author: KEENAN, District Judge:

text:
    Ron COMO, Arlene Bieler, Edith W. Forrester, Steve Friedland, Robert Friedlander, Dorothy Friedlander, Dominick Maita, Robert Margolies, Moria Company and Stan Zerner, Plaintiffs, v. COMMERCE OIL COMPANY, INC., Sam J. Lewis, Jr., William D. Goodwin, Miller Contract Drilling, Inc., Deloit Miller and Derwin R. Clary doing business as D.R. Clary Drilling and Production, Defendants.
    No. 84 Civ. 0506 (JFK).
    United States District Court, S.D. New York.
    March 26, 1985.

      James A. Moss, Peter C. Kirschenbaum, Herrick, Feinstein, New York City, for plaintiffs.
    William D. Goodwin, Crossville, Tenn., for Commerce defendants.
    Jeffrey R. Mann, Carol M. Roberts, Rubin Baum Levin Constant & Friedman, New York City, for Miller defendants.
   OPINION and ORDER

KEENAN, District Judge:

Plaintiffs allege that defendants engaged in fraudulent activities in connection with the sale of securities in oil drilling operations in Tennessee and Kentucky. Defendant Goodwin moves to dismiss plaintiffs’ claim under the Racketeer Influenced and Corrupt Organizations Act, 18 U.S.C. §§ 1961-1968 (1982) (“RICO”). He also moves to disqualify plaintiffs’ counsel and to dismiss the action, pursuant to Rule 12(b)(3) of the Federal Rules of Civil Procedure, for improper venue. Defendants De-loit Miller and Miller Contract Drilling, Inc. (collectively the “Miller defendants”) move to dismiss the complaint for lack of personal jurisdiction and on the ground of improper venue. For the reasons stated below, the Miller defendants’ motion to dismiss and Goodwin’s motion to dismiss the RICO claim are granted. Goodwin’s other motions are denied.

BACKGROUND

Plaintiff Ron Como, a New Jersey resident, is President of Ron Como & Associates, a New York corporation engaged in corporate public relations. The other individual plaintiffs are New York or New Jersey residents who invested in the oil exploration projects at issue in this case. Moria Company is a New York partnership that also invested in the projects.

Defendant Commerce Oil Company (“Commerce”) is a Utah corporation with its principal place of business in Nashville, Tennessee. Sam Lewis, Jr., (“Lewis”) is a Nashville resident who is chairman of the board of directors of Commerce. William D. Goodwin (“Goodwin”) is a Nashville resident who is president of Commerce. Miller Contract Drilling, Inc. (“Miller Drilling”) is a Tennessee corporation that was involved with the oil drilling operations at issue in this case. Defendant Deloit Miller (“Miller”) is a Tennessee resident and president of defendant Miller Drilling. Derwin R. Clary (“Clary Drilling”) is a Tennessee resident doing business as D.R. Clary Drilling and Production.

In February 1981, Como came into contact with Lewis and Goodwin who, as representatives of Commerce, sought financing from Como for Commerce’s oil exploration projects. (Amended Complaint II20-21). In July 1981, Como agreed to purchase 25% of Commerce’s assignable interest in the underlying oil and gas leases for several adjacent parcels in eastern Tennessee (“Ratliff Lease”). The agreement to buy the Ratliff parcels was negotiated at a meeting attended by Lewis, Como and William Drubel (“Drubel”), an associate of Como, in Como’s New York office. Como paid Commerce $113,000 pursuant to the Ratliff Lease. (Amended Complaint 11 21).

At this meeting, an agreement was also reached calling for Como to invest $27,500 in a new oil well known as the “Plateau Properties #A-Z well.” Como made this payment as well. (Amended Complaint # 22). At the July 1981 meeting in New York, the principals also discussed the financing of several other operations known as the “Investor Wells.” (Amended Complaint 1123).

In order to induce Como to enter the Ratliff Lease Agreement and to finance the Investor wells, Goodwin and Lewis allegedly made a series of materially false and misleading statements to Como and Drubel during the period from July 1981 to August 9, 1982. The statements involved the actual production of existing wells in the Ratliff Lease area and the anticipated production of the Investor wells. (Amended Complaint 1124). These misstatements allegedly were made at the July 1981 meeting in New York, and in letters sent from Nashville to New York and telephone calls between the same cities. (Amended Complaint ¶¶ 26, 30-31).

In November 1983, Commerce sued Como in Tennessee state court for breach of contract. On January 16, 1984, Como counterclaimed for fraud. One week later, Como and the other plaintiffs filed the instant action alleging claims virtually identical to those in his counterclaim in Tennessee. (Affidavit of Jeffrey Mann HIT 5-11).

Plaintiffs’ first claim alleges that defendants Commerce, Lewis and Goodwin made material misrepresentations in connection with plaintiffs’ investments in violation of 15 U.S.C. § 783(b), and 17 C.F.R. § 240.-10b-5 promulgated thereunder. Plaintiffs’ second claim, which is against the same defendants, alleges a violation of RICO. Plaintiffs’ third, fourth and fifth claims, also against Commerce, Lewis, and Goodwin, are allegations of fraud under state law. The sixth, seventh, and eighth claims allege breach of contract against Commerce, the Miller defendants and Clary Drilling, respectively. The ninth claim is made against all defendants for common law fraud.

DISCUSSION

1. RICO

Defendant Goodwin has moved to dismiss plaintiffs’ RICO claim for failure to state a claim upon which relief can be granted. In Sedima, S.P.R.L. v. Imrex Co., 741 F.2d 482 (2d Cir.1984), cert. granted, — U.S. -, 105 S.Ct. 901, 83 L.Ed.2d 917 (1985), and its two companion cases, Bankers Trust Co. v. Rhoades, 741 F.2d 511 (2d Cir.1984); Furman v. Cirrito, 741 F.2d 524 (2d Cir.1984), the Second Circuit ruled that a civil claim under RICO will not lie absent (1) an allegation of a racketeering injury, 741 F.2d at 496, and (2) predicate criminal convictions, id. at 503. The Second Circuit stated that defendants in “garden-variety” fraud cases are not within the reach of civil claims under RICO. Id.

The instant case alleges garden-variety fraud. There is no allegation that plaintiffs suffered a racketeering injury or that defendants have been convicted of the predicate criminal acts.

Accordingly, plaintiffs’ RICO claim against Commerce, Lewis and Goodwin is dismissed.

2. Personal Jurisdiction

The Miller defendants move to dismiss the claims against them for lack of personal jurisdiction. Plaintiffs assert that this Court has jurisdiction under New York Civil Practice Law & Rules § 301. Section 301 provides jurisdiction over foreign corporations that do business in New York. The New York Court of Appeals recently set forth the standard for exercising jurisdiction under § 301:

Under CPLR 301 “the authority of the New York courts [to exercise jurisdiction over a foreign corporation] is based solely on the fact that the defendant is “engaged in such a continuous and systematic course of ‘doing business’ here as to warrant a finding of its ‘presence’ in this jurisdiction”.... The test, though not “precise” ... is a “simple pragmatic one”: is the aggregate of the corporation’s activities in the State such that it may be said to be “present” in.the State “not occasionally or casually, but with a fair measure of permanence and continuity” ... and is the quality and nature of the corporation’s contacts with the state sufficient to make it reasonable and just according to “traditional notions of fair play and substantial justice” that it be required to defend the action here....

Laufer v. Ostrow, 55 N.Y6.2d 305, 449 N.Y. S.2d 456, 458, 434 N.E.2d 692, 694 (1982) (citations omitted). The Court of Appeals went on to state that “[solicitation of business alone will not justify a finding of corporate presence in New York with respect to a foreign manufacturer or purveyor of services.” Id. 449 N.Y.S.2d at 459, 434 N.E.2d at 695. However, where there are activities of substance beyond mere solicitation, there can be a finding of corporate presence. Id.; see, e.g., Bryant v. Finnish National Airlines, 15 N.Y.2d 426, 260 N.Y.S.2d 625, 627-28, 208 N.E.2d 439, 441-42 (1965) (doing business with solicitation, office, office staff and bank account in New York).

The facts of this case, even to the extent ambiguities have to be resolved in plaintiffs’ favor, Lovebright Diamond Co. v. Spragins, 574 F.Supp. 76, 79 (S.D.N.Y.1983), indicate that Miller Drilling is not doing business in New York. It is undisputed that Miller Drilling is not a resident of New York or doing business here in its own name. Moreover, Miller Drilling’s limited contacts with New York are totally unrelated to plaintiffs’ cause of action.

Plaintiffs, however, allege that Miller Drilling does business in New York through seven New York-based oil and gas limited partnerships. Pennessee Oil & Gas Ltd. (“Pennessee”), is the general partner of a partnership which does business in New York. The, Pennessee partnership uses Pawnee Development Company (“Pawnee”) to drill and operate its wells. (Affidavit of James A. Moss, Ex. A, at 49 (“Moss Aff.”)). Deloit Miller owns all the stock of Miller Drilling and 50% of the stock of Pawnee. (Affidavit of Debit Miller ¶ 12 (“Miller Aff.”); Miller Reply Aff. ¶ 7). Much of the work done by Pawnee for Pennessee is subcontracted to Milbr Drilling. (Moss Aff., Ex. A, at 52).

