author: KELLEHER, Senior District Judge.

text:
    SAN MARINO SAVINGS AND LOAN ASSOCIATION, Plaintiff, v. FEDERAL HOME LOAN BANK BOARD; Federal Savings and Loan Insurance Corporation; Lawrence W. Taggart, Commissioner, Savings and Loan Department, State of California; Timothy J. Lane; and Mary Liz Orban, Defendants.
    No. CV 84-0776-RJK (JRx).
    United States District Court, C.D. California.
    Nov. 19, 1984.

      Leff & Mason, Ernest Leff, Andrew E. Katz, Stephen G. Polard, Beverly Hills, Cal., for plaintiff.
    Tuttle & Taylor Inc., A. James Roberts, III, Merrick J. Bobb, Alan E. Friedman, Los Angeles, Cal., for defendants.
   FINDINGS OF FACT AND CONCLUSIONS OF LAW

KELLEHER, Senior District Judge.

This action came on for trial before the Court, the Honorable Robert J. Kelleher, Senior District Judge, presiding, and the issues having been duly tried, the Court makes the following findings of fact and conclusions of law:

FINDINGS OF FACT

Plaintiff San Marino Savings and Loan Association (“San Marino”) is a California-chartered stock savings and loan association incorporated under the laws of the State of California with its principal place of business in San Marino, California.

Defendant Federal Home Loan Bank Board (“Bank Board”) is an independent federal agency established by Congress with its headquarters in Washington, D.C.

San Marino’s savings deposit accounts are insured by the Federal Savings and Loan Insurance Corporation (“FSLIC”). The Bank Board is the operating head of FSLIC.

San Marino is subject to the regulatory authority of the Bank Board and FSLIC.

On February 3, 1984, the Bank Board adopted Resolution 84-59 appointing FSLIC the sole conservator for San Marino, based upon its findings that: (i) San Marino had incurred substantial dissipation of assets and earnings due to violations of law, rules, and regulations and to unsafe and unsound practices, and (ii) San Marino was in an unsafe and unsound condition to transact business. It also found that San Marino had violated a cease and desist order of the Commissioner, Savings and Loan Department of the State of California, dated December 4, 1983, as amended December 30, 1983.

On February 3, 1984, the Commissioner of the California Savings and Loan Department, Lawrence W. Taggart, gave his written approval and concurrence that the grounds for the appointment of a conservator existed as specified by the Bank Board.

On February 3, 1984, at approximately 5:00 p.m., FSLIC took possession of the assets and property of San Marino as its sole conservator.

There were facts before the Bank Board, when it acted on February 3, 1984, on which the Bank Board could and did reasonably conclude that statutory grounds existed for its appointment of FSLIC as conservator.

BONA/DOMINGUES LOANS

Prior to January 1984, San Marino made loans to Jack Bona and Frank Domingues, to companies controlled by them (“Bona/Domingues”) or to investors solicited by them in the amount of $193,931,-320.00.

Seventeen condominium conversion projects, located primarily in Texas, were used as collateral for the approximately $194 million in loans.

The condominium conversion projects were purchased by Bona/Domingues with San Marino loan proceeds.

In the aggregate Bona/Domingues paid approximately $104 million for the condominium conversion projects.

In substantially all instances the investor-borrowers had invested in cash no more than one percent of the purchase price for the various condominium conversion projects or units contained therein.

As these loans were funded, San Marino received appraisals of approximately $243 million on the Bona/Domingues properties, or almost two and one-half times the aggregate purchase prices of the properties. These appraisals were excessive.

The loans to Bona/Domingues resulted in a substantial dissipation of assets of San Marino due to violations of law, rules and regulations or to unsafe or unsound practices and placed San Marino in an unsafe aiid unsound condition to transact business.

During a portion of the time these loans were made to Bona/Domingues, five directors of San Marino (Messrs. Forde, Casanova, Crissman, Shelton, and Guiltinan) were indebted to Messrs. Bona and Domingues in the amount of $600,000. The aforementioned directors had borrowed the money from Bona and Domingues to buy stock in San Marino.

In early January 1984, San Marino, and the federal and state regulators, knew that Mr. Domingues threatened to default on $80 million in loans from San Marino.

THE DOMINGUES BUY BACK

On January 9, 1984, San Marino bought from Mr. Domingues units in nine of the seventeen Bona/Domingues condominium conversion projects in exchange for cancellation of $80 million in indebtedness. This transaction is referred to hereafter as the “Domingues Buy Back.”

At the time of the Domingues Buy Back, San Marino knew that the Bank Board was having the Bona/Domingues properties reappraised.

At the time of the Domingues Buy Back, San Marino also knew that the regulators believed those properties were worth substantially less than the loan amounts they secured.

San Marino intended to accomplish the Domingues Buy Back without prior disclosure to the state or federal regulatory agencies and did not present the Buy Back to federal or state regulators for their review. The Domingues Buy Back was negotiated and documented over the weekend of January 7-8. The transaction was consummated on January 9, prior to any disclosure to state or federal regulators, in violation of the state cease and desist order then in effect to which the Board of Directors of San Marino had consented.

San Marino entered into the Domingues Buy Back to obtain control of the property in order to avoid appraisal losses on the loans thereon.

After the Domingues Buy Back, San Marino continued to hold loans in substantial amounts to Bona/Domingues or to investors solicited by them, secured by the remaining condominium conversion projects and units not covered by the Buy Back.

THE LA JOLLA EXCHANGE TRANSACTIONS

San Marino embarked upon a plan to dispose of the properties acquired from Mr. Domingues in order to avoid the imposition of appraisal reserves by the Bank Board.

In order to achieve this result, it was important to San Marino that it dispose of these properties as quickly as possible.

On January 28, 1984, representatives of San Marino met with Leon Brukman, a principal of La Jolla Exchange, Inc. (“La Jolla Exchange”), to discuss the exchange of certain of the properties acquired in the Domingues Buy Back for a parcel of property located in northern San Diego, known as the Lake La Jolla property.

The agreements that were ultimately reached between San Marino and La Jolla Exchange are reflected in two documents: the Exchange Agreement and the Real Estate Purchase Agreement (“Purchase Agreement”).

Under the terms of the Exchange Agreement: (i) San Marino conveyed its interests in six of the projects it had acquired in the Domingues Buy Back to La Jolla Exchange to which the parties assigned a value of $60 million; (ii) La Jolla Exchange conveyed the Lake La Jolla property to San Marino to which the parties assigned a value of approximately $69 million; (iii) San Marino paid approximately $8 million in cash to La Jolla Exchange; and (iv) San Marino loaned $37 million to La Jolla Exchange secured by first trust deeds on the six projects conveyed to La Jolla Exchange.

Under the terms of the Purchase Agreement, San Marino purchased from La Jolla Exchange properties located in Utah (“Utah properties”) and in California for $15.8 million. Of this amount, approximately $7-8 million was used to pay off existing liens on the properties and approximately $8 million was paid in cash to La Jolla Exchange.

San Marino financed the La Jolla Exchange transaction primarily by means of soliciting from brokers jumbo certificates of deposit in increments of $100,000 or more. Approximately $40 million in such funds were raised during the week preceding the transaction. These certificates of deposit had maturity dates ranging from 60 days to one year, compared to a five-year maturity date for the $37 million loan to La Jolla Exchange.

The Exchange Agreement and Purchase Agreement were negotiated, documented, and executed between January 28, 1984 and February 1, 1984.

San Marino wire transferred approximately $53.5 million into escrow for the La Jolla Exchange transactions on February 2, 1984.

At the time, San Marino knew that the transactions with La Jolla Exchange would not be approved by the California Commissioner of Savings and Loans or by the Bank Board. It was San Marino’s intent to negotiate, document, and close the transactions without prior disclosure to state and federal regulators. San Marino did not provide any disclosure of the transactions with state or federal regulators prior to its closing.

There exists a reasonable basis in fact for the Bank Board’s assertion that the La Jolla Exchange transactions were consummated in an unsafe and unsound manner.

San Marino entered into the transactions with La Jolla Exchange without conducting a minimally adequate investigation of the credit worthiness or financial reliability of Leon Brukman or La Jolla Exchange.

In major transactions, San Marino testified that it was its custom and practice to make inquiries regarding the party’s prior bankruptcies and pending lawsuits, to obtain credit reports, to seek information from the California Corporations Commissioner, the California Secretary of State, and other persons who had done business with the party, and to review the party’s income tax returns.

With respect to the La Jolla Exchange transaction, San Marino had not, prior to February 2, 1984: (i) reviewed any court files, either state or federal, to determine if there were any lawsuits pending against Mr. Brukman or any of his companies; (ii) commissioned a credit report on Mr. Brukman or any of his companies; (iii) obtained an audited financial statement; (Instead, San Marino relied upon an unaudited compilation of La Jolla Exchange dated six months earlier and made no effort to discuss this compilation with the accountant who prepared the statement); (iv) reviewed any of the tax returns of La Jolla Exchange; (v) made any effort to check the Bankruptcy Court’s files to determine what the status of Mr. Brukman’s bankruptcy proceedings were or the bankruptcies of any of his companies even though it knew that Mr. Brukman and one of his companies were involved in a bankruptcy proceeding; (vi) reviewed any of the files of the California Commissioner of Corporations with respect to La Jolla Exchange; and (vii) reviewed any filings with the Secretary of State of the State of California with respect to La Jolla Exchange.

San Marino entered into the La Jolla Exchange transactions without conducting an adequate investigation into the value of the Lake La Jolla property. Prior to February 2, 1984, San Marino had not obtained an appraisal for the Lake La Jolla property.

San Marino entered into the La Jolla Exchange transactions without conducting an adequate investigation into the Utah properties. Prior to February 2, 1984, San Marino representatives had never visited the Utah properties and had never commissioned any appraisals on those properties.

To the extent that the value of the Lake La Jolla property was less than $69 million, San Marino intended in the Exchange Agreement to rely upon the guarantee of La Jolla Exchange.

San Marino lacked an adequate basis for reliance on this guarantee.

There exists a reasonable basis in fact for the Bank Board’s assertion that the La Jolla Exchange transaction involved violations of law and regulations.

San Marino’s failure to review the La Jolla Exchange transactions with federal or state regulators prior to their closings constituted a violation of the state cease and desist order to which the Board of Directors of San Marino had consented.

The loan of $37 million by San Marino to La Jolla Exchange violated state and federal loans-to-one-borrower limitations.

