author: TOM S. LEE, District Judge.

text:
    MISSISSIPPI POWER AND LIGHT COMPANY and Mississippi Public Service Commission, Plaintiffs, v. UNITED GAS PIPE LINE COMPANY, Defendant.
    Civ. A. No. J83-0267(L).
    United States District Court, S.D. Mississippi, Jackson Division.
    April 19, 1985.
    David W. Clark, Joseph P. Wise, Wise, Carter, Child & Caraway, Bennett Smith, Miss. Public Service Comm., Jackson, Miss., for plaintiffs.
    Holmes Adams, John R. Hutcherson, R. David Kaufman, Brunini, Grantham, Grower & Hewes, Jackson, Miss., for defendant.
   MEMORANDUM OPINION

TOM S. LEE, District Judge.

This cause is before the court on the application of the Mississippi Public Service Commission (the “Commission”) for review of an order of Magistrate John R. Countiss, III, which granted the motion of United Gas Pipe Line Company (“United”) to reconsider intervention, denied the Commission’s renewed motion to intervene and dismissed with prejudice the Commission’s complaint, allowing, however, the Commission to participate in the capacity of amicus curiae. After consideration of the briefs submitted by the parties with attachments, the court concludes that the Commission’s application for review should be granted for the reasons that the Magistrate was without authority to act on United’s dispositive motion and that the Fifth Circuit en banc decision on which the Magistrate relied is factually distinguishable from the situation present in this ease.

The Commission’s motion to intervene as a party plaintiff was initially granted by Magistrate Countiss under Rule 24(b) of the Federal Rules of Civil Procedure. On application for review before Judge Dan M. Russell, Jr., the ruling of the Magistrate was upheld. In denying the application, Judge Russell relied on a Fifth Circuit panel decision, New Orleans Public Service, Inc. v. United Gas Pipe Line Co., 690 F.2d 1203 (NOPSI I), modified, 694 F.2d 421 (NOPSI II) (5th Cir.1982), cert. denied, — U.S. -, 105 S.Ct. 434, 83 L.Ed.2d 360 (1984). The Commission did not appeal the Magistrate’s ruling denying the Commission leave to intervene as of right under F.R.Civ.P. 24(a). In the panel decision, NOPSI I, the Fifth Circuit had held that the district court erred in denying the city officials’ intervention as of right under Rule 24(a) and permissive intervention under Rule 24(b). 690 F.2d at 1207, 1209, 1210, 1215. The panel’s decision was predicated on the understanding that the city officials possessed the power to regulate the rates of public utilities within the City of New Orleans. Subsequently, the Fifth Circuit was informed that the city officials no longer had regulatory powers by virtue of a vote of the electorate of New Orleans and accordingly withdrew the holding that the public officials should have been granted leave to intervene as of right. 694 F.2d at 422. However, the panel emphasized that its holding that the district court abused its discretion in denying the officials leave to intervene permissively remained intact. Id. (Garwood, J., dissenting). On reconsideration in NOPSI III, the Court of Appeals, sitting en banc, held that the city officials were not entitled to intervene as of right and that the district court did not clearly abuse its discretion in denying the officials’ permissive intervention under Rule 24(b). 732 F.2d at 473. In reaching this decision, the Fifth Circuit summarized the panel’s rationale in support of the previous decision that the city officials should be allowed permissive intervention. The court stated:

In reversing the district court’s denial of permissive intervention to the City officials, the panel on original submission stressed the City’s rate regulatory authority over NOPSI (unaware of the transfer of that authority to the Public Service Commission), stating that “the government rate regulators will need to determine [presumably in NOPSI rate proceedings] the reasonableness of any recovery [by NOPSI] and the method of any refund to consumers”; that the “City Council’s intervention ... merely accelerates the public sector review of claims that eventually will require public scrutiny in any event” and “will minimize any future protests that consumers otherwise might have against the City Council for failure to carry out its governmental regulatory responsibilities”; and, that permissive intervention should have been allowed “by the government authorities with rate regulatory responsibilities affecting both the underlying dispute and an existing party to the suit.” 690 F.2d at 1210.

732 F.2d at 471. The Fifth Circuit then concluded, Judge Garwood writing for the majority, that “[Wjhatever the strength of these considerations in the context of the assumptions on which they rested, they are wholly inapplicable in view of the transfer of all the City’s rate and other relevant regulatory authority to the Public Service Commission, which has not sought intervention.” 732 F.2d 471-72. Taking into consideration this statement and others in the opinion to the same effect, this court interprets the Court of Appeals’ en banc decision to be predicated upon the factual circumstance of the city officials’ loss of regulatory power to the Louisiana Public Service Commission.

In this case, the Mississippi Public Service Commission maintains full regulatory authority over its co-plaintiff, Mississippi Power and Light Company (MP & L). Further, in this controversy, MP & L, a public utility, is suing United for an alleged breach of contract, asserting that United has improperly overcharged MP & L according to the pricing provisions of their contract. The factual situation presented is almost identical to what were perceived to be the facts by the panel of the Fifth Circuit in NOPSI I. The decision of the original panel, holding that the district court erred in denying the purported regulatory agency’s motion to intervene as of right or permissively, has been nullified by the panel decision on petition for rehearing, NOPSI II and the en banc decision, NOPSI III. However, the latter decisions were based upon the factual change in circumstance of the city officials’ loss of regulatory power to the Louisiana Public Service Commission. Since the Mississippi Public Service Commission is vested with regulatory powers, this court concludes that the reasoning in the original Fifth Circuit panel decision, NOPSI I, is applicable.

The Commission has requested that this court determine that it should be allowed to intervene as of right in accordance with the original Fifth Circuit panel decision. However, since the Commission failed to appeal the Magistrate's initial ruling that the Commission could only intervene permissively, the court is of the opinion that the Commission cannot now assert the right to intervene other than by permissive intervention.

For the reasons stated herein, it is ordered that the Commission’s application for review is granted and the Magistrate’s order denying permissive intervention and dismissing the Commission’s complaint is reversed.

      . Mississippi Power and Light Company (MP & L) charges United with violating the pricing provisions of a contract between MP & L and United. The Commission has sought intervention primarily to protect the interests of the public and to fulfill its duties as MP & L’s regulatory agency. MP & L has filed a statement in support of the Commission’s position stating that the Commission has interests which supersede those of MP & L, including the statutory duty to protect the public and assuring a proper distribution of any recovery by MP & L.

      . Local Rule 8(F) lists those motions regarded as dispositive in this district. The court construes the present motion as dispositive since a request contained in the motion seeks the dismissal of the Commission’s complaint with prejudice. Rule 8(F) states that a motion to involuntarily dismiss an action is considered a dis-positive motion. Judge Russell has granted both MP & L and the Commission a preliminary injunction, and that ruling has been appealed to the Fifth Circuit. The Magistrate’s dismissal of the Commission’s complaint does dispose of the issues and interests sought to be advanced by the Commission and is, therefore, as viewed by the court, an involuntary dismissal of "an action”. The fact that the breach of contract action between MP & L and United remains for adjudication does not dictate a contrary result.

      . Judge William L. Garwood wrote the dissenting opinion in NOPSI II in opposition to the majority’s holding that the district court abused its discretion in denying the city officials’ permissive intervention. 694 F.2d at 422. Judge Jerre S. Williams wrote the majority opinion in NOPSI II. Id. Upon consideration by the Fifth Circuit en banc, NOPSI III, Judge Garwood wrote the majority opinion and Judge Williams wrote the dissenting opinion. 732 F.2d at 454, 473. This might seem to indicate that the NOPSI III opinion holding that the district court did not err in denying the city officials intervention as of right or permissive intervention signifies a change in interpretation of the law from the panel's original ruling in NOPSI 1. However, this is not the case. Judge Garwood specially concurred in NOPSI I, stating that he joined in that portion of the majority’s opinion holding that the denial of the city officials’ requested permissive intervention was an abuse of discretion and found it "unnecessary to reach the question of whether the city officials were entitled to intervene as of right....’’ 690 F.2d at 1216. In NOPSI II, Judge Garwood dissented from the majority’s opinion holding that it was an abuse of discretion to deny the city officials’ requested permissive intervention but stated that the basis for his dissent was that relief was only sought under the private contract between NOPSI and United and that the Louisiana Public Service Commission, which did not seek to intervene, and not the city, had all of the authority to regulate NOPSI. 694 F.2d at 422. (Garwood, J. dissenting). The statements by Judge Garwood in NOPSI I and NOPSI II indicate that his opinion in the en banc decision was grounded upon the fact that the city officials had lost their powers to regulate NOPSI to the Louisiana Public Service Commission, not that a regulatory agency with its powers intact should not be allowed to intervene at least permissively.
      United argues that NOPSI I was withdrawn by the Fifth Circuit in NOPSI III and that the original panel decision is therefore without any precedential value. However, the court notes that this decision was recently cited as precedent in a Second Circuit decision. United States v. Hooker Chemicals & Plastics, 749 F.2d 968, 985 (2nd Cir.1984).


source: Caselaw Access Project

author: ROYNER, District Judge.

license: Public Domain

text:
    DEERE & COMPANY, a Delaware corporation, Plaintiff, v. DEUTSCHE LUFTHANSA AKTIENGESELLSCHAFT, a foreign corporation doing business in the United States as Lufthansa German Airlines, Defendant.
    No. 81 C 4726.
    United States District Court, N.D. Illinois, E.D.
    April 26, 1985.
   MEMORANDUM OPINION AND ORDER

ROYNER, District Judge.

This is an action under the Warsaw Convention brought by plaintiff Deere & Company (“Deere”) to recover expenses of approximately $195,500 resulting from damage to an IBM Model 3032 computer during loading by defendant Deutsche Lufthansa Aktiengesellschaft (“Lufthansa”) for shipment to Mannheim, Federal Republic of Germany.

Judge Grady previously has decided the majority of the issues presented in defendant’s motion for summary judgment and plaintiff’s motion for partial summary judgment. In a Memorandum Opinion dated December 30, 1982, the court granted Deere’s motion for partial summary judgment as to the liability of defendant Lufthansa. In a second Memorandum Opinion dated December 30, 1982, the court granted Lufthansa’s motion for summary judgment as to the use of the last official United States price of gold as the applicable standard governing limitation of its liability under Article 22(2) of the Warsaw Convention.