Miller Drilling also serves as the driller and operator, either directly or through Pawnee, for six oil and gas partnerships for which Republic Energy, Inc. is the general partner (“Republic partnerships”). Each of these partnerships are headquartered in New York, have bank accounts and conduct other business in New York. (Deposition of Ira Kent, President of Republic Energy, Inc. at 36-37, 40-41, 43-44, 49-51, 55-56, 59-60 (“Kent Dep.”)). Miller Drilling has obtained at least 1.4 million dollars in revenue between 1980 and 1984 through the Pennessee and Republic partnerships. (Moss Aff. 111117-18, Ex. M). These New York-based partnerships have solicited these funds from investors in and out of New York. (Kent Dep. at 68-69).

In addition, Deloit Miller, and other employees of Miller Drilling, have made a few visits to New York and been in telephone contact with the New York partnerships. (Déposition of Norman Nick, President of Pennessee, at 8-10, 12-16; Kent Dep. at 112-20, 26), and other New York associates (Miller Dep. at 40-41, 85-88, Deposition of David Wright, Miller Drilling’s Chief Financial Officer, at 19-26, 30-34, 37-38, 48-50).

Miller Drilling contends that it has not been involved with the management or direction of these partnerships. It has simply acted as the driller/operator of gas wells financed by the partnerships. These wells are located outside New York, principally in Tennessee. (Miller defendants’ reply brief at 5).

The fact that Miller Drilling has not itself solicited investors for its Tennessee drilling operations is not dispositive. Where a nonresident corporation, through its agents, does business in New York, those acts may be attributable to the non-domiciliary for jurisdictional purposes. Pneuma-Flo Systems, Inc. v. Universal Machinery, 454 F.Supp. 858, 862 (S.D.N.Y.1978); Frummer v. Hilton Hotels Int’l, Inc., 19 N.Y.2d 533, 281 N.Y.S.2d 41, 45, 227 N.E.2d 851, 855 (1967). Although the term “agent,” as used in the jurisdictional sense, is broader than the meaning given in the normal “principal-agent” context, Merkel Associates, Inc. v. Bellofram Corp., 437 F.Supp. 612, 617 n. 2 (S.D.N.Y.1977), plaintiff still must show that: (1) the nonresident requested the agent’s performance, (2) the agent’s instate activity benefited the nonresident, Eliah v. Ucatan Corp., 433 F.Supp. 309, 313 (W.D.N.Y.1977), and (3) the nonresident exercised some control over the agent, Louis Marx & Co. v. Fuji Seiko Co., 453 F.Supp. 385, 390 (S.D.N.Y.1978) (Weinfeld, J.).

The Court can infer that Miller Drilling requested, or at least consented to, the solicitation of investors by the New York-based limited partnerships. Moreover, there is little doubt that Miller Drilling benefited from the activities of the New York-based partnerships. The Court is not convinced, however, that Miller Drilling exercised sufficient control over these partnerships. See Delagi v. Volkswagenwerk, 29 N.Y.2d 426, 328 N.Y.S.2d 653, 657, 278 N.E.2d 895, 899 (1972).

Neither Miller Drilling nor Pawnee is the general partner in any of the New York operations. These operations do not exist exclusively, or even primarily, to raise funds for projects involving Miller Drilling. In fact, the Pennessee connection has not even been sufficiently established. It is Pawnee, not Miller Drilling, that does work for the Pennessee partnership. Pawnee is owned, in part, by Deloit Miller, not by Miller Drilling. The fact that two companies share a common co-owner and do work together does not automatically allow the Court to attribute their acts to one another. See Delagi, 328 N.Y.S.2d at 657, 278 N.E.2d at 899.

Even taking all plaintiffs’ assertions of interrelatedness of Miller Drilling and the New York partnerships as true, Miller Drilling receives only between 3.0 and 6.6 percent of its revenues from New York sources (Moss Aff. ¶ 18, Miller Aff. ¶ 15). We doubt that this percentage of revenues, together with the few visits to New York by Miller Drilling’s officers, constitutes the measure of permanence and continuity necessary to assert jurisdiction over Miller Drilling under § 301. Cf. Liquid Carriers Corp. v. American Marine Corp., 375 F.2d 951, 953 (2d Cir.1967) (occasional New York visits to solicit business and negotiate contract not doing business); Stark Carpet Corp. v. M-Geough Robinson, Inc., 481 F.Supp. 499, 505 (S.D.N.Y.1980) (4 visits to and 2% of revenues from New York not doing business).

Plaintiffs have the burden of proving that this Court has jurisdiction over Miller Drilling. Beacon Enterprises, 715 F.2d at 762. Plaintiffs have failed to meet this burden with regard to Miller Drilling’s responsibility for the acts of the New York-based limited partnerships. Even if plaintiffs had shown that Miller Drilling was responsible for the acts of the partnerships, plaintiffs would still have failed to demonstrate the requisite continuity and permanence of Miller Drilling’s business contacts with New York to allow the assertion of jurisdiction under § 301. To subject Miller Drilling to § 301 jurisdiction in this case would be tantamount to finding that any nonresident that does even an insubstantial amount of business with a New York entity is subject to jurisdiction in New York even if the claim did not arise out of the nonresident’s New York contacts. Such a finding, we think, would be unauthorized by § 301 and run afoul of the due process clause. We decline to so hold.

Plaintiffs have also failed to establish the existence of jurisdiction over Deloit Miller, who is being sued individually. In Laufer, the Court of Appeals ruled:

Although a corporation can act only through an employee or agent, the employee or agent being a live rather than a fictional being can act on behalf of himself or his employer or principal. He does not subject himself, individually, to the CPLR 301 jurisdiction of our courts, however, unless he is doing business in our State individually.

449 N.Y.S.2d at 460, 434 N.E.2d at 696. Plaintiffs have failed to even allege, nor is there any evidence, that Deloit Miller conducted business in New York for himself, as distinct from Miller Drilling. In addition, Miller has sworn that his limited New York activities were performed on behalf of Miller Drilling. (Miller Reply Aff. ¶ 3). Thus, there is no jurisdiction over Deloit Miller individually.

For the reasons stated above, the Miller defendants motion to dismiss the claims against them for lack of personal jurisdiction is granted.

The Miller defendants motion for costs is denied.

3. Venue

Defendant Goodwin, on behalf of himself, Lewis and Commerce, moves to dismiss the claims against them for improper venue. Title 28 U.S.C. § 1391(b) provides that this action, which claims violations of federal securities law and state law, “may be brought only in the judicial district where all defendants reside, or in which the claim arose, except as otherwise provided by law.” The critical language of this section is “except as otherwise provided by law.” See Securities and Exchange Commission v. Briggs, 234 F.Supp. 618, 623 (N.D.Ohio 1964) (even when only one claim of a multi-claim complaint alleges a securities violation, general venue provisions of § 1391 do not apply). Section 27 of the Securities Exchange Act of 1934 (“Act”), 15 U.S.C. § 78aa (1982), provides venue for claims brought under the Act in the district in which “any act or transaction constituting the violation occurred.”

The act or transaction committed within the district need not constitute the core of the violation, Leema Enterprises, Inc. v. Willi, 575 F.Supp. 1533, 1537 (S.D.N.Y.1983), but should be an important step in the fraudulent scheme, International Controls Corp. v. Vesco, 490 F.2d 1334, 1337 (2d Cir.), cert. denied, 417 U.S. 932, 94 S.Ct. 2644, 41 L.Ed.2d 236 (1974), or at least more than an “immaterial part of the alleged violations.” S-G Securities, Inc. v. Fuqua Investment Co., 466 F.Supp. 1114, 1121 (D.Mass.1979) (quoting Sohns v. Dahl, 392 F.Supp. 1208, 1215 (W.D.Va.1975)). The Second Circuit has stated that “any use of instrumentalities of the mails or other interstate facilities made within the forum district constituting an important step in ... [the] consummation [of the fraudulent scheme] is sufficient” for venue in the Southern District of New York. Mariash v. Morrill, 496 F.2d 1138, 1144-45 (2d Cir.1974); International Controls, 490 F.2d at 1347 (quoting Hooper v. Mountain States Securities Corp., 282 F.2d 195, 204-05 (5th Cir.1960), cert. denied, 365 U.S. 814, 81 S.Ct. 695, 5 L.Ed.2d 693 (1961)); see, e.g., International Controls, 490 F.2d at 1347 (defendant’s transfer agent merely mailed dividends from New York City and venue was proper); S-G Securities, 466 F.Supp. at 1121 (press releases sent into district sufficient); Stern v. Gobeloff, 332 F.Supp. 909, 911 (D.Md.1971) (telephoning into district sufficient); Zorn v. Anderson, 263 F.Supp. 745, 748 (S.D.N.Y.1966) (mailing material into district sufficient).

In the instant case, venue is surely proper under the broad venue provisions of the securities laws. Lewis came to New York and met with Como in this district, at which time he allegedly made misrepresentations of material fact. (Amended Complaint ¶¶ 21-24). In addition, Lewis also sent numerous letters and made several telephone calls to New York that contained misrepresentations or omissions of material fact. (Amended Complaint ¶¶ 26-31). When two individuals cooperate in an alleged securities swindle, and one of them commits a material transgression of the Act in a particular district, venue exists for all coconspirators in that district: Hill v. Turner, 492 F.Supp. 61, 63-64 (M.D.Pa.1980); Keene Corp. v. Weber, 394 F.Supp. 787, 790 (S.D.N.Y.1975). Thus, venue as to Commerce, Lewis and Goodwin is proper in this district.