There exists a reasonable basis in fact for the Bank Board’s assertion that the Lake La Jolla property had a value substantially less than $69 million.

The administrative record reflects, and plaintiff does not contest: (i) that the La Jolla property had been acquired on February 2, 1984 by Central Savings and Loan Association for $36 million; and (ii) that the La Jolla property had been purchased on February 2, 1984 by La Jolla Exchange from Central Savings and Loan Association for $43.5 million.

The testimony of Mr. Holmes, commissioned as an appraiser for La Jolla Exchange, as to the value of the Lake La Jolla property is lacking in credibility and is not accepted.

If the $60 million book value of the Domingues Buy Back properties that were exchanged with La Jolla Exchange in fact reflected their true value, the Exchange transaction resulted in a substantial dissipation of assets.

If, as the Bank Board reasonably believed, the value of the Bona/Domingues properties swapped with La Jolla Exchange was approximately $37 million, then the La Jolla Exchange transactions did not ameliorate the prior substantial dissipation of assets incurred in the original Bona/Domingues loans.

San Marino, and in particular its Chairman, Mr. Forde, and its Chief Operating Officer and Chief Financial Officer, Mr. Casanova, engaged in a course of conduct which caused inappropriate and unacceptable levels of risk to deposits insured by FSLIC.

Any conclusion of law which should be deemed a finding of fact is hereby adopted as such.

CONCLUSIONS OF LAW

This action arises under federal law pursuant to the provisions of 12 U.S.C. § 1464(d)(6)(A) (1984) and 12 U.S.C. § 1729(c)(1)(B) (1984).

Jurisdiction exists under 28 U.S.C. §§ 1331, 1337 (1984).

Venue is properly laid in the Central District of California pursuant to 12 U.S.C. § 1464(d)(6)(A) (1984).

The Federal Home Loan Bank Board (“Bank Board”) is an independent federal agency established by Congress. 12 U.S.C. § 1437 (1984).

The Bank Board is charged with the administration of the Home Owners’ Loan Act of 1933, 12 U.S.C. §§ 1461 et seq. (1984), and with administration of subtitle IV of the National Housing Act, 12 U.S.C. §§ 1724 et seq. (1984).

The Bank Board is the operating head of the Federal Savings and Loan Insurance Corporation (“FSLIC”), which insures and regulates eligible state and federal thrift institutions pursuant to 12 U.S.C. §§ 1725(a), 1726 (1984).

Congress has vested the Bank Board with authority to supervise all thrift institutions, including savings and loan associations, that are chartered by the Bank Board or are insured by FSLIC. 12 U.S.C. §§ 1464(a)(1), 1725(c) (1984).

San Marino Savings and Loan Association (“San Marino”) is a California-chartered stock savings and loan association whose savings deposit accounts are insured by FSLIC pursuant to 12 U.S.C. § 1726 (1984) and accordingly is subject to the regulatory authority of FSLIC and the Bank Board.

Congress has given to the Bank Board the discretion and exclusive authority to appoint FSLIC as sole conservator of a FSLIC-insured, state-chartered institution without notice. 12 U.S.C. § 1729(c)(1)(B) (1984).

Such authority may be immediately exercised by the Bank Board in the event that the Bank Board determines that any of the grounds specified in 12 U.S.C. § 1464(d)(6)(A) (1984) exist with respect to a FSLIC-insured, state-chartered institution. Such authority may be exercised immediately if the state official having jurisdiction over the institution gives his written approval of and concurrence in the Bank Board’s determination. 12 U.S.C. § 1729(c)(1)(B) (1984). '

The grounds set forth in 12 U.S.C. § 1464(d)(6)(A) are: (i) insolvency in that the assets of the association are less than its obligations to its creditors and others, including its members; or (ii) substantial dissipation of assets or earnings due to any violation or violations of law, rules or regulations, or to any unsafe or unsound practice or practices; or (iii) an unsafe and unsound condition to transact business.

On February 3, 1984, the Bank Board adopted Resolution 84-59 appointing FSLIC as sole conservator for San Marino based upon the Bank Boards findings that the grounds set forth at 12 U.S.C. §§ 1464(d)(6)(A)(ii) and (iii) existed. The Bank Board found further that San Marino violated a cease and desist order of Lawrence W. Taggart, the Commissioner of the California Savings and Loan Department.

The determination of the Bank Board was taken with the specific written consent of Mr. Taggart pursuant to 12 U.S.C. § 1729(c)(1)(B) (1984).

Pursuant to 12 U.S.C. § 1464(d)(6)(A) (1984), in the event of appointment of a conservator, an action may be brought, within 30 days thereafter, in the United States District Court for the judicial district in which the home of the association is located, or in the United States District Court for the District of Columbia, for an order requiring the Bank Board to remove such conservator, and the court shall upon the merits dismiss such action or direct the Bank Board to remove the conservator. Such proceedings shall be given precedence over other cases pending in such courts, and shall be in every way expedited.

Pursuant to § 1464(d)(6)(A) (1984), this action was timely commenced on February 6, 1984. On February 7, 1984, this Court, per Chief Judge Manuel Real, denied plaintiff’s application for temporary injunctive relief and set the matter down for trial commencing February 15, 1984 before this Court. Shortly thereafter, plaintiff dismissed all defendants except for the Bank Board.

On February 15, 1984, the Court and the parties agreed that as an initial step toward an expedited and orderly resolution of the matter, the Bank Board would introduce the administrative record before the Bank Board when it acted on February 3, 1984. It was further agreed the Bank Board would isolate from the record certain exhibits and transactions that the Bank Board contended, standing alone, and without waiving such other transactions and events as may be reflected in the record, constituted a sufficient basis for appointment of a conservator.

On February 16, 1984, the Bank Board proffered Exhibit 900, constituting the transcript of the proceedings before the Bank Board, Exhibit 901, constituting the resolutions adopted by the Bank Board, Exhibit 902, constituting the written consent of the Commissioner Taggart, and Exhibit 904, constituting the administrative record. The Bank Board also introduced Exhibit 903, which constituted documents extracted from the administrative record. Exhibits 903 and 904 were introduced and received in evidence for the limited purpose of showing that which was before the Bank Board on February 3. Exhibits 900, 901 and 902 were admitted into evidence for what they purported to be, i.e., the transcript, the resolutions of the Bank Board, and Mr. Taggart’s letter of consent. Also on February 16, plaintiff proffered Exhibit 1000, constituting further excerpts from Exhibit 904 which San Marino contended was necessary to counter purported facts presented in Exhibit 903. Exhibit 1000 was introduced into evidence for the limited purpose of showing that which was before the Bank Board on February 3.

Also on February 16, the Court and parties understood and agreed that the Court would decide as an initial matter whether the administrative record before the Bank Board, if true, constituted a sufficient basis for the appointment of a conservator. If so, plaintiff would be afforded an opportunity to contest the factual accuracy of the record.

On March 1, 1984, the Court entered its minute order concluding that the evidence in the record, if true, supported the appointment of a conservator and set the matter down for further trial on March 6, 1984.

On March 6, 1984, the Court and parties agreed that the next phase of the trial would focus principally on the La Jolla Exchange transactions which plaintiff contended were ameliorative transactions that cured any alleged substantial dissipation of assets related to the collateral for the Bona/Domingues loans involved in the Domingues Buy Back. Plaintiff offered to demonstrate that the Bank Board abused its discretion by concluding from the information before the Bank Board that the La Jolla Exchange transactions were not ameliorative. The Bank Board agreed to this focused inquiry without waiving its reliance upon the entire administrative record and without waiving its right to rebut plaintiff’s case, if necessary.

Commencing March 8, 1984, and continuing on March 14, 15 and 16, plaintiff presented its case.

The ultimate issue before this Court is whether San Marino has “sustained the burden of proving that the [Bank] Board abused its discretion in reaching its ‘opinion’ that a [conservator] should be appointed.” Washington Federal Savings and Loan Association v. Federal Home Loan Bank Board, 526 F.Supp. 343, 349 (N.D.Ohio 1981). In other words, the Court must determine “whether there were facts before the [Bank] Board, when it acted, on which the [Bank] Board could reasonably have concluded that ‘a’ statutory ground existed for appointment of a [conservator].” Biscayne Federal Savings and Loan v. Federal Home Loan Bank Board, 720 F.2d 1499, 1505 (11th Cir.1983); see also, Fidelity Savings and Loan Association v. Federal Home Loan Bank Board, 689 F.2d 803, 814 (9th Cir.1982), cert. denied, 461 U.S. 914, 103 S.Ct. 1983, 77 L.Ed.2d 283 (1983).

The appropriate standard of review is the arbitrary and capricious test. “The ‘arbitrary and capricious’ standard of review is a narrow one. [Citation] Its scope is more restrictive than the ‘substantial evidence’ test which is applied in reviewing formal findings made on a hearing record. [Citation] ‘Administrative action may be regarded as arbitrary and capricious only where it is not supportable on any rational basis.’ [Citation] Something more than mere error is necessary to meet the test. [Citation] To have administrative action set aside as arbitrary and capricious, the party challenging the action must prove that it was ‘wilful and unreasoning action, without consideration and in disregard of the facts and circumstances of the case.’ ” First National Bank of Fayetteville v. Smith, 508 F.2d 1371, 1376 (8th Cir.1974), cert. denied, 421 U.S. 930, 95 S.Ct. 1655, 44 L.Ed.2d 86 (1975) (citations omitted).

Section 1464(d)(6)(A) does not permit the Court, in its review of the Bank Board’s action, to determine if lesser remedies would have been appropriate. Fidelity, supra, 689 F.2d at 809; Biscayne, supra, 720 F.2d at 1504.

The Bank Board’s determinations that a particular condition or practice is unsafe or unsound are entitled to great weight. Beacon Federal Savings v. Federal Home Loan Bank Board, 162 F.Supp. 350, 355 (E.D.Wisc.1958). The Court grants deference to the Bank Board with respect to conflicting evidence of the Association’s financial condition. Telegraph Savings and Loan Association v. Federal Savings and Loan Insurance Corporation, 564 F.Supp. 862, 893 (N.D.Ill.1981), aff’d sub. nom. Telegraph v. Schilling, 703 F.2d 1019 (7th Cir.), cert. denied, — U.S. —, 104 S.Ct. 396, 78 L.Ed.2d 681 (1983).

There exists a reasonable basis in fact for the assertions by the Bank Board that there were loan underwriting deficiencies in connection with the Bona/Domingues loans and the La Jolla Exchange transactions. Loan underwriting rules are intended to assure that credit is extended on a sound and prudent basis.

