author: DAVID V. O’BRIEN, District Judge.

text:
    Keithley EDWARDS and Edith Edwards, Plaintiffs, v. BORN, INC., et al, Defendants.
    Civ. No. 1982/283.
    District Court, Virgin Islands, D. St. Croix.
    May 13, 1985.

      Mark L. Milligan, Darryl Donohue, Christiansted, St. Croix, V.I., for plaintiffs.
    R. Eric Moore, Christiansted, St. Croix, V.I., for defendant Born, Inc.
    Britain H. Bryant, Christiansted, St. Croix, V.I., for defendant St. Croix Petrochemical, Inc.
    James L. Hymes, III, St. Thomas, V.I., for defendant Fluor Engineers & Constructors, Inc.
   MEMORANDUM OPINION

DAVID V. O’BRIEN, District Judge.

On behalf of their respective clients, the attorneys in this personal injury case reached a settlement during a pre-trial conference on December 12, 1984. The plaintiffs’ attorney accepted an offer made jointly by the defendants’ counsel of $150,000 in full settlement of all plaintiffs’ claims. Each attorney stated that he had the authority to act on behalf of his client.

Shortly thereafter, plaintiffs repudiated the settlement and asserted that their attorney had no authority to enter into it. All three defendants moved to enforce the settlement. The plaintiffs’ attorney moved to withdraw due to irreconcilable differences; the motion was granted. On February, 27, 1985, the motion to enforce the settlement was heard. Plaintiffs’ new legal representative, listed above, attended and evidence was taken on the issue of the express authority or apparent authority of plaintiffs’ original attorney to settle the case.

The issue now before the Court is whether the original attorney possessed the express authority to settle his clients’ case for $150,000. If he did not, we must decide whether the attorney had apparent authority to commit his clients to such a settlement and if so, whether it is sufficient to bind the plaintiffs.

I. FACTS

Keithley Edwards was employed at Hess Virgin Islands Corporation on September 24, 1982 when he was injured while working on a boiler supplied by Born, Inc., installed by Fluor Engineers & Constructors, Inc., and owned by St. Croix Petrochemical Corporation. He filed this action against all three companies, and later his wife was added as party plaintiff with a loss of consortium claim. Both were represented by the same attorney.

Full discovery took place among the parties. Mr. Edwards’ essential claim of injuries concerned his back, a partial loss of the sense of taste and complete loss of the sense of smell. Since he did not lose a great deal of time from work, the issue of lost wages past, or future earning capacity, was not a major consideration in the monetary calculation of his claim.

A trial date was set for the period commencing January 8, 1985, and several weeks prior to that time, the Court scheduled an informal pre-trial conference among the attorneys to inquire into the possibility of settlement. This was in addition to the formal pre-trial conference conducted by the magistrate.

The Court followed its standard procedure in the settlement conference. The attorneys met together with the Court to discuss the claims and defenses. The plaintiffs themselves were not present. The Court met separately with plaintiffs’ counsel, and then with defendants’ counsel. The purpose was to seek a narrowing of the differences to a point where a settlement offer could be made which would be mutually acceptable.

In the instant situation, the narrowing of positions resulted in an offer by defendants’ counsel to plaintiffs’ counsel within the range of what the latter had informed the Court was necessary to settle all of plaintiffs’ claims. After the offer was made and accepted in chambers, a court reporter was called in and the offer and acceptance, was repeated. The transcript was made a part of this record.

One of the defendants’ counsel, speaking for all three of them, when asked by the Court whether he had an offer of settlement, responded:

“The offer is $150,000 in full settlement of all claims.”

To which the Court inquired:

“And that is all claims of all plaintiffs? Plaintiff will pay his own compensation claim out of the proceeds; is that correct?

The attorney responded:

“That is correct.”

All defendants’ counsel placed on the record their authority to make this combined offer. The Court then turned to plaintiffs’ counsel who stated:

“I accept that offer. I am authorized to accept it on behalf of the plaintiffs.”

Defense counsel then ordered settlement drafts totaling $150,000 which were delivered to plaintiffs’ attorney. At that point, the plaintiffs rejected the checks, claiming that they had not given their attorney authority to settle their claims for $150,000. The attorney moved to withdraw and plaintiffs retained their present counsel.

At the hearing, plaintiffs’ original attorney testified under oath that plaintiffs told him they would rely on his good judgment and experience as to the amount of the settlement. No figures were discussed. The plaintiffs filed affidavits indicating that at no time, orally or in writing, did they authorize the attorney to settle their claims and that the question of a settlement demand was never discussed. Both plaintiffs indicated that they had no idea a settlement conference was to take place. Mr. Edwards asserted that he was in Antigua at the time it was scheduled. The plaintiffs further swore that the first they learned of any settlement was after the conference when they were notified by the attorney.