Accordingly, defendants’ motion to dismiss for improper venue is denied.

4. Disqualification of Counsel

Defendant Goodwin, on behalf of himself, Lewis and Commerce, moves this Court for an order disqualifying plaintiffs’ counsel, James A. Moss. Goodwin’s motion is grounded on the assertion that the interests of Como are adverse to those of all the other plaintiffs. Goodwin contends that Como made misrepresentations and omissions of material fact to the other plaintiffs and thus is liable to them under federal securities laws. (Goodwin Aff. ¶¶ 10-15).

The Code of Professional Responsibility (“Code”) discourages, and in some cases bars, attorneys from representing multiple parties when the interests of those parties could prove to be adverse. (Ethical Considerations 5-14, 15, 16 and 19, Canons 5 and 9, Disciplinary Rule 5-105). There are, however, many situations where representation of multiple clients is completely proper. (Disciplinary Rule 5-105(C)).

The granting of a motion to disqualify counsel for alleged violations of the Code is generally disfavored. Such a motion is often interposed for tactical reasons and has the immediate deleterious effect of separating the client from his chosen counsel. Board of Education of the City of New York v. Nyquist, 590 F.2d 1241, 1246 (2d Cir.1979). In addition, such motions inevitably cause delay. Id. Cognizant of these problems, the Second Circuit has set forth the following test:

Weighing the needs of efficient judicial administration against the potential advantage of immediate preventive measures, we believe that unless an attorney’s conduct tends to “taint the underlying trial” ... by disturbing the balance of the presentations in [undermining the court’s confidence in the vigor of the attorney’s representation of his client or where the attorney is at least in a position to use privileged information concerning the other side obtained through prior representation] ... courts should be quite hesitant to disqualify an attorney.

Id. (citations omitted).

Defendant Goodwin argues that Mr. Moss’ vigorous representation of Como will be detrimental to the interests of the other plaintiffs. These plaintiffs, however, have been apprised of this potential conflict of interest and have chosen to continue to have Mr. Moss as the joint representative of themselves and Como. {See Affidavits of Bieler, Forrester, Friedland, Robert and Dorothy Friedlander, Maita, Margolies, Zerner, and Peek). When clients, with knowledge of a possible conflict of interest, reaffirm their desire for joint representation, the Court should be reluctant to disqualify their chosen counsel. See Tadier v. American Photocopy Equipment Co., 531 F.Supp. 35, 37 (S.D.N.Y.1981); Altschul v. Paine Webber, Inc., 488 F.Supp. 858, 861 (S.D.N.Y.1980).

The basis of this disqualification motion is, in fact, simply an argument that Como, rather than the defendants, are responsible for injuries to the investor group of plaintiffs. Defendants’ argument is a defense, not a viable ground for disqualification of counsel. The cases cited in support of the motion are inapposite. They relate to possible conflict of interest in multiple representation of criminal defendants, People v. Lloyd, 51 N.Y.2d 107, 432 N.Y.S.2d 685, 412 N.E.2d 371 (1980); People v. DeSuze, 77 A.D.2d 571, 429 N.Y.S.2d 464 (2d Dep’t 1980); People v. Doe, 98 Misc.2d 805, 414 N.Y.S.2d 617 (Cty.Ct. Nassau Cty.1979), and conflict of interest in civil cases where plaintiff’s counsel had previously represented the defendant or its agent, Sapienza v. New York News, Inc., 481 F.Supp. 676 (S.D.N.Y.1979); Narel Apparel Ltd. v. American Utex Int’l, 92 A.D.2d 913, 460 N.Y.S.2d 125 (2d Dep’t 1983). In the criminal cases, the motions to disqualify were all denied either because no real conflict existed or, as in this case, the clients reaffirmed their desire for joint representation despite a possible conflict. In addition, the dangers associated with a conflict of interest are more acute in criminal cases than civil cases. Regarding the civil cases, defendant has failed to even allege that Mr. Moss has privileged information about the defendants based on his prior representation of them.

Accordingly, defendants’ motion for disqualification of Mr. Moss, as plaintiffs’ joint counsel, is denied.

CONCLUSION

Plaintiffs’ RICO claim is dismissed. The motion of defendants Miller Drilling and Deloit Miller to dismiss for lack of personal jurisdiction is granted. The Miller defendants’ motion for costs is denied.

' The motions of defendants Goodwin, Lewis and Commerce to dismiss for improper venue and to disqualify plaintiffs’ counsel is denied.

SO ORDERED.

      . The Court is aware that the Supreme Court has agreed to review the Second Circuit’s determination in Sedima. — U.S. -, 105 S.Ct. 901, 83 L.Ed.2d 917 (1985). Nonetheless, unless and until Sedima is reversed, this Court is bound by it. Should it be reversed while this action is still pending, the Court would consider a motion by plaintiff to amend his complaint to add the RICO claims that we are dismissing today.

      . A recent Second Circuit case has suggested that the so-called "solicitation-plus” rule embodied in § 301 should not be applied inflexibly. The court said:
      It is often loosely said, as though it were a rule enunciated in the text of the statute, that under the New York state law jurisdiction over a foreign corporation may not be founded on mere solicitation of business within New York. We do not agree that in New York by statute or decision the rule is as inflexible as that statement indicates. In the days of the giants of the law the approach was surely not so absolute.

        Katz Communications, Inc. v. Evening News Association, 705 F.2d 20, 23 (2d Cir.1983). But see Beacon Enterprises, Inc. v. Menzies, 715 F.2d 757, 763 (2d Cir.1983) (sustaining solicitation-plus test).

      . The Miller defendants have been dismissed for lack of personal jurisdiction and Clary Drilling has not objected to venue. Under Rule 12(h) of the FRCP, if a party fails to raise a venue objection promptly, he waives it. See 15 Wright, Miller & Cooper, Federal Prac. & Proc.: Civil §§ 3826, 3829 (1976).


source: Caselaw Access Project

author: BALLANTINE, District Judge.

license: Public Domain

text:
    Marguerite McCARTHY, Plaintiff, v. KFC CORPORATION, d/b/a Kentucky Fried Chicken, et al., Defendants.
    No. C 84-0888-L(B).
    United States District Court, W.D. Kentucky, Louisville Division.
    March 26, 1985.

      Maurice J. McCarthy, Chicago, Ill., Franklin S. Yudkin, Louisville, Ky., for plaintiff.
    David J. Parsons, Chicago, Ill., Stephen B. Early, KFC Corp., Louisville, Ky., for defendants.
   MEMORANDUM

BALLANTINE, District Judge.

This action was transferred to this Court from the United States District Court for the Northern District of Illinois.

Plaintiff’s complaint, which is in 7 counts, is before the Court on the motion of defendants to dismiss Counts III through VII and on the motion of defendant, R.J. Reynolds Tobacco Company, to dismiss, F.R.Civ.P. 12(b)(6).

1. COUNT III

Count III asserts a claim for the tort of outrage. The substance of the allegations is that defendants required plaintiff to work long hours, leading to the development of mononucleosis and that defendants mistreated plaintiff because she was female, that defendants placed plaintiff on probation and finally discharged her, that defendants prepared false memoranda concerning plaintiff, that defendants harassed plaintiff throughout unemployment compensation hearings, that defendants “undermined plaintiff in her work”, and that defendants refused to transfer plaintiff.

Whether these allegations are sufficient to withstand a motion for summary judgment is a matter of conjecture. The Court is, however, faced with a Rule 12(b)(6) motion and in light of the fact that there is no discovery in the record as yet and in light of the holding of the Supreme Court of Kentucky in Craft v. Rice, Ky., 671 S.W.2d 247 (1984), the Court concludes that the allegations are sufficient to withstand a Rule 12(b)(6) motion, and the motion to dismiss Count III will be denied. In denying the motion, the Court does not intend to imply that plaintiffs claim for damages arising out of her alleged mononucleosis is cognizable in this action. A claim for illness arising from employment is within the exclusive jurisdiction of the Kentucky Workers Compensation Board. See KRS Chapter 342.

2.COUNT IV

Count IV alleges intentional interference with an employment relationship. This allegation is a paradigm of inconsistency when read in conjunction with the allegations of the complaint.

Count IV alleges that defendants Wink-field and Connor-interfered with the plaintiffs employment by defendant KFC. While there is ho specific allegation that Winkfield and Connor were agents of KFC, any conclusion that they were not would, for all practical purposes, leave plaintiff dead in the water as to her Title VII claims. For purposes of this portion of the memorandum, the Court will assume that Wink-field and Connor were agents of KFC.

The elements of tortious interference with a contract are set forth in Restatement of Torts 2d, Section 766, and cited with approval in Carmichael-Lynch-Nolan Etc. v. Bennett Etc., Ky.App., 561 S.W.2d 99 (1977):

“We feel confident ... that the Restatement of Torts [Section] 766 presents the correct guidelines. [Section] 766 provides,
[e]xcept as stated in Section 698, one who, without a privilege to do so, induces or otherwise causes a third person not to
(a) perform a contract with another, or
(b) enter into or continue a business relation with.another is liable to the other for the harm caused thereby.” 561 S.W.2d at 102.