There exists a reasonable basis in fact for assertions by the Bank Board that the loans to Bona/Domingues resulted in a substantial dissipation of assets and placed San Marino in an unsafe and unsound condition to transact business.

There exists a reasonable basis in fact for assertions by the Bank Board that the La Jolla Exchange transactions and the Bona/Domingues loans were undertaken in an unsafe or unsound manner and placed San Marino in an unsafe and unsound condition to transact business.

There exists a reasonable basis in fact for assertions by the Bank Board that the La Jolla Exchange transactions did not cure or ameliorate San Marino’s financial condition and actually constituted a substantial dissipation of assets.

There exists a reasonable basis in fact for the Bank Board’s assertions that San Marino violated federal and state loans to one borrower regulations in connection with the Bona/Domingues loans and the La Jolla Exchange transactions.

There exists a reasonable basis in fact for the Bank Board’s assertions that the Lake La Jolla property had a value substantially less than $69 million.

There exists a reasonable basis in fact for the Bank Board’s assertion that San Marino acted precipitously and imprudently in the manner in which it accomplished the La Jolla Exchange transactions.

There exists a reasonable basis in fact for the Bank Board’s assertions that the Domingues Buy Back and the La Jolla Exchange transactions violated the state cease and desist order to which the Board of Directors of San Marino had consented.

Such failures of investigation by the Bank Board or erroneous fact in the record as may have existed or have been demonstrated herein are insufficient to establish that the Bank Board’s action was arbitrary or capricious or an abuse of discretion.

San Marino, and in particular Messrs. Forde and Casanova, had engaged in a course of conduct that was in violation of regulations, both state and federal, and that by doing so caused unacceptable and inappropriate levels of risk to deposits insured by FSLIC.

The Bank Board did not act arbitrarily or capriciously or abuse its discretion in finding that statutory grounds existed for the appointment of a conservator.

There exists a reasonable basis in fact for the Bank Board’s findings that San Marino had substantially dissipated assets or earnings due to violations of law, rules, regulations, or to unsafe or unsound practices or was in an unsafe and unsound condition to transact business within the meaning of 12 U.S.C. § 1464(d)(6)(A)(ii), (iii) (1984).

The Court does find that San Marino had substantially dissipated assets due to violations of laws, rules, regulations or to unsafe or unsound practices and was in an unsafe and unsound condition within the meaning of Section 1464(d)(6)(A)(ii) and (iii).

Any finding of fact which should be deemed a conclusion of law is hereby adopted as such.


source: Caselaw Access Project

author: MENCER, District Judge.

license: Public Domain

text:
    Estelle JACABSON and Cynthis Carson, Plaintiffs, v. MERRILL LYNCH PIERCE FENNER & SMITH, INC., and Robert M. Kolaczynski, Defendants.
    Civ. A. No. 84-1844.
    United States District Court, W.D. Pennsylvania.
    Dec. 3, 1984.

      John R. McGinley, Jr., Grogan, Graffam, McGinley, Solomon & Lucchino, Pittsburgh, Pa., for plaintiffs.
    Marten R. Jenkins, Richard C. Lane, Foster S. Goldman, Jr., Stephen C. Yeltri, Pittsburgh, Pa., for defendants.
   MEMORANDUM

MENCER, District Judge.

This action arises out of alleged violations of the Securities Act of 1933, the Securities Exchange Act of 1934, the Racketeer Influenced and Corrupt Organizations Act (RICO) as well as alleged violations of common law. We have federal question jurisdiction pursuant to 28 U.S.C. § 1331 and also pendent jurisdiction over the state law claims.

The Court has before it a Motion by the Plaintiff for Leave to File an Amended Complaint which we grant in the interest of justice and in accord with the liberal pleading rules of federal practice. Also pending are Motions- by the defendants Kolaczynski and Merrill Lynch to Dismiss and Strike various counts of the plaintiffs’ complaint, to Compel Arbitration, For a More Definite Statement and to Strike a Prayer for Relief. We will grant the plaintiffs’ Motion and also consider the defendants’ motions at this time.

The plaintiffs, mother and daughter, are joint tenants of an options account held with Merrill Lynch which was opened on or about June 23, 1981. Estelle Jacobson, the mother, was a recent widow at that time and relied heavily on the advice of Robert Kolaczynski, a broker-dealer employed by Merrill Lynch. The plaintiffs’ account consisted of securities inherited from Estelle’s husband, the late Roger Jacobson. Estelle was dependent upon the interest and earnings of the inherited securities for her support. At the time the joint account was opened, the value of the securities then owned and deposited was $125,000.00. The defendant Kolaczynski allegedly misrepresented to the plaintiffs the risks of engaging in options trading and churned the plaintiffs’ account to generate commissions. On or about September 1983, the plaintiffs learned that there was no balance remaining in the account.

Plaintiffs claim that the defendants failed to comply with the rules and regulations of the Securities and Exchange Commission, the New York Stock Exchange, the National Association of Securities Dealers and failed to fulfill their fiduciary obligation to the plaintiffs. Plaintiffs also claim that the defendants violated the Securities Act of 1933, the Securities Exchange Act of 1934, and RICO, and intentionally caused the plaintiffs emotional distress. They are seeking general damages, as well as punitive damages on some counts and treble damages for the counts under RICO.

Motion to Compel Arbitration

The defendants move to compel arbitration of the plaintiffs’ claims pursuant to the Federal Arbitration Act. When the plaintiffs opened their options account at Merrill Lynch, they signed a Standard Option Agreement and also a Customer Agreement, both of which contained arbitration provisions. The plaintiffs could not, however, sign away their rights under the Securities Act of 1933 and the Securities Exchange Act of 1934. Those Acts contain anti-waiver provisions.

Section 29 of the Securities Exchange Act of 1934, 15 U.S.C. § 78ec(a) provides: “Any condition, stipulation or provision binding any person to waive compliance with any provision of this chapter or of any rule or regulation thereunder, or of any rule of an exchange required thereby shall be void.” This provision is uniformly held to render void agreements to arbitrate future Securities Act and Securities Exchange Act violations. Wilko v. Swan, 346 U.S. 427, 74 S.Ct. 182, 98 L.Ed. 168 (1953); see also Ging v. Parker-Hunter, Inc., 544 F.Supp. 49 (W.D.Pa.1982). Thus, the plaintiffs cannot be compelled to arbitrate their federal securities claims.

This Court will follow the reasoning of the New York court in S.A. Mineracao Da Trindade-Samitri v. Utah International Inc., 576 F.Supp. 566 (S.D.N.Y.1984) in holding the plaintiffs’ RICO claims to be non-arbitrable as well. We also decline to sever the issues in this case since the factual issues in all of the plaintiffs’ claims appear to be identical.

Motion tó Dismiss and Strike Various Counts

A. The stock exchange rules and rules of the national association of securities dealers

The Securities Exchange Act does not expressly authorize private actions for stock exchange rule violations. The plaintiffs, in claiming violations of the New York Stock Exchange Rules, are seeking to imply private rights of action under the relevant congressional statutes. The Supreme Court in Touche Ross & Co. v. Redington, 442 U.S. 560, 99 S.Ct. 2479, 61 L.Ed.2d 82 (1979) enunciated the standard for implying private actions. The Court stated

“the fact that a federal statute has been violated and some person harmed does not automatically give rise to a private cause of action in favor of that person.” Cannon v. University of Chicago, supra, 441 U.S. [677] at 686 [99 S.Ct. 1946, at 1952, 60 L.Ed.2d 560]. Instead, our task is limited solely to determining whether Congress intended to create the private right of action....

442 U.S. at 568, 99 S.Ct. at 2485.

The Supreme Court’s decisions in Touche Ross and Transamerica Mortgage Advisors, Inc. v. Lewis, 444 U.S. 11, 100 S.Ct. 242, 62 L.Ed.2d 146 (1979), reflect a restrictive approach to implying private rights of action. Prior to Transamerica and Touche Ross, courts had found a statutory basis for implying private rights of action under §§ 6(b) and 27 of the Securities Exchange Act. See Buttrey v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 410 F.2d 135 (7th Cir.) cert. denied 396 U.S. 838, 90 S.Ct. 98, 24 L.Ed.2d 88 (1969). Both of these sections, however, have since been rejected as a basis for implying a private right of action. Jablon v. Dean Witter & Co., 614 F.2d 677 (9th Cir.1980).

The plaintiffs are also claiming a violation of the rules of the National Association of Securities Dealers (NASD). No provision of the Securities Exchange Act explicitly provides for a private action for violations of stock association rules, however. The argument that the violation of a NASD rule gives rise to a private right of action is grounded primarily on § 15A(b)(6) of the 1934 Act, 15 U.S.C. § 78o-3(b)(6), which requires a securities association such as the National Association of Securities Dealers to adopt disciplinary rules. However, § 15A(b)(6) “neither confers rights on private parties nor proscribes any conduct as unlawful,” Touche Ross v. Redington, 442 U.S. 560, 99 S.Ct. 2479, 61 L.Ed.2d 82 (1979), and cannot indicate a legislative intent to create a private cause of action. Emmons v. Merrill Lynch, Pierce, Fenner & Smith, 532 F.Supp. 480 (S.D.Ohio 1982). The plaintiffs in this case are therefore barred from bringing a private action against the defendant under the New York Stock Exchange or NASD rules, so such count should be dismissed.

B. Intentional infliction of emotional distress

The standard which is followed in Pennsylvania for the tort of intentional infliction of emotional distress is set forth in the Restatement (Second) of Torts: “One who by extreme and outrageous conduct intentionally or recklessly causes severe emotional distress to another is subject to liability for such emotional distress....” Restatement (Second) of Torts, § 46(1) at 71 (1965). Pennsylvania courts and federal courts applying Pennsylvania law have consistently refused to extend this tort to anything other than the most extreme and outrageous conduct. Price v. Blyth Eastman Paine Webber, Inc., 576 F.Supp. 431 (W.D.Pa.1983). We find that the conduct alleged by plaintiffs in their Complaint, even if fully proven, is not sufficiently “extreme and outrageous” as to permit recovery for intentional infliction of emotional distress.

C. Defendants’ remaining motions

The two remaining motions by the defendants to Dismiss the claims under RICO for failure to state a claim and for a more definite statement are denied at this time. The defendants are free however, to reassert these motions after the plaintiffs’ amended complaint has been filed.