Presently before this Court is the sole remaining issue on which the parties move for summary judgment: whether Lufthansa’s liability under Article 22(2) must be calculated with reference to the entire weight of the shipment or with reference only to the weight of the package specifically damaged. For the following reasons, this Court grants Deere’s motion for partial summary judgment as to the use of the weight of the entire shipment in calculating the limitation of Lufthansa’s liability. Correspondingly, Lufthansa’s motion for summary judgment on this issue is denied.

The entire shipment consisted of the various components that comprise an IBM Model 3032 computer. The damaged package contained one of those components, the “directors frame.” The court, in a Memorandum Opinion dated August 8, 1984, has determined the applicable law: “If the damage to the director frame affects the value of the entire computer, Lufthansa’s liability must be calculated with reference to the weight of the entire computer shipment.” Mem.Op. at 4. The court also allowed extended discovery on the issue of whether “the damage to the director frame of the computer did, in fact, affect the value of the entire computer.” Id.

After a complete review of the evidence submitted, this Court concludes that there exists no genuine issue as to the material fact of the direct effect which the damage to the director frame had on the value of Deere’s 3032 computer. The deposition testimony of Alexander G. Cameron, a product planner for IBM Corporation, Lufthansa’s Response to Deere’s Request for Admission, and the affidavit of Dieter Schirmer, Manager of Computer Services at Deere’s European office, establish the following facts: the damaged frame was an integral part of the computer and the computer was inoperable without the frame; the director frame is not a minor maintenance component which can be readily replaced; IBM did not separately sell or lease director frames for Model 3032 computers; IBM engineers who inspected the damaged computer in Mannheim determined that it was necessary to return the damaged frame to the Poughkeepsie, New York plant for rebuilding; and the cost of rebuilding the frame alone, not including transportation charges or the cost to Deere of leasing a replacement computer, was approximately $57,000. Based on his experience at IBM, Mr. Cameron testified that “certainly” a damaged director frame would affect the value of the entire computer.

Lufthansa attempts to controvert the import of this evidence by pointing to deposition testimony that the IBM Model 3032 was not “one-of-a-kind” but rather was a “standard” IBM computer during the years it was produced, implying that Deere easily could replace one damaged component of the system. The evidence clearly shows, however, that the director frame was not readily replaceable: IBM did not separately sell or lease director frames for the Model 3032 computers. Therefore, that the IBM Model 3032 computer was “standard” rather than “one-of-a-kind,” fails to raise an issue of fact.

This Court finds that the damage to the director frame, which rendered the 3032 computer inoperable for several months, affected the value of the entire computer. Thus, this Court grants partial summary judgment to Deere as to the use of the weight of the entire shipment in calculating Lufthansa’s limitation of liability under Article 22(2) of the Warsaw Convention. Lufthansa’s cross-motion for summary judgment on this issue therefore is denied.

      . Convention for the Unification of Certain Rules Relating to International Transportation by Air concluded at Warsaw, Poland, on October 12, 1929, 49 Stat. 3000, T.S. No. 876, adhered to by the United States June 27, 1934.

      . Article 22(2) provides, in pertinent part: “In the transportation of checked baggage and of goods, the liability of the carrier shall be limited to a sum of 250 francs per kilogram____” 49 U.S.C. § 1502.


author: VOORHEES, District Judge.

text:
    Timothy COLLINS, Plaintiff, v. STATE OF ALASKA and Division of Marine Highway Systems, Defendants.
    No. C84-418V.
    United States District Court, W.D. Washington.
    April 30, 1985.

      Steven R. Pruzan, of Miracle, Pruzan, Morrow, Pruzan & Johnson, Seattle, Wash., for plaintiff.
    James P. Moynihan, of Bauer, Moynihan & Johnson, Seattle, Wash., for defendant.
   VOORHEES, District Judge.

Having considered the motion of plaintiff for partial summary judgment and the motion of defendant for summary judgment, together with the memoranda, affidavits, and exhibits submitted by counsel, and, having heard and considered the oral argument of counsel, the Court now finds and rules as follows:

1. This case, which is apparently one of first impression, involves a conflict between two strong public policies, one upholding collective bargaining, the other protecting the rights of seamen. At issue is whether a provision in a labor contract can foreclose plaintiff from asserting the traditional remedies of an injured seamen.

2. The facts in this case are not controverted. In December, 1983, the plaintiff was a seaman aboard the M/V COLUMBIA, a vessel in the fleet of ferries owned and operated by defendant. Plaintiff’s complaint alleges that on December 5, 1983, he fell into a void of that vessel and was injured. He alleges that the cause of his injury was the failure by defendant to provide guardrails and adequate lighting on the vessel. Plaintiff claims his right to the traditional remedies of a seaman: damages for negligence under the Jones Act and for unseaworthiness of the vessel as well as the payment of maintenance and cure.

3. At the time of his accident plaintiff was a member of the Inlandboatmen’s Union of the Pacific (hereinafter IBU). As part of the collective bargaining agreement which was then in effect between that union and the defendant, there was the following provision:

9.01 In lieu of Wages, Maintenance and Cure, remedies for seaworthiness and other seamen’s remedies including Jones Act remedies, employees shall be entitled to Alaska Worker’s Compensation benefits.

4. After his injury plaintiff applied for and received time loss benefits in the sum of $13,213.78 under this provision of the agreement. His medical bills in the sum of $6,022.11 were paid under that same provision.

5. Plaintiff has moved for partial summary judgment, striking defendant's affirmative defense that this provision of the collective bargaining agreement is a bar to plaintiff’s action. Plaintiff has also moved for dismissal of defendant’s counterclaim for damages for his alleged breach of the labor contract between defendant and the IBU. Defendant has filed a cross-motion for summary judgment of dismissal, contending that the collective bargaining agreement bars plaintiff’s claim.

6. Historically, of course, seamen have been the wards of admiralty. As Justice Story stated in Harden v. Gordon, 11 F.Cas. 480, 485 (C.C.D.Maine 1823) (No. 6047):

[T]he most rigid scrutiny is instituted into the terms of every contract, in which they engage. If there is any undue inequality in the terms, any disproportion in the bargain, any sacrifice of rights on one side which are not compensated by extraordinary benefits on the other, the judicial interpretation of the transaction is that the bargain is unjust and unreasonable, that advantage has been taken of the situation of the weaker party, and that pro tanto the bargain ought to be set aside as inequitable. Hence every deviation from the terms of the common shipping paper, (which stands upon the general doctrines of maritime law,) is rigidly inspected; ... [a]nd on every occasion the court expects to be satisfied, that the compensation for every material alteration is entirely adequate to the diminution of right or privilege on the part of the seamen.

7. Plaintiff has not contended, nor does it appear that he can contend, that there was any inequality in the bargaining strengths of the IBU and defendant in their negotiation of the terms of the collective bargaining agreement in question.

8. With respect to that collective bargaining agreement the Court finds that the provisions of that agreement provide an adequate quid pro quo for the replacement of the traditional maritime remedies of covered seamen by a right to workmen’s compensation.

9. The seamen within the bargaining unit derived a number of advantages in being able to pursue their claims under the Alaska Workers’ Compensation Act (hereinafter AWCA), rather than being required to pursue their traditional remedies through court proceedings. Not the least of those advantages was the nonapplicability of the doctrine of comparative negligence. ALASKA STAT. Section 23.30.-045(b). The Act also creates a statutory presumption in favor of coverage and provides for attorney’s fees for services rendered in connection with a claim. ALASKA STAT. Sections 23.30.120, 23.30.145. Benefits paid under the statute appear to be relatively generous. For example, for temporary total disability an injured employee is paid 80% of his net income. ALASKA STAT. Section 23.30.185. The AWCA provides for injured employees a speedy and assured means of obtaining compensation for injuries. This is by contrast with the slower and less certain remedies provided by the courts.

10. It is true, of course, that some injured seamen might receive higher benefits by the exercise of their traditional rights of seamen. Other seamen might, however, receive higher benefits under the AWCA. In this Court’s opinion it was well within the competence of the IBU to negotiate an agreement which it felt provided the greatest good to the greatest number of its injured members.

11. The remedy provided by the collective bargaining agreement for injured seamen is, of course, but one of many aspects of that agreement. Its table of contents reveals the many areas covered by the agreement. Plaintiff has enjoyed many benefits under the agreement. He now seeks to disavow only that provision which affects the remedies available to him upon being injured. The employees in a bargaining unit cannot, however, be permitted to pick and choose among the provisions negotiated by their collective bargaining representative, to ratify those they like and to disavow those they do not. Permitting that practice would reduce collective bargaining to a shambles. Those who are bound by a collective bargaining agreement must accept the bitter with the better.

12. Plaintiff contends that the purported exchange of rights was illusory since, he asserts, he was covered under the Alaska Workers’ Compensation Act before the collective bargaining agreement was entered into. This appears, however, not to be correct. Although an Alaskan statute purported to cover ferry workers under the AWCA, it has been twice held that, despite that statute, injuries sustained by seamen were within the exclusive jurisdiction of admiralty and were not compensable under the Act. Alaska Industrial Board v. Alaska Packers Assn., 13 Alaska 178, 186 F.2d 1015 (9th Cir.1951); Anderson v. Alaska Packers Assn., 635 P.2d 1182 (Alaska 1981). Plaintiff came under the coverage of the AWCA only because of the collective bargaining agreement between defendant and the IBU.

13. Plaintiff also contends that he should not be bound by the collective bargaining agreement because he did not vote on it and was not given an explanation of the nature and extent of the rights which were surrendered. Plaintiff is estopped from making this argument, however, by his seeking and accepting of benefits under the AWCA. Moreover, our nation’s labor laws have extinguished plaintiff’s right to order his own relations with his employer. NLRB v. Allis-Chalmers Mfg. Co., 388 U.S. 175, 180, 87 S.Ct. 2001, 2006, 18 L.Ed.2d 1123 (1967). In a collective bargaining unit, it is the collective bargaining representative which is given the power to negotiate the terms of the labor contract between the employer and the employees. If plaintiff is aggrieved by the terms of the collective bargaining agreement negotiated by his union, his remedy lies in an action against the union for a violation by it of its duty of fair representation. See Vaca v. Sipes, 386 U.S. 171, 87 S.Ct. 903, 17 L.Ed.2d 842 (1967).

14. The Court is of the opinion and finds that where, as here, the terms of a freely-negotiated collective bargaining agreement come into conflict with the traditional remedies of a seaman, and where, as here, an adequate quid pro quo has been demonstrated for the relinquishment of the traditional remedies, the terms of the collective bargaining agreement are controlling and must be given effect.