II. DISCUSSION

A. Public Policy Behind Settlements

The Third Circuit Court of Appeals has consistently held that “[a]n agreement to settle a law suit is binding upon the parties, whether or not made in the presence of the court, and even in the absence of a writing.” Green v. John H. Lewis & Co., 436 F.2d 389, 390 (3d Cir.1970). Accord Good v. Pa.R.R.Co., 384 F.2d 989 (3d Cir.1967); Kelly v. Greer, 365 F.2d 669 (3d Cir.1966); Main Line Theatres, Inc. v. Paramount Film Distribution Corp., 298 F.2d 801 (3d Cir.1962). Other courts have ruled that voluntary settlements are highly favored and, when reached validly, cannot be repudiated. See, e.g. Aro Corp. v. Allied Witan Co., 531 F.2d 1368 (6th Cir.1976); D.H. Overmyer Co. v. Loflin, 440 F.2d 1213 (5th Cir.1971); Bergstrom v. Sears, Roebuck & Co., 532 F.Supp. 923 (D.Minn.1982).

Underlying the judicial preference to enforce settlements are public policy considerations. Most commonly cited is the avoidance of costly and time-consuming litigation. But, in the case of settlements in which the court is actively involved, such as the one at issue, the integrity of the court and the management of its calendar are important factors.

B. Express Authority to Settle

It is a well accepted principle that an attorney has no power to settle his client’s case nor to consent to a dismissal upon the merits without express authority. United States v. Beebe, 180 U.S. 343, 21 S.Ct. 371, 45 L.Ed. 563 (1901); Bradford Exchange v. The Treins Exchange, 600 F.2d 99 (7th Cir.1979); Associates Discount Co. v. Goldman, 524 F.2d 1051 (3d Cir.1975); Thomas v. Colorado Trust Deed Funds, Inc., 366 F.2d 136 (10th Cir.1966); In re Gsand, 153 F.2d 1001 (3d Cir.1946); Griego v. Kokkeler, 543 P.2d 729 (Colo.Ct. App.1975). Express authority is the authority that the principal, the client, expressly or explicitly gives to the agent, the attorney. United States v. Martinez, 613 F.2d 473, 481 (3d Cir.1980); Downing v. Fortuna Bay Estates, Inc., 17 V.I. 20,26 (D.V.I.1980); see also Restatement (Second) of Agency § 7 comment c (1958).

It is clear from the plaintiffs’ affidavits as well as the testimony of their original attorney that by no acts of theirs was express authority conferred on the attorney to settle plaintiffs’ claims. When an attorney is told by his or her client that the client relies on the attorney’s judgment and experience in these matters, the attorney is not relieved from further consultation with the client when settlement negotiations reach specific dollar amounts.

According to the ABA Code of Professional Responsibility a lawyer is entitled to make decisions of his or her own only in those areas “not affecting the merits of the cause or substantially prejudicing the rights of a client.” It is for the client to decide whether or not to accept a settlement offer. Model Code of Professional Responsibility EC 7-7 (1983).

C. Apparent Authority

Notwithstanding the lack of express settlement authority, we must discern whether plaintiffs’ attorney had apparent authority to settle the action. In order to determine whether the settlement should be set aside, we must also decide whether apparent authority is sufficient to bind the client.

Under the law of agency, apparent authority is defined as “the power to affect the legal relations of another person by transactions with third persons, professedly as agent for the other, arising from and in accordance with the other’s manifestations to such third persons.” Restatement (Second) of Agency § 8 (1958) (applicable to the Virgin Islands by virtue of 1 V.I.C. § 4 (1967)).

Certain courts hold that apparent authority is sufficient to bind a client to a settlement entered into by his or her attorney. In Glazer v. J.C. Bradford & Co., 616 F.2d 167 (5th Cir.1980), the court found that “a client is bound by his attorney’s agreement to settle a lawsuit, even though the attorney may not have had express authority to settle, if the opposing party was unaware of any limitation on the attorney’s apparent authority.” Id. at 168 (Georgia law).

Similarly, in International Telemeter Corp. v. Teleprompter Corp., 592 F.2d 49, 55 (2d Cir.1979), the court held that as long as there was no reason to believe the attorney was exceeding the scope of his apparent authority in settlement negotiations, the opposing party was entitled to rely on it.

The reasoning behind these rulings was stated in Bergstrom v. Sears, Roebuck & Co., 532 F.Supp. 923 (D.Minn.1982). The court found that “where one of two innocent parties must suffer from the wrongful act of another, the loss should fall upon the one who, by his conduct, created the circumstances which enabled the third party to perpetrate the wrong and cause the loss.” Id. at 933 (citing 3 Am.Jur.2d Agency § 76 (1962)).

Thus, although the settlement should not be set aside, the client would have a remedy against his or her attorney. See, e.g. Parker v. Board of Trustees of Southern Illinois Univ., 74 Ill.App. 467, 220 N.E.2d 258, 260 (1966); Cohen v. Goldman, 85 R.I. 434, 132 A.2d 414, 417 (1957); Hallock v. State of New York, 64 N.Y.2d 224, 485 N.Y.S.2d 510, 474 N.E.2d 1178 (Dec. 27, 1984); see generally R. Mallen & V. Levit, Legal Malpractice § 580 at 727 (2d ed. 1981).

There is, however, a distinct minority-view, relied on by the plaintiffs, which states that an attorney has no authority, to settle or compromise an action without express permission from his or her client. See Harrop v. Western Airlines, Inc., 550 F.2d 1143 (9th Cir.1977) (California law); United States v. State of Texas, 523 F.Supp. 703 (E.D.Tex.1981); Daley v. Bright, 413 F.Supp. 28, 29 (E.D.Pa.1975) (Pennsylvania law); Rothman v. Fillette, 305 Pa.Super. 28, 451 A.2d 225 (1982).

