text:
    LITTON SYSTEMS, INC., d/b/a Ingalls Shipbuilding Division, Plaintiff, v. FRIGITEMP CORPORATION and Lawson F. Bernstein, Trustee in Bankruptcy of Frigitemp Corp., Frigitemp Corporation, Lawson F. Bernstein, Trustee in Bankruptcy of Frigitemp Corporation, Gerald Lee, and Marvyn Silver, Defendants.
    Civ. A. No. S77-0372(B).
    United States District Court, S.D. Mississippi, S.D.
    July 3, 1985.
    Karl Wiesenberg, Pascagoula, Miss., Thomas L. Patten, Latham, Watkins & Hills, Washington, D.C., William J. Powers, Pascagoula, Miss., D. Michael Fitzhugh, McKenna, Conner & Cuneo, Washington, D.C., L.E. Allison, Jr., Edmund L. Brunini, Brunini, Grantham, Grower & Hewes, Jackson, Miss., for plaintiff.
    William R. Grimes, Garrity, Connolly, Lewis, Lowry & Grimes, New York City, George S. Shaddock, Pascagoula, Miss., J. Leray McNamara, Jackson, Miss., Richard F. Scruggs, Pascagoula, Miss., W. Scott Welch, III, Butler, Snow, O’Mara, Stevens & Cannada, Jackson, Miss., Norman M. Monhait, Irving Morris, Morris & Rosenthal, Wilmington, Del., for defendants.
   MEMORANDUM OPINION AND ORDER

BARBOUR, District Judge.

This matter is before the Court on the Motion of the Plaintiff, Litton Systems, Inc., d/b/a Ingalls Shipbuilding Division (“Litton”), for partial summary judgment on its entitlement to an accounting and for an Order appointing a master. The Court, having considered the briefs, affidavits and materials submitted in support of, and in opposition to the Motion, is of the opinion, for the reasons set out hereinafter, that the Motion should be denied.

FACTS

In May, 1969, Litton entered into Contract No. N00024-69-C-0283 for the construction of certain Landing Helicopter Assault (LHA) vessels to be delivered to the United States Navy. In 1970, Litton entered into Contract No. N00024-70-C-0275 for the construction of 30 destroyer (DD) vessels to be delivered to the United States Navy. Litton subcontracted to Frigitemp a substantial portion of essential construction work on the LHA and DD vessels, three of which subcontracts are at issue in this proceeding.

On or about June 20, 1972, Litton placed Purchase Order P.O. No. 21-01-A00505-01 with Frigitemp for the purchase and installation of hull insulation on an LHA at a fixed price of $5,100,000. On or about April 16, 1973, Litton placed P.O. No. 69-01514-011 with Frigitemp for LHA joiner work at a fixed price of $10,985,250. On or about April 16,1973, Litton placed P.O. No. 70-01501-001 with Frigitemp for DD joiner work and hull insulation at a fixed price of $52,800,000. Litton alleges that by letters and in meetings during 1976, Frigitemp falsely and fraudulently asserted that it had obtained and stored in its Pascagoula warehouses substantially all of the materials for the subcontracts and that it had incurred costs substantially in excess of the face amount of the three subcontracts. In late 1976 and early 1977 Frigitemp asserted that it could not continue its work under the subcontracts due to its precarious financial condition (allegedly caused by Litton’s defaults and breaches of the three subcontracts). Litton agreed to pay Frigitemp its allowable actual costs incurred on the three subcontracts from and after November 15, 1976. Pursuant to this agreement, Litton alleges that it has overpaid Frigitemp by approximately 50 million dollars.

PROCEDURAL HISTORY

On or about October 19, 1977, Frigitemp threatened to stop work on the subject subcontracts. On October 27, 1977, Litton filed this action. On October 28, 1977, a Consent Order was entered obligating Frigitemp to continue performance on the subcontracts and reserving to the parties all of their rights and remedies. On May 28, 1979, Litton terminated the Frigitemp subcontracts for default due in part to insolvency pursuant to paragraph 7b(3) of the LHA terms and conditions and paragraph 7b(3) of the DD standard terms and conditions as contained in the subcontracts. On May 29, 1979, the United States District Court for the Southern District of New York entered an Order adjudicating Frigitemp a bankrupt pursuant to Sections 1(2), (12) and (18) of the Bankruptcy Act. On or about September 12, 1979, Litton filed a Complaint to Vacate Stay and Extend Time for Filing Proof of Claim. The United States Bankruptcy Judge for the United States District Court, Southern District of New York entered an Order on January 2, 1980, denying Litton’s application for an extension of time to file proof of claim. The last day for filing a proof of claim in the Frigitemp Bankruptcy proceeding was February 4, 1980. Litton did not file a proof of claim in this proceeding. The bankruptcy stay which had been entered on May 29, 1979, was lifted by Order of the Bankruptcy Court on May 15, 1980. Litton filed its first Amended Complaint on which this proceeding is based, on May 6, 1981.

DISCUSSION

In its Motion for Partial Summary Judgment on its entitlement to an accounting and for Appointment of a Master, Litton seeks two separate, although related things. These will be discussed separately hereinafter.

A. Request for Accounting.

In Count II of its First Amended Complaint, Litton seeks an accounting with respect to: 1) the money it paid Frigitemp under the subcontracts, 2) all of Frigitemp’s costs incurred pursuant to its performance under the subcontracts, 3) all amounts which Frigitemp’s books, records of account, invoices and documents in the possession of Frigitemp or its trustee in bankruptcy reflect as having been paid by Litton to Frigitemp during Frigitemp’s performance on the subcontracts, and 4) all materials acquired by Frigitemp for performance of the subcontracts. Litton asserts that it is entitled to an accounting as a matter of contract right, and as a matter of equity.

1. Contractual entitlement to accounting.

Each of the subcontracts at issue contains the following clause in the Terms and Conditions:

RIGHT TO INSPECT — [Frigitemp] agrees that [Litton] and/or government shall have the privilege of inspecting, checking and verifying the correctness and physical progress of the work and material described in paragraph 3(a), and the cost and value of such work and materials at any time, and [Frigitemp] agrees to make available to [Litton] and/or Government at [Frigitemp’s] office and plants at all reasonable times, such of its records and information as are necessary for said inspection, checking and verification.

Furthermore, Litton asserts that it is entitled to an accounting pursuant to a series of agreements entered into between Litton and Frigitemp beginning in early January, 1977. The first such agreement provides in pertinent part:

Frigitemp agrees to repay to Ingalls any amounts which Ingalls so pays to Frigitemp [under the agreement to pay allowable incurred costs] in the event that Frigitemp’s claims do not legally or contractually support the amounts so paid.
Frigitemp’s books, records and accounting records will be subject to complete inspection and audit by Ingalls and the Government for the purpose of verifying the validity of Frigitemp’s claims and allowability of Frigitemp’s costs.

The second in this series of agreements, dated March 30, 1977, provided:

Ingalls agrees to continue to pay Frigitemp all of Frigitemp’s allowable costs incurred, in performance of these purchase orders ... during the period April 1, 1977, through December 31, 1977.
Frigitemp’s books, records and accounting records will be subject to complete inspection and audit by Ingalls and the U.S. Government for the purposes of verifying Frigitemp’s claims and the allowability of Frigitemp’s costs incurred under ASPR Section 15 Part 2.

The third in this series of agreements, dated March 16, 1978, stated:

3. Ingalls shall pay to Frigitemp all of Frigitemp’s allowable costs incurred in performance of the Purchase Orders ... for the period January 1, 1978 through December 31, 1978.
4. Frigitemp’s books, records and accounting records will be subject to compíete inspection and audit by Ingalls and the United States for the purpose of verifying the validity of Frigitemp’s claims and the allowability of its costs____

Finally, Litton argues that Frigitemp owes a duty to the Navy to maintain auditable records pursuant to the following clause found in the Terms and Conditions of each subcontract:

RECORDS — [Frigitemp] shall maintain, until the expiration of the three (3) years following the date of final payment under this Order, records showing the cost of performing this Order and any termination of work thereunder. Such records shall be available for inspection by the Government at all reasonable times, at the office of [Frigitemp]. [Frigitemp’s] method of accounting shall be subject to approval of the Government, but no material change shall be made therein if it conforms to good accounting practice.

It is clear from examination of the clauses above referenced that Frigitemp is not contractually obligated to provide either Litton or the Navy with an accounting. While the clauses clearly obligate Frigitemp to open its books and accounting records to Litton and the Navy for inspection and audit, the clauses do not place the burden of performing this audit, nor do they place the responsibility of an accounting, on Frigitemp. Litton has cited no cases, and the Court has been unable to uncover any in its own search, construing language similar to that set out in the clauses above referenced as requiring an obligation to account to the other contracting party. The Court is therefore of the opinion that Frigitemp is not contractually obligated to provide an accounting in this proceeding.

2. The equitable remedy of accounting.

Although stated in various ways, Litton’s arguments of entitlement to an equitable accounting may be expressed as follows: 1) the complexity and number of documents involved mandates an accounting; 2) Litton owes a duty to the Navy to seek and obtain an accounting; 3) Litton’s lack of success in prior audits and the unreliability of the audits performed by Arthur Anderson & Co. make an accounting necessary; 4) allegations of fraud against Defendant Silver and other Frigitemp corporate officers necessitate an accounting; 5) the records are in the sole possession of the trustee; and 6) the positions of Litton and Frigitemp are radically different and diametrically opposed.

In Dairy Queen v. Wood, 369 U.S. 469, 82 S.Ct. 894, 8 L.Ed.2d 44 (1962), the Plaintiff sought damages and an injunction preventing the defendant from infringing upon the plaintiff’s exclusive use of the trademark “Dairy Queen.” The plaintiff’s complaint was cast in terms of an “accounting” and the plaintiff resisted the defendant’s demand for a jury trial. The Supreme Court held that where both legal and equitable issues are presented in a single case, any legal issues must be submitted to a jury first. The Court, in discussing the equitable right to an accounting, noted:

The necessary prerequisite to the right to maintain a suit for an equitable accounting, like all other equitable remedies, is, as we pointed out in Beacon Theatres, the absence of an adequate remedy at law____ The legal remedy cannot be characterized as inadequate merely because the measure of damages may necessitate a look into ... business records.

Id. at 478-79, 82 S.Ct. at 900-01. In Beacon Theatres v. Westover, 359 U.S. 500, 79 S.Ct. 948, 3 L.Ed.2d 988 (1959) the Supreme Court held that the fact that an antitrust action was brought as a declaratory judgment could not deprive a party of its right to a jury trial. Although the Court was speaking specifically about the basis for injunctive relief, the following statement pertains to equitable relief in general:

Inadequacy of remedy and irreparable harm are practical terms, however. As such their existence today must be determined, not by precedents decided under discarded procedures, but in the light of the remedies now made available by the Declaratory Judgment Act and the Federal Rules.