15. The Court finds, therefore, that plaintiff’s claims are barred by the collective bargaining agreement entered into between the IBU and the defendant. Because this ruling is dispositive, the Court need not rule upon defendant’s motion that plaintiff’s action be dismissed because it is allegedly in violation of the Tenth and Eleventh Amendments to the United States Constitution.

Accordingly, defendant’s motion for summary judgment is GRANTED. The action of the plaintiff is DISMISSED WITH PREJUDICE. The sole remaining issue is defendant’s claim against plaintiff for breach of the collective bargaining agreement.

Defendant’s counsel shall advise the Court whether defendant proposes to pursue its counterclaim against plaintiff for breach of the collective bargaining agreement.


author: LONGOBARDI, District Judge.

text:
    JACK ECKERD CORPORATION, Plaintiff, v. DART GROUP CORPORATION, Defendant.
    Civ. A. No. 85-341 LON.
    United States District Court, D. Delaware.
    July 3, 1985.

      Richard L. Sutton (argued), and Jack B. Blumenfeld, of Morris, Nichols, Arsht & Tunnell, Wilmington, Del., for plaintiff; Sheldon Raab, and Stephen Lew, of Fried, Frank, Harris, Shriver & Jacobson, New York City, Shackleford, Farrior, Stallings & Evans, Tampa, Fla., of counsel.
    Donald Wolfe, Jr., and Charles S. Crompton, Jr. (argued), of Potter, Anderson & Corroon, Wilmington, Del., for defendants; Robert B. Hirsch, James P. Mercurio, Salvatore A. Romano, and Howard B. Possick, of Arent, Fox, Kintner, Plotkin & Kahn, Washington, D.C., of counsel.
   MEMORANDUM OPINION

LONGOBARDI, District Judge.

The Plaintiff, Jack Eckerd Corporation (“Eckerd”), brought this action claiming that the Defendant, Dart Group Corporation (“Dart”), is violating the federal securities laws by filing a false and misleading Schedule 13D and by conducting a “creeping tender offer” to gain control of Eckerd. Currently before the Court is Dart’s motion to disqualify the firm of Fried, Frank, Harris, Shriver & Jacobson (“Fried, Frank”) from acting as attorneys for Eckerd because of the firm’s alleged prior relationship with Dart.

BACKGROUND

The basis for this motion is Fried, Frank’s role in Dart’s acquisition of stock in the May Department Store Corporation (“May”). In June, 1984, Dart sold its Dart Drug Store Division for approximately 160 million dollars. The proceeds of this sale represented more than half of Dart’s total assets. As a means of investing these funds, Dart began acquiring May shares in late 1984 and hired the First Boston Corporation (“First Boston”), an investment banking firm, as financial advisor concerning the acquisition of May. Fleischer Supplemental Affidavit, Docket Item (“D.I.”) 50, Exhibit A. As part of its agreement with First Boston, Dart agreed to reimburse First Boston “for its out-of-pocket expenses, including fees and expenses of its counsel or any other advisor or consultant retained by First Boston with the prior approval of Dart.” Id. In November, 1984, First Boston retained Fried, Frank as its legal counsel. Fleischer Affidavit, D.I. 29, ¶ 3. Dart was represented throughout this period by its regular outside counsel, the firm of Arent, Fox, Kintner, Plotkin & Kahn (“Arent, Fox”).

An important consideration in Dart’s investment strategy was to avoid becoming subject to regulation as an “investment qompany” under the Investment Company Act of 1940 (“the 1940 Act”), 15 U.S.C. § 80a-1 et seq. The definition of “investment company” is given in 15 U.S.C. § 80a-3(a) and includes a company which owns investment securities having a value exceeding 40% of its total assets and which meets certain other requirements. Since the proceeds from Dart’s sale of its Drug Store Division represented over half of Dart’s total assets, it faced the risk of becoming subject to regulation as an investment company if it used those proceeds to acquire additional investment securities. The law provides exemptions, however, one of which is for a company that engages, directly or through a wholly owned subsidiary or subsidiaries, in a non-investment business. 15 U.S.C. § 80a-3(b)(1).

In December, 1984, an associate at Fried, Frank prepared a memorandum discussing Dart’s potential regulatory problems under the 1940 Act. A copy of this memorandum has been submitted to the Court for in camera inspection. The memorandum is 38 pages long with 11 pages of tables and charts. It refers to Dart as “client” and contains a specific detailed discussion of Dart’s exposure to regulation under the 1940 Act. After discussing these difficulties, the memorandum suggests nine alternative means of avoiding investment company status, some of which are quite sophisticated.

The memorandum calculates the exact amounts of May stock which could be purchased by Dart without any corporate changes and also calculates how much additional stock could be purchased under some of the proposed alternatives. In order to obtain the figures used in these calculations, Fried, Frank requested permission from Arent, Fox to contact Dart directly. After permission was granted, Fried, Frank requested and received the figures directly from Dart.

The memorandum was addressed to the “April Group” which was a group of lawyers at Fried, Frank who were working on the May acquisition. Raymond Affidavit, ¶ 2. Fried, Frank sent copies of the memorandum to First Boston and Arent, Fox but not to Dart. Fleischer Affidavit, D.I. 29, ¶ 11; Fleischer Supplemental Affidavit, D.I. 50, Exhibits B and C. Dart later received a copy of the report indirectly.

In March, 1985, Dart abandoned its interest in May and sold all of its May shares. Haft Affidavit, D.I. 17, ¶ 1. Dart then terminated its relationship with First Boston, and Fried, Frank ceased its representation of First Boston with regard to the May acquisition.

In late May, 1985, Eckerd noticed unusually heavy trading in its stock and suspected an attempted takeover. Eckerd retained Fried, Frank to represent it in dealing with the problem. At the time, Eckerd was not certain who was buying its shares but there were rumors that it might be Dart. Raab Affidavit, D.I. 30, ¶ 5. On June 5, 1985, Dart filed a Schedule 13D revealing that it owned more than 5% of the shares of Eckerd. Complaint, D.I. 1, Exhibit A. In the 13D filing, Dart stated that, beginning on May 21, it had acquired almost 1.9 million shares “solely for investment.” Id. at p. 4. Dart further stated that on June 1, 1985, its Board of Directors met to review its investment in Eckerd and determined to evaluate the matter further. As a result of this developing evaluation, the 13D continues, Dart may decide to buy all or part of the outstanding shares of Eckerd or, alternatively, it may decide to sell all or part of the shares already purchased.

On June 10, 1985, Eckerd filed this action charging that the Schedule 13D filed by Dart was false and misleading, in violation of the Securities Exchange Act of 1934. Eckerd charged that Dart had already decided to seek control of Eckerd and that its statement that the shares were acquired “solely for investment” was false and misleading. As part of its support for this contention, Eckerd points to Dart’s need to acquire control of a company rather than merely investing in it in order to avoid becoming subject to regulation as an “investment company” under the 1940 Act. Complaint, D.I. 1, ¶ 16(a)

Eckerd’s complaint further alleges that Dart’s failure to disclose its need to acquire an operating company in order to avoid regulation under the 1940 Act is, in itself, a material omission. The complaint goes on to allege various other material misrepresentations and omissions in the 13D filing and also contends that Dart is conducting a “creeping tender offer” in violation of section 14(d) of the Securities Exchange Act.

The same day that the complaint was filed, June 10, 1985, Robert B. Hirsch, a partner in Arent, Fox and counsel for Dart, spoke to Arthur Fleischer, a partner in Fried, Frank, and requested that Fried, Frank withdraw voluntarily as counsel for Eckerd because of its prior role in Dart’s attempted acquisition of May. Certificate of Robert B. Hirsch, D.I. 16. The move was not a complete surprise. Fried, Frank had been aware of the potential conflict since some time before June 5 but had concluded that it could properly represent Eckerd. Raab Affidavit, D.I. 30, 11116-8. Although it did not consider itself bound to do so, Fried, Frank had put up a “Chinese Wall” which denied its attorneys who were working for Eckerd access to the non-public information supplied by Dart. Id. 118(d). Fried, Frank declined to withdraw voluntarily. On June 13, 1985, Dart moved to disqualify Fried, Frank as counsel for Eckerd.

MOTION TO DISQUALIFY

In In Re Corn Derivatives Antitrust Litigation, 748 F.2d 157, 160-62 (3d Cir. 1984), the court adopted Rule 1.9 of American Bar Association Model Rules of Professional Conduct as the appropriate standard for disqualifying an attorney from representing interests adverse to a former client. Rule 1.9 provides that:

A lawyer who has formerly represented a client in a matter shall not thereafter: (a) represent another person in the same or a substantially related matter in which that person’s interests are materially adverse to the interests of the former client unless the former client consents after consultation

Here, the interests of Eckerd are directly adverse to those of Dart. Therefore, Fried, Frank must be disqualified from representing Eckerd if the subject matter of this litigation is “the same or substantially related” to the facts, plan or processes relative to the acquisition of May and if Dart can be considered a former client of Fried, Frank.

Fried, Frank contends that its analysis of the 1940 Act in connection with the May acquisition is not substantially related to the claims of misrepresentation in Dart’s Schedule 13D, even though two of these claims are based on the 1940 Act. Fried, Frank argues that whether a Schedule 13D is misleading depends on the acquiror’s specific intent regarding the target. Since the alleged target in this litigation, Eckerd, is different than the target in the previous matter, May, the two matters are not substantially related. Fried, Frank further contends that the financial data it obtained in connection with the May acquisition, a matter of importance in determining how much money could be utilized for acquisition purposes, is now out of date and is no longer useful in this litigation.

The standard for determining whether the current matter is substantially related to the former representation is “whether it can reasonably be said that in the course of the former representation the attorney might have acquired information related to the subject matter of his subsequent representation.” Richardson v. Hamilton International Corporation, 469 F.2d 1382, 1385 (3d Cir.1972) (quoting T.C. Theatre Corp. v. Warner Bros. Pictures, 113 F.Supp. 265, 269 (S.D.N.Y.1953)), cert. denied, 411 U.S. 986, 93 S.Ct. 2271, 36 L.Ed.2d 964 (1973); See, also, Kevlik v. Goldstein, 724 F.2d 844, 851 (1st Cir.1984) and cases cited therein. Here, it is undisputed that Fried, Frank acquired confidential information from Dart during the May acquisition and further that Fried, Frank requested and received financial information from Dart in order to prepare its memorandum.