We believe that the majority position instructs us, public policy compels us, and the special circumstances of legal practice in the Virgin Islands requires us to uphold settlements entered into by an attorney clothed with apparent authority. Of course, if the settlement is so unfair as to put the third party on notice of fraud, collusion, mistake or accident, it will be set aside.

If the settlement conference is to continue as a viable tool used by the Court to settle cases, then settlements such as the one entered into in this case must bind the parties. This is especially true in the Virgin Islands legal community where, in the Division of St. Croix, there are less than 100 practicing attorneys constantly interacting. Succinctly stated, to set aside this settlement stipulation

“invites the destruction of the process of open court settlements, for every such settlement would be liable to subsequent rescission by the simple expedient of a litigant’s self-serving assertion, joined in by his attorney and previously uncommunicated to either the court or others involved in the settlement, that the litigant had limited his attorney’s authority.”

Hallock, supra, 64 N.Y.2d at 232, 485 N.Y. S.2d at 514, 474 N.E.2d at 1182 (citing 98 A.D.2d 856, 858-859, 470 N.Y.S.2d 844 (Mahoney, J. dissenting)).

The dispositive question, then, is whether plaintiffs’ original attorney had apparent authority to settle the plaintiffs’ claim. The mere retention of an attorney does not bestow apparent authority to settle or compromise a client’s cause of action. See, e.g., Luis C. Forteza e Hijos, Inc. v. Mills, 534 F.2d 415, 418 (1st Cir.1976); Hayes v. Eagle-Picher Industries, Inc., 513 F.2d 892, 893 (10th Cir.1975); Sockolof v. Eden Point North Condominium, 421 So.2d 716, 719 (Fla.Dist.Ct.App.1982); Rothman v. Fillette, 305 Pa.Super. 28, 451 A.2d 225, 227-28 (1982); Annot., 30 A.L. R.2d 944 (1953).

According to the Restatement (Second) of Agency § 27 (1958):

apparent authority to do an act is created as to a third person by written or spoken words or any other conduct of the principal which, reasonably interpreted, causes the third person to believe that the principal consents to have the act done on his behalf by the person purporting to act for him.

See Amritt v. Paragon Homes, Inc., 9 V.I. 570, 573, 474 F.2d 1251, 1252 (3d Cir.1973); Leader v. Merchant’s Market, Inc., 1985 St.T.Supp. -, (D.V.I. Feb. 7, 1985); Downing v. Fortuna Bay Estates, 17 V.I. 20, 26 (Terr.Ct.1980).

Because the agent, in this instance the attorney, cannot clothe himself with apparent authority, we must examine the representations made by the principal, the plaintiffs, to the third party, the defendants’ counsel. These representations may be made directly, or through authorized statements of the agent, from documents or other indicia of authority given by the principal to the agent, or from third persons who have heard of the agent’s authority through authorized channels. Restatement (Second) of Agency § 27 comment a (1958).

It is justifiable for third persons to rely on an agent’s apparent authority when the principal puts an agent into, or knowingly permits him or her to occupy, a position in which, according to the ordinary habits of persons in the locality or profession, it is usual for the agent to have such authority, unless there is a reason to know otherwise. Restatement (Second) of Agency § 49 comment c (1958).

In this ease the complaint was filed on December 10, 1982. Plaintiffs were represented from the outset by the same attorney. When interrogatories were sent from the defense to plaintiffs’ counsel requiring the personal signature of Keithley Edwards on the answers, such signed answers were returned via the plaintiffs’ attorney as a matter of course. When other documents and medical data of Keithley Edwards were requested, they were produced via the plaintiffs’ attorney. When a deposition of the plaintiff was noticed to his attorney, Keithley Edwards promptly appeared. Two separate pre-trial orders were entered requiring counsel to appear with settlement authority, or to have the client actually present at the pre-trial conference. Plaintiffs’ attorney appeared at all conferences of this nature without his clients. Under such a situation, there is an understanding that the attorney arrives with authority to settle unless restrictions are expressly stated.

In sum, then, whenever the performance of the client was personally necessary, he acted through the attorney. Whether it was in answering interrogatories or producing documents, or showing up at his own deposition, he either answered, produced, or appeared through or with his attorney.

The manifestation by plaintiff Keithley Edwards of the extent of the authority he granted to his attorney was strikingly indicated when defense counsel took his deposition. He revealed that his attorney had recommended, and he had accepted without question, the very physicians who would diagnose his injuries and treat them. These are injuries which he considered serious and possibly permanent or disabling. He also accepted without question the recommendation of his attorney as to a psychiatrist who would probe each recess of his mind, and to whom he would reveal the most personal of data. If a client would unhesitatingly place himself in the hands of his attorney to provide medical and psychiatric assistance of the most vital and personal nature, and defendants’ counsel have been made aware of this form of apparent authority, can there be any doubt that the same defense counsel would consider that the client extended this authority in his attorney to matters monetary?

This Court conducted the pre-trial settlement conference. All information on potential damages was reviewed, as well as possible contributory negligence and other defenses. We believe that the settlement was within the acceptable range, and cannot be set aside for fraud, collusion or overreaching. It was no easy task for the Court to move defense counsel up from the original offer to the amount finally agreed upon.