Id. at 507, 79 S.Ct. at 955 (footnote omitted).

In Bynum v. Baggett Transportation Co., 228 F.2d 566 (5th Cir.1956) an action for accounting brought by owner-lessors of motor trucks against an interstate truck carrier, the Fifth Circuit held that the action was “a proper action for accounting in both substance and procedure, involving hundreds of distinct shipments of countless commodities to and from numerous points, presenting thus the inevitable esoteric mysteries of application and interpretation of carrier tariffs____” Id. at 569. Litton cites several older Mississippi decisions in accord with the Fifth Circuit’s ruling in Bynum. These older decisions do not take into account the far-ranging discovery features of the modern day Federal Rules of Civil Procedure. In Bradshaw v. Thompson, 454 F.2d 75 (6th Cir.), cert. denied, 409 U.S. 878, 93 S.Ct. 130, 34 L.Ed.2d 131 (1972) the Sixth Circuit held that a plaintiff seeking an accounting as to the proceeds received from the sale of 60 horses was not entitled to the “extraordinary” remedy of an accounting, since discovery would provide the plaintiff with the information sought. After discussing the holdings in Beacon Theatres and Dairy Queen that equitable relief will not be granted where the legal remedy is adequate, the court noted:

The availability of declaratory judgments and the liberal discovery procedures of the Federal Rules operate to make the legal remedies more “adequate” than before. This case is an example of that fact.
The appellant obtained by discovery all information to which he could have been entitled in an accounting. Information concerning the disposition of each horse, including purchase price, name of purchaser and the consideration received was obtained and was set forth in the pretrial order____
An accounting is a species of disclosure, predicated upon the legal inability of a plaintiff to determine how much, if any, money is due him from another. It is an extraordinary remedy, and like other equitable remedies, is available only when legal remedies are inadequate. We find no basis for disturbing the District Court’s conclusion that the procedures of the Federal Rules for causes at law were fully adequate to provide the relief sought by the appellant.

Id. at 79 (emphasis added). Nor is the alleged fraud of Frigitemp’s officers and the alleged fraud or unreliability of the Arthur Anderson audits sufficient reason to order an accounting, since the remedy at law in this case is adequate. See, e.g., Equitable Life Assurance Society v. Brown, 213 U.S. 25, 49, 51, 29 S.Ct. 404, 412, 413, 53 L.Ed. 682 (1909); United States v. Bitter Root Company, 200 U.S. 451, 26 S.Ct. 318, 50 L.Ed. 550 (1906); Buzard v. Houston, 119 U.S. 347, 7 S.Ct. 249, 30 L.Ed. 451 (1886).

The Court is of the opinion that there is no contractual or equitable basis for an accounting in this action. Litton has had access to the accounting records of Frigitemp and has in fact conducted several audits of these records during the course of the contracts. Furthermore, Litton has access to all of the discovery means available to litigants under the liberal Federal Rules of Civil Procedure pertaining to discovery.

Since a court-ordered accounting is merely evidence of the mutual debts and obligations of the parties which a jury is free to accept or reject, the Court is not swayed by Frigitemp’s arguments that an accounting would deprive them of their Seventh Amendment right to a jury trial. Even though an accounting could be granted in this case without violating Frigitemp’s Seventh Amendment right to a jury trial, the Court has concluded that this “extraordinary” remedy is not justified in this case. The matter boils down to a question of who should pay for the compilation of data and evidence necessary to present the case to a jury. The Court sees no compelling reason to shift this burden from each litigant under present discovery procedures and place it solely on Frigitemp. Although the prevailing party may be entitled to an allocation of costs against the losing party which would entail some of the discovery expenses, it is premature at this point to allocate this burden to Frigitemp absent a showing that Litton’s entitlement to an accounting cannot genuinely be disputed.

B. Request for Appointment of Master.

Litton has moved for the appointment of a master pursuant to F.R.Civ.P. 53. Since “[a] reference to a master shall be the exception and not the rule” F.R. Civ.P. 53(b), the propriety of appointing a master in this proceeding must be clearly shown. Litton argues that the complexity of the issues in this ease make it appropriate for the appointment of a master. As the United States Supreme Court noted in La Buy v. Howes Leather Co., 352 U.S. 249, 77 S.Ct. 309, 1 L.Ed.2d 290, reh’g denied, 352 U.S. 1019, 77 S.Ct. 553, 1 L.Ed.2d 560 (1957), however, “on the contrary, [complexity] is an impelling reason for trial before a regular, experienced judge rather than before a temporary substitute appointed on an ad hoc basis and ordinarily not experienced in judicial work.” Id. 352 U.S. at 259, 77 S.Ct. at 315. While noting that reference to a master lies within the sound discretion of the trial court, the Supreme Court overturned reference to a master in La Buy. Likewise, in Bradshaw v. Thompson, 454 F.2d 75 (6th Cir.), cert. denied, 409 U.S. 878, 93 S.Ct. 130, 34 L.Ed.2d 131 (1972), the court noted:

The appellant further contends that the Court abused its discretion in declining to appoint a master to assist the jury. The decision to appoint a master whose function is to aid the judge in the performance of specific judicial duties, is within the discretion of the District Court. La Buy v. Howes Leather Co., 352 U.S. 249, 256, 77 S.Ct. 309 [313], 1 L.Ed.2d 290 (1957). The fact that “the case involves complex issues of fact and law is no justification for reference to a Master, but rather is an impelling reason for trial before an experienced judge.” Bartlett-Collins Co. v. Surinam Nav. Co., 381 F.2d 546, 551 (10th Cir.1967); see also In Re Watkins, 271 F.2d 771 (5th Cir.1959). The overall mandate of Rule 53(b) is that reference to a master is to be the exception and not the rule. Actions for fraud are particularly inappropriate for reference to a master “save in extraordinary or exceptional cases.” Irving-Austin Bldg. Corp. v. Cunningham, 100 F.2d 574 (7th Cir.1938). We find no abuse of discretion in the Court’s refusing to appoint a master to assist the jury.

Id. at 80.

The Court is of the opinion that reference to a master would not materially aid in the disposition of this case. While the issues in this case are concededly complex and the documentary and other evidence at trial will undoubtedly be massive, the Court has already gained some familiarity with the dispute from having ruled on this and other motions and judicial efficiency and economy would best be served by refusing to appoint a'master, even on a limited basis, in this case. Accordingly, Litton’s Motion for the Appointment of a Master is hereby denied.

CONCLUSION

There being no contractual or equitable basis for an accounting in this action, Litton’s Motion for an Accounting is hereby denied. There being no justification for the appointment of a master in this case, Litton’s Motion for Appointment of a Master is also denied.

      . Frigitemp argues that an accounting would deprive them of their right to a jury trial in this case. See Dairy Queen, Inc. v. Wood, 369 U.S. 469, 82 S.Ct. 894, 8 L.Ed.2d 44 (1962); Beacon Theatres, Inc. v. Westover, 359 U.S. 500, 79 S.Ct. 948, 3 L.Ed.2d 988 (1959); Thermo-Stitch, Inc. v. Chemi-Cord Processing Corp., 294 F.2d 486 (5th Cir.1961). These cases merely stand for the proposition that in a case combining legal and equitable claims, the legal claim should be tried before the jury prior to determination of the equitable claims. Inasmuch as the results of the accounting could be presented to the jury in the instant case for their consideration, an accounting would not deprive Frigitemp of a right to jury trial in this case. For reasons set out hereinabove, however, the Court is of the opinion that an accounting is not justified in this case.

      . In this Motion for Summary Judgment Litton bears the burden of showing that there are no genuine issues as to any material facts pertaining to their entitlement to an accounting. See, e.g., Poller v. Columbia Broadcasting System, 368 U.S. 464, 467, 82 S.Ct. 486, 488, 7 L.Ed.2d 458 (1962); Nunez v. Superior Oil Company, 572 F.2d 1119, 1123-24 (5th Cir.1978); Gossett v. Du-Ra-Kel Corporation, 569 F.2d 869, 871-72 (5th Cir.1978). Litton has not met this burden.


source: Caselaw Access Project

author: EARL E. O’CONNOR, Chief Judge.

license: Public Domain

text:
    FEDERAL DEPOSIT INSURANCE CORPORATION, Plaintiff, v. Jack GALLOWAY; Jack Galloway, d/b/a Jack's Excavating, a/k/a Jack's Excavating Co.; John W. Meyers, Jr.; Lorna M. Meyers; Harry D. Sharp; and Brenda C.M. Sharp, Defendants.
    Civ. A. No. 84-2106.
    United States District Court, D. Kansas.
    July 12, 1985.

      Daniel B. Denk, McAnany, Van Cleave and Phillips, Kansas City, Kan., for plaintiff.
    Ernest C. Ballweg, Cooke, Ballweg & Tuley, Leawood, Kan., for defendants Meyers & Sharp.
    Joseph A. Bukaty, Kansas City, Kan., for defendants Galloway.
   MEMORANDUM AND ORDER

EARL E. O’CONNOR, Chief Judge.

Through this action, plaintiff seeks to recover from defendant Jack’s Excavating Co. (“Company”) and its president, defendant Jack Galloway (“Galloway”), on some seven promissory notes. As against defendants John W. and Loma M. Meyers and Harry D. and Brenda C.M. Sharp (“the guarantor defendants”), the action is based on certain guaranty agreements related to those seven notes. Defendant Company essentially admits its liability, while defendant Galloway seeks to avoid liability on the ground that he signed the notes only in his representative capacity. Among the defenses raised by the guarantor defendants are the statute of limitations and fraud in the inducement.

The case was tried to the court on May 22 and 23, 1985. Upon reviewing the pleadings, the evidence received at trial, and the arguments and statements of counsel, the court makes the following:

Findings of Fact

1. Plaintiff Federal Deposit Insurance Corporation (“FDIC”) has been appointed by the Banking Commissioner of the State of Kansas as receiver of the former Mission State Bank & Trust Company (“the Bank”).

2. On August 8,1980, the District Court of Johnson County, Kansas, authorized FDIC (as receiver of the Bank) to sell to FDIC (in its corporate capacity) all assets of the Bank remaining after the sale or transfer of certain assets and liabilities to The Mission Bank, the Bank’s successor.

3. Pursuant to that court order, certain assets, including, the seven promissory notes and three guaranties at issue in this case, were sold or assigned to FDIC in its corporate capacity. Thus, any interest in those instruments once held by the Bank is now held by FDIC.

4. Defendant Jack Galloway is the president of defendant Jack’s Excavating, a/k/a Jack’s Excavating Co.

5. Defendants John W. Meyers, Jr., and Loma M. Meyers are husband and wife. John W. Meyers was a stockholder and officer of Johnson County Equipment, Inc., which engaged in the purchase and resale of heavy equipment.

6. Defendants Harry D. Sharp and Brenda C.M. Sharp are husband and wife.

7. Defendants John W. Meyers and Harry D. Sharp each owned 25% of the stock in Kan-Tuck Coal Company, a Kentucky corporation.