Fried, Frank’s attempts to distinguish the two matters are unpersuasive. Although the targets are different, this is of little significance in evaluating the 1940 Act as it applies to Dart. Dart may be subject to regulation under the 1940 Act because of its own financial structure, not because of the specific characteristics of the target. For this reason, the memorandum prepared by Fried, Frank in the May acquisition discusses the specific characteristics of Dart, not May, and much of it would be equally applicable to the Eckerd lawsuit. The financial data which Fried, Frank acquired during the May acquisition, although no longer completely up to date, may still be extremely useful. Moreover, only a cursory perusal of the memorandum leads one to conclude that it could easily be construed as a blueprint for opposing any takeover attempt by Dart. Indeed, it is obvious that much of Dart’s acquisition plans and tactics could be anticipated. Dart’s basic problem in dealing with the 1940 Act arises from the sale of its Drug Store Division in 1984 and this has not changed fundamentally between the May acquisition and the present. Further, in Richardson, the court disqualified an attorney based on his access to his former client’s finances, corporate structure and operations even though the former representation had concluded four years previously. In this case, by contrast, only two months elapsed between the conclusion of the May acquisition and Eckerd’s retention of Fried, Frank. The Court accordingly concludes that the two matters are substantially related.

Whether Dart was ever a client of Fried, Frank is an issue that is more difficult to establish. It is undisputed that there was no express agreement for Fried, Frank to act as attorney for Dart in the May acquisition. Thus, the issue is whether an intent to create an attorney-client relationship can be implied from the conduct of the parties. See, Connelly v. Wolf, Block, Schorr and Solis-Cohen, 463 F.Supp. 914, 919 (E.D.Pa.1978); E.F. Hutton & Company v. Brown, 305 F.Supp. 371 (S.D.Tex.1969).

The parties have pointed to two different standards as the appropriate means of determining whether an attorney-client relationship was formed. Fried, Frank points to dictum in the Third Circuit’s opinion in Committee on Professional Ethics & Griev. v. Johnson, 447 F.2d 169, 174 (3d Cir.1971), which stated that “[a]n attorney client relationship is one of agency and arises only when the parties have given their consent, either express or implied, to its formation.” Committee on Professional Ethics dealt with the appeal of an attorney, Johnson, who had been disbarred for unethical conduct in connection with a real estate transaction. One of the charges against him was that he made material misrepresentations and omissions in dealing with two prospective purchasers, Richardson and Santana, while they were his clients. The district court did not find that Johnson was acting as the attorney for Richardson and Santana but held that he should be disbarred anyway because he violated duties he owed to them as parties. The Third Circuit reversed holding that Johnson’s due process rights had been violated because he had not received notice of the violations for which he was disbarred. The Court of Appeals thus had no occasion to consider whether an attorney-client relationship was actually formed because no such finding was made by the district court.

Dart points to the standard formulated by the Seventh Circuit in Westinghouse Elec. Corp. v. Kerr-McGee Corp., 580 F.2d 1311, cert. denied, 439 U.S. 955, 99 S.Ct. 353, 58 L.Ed.2d 346 (1978). In Westinghouse, the court cogently reasoned that the attorney-client relationship could be formed in situations that did not satisfy the formal rules of agency. For example, the attorney-client relationship extends to preliminary consultation by a prospective client with a view to retention of the attorney although actual employment does not result. Id. at 1319. The court went on to hold that an attorney-client relationship arises whenever a lay party submits confidential information to a lawyer with the reasonable belief that the lawyer is acting as his attorney.

The Court finds the Seventh Circuit’s reasoning persuasive and believes that the Third Circuit would adopt this position if it were squarely faced with the question. Since the dictum in Committee on Professional Ethics remains the Third Circuit’s only pronouncement on the subject, however, the Court will discuss the application of both standards to this issue.

In determining whether an attorney-client relationship can be implied, the Court must examine two alternative means of creating this relationship. First, the Court must determine whether the direct dealings between Dart and Fried, Frank imply an attorney-client relationship. Second, the Court must determine whether First Boston was acting as the agent for Dart when it retained Fried, Frank as its attorney.

As discussed above, when Fried, Frank prepared the memorandum on the 1940 Act, it contacted Arent, Fox and then Dart directly to obtain the necessary corporate data. Fried, Frank then used this data to prepare a detailed analysis of the 1940 Act as it applied specifically to Dart’s proposed acquisition of May. The memorandum was not merely a matter of inserting Dart’s financial data into statutory definitions of investment companies. Instead, it involved a sophisticated legal analysis specifically and uniquely tied to Dart and Dart’s acquisition problems. This situation falls squarely within the holding in Westinghouse in that Dart supplied confidential information to Fried, Frank for the purpose of obtaining professional legal services. Considering the attendant circumstances in this case, it was not unreasonable for Dart to assume that Fried, Frank was acting as its attorney. Furthermore, it is irrelevant whether Fried, Frank thought it was acting as Dart’s attorney. Westinghouse, 580 F.2d at 1319 n. 14.

Even if the more stringent agency test of Committee on Professional Ethics is adopted, the result in this case would be the same. As that court noted, an agency relationship can be created by implied consent on both sides. The Court finds that the actions by Dart in supplying data to be used in a detailed analysis of a specific legal problem facing Dart at the time, and the actions by Fried, Frank in preparing the report fairly, imply the consent of both parties to the formation of an attorney-client relationship.

Even if this direct connection between Dart and Fried, Frank were lacking, there is also the possibility that First Boston was acting as the agent for Dart when it retained Fried, Frank. It is well established that an agent can retain an attorney for his principal. See, e.g., Matter of King Resources, 20 B.R. 191 (D.Colo.1982); Abodeely v. Cavras, Iowa Supr., 221 N.W.2d 494 (1974); Lake Shore Management Co. v. Blum, 92 Ill.App.2d 47, 235 N.W.2d 366 (1968). Fried, Frank contends that First Boston was acting as an independent contractor when it retained Fried, Frank. However, the terms “agent” and “independent contractor” are not mutually exclusive. Most of the persons known as agents, such as brokers, factors or attorneys, are also independent contractors. Restatement (Second) of Agency, Comment to § 14N. Although not subject to the physical control of their principal, these persons are fiduciaries and owe the principal the obligations of loyalty and obedience. Id.

The Restatement lists three fundamental characteristics of an agency relationship. Restatement (Second) of Agency §§ 12-14. The “touchstone” of the agency relationship is the principal’s right to control the agent. Government of Virgin Islands v. Richards, 618 F.2d 242, 244 (3d Cir.1980) (citing Restatement (Second) of Agency § 14). In this case, the agreement between First Boston and Dart required First Boston to obtain the prior approval of Dart before it retained counsel or any other advisor or consultant. Supplemental Fleischer Affidavit, Exhibit A. Thus, the element of control by Dart points to the existence of an agency relationship.

A second element is that an agent is a fiduciary who works on behalf of the principal and primarily for his benefit. Westinghouse Elec. Corp. v. Rio Algom Ltd., 448 F.Supp. 1284, 1301 (N.D.Ill.1978) (citing Restatement (Second) of Agency §§ 1, 13), rev’d in part on other grounds sub nom., Westinghouse Elec. Co. v. Kerr-McGee Corp., 580 F.2d 1311 (7th Cir.1978). In examining this element, it is important to distinguish among the various tasks performed by Fried, Frank. As Fried, Frank has pointed out, the interests of Dart could have been adverse to those of First Boston in a variety of circumstances. Fleischer Affidavit, D.I. 29, ¶¶ 5-6. For example, as counsel to First Boston, Fried, Frank reviewed the retainer agreement between Dart and First Boston. Id. In the event of a dispute between First Boston and Dart over the retainer agreement, Fried, Frank would have been obligated to protect the interests of First Boston. In assigning such tasks to Fried, Frank, First Boston was acting to protect its own interests, not those of Dart, and, thus, it was obviously not acting as the agent of Dart.

The situation is entirely different, however, when examining such issues as the memorandum on the 1940 Act. In this case, First Boston was acting on behalf of Dart’s interests, not its own. In such a case, First Boston is acting as the agent of Dart in consulting with Fried, Frank. The multiple hats posed no legal or ethical problems until a conflict would have required Fried, Frank to resolve their dilemna.

Finally, the third basic element of agency is that the agent has the power to alter the legal relations between the principal and third persons or the principal and himself. Restatement (Second) of Agency § 12. In this case, the agreement between Dart and First Boston provides that' if, with the prior approval of Dart, First Boston hired an attorney or other advisor, Dart became liable to reimburse First Boston for any fees paid. Accordingly, First Boston had the power to obligate Dart to pay legal fees. Thus, all three elements of agency support the inference that First Boston was acting as the agent for Dart when it retained Fried, Frank to prepare a legal analysis of the 1940 Act issues.

For all of the reasons discussed above, the Court concludes that Fried, Frank was acting as the attorney for Dart when it prepared the memorandum regarding the 1940 Act. This conclusion is bolstered by the conduct of Eckerd’s own attorneys in this litigation. Eckerd has retained the investment banking firm of Goldman, Sachs as an advisor in this litigation. Goldman, Sachs has hired the firm of Simpson, Thacher & Bartlett as its counsel. At a recent deposition of an Eckerd executive, attorneys for Dart attempted to question the executive about the substance of legal advice given by an attorney from Simpson, Thacher at a meeting of the Eckerd Board of Directors. Eckerd’s attorney objected on the grounds of attorney-client privilege. D.I. 45, Exhibit A. This indicates that attorneys, as well as laymen, share the perception that when an attorney for an investment banker gives legal advice to the investment banker’s client on matters concerning the client’s legal problems, he is acting as attorney for the investment banker’s client and his communications are privileged.

Finally, the Court believes that the policy considerations underlying Rule 1.9 of the Model Rules of Professional Conduct support disqualification. As Judge Seitz noted in In Re Com Products Derivatives Antitmst Litigation, 748 F.2d at 162, an important consideration is the maintenance of public confidence in the integrity of the Bar. In order to maintain this confidence, lawyers are held to higher standards of loyalty and integrity than other fiduciaries. As the circumstances of this case make clear, a layman often consults with his investment banker’s attorney under circumstances indistinguishable from those in which he consults his own attorney. He expects the investment banker’s attorney to exercise the same professional judgment and to display the same loyalty as his own attorneys. If the investment banker’s attorney, after receiving confidential information and encouraging the client to confide in him, then switches sides in a related matter, the outrage and betrayal felt by the client could not be said to be unreasonable. In order to maintain the public confidence in the Bar, it is essential for attorneys to avoid situations that pose these apparent conflicts.