Since it is hornbook law that a corporation can act only through its agents, alleged acts of Winkfield and Connor were the acts of the corporation and there is simply no third party involved in the controversy. This fatal defect dictates that Count IV be dismissed.

3.COUNT V

Count V alleges abuse of process. The substance of this allegation seems to be that KFC resisted plaintiff’s claim for unemployment insurance benefits. This count of plaintiff’s complaint borders on the frivolous.

As noted in Prosser and Keaton on Torts, 5th Ed. (West, 1983): “... it is clear that the judicial process must in some manner be involved.” Id. at page 898 (emphasis added). In Bonnie Braes Farms, Inc. v. Robinson, Ky.App., 598 S.W.2d 765 (1980), the court articulated the elements of the tort of abuse of process:

“Abuse of process may be defined as the irregular or wrongful employment of a judicial proceeding. (Citation omitted.) The essential elements of the tort include (1) an ulterior purpose and (2) a wilful act in the use of the process not proper in the regular conduct of the proceeding. * * * * Judicial process may broadly be defined as all acts of the court, from the beginning of the proceeding to its end; a more narrow definition is the means of compelling a defendant to appear in court.” 598 S.W.2d at 766.

The Bonnie Braes court relied on Stoll Oil Refining Co. v. Pierce, Ky., 337 S.W.2d 263 (1960), in which the court wrote: “... abuse of process ... is the technical designation of the illegal or wrongful employment of a judicial proceeding although it is generally the malicious use of the process.” 337 S.W.2d at 266.

This Court is not prepared to treat hearings before an unemployment compensation hearing officer, who may or may not be a lawyer, as “judicial proceedings” and Count V will be dismissed.

4.COUNT VI

This count, although titled “Wrongful Discharge”, appears to be a veritable sal-magundi of claims.

There is a claim for wrongful discharge which is not alleged to have, resulted from plaintiffs assertion or exercise of a constitutional or statutory right, nor is there any allegation of a written contract of employment. Plaintiff is therefore without the protection of Firestone Textile Co. v. Meadows, Ky., 666 S.W.2d 730 (1983), and she is no more than an employee at will. In that circumstance, she is subject to the “terminable at-will” doctrine set forth in Scroghan v. Kraftco Corp., Ky. App., 551 S.W.2d 811 (1977), cited with approval in Meadows.

Plaintiff next offers the astounding claim that her discharge violated her constitutional rights under the Fourteenth Amendment. The Fourteenth Amendment is directed at state action and the use of “Kentucky” in defendant’s name doesn’t raise defendant’s actions to the level of state involvement.

Plaintiff also offers the gratuitous observation that the Kentucky Unemployment Commission found that plaintiff was not terminated for just cause. If this allegation is an attempt to have the Court give preclusive effect to that finding, the attempt is fruitless. Even if the Court were to elevate the decision of the Commission to the level of an arbitrator’s award, it cannot be given preclusive effect. McDonald v. City of West Branch, Michigan, — U.S. -, 104 S.Ct. 1799, 80 L.Ed.2d 302 (1984).

The next few paragraphs in Count VI apparently attempt to assert a claim of defamation arising out of the preparation of personnel memoranda by plaintiff’s superiors. If plaintiff is attempting to assert a claim for defamation, the allegations fail woefully short of alleging any factual predicate for such an action. Whether the allegations, even if sufficient to withstand a Rule 12(b)(6) motion, are subject to the defense of privilege is a question we do not decide.

In sum, Count VI fails to state a claim and it will be dismissed.

5. COUNT VII

This Count alleges fraud and deceit and was apparently prepared without any consideration of F.R.Civ.P. 9(b).

In response to defendant’s motion to dismiss this count, plaintiff suggests that defendant should have moved for a more definite statement. This suggestion is so absurd as to merit no further comment except to note that plaintiff’s memoranda setting forth what she argues is the particularity required by Rule 9 does not satisfy the rule.

Count VII will be dismissed.

6. MOTION OF DEFENDANT, R.J. REYNOLDS COMPANY, TO DISMISS

Plaintiff’s allegations against R.J. Reynolds are, in their entirety, as follows: “R.J. Reynolds Tobacco Company owns KFC Corporation and Kentucky Fried Chicken, a Delaware corporation.” (Complaint, page 2). Plaintiff’s response cites no authority except a broad statement from ALR 3d which is totally inapplicable to this situation.

In short, being the owner of KFC is not actionable absent some allegation that even arguably would satisfy the broad statement from ALR 3d.

The complaint against R.J. Reynolds Tobacco Company will be dismissed.

CONCLUSION

The Court has reviewed the complaint and the memoranda in opposition to defendant’s motion. The Court is appalled at the cavalier disregard of the local rules by local counsel and of the principles of brief writing.

The court is cited to cases from foreign jurisdictions and from law review articles. See pages 2 (1982 and 1983 Annual Reports of R.J. Reynolds Tobacco Company); 3 (Harvard Law Review); 4 (Pennsylvania and Arkansas state court cases); 5 (Harvard Law Review, American Bar Association Journal, Massachusetts Law Review); and 6 (a District of Columbia case reported in the Atlantic Reporter). The Court would call counsel’s attention to Local Rule 8(e).

The Court is also treated to the digest of as yet unreported cases by the Kentucky courts. Whether this is in violation of the spirit of Ky.R.Civ.P. 76.28(4)(c) may be a matter of conjecture. What is distressing to the Court is that in at least two instances counsel admits that he doesn’t know whether or not the opinions are final.

Next, in what has to be the most blatant example of the disregard of the Rules of Civil Procedure, the rules of this Court, and common sense, plaintiff files a copy of a newspaper article in support of a memorandum filed in total disregard of Local Rule 10(a).

Finally, the Court has been treated to a copy of an opinion of Jefferson Circuit Judge Schroering upholding the award of the Kentucky Unemployment Commission. We have addressed this decision earlier in this memorandum and make no further comment.

The Court has said enough and concludes this memorandum with an admonition to counsel to be prepared to answer a motion for sanctions under F.R.Civ.P. 11 if the Court is assaulted with any more such documents as presently clutter this record. Defendant’s pending motion for sanctions under Rule 11 will be denied.


author: HUYETT, District Judge.

text:
    William H. and Linda L. JOHNSON v. UNITED STATES of America, Carl J. Butler, Revenue Agent, Internal Revenue Service.
    Civ. A. No. 84-6236.
    United States District Court, E.D. Pennsylvania.
    March 27, 1985.

      William and Linda Johnson, pro se. Rachel Shao, Asst. U.S. Atty., Philadelphia, Pa., for the I.R.S.
   MEMORANDUM AND ORDER

HUYETT, District Judge.

Presently before me is a petition to quash a summons issued by the Internal Revenue Service to the Vice President of the Ephrata National Bank requesting information concerning the financial affairs of petitioners William H. and Linda L. Johnson. The IRS is currently investigating the federal income tax liability of the Johnsons for the years 1981 through 1983. The United States filed a motion for summary denial of the petition and a motion for summary enforcement of the summons, and has requested an award of attorney’s fees and costs. For the reasons which follow, the petition to quash will be denied and the government’s request for summary enforcement and for an award of attorney's fees and costs will be granted.

The relevant facts in this case can be summarized as follows. On November 29, 1984, Carl J. Butler, a special agent with the IRS, issued a “third party recordkeeper” summons to the Ephrata National Bank to obtain information which the bank possessed relating to the Johnsons’ financial transactions for the years in question. Such “third party recordkeeper” summons are authorized by 26 U.S.C. § 7609(a)(3).

In order to establish a prima facie case for enforcement, the government must show that (1) the investigation is being conducted for a legitimate purpose; (2) the information sought is relevant to that purpose; (3) the information is not already in the possession of the IRS, and (4) the administrative steps required by the IRS have been followed. See United States v. Powell, 379 U.S. 48, 57-58, 85 S.Ct. 248, 254-255, 13 L.Ed.2d 112 (1964); Godwin v. United States, 564 F.Supp. 1209 (D.Del.1938). The government has filed a sworn declaration of Special Agent Butler that establishes all of the requisite elements of a prima facie case for enforcement of the summons. The burden therefore shifts to the petitioners to disprove the existence of a valid purpose or to show that enforcement of the summons would be an abuse of the court’s process or would otherwise be improper. United States v. Powell, 379 U.S. at 58, 85 S.Ct. at 255; Byasse v. United States, No. 84-2415 slip op. (E.D.Pa. Sept. 26, 1984). Specifically, the party opposing an IRS summons must come forward with specific facts, under oath, from his or her own resources, demonstrating that a triable issue exists on a legally sufficient defense, in order to justify an evidentiary hearing. Universal Life Church, Hidden Valley Congregation v. United States, 573 F.Supp. 181, 183 (W.D.Va.1983); Godwin v. United States, 564 F.Supp. at 1215.

The petitioners have failed to adduce any basis for an evidentiary hearing or discovery. They raise in their petition a virtual “laundry list” of conclusory assertions as to why the summons should be quashed. Every contention raised by the petitioners has been decisively rejected by the courts. See Uhrig v. United States, 592 F.Supp. 349 (D.Md.1984); Byasse, supra; Smith v. United States, 54 A.F.T.R.2d 5182 (M.D.Pa.1984). The petition here is virtually identical to the ones filed in Uhrig, Smith, and Byasse, copies of which are attached to the government’s brief. Each argument raised by the petitioner in the case at bar has been clearly and concisely dealt with by the courts in these cases. There is no reason for this court to repeat this discussion. The petition must be dismissed because it is completely lacking in merit.

