Bank v. Lampe, 414 F.Supp. 1270 (N.D.Ill.1976), where there was "nothing whatsoever in the complaint to indicate that [the] promissory notes were not run-of-the-mill commercial notes.” Id. at 1275.

      . Compare Keys v. Wolfe, 709 F.2d 413, 416 (5th Cir.1983), Landry v. All American Assurance Co., 688 F.2d 381, 384-91 (5th Cir.1982), and Shull v. Dain, Kalman & Quail, Inc., 561 F.2d 152, 159 (8th Cir.1977), cert. denied, 434 U.S. 1086, 98 S.Ct. 1281, 55 L.Ed.2d 792 (1978) (holding no private right of action) with Stephenson v. Calpine Conifers II, Ltd., 652 F.2d 808, 815 (9th Cir.1981) and Kirshner v. United States, 603 F.2d 234, 241 (2d Cir. 1978), cert. denied, 442 U.S. 909, 99 S.Ct. 2821, 61 L.Ed.2d 274 (1979) (holding such a right exists).

      . See, e.g., Herman & MacLean v. Huddleston, 459 U.S. 375, 378, n. 2, 103 S.Ct. 683, 685, n. 2, 74 L.Ed.2d 548 (1983); Aaron v. SEC, 446 U.S. 680, 689, 100 S.Ct. 1945, 1951, 64 L.Ed.2d 611 (1980).

      . See Daniel v. International Brotherhood of Teamsters, 561 F.2d 1223, 1246 (7th Cir.1977), rev’d on other grounds, 439 U.S. 551, 99 S.Ct. 790, 58 L.Ed.2d 808 (1979); Schaefer v. First National Bank of Lincolnwood, 509 F.2d 1287, 1293 (7th Cir.), cert. denied, 425 U.S. 943, 96 S.Ct. 1682, 48 L.Ed.2d 186 (1975); Surowitz v. Hilton Hotels Corp., 342 F.2d 596, 604 (7th Cir.), rev’d on other grounds, 383 U.S. 363, 86 S.Ct. 845, 15 L.Ed.2d 807 (1965).
      In Nemkov v. O'Hare Chicago Corp., 592 F.2d 351 (7th Cir.1979), the Seventh Circuit specifically stated that it did not reach the issue of whether there is an implied cause of action under Section 17(a) of the 1933 Act absent a viable claim based on Section 10(b) of the 1934 Act and Rule 10b-5. Id. at 353 n. 2 (court affirmed dismissal of case based solely on statute of limitations grounds).

      . This reasoning appears to have been employed initially by Judge Friendly in his concurrence in SEC v. Texas Gulf Sulpher Co., 401 F.2d 833 (2d Cir. 1968), cert. denied, 394 U.S. 976, 89 S.Ct. 1454, 22 L.Ed.2d 756 (1969) and has been heavily relied upon since by the courts which do imply a private right of action. See, e.g., Stephenson v. Calpine Conifers II, Ltd., 652 F.2d 808, 815 (9th Cir.1981). It is interesting that circuit courts still rely upon this rationale in light of Aaron v. SEC, 446 U.S. 680, 100 S.Ct. 1945, 64 L.Ed.2d 611 (1980), where the Supreme Court in an SEC enforcement action held that, unlike Rule 10b-5, subsections 17(a)(2) and 17(a)(3) do not require proof of scienter. Id. at 695-701, 100 S.Ct. at 1955-1958.

      . The several recent cases from the courts in the Seventh Circuit which have declined to imply a private right of action under Section 17(a) contain facts distinguishable from the instant case. In North American Financial Group, Ltd. v. S.M.R. Enterprises, Inc., 583 F.Supp. 691, 695-97 (N.D.Ill.1984), the court was confronted by a "naked” Section 17(a) violation, unaccompanied by a Rule 10b-5 claim. Similarly, in Roskos v. Shearson/American Express, Inc., 589 F.Supp. 627 [current] Fed.Sec.L.Rep. (CCH) ¶ 91, 624 (E.D.Wis.1984), the plaintiff had alleged a count based in negligence. The Supreme Court has held in an SEC enforcement action that subsections 17(a)(2) and 17(a)(3) may be grounded in simple negligence, Aaron v. SEC, 446 U.S. 680, 697, 100 S.Ct. 1945, 1956, 64 L.Ed.2d 611 (1980), whereas scienter is an essential element of a Rule 10b-5 suit, Ernst & Ernst v. Hochfelder, 425 U.S. 185, 201, 96 S.Ct. 1375, 1384, 47 L.Ed.2d 668 (1976). Thus, in both North American and Roskos, the question of the existence of a private right of action under Section 17(a) was significant and possibly outcome-determinative.
      In the instant case, however, the Amended Complaint includes both Section 17(a) and Rule 10b-5 counts, and all allegations are grounded in scienter. This Court therefore follows the approach of both Judge Posner and Judge Shadur:
      This Court will take a leaf from the Court of Appeals’ book in Peoria Union Stock Yards and treat the Section 17(a) issue as irrelevant — that is, not necessary for decision — unless a substantive distinction between Rule 10b-5 and Section 17(a) develops. This Court therefore defers any current decision as to the independent viability of a Section 17(a) claim. Caliber Partners, Ltd. v. Affeld, 583 F.Supp. 1308 (N.D.Ill.1984).