Fried, Frank objects that extending the disqualification rule to cover this situation will result in numerous disqualifications in many tender offer situations. There are two aspects to this concern: the effect on the law firm which is deprived of clients and the effect on the client which is deprived of the counsel of its choice. The effect on the law firm is of little moment when the benefits and the burdens of professional responsibility are weighed against the demands of the market place. This is not to deny the need for the law firm to be able to attract and represent clients in its field of expertise. However, law firms can deal with this problem by appropriate circumspection in their choice of clients and in the areas in which they agree to represent those clients. A more significant consideration is the potential effect on the client.

Eckerd contends that it will be prejudiced if it is deprived of its choice of counsel. The Third Circuit has often employed a balancing test which weighs the litigant’s interest in the counsel of its choice against the policies served by the disqualification rule. In Re Corn Derivatives Antitrust Litigation, 748 F.2d at 162; United States v. Miller, 624 F.2d 1198, 1201 (3d Cir.1980). In this case Eckerd is represented by two large and distinguished law firms apart from Fried, Frank and the Court is informed that it has been consulting a third law firm on the 1940 Act allegations. Further, as discussed above, Fried, Frank has been aware of the potential conflict of interest since the first days of its representation of Eckerd and, thus, has had the opportunity to mitigate the effects of disqualification by taking appropriate precautions. Finally, Dart raised the issue of disqualification promptly by calling Fried, Frank on the same day this lawsuit was filed and by filing this motion only three days later. The Court accordingly finds that the prejudice to Eckerd is outweighed by the need for disqualification in this case.

Finally, Fried, Frank cites the decision in In Re John Doe Corp., 675 F.2d 482 (2d Cir.1982), as supporting its contention that an attorney for an investment banker does not represent the investment banker’s client. “Doe Corp.” was the pseudonym used by the court to refer to a company which was being investigated by a grand jury. An attorney for Doe Corp.’s underwriter demanded that the company disclose a certain report to him so that he could determine whether a Registration Statement and prospectus filed with the SEC contained material misrepresentations or omissions. The attorney informed the company that if they failed to give him the report, he would so inform the underwriter which would then decide on whether or not to proceed with the offering. The court held that this disclosure to the underwriter’s attorney waived the attorney-client privilege with regard to the report.

John Doe Corp. is distinguishable for two reasons. First, as the court noted, the disclosure to the underwriter’s attorney was not for the purpose of seeking legal advice. 675 F.2d at 489. Second, the underwriter’s attorney was clearly representing the interests of the underwriter, not Doe Corp., when he demanded disclosure of the report. Under such circumstances, there is no attorney-client relationship between the corporation and the underwriter’s attorney. John Doe Corp. is not applicable to this case nor does it conflict with the decisions of other Courts of Appeals which support the conclusion that Fried, Frank must be disqualified. See, Wilson P. Abraham Const. v. Armco Steel Corp., 559 F.2d 250 (5th Cir.1977); Analytica, Inc. v. NPD Research, Inc., 708 F.2d 1263, 1268-69 (7th Cir.1983).

CONCLUSION

For all of the foregoing reasons, Fried, Frank must be disqualified from representing Eckerd in this litigation. Dart’s further application to disqualify Fried, Frank from any future litigation involving the acquisition of Eckerd shares by Dart is premature. The necessity for such disqualification depends upon the subject matter of such litigation and the Court declines to speculate on such hypothetical possibilities.

      . (a) When used in this subchapter, "investment company” means any issuer which—
      (1) is or holds itself out as being engaged primarily, or proposes to engage primarily, in the business of investing, reinvesting, or trading in securities;
      (2) is engaged or proposes to engage in the business of issuing face-amount certificates of the installment, type, or has been engaged in such business and has any such certificate outstanding; or
      (3) is engaged or proposes to engage in the business of investing, reinvesting, owning, holding, or trading in securities, and owns or proposes to acquire investment securities having a value exceeding 40 per centum of the value of such issuer’s total assets (exclusive of Government securities and cash items) on an unconsolidated basis.
      As used in this section, "investment securities” includes all securities except (A) Government securities, (B) securities issued by employees' securities companies, and (C) securities issued by majority-owned subsidiaries of the owner which are not investment companies.


author: KOCORAS, District Judge:

text:
    Don SERPAS, et al., Plaintiffs, v. Charles E. SCHMIDT, et al., Defendants.
    No. 82 C 4715.
    United States District Court, N.D. Illinois, E.D.
    July 11, 1985.

      Roger Pascal, Thomas B. Quinn, Marci A. Eisenstein, Jeanne L. Nowaczewski of Schiff, Hardin & Waite, Harvey M. Gross-man, of Roger Baldwin Foundation of the ACLU, Inc., Chicago, Ill., for plaintiffs.
    Moshe Jacobius, Asst. Atty. Gen., Chicago, Ill., for defendants.
   MEMORANDUM OPINION

KOCORAS, District Judge:

This matter comes before the Court on the plaintiffs’ motion for summary judgment. Plaintiffs seek an order declaring Illinois’ Thoroughbred Rule 322 and Harness Racing Rule 25.19 unconstitutional under the Fourth and Fourteenth Amendments, permanently enjoining defendants from engaging in certain acts under the authority of those Rules, and holding defendants liable for authorizing and conducting unlawful stops and searches. Defendants oppose plaintiffs’ motion and request summary judgment in their favor. For the reasons which follow, the plaintiffs’ motion is granted in part and denied in part.

The plaintiffs in this action are Don Serpas, Raymond Johnson, and Carl Waters, individually and on behalf of the class of all occupation licensees of the Illinois Racing Board who serve as exercise persons, grooms, and hotwalkers at Illinois racetracks (the plaintiffs). Each named plaintiff lives in residential quarters at Arlington Park Racetrack provided to him in connection with his work. The defendants are former and present members of the Illinois Racing Board, the director of the Illinois Department of Law Enforcement (IDLE), and unknown agents of IDLE. On a motion for a preliminary injunction, the plaintiffs challenged the constitutionality of certain searches conducted under the authority of Thoroughbred Rule 322 and Harness Rule 25.19 (the Rules). The plaintiffs made three arguments against the Rules’ application and challenged: (1) the warrant-less searches of their residences; (2) the investigatory stops and searches of their persons within the race track enclosure; and (3) the conditioning of their occupation licenses upon their consent to such searches. On June 16, 1983, this Court granted the plaintiffs’ motion and preliminarily enjoined the challenged activities. Serpas v. Schmidt, Memorandum Opinion (N.D.Ill. June 16, 1983) (hereinafter Mem. Op.).

Plaintiffs now move for summary judgment and defendants have made a cross-motion for summary judgment as well. Summary judgment shall be granted when the record shows that “there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law.” Fed.R.Civ.P. 56. The underlying facts and all inferences to be drawn from them must be viewed in the light most favorable to the party opposing the motion. Fitzsimmons v. Best, 528 F.2d 692, 694 (7th Cir.1976). A material question of fact is one which is outcome determinative under the governing law. Egger v. Phillips, 710 F.2d 292, 296 (7th Cir.1988). Whether there is a disputed question of fact to be presented to the trier of fact is, in the first instance, a question of law for the Court to determine.

The legal issues in the action fall into three parts: (1) whether Fourth Amendment protection is afforded plaintiffs during warrantless searches of their living quarters; (2) whether the investigatory stops and searches of the plaintiffs’ person while in the race track enclosure are unconstitutional under the Fourth Amendment; and (3) whether the Rules unconstitutionally condition the occupation license on consent to the searches.

I. Warrantless Residential Searches

In issuing the preliminary injunction, this Court placed the burden upon the defendants to show their warrantless residential searches, taken pursuant to the Rules, fell into a recognized exception to the warrant requirement of the Fourth Amendment. See Camara v. Municipal Court, 387 U.S. 523, 87 S.Ct. 1727, 18 L.Ed.2d 930 (1967). In opposing the plaintiffs’ summary judgment motion, defendants now contest the initial premise that the Fourth Amendment is applicable at all to the plaintiffs’ allegations. Defendants assert that the searches take place within the context of the horse racing industry, an industry with such a long history of regulation that “no reasonable expectation of privacy exists within the industry.” United States v. Harper, 617 F.2d 35 (4th Cir.1980). Therefore, defendants argue, plaintiffs are without any reasonable expectations of privacy and are necessarily outside the scope of Fourth Amendment protection. Defendants rely upon a variety of factors — a long history of warrantless racetrack searches, the public and plaintiffs’ knowledge of the searches, and the “commercial” nature of the plaintiffs’ living quarters. This reliance is misplaced.

Without doubt, defendants accurately assert that horse racing is a highly regulated industry and that the State has an interest in maintaining the industry’s integrity. Phillips v. Graham, 86 Ill.2d 274, 427 N.E.2d 550 (1981). Moreover, the Supreme Court has clearly recognized that warrantless searches in closely regulated industries can be reasonable. Donovan v. Dewey, 452 U.S. 594, 600, 101 S.Ct. 2534, 2538-39, 69 L.Ed.2d 262 (1981). Under this exception to the Fourth Amendment’s warrant requirement, courts have found that by accepting the benefits of a highly regulated trade, an individual also accepts the burden of regulation and thereby consents to administrative investigations or inspections. Marshall v. Wait, 628 F.2d 1255, 1258 (9th Cir.1980). Therefore, the individual operating within a highly regulated industry can have no reasonable expectation of privacy as least as to administrative inspections. Id. (emphasis added).

From this administrative inspection case law, defendants conclude that plaintiffs cannot have a reasonable expectation of privacy in their living quarters located within the racetrack grounds. To accept this conclusion, this Court must accept defendants’ necessary first premise — that the warrantless searches of plaintiffs’ living quarters are administrative inspections. This court cannot accept the characterization of the residential searches as administrative inspections because: (A) the warrantless searches are conducted on private, residential premises, not commercial premises; (B) the statute’s language in this case does not provide an adequate substitute for a warrant; (C) the regulatory scheme present does not provide an adequate substitute for a warrant; and (D) a balance of plaintiffs’ privacy interests and the Government’s enforcement needs favors the plaintiffs.

(A) Residential Nature of Plaintiffs’ Quarters

The administrative inspection exception to the Fourth Amendment’s warrant requirement extends to commercial or public premises. An administrative search of commercial premises and a warrantless search of a private residence are afforded very different degrees of protection. Donovan v. Dewey, 452 U.S. at 598-99, 101 S.Ct. at 2537-38. Defendants acknowledge these differences, but justify the warrant-less searches of plaintiffs’ living quarters by describing the quarters as commercial premises. Defendants highlight the temporary, cramped, limited nature of the quarters. The rooms are: only provided to employees; adjacent to barns or above horse stalls; accessible by track authorities who have a master key; and very small— providing only one or two person occupancy. No cooking is permitted and some licensees do not choose to stay in the dorm room.