Motion to Strike Prayer For Relief

The Securities Act of 1933 and the Securities Exchange Act of 1934 do not permit recovery of punitive damages. 15 U.S.C. §§ 77l, 78bb(a); Ging v. Parker-Hunter Inc., 544 F.Supp. 49 (W.D.Pa.1982). Therefore, that portion of the plaintiffs’ prayer for relief must be stricken.

An appropriate order will issue.

      . § 14 of the Securities Act of 1933, 15 U.S.C. § 77n; § 29 of the Securities Exchange Act of 1934, 15 U.S.C. § 78cc(a).


author: MOTLEY, Chief Judge.

text:
    UNITED STATES of America v. Darren JONES, Defendant.
    No. 84 Cr. 268 (CBM).
    United States District Court, S.D. New York.
    Dec. 3, 1984.

      Rudolph W. Giuliani, U.S. Atty., S.D.N.Y. by Robert Gage, New York City, for U.S.
    Robert L. Herbst, New York City, for defendant.
   MEMORANDUM OPINION AND ORDER

MOTLEY, Chief Judge.

On October 26, 1984, defendant Darren Jones was found guilty by a jury before this court of aiding and abetting the sale of heroin in violation of 21 U.S.C. section 812, 841(a)(1), and 841(b)(1)(A) and 18 U.S.C. section 2. Before the case was submitted to the jury, the court denied defendant’s motion for a judgment of acquittal pursuant to Fed.R.Crim.P. 29 with leave to renew the motion after the jury returned its verdict. That renewed motion is now be-' fore the court. For the reasons set forth below, defendant’s motion is granted.

This case arises out of “Operation Pressure Point,” a major law enforcement effort to curb drug traffic on Manhattan’s Lower East Side through undercover “buy-bust” operations. According to evidence adduced at trial, the jury was entitled to find the following facts. At 6:50 p.m. on April 11, 1984, Police Officér Ronald Fitzpatrick, posing as a drug user, approached Ephraim Santiago on Madison Street near the corner of Rutgers Street and requested a “bundle”, or ten bags, of heroin. Santiago said that he would have to speak to his partner first, and immediately approached defendant Jones. Santiago and Jones had a brief conversation out of the officer’s earshot. Then the pair returned to the officer and walked with him around the corner onto the less-busy Rutgers Street. There Santiago told the officer that “I only have seven bags left,” and told him to get his money ready. Santiago then approached Jones, who was apparently standing at least a few feet away, and immediately left him to go back around the corner. While Santiago was gone, Jones remained on the street near the undercover, looking at him periodically. Santiago then returned with James Strong and asked Strong if the undercover was “okay”. Strong looked the officer up and down and then replied, “Yes, he’s cool.” Santiago then handed the officer seven glassine envelopes containing heroin and received $70 in pre-recorded buy money.

Defendant asserts that the evidence presented was insufficient as a matter of law to support his conviction. He bears a heavy burden in making this claim, since a jury verdict must stand if, “viewing the evidence in the light most favorable to the prosecution, any rational trier of fact could have found the essential elements of the crime beyond a reasonable doubt.” Jackson v. Virginia, 443 U.S. 307, 319, 99 S.Ct. 2781, 2789, 61 L.Ed.2d 560 (1979) (emphasis in original). See United States v. Gaviria, 740 F.2d 174, 183 (2d Cir.1984). In evaluating the evidence, the government is entitled to the benefit of all inferences on which the jury could reasonably have relied. United States v. Rodriguez, 702 F.2d 38, 41 (2d Cir.1983).

The Second Circuit’s cases offer uneven guidance in applying this facially clear standard, since the question of sufficiency of the evidence depends on a subjective weighing of unique factual records. Defendant cites several cases in which facts arguably more incriminating than those offered against defendant here were deemed insufficient on appeal to support the conviction. See, e.g., United States v. Gaviria, 740 F.2d 174 (2d Cir.1984); United States v. DiStefano, 555 F.2d 1094 (2d Cir.1977). Defendant argues that the cases require his guilty verdict to be overturned both because there was insufficient evidence to show that he knew drugs were being sold and because there was insufficient evidence to show that he had the intent to aid and abet the sale.

The government responds by citing other cases in which verdicts were permitted to rest on factual records difficult to distinguish from those deemed insufficient. See, e.g., United States v. Diez, 736 F.2d 840 (2d Cir.1984); United States v. Rodriguez, 702 F.2d 38 (2d Cir.1983). What may fairly be gleaned from the case law, however, is that mere presence at the scene of a crime, association with criminals, or even knowledge that a crime is being committed is insufficient to support a conviction for aiding and abetting, absent some purposeful behavior from which the requisite intent can be inferred. See, e.g., United States v. Soto, 716 F.2d 989, 991-92 (2d Cir.1983); United States v. Johnson, 513 F.2d 819, 823-24 (2d Cir.1975). Moreover, there must be sufficient evidence in the record for the jury to conclude beyond a reasonable doubt that the defendant knew the nature of the crime being committed. See, e.g., DiStefano, 555 F.2d at 1103-04; United States v. Gallishaw, 428 F.2d 760, 763-64 (2d Cir.1970).

The court is cognizant of the government’s argument that the evidence in this type of case must be looked at in the realistic context of a street sale of narcotics. Unlike major drug conspiracies where government agents have the opportunity to assemble a case against co-conspirators based on repeated surveillance, the average street sale of heroin is initiated and consummated in a matter of minutes. The government, therefore, will seldom be able to assemble a detailed factual record, and will frequently have to rely on reasonable inference from circumstantial evidence to establish guilt.

Nevertheless, the court is concerned that in this type of “sweep” operation, innocent bystanders or acquaintances who lack sufficient criminal intent may be swept up along with the drug dealers who are properly the government’s targets. Evidence introduced at trial must be sufficient to permit a jury to reach a separate verdict of guilty beyond a reasonable doubt as to each individual under indictment.

This concern is heightened by the government’s reliance on the testimony of Officer Fitzpatrick that street pushers require and routinely use look-outs and “safeties” and that in his opinion Jones performed these necessary roles. The government argues that the jury should be permitted to find, based on this expert testimony, that it was highly unlikely that Santiago would undertake the sale of heroin without this important help from Jones. Although such expert opinion based on observation has been held admissible, United States v. Carson, 702 F.2d 351, 369 (2d Cir.), cert. denied, 462 U.S. 1108, 103 S.Ct. 2456, 77 L.Ed.2d 1335 (1983), it cannot substitute for evidence of knowledge and intent sufficient to support a conviction.

In this connection, the court notes the concurring opinion of Judge Newman in United States v. Young, 745 F.2d 733 (2d Cir.1984) urging a limited role for such testimony regarding drug sales in evaluating the sufficiency of a case against a particular defendant. Judge Newman suggested that expert opinion by police officers carries “an aura of special reliability and trustworthiness,” and that a jury may unreasonably assume that an investigative officer has additional information proving a defendant’s guilt. Id,., at 765-66 (Newman, J., concurring). While Carson holds that such expert testimony may be admissible, Judge Newman nevertheless urged that it not be given undue weight in measuring the sufficiency of a case.

If the observed actions of a defendant do not establish a prima facie case, I do not believe that an expert’s opinion that his actions are criminal may carry the prosecution’s proof above the requisite line. It is one thing to permit a jury to weigh that opinion in considering an otherwise adequate case; it is quite another matter to let that opinion salvage an otherwise insufficient case.

Id., at 767. This court shares Judge Newman’s concern, and fears that in this case the jury may have given undue weight to the expert opinion of Officer Fitzpatrick that Jones was acting as a look-out when he stood on the street and looked occasionally at the officer.

Upon examining the distressingly thin evidence which constitutes the rest of the case against defendant, the court finds it even more likely that the jury substituted the opinion of the undercover for its own process of reasonable inference from the objective actions of defendant. There is no evidence of a prior arrangement between Jones and Santiago. No pre-recorded money was found on Jones, nor any drugs or drug paraphernalia. There is no evidence that Jones possessed heroin or gave any to Santiago or the officer. There is no evidence that Jones heard anything said among Santiago, Strong, and the officer, since the officer’s testimony, while inconclusive, apparently places Jones some feet away from the other parties during all discussions of the sale. There is not even any specific evidence that Jones actually saw the drugs and money change hands.

It is true, as the government argues, that Jones’ knowledge of the drug deal and intent to aid and abet it can be established by inference from circumstantial evidence. Moreover, a jury is not required to eliminate all factual hypotheses inconsistent with guilt. There comes a point, however, where reasonable inference gives way to speculation and conjecture, and alternative hypotheses become too plausible to permit a reasonable jury to reject them beyond a reasonable doubt.

Convictions based on circumstantial evidence have been upheld notwithstanding the arguments of defendants that there is a plausible innocent interpretation for their actions. In these cases, however, the conduct of defendants generally forms a pattern that minimizes the plausibility of noncriminal explanations. See, e.g., United States v. Stanchich, 550 F.2d 1294, 1300 (2d Cir.1977) (mathematical chances “infinitesimal” that innocent party would engage in as much “hovering and covering” as defendant); United States v. Pui Kan Lam, 483 F.2d 1202, 1208 (2d Cir.1973), cert. denied, 415 U.S. 984, 94 S.Ct. 1577, 39 L.Ed.2d 881 (1974) (jury may infer guilt from circumstantial evidence since defendant’s story inherently incredible). At the very least, there must be enough evidence in the record for the jury to rationally choose to believe the government’s story of the case and harbor no reasonable doubt in so doing.

There simply was not enough evidence introduced at trial in this case to support such a choice. The court finds that a reasonable jury, on this record, would have to have a reasonable doubt on two distinct elements of the government’s case.

First, there was insufficient evidence for the jury to conclude beyond a reasonable doubt that Jones was aware that a drug deal was in progress. As noted above, there is no evidence that Jones heard any of the negotiations or saw any drugs in anyone’s possession. Even if the jury could conclude from the evidence that Jones was, at Santiago’s request, keeping an eye on the undercover officer, there is no evidence that Jones knew it was a drug deal, rather than trade in stolen property or prostitution. Knowledge that one is helping some kind of criminal activity is insufficient, since an aider and abetter must have the same specific intent as a principal. See DiStefano, 555 F.2d at 1103-04; Gallishaw, 428 F.2d at 763-64. On the evidence presented, any “inference” that Santiago and Jones discussed drugs when out of earshot of the officer is mere conjecture.