Given all that has been pointed out herein, the reliance by defendants’ counsel on the appearance of authority in the hands of plaintiffs’ counsel was entirely reasonable. We therefore conclude that plaintiffs’ counsel was clothed with apparent authority to settle their claims.

III. CONCLUSION

We find that plaintiffs’ attorney did not have express authority to settle his clients’ claims. We hold, however, that the attorney did have apparent authority to do so, and this is sufficient to bind plaintiffs to the settlement reached. The defendants’ motion to enforce the settlement will be granted.


source: Caselaw Access Project

author: LEE R. WEST, District Judge.

license: Public Domain

text:
    Charles (NMN) BOKIS, III, and Melva Sue Bokis, Plaintiffs, v. CHAMPION FINANCIAL CORPORATION, a California corporation, Defendant.
    No. CIV-84-2238-W.
    United States District Court, W.D. Oklahoma.
    May 13, 1985.

      Gary R. Morris, Morris, Bailey, Sumner, Schem & Associates, Midwest City, Okl., Rex K. Travis, Oklahoma City, Okl., for plaintiffs.
    Michael L. Darrah, Huckaby, Fleming, Frailey, Chaffin & Darrah, Oklahoma City, Okl., for defendant.
   ORDER

LEE R. WEST, District Judge.

Plaintiffs, Charles (NMN) Bokis III, and Melva Sue Bokis, tenants, have sued their landlord, Champion Financial Corporation, for damages resulting from a fall in a common area of the leased premises. Defendant has moved for summary judgment, to which motion plaintiffs have responded.

Defendant bases its motion on the theory that it had no legal duty toward plaintiff, since the holes into which plaintiff stepped were known to plaintiff prior to the accident, and plaintiff has the status of a business invitee. All authority cited by defendant is prior to 1978, the effective date of the Oklahoma Residential Landlord and Tenant Act, 41 O.S. §§ 101 et seq. (1981). In that legislation, the Oklahoma Legislature enacted a comprehensive scheme for governing the relations between landlords and tenants of residential property.

Section 118 of the Act imposes a series of obligations on the landlord of residential property, which includes:

... “A. A landlord shall at all times during the tenancy:
1. Except in the case of the single-family residence, keep all common areas of his building, grounds, facilities and appurtenances in a clean, safe and sanitary condition.”

It seems obvious that this provision places defendant under a more stringent duty than that of merely protecting from hidden traps, snares and pitfalls, which rule was applied by the Supreme Court of Oklahoma in Harrod v. Baggett, 418 P.2d 652 (Okla. 1966), twenty-two years before the legislative reforms brought about by the Oklahoma Residential Landlord Tenant Act.

The provision of the Oklahoma Residential Landlord Tenant Act which imposes the duty on the landlord to provide safe conditions in common areas is taken directly from the Uniform Residential Landlord and Tenant Act, § 2.104. The comments of the Commissioners on Uniform State Laws appended to this Act explain the section as follows:

“Vital interests of the parties and public under modern urban conditions require the proper maintenance and operation of housing. It is thus necessary that minimum duties of landlords and tenants be set forth. Generally duties of repair and maintenance of the dwelling unit and the premises are imposed upon the landlord by this section. Major repairs, even access, to essential systems outside the dwelling unit are beyond the capacity of the tenant.” (Emphasis added.)

The provisions of the Oklahoma statute also reflect the law as it has developed over the nation in regard to the responsibilities of landlords to provide safe housing. The Restatement of the Law, Second, Property, § 17.3 provides as follows:

“A landlord who leases a part of his property and retains in his own control any other part the tenant is entitled to use as appurtenant to the part leased to him, is subject to liability to his tenant and others lawfully upon the leased property with the consent of the tenant or a subtenant for physical harm caused by a dangerous condition upon that part of the leased property retained in the landlord’s control, if the landlord by the exercise of reasonable care could have:
(1) discovered the condition and the unreasonable risk involved therein; and
(2) made the condition safe.”

The comment to this section states that the rule applies “not only to the hall, stairs, elevators and other approaches to the part of the property leased to the tenant ... ”, which would clearly encompass the place in which plaintiff’s accident occurred in the instant case.

The comment continues:

c. Landlord’s knowledge of the dangerous condition. The rule stated in this section applies only to dangerous conditions which the landlord knows about or could have discovered by the exercise of reasonable care. The state of the landlord’s actual knowledge may be determined by the implications of his actions. Beyond this, the landlord is accountable for dangerous conditions which he could have discovered by the exercise of reasonable care. The state of the landlord’s knowledge is important not only with regard to the physical condition of the areas in question but also with regard to the specific uses of the areas by the tenant which may create dangers in themselves. For purposes of determining the state of the landlord’s knowledge, the knowledge of the landlord’s agents is imputed to the landlord.
* sk * * * #

This is virtually identical with the provisions found in Section 360 of the Restatement of Torts. Both of the Restatement rules, according to the reporters for the Restatement of the Law, Second, Property, reflect the prevailing rule of law in the United States.