8. Plaintiff’s Exhibit 10 is a promissory note executed on November 30, 1977, with an initial maturity date of February 28, 1978. The principal amount financed through this note was $10,006.00, at an interest rate of 10 percent. The note was signed by “Jack Galloway,” whose signature appears below the typewritten name “Jacks Excavating.” The note indicates, and the evidence received at trial confirms, that the note’s payee (“The Mission State Bank & Trust Company”) granted various extensions of the maturity date in return for partial payments by the maker(s). The last such extension expired on June 5,1979.

9. Plaintiff’s Exhibit 13 is a promissory note executed on October 25, 1977, with an initial maturity date of January 23, 1978. The principal amount financed through this note was $103,350.00, at an interest rate of 10 percent. The note was signed by “Jack Galloway,” whose signature appears below the typewritten name “Jack’s Excavating Co.” The note indicates, and the evidence received at trial confirms, that the note’s payee (“The Mission State Bank & Trust Company”) granted various extension of the maturity date in return for partial payments by the maker(s). The last such extension expired on June 23, 1979.

10. Plaintiff’s Exhibit 16 is a promissory note executed on March 21, 1979, with a maturity date of April 1, 1982. The principal amount financed through this note was $531,000.00, at an interest rate of 11.08 percent. Repayment was to be made in 36 monthly installments of $17,468.66, beginning on May 1, 1979, and continuing on the first day of each succeeding month until paid in full. The note was signed by “Jack Galloway.” The name of no other maker appears on the face of the note. The note’s payee (“The Mission State Bank & Trust Company”) granted no extension of the note’s maturity date.

11. Plaintiff’s Exhibit 20 is a promissory note executed on March 14, 1979, with a maturity date of May 13, 1979. The principal amount financed through this note was $28,240.51, at an interest rate of 11 percent. The note was signed by “Jack Galloway.” The name of no other maker appears on the face of the note. The note’s payee (“The Mission State Bank & Trust Company”) granted no extension of the note’s maturity date.

12. Plaintiff’s Exhibit 23 is a promissory note executed on February 10, 1979, with a maturity date of May 11, 1979. The principal amount financed through this note was $54,000.00, at an interest rate of 10 percent. The note was signed by “Jack Galloway.” The name of no other maker appears on the face of the note. The note’s payee (“The Mission State Bank & Trust Company”) granted no extension of the note’s maturity date.

13. Plaintiff’s Exhibit 26 is a promissory note executed on August 5, 1978, with an initial maturity date of October 4, 1978. The principal amount financed through this note was $112,000.00, at an interest rate of 10 percent. The note was signed by “Jack Galloway.” The name of no other maker appears on the face of the note. The note indicates, and the evidence received at trial confirms, that the note’s payee (“The Mission State Bank & Trust Company”) granted various extensions of the maturity date in return for partial payments by the makers). The last such extension expired on June 5, 1979.

14. Plaintiff’s Exhibit 29 is a promissory note executed on February 15, 1978, with an initial maturity date of April 16, 1978. The principal amount financed through this note was $52,003.00, at an interest rate of 10 percent. The note was signed by “Jack Galloway.” The name of no other maker appears on the face of the note. The note indicates, and the evidence at trial confirms, that the note’s payee (“The Mission State Bank & Trust Company”) granted various extensions of the maturity date in return for partial payments by the maker(s). The last such extension expired on June 5, 1979.

15. In signing each of these seven notes, Galloway intended to act only as the representative of the Company. Neither he nor the Bank intended that he be personally liable on the notes.

16. Galloway had authority to sign these notes on behalf of the Company.

17. On May 14,1981, FDIC realized proceeds of $170,755.25 from the sale of collateral that had secured these notes.

18. Demand has been made for the payment of the notes’ remaining principal and accrued interest.

19. As of April 15, 1985, the remaining principal and interest due on these seven notes totalled $1,068,578.25. Since that date, interest has been accruing on the notes at the contractual rate of $209.79 per day.

20. Aside from its notarization, Plaintiff’s Exhibit 32 reads, in full:

LOAN GUARANTY AGREEMENT
10-20 , 1977
The undersigned for and in consideration of the sum of One Dollar and other good and valuable considerations, to me in hand paid by THE MISSION STATE BANK & TRUST CO., Mission, Kansas (hereinafter called the “Bank”) the receipt whereof is hereby acknowledged, does hereby absolutely and unconditionally guarantee to said Bank, its successor, successors or assigns, payment at maturity of any and all existing and future indebtedness and liability of every kind, nature and character of $ 63000.00 (Plus all legal interest charges made by said Bank) either made or endorsed by Jack Galloway (Hereinafter called the “Borrower”) to the Bank, howsoever and whensoever created, or arising, or evidenced, or acquired; and the undersigned waives notice of the acceptance of this guaranty and any and all such indebtedness and liability. The undersigned hereby waives presentment, protest, notice, demand or action on delinquency in respect of any such indebtedness or liability, including any right to require the Bank to sue or otherwise enforce payment thereof.
This guaranty is made and shall continue as to any and all such indebtedness and liability of the borrower to the bank incurred or arising prior to receipt by the bank of written notice of the termination hereof from the undersigned.
This guaranty shall bind the heirs, personal representatives, succesors assigns of the undersigned and shall inure to the Bank, its successors and assigns.
/s/ Jack W. Meyers
Guarantor

21. With the following exceptions, plaintiff’s Exhibit 33 is identical to Plaintiff’s Exhibit 32:

(1) The date is “3-20-1979,” rather than “10-20-1977”;
(2) The amount is “$531,000.00,” rather than “$63,000.00”; and
(3) The signatures are those of “Jack W. Meyers” and “Loma M. Meyers,” rather than merely “Jack W. Meyers.”

22. Plaintiff’s Exhibit 34 is identical to Plaintiff’s Exhibit 33, except that the signatures appearing thereon are those of “Harry D. Sharp” and “Brenda C.M. Sharp,” rather than “Jack W. Meyers” and “Lorna M. Meyers.”

23. Defendant John W. Meyers signed Plaintiff’s Exhibit 32 because Galloway had borrowed money from the Bank for the purpose of purchasing $63,000.00 worth of machinery from Johnson County Equipment, Inc. The guaranty was thus beneficial to defendant Meyers.

24. The guarantor defendants signed Plaintiff’s Exhibits 33 and 34 because Galloway had borrowed $531,000.00 from the Bank so he could purchase equipment of that value from Kan-Tuck Coal Company. The sale of that equipment to Galloway allowed Kan-Tuck to repay its loan to the Bank. The guaranty was thus beneficial to the guarantor defendants.

25. Before signing Plaintiff’s Exhibits 33 and 34, the guarantor defendants asked the Bank’s president, Theodore Meyer, whether Galloway was a good credit risk. Among other assurances given these defendants by Mr. Meyer were that (1) Galloway had repaid in full the loan guaranteed by John W. Meyers in Plaintiff’s Exhibit 32, and (2) the Bank would establish a $50,000.00 escrow account to help cover any monthly payments that Galloway might fail to make on the note introduced as Plaintiff’s Exhibit 13.

In fact, Galloway had not repaid the earlier loan, and Theodore Meyer was aware of that fact. Nor did the Bank establish the promised $50,000.00 escrow account. At no time did Theodore Meyer even intend to establish such an account.

These misrepresentations were made with the intent to deceive the guarantor defendants by understating the risks involved in signing the guaranties. Because these risks were understated, the guarantor defendants did suffer an injury as a result of the misrepresentations. Given all the circumstances, including Theodore Meyer’s status as president of the Bank, the guarantor defendants justifiably relied on his misrepresentations in deciding to sign Plaintiff’s Exhibits 33 and 34. Were it not for these misrepresentations, they would not have signed.

As to all the facts contained within finding number 25, the evidence received at trial was clear and convincing.

26. On August 4, 1979, defendant John W. Meyers made a payment to the Bank of $17,468.66. This represented one month’s payment on the note introduced as Plaintiff’s Exhibit 16, and was paid pursuant to the 1979 loan guaranty agreement (Plaintiff’s Exhibit 33).

27. This action was filed on March 9, 1984.

Conclusions of Law

1. Pursuant to 12 U.S.C. § 1819 (Fourth), we have subject matter jurisdiction over this action. See Freeling v. Sebring, 296 F.2d 244 (10th Cir.1961).

2. The pre-trial order notes no objection either to personal jurisdiction or to venue. The parties have thus waived any such objection.

3. Under the Kansas Uniform Commercial Code:

(1) A holder in due course is a holder who takes the instrument
(a) for value; and
(b) in good faith; and
(c) without notice that it is overdue or has been dishonored or of any defense against or claim to it on the part of any person.

K.S.A. 84-3-302(1).

4. The Code also provides, however, that:

(3) A holder does not become a holder in due course of an instrument:
(c) by purchasing it as part of a bulk transaction not in [the] regular course of business of the transferor.

K.S.A. 84-3-302(3)(c). This provision “has particular application to the purchase by one bank of a substantial part of the paper held by another bank which is threatened with insolvency and seeking to liquidate its assets.” Id., Official U.C.C. Comment 3, II2. Not surprisingly, then, the transfer of financial instruments to the FDIC under circumstances such as these is not “in the ordinary course of business.” Gunter v. Hutcheson, 674 F.2d 862, 872 (11th Cir.1982), cert. denied, 459 U.S. 826, 103 S.Ct. 60, 74 L.Ed.2d 63 (1982). Thus, even assuming FDIC’s receipt of these instruments satisfied the three requirements of K.S.A. 84-3-302(1), FDIC would still not be a holder in due course under Kansas law.

5. The federal courts, however, have not confined the FDIC to reliance on applicable state holder in due course rules. Rather, they have enunciated as a matter of federal common law a holder in due course rule that abandons the “regular course of business” requirement. The Sixth Circuit, for example, has held that:

When the FDIC in its corporate capacity, as part of a purchase and assumption transaction, acquires a note in good faith, for value, and without actual knowledge of any defenses against the note, it takes the note free of all defenses that would not prevail against a holder in due course.

F.D.I.C. v. Wood, 758 F.2d 156, 161 (6th Cir.1985). In Gunter, the Eleventh Circuit enunciated a similar rule of federal common law. See 674 F.2d at 873.

6. As to the promissory notes at issue here (Plaintiff’s Exhibits 10, 13, 16, 20, 23, 26, and 29), FDIC qualifies as a holder in due course under federal common law. The maker or makers of these notes are thus liable to FDIC for the total outstanding balance and accrued interest. The question is: who is/are the maker(s) of these notes?

7. Under the Kansas Uniform Commercial Code:

(1) A signature may be made by an agent or other representative, and his authority to make it may be established as in other cases of representation. No particular form of appointment is necessary to establish such authority.