Second, there was insufficient evidence of purposeful conduct on the part of defendant for the jury to conclude beyond a reasonable doubt that Jones intended to aid and abet the sale. Despite the government’s strained attempt to turn the transaction into an elaborate affair taking place at two distinct settings, all that the evidence essentially shows is that Santiago talked briefly with Jones, that Jones walked with him around the corner, and that Jones stood by while Santiago fetched Strong and returned to sell drugs in a matter of seconds. Without evidence that Jones had a stake in the venture or said or did something objectively purposeful to help the crime, no reasonable jury could dismiss substantial doubt as to whether Jones was an aider and abetter or merely a friend hanging around. The gaps in knowledge and intent can only be filled in by unsupported speculation as to what Santiago said to him or what Jones heard or saw. In this overall factual context, this court cannot allow the speculation of Officer Fitzgerald that Jones was acting as a lookout, however grounded in experience, to substitute for evidence of knowledge and intent.

There being insufficient evidence of purposeful conduct on the part of defendant from which a reasonable jury could find guilt beyond a reasonable doubt, the defendant’s motion for a judgment of acquittal is granted.

SO ORDERED.


author: SHADUR, District Judge.

text:
    UNITED STATES of America, Plaintiff, v. Gary GOEHL, Defendant.
    No. 83 CR 956.
    United States District Court, N.D. Illinois, E.D.
    Dec. 6, 1984.

      John F. Podliska, Asst. U.S. Atty., Chicago, Ill., for plaintiff.
    Robert A. Korenkiewicz, Chicago, Ill., for defendant.
   MEMORANDUM OPINION AND ORDER

SHADUR, District Judge.

Gary Goehl has moved under Fed.R. Crim.P. (“Rule”) 35 for reduction of the sentence imposed by this Court July 26, 1984 pursuant to a plea agreement Goehl had previously entered into with the United States. For the reasons briefly stated in this memorandum opinion and order, the motion is denied.

At the outset a comment is in order as to the timing of the motion. It was filed November 21, 118 days after imposition of sentence. That meant of course the United States had no opportunity to prepare even a skeletal response until more than 120 days had elapsed after sentencing. Yet in literal language all Rule 35 empowers this Court to do is “to reduce a sentence within 120 days after the sentence is imposed....”

Despite the clear language of Rule 35— and its seemingly jurisdictional time limitation—some courts have stretched the Rule to allow relief after 120 days have expired, so long as relief was requested within the 120 day period. Our own Court of Appeals has not ruled specifically on that jurisdictional question. However its opinion in United States v. Kajevic, 711 F.2d 767, 770-72 (7th Cir.1983), after discussing the problem under the special circumstances posed there, read like a caveat to the bar and District Court bench that the questionable practice of filing Rule 35 motions just before the láO days ran out ought to be abandoned. This is one of the many areas of law in which certainty ought to be the primary goal to mold people’s conduct, for there is no reason practitioners cannot (with rare exceptions) get their motions into court sufficiently within the 120-day limit to allow due consideration and clearly jurisdictional rulings. United States v. Inendino, 655 F.2d 108, 110 (7th Cir.1981), quoted in Kajevic, 711 F.2d at 770; United States v. Dunn, 585 F.Supp. 1365, 1366 (N.D.Ill.1984).

Nonetheless this Court is aware of at least one Seventh Circuit decision, unpublished and therefore unciteable under its Circuit Rule 35(b)(2), that suggests via footnote that Rule 35 is not to be read as it reads. Absent a definitive signal on the subject, therefore, this Court will consider Goehl’s motion on the merits.

Goehl’s plea agreement was under Rule 11(e)(1)(C)—an agreement for a specific sentence of 18 months’ imprisonment among other things. That meant this Court had to advise Goehl at the time of his guilty plea, as it did in fact, that if the Court ultimately rejected the plea agreement all bets were off and Goehl would get a second chance to decide whether he wanted to withdraw his guilty plea or to persist and take his chances on what sentence this Court would impose on its own.

After full deliberation, including consideration of the usual extensive presentence investigation report provided by this District Court’s Probation Office and a full allocution hearing, this Court decided to honor the agreement the parties had struck to deal with Goehl’s large-scale fraud. It imposed a sentence identical to that set out in the plea agreement, stating at the end of the allocution hearing that though this Court might perhaps have arrived at a sentence somewhat different from that represented by all the components of the Rule 11(e)(1)(C) agreement, the agreed-upon terms were well within the range of a reasonable societal response to the offenses and to Goehl’s personal circumstances.

Now Goehl asserts a half-dozen reasons for changing the deal he made. Though it is true a sentence under a plea agreement (unlike other contracts) implicates liberty, the fact remains a plea agreement is a contract and both government and defendant are contractually bound by the commitments in a Rule 11(e)(1)(C) plea agreement. United States v. Mooney, 654 F.2d 482, 486 (7th Cir.1981). Of course reduction of an agreed-on sentence may nonetheless be justified if post-sentencing developments, previously unforeseen and rendering the earlier binding agreement inappropriate, were to occur. Id. at 487; Dunn, 585 F.Supp. at 1366.

But even from the perspective of a fresh look unfettered by considerations of contract, no reduction in sentence is warranted here. It is unnecessary to deal chapter and verse with what Goehl argues and the reasons for rejecting those arguments. Instead this Court finds the government response (attached as Appendix A) fairly states the reasons Goehl’s motion is nonpersuasive.

Accordingly, as stated at the outset of this opinion, Goehl’s Rule 35 motion is denied.

APPENDIX A

GOVERNMENT’S RESPONSE IN OPPOSITION TO DEFENDANT’S MOTION TO REDUCE SENTENCE

Nov. 2, 1984

The UNITED STATES OF AMERICA by DAN K. WEBB, United States Attorney for the Northern District of Illinois, moves this Court to deny defendant Gary Goehl’s motion to reduce his sentence. In support thereof the government states as follows:

1. On June 6, 1984, defendant Goehl pleaded guilty to Counts 1 (conspiracy) and 23 (false statement to bank) of a 25 count indictment. Goehl pleaded guilty pursuant to a written, signed plea agreement in which he agreed

that at the time of sentencing the Court shall impose on Count Twenty-three of the indictment a sentence of eighteen months imprisonment.

Plea Agreement at 4. Goehl admitted in court and in the plea agreement that he had engaged in a conspiracy with co-defendant Patricia Weeks to obtain money from approximately 21 Chicago area banks by submitting false information and at least 24 false personal financial statements. Pursuant to the conspiracy Goehl and Weeks obtained approximately 45 loans totalling approximately $800,000. Thirty seven (37) of the loans totalling approximately $600,000 were obtained by Goehl. At the time of the plea $300,000 had not been repaid.

2. On July 26, 1984, this Court imposed the sentence agreed to by the parties in the plea agreement. Pursuant to the agreement this Court imposed a sentence of 18 months imprisonment on Count 23 and a sentence of three years consecutive probation on Count 1. As a condition of that probation the defendant was ordered to make restitution of $204,553 to eleven specified banks. This Court also ordered that the probation could be extended to five years if any of the restitution remained unpaid. Further, the Court recommended to the Bureau of Prisons that the defendant be incarcerated at a minimum security institution in the Western Region and that the defendant be permitted to report on his own and at his own expense to the designated institution. All of those provisions of the Court’s order were identical to the terms of the plea agreement. On September 6, 1984, the defendant surrendered to begin serving his sentence at the federal prison camp at Boron, California.

3. Despite the imposition of a sentence to which the defendant agreed to be bound in the plea agreement, the defendant moved for a reduction of sentence 118 days after its imposition. The defendant asserts six grounds in support of his request that this Court reduce his sentence to six months imprisonment or less. Defendant first cites a change in the health of his parents in Scottsdale, Arizona. He asserts that, although his parents’ condition was relatively good and stable at the time of sentencing, there has been a “substantial change of circumstances”, that their physical conditions have materially and seriously worsened, that his father’s condition is terminal, and that the Court’s sentence is punishing defendant’s parents by depriving them “of his succor and comfort in their final moments.”

4. Defendant Goehl further asserts that his own “mental condition has begun to deteriorate” because his confinement has made it impossible to counsel with his clinical psychologist in Denver. Goehl further claims that his forced absence from his parents at this time “may well accelerate his deteriorating psychological state.”

5. As additional grounds for a reduction of his sentence Goehl contends 1) that at the time of sentencing he expected to serve no more than 13 months and 20 days and perhaps as little as six months imprisonment, that the Court’s order pursuant to 18 U.S.C. § 4205(b) permitting the parole board to release him at any time caused him to believe that he might serve less than six months, and that, in his view now, “it is unlikely that the Parole Commission will exercise its discretion in favor of parole” at his parole hearing scheduled in February, 1985; 2) that he has made $8,000 in restitution, that he is remorseful for the crimes that he committed, and that he has “gained some valuable insights on account of his being incarcerated”; 3) that his crimes were non-violent acts; and 4) that co-defendant Weeks knowingly participated in and benefited from Goehl’s acts and was not punished as severely as Goehl.

6. To support a motion for reduction of sentence a defendant should set forth matters allegedly misperceived by the Court at sentencing or unforeseen at the time of sentencing. United States v. Dunn, 585 F.Supp. 1365, 1366 (N.D.Ill.1984). Furthermore, a plea agreement is a contract and where, as here, the defendant has agreed to the imposition of a specific sentence in a plea agreement and that sentence has been imposed, the defendant as well as the government are contractually bound by the terms and commitments of the plea agreement. Cf. United States v. Mooney, 654 F.2d 482, 484-87 (7th Cir.1981). Under the terms of the plea agreement it is inappropriate and improper for the defendant to seek a reduction in his sentence to less than 18 months after obtaining substantial concessions from the government in return for agreeing to the imposition of an 18 month sentence.

7. The defendant asserts that the grounds upon which he relies are a substantial change in circumstances. Assuming, arguendo, that a substantial and unforeseen change in circumstances permits a breach of the terms of a plea agreement of the defendant, his assertions were not unforeseeable and are inadequate to warrant any reduction of sentence. In defendant’s Exhibit C Dr. Ibrahim states that

Mr. Jack Goehl has severe end-stage congestive heart failure related to long standing cardiomyopathy.