The Oklahoma law relating to liability of a landlord to the tenant, who has been characterized as a business invitee, was not consistent with the weight of authority. See, e.g., Turner v. Rector, 544 P.2d 507 (Okla.1975). The legislature, in enacting the comprehensive act to govern the residential rental transaction, had a primary concern for the protection of both parties to the transaction, and to the improvement of the quality of rental housing. This Court finds, therefore, that Section 118 of the Oklahoma Residential Landlord Tenant Act has as its underlying basis the majority rule enunciated by the Restatements of Property and Torts.

Having ascertained that there is a higher duty imposed upon defendant by statute than under the cases cited by defendant, the Court will further consider whether, assuming such duty exists, there are no facts in dispute. A motion for summary judgment will be granted when “there is no genuine issue as to any material fact and ... the moving party is entitled to a judgment as a matter of law.” Fed.R. Civ.P. 56(c). The deposition testimony submitted with defendant’s motion, and the allegations of the pleadings do not reflect the absence of factual dispute necessary for the granting of a summary judgment. The Court must construe the facts in the way most favorable to the nonmoving party. United States v. Diebold, Inc, 369 U.S. 654, 82 S.Ct. 993, 8 L.Ed.2d 176 (1962). Summary judgment is appropriate only when there are no genuine issues of material fact present in the case. Adickes v. S.H. Kress & Co., 398 U.S. 144, 90 S.Ct. 1598, 26 L.Ed.2d 142 (1970).

Defendant’s Motion for Summary Judgment is therefore DENIED.


author: JOHN P. MOORE, District Judge.

text:
    JACKSON COUNTY FEDERAL SAVINGS AND LOAN ASSOCIATION, Plaintiff, v. MADUFF MORTGAGE CORPORATION, a Nevada Corporation; Maduff Group, Inc., an Illinois Corporation; Maduff & Sons, Inc., an Illinois Corporation; Colorado National Bank of Denver, a National Banking Association; Columbia Savings and Loan Association; Aspenridge Development Corporation, a Colorado Corporation; Richard L. Sullivan; Sondra Sullivan; Donald L. Jackson; and Patricia V. Jackson, Defendants. FIRST AMERICAN TITLE INSURANCE COMPANY, a California Corporation, Plaintiff, v. MADUFF MORTGAGE CORPORATION, a Nevada Corporation; Colorado National Bank of Denver, a National Banking Association; Jackson County Federal Savings and Loan Association, a Federally-Chartered Savings and Loan Association, Defendants. MADUFF MORTGAGE CORPORATION, a Nevada Corporation, Plaintiff, v. Donald L. JACKSON and Patricia V. Jackson, Defendants.
    Civ. A. Nos. 84-JM-505, 84-JM-933 and 84-JM-1722.
    United States District Court, D. Colorado.
    May 13, 1985.

      James L. Kurtz-Phelan, I.H. Kaiser, Berenbaum & Weinshienk, Hugh A. Burns, Phillip S. Figa, Burns & Figa, P.C., Denver, Colo., for plaintiff.
    Richard I. Brown, Atler, Zall & Haligman, Englewood, Colo., Christine J. Jobin, Michael E. Katch, Thomas R. Bromberg, Hall & Evans, Denver, Colo., Val W. Sandana, Fullerton, Lang, Richert & Patch, Fresno, Cal., for defendants.
   ORDER

JOHN P. MOORE, District Judge.

THIS MATTER is before me on motions for summary judgment on behalf of the plaintiff, Jackson County Federal Savings and Loan Association and defendant Colorado National Bank in civil action 84-JM-505. Jurisdiction is based upon 28 U.S.C. § 1332. Colorado National Bank (CNB) moved for summary judgment as to its interest in a promissory note and deed of trust. Subsequent to the filing of CNB’s motion, plaintiff, Jackson County Federal Savings and Loan Association (JCF), moved the court for partial summary judgment as to its competing interest in the same promissory note and deed of trust. The primary issues raised by the closely related motions are the nature of the respective interests of CNB and JCF and the appropriate controlling law to be applied in the determination of the relative priorities of those interests. Based upon the pleadings, affidavits, and other materials submitted by the parties and on the arguments of the parties, I am persuaded that defendant’s motion for summary judgment must be granted in part and denied in part. Plaintiff’s motion for partial summary judgment will be denied.

This action arises out of financing arrangements entered into by the parties for the construction of a residential real estate project located in Keystone, Colorado, and known as Phase II of Aspenridge Town-homes. Defendant Maduff Mortgage Corporation (MMC), as primary or lead lender on the project, closed on a $5,850,000.00 construction loan with the developer, defendant Aspenridge Development. As collateral for the loan, Aspenridge Development executed a promissory note and a construction deed of trust in favor of MMC. Half of the funds for the loan were provided to MMC by CNB under a line of credit established by prior agreement between MMC and CNB. The other half was funded by JCF pursuant to a participation agreement between JCF and MMC. Other defendants became involved in the controversy as guarantors of either the Aspen-ridge loan or of MMC’s obligations. JCF and CNB claim conflicting interests in the Aspenridge note and deed of trust as a result of their respective agreements with MMC and their corresponding extensions of credit to MMC. The priorities of their interests became the paramount issue when Aspenridge Development defaulted on its note and deed of trust and MMC defaulted on its obligations to JCF and CNB. The property encumbered by the Aspenridge deed of trust was subsequently sold through foreclosure proceedings instituted by CNB. Pursuant to an order of this court of March 29, 1984, the funds realized from the foreclosure sale were placed in an escrow account pending the outcome of this litigation.