K.S.A. 84-3-403(1). Parol evidence is admissible for the purpose of establishing such authority. Id., Official U.C.C. Comment 1, ¶ 2. In this case, we have found that defendant Galloway, whose signature appears on each of these notes, was authorized by defendant Company to sign the notes on the Company’s behalf. The Company is thus liable to FDIC as a maker of the notes.

8. Defendant Galloway asserts that, because he signed the notes only in his representative capacity as president of defendant Company, he is not personally liable on the notes. This issue must be addressed under the following provisions of the Kansas Uniform Commercial Code:

(2) An authorized representative who signs his own name to an instrument
(a) is personally obligated if the instrument neither names the person represented nor shows that the representative signed in a representative capacity;
(b) except as otherwise established between the immediate parties, is personally obligated if the instrument names the person represented but does not show that the representative signed in a representative capacity,

K.S.A. 84-3-403(2).

Standing alone, an agent's signature “personally obligates the agent and parol evidence is inadmissible under subsection (2)(a) to disestablish his obligation.” Id., Official U.C.C. Comment 3, ¶ 3. As to the notes introduced as Plaintiff’s Exhibits 16, 20, 23, 26, and 29, then, parol evidence may not be received for the purpose of relieving defendant Galloway of personal liability.

The rule as to the notes introduced as Plaintiff’s Exhibits 10 and 13 is only slightly less restrictive. Because these two notes do “[name] the person represented but [do] not show that the representative signed in a representative capacity,” K.S.A. 84-3-403(2)(b), parol evidence is admissible “in litigation between the immediate parties to prove signature by the agent in his representative capacity.” Id., Official U.C.C. Comment 3, ¶ 5 (emphasis added). The “immediate parties” to these notes do not include FDIC. Parol evidence as to defendant Galloway’s intent in signing the notes is thus inadmissible as against FDIC. As with defendant Company, then, defendant Galloway is personally liable to FDIC on all seven of these notes.

9. Defendants Galloway and Company are jointly and severally liable for the full amount of FDIC’s prayer against them in this case.

10. “The following actions shall be brought within five (5) years: (1) an action upon any agreement, contract or promise in writing.” K.S.A. 60-511(1). However, “[i]n any case founded on contract, when any part of the principal or interest shall have been paid, ... an action may be brought in such case within the period prescribed for the same, after such payment.” K.S.A. 60-520(a). See Hustead v. Bendix Corp., 233 Kan. 870, 877, 666 P.2d 1175, 1180-81 (1983).

11. This suit was filed more than five years after the original maturity dates on the notes introduced as Plaintiff’s Exhibits 10, 13, 26, and 29. However, because defendant Galloway made partial payments on those notes, and because suit was filed less than five years after the notes’ extended maturity dates, none of the notes is subject to a statute of limitations defense.

12. This is not to say, however, that K.S.A. 60-511(1) might not bar at least part of FDIC’s suit against the guarantors of these notes. The parties have cited no Kansas authority directly on point. As a general rule, however:

the statute of limitations begins to run on the obligations of a guarantor when all of the conditions to the liability of the guarantor have occurred. Thus, in an absolute guaranty — where the only condition to the obligation of the guarantor is the default of the debtor — the statute of limitations begins to run against the creditor on the guaranty contract at the date when the debt or obligation is payable. In the case of a guaranty of a promissory note, the running of the statute commences at the time of maturity of the instrument; ....
It has generally been held that a payment by the principal debtor does not have the effect of tolling the statute of limitations as to the guarantor.

38 Am.Jur.2d Guaranty § 122 (1968). See also Annot., 84 A.L.R. 729 (1933) (“In most of the jurisdictions in which the point has arisen, it has been held that a payment by a principal debtor will not operate to toll the Statute of Limitations as to a guarantor of the debt.”).

13. The note introduced as Plaintiffs Exhibit 13 became “payable” on its original maturity date of January 23, 1978. Because that note financed a principal amount of $103,350.00, the statute of limitations as to the entire guaranty agreement introduced as Plaintiffs Exhibit 32 (in the amount of $63,000.00) began to run as of that date. Defendant Galloway’s partial payments on the note did not toll the statute of limitations as to this guaranty agreement. Thus, K.S.A. 60-511(l)’s five-year statute of limitations bars FDIC’s suit on the guaranty introduced as Plaintiff’s Exhibit 32.

14. As to the other guaranty agreements (Plaintiff’s Exhibits 33 and 34), the guarantor defendants rely on the defense of fraud in the inducement. Under Kansas law:

6. “Actionable fraud includes an untrue statement of fact, known to be untrue by the party making it, made with the intent to deceive or recklessly made with disregard for the trust (sic), where another party justifiably relies on the statement and acts to his injury.”
7. “Fraud is never presumed and must be proven by clear and convincing evidence.”
8. “The term ‘clear and convincing evidence’ means: The witnesses to a fact must be found to be credible, the facts to which the witnesses testify must be distinctly remembered; the details in connection with the contract must be narrated exactly and in order; the testimony must be clear, direct and weighty, and the witnesses must be lacking in confusion as to the facts at issue.”

Price v. Grimes, 234 Kan. 898, 902-03, 677 P.2d 969, 973 (1984) (quoting Nordstrom v. Miller, 227 Kan. 59, Syl. ¶¶ 6-8, 605 P.2d 545 (1980)). Kansas law further provides that:

Although contractual fraud requires the false representation of a material existing fact, rather than a promise of something to be done in the future, an exception exists when the promissor has no intention of carrying out the promise at the time it is made. Under those circumstances the promissor’s intent is the existing fact which is fraudulently misrepresented.

Gonzalez v. Allstate Insurance Co., 217 Kan. 262, 265, 535 P.2d 919, 922 (1975).

15. Judged by these standards, the Bank (acting through its president, Theodore Meyer) defrauded the guarantor defendants in at least the following two respects: (1) by promising, without so intending, to establish a $50,000.00 escrow account for the purpose of covering payments defendant Galloway might fail to make on his $531,000.00 promissory note, and (2) by informing the guarantor defendants that defendant Galloway had already repaid in full the loan as to which defendant John W. Meyers had executed his earlier $63,000.00 guaranty agreement. In justifiable reliance on these two misrepresentations of fact, the guarantor defendants executed Plaintiff’s Exhibits 33 and 34. Thus, unless otherwise barred as a legal defense, either instance of fraud would relieve these defendants of liability on their guaranty agreements. 17 Am.Jur.2d Contracts § 151 (1964).

16. Arguing that fraud in the inducement is indeed barred as a defense to this suit, FDIC filed a motion in limine seeking the exclusion from trial of all evidence concerning fraud. We chose to admit such evidence on a conditional basis and then to rule on FDIC’s motion in this written memorandum. The motion in .limine rests on the following three grounds:

(1) that FDIC is a holder in due course of the guaranty agreements, and is thus not subject to the personal defense of fraud in the inducement;
(2) that as against the FDIC, such a defense is barred by the provisions of 12 U.S.C. § 1823(e); and
(3) that such a defense is barred by the Court’s decision in D'Oench, Duhme & Co., Inc. v. F.D.I.C., 315 U.S. 447, 62 S.Ct. 676, 86 L.Ed. 956 (1942).

17. Because FDIC did not acquire these guaranties in the “regular course of business,” it fails to qualify as a holder in due course under the Kansas Uniform Commercial Code. See K.S.A. 84-3-302(3)(c), discussed supra. As noted in our discussion of the promissory notes, the federal common law holder in due course rule has abandoned this “regular course of business” requirement. See Gunter, 674 F.2d at 872-73. Nonetheless, we may not automatically conclude that, as to these guaranties, FDIC is a holder in due course under federal common law. Two questions must still be addressed. First, does FDIC meet all the other U.C.C. holder in due course requirements (i.e., aside from the “ordinary course of business” element)? And second, assuming FDIC fails to satisfy one or more of those other U.C.C. requirements, does the federal common law holder in due course rule mandate compliance with those other requirements?

18. Even aside from the “ordinary course of business” requirement, FDIC fails to qualify as a holder in due course of the guaranties under the Kansas U.C.C. Under the Code, a holder in due course is a holder who takes an “instrument.” K.S.A. 84-3-302(1). The same U.C.C. article defines “instrument” as a “negotiable instrument.” K.S.A. 84-3-102(l)(e) (emphasis added). Only those documents meeting the requirements of K.S.A. 84-3-104(1) are negotiable instruments. Where the Kansas courts have considered guaranty agreements, they have held them not to be negotiable instruments.

For instance, the guaranty agreement at issue in Halpin v. Frankenberger, 231 Kan. 344, 644 P.2d 452 (1982), was remarkably similar to those introduced as Plaintiff’s Exhibits 33 and 34. After engaging in the above analysis, the Halpin court concluded, “The guaranty agreement does not comply with 84-3-104 in several respects and therefore 84-3-606 [regarding discharge through impairment of collateral] does not apply.” 231 Kan. at 349, 644 P.2d at 456. The court in Kansas State Bank & Trust Co. v. DeLorean, 7 Kan.App.2d 246, 640 P.2d 343 (1982), rev. denied, 231 Kan. 800 (1982), was even more emphatic. The court flatly stated: “The document in question is not a negotiable instrument but rather a separate contract of guaranty. Thus, the UCC provision is not applicable.” 7 Kan.App.2d at 256, 640 P.2d at 351.

Although not explained in either of these Kansas decisions, the basis for holding that a guaranty agreement is not a negotiable instrument is rather obvious. To be “negotiable,” an instrument must “contain an unconditional promise or order to pay a sum certain in money____” K.S.A.-84-3-104(l)(b) (emphasis added). Because the guarantor defendants waived their right to require the Bank to proceed against Jack Galloway before enforcing the guaranty agreements, those agreements are properly termed “unconditional guaranties.” See DeLorean, 7 Kan.App.2d at 255, 640 P.2d at 350. But a guaranty is by its very nature a conditional promise to pay. That is, a guarantor promises to pay only on the condition that the principal debtor fails to pay. A creditor may not refuse a tender of payment by the principal debtor and then force the guarantor to make good on his guaranty. 38 C.J.S. Guaranty § 77(c) (1943). It is in that sense that these' guaranty agreements are conditional. Because- they contain no unconditional promise to pay, the guaranties are not negotiable instruments. FDIC could thus never qualify as a holder in due course of the guaranties under the Kansas U.C.C. K.S.A. 84-3-302(1), -102(l)(e), -104(l)(b).

Under the Kansas U.C.C., FDIC fails to qualify as a holder in due course of these guaranties on yet another ground. A negotiable instrument must “be payable to order or to bearer.” K.S.A. 84-3-104(l)(d). Even if these guaranties otherwise qualified as negotiable instruments, failure to meet this requirement means “that there can be no holder in due course of such an instrument.” K.S.A. 84-3-805. An examination of these guaranties (set out verbatim in finding number 20) reveals no compliance with this “payable to order or to bearer” requirement. On this alternative ground, then, FDIC fails to qualify as a holder in due course of the guaranties under the Kansas U.C.C.