Thus, while Mr. Goehl’s condition may have changed since sentencing, the eventual development of that condition was neither unexpected nor unforseeable at the time of sentencing and at the time of Goehl’s commitment to an 18 month sentence in the plea agreement. Furthermore, although Exhibits C and D state that Mr. Goehl’s prognosis is poor and that Mrs. Goehl is under psychiatric care as a result of the stress, nothing in the doctors’ letters supports the defendant’s claim that his parents are “in their final moments”. Defendant’s Motion at 4. Goehl’s assertion that his sentence should be reduced so that he can be with his parents in Scottsdale, Arizona, is inconsistent with other facts showing that his former employer is located in a suburb of Denver, Colorado, a prospective employer has offices in California, Utah, and Colorado but not Arizona, and that his psychologist is located in Denver. Goehl also fails to note that, as reflected in the presentence report, he has both a brother and a sister to aid in the care of his parents.

8. The letter from Goehl’s psychologist, Jerry Cox, presents no new facts or circumstances. Contrary to Goehl’s claim that he is in a deteriorating psychological state and that his condition has begun to deteriorate, Mr. Cox says only that

Goehl’s once excellent prognosis may be threatened, or at best that he will remain stagnant, if he stays in prison.

(Defendant’s Exhibit A at 2). (Emphasis added). That position is the same as Cox’s view, set forth in the presentence report, that incarceration of the defendant would not serve any meaningful purpose in his life.

9. Goehl’s remaining assertions are patently meritless. He is barred by the agreed sentence in the plea agreement from relying upon the non-violent nature of his conduct, the sentence imposed on Patricia Weeks, the relative degree of knowledge, participation, and benefit of Weeks and himself, the fact of restitution, his claimed remorse, and his own perceptions as to the actual length of his imprisonment.

10. Even without the agreed sentence those assertions would be meritless. The Court was aware of many of them at the time of sentencing and none of them warrants any reduction of sentence. Goehl knew from the presentence report that the Parole Commission would have required him to serve 40 to 52 months before parole because of the magnitude of this offense; he was substantially more culpable than Weeks; his crimes, though non-violent, were premeditated, systematic, calculating and of substantial magnitude; he is required by the terms of his sentence to make restitution, and his expressions of remorse were part of his remarks at the sentencing hearing.

11. Even in the absence of the agreed sentence, no reduction in sentence would be warranted. In light of the magnitude and duration of this offense, the eighteen month sentence was fair and reasonable, as Goehl’s own agreement with it attests. Any reduction in the sentence would deprecate the seriousness of Goehl’s offenses.

For the reasons stated above, the government asks that defendant Gary Goehl’s motion for reduction of sentence be denied.

Respectfully submitted,

DAN K. WEBB

United States Attorney

By: -

JOHN F. PODLISKA

Assistant United States Attorney

      . In fact the United States responded November 28, 125 days after sentencing.

      . Appendix A, as is appropriate given its function, is an advocate’s piece. This Court need not however adopt all its rhetoric to recognize the overall soundness of its arguments.

      . The presentence report also noted that Goehl had seen his parents twice in the year prior to the July, 1984, report.


author: CARL B. RUBIN, Chief Judge.

text:
    Marvin L. WARNER, Plaintiff, v. FEDERAL DEPOSIT INSURANCE CORPORATION, Defendant.
    No. C-1-82-1081.
    United States District Court, S.D. Ohio, W.D.
    Dec. 7, 1984.

      Kevin E. Irwin, Cincinnati, Ohio, for plaintiff.
    Gerald Baldwin, Arnold Morelli, Cincinnati, Ohio, for defendant.
   FINDINGS OF FACT, OPINION, AND CONCLUSIONS OF LAW

CARL B. RUBIN, Chief Judge.

This matter is before the Court for determination on its merits. Plaintiff seeks return of $249,075 paid to defendant, while defendant in a counterclaim seeks $103,950 from plaintiff as his proportionate share of a delinquent loan. Hearings on Motions for Injunctive Relief were held on November 3, 1982, November 29, 1982, December 27, 1982, and August 27, 1984. Pursuant to Fed.R.Civ.P. 65(a)(2) and by agreement of the parties, the Court will include all evidence presented at such hearings in this determination of the merits. In accordance with Fed.R.Civ.P. 52, the Court does submit herewith its Findings of Fact, Opinion, and Conclusions of Law.

I. Findings of Fact

(1) In the fall of 1980, plaintiff, Marvin Warner, an investor experienced in banking and real estate, agreed to purchase an interest in a limited partnership known as High Plains Drilling Partners 1980-11, Ltd. (“High Plains”). The partnership intended to purchase and lease four oil drilling rigs.

(2) The partnership was put together by Carl Swan, Chairman of the Board and a Director of High Plains Company, an Oklahoma corporation that acted as the general partner of High Plains.

(3) Plaintiff purchased 15 limited partnership units representing 15% of the partnership. The total purchase price was $498,-150. Plaintiff was given the option of paying the entire amount in cash and short-term notes or paying half in cash and short-term notes and the other half through a complex financing arrangement whereby High Plains borrowed the partners’ contributions from Penn Square Bank, N.A. (“Penn Square”) secured by irrevocable standby letters of credit, promissory notes, and loan assumption agreements in favor of High Plains. All of the limited partners elected the latter option. The loan thus obtained was known as the “Equity Loan.”

(4) A Private Placement Memorandum (“Placement Memo”) described the arrangement (Pltf s. Ex. 1). It indicated that the limited partners’ promissory notes would be payable in quarterly installments over four years. Proceeds from these payments would be used to repay the Equity Loan from Penn Square. The memo anticipated that such loan would likewise be due in quarterly installments and would bear a floating interest rate of three and one-half percent over Penn Square’s prime rate.

(5) The Placement Memo required that the letters of credit extend to June 30, 1985 and cover 110% of the principal amount of the limited partners’ promissory notes.

(6) In the Placement Memo and in the Subscription Agreement (FDIC Ex. A) whereby plaintiff actually purchased his partnership interest, plaintiff was expressly warned about the speculative nature of the investment and the “high degree of risk of loss” involved.

(7) The Subscription Agreement required as part of the loan purchase option a letter of credit on the same terms as those stated in the Placement Memo.

(8) On October 29, 1980, plaintiff executed the Subscription Agreement along with a Power of Attorney, a promissory note for $249,075 payable in accordance with the terms set out in the Placement Memo, an Equity Loan Assumption Agreement, and a Working Loan Assumption Agreement.

(9) Under the Equity Loan Assumption Agreement, plaintiff agreed to assume personal liability for a pro rata share of High Plains’s $1,660,500 Equity Loan from “a national commercial bank.” The terms of that Equity Loan were to be the same as those set out in the Placement Memo. Plaintiff also agreed under the Equity Loan Assumption Agreement to execute a letter of credit in the amount of 110% of the principal amount of his share of the Equity Loan as security for the loan.

The Equity Loan Assumption Agreement contained the statement that the lender was not a party to it nor had the lender any obligations thereunder. The Subscription Agreement and the Placement Memo each stated that Penn Square was looking to the limited partners’ letters of credit as the primary security for the Equity Loan. (FDIC Ex. A at 33; Pltf’s Ex. 1 at 10).

(10) On December 30, 1980, High Plains and Penn Square entered into a Secured Term Loan Agreement for the Equity Loan. The terms of this $1,660,500 Equity Loan were different from those represented to plaintiff in the Placement Memo and Equity Loan Assumption Agreement. Instead of a 48-month, three and one-half percent over prime loan payable in quarterly installments, the actual loan was for 19 months, with interest at one and one-half percent over prime, and the entire principal payable on August 15, 1982.

(11) The letters of credit demanded by the Secured Term Loan Agreement were also different. They were to cover only 100% of the principal amount instead of 110%. (Pltf’s. Ex. 5 at 12).

(12) The actual terms of the Equity Loan differed from those represented in the Placement Memo and the Equity Loan Assumption Agreement because banks were reluctant to issue the limited partners letters of credit for longer than two years. As a result, most limited partners could not obtain 48-month letters of credit. Since Penn Square refused to make High Plains • an unsecured loan, the parties to the Equity Loan restructured it into a 19-month “bullet loan” at a lower interest rate and adjusted the letter of credit and promissory note requirements accordingly.

(13) There was an “understanding” among the parties that at the end of the 19 months the Equity Loan would be rolled over and letters of credit would be renewed for another two years. Most of the Equity Loan was later sold to Continental Bank, N.A. of Illinois.

(14) In a letter dated November 13, 1980, plaintiff was informed of the financing problem by Brent Davis, Vice President of High Plains, and advised to have his bank prepare a two-year letter of credit on Penn Square for $249,075. Plaintiff ordered the Central Trust Company, N.A. of Cincinnati (“Central Trust”) accordingly and the letter issued December 9, 1980.

(15) The actual Equity Loan did not require quarterly payments as had been anticipated by the Placement Memo and Equity Loan Assumption Agreement and as a result plaintiff was informed that he was not required to make quarterly payments on his promissory note to High Plains as its terms indicated.

(16) During the course of 1981, High Plains prospered. Its rigs experienced a utilization rate of 97.5%. By December of 1982, however, the demand for rigs had dropped dramatically and none was in operation. (Novakowski Depo. at 137).

(17) High Plains defaulted on the Equity Loan when it came due August 15, 1982.

(18) On July 5, 1982, pursuant to 12 U.S.C. § 1291, the Comptroller of the Currency determined that Penn Square was insolvent. Defendant, the Federal Deposit Insurance Corporation (“FDIC”), was appointed Receiver of Penn Square and now stands in its shoes.

(19) On October 13, 1982, the FDIC notified Central Trust of its intent to call plaintiff’s letter of credit. After legal proceedings in the Common Pleas Court of Hamilton County, the United States District Court for the Southern District of Ohio, and the United States Court of Appeals for the Sixth Circuit, Central Trust honored the letter of credit on September 13, 1983.

(20) FDIC is the only remaining defendant in the case.

There remain but two questions for the Court to determine: (1) is plaintiff entitled to recover $249,075 from FDIC, and (2) is plaintiff liable for his share of the defaulted working capital loan.

II. Opinion

A.