JCF filed suit seeking a declaratory judgment that it owned one-half of the Aspen-ridge note and deed of trust and that, in accordance with the participation agreement, it is entitled to be paid amounts due it from the proceeds of the foreclosure sale before CNB collects its share of the proceeds. JCF also seeks injunctive relief ordering CNB to pay over JCF’s share of the proceeds or, in the alternative, restraining the distribution of the proceeds by CNB. In addition, JCF seeks compensatory and punitive damages. JCF’s claims are based upon a variety of legal theories, including its rights as an owner of half of the note and deed of trust, the existence of an equitable lien or a constructive trust, as well as allegations of breach of contract, negligence, breach of fiduciary duty, fraudulent inducement, intentional misrepresentation and conspiracy to defraud.

For the purposes of this summary judgment proceeding, the sequence of events surrounding the creation of the respective interests of CNB and JCF is important. On January 13, 1982, CNB and MMC entered into an agreement (“Loan Agreement”) whereby CNB established a $5 million revolving line of credit for MMC “in order that funds will be available when needed for the financing of real estate loans.” [Loan Agreement, ¶ 1.1(B) ]. The Loan Agreement recited that all advances under the line' of credit “shall be evidenced by Mortgage Company’s Promissory Note dated January 13, 1982, in the amount of Five Million and No/100 Dollars.” (¶ 2.6.) As collateral for the line of credit, the Loan Agreement required that MMC grant to CNB a “first security interest in all Notes evidencing all Construction Loans, Land Acquisition and Development Loans and Permanent Loans now existing or hereafter arising, together with all items of collateral securing each such loan including without limitation all Deeds of Trust, mortgages, and security agreements.” (¶ 3.1.) MMC agreed to deliver such items as necessary when it requested an advance or when delivery was requested by CNB. CNB first advanced funds to MMC under the line of credit on April 29, 1982, when MMC closed on the construction loan with Aspenridge Development. On that date MMC endorsed the Aspenridge note and deed of trust and delivered them to CNB. It is undisputed that CNB retained possession of the instruments from that date.

JCF’s involvement in the Aspenridge project began on April 8, 1982, when it signed an agreement with MMC which JCF characterizes as the “Letter Agreement.” The letter, which was written to Richard McLaughlin, President of JCF, by Philip Brazeau, Vice President of MMC, contained an offer on behalf of MMC to JCF of “two excellent investment opportunities in the state of Colorado.” In the letter MMC requested a 50% participation from JCF in the $5,850,000.00 construction loan for Phase II of Aspenridge and specified that the participation “would be on a standard U.S. League participation form and would be on a last in-first out basis.” Mr. Brazeau requested that Mr. McLaughlin sign in the space provided if the terms and conditions of the letter met with his approval and stated that MMC would then “proceed to close as expeditiously as possible.” Mr. McLaughlin and Steven Nelson, Vice President of JCF, signed the letter.

Subsequent to the signing of the Letter Agreement, there was additional correspondence between JCF and MMC regarding the terms and the status of the arrangement between them. Then, on May 1, 1982, JCF and MMC executed a “Master Participation Certificate,” which stated that MMC sold to JCF a participation of $2,925,000.00 in a loan for $5,850,000.00 made to Aspenridge Development on April 29, 1982. The certificate specified that the “First Deed of Trust and Security Agreement, dated April 29, 1982, from Aspen-ridge Development Corporation for the benefit of Maduff Mortgage Corporation” was “collateral security.” It recited that the participant, JCF, was to be promptly paid its pro rata share of all payments of interest and all payments of principal until the participation was repaid “in accordance with the Letter Agreement, dated April 8, 1982.”

CNB argues that, through the Loan Agreement with MMC and its advancement of funds for the Aspenridge project, it acquired a security interest in the Aspenridge note and deed of trust which was perfected when CNB took possession of the instruments on April 29, 1982. It contends that, because JCF did not acquire an interest in the instruments until after that date, CNB has a superior interest and is entitled to be paid the full amount due it out of the proceeds of the foreclosure sale before any amounts are disbursed to JCF.

With respect to its interest, JCF claims that the Letter Agreement of April 8, 1982, which it contends was incorporated into the Master Participation Certificate, gave it ownership of one-half of the Aspenridge note and deed of trust as of that date. It argues that MMC owned only half of the instruments when it delivered them to CNB on April 29,1982, and, therefore, that MMC granted to CNB a security interest in one-half of the instruments in accordance with MMC’s proportionate share. As a result, JCF claims that it is entitled to be paid the full amounts due it under the Letter Agreement and Master Participation Certificate and that such amounts should be paid from the proceeds of the foreclosure sale before any disbursement to CNB. JCF supports its claim of superiority by alleging that, because CNB took the instruments with notice of JCF’s interest, CNB cannot claim status as a holder in due course of the instruments in order to defeat JCF’s ownership claim.