19. Because nearly every case decided under the federal common law holder in due course rule has involved a promissory note, there is little authority as to whether that rule applies to documents which fail to qualify as U.C.C. negotiable instruments. Indeed, the rule itself is generally phrased in terms of a “note” acquired by the FDIC. See Wood, 758 F.2d at 161; Gunter, 674 F.2d at 873. Only in one reported decision was this issue addressed. The court in F.D.I.C. v. Gulf Life Ins. Co., 737 F.2d 1513 (11th Cir.1984), held that the FDIC could obtain holder in due course status as to a non-negotiable instrument (there, an unearned insurance premium refund). Because we disagree with both the analysis and result of the Gulf Life court, we find it necessary to quote from certain portions of that opinion.

The Gulf Life court began by drawing a parallel between its case and that same circuit’s earlier decision in Gunter v. Hutcheson, 674 F.2d 862 (involving a negotiable promissory note purchased by the FDIC):

Gunter dictates that federal law govern this case because the rights and obligations of the FDIC are at stake. The considerations identified by the Supreme Court in Kimbell Foods as being pertinent in deciding whether state law should form the content of that federal law are: first, whether the federal program by its nature requires national consistency; second, whether state law would frustrate specific goals of the federal program; and third, the extent to which a uniform federal rule would upset state-based commercial relations. 440 U.S. at 728-29, 99 S.Ct. at 1458-59.

737 F.2d at 1517 (citing United States v. Kimbell Foods, Inc., 440 U.S. 715, 99 S.Ct. 1448, 59 L.Ed.2d 711 (1979)). After concluding that the first two considerations argued against the application of state law to the instrument at issue there, the Gulf Life court continued:

As in Gunter, the third Kimbell Foods factor points toward employing state law as the federal rule of decision, but not with sufficient force to overcome the pull of the first two considerations. The Gunter court noted that the alleged adverse effect of a uniform protective rule on settled commercial expectations grounded in state law was largely illusory because the FDIC would carry a shield no greater than that possessed by a holder in due course — a much more likely transferee than the FDIC. See id. at 872. The asset involved in the present case, however, is not a negotiable instrument, which strengthens the effect of the third Kimbell factor.
Gunter’s comparison of the FDIC to a holder in due course is nevertheless apt. In the majority of cases in this circuit in which the obligor has sought to avoid payment to the FDIC, the obligation has been embodied in a note. In the common situation where a note is a negotiable instrument, estoppel, waiver, and unjust enrichment are defenses to which a holder in due course would be impregnable. See U.C.C. § 3-305(2). Gunter’s analy sis thus persuades us that in the majority of cases little dashing of commercial expectations would result from a uniform federal rule protecting the FDIC from such defenses.

737 F.2d at 1517-18 (emphasis added; citations omitted).

This analysis seems entirely reasonable until one reaches the highlighted sentence. The reason there is little dashing of commercial expectations in cases involving negotiable instruments is that one who signs such an instrument can reasonably expect that he will eventually be asked to pay a holder in due course. Granting the FDIC holder in due course status after a bank’s failure thus imposes no greater liability on the maker/drawer of a negotiable instrument than he had reasonably expected to bear. However, one who signs a non-negotiable instrument reasonably expects to avoid having to contend with a holder in due course. In our opinion, the Gulf Life court underestimated the extent to which its result dashes the latter party’s commercial expectations.

That may contribute to what we see as an even greater error. It strains logic to suggest that because a rule makes sense in “the majority of cases” (i.e., when a negotiable instrument is involved), it should therefore be applied to all other cases. Having determined that different considerations apply to non-negotiable instruments, the Gulf Life court should logically have determined if an alternative rule were feas-, ible. In our view, such an alternative rule is entirely feasible.

Because the U.C.C. has been widely adopted, nearly every state has the same definition of “negotiable instrument.” Thus, the FDIC can easily separate a failed bank’s financial instruments into negotiable and non-negotiable categories. Protected by the holder in due course rule, the FDIC would have no need to engage in a close examination of the negotiable instruments. Assuming, as did the Gulf Life court, that most of a failed bank’s instruments would be negotiable, the FDIC should be able to examine the non-negotiable instruments in some detail. To account for possible personal defenses, the FDIC might discount the price it would pay for such instruments. Again, given the apparently small number of non-negotiable instruments, the overall effect of such discounting should be minimal.

Not only would such an alternative rule be feasible for the FDIC, it would clearly be more equitable for parties to non-negotiable instruments. By choosing not to comply with the requirements for negotiability, one who executes a non-negotiable instrument makes a conscious decision not to waive any personal defenses he might have. Similarly, a bank’s acceptance of a non-negotiable instrument is presumably a voluntary act. Indeed, logic suggests that parties would structure their financial transactions quite differently if another party were allowed to announce that a previously non-negotiable instrument were suddenly to have all the attributes of negotiability. Where non-negotiable instruments are obtained by the FDIC, then, we would “decline to override intricate state laws of general applicability on which private creditors base their daily transactions.” Kimbell Foods, supra, 440 U.S. at 729, 99 S.Ct. at 1459. We conclude that, as to non-negotiable instruments, federal common law incorporates such state laws. This federal rule thus denies FDIC holder in due course status as to these guaranty agreements.

20. Because FDIC lacks holder in due course status as to these guaranty agreements under either the Kansas Uniform Commercial Code or federal common law, the guarantor defendants may raise the personal defense of fraud in the inducement.

21. Alternatively, FDIC attempts to defeat the guarantor defendants’ reliance on the defense of fraud in the inducement by citing 12 U.S.C. § 1823(e). That subsection provides that:

No agreement which tends to diminish or defeat the right, title or interest of the [Federal Deposit Insurance] Corporation in any asset acquired by it under this section, either as security for a loan or by purchase, shall be valid against the Corporation unless such agreement (1) shall be in writing, (2) shall have [been] executed by the bank and the person or persons claiming an adverse interest thereunder, including the obligor, contemporaneously with the acquisition of the assets by the bank, (3) shall have been approved by the board of directors of the bank or its loan committee, which approval shall be reflected in the minutes of said board or committee, and (4) shall have been, continuously, from the time of its execution, an official record of the bank.

22. Thus, where fraudulent inducement is the result of an agreement, an otherwise valid defense may be barred by 12 U.S.C. § 1823(e). See F.D.I.C. v. Rodenberg, 571 F.Supp. 455, 459 (D.Md.1983). By the same token, however, where fraudulent inducement does not take the form of an agreement, section 1823(e) is inapplicable. F.D.I.C. v. Gulf Life Ins. Co., 737 F.2d 1513, 1516 (11th Cir.1984); F.D.I.C. v. Merchants National Bank of Mobile, 725 F.2d 634, 639 (11th Cir.1984), cert. denied, — U.S. ---, 105 S.Ct. 114, 83 L.Ed.2d 57 (1984); Gunter, supra, 674 F.2d at 867; F.D.I.C. v. Kucera Builders, Inc., 503 F.Supp. 967, 971 n. 2 (N.D.Ga.1980).

23. In D’Oench, Duhme, supra, the Court held that, as against the FDIC, the maker of a note may not plead as a defense his own scheme to deceive bank regulators (i.e., by asserting that a secret agreement existed between himself and the bank). Estoppel under such circumstances does not require proof of actual intent to deceive on the part of the note’s maker. Rather, “one who gives such a note to a bank with a secret agreement that it will not be enforced must be presumed to know that it will conceal the truth from the vigilant eyes of the bank examiners.” 315 U.S. at 460, 62 S.Ct. at 680-81. The elements of D’Oench, Duhme estoppel are thus as follows: “(1) the FDIC must be the party against whom the claim or defense is asserted, and (2) the party asserting the claim or defense must have lent himself (3) to a secret agreement (4) that deceived or would tend to deceive the FDIC.” In Re Longhorn Securities Litigation, 573 F.Supp. 278, 280-81 (W.D.Okla.1983).

24. Of the two instances of fraud in the inducement described in conclusion 15, supra, the first does involve an agreement between the Bank and the guarantor defendants. That is, the Bank agreed to establish a $50,000.00 escrow account in partial consideration for the defendants’ agreement to guarantee Galloway’s promissory note. The defendants’ reliance on that instance of fraud in the inducement is thus barred as a defense by both 12 U.S.C. § 1823(e) and the D’Oench, Duhme doctrine.

25. The other instance of fraud in the inducement, however, involved no agreement. Theodore Meyer, the Bank’s president, simply misrepresented to the guarantor defendants that Galloway had repaid in full the loan as to which defendant John W. Meyers had executed his earlier guaranty agreement. Therefore, neither 12 U.S.C. § 1823(e) nor the D’Oench, Duhme doctrine would defeat the guarantor defendants’ reliance on this instance of fraud in the inducement. As to the guaranty agreements introduced as Plaintiff’s Exhibits 33 and 34, then, FDIC is in no better position than the Bank would have been. That is, the guarantor defendants have a complete defense to a suit based on those agreements.

26. Having concluded that the guarantor defendants may rely on the defense of fraud in the inducement, we hereby overrule FDIC’s motion in limine.

ORDER

IT IS THEREFORE ORDERED that judgment be entered in favor of plaintiff Federal Deposit Insurance Corporation and against defendants Jack Galloway and Jack Galloway, d/b/a Jack’s Excavating, a/k/a Jack’s Excavating Co. (jointly and severally) in the amount of $1,068,578.25, plus interest of $209.74 per day from April 16, 1985.

IT IS FURTHER ORDERED that judgment be entered in favor of defendants John W. Meyers, Jr., Loma M. Meyers, Harry D. Sharp, and Brenda C.M. Sharp, and against plaintiff Federal Deposit Insurance Corporation.


author: BRIMMER, District Judge.

text:
    Georgia ANDREWS; Erin Brett; Frances E. Cassle; B.J. Durham; Maureen Engert; Mary Fox; Maxine Griffin; Betty Grubb; Ruth Holmes; Lucille Hoppe; Dorothy Homyak; Sharon K. Kaiser; Chandra K. Lillemoen; Carolyn O'Brien; Deloris O'Brien; Mary Jane Prysock; Laura Russell; Laura Scherr; Joan Schick; Brenda Schulz; Victoria Smith; Kathryan Toulouse; Margaret Wickham; Norman Wilde; and all others similarly situated, Plaintiffs v. VETERANS ADMINISTRATION, OF the UNITED STATES of America and the Veterans Administration Medical Center of Cheyenne, Wyoming, Defendants.
    No. C84-0459-B.
    United States District Court, D. Wyoming.
    July 17, 1985.

      Donald W. Riske and Warren R. Darrow, Cheyenne, Wyo., for plaintiffs.
    Henry T. Jones, Dist. Counsel, Veterans Admin., David A. Kern, Asst. U.S. Atty., Cheyenne, Wyo., for defendants.
   FINDINGS OF FACT AND CONCLUSIONS OF LAW

BRIMMER, District Judge.