The Court has jurisdiction over this matter pursuant to 12 U.S.C. § 1819 (1982). In cases involving the rights of the United States arising under nationwide federal programs, federal law governs. United States v. Kimbell Foods, Inc., 440 U.S. 715, 726, 99 S.Ct. 1448, 1457, 59 L.Ed.2d 711 (1979). Such cases include those involving the FDIC as receiver of a national bank. D’Oench, Duhme, & Co. v. FDIC, 315 U.S. 447, 62 S.Ct. 676, 86 L.Ed. 956 (1942). When, as here, no federal statute provides the appropriate rule of decision, it is the Courts’ task to “fill the interstices of federal legislation ‘according to their own standards.’ ” 440 U.S. at 727, 99 S.Ct. at 1458 (quoting Clearfield Trust Co. v. United States, 318 U.S. 363, 367, 63 S.Ct. 573, 575, 87 L.Ed. 838 (1943)). This involves a choice between adopting state law or fashioning a nationwide federal rule. Id. 440 U.S. at 723, 99 S.Ct. at 1455. Resolution of this question depends upon the balancing of three factors: (1) whether the federal program was one which, by its nature, required nationwide uniformity, (2) whether adopting state law would frustrate the specific objectives of the federal program, and (3) whether applying a federal rule would disrupt commercial relations predicated on state law. Id. at 728-29, 99 S.Ct. at 1458-59; Gunter v. Hutcheson, 674 F.2d 862, 868 (11th Cir.1982).

It should be noted from the outset that the parties here avoided this difficult question and variously briefed Oklahoma, Ohio, and Restatement law. They obviously have no preference, and well they should not because plaintiff’s claims are grounded on relatively basic tort and contract principles. No federal common law has developed in these areas, and they are the traditional province of state law. In the absence of ready-made federal common law and in light of the general reluctance to displace state law without explicit statutory or constitutional direction to do so, the presumption is that state law is adequate and should be adopted by the federal court as the rule of decision. See 440 U.S. at 740, 99 S.Ct. at 1464; FDIC v. Braemoor Associates, 686 F.2d 550, 554 (7th Cir.1982). Such is the case here. There is no need in this instance for a uniform federal rule. Operation of the FDIC would not be frustrated by application of state law to this dispute, and fabrication of a federal rule would disrupt commercial relations predicated on state law. Thus, we adopt state law as the rule of decision in this case.

This brings us to the issue of which state’s law should apply. The Subscription Agreement, Equity Loan Assumption Agreement, and Working Capital Assumption Agreement specify that Oklahoma law shall govern them. No reason exists for rejecting that designation. High Plains and High Plains Company were organized under Oklahoma law. Penn Square had its principal place of business in Oklahoma City. Swan was a citizen of Oklahoma and the business of the partnership was conducted in Oklahoma and Texas. With Oklahoma the focal point of the dealings among the parties, its designation by them was appropriate. Oklahoma contract and tort law must be applied to the transactions in question.

B.

In order to establish fraud in Oklahoma, plaintiff must prove (1) that defendant made a material misrepresentation, (2) with knowledge of its falsity or reckless disregard for its truth, (3) with the intent that plaintiff act on the misrepresentation, and (4) actual reliance on the misrepresentation by the plaintiff (5) resulting in injury. D & H Co. v. Shultz, 579 P.2d 821 (Okla.1978). Oklahoma recognizes an exception to the general rule that the misrepresentation must relate to existing or past facts. Promises as to future acts are actionable where the promise to act in the future is accompanied by an intention not to perform and the promise is made with the intent to deceive the promisee into acting where he otherwise would not have done so. Citation Co. Realtors v. Lyon, 610 P.2d 788, 790 (Okla.1980).

The theory of plaintiff’s case stated in terms of Oklahoma fraud law, is that Penn Square conspired with Swan to deceive the limited partners into investing in High Plains when Swan and Penn Square knew from the start they could not obtain the promised financing for the project and when they knew the limited partners would not invest at the financing terms actually available. Plaintiff has failed to prove this theory.

The central pillar supporting plaintiff’s theory is the fact that the Equity Loan was not made on the same terms represented in the Placement Memo and Equity Loan Assumption Agreement. Plaintiff would have the Court infer from this fact that plaintiff was defrauded. Without more, such an inference is unwarranted. Plaintiff’s contract and partnership rights may have been breached, but without a showing of an intent to deceive on the part of Penn Square, and a showing that Penn Square made promises it did not intend to fulfill at the time the Placement Memo and Equity Loan Assumption Agreement were executed, no claim of fraud can succeed against FDIC. See Citation Co. Realtors v. Lyon, supra.

The total of plaintiff’s evidence supporting the alleged fraud is as follows: (1) Swan, the architect of the High Plains endeavor, was a director and shareholder of Penn Square. (2) Swan had a close working relationship with William Jennings, Chief Executive Officer of Penn Square. (Swan depo. at 30-36). (3) Penn Square had expertise and experience in making energy loans of this type. (4) Statements of Jerry Novakowski, Vice President of High Plains Co., that he assumed that drafts of the Equity Loan Assumption Agreement would have been reviewed by William Patterson, Officer of Penn Square, and that Penn Square was aware of the terms of the Equity Loan Assumption Agreement before making the Equity Loan. (Novakowski depo. at 89). (5) Patterson would not testify on Fifth Amendment grounds. (6) The existence of an understanding between High Plains and Penn Square that the Equity Loan, due October 15, 1982, would be extended for an additional two years. (December 27 trans. at 102-05, Davis testimony). (7) Verbal representations by officers of Hign Plains that plaintiff’s letter of credit was a mere formality and would never be called. (November 29 trans. at 12, Warner testimony). (8) The Secured Term Loan Agreement memorializing the Equity Loan stated that the terras of the Equity Loan Assumption Agreement were incorporated by reference into it. (Section 9). (9) The four oil rigs owned by the partnership were encumbered in excess of their worth.

If all the above were taken as true, there is still no direct evidence that High Plains or Swan, much less Penn Square, made the promises to perform contained in the Placement Memo and Equity Loan Assumption Agreement with the intent not to perform them but instead intended to deceive the limited partners. At best, the evidence shows that Penn Square knew of the contract between High Plains and the limited partners but nonetheless made High Plains a loan at terms different from those represented in the contract. This action may have been a breach of plaintiff’s partnership contract, but it certainly does not justify an inference of fraud.

The totality of the evidence leads to the more plausible conclusion that the plaintiff, a sophisticated banker and real estate investor, entered into a high risk, potentially high yield investment fully aware of its speculative nature. The deal was only offered to those who could afford the potential losses and could fully appreciate the risks involved. Large tax benefits were also a consideration. See In Re Longhorn Securities Litigation, 573 F.Supp. 255, 273 (W.D.Okla.1983). When all the limited partners could not obtain four-year letters of credit as anticipated, and as were necessary because the loan was to be sold to another bank, the parties secured the best possible terms available and entered into an unwritten “understanding” for refinancing on the same terms in two years. Although the length of the Equity Loan was one-half the time represented in the Placement Memo, the interest rate was 2% less, the limited partners were released from their obligations to make quarterly payments on their promissory notes. The amount of the attendant letters of credit was also reduced from 110% to 100% of the pro rata share of the Equity Loan.

The oil rigs were then built and business begun. From the evidence presented, there is no reason to believe that had the oil market remained healthy, the Equity Loan would not have been refinanced and High Plains and its investors would not have realized large profits. As events occurred, just as High Plains had all four of its rigs fully operational and was at the pinnacle of its debt obligations, the bottom fell out of the oil market and High Plains was left with four idle rigs and Penn Square was left with one bad loan. Fraudulent financing did not cost plaintiff his investment. A drop in the demand for oil denied High Plains the income necessary to pay off its large debts.

Several items of plaintiff’s evidence warrant further discussion. First is plaintiff’s claim that he was induced into obtaining his letter of credit based upon representations by officers of High Plains that it would not be called. The evidence does not support a claim that the letter of credit was a mere formality. The Placement Memo and Equity Loan Assumption Agreement relied on so heavily by plaintiff in his fraud argument stated specifically that the lender looked to the letters of credit as the primary security for the Equity Loan. (FDIC Ex. A at 33; Pltf.’s Ex. 1 at 10). Bank officials asserted that they would not have made the loan without the letters of credit as security. Plaintiff himself testified that it would have been bad banking practice for a bank to make an unsecured loan of the type involved here and that the letters of credit would be necessary if Penn Square were to sell the loan to other banks as it did. (Warner depo. at 103; November 29 trans. at 12). So important were the letters of credit to the acquisition of the Equity Loan that it was completely restructured to conform to the time limitations of the shortest-term letters of credit. In terms of the letters of credit only, the Court finds that the justifiable reliance element of a fraud claim is missing. See Southwestern Bell Telephone Co. v. Brown, 519 P.2d 491, 495 (Okla.1974).

Plaintiff next contends that William Patterson’s Fifth Amendment refusal to testify is an admission of fraudulent conduct in Penn Square’s dealings with the High Plains limited partners. In the absence of direct evidence of fraud in this case, the Court is unable to manufacture fraud from the silence of a Penn Square loan officer whose actual involvement in the transactions is far from certain.

The alleged “understanding” between Penn Square and High Plains does not provide evidence of fraud, if anything, it is evidence that the parties intended in good faith from the beginning to provide financing as represented to the limited partners. The “understanding” was their informal attempt to keep that prospect alive.

Plaintiff would have us read a provision of the Secured Term Loan Agreement incorporating by reference the terms of the Equity Loan Assumption Agreement as contractually binding Penn Square to making the Equity Loan on the terms set out in the Equity Loan Assumption Agreement. (Pltf’s. Ex. 5 at 12). The short answer to this argument is that the provision cited is not evidence of fraud. The long answer is that Penn Square is not a party to any contract with plaintiff. The Secured Term Loan Agreement specifically states that “[t]he Bank has not participated in the preparation of the Offering Circular of the Company for the offering of Units in the Partnership, and is not responsible for any statements contained therein or the accuracy or completeness thereof.” (Section 8). The Placement Memo further states, “[i]t is not anticipated that Penn Square will be obligated to or will conduct any due diligence investigations with regard to the terms of this' private Placement Memorandum, ... or any other matters except the collateral value of particular letters of credit.” (P. 30). Although Swan was a director of Penn Square and the bank worked closely with High Plains on the loan, this is insufficient evidence to hold Penn Square liable for High Plain’s breach under any theory of contract law known to this Court. In a similar case involving a partnership formed by Swan, it was held that the partnership and Penn Square were not participating in a joint venture. In Re Longhorn Securities Litigation, 573 F.Supp. 255, 273 (W.D.Okla.1983).

The provision plaintiff relies on above, by its plain meaning, only obligates Penn Square to honor the terms of the Equity Loan Assumption Agreement should it ever try to enforce it against plaintiff. Since FDIC claims no rights under the Equity Loan Assumption Agreement, this passage has no bearing on this case.