CNB moved for summary judgment that: (1) CNB has a security interest in the Aspenridge note and deed of trust; (2) CNB perfected its interest on April 29, 1982; (3) CNB has priority and its interest in the Aspenridge note and deed of trust is superior to any interest that may be claimed by JCF; and (4) that issues raised by JCF concerning alleged knowledge or an alleged duty to inquire on the part of CNB and CNB’s status as a holder in due course of the Aspenridge note and deed of trust are irrelevant to the determination of its interest. JCF opposed CNB’s motion and moved for partial summary judgment that: (1) JCF is the owner of one-half of the Aspenridge note and deed of trust; (2) MMC granted a security interest to CNB only in the proportionate ownership of the Aspenridge note and deed of trust retained by MMC; (3) CNB took possession of the Aspenridge note and deed of trust with actual notice of JCF’s ownership of one-half of the Aspenridge note and deed of trust, and such possession is subject to JCF’s ownership interest; (4) JCF is entitled to payment from the proceeds from the foreclosure sale in accordance with its rights as the owner of one-half of the note and deed of trust as set forth in the Letter Agreement and Master Participation Certificate; and (5) JCF is entitled to repayment in full of all principal and interest due it prior to any payments made to CNB or MMC.

While CNB and JCF are in substantial agreement regarding the sequence of events leading up to the controversy between them, they vigorously dispute the nature of their respective interests, as well as the controlling law to be applied to the determination of the relative priority of those interests. CNB claims that Article 9 of the Uniform Commercial Code (Secured Transactions) applies, giving it a perfected security interest which is superior to any interest claimed by JCF. On the other hand, JCF argues that the law is well established that a participating lender is an owner of its proportionate share of the mortgage or deed of trust securing a loan in which it participates. According to JCF, since Article 9 applies only to the determination of the relative priorities of competing security interests and since JCF is not a secured party, but an owner, Article 9 is inapplicable to the controversy between JCF and CNB. JCF also advances the theory that Article 9 by the terms of Colo. Rev.Stat. § 4-9-104(j) (Cum.Supp.1984), cannot apply to the creation of any interest in the Aspenridge deed of trust because it is an interest in real estate.

JCF contends that Article 3 of the Uniform Commercial Code governs the controversy between it, as owner and holder of one-half of the Aspenridge note and deed of trust, and CNB. Because CNB cannot qualify for the protections afforded a holder in due course of instruments under Article 3 due to its actual or constructive notice of JCF’s interest, JCF argues that CNB’s interest is secondary to its interest. Even if CNB could qualify as a holder in due course, JCF contends that the note is not a negotiable instrument, and, therefore, CNB’s claim of superiority must fail. JCF argues that, as owner of one-half of the instruments, it is entitled to have the participation agreement enforced according to its terms, which include a provision that JCF be paid in full before MMC’s interest is reimbursed.

A federal court exercising jurisdiction in a diversity action must apply the substantive law of the forum state. Klaxon v. Stentor Manufacturing Co., 313 U.S. 487, 61 S.Ct. 1020, 85 L.Ed. 1477 (1941). Article 9 of the Uniform Commercial Code, as adopted by Colorado, applies to “any transaction (regardless of its form) which is intended to create a security interest in personal property or fixtures including goods, documents, instruments, general intangibles, chattel paper, accounts or contract rights.” See Colo.Rev.Stat. § 4-9-102 (Cum.Supp.1984). Comment 1 to § 4-9-102 indicates that the scope of Article 9 was intended by the drafters to be very broad in that all consensual security interests in personal property are covered, including sales of accounts, chattel paper, and contract rights “whether intended for security or not unless excluded by Section 9 — 104(f).” The Loan Agreement between CNB and MMC was clearly intended to create a security interest in the Aspenridge note and deed of trust as evidenced by the language of § 3.1:

As security for each Advance, Mortgage Company grants to Bank a first security interest in all Notes evidencing all Construction Loans, Land Acquisition and Development Loans and Permanent Loans now existing or hereafter arising, together with all items of collateral securing each such Loan, including without limitation all Deeds of Trust, mortgages and security agreements.

It is without question, therefore, that Article 9 properly applies to the attachment and perfection of CNB’s interest in the Aspenridge note and deed of trust which were delivered to CNB pursuant to the Loan Agreement.

Furthermore, the fact that part of the collateral, the deed of trust, secures an interest in real estate does not bring it within the exclusion of § 4 — 9—104(j) to make Article 9 inapplicable. I agree that, under this section, Article 9 would not apply to the creation of MMC’s interest in the Aspenridge note and deed of trust, which is an “interest in or lien on real estate.” However, § 4 — 9—104(j) must be read in conjunction with § 4-9-102(3), which states that “[t]he application of this article to a security interest is not affected by the fact that the obligation is itself secured by a transaction to which this article does not apply.” Comment 4 to this section demonstrates that Article 9 applies to situations in which a secured party takes a note and deed of trust to secure the obligation of a mortgagee by using an example which is analogous to the case at hand. In the example, the owner of Blackacre borrows $10,000.00 and secures his note by a mortgage on Blackacre, a transaction to which Article 9 does not apply. The comment then states: “However, when the mortgagee in turn pledges this note and mortgage to secure his own obligation to X, this Article is applicable to the security interest thus created in the note and the mortgage.” (Emphasis added.)