The government has asked for the imposition of sanctions. It asserts that the petition submitted by the petitioners in this case is a patently frivolous form petition brought solely for the purpose of delay in contravention of Rule 11 of the Federal Rules of Civil Procedure. Alternatively, if this position is not accepted, the government has requested that sanctions be imposed if the petitioner continues to prosecute this action on frivolous grounds.

I agree with the government that the imposition of sanctions is warranted in this case. Under Rule 11 of the Federal Rules of Civil Procedure, the petitioners’ signing of the petition constituted a certification that: “to the best of his [their] knowledge, information, and belief formed after reasonable inquiry it is well grounded in fact and is warranted by existing law or a good faith argument for the extension, modification, or reversal of existing law, and that it is not interposed for any improper purpose, such as to harass or to cause unnecessary delay or needless increase in the cost of litigation ... [Emphasis added.]”

As the Advisory Committee Notes state, the standard is the same for unrepresented parties, but a determination as to what is reasonable must take into account any special circumstances of the pro se litigant.

The petitioners here have filed a form petition which is virtually identical to those submitted in the eases cited above, raising issues which have all been conclusively dealt with by the courts. The filing of this identical petition cannot be attributed to mere coincidence, and the petitioners could not possibly have believed, after reasonable inquiry, that the petition’s allegations were “warranted by existing law or a good faith argument for the extension, modification, or reversal of existing law.” While I recognize that the petitioners should be held to a less stringent standard because of their pro se status, I find that they fail to meet their burden of proof because petitioners must have been aware of the existing caselaw in order to obtain copies of the petition which they used. Even if they were not aware, a reasonable inquiry directed to the source from which the identical form petition was obtained would have readily uncovered the status of such petitions in the courts. Under these circumstances, I can only conclude that the petition was filed solely for the purpose of delay. An award of attorney’s fees and costs is an appropriate sanction.

Accordingly, the government’s request for attorney’s fees and costs will be granted. The government shall submit within two weeks appropriate affidavits so that a determination may be made as to the appropriate attorney’s fees and costs.

      . Petitioners assert that the government lacks subject matter jurisdiction over them; that the IRS failed to follow the administrative steps required by the Code; that the petitioners are immune from the operation of the Internal Revenue Code; that the government is guilty of bad faith; and that the government has unclean hands.

      . In addition to the three cases cited above, the government has also attached copies of similar petitions filed in Boch v. United States, No. 83-1353, slip op. (M.D.Pa. Sept. 20, 1983), and Newbauer v. United States, No. 83-3677, slip op. (E.D.Pa. Nov. 17, 1983). In all of these cases, the petitions are almost identical, differing only in the number of contentions asserted.

      .Likewise, there is absolutely no basis for the granting of an evidentiary hearing so that petitioners may be able to meet their burden of proof. Under United States v. Garden State National Bank, 607 F.2d 61, 71 (3d Cir.1979), an evidentiary hearing may be held where a petitioner asserts, and pleads with some particularity, claims such as "bad faith.” Allegations that are merely conclusory are insufficient to warrant an evidentiary hearing. Petitioners present no specific allegations concerning bad faith in their petition. Therefore, an evidentiary hearing is not warranted. See Godwin v. United States, 564 F.Supp. 1209 (D.Del.1983).


author: JARVIS, District Judge.

text:
    E. Denton JONES, Plaintiff, v. FIRST EQUITY CORPORATION OF FLORIDA; Paine, Webber, Jackson & Curtis, Incorporated; and Richard B. Rayl, Jr., Defendants.
    No. Civ. 3-84-822.
    United States District Court, E.D. Tennessee, N.D.
    March 28, 1985.

      Stephen P. Parsons, Stophel, Caldwell & Heggie, P.C., Knoxville, Tenn., for plaintiff.
    Rebecca O. Gillen, L. -Anderson Galyon, III, Knoxville, Tenn., for defendants.
   MEMORANDUM

JARVIS, District Judge.

This is a cause of action for alleged violation of federal and state securities laws and common law misrepresentation, fraud and deceit. The case is before the Court on motion of defendant, Paine, Webber, Jackson & Curtis, Inc., for summary judgment.

The complaint alleges that defendant Richard B. Rayl, Jr. [“Rayl”], as an agent of both defendant First Equity Corporation of Florida [“First Equity”] and defendant Paine, Webber, Jackson & Curtis, Inc. [“Paine Webber”], through representation and fraud, persuaded plaintiff E. Denton Jones [“Jones”] to place an order with First Equity for 10,000- shares of stock of International Property Exchange, Inc. [“IPX”]. The complaint further alleges that defendant Rayl told plaintiff that First Equity and Paine Webber were making a market in IPX stock when in fact there was no active market for such stock; and that when Jones attempted to sell his IPX stock, he was informed by defendant Rayl that there was no market for the stock, and therefore, his stock could not be sold.

The complaint alleges the following bases of liability: Counts I and II — common law fraud and misrepresentation; Count III — misstatement and omission of material facts in the sale of securities in violation of section 12(2) of the Securities Act of 1933 (“1933 Act”), 15 U.S.C. § 77/; Count IV— use of a scheme to defraud and misstatements and omissions in sale of securities in violation of section 17(a) of the 1933 Act, 15 U.S.C. § 77q; Count V — “controlling person liability” under section 15 of the 1933 Act, 15 U.S.C. § 77o and section 20(a) of the Securities Exchange Act of 1934 (“1934 Act”), 15 U.S.C. § 78t(a); Count VI — use of fraud, misrepresentation and omission of material facts in sale of securities in violation of section 10 of the 1934 Act, 15 U.S.C. § 78j(b); and Rule 10b-5, 17 CFR § -240.-10b-5; Count VII — misrepresentation and fraud in the sale of securities in violation of Tennessee Code Annotated § 48-16-101 -124 (1984); Count VIII — misrepresentation and fraud in violation of Florida Code Annotated § 517.011 et seq.; and Count IX — vicarious liability and conspiracy.

As grounds for summary judgment on Counts I, II, III, IV, VI, VII, VIII and IX, defendant Paine Webber says that it cannot be held vicariously liable for the alleged illegal acts of defendant Rayl because Rayl was an employee of First Equity and no principal and agent relationship existed between Paine Webber and Rayl. Further, Paine Webber says that pursuant to a “Clearance Agreement”, First Equity and Paine Webber had the relationship of either independent contractor or principal and agent and if the latter, Paine Webber was the agent of First Equity. In support of its motion, Paine Webber has submitted an affidavit of the Secretary and Treasurer of First Equity which states that Rayl was an employee of First Equity and not an employee and agent of Paine Webber. [Doc. 10, Attachment]. The affidavit further states that First Equity acted as an introducing firm for its customer, plaintiff Jones, and Paine Webber served as a carrying firm, whose responsibilities involved no direct contact with plaintiff except for confirmation of sales and purchases. Paine Webber also has submitted a copy of the Clearance Agreement.

In response, plaintiff says that the Clearance Agreement indicates that First Equity was acting as the agent of Paine Webber and further that account statements furnished plaintiff contained representations indicating that First Equity was working through Paine Webber in servicing plaintiffs account. Finally, plaintiff says First Equity and its employees were allowed to make statements relating to Paine Webber and its involvement in the making of a market for IPX stock, upon which statements plaintiff relied in purchasing IPX stock. Thus, plaintiff says numerous facts exist from which apparent authority, if not express authority, could be found.

“Agency is the fiduciary relation which results from the manifestations of consent by one person to another that the other shall act on his behalf and subject to his control, and consent by the other so to act. The one for whom action is to be taken is the principal. The one who is to act is the agent.” RESTATEMENT (2d) OF AGENCY, § 1 (1958). “In order to determine whether an agency relationship has been established, the relationship of the parties is scrutinized, and the facts will establish agency whether the parties so intended or understood.” Tosco Corp. v. FDIC, 723 F.2d 1242, 1249 (6th Cir.1983) quoting V.L. Nicholson Co. v. Transcon Investment and Financial Ltd., 595 S.W.2d 474, 483 (Tenn.1980). Pursuant to the doctrine of respondeat superior, the rule in Tennessee is that a principal is bound by the acts of an agent within his apparent or ostensible authority. 723 F.2d at 1248 [citations omitted]. Ostensible or apparent authority to act as an agent exists when the principal affirmatively, intentionally or by lack of ordinary care causes or allows a third party to act on an apparent agency. Id. Two facts must be established: (1) that the principal held the agent out to the public as possessing authority; and (2) that the person dealing with the agent knew of the facts and in good faith believed the agent had authority. Id. The liability of the principal is not determined merely by what was the apparent authority of the agent, but also by what authority the third party was justified in believing the principal had conferred. Id. Although apparent authority normally results from a prior relation of principal and agent, such a prior relationship is not required. RESTATEMENT (2d) OF AGENCY § 8, Comment (a) (1958). Finally, a company has a duty to prevent the use of its prestige by agents to defraud the public. Holloway v. Howerdd, 536 F.2d 690, 696 (6th Cir.1976).