This matter came on regularly for trial to the Court on June 13 and 14, 1985, the Honorable Clarence A. Brimmer, United States District Judge for the District of Wyoming presiding. Counsel appearing were Donald W. Riske, Esq., and Warren R. Darrow, Esq., for plaintiffs, and Henry T. Jones, Esq., counsel for the Veterans Administration, and David A. Kern, Esq., Assistant United States Attorney, for defendant. The Court has reviewed the pleadings, considered the arguments of counsel, the views of Local 1014 of the American Federation of Government Employees set forth in its Amicus Curiae Brief, has reviewed the exhibits submitted, and considered the testimony presented at trial, and being fully advised in the premises makes its Findings of Fact and Conclusions of Law:

FINDINGS OF FACT

Plaintiffs are registered nurses employed by defendant, Veterans Administration, at its Medical Center located in Cheyenne, Wyoming. They bring this action under the Privacy Act of 1974, 5 U.S.C. § 552a(g), requesting injunctive relief and damages in the amount of $1,000.00 per plaintiff, alleging defendants released personnel records in an improperly sanitized condition, so that the identity of plaintiffs could be determined from the information released. Plaintiffs contend such files contained sensitive information, including evaluations of job performance, the release of which constituted clearly unwarranted invasions of plaintiffs’ personal privacy, that the release was not compelled under exemption six of the Freedom of Information Act, 5 U.S.C. § 552(b)(6), and that the release was in violation of plaintiffs’ rights under the Privacy Act, 5 U.S.C. § 552a.

The dispute which culminated in this suit began on June 4, 1984 when Patricia Sanchez, President of Local 1014, American Federation of Government Employees, the exclusive bargaining agent for nurses at the Medical Center, including plaintiffs, made a written request for release to her of the proficiency reports of all of the registered nurses employed at the Center. Just after she made this request Mrs. Sanchez, on June 5, 1984, filed a grievance on her own behalf because she failed to receive a requested promotion in the C Ward at the Center. However, Mrs. Sanchez’ request was not limited to reports relating to the successful candidates for promotions in the C Ward, or to the time in question, but rather related to all registered nurses in all wards and covered a period of three years. The initial request stated no reason concerning why the union sought access to this sensitive information.

The Proficiency Reports are a means of evaluation of job performance and abilities of registered nurses employed at the Center. The report is prepared on a standard form, containing two pages. The first page contains various numerical ratings for factors such as integrity, emotional stability, dependability, and interpersonal relations. An overall numerical score is assigned, as well as a rating of the individual’s capacity for advancement. The second page contains a narrative discussion of the individual’s performance during the relevant period, areas of advancement, strengths and weaknesses, and other similar matters. It is beyond doubt that the information in the proficiency reports is sensitive in nature, and release of this information, if identifying information were not adequately deleted, would result in embarrassment of the persons to which they pertain.

Mrs. Sanchez had previously sought, and obtained, release of proficiency reports pertaining to one or a few nurses at the Center in relation to specific grievances then pending, but each such release was obtained after she sought and obtained consent from the individual or individuals to which the reports pertained. In this instance she did not request consent from the nurses at the Center before making the request, and could not have obtained consent from plaintiffs, who vehemently objected to the release of their proficiency reports. Nor was the request made pursuant to any pending grievance. Mrs. Sanchez, acting alone, decided to review all proficiency reports to determine whether a grievance could or should be filed in relation to the manner in which the reports were prepared by management personnel. The reports were never used in relation to any grievance or other union-related activity subsequent to their release. Furthermore, the union membership had taken no official action to authorize Mrs. Sanchez to make such request or to file a grievance regarding the general issue of completion of the proficiency reports by Head Nurses.

Mrs. Sanchez’s request of June 5, 1984 was received by Ms. Hazel Gilligan, who is the Chief of Personnel Services at the center, and is the custodian of the personnel files. Ms. Gilligan had received some training concerning her duties under the Privacy Act, and was supplied with a Federal Personnel Manual which contains guidelines for responses to requests for information contained in personnel files. Ms. Gilligan had never before been presented with a blanket request for personnel files, and she never had been requested to disclose such information without the consent of the individual to which the file pertained. Therefore, she consulted the provisions of the Personnel Manual in response to the request by Mrs. Sanchez. She then wrote a letter to Mrs. Sanchez, dated June 5, 1984, stating that, before a determination could be made as to the Union’s entitlement to such records, a reason for the request had to be given. By letter dated June 7, 1984, Mrs. Sanchez responded by stating generally that the reports would be used in a grievance which the Union was considering filing, and in preparing for a labor/management meeting scheduled to be held later in the month of June.

Ms. Gilligan also sought guidance from the defendants’ national office in Washington, D.C., but only discussed the matter with the Labor Relations Department, and did not consult with the legal department. She was informed that she was required to release the proficiency reports under 5 U.S.C. § 7114(b), but that she should sanitize the reports prior to their release so as to delete any identifying information. Ms. Gilligan had received no training regarding sanitizing personnel records, and received no assistance or guidance from the national office in this regard.

Between June 7, 1984 and June 19, 1984 Ms. Gilligan attempted to remove any identifying information from the approximately sixty reports to be released by making photocopies of the original reports and by using a black felt tip pen to black out any information which, in her judgment, might serve to identify the subject of the report. After completing this task she requested her assistant, Wanda Dykeman, to review the copies and delete any additional information which Dykeman felt might identify the subject of the report. However, Ms. Gilligan felt unqualified to detect all identifying information relating to the subjects of the reports, due to her lack of knowledge concerning information such as classes attended or conducted, committee assignments or chairmanships, outside activities, and the like. She therefore requested Mrs. June Wright, the Head Nurse at the Medical Center, to review the reports and to delete any additional identifying information prior to their release. After receiving back the sanitized reports from Dykeman and Wright, Ms. Gilligan briefly reviewed them, made photocopies, and produced these to Mrs. Sanchez on June 19, 1984. Among the reports so provided were reports pertaining to the plaintiffs in this action.

Between June 14 and June 19, 1984 Ms. Gilligan received several written objections to the release of the reports from plaintiffs and other nurses employed at the Medical Center, all requesting that their reports not be released. In response to these requests Ms. Gilligan, by letter dated June 20, 1984 to all nurses employed at the Medical Center, stated that “Management is required to release these documents under the provisions of PL-95-454, Section 7114.” Such letter reassured the nurses that all of the reports released had been completely sanitized by members of the personnel office, with the assistance of the Chief Nurse, and included as an attachment a proficiency report pertaining to Laura Scherr in its sanitized condition, intended to show that identification of the subject of the report was not possible as sanitized. However, the report pertaining to Laura Scherr was not adequately sanitized, and several of her co-workers were able to identify her, based upon the information contained in the released report.

The record establishes that third parties acquainted with the following plaintiffs could, and did, recognize their identity through the information released in their proficiency reports: B.J. Durham, Mary Fox, Maxine Griffin, Betty Grubb, Ruth Holmes, Lucille Hoppe, Deloris O’Brien, Laura Russell, Laura Scherr, and Kathryan Toulouse. Indirect evidence adequately establishes that the identity of the following plaintiffs could be determined through the information released in their proficiency reports, though no third party did in fact so identify them: Diane Ingle, Carolyn O’Brien, Ada Shader, and Victoria Smith. In each of these instances the testimony offered was that the subject of the report could identify herself through the information released, but no direct evidence or testimony was offered to show that any third party could or did identify them through such information. However, a review of the reports themselves, as well as the other evidence in the record is adequate to lead to a logical inference that persons acquainted with such plaintiffs, including their co-employees, could readily identify their reports based upon the information released. No evidence was submitted to show that the information in the proficiency reports of the following plaintiffs was such as would enable any third party to identify the subject of the report: Frances Cassle, Dorothy Homyak, and Margaret Wickham. The testimony shows that each of the plaintiffs suffered some degrees of anguish, embarrassment, or other mental trauma as a result of the release of their proficiency reports, but none suffered any pecuniary loss. The evidence also indicates that the release has adversely effected the proficiency reporting system at the Medical Center as a means of performance evaluations due to fear that the information contained in the reports may later be disclosed to third persons. Also, the working environment at the Medical Center was adversely effected by the release, and tensions and antagonism are more prevalent there since the information was released.

Hazel Gilligan acted conscientiously, in good faith, though inadvertently negligently, in releasing the proficiency reports in an inadequately sanitized condition. Her superiors in Washington, in failing to provide her with adequate training or guidance in relation to release of information covered by the Privacy Act, and in instructing her that release of the proficiency reports was compelled by 5 U.S.C. § 7114 were grossly negligent. The evidence is adequate to establish a willful or intentional violation of the Privacy Act, as that term has been defined by relevant cases, by the Washington personnel of the defendant. Ms. Gilligan requested a reason for disclosure from Mrs. Sanchez solely for the purpose of having information in her file to justify the release. She felt that she could not second guess the Union in determining whether release to aid in a pending or proposed grievance proceeding would be proper. She viewed her obligations under the Privacy Act as being limited to assuring the materials were fully sanitized before the release in a context where the Union has requested access to them. She did not attempt to balance the privacy interests of the subjects of the reports against the competing interests of the Union in obtaining the records, which interests were ambiguous and virtually undefined, and she never concluded that the Union’s interests were adequate to override the privacy interests of plaintiffs. She felt that whenever the Union asks for information in the personnel files of employees it represents, when it is acting in a representative capacity, it should be given the records in sanitized form. She determined that the Union was entitled to receive the information without having an adequate factual basis to determine whether the request was legitimate, or was necessary to the Union’s attempts to represent the nurses at the Medical Center. She did not seek consents to the releases, and considered no alternatives to a blanket release of all reports requested, after attempts were made at sanitization. As a result the privacy interests of plaintiffs Durham, Fox, Griffin, Grubb, Holmes, Hoppe, Delores O'Brien, Russell, Scherr, Toulouse, Ingle, Carolyn O’Brien, Shader and Smith were violated.

CONCLUSIONS OF LAW

The Court has jurisdiction over the subject matter of this action under 5 U.S.C. § 552a(g) and 28 U.S.C. § 1331, and venue is properly in the United States District Court for the District of Wyoming.

The Privacy Act of 1974, including 5 U.S.C. § 552a, provides:

No agency shall disclose any record which is contained in a system of records by any means of communication to any person, or to another agency, except pursuant to a written request by, or with the prior written consent of, the individual to whom the record pertains ... 5 U.S.C. § 552a(b).

The Act defines “system of records” to include:

... a group of any records under the control of any agency from which information is retrieved by the name of the individual or by some identifying number, symbol, or other identifying particular assigned to the individual. 5 U.S.C. § 552a(a)(5).