Double collateralization of the rigs presents a separate set of problems. The evidence showed that Penn Square made a $5.5 million loan to High Plains Company on June 5, 1980, for the purpose of constructing two rigs. Those rigs were used as collateral for the loan. On October 29, 1980, those rigs were sold to High Plains. On December 1, 1981, Penn Square consolidated four loans it had made to High Plains into one $8.8 million loan secured by all four rigs and other equipment owned by the partnership. Continental Bank participated in this loan. It was understood by the parties that High Plains Company would use the proceeds of the second loan to pay off the first, but it did not. Again, plaintiff may very well have a contract claim against High Plains and an action for breach of fiduciary duty against Swan, but plaintiff presents no evidence from which to infer fraud on the part of Penn Square. In fact, plaintiff has provided so little evidence on this matter that the Court is unable to reconstruct the transaction.

The evidence shows that neither loan was paid off and that two rigs have both High Plains and High Plains Company listed as debtors, but that is all that has been proved. Defendant, for its part, has provided evidence that the double collateralization resulted from filing UCC statements under the names of both the partnership and general partner as a precautionary measure. (Cates depo. at 97-102). This is a plausible explanation. The only other evidence on double collateralization is an auditor’s tentative report in which he states that the documentation on the $8.8 million loan needs to be resolved. Plaintiff has not provided that resolution. Plaintiff has provided 1982 UCC statements but has given no indication as to what loans the statements are associated. Nor has either party produced the UCC statements or promissory notes for the individual loans that formed the basis for the $8.8 million consolidation. It is possible that the partners of High Plains Company have misused the $5.5 million dollars but plaintiff has not proved it. More importantly, plaintiff has again failed to provide evidence that there was a preconceived plan to defraud the High Plains limited partners or that Penn Square participated in such a plan.

C.

Plaintiff does assert a contract claim, but only in connection with his alleged position as surety for the Equity Loan. Plaintiff argues that by execution of the Equity Loan Assumption Agreement and the letter of credit, his role in the financing arrangement was that of a surety. Under general suretyship principles, plaintiff claims that the changes in the underlying obligation without his consent released him from his suretyship obligations.

Under Oklahoma law, there is no distinction between guarantors and sureties. Central Surety & Ins. Corp. v. Richardson, 183 Okl. 38, 80 P.2d 663 (1938). A guaranty is defined as “a promise to answer for the debt, default or miscarriage of another person.” Okla.Stat. Ann. tit. 15, § 321 (West 1981). A letter of credit is defined as “an engagement by a bank ... made at the request of a customer and of a kind within the scope of this Article (Section 5-102) that the issuer will honor drafts or other demands for payment upon compliance with the conditions specified in the credit.” Id. tit. 12A, § 5-103. The difference lies in the conditions for liability. Dubuque Packing Co. v. Fitzgibbon, 599 P.2d 440, 441 (Okla.Ct.App.1979). A guarantor is secondarily liable; his obligation is conditioned upon a default by the principal debtor. See Reed v. Richards & Conover Hardware Co., 188 Okl. 452, 110 P.2d 603 (1941); 38 Am.Jur.2d Guaranty § 3 (1968). An issuer of a letter of credit, on the other hand, is primarily liable. His is an independent obligation to honor a draft accompanied by documents complying with the terms of the letter without reference to their compliance to the underlying contract. Okla.Stat.Ann. tit. 12A, § 5-114(1) & Official Comment 1 (West 1981). To require more, would undermine the letter of credit’s basic purpose of providing a means of assuring payment cheaply by eliminating the need for the issuer to police the underlying transaction. Wichita Eagle & Beacon Publishing Co. v. Pacific Nat. Bank, 493 F.2d 1285, 1286 (9th Cir.1974).

A review of the documentation in this case confirms that plaintiff’s letter of credit is indeed a letter of credit and that plaintiff was not a guarantor. The letter of credit authorizes a draw on plaintiff’s account upon the presentation of a sight draft and a signed letter certifying the holder’s specific reasons entitling him to draw. There is no indication that payment was conditioned on the default of any principal. Thus it stands in stark contrast to the document in Dubuque Packing. There, an Oklahoma appellate court held a letter that used the word “guaranty” four times and looked to default on the part of a principal as a condition to payment was a guaranty. 599 P.2d 440 (Okla.Ct.App.1979). Here, we have a classic letter of credit unencumbered by any language or conditions of suretyship. The parties were thus correct in treating it as such.

More fundamentally, however, plaintiff was not a guarantor because he did not promise to answer for the debt of another person. The debt was his own. Under the financing scheme set out in the Placement Memo and elected by all of the limited partners, the Equity Loan was a loan obtained by High Plains for the limited partners to allow them to finance half of their partnership contribution. High Plains acted as their agent in obtaining the loan but it was at all times the limited partners’ loan. Plaintiff’s characterization as principal debtor is supported by the Equity Loan Assumption- Agreement whereby plaintiff “unconditionally assumes the obligations of the Partnership to pay all sums of principal, now or hereafter due with respect to the Equity Loan, provided, however, that the liability of the undersigned hereunder shall not in any event exceed his pro rata share of the Equity Loan.” It is therefore the holding of the Court that plaintiff was not a guarantor of the Equity Loan and that the letter of credit was properly paid.

D.

FDIC has asserted a counterclaim for plaintiff’s pro rata share of the Working Capital Loan, interest lost on the letter of credit from October 13, 1982 when FDIC demanded payment until September 13, 1983 when it was paid, and the fees and costs incurred in enforcing the Working Capital Assumption Agreement.

In addition to the Subscription Agreement, plaintiff executed a Working Capital Assumption Agreement whereby he personally and unconditionally assumed liability for his pro rata share of High Plains’s $693,000 working capital loan including interest and charges. The full amount is in default. Plaintiff does not dispute the validity of this contract. Instead, he justifies his withholding payment on an alleged right of set off against any recovery he might realize on his claims. (Reply to Counterclaim doc. no. 80). Since those claims have been rejected, plaintiff must now pay FDIC his $103,950 pro rata share of the working capital loan along with interest due pursuant to the Working Capital Assumption Agreement.

The Agreement also contains a provision whereby plaintiff agreed to reimburse Penn Square for attorneys’ fees and costs incurred in its enforcement. (FDIC Ex. A at 25). Such provisions are recognized as valid by Oklahoma courts. See e.g., Kemp v. Metz, 197 Okl. 25, 168 P.2d 107, syllabus (1946); Webster Drilling Co. v. Walker, 286 F.2d 114, 117 (10th Cir.1961); Security Nat. Bank v. Bonnett, 623 P.2d 1061, 1064 (Okla.Ct.App.1980). The determination of the reasonableness of those fees, however, is within the discretion of the Court. State ex rel. Burk v. City of Oklahoma City, 598 P.2d 659, 663 (Okla.1979). Counsel for FDIC is directed to present this Court within 30 days of the date of this filing, a sufficiently detailed account of his time expended in order that an award in accordance with the strictures of Northcross v. Board of Education of Memphis City Schools, 611 F.2d 624 (6th Cir.1979), may be made. Counsel’s attention is drawn to this Court’s General Order on Attorney Fees, Section V of the Pre-Trial Packet as revised June, 1984.

FDIC’s final claim is for pre-judgment interest from October 13, 1982 when it demanded payment of the letter of credit until September 13, 1983 when the money was actually received. Oklahoma law provides that “[t]he detriment caused by the breach of an obligation to pay money only is deemed to be the amount due by the terms of the obligation, with interest thereon.” Okla.Stat.Ann. tit. 23, § 22 (West 1981).

Any person who is entitled to recover damages certain, or capable of being made certain by calculation, and the right to recover which is vested in him upon a particular day, is entitled also to recover interest thereon from that day, except such time as the debtor is prevented by law, or by the act of the creditor from paying the debt.

Id. § 6. The Court finds these statutes applicable here. Plaintiff is therefore liable to FDIC for interest on $249,075 from October 13, 1982 to September 13, 1983 at 15%. Okla.Stat.Ann. tit. 12, § 727 (West 1983-84).

III. Conclusions of Law

(A) This Court has jurisdiction pursuant to 12 U.S.C. § 1819 (1982).

(B) Oklahoma law supplies the rule of decision.

(C) Plaintiff has failed to prove by a preponderance of the evidence that Penn Square defrauded him into investing in High Plains.

(D) Plaintiff was not a guarantor of the Equity Loan.

(E) The letter of credit was properly honored.

(F) Plaintiff is in breach of the Working Capital Assumption Agreement.

(G) In accordance with the foregoing, plaintiff’s claims are hereby DENIED. FDIC’s counterclaim is hereby GRANTED. It is awarded $103,950 on the Working Capital Assumption Agreement, attorneys’ fees and costs thereon, together with interest on $249,075 from October 13, 1982 to September 13, 1983 at 15%.

IT IS SO ORDERED.

      . A previous Motion for Preliminary Injunction by plaintiff was denied and such denial affirmed by the United States Court of Appeals for the Sixth Circuit, 715 F.2d 1121 (1983).

      . The first page of the Placement Memo states, "purchase of the units involves material risks and is suitable only for persons of substantial means who have no need for liquidity in this investment and can afford a substantial loss of their investment.” The memo then devotes several different sections to specific areas of risk.

      . Although the breach of contract question is not before the Court, there is much evidence to support an argument that there was no breach of contract here. The Placement Memo and Equity Loan Assumption Agreement speak only in anticipatory, not definitive language regarding the Equity Loan. Further, it could be said that plaintiff agreed to a modification of his contract when he accepted the benefits of the change in the terms of the Equity Loan, i.e., the less costly letter of credit, and release from making quarterly payments of his promissory note.

      . The following constitutes the entire letter of credit.
      We hereby authorize you to draw on The Central Trust Company, N.A., at sight for account of Marvin L. Warner up to an aggregate amount of Two Hundred Forty-Nine Thousand Seventy-Five and °°/ioo United States Dollars ($249,075.00).
      Drafts to be accompanied by: this letter and your signed statement certifying that you are entitled to draw under this letter specifying the specific reason(s) for the draw.
      This Letter of Credit expires on October 31, 1982. This Letter of Credit is automatically extended for a period of one year from the above referenced maturity date unless 30 days prior to such maturity date we notify you in writing that we choose not to extend said credit. In any event, this Letter of Credit will expire not later than October 31, 1984.
      This Letter of Credit is transferable and assignable in its entirety to a state or national bank upon 30 days prior written notice by Central Trust Co., N.A.
      This credit is subject to the "Uniform Customs and Practice for Documentary Credits” (1974 Revision) of the International Chamber of Commerce Publication No. 290.