The detailed description of the dorm rooms does not persuade this Court that they qualify as a commercial premise for purposes of the Fourth Amendment. The crucial quality which the rooms possess is their exclusive residential use. Serpas v. Schmidt, Mem.Op. at 8-10. The other details of the plaintiffs’ living conditions cannot deprive them of their constitutional rights to be free of unreasonable searches in their homes. The courts have viewed rooms similar to plaintiffs’ quarters as homes. These rooms include hotel rooms, boarding house rooms, and college dormitory rooms. See, e.g., Stoner v. State of California, 376 U.S. 483, 84 S.Ct. 889, 11 L.Ed.2d 856 (1964); Smyth v. Lubbers, 398 F.Supp. 777 (W.D.Mich.1975). Such private rooms have been found to be homes and residences although they share the very qualities the defendants argue make them “commercial”: they are small, temporary, and accessible by a master key. The plaintiffs’ rooms’ proximity to the barns and stalls do not make them commercial; they are used for residential purposes exclusively-

Defendants, however, analogize the warrantless searches of plaintiffs’ rooms to the warrantless searches of the baggage of persons boarding airlines, United States v. Bonstein, 521 F.2d 459 (2d Cir.1975), cert. denied 424 U.S. 918, 97 S.Ct. 1121, 47 L.Ed.2d 324 (1976); of persons entering courtrooms, McMorris v. Alioto, 567 F.2d 897 (9th Cir.1978); of prison guards, United States v. Sihler, 562 F.2d 349 (5th Cir. 1977); and of a parolee’s residence pursuant to a consent provision in his parole terms, United States v. Dally, 606 F.2d 861 (9th Cir.1979). These cases do not change the nature of the plaintiffs’ quarters. The cases generally involve searches on public property — an airport, a courtroom, a prison. The search of a parolee in Dally was governed by the terms of a search consent which was a condition of a prisoner’s parole. The Dally search was not characterized as an administrative inspection. Plaintiffs’ situation is not analogous to individuals on parole from prison.

Therefore, the plaintiffs’ living quarters are residential, not commercial. Their temporary and crowded conditions do not change their nature. Although employed in a highly-regulated industry, the plaintiffs possess the constitutional right to be from unreasonable searches in their homes.

(B) Statutory Authority for the Searches

In other highly regulated industries, warrants are not required where statutory language authorizes the terms and conditions of searches of particular premises. Donovan v. Dewey, 452 U.S. 594, 101 S.Ct. 2534, 69 L.Ed.2d 262 (1981) (mining industry); United States v. Biswell, 406 U.S. 311, 92 S.Ct. 1593, 32 L.Ed.2d 87 (1972) (gun dealers); Colonnade Catering Corp. v. United States, 397 U.S. 72, 90 S.Ct. 774, 25 L.Ed.2d 60 (1970) (liquor industry). The applicable statute in the Illinois horse racing industry reads, in pertinent part:

(c) The Board, and any person or persons to whom it delegates this power, is vested with the power to enter the office, horse race track, facilities and other places of business of any organization licensee to determine whether there has been compliance with the provisions of this Act and its rules and regulations.

Illinois Horse Racing Act of 1975, 8 Ill. Ann.Stat. § 87-9 (Smith-Hurd Supp.1980).

Defendants argued earlier and again urge the Court to find that the terms “race track” and “facilities” must include the dormitory rooms. Such a conclusion is said to be dictated by the track’s ownership of the rooms, the rooms’ location within the racetrack, the track’s accessibility to the room for health and safety inspections, and the track’s provision of the rooms to licensees at no charge. Defendants’ Memo, at 19-20. None of these allegations change the exclusive residential nature and purpose of the rooms themselves.

Nor does the language of the statute support defendants’ conclusion that the rooms are a “facility” or a “racetrack.” The sentence specifically lists a series of places and ends with the general phrase— “and other places of business____” This concluding phrase labels the earlier places as places of business. The most reasonable reading of “facility” or “racetrack” within the sentence is to find that they are examples of places of business. Therefore, as this Court found earlier, there is “a complete dearth of statutory authorization for searches of residences or statutory limitations on any searches.” Therefore, this Court “will not authorize what the legislature has not.” Mem.Op. at 17.

(C) Regulatory Powers as Authority for the Searches

In the absence of specific statutory authority, the defendants argue that the power to conduct the warrantless searches of plaintiffs’ living quarters may be inferred or implied from the broad regulatory powers of the Illinois Racing Board. Defendants rely upon Balelo v. Baldridge, 724 F.2d 753, 765 (9th Cir.1984), to argue that the Board has been given extensive regulatory powers from which the power to search may be inferred. Other courts have viewed a warrantless administrative search as permissible only when the search is specifically authorized by a statute. See, e.g., United States v. Biswell, 406 U.S. 311, 315, 92 S.Ct. 1593, 1596, 32 L.Ed.2d 87 (1972); Bionic Auto Parts and Sales, Inc. v. Fahner, 721 F.2d 1072, 1078 (7th Cir. 1983). This Circuit does not appear to recognize implied statutory authority for warrantless administrative searches. Even if this Circuit should determine to recognize inferred authority, the regulatory scheme in this case is inadequate.

Under Balelo, to determine whether warrantless searches in a closely regulated industry are reasonable, the court “must decide whether the regulatory scheme ‘in terms of the certainty and regularity of its application, provides a constitutionally adequate substitute for a warrant.’ ” Balelo v. Baldridge, 724 F.2d at 765-66, quoting in part, Dewey v. Donovan, 456 U.S. at 603, 101 S.Ct. at 2540. The Balelo court found that a program of observers of fishing vessels, which collected data pursuant to the Marine Mammal Protection Act, was sufficiently regulated to provide an adequate substitute for a warrant. The court based its decision on several grounds: published regulations which clearly defined the objective and purpose of the observer; regulations which limited the scope of the observer’s activities; written manuals to define the observer’s role; . standardized forms to record observations; advance notice to the vessel’s owner of an observer’s presence; a pre-departure conference; and the manual’s specific limits which “do not authorize the observers to conduct searches of the persons, personal effects, or living quarters of the Captains and their crews.” Balelo v. Baldridge, 724 F.2d at 767. Moreover, no alternative method of enforcement existed aboard the vessel. Balelo v. Baldridge, 724 F.2d at 768 (Nelson, J., concurring).

The defendants urge the Court to find that the Board’s regulatory scheme offers similar “certainty and regularity” of application and provides an adequate substitute for a warrant. In contrast to the Balelo regulations, however, the agents who conduct the living quarters’ searches are not given written manuals, but “given instructions” on “how to carry out the searches.” No further details of the nature of the instructions are offered. The search procedures include: having the agent identify himself; signing a written consent form or where no consent is given, the individual is reported to the steward; and providing individuals with a receipt if the agents take any property. Generally, rooms are searched only when an occupant is present and the agent has permission to enter.

These practices, however, do not impose any meaningful limitations on the agents’ discretion. The searches may be focused or random and are not restricted to particular times nor restricted to particular areas or items in those areas which are in plain view. Unlike the observers in Balelo, the agents here may search plaintiffs’ living quarters and personal effects as extensively as they wish. Plainly, the agents have an unrestricted scope of search; requiring them to hand out receipts or consent forms does not affect or limit the agent’s discretion to undertake an exhaustive search of every personal effect in an individual’s room. These practices fall short as an adequate substitute for a warrant.

(D) Balance of Privacy Interests and Enforcement Interests

In determining the reasonableness of a warrantless search, the Court must balance the enforcement needs of the government and the privacy interest of the plaintiffs. See, e.g., Marshall v. Barlow’s Inc., 436 U.S. 307 at 321, 98 S.Ct. 1816 at 1825, 56 L.Ed.2d 305. The plaintiffs’ interest is strong. “[PJhysical entry of the home is the chief evil against which the wording of the Fourth Amendment is directed____” United States v. United States District Court, 407 U.S. 297, 313, 92 S.Ct. 2125, 2134-35, 32 L.Ed.2d 752 (1972). Because of the constitutional protection afforded the home, the warrant requirement has been strictly applied to searches of the home. Illinois Migrant Council v. Pillod, 531 F.Supp. 1011, 1021 (N.D.Ill.1982). Therefore, governmental authorities may not search the home without a warrant showing probable cause unless there are exigent circumstances. Id. at 1022. In Camara v. Municipal Court, the Court found that administrative warrants could authorize searches of dwellings for building code violations. 387 U.S. at 537-40, 87 S.Ct. at 1735-36. The Court articulated several factors which made the search reasonable, including: public interest in preventing or abating dangerous conditions; the history of such inspections; good alternate techniques to discover violations were not available; the searches were not personal in nature; and the searches were not directed toward discovering evidence of a crime. 387 U.S. at 536-37, 87 S.Ct. at 1734-35.

The defendants contend that although plaintiffs’ privacy interests are great, the government’s enforcement needs are greater. They argue the warrantless residential searches are reasonable and cite the long history of such warrantless searches in Illinois and elsewhere. But, primarily, defendants’ arguments are focused on the public and the State’s interests in maintaining the integrity of the horse racing industry — an industry prone to abuse by “undesireable elements.” Feliciano v. Illinois Racing Board, 110 Ill. App.3d 997, 66 Ill.Dec. 578, 443 N.E.2d 261 (1st Dist.1982). Specifically, defendants justify the warrantless searches because they serve as deterrents to violations, are justified by the “positive results” — contraband found during searches, and because less intrusive methods would be ineffective.

The deterrent effects of the searches cannot render them constitutional. Proof of such deterrence is speculative. The statistics of positive results from searches of the plaintiffs do not readily support the defendants’ position. During 1981-1983, there were 361 reported searches of the plaintiffs’ residences and persons. The stated purpose of such searches is to find illegal “buzzers” and drugs which could affect the results of the horse race. There appear to be approximately seven searches which produced these items. Affidavit of Leonard Becika, Exhibits A, B, C. These statistics do not justify the warrantless searches. While the individual character and integrity of the Board’s licensees may reflect upon the character of the horse racing industry, this does not justify warrantless residential searches to insure that licensees possess no drugs used by humans in their homes.