On the record in this case, the Court cannot say as a matter of law that First Equity and Rayl were not agents of Paine Webber. Paine Webber admits a relationship existed between it and First Equity, but contends that it was the agent and not the principal. However, on its face the Clearance Agreement appears to give Paine Webber control over First Equity with regard to servicing customer accounts. {See Doc. 10, Exh. A, ¶¶ 1-3, 5]. Further, in light of the allegations that Paine Webber allowed First Equity and its employees to make statements relating to Paine Webber and its involvement in the making of a market in IPX stock, questions of fact exist whether Rayl and First Equity acted with apparent authority as agent of Paine Webber.

As grounds for summary judgment on Counts I, II, III, Y, VI, VII and VIII, Paine Webber says that “controlling personal liability” requires allegations of violations of the 1933 and 1934 Acts and direct participation in the acts constituting the securities violations. Paine Webber says Counts I and II must fail because they allege no violation of either Act. Paine Webber says Count III must fail because Paine Webber had only limited direct contact in the securities purchase transaction with plaintiff. Paine Webber says Count VI must fail because the affidavit and Clearance Agreement indicate that the elements necessary to make out a cause of action under section 10 and Rule 10b-5 of the 1934 Act cannot be made out against Paine Webber directly.

Plaintiff says that a controlling person can be held responsible for securities violations by the controlled person despite the fact that the controlling person has no direct participation in the actions constituting securities violations. Further, plaintiff says that if Paine Webber is found to be a controlling person in its relationship with Rayl and First Equity, then Paine Webber can be held jointly and severally liable with Rayl and First Equity for the violations despite the fact that only Rayl and First Equity may have committed the actual violations. Plaintiff says that whether Paine Webber is a controlling person is a question of fact. Plaintiff does not allege that controlling person liability exists with respect to Counts I, II, VII, or VIII.

Section 15 of the 1933 Act provides: Every person who ... controls any person liable under sections 77k or 771 of this title, shall also be liable jointly and severally with ... the ... controlled person to any person to whom such controlled person is liable, unless the controlling person had no knowledge of or reasonable ground to believe in the existence of the facts by reason of which the controlled person is alleged to exist.

15 U.S.C. § 77o.

Section 20(a) of the 1934 Act provides: Every person who, directly or indirectly, controls any person liable under any provision of this chapter or rule or regulation thereunder shall also be liable jointly and severally with ... the ... controlled person to any person to whom such controlled person is liable, unless the controlling person acted in good faith and did not directly or indirectly induce the act or acts constituting the violation or cause of action.

15 U.S.C. § 78t(a).

Thus, if Paine Webber is a controlling person under 15 U.S.C. § 77o, then Paine Webber is jointly and severally liable for any violation by defendants of 15 U.S.C. § I'll, as alleged in Count III. If Paine Webber is a controlling person under 15 U.S.C. § 78t(a), then Paine Webber is jointly and severally liable for any violation by defendants of 15 U.S.C. § 78j(b) and Rule 10b-5, as alleged in Count VI.

“[I]n order to establish control within the meaning of § 20(a), it is not necessary to establish a strict agency relationship. Rather, it is only necessary to show some indirect means of discipline or influence to find that a person is a controlling person within the meaning of the Section.” McGraw v. Matthaei, 388 F.Supp. 84, 93 (E.D.Mich.1972); see also, Kaufman v. Merrill Lynch, Pierce, Fenner & Smith, 464 F.Supp. 528 (D.C.Md.1978). The test for control is the same under the controlling person provision in section 15 of the 1933 Act. Sun First Nat’l Bank of Orlando v. Miller, 77 F.R.D. 430 (S.D.N.Y.1978). Generally, whether a person is a controlling person within the meaning of these sections is a question of fact. Id.

As previously stated, the Clearance Agreement on its face appears to give Paine Webber control over First Equity with regard to certain aspects of servicing customer accounts. Whether in fact Paine Webber exercised control over either Rayl or First Equity sufficient to invoke liability under the controlling person provisions is a question of fact.

Finally, as grounds for summary judgment on Count IV, Paine Webber says that no private right of action exists for alleged violations of § 17(a) of the 1933 Act, 15 U.S.C. § 77q. Plaintiff says that there is a conflict in this Circuit among the district courts whether a private right of action exists under § 17(a). However, plaintiff says that the last indication given by the Sixth Circuit is that a private right of action may well exist under § 17(a).

Section 17(a) grants no explicit private right of action. In the past, the courts have found an implied right of action in many sections of the federal securities acts where no explicit private right of action is provided. However, recently courts have become more reluctant to imply private rights of action because of the more restrictive approach to implying private rights of action now followed by the Supreme Court. See David L. Ratner, Securities Regulation in a Nutshell, (2d ed. 1982) at 259-60. The Sixth Circuit Court of Appeals has not addressed the issue whether an implied private right of action exists under § 17(a). However, in several decisions the Sixth Circuit assumed without deciding that a private right of action exists. See Herm v. Stafford, 663 F.2d 669, 677-79, n. 12 (6th Cir.1981); Gutter v. Merrill Lynch, Pierce, Fenner & Smith, 644 F.2d 1194, 1196-97 (6th Cir.1981), cert. den. 455 U.S. 909, 102 S.Ct. 1256, 71 L.Ed.2d 447 (1982); Simmons v. Wolfson, 428 F.2d 455 (6th Cir.1970), cert. den. 400 U.S. 999, 91 S.Ct. 459, 27 L.Ed.2d 450 (1971). In each of these decisions, the issue whether a private right of action exists under § 17(a) was not raised before the Court and was not required to be decided by the Court because the action was dismissed on other grounds. Id. Therefore, these decisions are not authority for the position that an implied right of action exists. Most recently, the Sixth Circuit has expressed substantial reservations with regard to the existence of an implied private right of action under another section of the federal securities acts. See Rauchman v. Mobil Corp., 739 F.2d 205 (6th Cir.1984).

Whether an implied private right of action exists must be determined by the four-pronged test set forth by the Supreme Court in Cort v. Ash, 422 U.S. 66, 95 S.Ct. 2080, 45 L.Ed.2d 26 (1975). The four factors which must be considered are: (1) is the plaintiff a member of the class for whose benefit the statute was enacted; (2) is there a legislative intent to indicate creation of the remedy; (3) is implying the remedy consistent with the legislative scheme; and (4) is the cause of action one traditionally relegated to state law. 422 U.S. at 78, 95 S.Ct. at 2087. Legislative intent is considered to be the most important factor. Touche Ross & Co. v. Redington, 442 U.S. 560, 575-76, 99 S.Ct. 2479, 2488-89, 61 L.Ed.2d 82 (1979). If legislative intent is lacking, the other three factors need not be considered: Id. In discerning legislative intent, three factors are considered: (1) the language of the statute; (2) its legislative history; and (3) its place in the legislative scheme. See Transamerica Mortgage Advisors v. Lewis, 444 U.S. 11, 100 S.Ct. 242, 62 L.Ed.2d 146 (1979). In a well-reasoned opinion by Judge Reed of the United States District Court for the Eastern District of Kentucky, the Court applied the four-factor test and determined that no implied private right of action exists under section 17(a). Ingram Industries, Inc. v. Nowicki, 502 F.Supp. 1060 (E.D.KY.1980). The Court noted that the legislative history of the 1933 Act indicates that section 17(a) was intended to afford a basis for injunctive relief and for criminal liability and was not intended to provide a civil remedy. Further, the Court noted that sections 11 and 12 of the 1933 Act provide various civil remedies for violations of the Act and therefore no need exists to provide further civil remedies by implying a private right of action under section 17(a). Finally, the Court noted that although the United States Supreme Court has implied a private right of action in the nearly identical provision of section 10 of the 1934 Act, the Supreme Court subsequently has stated that it only did so because the lower courts had done so for 25 years. As indicated, recently the Supreme Court has adopted a restrictive approach to implying private rights of action.

Two circuit courts of appeals have held that no private right of action exists under section 17(a) of the 1933 Act, while four circuit courts of appeals have held that such an action exists. See Landry v. All American Assur. Co., 688 F.2d 381, 384 nn. 11 & 12 (5th Cir.1982). This Court is of the opinion that the decision of those circuits which have found an implied private right of action are not persuasive precedent because either they were decided prior to Cort v. Ash and its progeny restricting implied private rights of action, or because they failed to apply the Cort four-factor test. See Landry, 688 F.2d at 384-85; Hudson v. Capital Management International, Inc., 565 F.Supp. 615, 626 (N.D.Cal.1983). On the other hand, those circuits which have held that no implied private right of action exists have supplied a more insightful analysis to support their decisions. See Landry, 688 F.2d at 384-91; Greater Iowa Corp. v. McLendon, 378 F.2d 783, 788-91 (8th Cir.1967). In particular, the Fifth Circuit Court of Appeals has held that consideration of the conservative trend toward implying private rights of action and application of the Cort test lead to the conclusion that no private right of action exists under section 17(a). 688 F.2d at 391.

In view of the Sixth Circuit’s recent reservations with respect to implying a private right of action under the securities laws, the conservative trend toward implying private rights of action in general and the decisions of those courts which have applied the Cort test to determine whether a private right of action exists under section 17(a), this Court holds that no private right of action exists under section 17(a).