The personnel files relating to plaintiffs were “systems of records” covered by the Privacy Act of 1974, and the proficiency reports were records contained within the system of records. 5 U.S.C. § 552a(a)(4).

The Privacy Act was adopted to protect the individual privacy of persons. The Congressional policy underlying the Act was stated in part as follows:

[T]o promote governmental respect for the privacy of citizens by requiring all departments and agencies of the executive branch and their employees to observe certain constitutional rules in the ... use, and disclosure of personal information about individuals ...
[T]o prevent ... the wrongful disclosure and use, in some cases, of personal files held by Federal agencies ... [and]
[T]o promote observance of valued principles of fairness and individual privacy by those who ... administer ... institutional and organizational data banks of government and society. Sen.Rep. No. 93-1183 (1974) U.S.Code Cong. & Admin. News 1974, p. 6916 as discussed in Davis, Administrative Law Treatise, § 5.43 (2nd ed. 1978).

The Privacy Act does not forbid disclosure of such records in every instance, but rather contains a series of exceptions from the general rule of non-disclosure. Two exceptions are relevant to the issues raised in this action: 5 U.S.C. § 552a(b)(2), which provides that disclosure is allowed if required under Section 552 of this title (The Freedom of Information Act), and 5 U.S.C. § 552a(b)(3) which permits disclosure for a routine use as defined under 5 U.S.C. § 552a(a)(7), and subject to compliance with requirements set forth in 5 U.S.C. § 552a(e)(4)(D).

The first exception, stated in 5 U.S.C. § 552a(b)(2), is designed to reconcile competing, and conflicting, policies of Congress embodied in the Freedom of Information Act, and the Privacy Act of 1974. 5 U.S.C. § 552(a) states that agencies must generally make available to the public information contained in their files. Section 552(b) contains various exemptions from disclosure, and includes:

(6) personnel and medical files the disclosure of which would constitute a clearly unwarranted invasion of personal privacy; ... Any reasonably segregable portion of a record shall be provided to any person requesting such record after deletion of the portions which are exempt under this subsection.

However, the Freedom of Information Act did not preclude release of such information, but instead gave the agency discretion to withhold personnel files if it chose to do so. Pennzoil Co. v. Federal Power Commission, 534 F.2d 627 (5th Cir.1976); Moore-McCormack Lines, Inc. v. I.T.O. Corp. of Baltimore, 508 F.2d 945 (4th Cir.1974). Disclosure by the agency of information exempt from mandatory disclosure under Section 552(b)(6) did not constitute a violation of the Freedom of Information Act. Id.

The effect of the Privacy Act was to preclude disclosure of some information exempt from mandatory disclosure under the Freedom of Information Act, except under specified circumstances, and thus to remove the agency’s discretion to disclose such information when not compelled by the Freedom of Information Act. Davis, Administrative Law Treatise, supra, § 5.43 p. 439; Local 2047, Am. Federation of Government Emp. v. Defense General Supply Center, 423 F.Supp. 481 (E.D.Va.1976), affirmed 573 F.2d 184 (4th Cir.1978); DePlanche v. Califano, 549 F.Supp. 685 (W.D.Mieh.1982); Antonelli v. F.B.I., 536 F.Supp. 568 (N.D.Ill.1982), rev’d on other grounds 721 F.2d 615 (7th Cir.1983), cert. denied — U.S. ---, 104 S.Ct. 2399, 81 L.Ed.2d 355; Florida Medical Ass’n, Inc. v. Dept. of Health, Education and Welfare, 479 F.Supp. 1291 (M.D.Fla.1979); Lovell v. Alderete, 630 F.2d 428 (5th Cir.1980); Brown v. Federal Bureau of Investigation, 658 F.2d 71 (2nd Cir.1981). The proper analysis under Section 552a(b)(2) utilizes the standards developed under the Freedom of Information Act in determining whether disclosure is mandatory, or whether the information is exempt under Section 552(b)(6). Rose v. Department of Air Force, 495 F.2d 261 (2nd Cir.1974), affirmed 425 U.S. 352, 96 S.Ct. 1592, 48 L.Ed.2d 11 (1976).

Although a document contains information the release of which would constitute a clearly unwarranted invasion of personal privacy, still the agency must attempt to segregate and release non-sensitive or purely factual portions of the document. Environmental Protection Agency v. Mink, 410 U.S. 73, 93 S.Ct. 827, 35 L.Ed.2d 119 (1973); Rose v. Department of Air Force, supra; Vaughn v. Rosen, 484 F.2d 820 (D.C.Cir.1973), cert. denied 415 U.S. 977, 94 S.Ct. 1564, 39 L.Ed.2d 873 on remand 383 F.Supp. 1049 (D.D.C.1974); Ethyl Corporation v. Environmental Protection Agency, 478 F.2d 47 (4th Cir.1973). If the exempt materials are inextricably intertwined with the non-exempt materials, the entire document is exempt from mandatory disclosure under the Freedom of Information Act, and disclosure is precluded by the Privacy Act. Neufeld v. Internal Revenue Service, 646 F.2d 661 (D.D.C.1981); Mead Data Cent, Inc. v. U.S. Dept. of Air Force, 566 F.2d 242 (D.C.Cir.1977); Long v. U.S. Internal Revenue Service, 596 F.2d 362 (9th Cir.1979), cert. denied 446 U.S. 917, 100 S.Ct. 1851, 64 L.Ed.2d 271 (1980); Sealand Terminal Corp. v. N.L.R.B., 414 F.Supp. 1085 (S.D.Miss.1976). The information in the numerical ratings pertaining to plaintiffs is sensitive, but deletion of any identifying information in this portion of the reports would be a simple procedure, and then disclosure would not violate any person’s privacy interests. Where, as here, identification is possible based upon the information released, a violation of the subject’s privacy interests occurs. The information in the narrative sections of the reports is such that identifying information would normally be so inextricably intertwined with other materials that segregation is not reasonably possible, and it should be expected that release of any meaningful part of this portion of the reports will enable identification of the subject, and will result in an invasion of the privacy interests of the subject in the context of a relatively small facility such as the Medical Center.

In determining whether a violation of personal privacy is clearly unwarranted, the agency, and the Court, must balance the interests of the subject in personal privacy against the competing interests of the party requesting the information in having access to agency documents. Rose v. Department of Air Force, supra; Campbell v. United States Civil Service Commission, 539 F.2d 58 (10th Cir.1976); Chamberlain v. Kurtz, 589 F.2d 827 (5th Cir.1979), cert. denied 444 U.S. 842, 100 S.Ct. 82, 62 L.Ed.2d 54; Weahkee v. Norton, 621 F.2d 1080 (10th Cir.1980). Each case must be determined based upon its own facts. Cohen v. E.P.A., 575 F.Supp. 425 (D.D.C.1983); Schonberger v. Nat. Transp. Safety Bd., 508 F.Supp. 941 (D.D.C.1981). Both the agency, and the Court de novo, must balance these interests. It is error for the agency to fail to engage in this sort of analysis before determining whether or not to release the information. Disabled Officer’s Ass’n v. Rumsfeld, 428 F.Supp. 454 (D.D.C.1977); Sears, Roebuck Co. v. General Services Admin., 553 F.2d 1378 (D.C.Cir.1977) cert. denied 434 U.S. 826, 98 S.Ct. 74, 54 L.Ed.2d 84; People of the State of Ill. v. United States, 668 F.2d 923 (7th Cir.1981) cert. denied 455 U.S. 1000, 102 S.Ct. 1631, 71 L.Ed.2d 866 (1982); Judiciary Committee of General Assembly v. Freedom of Information Com’n, 39 Conn.Sup. 176, 473 A.2d 1248 (1983). With a request for multiple documents the balancing must be made in relation to each document on an individual basis. American Civil Liberties Union v. Brown, 609 F.2d 277 (7th Cir.1979), on rehearing en banc 619 F.2d 1170 (1980). The enactment of the Privacy Act did not alter this analysis, which still must be followed in determining whether any given document falls within the exemption of Section 552(b)(6). Sears, Roebuck Co. v. General Services Agency, supra.

In balancing the competing interests, the Court must consider a variety of factors, including the following: (A) The type of record requested, and the type of information it contains; (B) Potential for harm in any subsequent, non-consensual disclosure; (C) Injury from disclosure to the relationship in which the record was generated; (D) Adequacy of safeguards to prevent unauthorized disclosure; (E) Degree of need for disclosure, including any express statutory mandate; and, (F) Any articulated public policy, or other recognizable public interest affected by disclosure or nondisclosure of the information. United States v. Westinghouse Elec. Corp., 638 F.2d 570, 578 (3rd Cir.1980).

The records requested contain very sensitive information, and the violation of plaintiffs’ privacy interests was substantial. The evidence shows that plaintiffs suffered embarrassment and anxiety as a result of subsequent non-consensual disclosures. Clearly, the safeguards utilized to prevent disclosure beyond disclosure to the Union were inadequate. Non-consensual disclosures to other persons were foreseeable at the time the information was released to the Union. The disclosure substantially harmed the relationship between subjects of reports and those conducting performance evaluations, and chilled communications in a relationship in which candor and confidence are essential.

Although it is possible that the Union’s need for this sort of information could be substantial under other circumstances, the record shows that its interest in disclosure in this case was minimal. Mrs. Sanchez was on a general fishing expedition, which may have been motivated by spite or anger resulting from her own failure to obtain a requested promotion. The information was not needed to process any pending grievances. It was never used by the Union in representing the interests of the nurses employed at the Medical Center. While public policy favors the collective bargaining process, this interest was not substantially forwarded by disclosure under the facts of this case, and it must be balanced against the Congress’ policy of protecting the privacy interests of plaintiffs as embodied in the Privacy Act and its legislative history. The balance in this case falls clearly against disclosure. The release of the proficiency reports to Mrs. Sanchez, in those instances where there was inadequate sanitization, constituted a clearly unwarranted invasion of the privacy interests of the subjects. Disclosure was not compelled by the Freedom of Information Act, and therefore release of this information violated plaintiffs’ rights under the Privacy Act.

Defendants’ continued reliance upon the holding in Clemins v. U.S. Dept. of Treasury, I.R.S., 457 F.Supp. 13 (D.D.C.1977) is misplaced. The Court in its Order on Motion to Dismiss or for Summary Judgment dated May 6, 1985 discussed in detail the holding in Clemins, and need not reiterate that analysis here. Clemins involved non-sensitive information relating to only a few successful candidates for promotions sought by a union in relation to a pending grievance on behalf of non-successful candidates, rather than a broad request for information relating to all of the employees in a specified category employed by the agency. The Court denied disclosure of similar information relating to unsuccessful candidates unless all identifying information could be deleted, and refused disclosure in one instance because the identity of the subject of the report was known. Clemins supports the plaintiffs’ position that the proficiency reports in this case should not have been disclosed due to inadequate sanitization, and also indicates that the information could have been disclosed without violating the Privacy Act had the agency exercised greater care in sanitizing the reports, for example by deleting the narrative portions of the reports and replacing these with paraphrased summaries which omit any means of identifying the subject. The information in these proficiency reports was exempt from disclosure under Section 552(b)(6), and disclosure was not allowed by Section 552a(b)(2).