The defendants also contend that these unannounced warrantless searches are the most effective method of enforcement and that other less intrusive methods would be ineffective. The element of surprise is deemed crucial to enforcement. The element of surprise and a warrant to search, however, may co-exist in an ex parte warrant. Marshall v. Barlow’s Inc., 436 U.S. at 319-20, 98 S.Ct. at 1824. This alternative would accommodate enforcement needs and the plaintiffs’ privacy rights. The rest of defendants’ enforcement scheme does not involve warrantless searches and can prevent the wrongs they seek to prevent. Defendants may continue to detain horses and conduct metal detector searches of them before the race, make searches of the commercial premises of the racetrack, and use drug testing techniques.

The defendants’ enforcement needs do not outweigh the plaintiffs’ privacy interests. The additional Camara factors — that the search not be personal in nature nor directed towards discovery of criminal evidence — are plainly not present here. Therefore, having considered both parties’ interests fully, this Court finds the plaintiffs’ privacy interest is superior and renders the warrantless searches of their homes unreasonable under the Fourth Amendment.

II. Stops and Searches of Plaintiffs’ Persons

The plaintiffs have also challenged the warrantless investigative stops and searches of their persons, which take place anywhere within the racetrack enclosure. Defendants argue that these searches, like the residential searches, are sanctioned under the administrative search exception to the Fourth Amendment. Once again, defendants have the burden of showing statutory authority or even implied statutory authority for the warrantless searches. The statute authorizes the search of “facilities” and other commercial premises, but nowhere is there authorization for the search, not of a place, but of a person. There is no statutory authority for the searches nor any limits placed on the searchers’ discretion. The “orders” and procedures of the agents do not supply the requisite limits on discretion. See supra, at 9-12.

Moreover, as Judge Prentice Marshall noted in Illinois Migrant Council v. Pilliod, the Supreme Court has stated that administrative warrants authorize searches of commercial premises or property only— not the search of persons found on the premises. 531 F.Supp. 1011, 1020-21 (N.D. Ill.1982). Finally, this Court has distinguished this case from Willey v. Illinois Racing Board, et al., 74 C 3524, aff'd, 423 U.S. 802, 96 S.Ct. 9, 46 L.Ed.2d 23 (1975), and there are no reported opinions which permitted administrative searches of commercial premises and warrantless searches of licensees on the premises. Mem.Op. at 18-23.

III. Conditioning License on Consent

The plaintiffs’ last challenge is directed to the conditioning of their occupation licenses upon their consent to be searched. Defendants argue that the plaintiffs have voluntarily consented to the searches by signing a statement to abide by Board Rule 332 and 25.19, which are printed on the application form. The defendants rely upon the doctrine of implied consent — that when plaintiffs entered their occupation, they agreed to abide by the industry’s regulation. This Court has found, however, that the issue is not whether consent can be implied, but whether, absent the condition, the challenged searches are constitutional. Mem.Op. at pp. 23-28. Standing alone, the searches of the residences and persons have been found to be unconstitutional because they violate plaintiffs’ Fourth Amendment rights. Because these searches are unconstitutional, the license applications requiring consent to such searches are also unconstitutional. The Racing Board cannot issue a license conditioned on the applicant’s consent to waive his or her Fourth Amendment protections. Frost v. Railroad Commission, 271 U.S. 583, 592-594, 46 S.Ct. 605, 606-07, 70 L.Ed. 1101 (1926).

Defendants argue, however, that the question of consent by plaintiffs raises a disputed question of material fact which bars plaintiffs’ motion for summary judgment. The facts demonstrate that plaintiffs’ signature and compliance was motivated by their fear of losing the license and the livelihood that could be available to them only through that license. The forms cannot make reasonable the warrant-less searches of plaintiffs’ persons and homes. Schneckcloth v. Bustamonte, 412 U.S. 218, 93 S.Ct. 2041, 36 L.Ed.2d 854 (1973).

IV. Requirements for Permanent Injunction

To gain injunctive relief, the plaintiffs must demonstrate that they have no adequate remedy at law and will suffer irreparable harm without an injunction. The plaintiffs have shown that in the absence of permanent injunction, they will continue to have their homes and persons searched without a warrant. Fourth Amendment violations have been deemed “irreparable harm” for purposes of gaining injunctive relief. Illinois Migrant Council v. Pillod, 531 F.Supp. 1011, 1023 (N.D.Ill. 1982). Additionally, the public has an interest in securing the plaintiffs’ constitutional rights. The defendants will retain their full complement of enforcement procedures and will only be precluded from making unlawful searches and seizures. Therefore, plaintiffs have demonstrated that they are entitled to permanent injunctive relief.

V. Defendant’s Liability for Unlawful Acts

Plaintiffs seek to have this Court hold defendants liable for authorizing and conducting the unlawful stops and searches of the named plaintiffs. Summary judgment is sought only on the issue of liability, not damages. Both parties agree that the applicable law of government official’s qualified immunity is set out in Harlow v. Fitzgerald, 457 U.S. 800, 102 S.Ct. 2727, 73 L.Ed.2d 396 (1982). The Supreme Court stated: “On summary judgment, the judge appropriately may determine, not only the currently applicable law, but whether the law was clearly established at the time.”

To establish this qualified immunity as an affirmative defense, the defendants must demonstrate that the searches of the named plaintiffs were authorized when they were made. The standard requires the defendants to establish that their c'onduct does not violate clearly established statutory or constitutional rights of which a reasonable person would have known. Defendants argue that the law of warrantless administrative investigations in closely regulated industries plainly authorized their searches. Reasonable people could have concluded they had the authority to conduct the searches. Donovan and Camara permitted administrative searches and defendants could have believed there were sufficient limits on the discretion of those conducting the search. Therefore, this court holds the defendants are not liable for authorizing and conducting the unlawful stops and searches of the named plaintiffs.

VI. Discovery Sanctions

Defendants have asked this Court to dismiss plaintiffs’ action because plaintiffs failed to answer discovery demands. Plaintiffs invoked the Fifth Amendment in response to defendants’ interrogatories about plaintiffs’ possession or use of equine drugs, buzzers or mechanical devices, and cocaine or marijuana. Defendants assert that the information is requested to show the need for their searches and to develop a possible equitable defense of unclean hands. At a minimum, defendants ask the Court to dismiss plaintiffs’ damages claim.

Without addressing the necessity or relevance of the evidence requested, this Court finds that the plaintiffs’ invocation of the Fifth Amendment does not warrant the extreme remedy of dismissal. Case law indicates that dismissal is an option only where the invocation of the right is improper and pretextual and the plaintiff has refused the court’s order compelling discovery. See, e.g., Campbell v. Gerrans, 592 F.2d 1054, 1057-58 (9th Cir.1979). Neither element is present here; plaintiff’s invocation is not improper and no court order issued. Plaintiffs have replied to discovery completely with this exception. Defendants are not entitled to dismissal.

VII. Scope of the Injunction

The defendants also raise an issue concerning the scope of this Court’s injunction, if it issued. The plaintiffs seek relief against the named defendants and this Court’s injunction binds them and “those persons in active concert or participation with them who receive actual notice of the order by personal service or otherwise.” Fed.R.Civ.P. 65(d). At this time, the Court grants the injunction against the named defendants.

VIII. Probable Cause Requirement

In its earlier decision, this Court conducted an extensive analysis of Camara v. Municipal Court, 387 U.S. 523, 87 S.Ct. 1727, 18 L.Ed.2d 930 (1967) and concluded that under its rationale, an administrative warrant would be inappropriate and that defendants must procure a warrant based upon “the more vigorous standard of ‘probable cause’ used in criminal cases.” Mem.Op. at 29-37. At that time, the Court indicated that it would entertain a motion to modify the type of warrant required if further evidence were forthcoming. The evidence developed during discovery has not disturbed the Court’s initial findings. Therefore, the Court finds that: (1) the harm resulting from violations of racing requirements is not comparable to the harm from “an epidemic or an uncontrollable blaze” in Camara; (2) there is no showing that defendants will be unable to regulate the industry effectively if probable cause is required for a warrant; (3) there are important privacy interests at stake and the searches are personal and aimed at discovery of criminal evidence; (4) there are no “reasonable legislative or administrative standards” for the searches. See supra at 8-12.

For the foregoing reasons the Court declares: that Thoroughbred Rule 322 and Harness Racing Rule 25.19 are unconstitutional under the Fourth and Fourteenth Amendments to the United States Constitution.

The Court permanently enjoins defendants from engaging in these acts pursuant to the Rules:

a. Conducting or authorizing searches and seizures of the persons and residential quarters of plaintiffs and the class they represent without warrants and probable cause;
b. Conducting or authorizing investigatory stops of plaintiffs and the class they represent without at least a reasonable suspicion, based on specific, articulable facts, that the person stopped is engaged in criminal activity; and
c. Conditioning the issuance of occupation licenses upon applicants’ forfeiture of their constitutional right to be free from the searches authorized by Rules 322 and 25.19.

Finally, this Court holds that defendants are not liable to the named plaintiffs for authorizing and conducting unconstitutional searches of named plaintiffs’ persons and residences.

      . This Court certified these persons as a Rule 23(b)(2) class on September 19, 1983.

      . The regulations are set forth in two rules, identical in language, which read as follows:
      INSPECTIONS AND SEARCHES
      a. The Illinois Racing Board or the state steward investigating for violations of law or the Rules and Regulations of the Board, shall have the power to permit persons authorized by either of them to search the person, or enter and search the stables, rooms, vehicles, or other places within the track enclosure at which a meeting is held, or other tracks or places where horses eligible to race at said race meeting are kept, of all persons licensed by the agents of any race track operator licensed by said Board; and of all vendors who are permitted by said race track operator to sell and distribute their wares and merchandise within the race track enclosure, in order to inspect and examine the personal effects or property on such persons or kept in such stables, rooms, vehicles, or other places as aforesaid. Each of such licensees, in accepting a license, does thereby irrevocably consent to such search as aforesaid and waive and release all claims or possible actions for damages that he may have by virtue of any action taken under this rule. Each employee of a licensed operator, in accepting his employment, and each vendor who is permitted to sell and distribute his merchandise within the race track enclosure, does thereby irrevocably consent to such search as aforesaid and waive and release all claims or possible actions for damages they may have by virtue of any action taken under this rule. Any person who refuses to be searched pursuant to this rule may have his license suspended or revoked.
      b. The Illinois Racing Board delegates the authority to conduct inspections and searches, under this rule, to the Chief Investigator of the Illinois Racing Board and to Special Agents of the Illinois Bureau of Investigation, or designees of the Department of Law Enforcement assigned, from time to time, to assist the Chief Investigator in his duties.

      . The underlying facts of the action are set out in the preliminary injunction ruling. Mem.Op. at 1-5.