For the foregoing reasons, Paine Web-ber’s motion for summary judgment is DENIED as to Counts I, II, III, V, VI, VII, VIII, and IX, and is GRANTED with respect to Count IV.

Order Accordingly.

       Although both the Seventh and Ninth Circuits previously have held that an implied private right of action exists under section 17(a), it appears that those holdings now may be subject to question. See Roskos v. Shearson/American Exp., Inc., 589 F.Supp. 627, 629-31 (E.D.Wis.1984); Hudson v. Capital Management International, Inc., 565 F.Supp. 615, 626 (N.D.Cal.1983).


author: JOHN T. NIXON, District Judge.

text:
    James Thomas JEFFERSON v. Michael DUTTON, Warden, et al.
    No. 82-3315.
    United States District Court, M.D. Tennessee, Nashville Division.
    March 30, 1985.

      Charles Ray, Nashville, Tenn., for petitioner.

      John F. Southworth, Jr., Kimberly Dean, Asst. State Atty. Gen. for State of Tenn., Nashville, Tenn., for respondent.
   MEMORANDUM

JOHN T. NIXON, District Judge.

Petitioner James Thomas Jefferson brings this action seeking a writ of habeas corpus pursuant to 28 U.S.C. § 2254. This cause came on for hearing on September 28, 1984. For the reasons discussed below, the petition for a writ of habeas corpus will be GRANTED.

The petitioner is a black citizen who was indicted for first degree murder by the Davidson County Grand Jury during its May 1968 term. The indictment was filed on July 23, 1968, to which petitioner filed a plea of abatement alleging systematic exclusion of blacks from the Davidson County grand juries and petit juries. Petitioner’s first trial, which began on October 28, 1969, resulted in a hung jury. At his second trial, which began on January 18, 1971, Mr. Jefferson again alleged that blacks had been systematically excluded from the grand and petit juries. After the trial court overruled his objection, he was convicted and sentenced to ninety-nine (99) years in the state penitentiary.

Mr. Jefferson appealed to the Tennessee Court of Criminal Appeals, which remanded the case to the trial court to conduct an evidentiary hearing on the issue of systematic exclusion of blacks from petit and grand juries. After granting certiorari, the Tennessee Supreme Court affirmed the appeals court decision to remand. Tennessee v. Jefferson, 529 S.W.2d 674 (Tenn.1975). Upon remand, the trial court limited petitioner’s proof to the composition of the grand jury that actually indicted him and the petit jury that actually convicted him. The trial court concluded .that there had been no systematic exclusion of blacks from either petitioner’s grand jury in 1968 or his petit jury in 1971. In 1977, the Court of Criminal Appeals affirmed this decision, and in October 1977, the Tennessee Supreme Court denied permission to appeal. Jefferson v. Tennessee, 559 S.W.2d 649 (Tenn.Crim.App.1977). Petitioner brought this action pro se in April 1982. Counsel was appointed on June 14, 1982.

Petitioner contends that his 1968 indictment must be quashed and his subsequent conviction in 1971 must be vacated because there was systematic exclusion of blacks from grand and petit juries in Davidson County during and preceding his indictment and conviction. He maintains that this alleged exclusion violates the Equal Protection Clause of the Fourteenth Amendment to the United States Constitution as well as the Sixth Amendment requirement that petit juries represent a cross section of the community.

Because petitioner brings this action under 28 U.S.C. § 2254, the Court must first determine if petitioner has satisfied the habeas corpus requirements; that is, requirements as to the timeliness of the raising of the issue at trial, the exhaustion of state remedies required in Section 2254(b), (c), and the mandate of Section 2254(d). The Court finds that petitioner timely raised the issue of systematic exclusion of blacks on the grand juries, Francis v. Henderson, 425 U.S. 536, 538, 540-42, 96 S.Ct. 1708, 1709, 1710-1712 (1976) and, as both parties agree, has fully exhausted that claim in state court.

As to the Section .2254(d) prerequisites, this Court finds that petitioner has demonstrated that he did not receive a full, fair, and adequate hearing in state court as required in Section 2254(d)(6) and that he was otherwise denied due process of law in state court proceedings as required in Section 2254(d)(7). The basis for this finding is that the state courts limited petitioner’s proof to the composition of the actual 1968 grand jury that indicted him. In other words petitioner was not permitted to put on proof of the composition of prior grand juries. In Castaneda v. Partida, 430 U.S. 482, 97 S.Ct. 1272, 51 L.Ed.2d 498 (1977), the Supreme Court held that petitioners were required to prove a “degree of under-representation ... by comparing the proportion of the group in the total population to the proportion called to serve ... over a significant period of time.” Id. at 494, 97 S.Ct. at 1280. The Court referred to this method of proof as the rule of exclusion. Id. When the state courts refused to permit petitioner the opportunity to present evidence as to the composition of prior grand juries, they denied the full, fair, and adequate hearing contemplated by Section 2254(d)(6) and due process of law as required by Section 2254(d)(7).

Having determined that the petition for habeas corpus was properly brought under 28 U.S.C. § 2254, the Court must ascertain whether an equal protection violation occurred in the context of the grand jury selection process. In Castaneda, the Court held that the initial burden is on the petitioner to make out a prima facie case of racial discrimination in the selection of grand jury members by showing that the process employed resulted in a substantial underrepresentation of his race. Id. at 494, 97 S.Ct. at 1280. To establish substantial underrepresentation, petitioner must show that his race is a distinct class singled out for different treatment under the procedure, as written or applied, that the rule of exclusion, that is, the degree of underre-presentation, has been satisfied, and that the actual procedure employed by the state was susceptible to abuse. Id.

The parties agree that petitioner has made out a prima facie case of racial discrimination in the selection of grand juries. As to the first element in the three-prong test in Castaneda, blacks are clearly a suspect category for purposes of equal protection analysis. See Hernandez v. Texas, 347 U.S. 475, 478, 74 S.Ct. 667, 670, 98 L.Ed. 866 (1954); Second, petitioner has satisfied the rule of exclusion. Evidence was presented that in the decade prior to petitioner’s indictment (1958-1968), there were thirty-three (33) grand juries. Each grand jury was composed of thirteen members who were selected by criminal court judges in Davidson County. Of those thirty-three, seventeen grand juries had only one black member. Seven grand juries had no blacks, and the number of blacks on eight grand juries was unknown. There were two blacks on petitioner’s grand jury. The black population of Davidson County was approximately nineteen percent during the period in question. All twenty-five of the grand juries, for which data is available, had a percentage of blacks that was significantly less than' the percentage of the population of blacks in Davidson County. Thus, the Court concludes that petitioner has satisfied the rule of exclusion.

Petitioner has also satisfied the third element of the Castaneda test by showing that the appointing judges under the key-man system were aware of the race of the grand jurors that they appointed. Such a procedure is clearly susceptible to abuse. See Rose v. Mitchell, 443 U.S. 545, 566, 99 S.Ct. 2993, 3005, 61 L.Ed.2d 739 (1979) (Tennessee’s key-man system susceptible to abuse). See also Castaneda, 430 U.S. at 497, 97 S.Ct. at 1281-82 (Texas’ key-man system susceptible to abuse). Because petitioner has satisfied all three elements of the Castaneda test, the Court finds that he has made out a prima facie ease in that blacks were substantially underrepresented in the grand jury selection process during the decade from 1958 to 1968.

Once a habeas corpus petitioner establishes a prima facie case of a violation of his equal protection rights, the burden shifts to the respondent to rebut that case. Castaneda, 430 U.S. at 495, 97 S.Ct. at 1280. At this stage, the state must show “that permissible racially neutral selection criteria and procedures have produced the monochromatic result.” Alexander v. Louisiana, 405 U.S. 625, 631-32, 92 S.Ct. 1221, 1225-26, 31 L.Ed.2d 536 (1972).

In order to determine if the state has successfully rebutted petitioner’s prima facie case, a court is permitted to consider disclaimers by appointing authorities that race did not play a role in the appointment process, but such testimony standing alone may be insufficient to rebut the presumption of discrimination. Alexander, 405 U.S. at 632, 92 S.Ct. at 1226. Under these circumstances, the burden is on the trial court to use the greatest judicial scrutiny in evaluating the testimony. United States v. Perez-Hernandez, 672 F.2d 1380, 1387 (11th Cir.1982) (per curiam'). Furthermore, the trial court should look beyond the conscious attitude of the appointing authority to determine if the “result bespeaks discrimination.” Alexander, 405 U.S. at 632, 92 S.Ct. at 1226 (quoting Hernandez v. Texas, 347 U.S. at 482, 74 S.Ct. at 672-73).

In the case at bar, three grand juries were selected by the criminal court judges for Davidson County each year during the period from 1958 to 1968 using the key-man system. In 1971, three years after petitioner’s indictment, the County changed to a system whereby both grand jurors and petit jurors were selected from computer-generated lists. During the decade in question, most of the jurors were appointed by the Honorable Raymond H. Leathers, who began serving in Division I of the Davidson County Criminal Court in 1958, and the Honorable John L. Draper, who began serving in Division II in October 1960. These two judges appointed twelve jurors plus one foreman to each grand jury. Documented evidence as to the racial composition of the grand juries is available for all but five of the grand juries and all twenty-six foremen. All twenty-six of the foremen were white, and only fourteen of the 252 jurors were black. Petitioner introduced testimonial evidence as to five additional grand juries and seven additional foremen. Of the total of thirty-three grand jury foremen, all were white. Of the twenty-six grand juries with a total of 312 non-foreman positions, no more than twenty (6.45%) were black.