5 U.S.C. § 552a(a)(7) defines a “routine use” as “the use of such record for a purpose which is compatible with the purpose for which it is collected.” Section 552a(e)(4) provides, in part, that:

Each agency that maintains a system of records shall — ____
(4) Subject to the provisions of paragraph (ii) of this subsection, publish in the Federal Register upon establishment or revision a notice of the existence and character of the system of records, which notice shall include ...
(D) each routine use of the records contained in the system, including the category of users and the purpose of such use____

In order to qualify any use as a routine use under the Privacy Act the agency is required to comply with the provisions mandating that such uses be published in the Federal Register. Parks v. United States Internal Revenue Service, 618 F.2d 677 (10th Cir.1980); Ryan v. Department of Justice, 595 F.2d 954 (4th Cir.1979); Exner v. Federal Bureau of Investigation, 612 F.2d 1202 (9th Cir.1980); Zeller v. United States, 467 F.Supp. 487 (E.D.N.Y.1979). In keeping with Congress’ policies embodied in the Privacy Act and its legislative history, the agency should narrowly define routine uses, and permit disclosure only when justified by a substantial public interest. Local 2047 Am. Federation of Government Emp. v. Defense General Supply Center, supra. Any regulations enacted under the Privacy Act must be consistent with its purposes, and inconsistent regulations are invalid, and will not justify release of covered information. Id. Parks v. United States Internal Revenue Service, supra. Wisdom v. Dept. of Housing Urban Development, 713 F.2d 422 (8th Cir. 1983), cert. denied — U.S. ---, 104 S.Ct. 1272, 79 L.Ed.2d 678; DePlanche v. Califano, supra. Saunders v. Schweiker, 508 F.Supp. 305 (W.D.N.Y.1981); Florida Medical Ass’n, Inc. v. Dept. of Health, Education and Welfare, supra. In construing regulations, the Court should narrowly interpret routine uses, pursuant to Congress’ intent, and in order to preserve the validity of the regulations. Stiles v. Atlanta Gas Light Co., 453 F.Supp. 798 (N.D.Ga.1978). Furthermore, though a union represents the subject of the document, still it is not entitled to any information in the employee’s files based upon that status alone, or based upon any provision contained in the collective bargaining agreement, since the terms of the regulations, and of the statute, control access to such records. Am. Federation Government Emp. v. Defense General Supply Center, supra. Any release made in reliance upon a routine use, as defined in the applicable regulations, must be for reasons consistent with the reasons stated in the rule. Exner v. Federal Bureau of Investigation, supra; Alford v. Central Intelligence Agency, 610 F.2d 348 (5th Cir.1980) cert. denied 449 U.S. 854, 101 S.Ct. 150, 66 L.Ed.2d 68, reh’g denied 449 U.S. 1027, 101 S.Ct. 597, 66 L.Ed.2d 488. Furthermore, Section 552a(b)(3) permits disclosure of sensitive information, rather than compels it, and the court should still balance the competing interests of the parties in determining whether the release was an abuse of discretion under the circumstances.

The American Federation of Government Employees, in its amicus brief, argues that the release in this action was for a routine use and relies upon regulations of the Office of Personnel Management published at 47 F.R. 16,489 et seq. (April 16, 1982). Such regulations govern maintenance and use of official personnel files of agencies of the United States, including “Records that are performance-related, including: appraisal forms and supporting documentation issued under OPM approved employee ... approval systems ...”. 47 F.R. 16,490 column 2, paragraph k. The regulations go on to define routine uses, stating that: “These records and information in these records may be used: ... j. To disclose information to officials of labor organizations recognized under 5 U.S.C. Chapter 71 when relevant and necessary to their duties of exclusive representation concerning personnel policies, practices, and matters affecting work conditions.” 47 F.R. 16,490-16,491. (Emphasis added).

No testimony or evidence was submitted to establish that these particular records were kept under an OPM approved employee approval system, or otherwise fell within the parameters of the cited regulations. However, assuming these records are covered by the OPM regulations, still the union ignores the limiting language requiring the union to establish the records are relevant and necessary to performance of its duties as the exclusive bargaining agent of the registered nurses employed at the Medical Center. In effect the union and the defendant argue this regulation eviscerates completely the protections of the Privacy Act to the extent the information is requested by the subject’s bargaining agent. The language of the regulations, and the principles of law discussed above prevent such an interpretation of the regulation, and the agency’s position is clearly erroneous. The union is not entitled to receive any and all information contained in the relevant personnel files in every instance. To justify its request, the union must, under the regulations, be prepared to make an initial showing that it has a specific need for the information, and that the information is germane to a specific pending or contemplated grievance or other union activity. No such showing or justification was made in this case, and the overbroad, general, and undefined request made by Mrs. Sanchez was inadequate to justify release under these regulations.

The danger of disclosure made pursuant to such an ill-defined request is apparent on the facts of this case. The information released was never used in any manner to assist plaintiffs, or the other nurses at the Center or to improve their working conditions. Rather plaintiffs’ personal privacy was adversely affected, and no countervailing benefit was reaped by anyone. The limiting language in the regulations was designed to prevent this sort of occurrence, and the damage done could have readily been avoided had the regulations been followed as written. The release of the information in this case cannot be justified as being a routine use under Section 552a(b)(3) or OPM regulations. Therefore, the release to Mrs. Sanchez constituted a violation of plaintiffs’ rights under the Privacy Act. Moreover, even if the disclosure could be justified as a routine use, still release on the facts of this case constituted an abuse of discretion by the defendant, since it failed to give adequate weight to, or even to consider, plaintiffs’ private interests.

In addition, Ms. Gilligan’s belief that disclosure was required by 5 U.S.C. § 7114(b)(4) was erroneous. Such statute provides:

The duty of the agency and an exclusive bargaining representative to negotiate in good faith under subsection (a) of this section shall include the obligation—
(4) In the case of an agency, to furnish to the exclusive representative involved, or its authorized representative, upon request and, to the extent not prohibited by law, data—
(A) Which is normally maintained by the agency in the regular course of business; [and]
(B) Which is reasonably available and necessary for full and proper discussion, understanding and negotiation of subjects within the scope of collective bargaining. (Emphasis added)

Disclosure was in fact prohibited by law. Disclosure was not mandated by this Section under the circumstances of this case.

The union also argues that this action should be dismissed because plaintiffs failed to join the union as a co-defendant, and an indispensable party to this action. Both the Freedom of Information Act and the Privacy Act govern the conduct of Federal agencies. Neither provides a right of action against any other person or entity. Parks v. United States I.R.S., supra, 618 F.2d at p. 684; Bruce v. United States, 621 F.2d 914 (8th Cir.1980); Brown-Bey v. United States, 720 F.2d 467 (7th Cir.1983); Windsor v. The Tennessean, 719 F.2d 155 (6th Cir.1983), rehearing denied 726 F.2d 277 cert. denied — U.S. ---, 105 S.Ct. 105, 83 L.Ed.2d 50. A union lacks standing to assert claims under either Act on behalf of its members. Id. Thus, this argument lacks merit. Had plaintiffs joined the union as a defendant in this action it would have been summarily dismissed, since no claim could be asserted against the union under either statute. Therefore, it was not an indispensable party to this action.

Plaintiffs cannot recover injunctive relief under the Privacy Act based upon the allegations asserted herein. Parks v. United States I.R.S., supra, 618 F.2d at p. 684; Edison v. Department of the Army, 672 F.2d 840 (11th Cir.1982); St. Michael’s Convalescent Hospital v. State of Cal., 643 F.2d 1369 (9th Cir.1981); Cell Associates v. National Institutes of Health, 579 F.2d 1155, 1158-60 (9th Cir.1978). 5 U.S.C. § 552a(g) provides, in part:

(1) Whenever any agency____
(d) fails to comply with any other provision of this section, or any rule promulgated thereunder, in such a way as to have an adverse effect on an individual, the individual may bring a civil action against the agency, and the district courts of the United States shall have jurisdiction in the matters under the provisions of this subsection.....
(4) In any suit brought under the provisions of subsection (g)(1)(C) or (D) of this section in which the Court determines that the agency acted in a manner which was intentional or willful, the United States [shall] be liable to the individual in an amount equal to the sum of—
(A) actual damages sustained by the individual as a result of the refusal or failure, but in no case shall a person entitled to recovery receive less than the sum of $1,000; and
(B) the costs of action together with reasonable attorney fees as determined by the Court. (Emphasis added).

Emotional trauma, though unaccompanied by pecuniary loss, is adequate to establish an “adverse effect” giving a plaintiff standing to sue under these provisions. Parks v. United States I.R.S., supra, 618 F.2d at pp. 682-83; Albright v. United States, 732 F.2d 181 (D.C.Cir.1984); Johnson v. Department of Treasury, I.R.S., 700 F.2d 971 (5th Cir.1983); Fitzpatrick v. Internal Revenue Service, 665 F.2d 327 (11th Cir.1982).

Although there is some authority stating that a plaintiff may not recover actual damages for such injury under the Privacy Act, plaintiffs herein seek only the minimum damages amount of $1,000.00, and have not attempted to substantiate any entitlement to a greater amount. That is much more than this Court thinks is warranted here, but Congress, not this Court, has set that amount. Therefore, the plaintiffs may recover this amount, even in the absence of proof of pecuniary loss. Parks v. United States I.R.S., supra; Johnson v. Department of Treasury, I.R.S., supra; Fitzpatrick v. Internal Revenue Service, supra. Nor is proof of premeditation required for an intentional or willful violation within the meaning of the Privacy Act. Parks v. United States I.R.S., supra, 618 F.2d at p. 683. Chapman v. National Aeronautics and Space Administration, 736 F.2d 238 (5th Cir.1984)); Chocallo v. Bureau of Hearings and Appeals, SSA, 548 F.Supp. 1349 (E.D.Pa.1982) affirmed without opinion 716 F.2d 889 (3rd Cir.1983), cert. denied — U.S. ---, 104 S.Ct. 426, 78 L.Ed.2d 360.

Plaintiffs Durham, Fox, Griffin, Grubb, Holmes, Hoppe, Deloris O’Brien, Russell, Scherr, Toulouse, Ingle, Carolyn O’Brien, Shader and Smith were each adversely affected due to defendant’s violation of their rights under the Privacy Act, and are entitled to recover damages in the amount of $1,000.00 each, as well as their costs of action. Plaintiffs have substantially prevailed on the merits, and are entitled to recover a reasonable attorneys fee, which the Court finds to be $5,000.00. Exner v. Federal Bureau of Investigation, supra. Judgment will be entered in compliance with these Findings of Fact and Conclusions of Law.