      . Section 37-9(a) grants the Board jurisdiction over "all persons on organizational grounds.” Section 37-9(d) authorizes the Board to "investigate alleged violations of the provision of this Act.” Neither of these constitute authorization of the warrantless search of persons.

      . Disputes over when consent for a single, particular search was given or what precise items were searched are not material questions of fact.


author: ORINDA D. EVANS, District Judge.

text:
    UNITED STATES of America, et al. v. Harry D. SAUNDERS, et al.
    Civ. No. C85-1644.
    United States District Court, N.D. Georgia, Atlanta Division.
    July 12, 1985.

      Sharon Douglas Stokes, Asst. U.S. Atty., Atlanta, Ga., Michael J. King, Trial Atty., Tax Div., U.S. Dept. of Justice, Washington, D.C., for plaintiffs.
    Robert W. Stockmeier, pro se.
   ORDER

ORINDA D. EVANS, District Judge.

This action was instituted by Robert W. and Raenelle B. Stockmeier, pursuant to 26 U.S.C. § 7609(b), to quash IRS summonses served upon Harry D. Saunders, Senior Vice President of Citizens and Southern Corporation, requiring him to appear and produce various bank statements, cancelled checks, and other records with respect to the Petitioners. The United States has moved for enforcement of the summons.

Petitioners contend the summons should be quashed because the IRS has not complied with the notice provisions of § 7605(c). However, the administrative requirements of § 7605(c) extend only to an examination of a religious organization itself, not to members of the organization. By Petitioners’ own admissions, they are merely members of an alleged religious organization. (See Petition to Quash, If 7-9, 16). Furthermore, the IRS summons was issued in an examination of the Petitioners’ tax liability, rather than in an examination of the religious organization itself. The summons seeks to examine third party records, such as bank records and check stubs in the possession of Harry Saunders, which do not constitute church books of account. See Troyer v. United States, 53 A.F.T.R.2d 831 (N.D.Inc. Feb. 7, 1984) (summons to bank for the bank’s own records does not violate the restriction on the examination of church records). Thus, the court finds that the Petitioners were not entitled to any notice under § 7605(c).

The Petitioners further argue that this summons is overbroad because it directs the bank to produce all financial records relative to the Petitioners for the years 1981, 1982, and 1983 to the present period. The test for determining whether summoned documents are relevant to an ongoing tax investigation is whether the summons seeks information “which might throw light upon the correctness of the taxpayer’s return.” United States v. Wyatt, 637 F.2d 293, 300 (5th Cir.1981). Here, IRS agent Karen Yates is conducting an investigation into the Petitioners’ tax liability for the 1981, 1982, and 1983 tax years. The court finds that financial records for the 1981 through 1983 tax years would clearly “shed light upon the correctness” of the Petitioners’ returns for those years. Moreover, records for the year immediately succeeding the tax years under investigation might throw light upon the correctness of the taxpayer’s returns for the years under investigation. As Judge Vining stated in his September 27, 1984 order dismissing the Petitioners’ previous petition to quash:

When indirect proof of a taxpayer’s potential tax liability must be utilized, it is certainly reasonable to investigate sources of income identified over a period of years in an effort to determine whether those sources of income existed during the years in question.

Id. at 2. Here, the financial records pertaining to the 1984 year may allow the IRS to use an indirect method of proving the Petitioners’ tax liabilities for the previous years by enabling the IRS to show a pattern of understatement of income. Therefore, the court finds that all of the summoned documents are relevant to determination of the Petitioners’ tax liabilities for the years in question.

The Petitioners also argue that enforcement of the summons would have a chilling effect upon their First Amendment rights. However, the Petitioners have not shown how enforcement of the summons would place a burden on the exercise of their religion or in any way impede the free exercise of their religious rights. See United States v. Holmes, 614 F.2d 985, 989 (5th Cir.1980). Furthermore, the IRS summons seeks only the bank records of the Petitioners and not information about any other members of the religious organization or about the religious organization itself. It is well settled in this Circuit that a summons to a bank requesting records relevant to the tax liability of an individual member of a religious organization does not violate the First Amendment, as such a summons imposes no restriction on the church or religious organization’s freedom to espouse doctrine or to solicit support. United States v. Grayson County State Bank, 656 F.2d 1070 (5th Cir.1981). Accord United States v. Groos National Bank of San Antonio, 661 F.2d 36 (5th Cir.1981). For these reasons, the court finds that the First Amendment does not preclude investigation of the Petitioners’ potential tax liability.

The Petitioners further claim that the IRS summons violates their Fifth Amendment privilege against self incrimination. However, the Fifth Amendment does not protect against production of records belonging to third parties. Fisher v. United States, 425 U.S. 391, 96 S.Ct. 1569, 48 L.Ed.2d 39 (1976). Furthermore, there has been no Justice Department referral, as defined in 26 U.S.C. § 7602(c)(2) of the Internal Revenue Code, with respect to either of the Petitioners for any of the years under investigation. The court finds that the Petitioners’ allegation that the records are being sought for a criminal prosecution is without merit.

Finally, the Petitioners challenge to the jurisdiction of this court over the IRS summons is clearly without merit. Section 7609(h)(1) of the Internal Revenue Code specifically grants the United States District Court jurisdiction over this proceeding. Further, §§ 7402 and 7604 grant the district court jurisdiction to enforce the summons.

Accordingly, the Petitioners’ request that the IRS summons at issue in these proceedings be quashed is DENIED, and the government’s motion to enforce the summons is GRANTED. The third party recordkeeper to whom the summons was addressed is hereby DIRECTED to comply with that summons within 20 days of the date of entry of this order.

SO ORDERED.

      . The Stockmeiers have styled their initial pleading as "Respondents-Intervenors Motion to Quash Summons.” However, because the Stockmeiers commenced this action the court will refer to the Stockmeiers as the "Petitioners” for purposes of this order.


author: ROVNER, District Judge.

text:
    Gregory WOOTEN, Administrator of the Estate of Lester Lee Wooten, Plaintiff, v. JOHNSON & JOHNSON PRODUCTS, INC., et al., Defendants.
    No. 84 C 853.
    United States District Court, N.D. Illinois, E.D.
    July 17, 1985.
   MEMORANDUM OPINION AND ORDER

ROVNER, District Judge.

Presently before this Court is the plaintiff’s motion to vacate the dismissal of this action for want of prosecution entered by Judge Bua on March 15, 1985 after the plaintiff’s attorney failed to appear in court on the defendants’ motion to dismiss for failure to comply with discovery which had been entered and continued to that date from March 8, 1985. Judge Bua’s order noted that the plaintiff failed to appear “or comply with outstanding discovery.”

On January 11, 1985, defendants filed a motion to compel answers to supplemental interrogatories which defendants had served on plaintiff on July 25, 1984. Defendants also sought to compel the production of documents and tape recordings which plaintiff identified at his deposition on October 24, 1984. Plaintiff failed to comply with defendants’ discovery requests and, on February 28, 1985, defendants filed a motion to dismiss plaintiff’s complaint pursuant to Rule 37 of the Federal Rules of Civil Procedure. On March 8, 1985, at the hearing on defendants’ motion, Judge Bua ordered plaintiff to comply with all outstanding discovery and entered and continued defendants’ motion to March 15. As of the time of the continued hearing on defendants’ motion, plaintiff still had not complied with discovery and counsel for plaintiff failed to appear at the hearing. Judge Bua dismissed plaintiff’s action as a sanction for failure to comply with discovery.

In addition, this Court had also twice set discovery cut-off dates, of January 15 and March 8, 1985 respectively, which passed without plaintiff having complied with discovery. Plaintiff also failed to comply with the briefing schedule set by this Court on the defendants’ motion for summary judgment which expressly provided that the schedule set was the final extension. Finally, despite plaintiff’s assertions that he has now fully complied with discovery, plaintiff’s attorney admits that he has not fully answered the defendants’ supplemental interrogatories because his expert had not yet prepared his report, a lame excuse at best in light of this Court’s discovery orders. Thus, plaintiff delayed in answering the defendants’ supplemental interrogatories for over seven months despite the passing of two discovery cut-off dates and despite Judge Bua’s order that he comply by March 15, and has yet to do so in a satisfactory manner.

Because this Court is concerned that the rights of the plaintiff estate should not be affected by the conduct of its counsel, the Court will vacate the dismissal for want of prosecution. Nonetheless, enough is enough. The only excuse offered by plaintiff’s counsel for his failure to appear in court at 9:30 a.m. on March 15 is that the Court’s minute order did not expressly direct him to do so. That excuse is simply frivolous in light of the fact that the minute order specifically stated that the motion to dismiss for failure to comply with discovery was “entered and continued to March 15, 1985.” Attorneys in this District know the meaning of these words. This Court will not condone such conduct by requiring the defendants to bear the cost of making the plaintiff’s attorney comply with his obligations to this Court. At the same time, the Court is fully cognizant of the fact that it is plaintiff’s attorney who is at fault here, not plaintiff.

Rule 37(a)(4) of the Federal Rules of Civil Procedure provides as follows:

If the motion [to compel] is granted, the court shall, after opportunity for hearing, require the party or deponent whose conduct necessitated the motion or the party or attorney advising such conduct or both of them to pay the moving party the reasonable expenses incurred in obtaining the order, including attorney’s fees, unless the court finds that the oppo-. sition to the motion was substantially justified or that other circumstances make an award of expenses unjust.

Under the circumstances of this case, the Court believes it would be unjust not to award defendants their expenses and attorneys’ fees for undertaking to confer and correspond numerous times with plaintiff’s counsel, for preparing a motion to compel discovery and a motion to dismiss for failure to comply with discovery, and for responding to plaintiff’s motion to vacate the dismissal. Accordingly, pursuant to Fed.R. Civ.P. 37(a)(4), this Court has decided to require the plaintiff’s attorney, Leonard B. Miller, personally to pay the defendants their reasonable expenses incurred in obtaining this Order, including attorneys’ fees.

Defendants’ attorneys submitted with their response to the motion to vacate the affidavit of counsel that the legal fees incurred total $1280. Although Mr. Miller was given an opportunity to object in his reply brief, he made no mention of it. Thus, this Court grants the motion to vacate the dismissal for want of prosecution but requires that Leonard B. Miller pay the defendants the sum of $1280 as a sanction under Fed.R.Civ.P. 37(a)(4). In addition, the plaintiff is ordered to file his brief responding to defendants’ motion for summary judgment by August 1, 1985 and to comply with all outstanding discovery forthwith. Failure to do so will result in dismissal of this case with prejudice. The defendants’ reply brief is to be filed by August 15, 1985. It is so ordered.