The testimonies of Judge Draper and Judge Leathers deny any racial bias in the selection process. The evidence indicates that they depended on first-hand knowledge and referrals from friends and civic groups as the basis for recruiting grand jurors. Both judges used objective guidelines to select jurors; the juror characteristics sought included citizenship activities, maturity, work experience, standing in the community, and general qualities of good citizenship. Of primary concern to the Court, however, is not the criteria used to select actual grand jurors, but the pool from which those jurors were chosen. It is the judgment of the Court that the effect of the process by which the pool of potential jurors was formed was excessively weighted toward the white community and served to exclude potential black grand jurors. This conclusion is buttressed by the fact that all but one of the twenty-six juries had zero or one blacks and by the fact that not one of the thirty-three foremen selected was black. “Statistics are not, of course, the whole answer, but nothing is as emphatic as zero_” United States v. Hinds County School Board, 417 F.2d 852, 858 (5th Cir.1969), cert. denied, 396 U.S. 1032, 90 S.Ct. 612, 24 L.Ed.2d 531 (1970). It is the judgment of the Court that the state has failed to rebut the prima facie case of discrimination. See Castaneda, 430 U.S. at 494-95, 97 S.Ct. at 1280.

The state, however, seeks to invoke Rule 9 of the Rules Governing Section 2254 Cases in United States District Courts and argues that petitioner should be denied his habeas corpus relief because he has brought a “delayed petition.” Rule 9(a) states as follows:

(a) Delayed petitions. A petition may be dismissed if it appears that the state of which the respondent is an officer has been prejudiced in its ability to respond to the petition by delay in its filing unless the petitioner shows that it is based on grounds of which he could not have had knowledge by the exercise of reasonable diligence before the circumstances prejudicial to the state occurred.

Rules Governing § 2254 Cases in the United States District Courts, Rule 9(a), 28 U.S.C. foil. § 2254. Rule 9(a) does not specify the length of delay that is necessary to invoke the rule but the Advisory Committee Note accompanying Rule 9(a) states that if petitioner waits longer than five years after the judgment of conviction, the delay is presumed prejudicial to the state. Rule 9(a) is not designed to be a statute of limitations after the expiration of which a petitioner would be barred from seeking habeas corpus relief. Moore v. Smith, 694 F.2d 115, 117 (6th Cir.1982), cert. denied, 460 U.S. 1044, 103 S.Ct. 1442, 75 L.Ed.2d 798 (1983). Rule 9(a) has been treated in this circuit as a codification of the doctrine of laches as applied to habeas corpus petitions. Id. The Sixth Circuit has held that the district court must apply a two-pronged test. Davis v. Adult Parole Authority, 610 F.2d 410, 414 (6th Cir.1979). First, there must be apparent prejudice to the state, and second, the petitioner must be afforded the opportunity either to rebut the appearance of prejudice to the state or to show that the prejudice was not the result of the delay. Id. Furthermore, the state may not prevail unless the delay by petitioner was inexcusable. Id. at 414-15. The Davis court also warned that because of the rule’s potentially devastating impact, the trial court must give careful consideration and liberal construction to its invocation. Id. at 413. “[T]he Court must use its discretion in weighing the equities involved [in invoking Rule 9(a) ].” Cotton v. Mabry, 674 F.2d 701, 704 (8th Cir.1982) (cited with approval in Moore, 694 F.2d at 119).

In the instant case petitioner has brought his petition eleven years after his conviction but less than five years after fully exhausting his claim in state court. Although petitioner’s delay exceeded the five year limit discussed in the Advisory Committee Note to Rule 9, this delay must be considered in light of the fact that he had actively pursued his relief on this issue in the state courts until 1977. Inasmuch as petitioner was actively pursuing his state court remedies pursuant to the systematic exclusion claim from 1971 to October 1977, the Court must consider whether the failure to file this claim in federal court until April 1982 dictates dismissal via Rule 9(a). Pursuant to the warning of the Sixth Circuit in Davis that Rule 9(a) should be liberally construed, 610 F.2d at 413, the five years should not begin running so as to invoke the presumption of prejudice until the petitioner is shown to have unreasonably delayed his relief in state courts or until his attempts for relief in state courts have been exhausted. This liberal construction is even more appropriate when, as in this ease, the prisoner must proceed to evaluate his claims after exhaustion without benefit of counsel. In the Court’s opinion less than five years after exhausting a claim in state court constitutes excusable delay under the circumstances of this case. It is the judgment of the Court that because the requisite five years had not passed after the petitioner had exhausted his state remedies on this claim, there is no presumption of prejudice to the state in this ease.

Inasmuch as there is no presumption of prejudice, the state must prove prejudice in order to invoke Rule 9(a). Davis, 610 F.2d at 414 n. 12 (“[i]f the petition is filed within five years after the judgment of conviction, the state has the burden of proving prejudice to its ability to respond to petitioner’s claim”). The only evidence presented to the Court as to prejudice is the following stipulation:

1. If Thomas Shriver were called as a witness in this case, he would testify as follows:
(a) From the time of the indictment of James Thomas Jefferson until the present, Thomas Shriver has been the District Attorney General for Davidson County, Tennessee. He participated in both trials of the petitioner.
(b) General Shriver has checked the Criminal Court Clerk’s office and discovered that all of the physical evidence from this prosecution has, at some time in the past, been destroyed.
(c) Given the complexity of evidence in this case, the unavailability of the physical evidence in this case, the number of witnesses, and the length of time since the prosecution, it would be at best improbable and probably impossible for the State to remarshall its evidence and retry the petitioner.

Affidavit of Thomas Shriver, at 12. It is the opinion of the Court that this stipulation fails to demonstrate prejudice to the state as a result of the delay. The stipulation concerning General Shriver’s testimony does not indicate when the physical evidence was destroyed, and General Shriver’s highly speculative observation about the availability and memory of witnesses does not specify when those witnesses might have become unavailable to testify for the state. Failure of the respondent to demonstrate that the petitioner’s delay results in prejudice to the state dictates the conclusion that no prejudice has been proved for purposes of Rule 9(a). See Davis, 610 F.2d at 416 (“although the state may indeed be prejudice [sic] by the absence of the transcript, it would appear that the excusability or inexcusability of petitioner’s delay does not bear on that prejudice”). See also McDonnell v. Estelle, 666 F.2d 246, 254 (5th Cir.1982) (evidence submitted did not show prejudice so as to invoke Rule 9(a)). It is the judgment of the Court that the state has not proved prejudice in this case.

An ORDER will be entered contemporaneously with this Memorandum.

ORDER

For the reasons discussed in the accompanying Memorandum, the petition for a writ of habeas corpus is GRANTED. The State of Tennessee is ORDERED to re-indict the petitioner within ninety (90) days or release him from custody.

      . The first jury was composed of seven (7) whites and five (5) blacks.

      . The second jury was composed of ten (10) whites and two (2) blacks.

      . For the reasons discussed below, the Court does not deem it necessary to examine the constitutionality of petitioner's petit jury.

      . The respondent maintains that the petitioner’s "claim" as to racial discrimination in the selection process of the grand jury foreman was not exhausted. Therefore, the respondent contends that the petition contains both exhausted and unexhausted claims and must be dismissed pursuant to Rose v. Lundy, 455 U.S. 509, 102 S.Ct. 1198, 71 L.Ed.2d 379 (1982). It is the Court’s opinion that petitioner is alleging a single claim of discrimination in the selection process of the grand jury, including the selection of the foreman as the thirteenth member of the grand jury. Although petitioner may have brought a separate Section 2254 claim for discrimination in selecting the foreman only, see Rose v. Mitchell, 443 U.S. 545, 99 S.Ct. 2993, 61 L.Ed.2d 739 (1979), he chose to state his claim as to the entire process.

      . In fact, it is the Court’s opinion that without evidence of other grand juries, it would be virtually impossible to prove systematic exclusion.

      . For a description of Tennessee's key-man system, see Mitchell, 443 U.S. 545, 548 n. 2, 99 S.Ct. 2993, 2996 n. 2, 61 L.Ed.2d 739 (1979).

        .Perez-Hernandez involved a due process challenge to the federal grand jury foreman selection process under the Fifth Amendment. Although the court in Perez-Hernandez held that criminal defendants could challenge racial discrimination in the selection of federal foreman, Id. at 1385-86, the Supreme Court has recently overruled that position. See Hobby v. United States, — U.S. -, 104 S.Ct. 3093, 3099, 82 L.Ed.2d 260 (1984) (a federal grand jury foreman does not possess the same authority as Tennessee's foreman; therefore, racial makeup of federal grand jury foremen was not susceptible to Fifth Amendment due process attack).

      . The numbers do not refer to replacement jurors.

      . The Court admitted the deposition testimony of each judge concerning grand jury foreman selection in Briggs v. Thomas, No. 81-3859 (M.D.Tenn. filed April 19, 1983). Although
        Briggs involved only a challenge to grand jury foremen, both parties agree that basically the same criteria were important to the judges in the selection of other grand jurors.