JFC cites substantial case law in support of its contention that Article 9 cannot apply to the perfection of CNB’s interest in the Aspenridge note and deed of trust. While the cases from various jurisdictions are split as to whether the perfection rules of Article 9 apply to a security interest in a mortgage or deed of trust, those supporting JCF’s argument are derived from jurisdictions which have amended Comment 4 to read differently from the Colorado version. In more than one of the cases cited by JCF, the court’s finding that Article 9 is inapplicable to perfection of an interest in a mortgage, deed of trust, or lease turned upon the apparent intent of the legislature in making a change in the language of the comment. For example, in In Re Bristol Associates, Inc., 505 F.2d 1056 (1974), the Third Circuit held that, by deleting the words “and the mortgage” from “this Article is applicable to the security interest thus created in the note and the mortgage,” the Pennsylvania legislature expressed its clear intent that Article 9 not apply to the perfection of an interest in a lease.

Furthermore, the two Colorado cases cited by JCF in support of its argument, when read carefully, are consistent with the application of Article 9 to a security interest in a note and deed of trust. The comment by the Colorado Court of Appeals that a deed of trust was not governed by provisions of the Uniform Commercial Code, which JCF cited from Fort Collins Prod. Credit Association v. Carroll Dairy, 37 Colo.App. 536, 553 P.2d 95, 97 (1976), was made under the assumption that the deed of trust had been severed from the original note it secured by cancellation or loss of the note. This situation is not presented by the instant case. In Swofford v. Colorado National Bank of Denver, 628 P.2d 184, 186 (Colo.App.1981), the Colorado Court of Appeals held that the bank’s initial interest in a promissory note and deed of trust were perfected by the mortgagee’s endorsement and delivery of the instruments to the bank, “such being personal property.” The bank’s interest ripened into an interest in real property upon the mortgagee’s default on its obligations to the bank and the bank’s election to retain the collateral. Contrary to JCF’s representation that the court relied heavily on local real estate law in the determination of the bank’s rights, the court applied real estate law only to the bank’s assertion of mortgagee’s rights against the mortgagor. The bank’s rights in the note and deed of trust with respect to other creditors of the mortgagor were governed by Article 9.

It is clear that the creation and perfection of CNB’s security interest in the Aspenridge note and deed of trust is properly determined under Article 9. The priority of that interest with respect to JCF’s competing interest may also be controlled by Article 9. JCF cannot remove the entire issue of CNB’s priority from coverage by Article 9 by merely asserting that it is not a secured creditor of MMC, but an owner of the collateral. The drafters of Article 9 clearly intended that it be applied to a broad spectrum of contests over interests in collateral beyond the narrow situation presented by two or more parties claiming a security interest in the same collateral. Section 4-9-201 establishes that a security agreement may be effective against third parties other than those claiming priority as secured creditors: “Except as otherwise provided by this title, a security agreement is effective according to its terms between the parties, against purchasers of the collateral, and against creditors.” Furthermore, 4-9-301 specifically addresses the priority of a secured party with respect to claimants who are not secured parties, such as lien creditors or purchasers of certain collateral.

Even if JCF establishes beyond question that it owns half of the note and deed of trust, application of the priority provisions of Article 9 will not be precluded. The drafters of Article 9 recognized that, in some instances, the debtor in a secured transaction and the owner of the collateral may not be the same person or entity. In § 4-9-105(1)(d), “debtor” is defined as “the person who owes payment or other performance of the obligation secured, whether or not he owns or has rights in the collateral.” This section further provides that “debtor” may refer to the obligor or the owner of the collateral, or both, depending on the context required by individual subsections. Section 4-9-112, entitled “Where Collateral Is Not Owned By The Debtor,” sets out the duties of a secured party toward the owner of the collateral where the secured party knows the identity of the owner. However, the comment to § 4-9-112 states that the section was not intended to “cut across the law of conversion and ultra vires.” It continues: “Whether a person who does not own property has authority to encumber it for his own debts and whether a person is free to encumber his property as collateral for the debts of another are matters to be decided by other rules of law and are not covered by this section.” Therefore, ownership of all or part of the collateral by someone other than the debtor does not automatically remove the conflict between the owner and a creditor from coverage by Article 9, though other rules of law may apply to the ultimate resolution of the dispute among all of the parties involved.

The Colorado courts have also recognized that the perfection and priority provisions of Article 9 may apply to situations in which the collateral subject to conflicting claims is not owned by the debtor. In American National Bank v. Magor, 28 Colo.App. 522, 476 P.2d 267 (1970), the Colorado Court of Appeals held that a bank’s perfected security interest in construction equipment, which was in the debtor’s possession pursuant to a conditional sales contract, was superior to the vendor’s interest even though the sale eventually fell through and the vendor retained title to the equipment. The court found that the trial court erred in its holding that the priority of the bank’s security interest depended upon its extension of credit in reliance on ownership of the collateral by the debtor. The court’s decision turned on its identification of the nature of the interest in conflict with the security interest and the steps which the competing party could have taken to perfect that type of interest. Because the vendor failed to file a financing statement as required by the Chattel Mortgage Act, Colo.Rev.Stat. §§ 21-1-4, 21-1-16 (1963), its interest, which could be characterized as an ownership interest, was inferior to the perfected security interest. Therefore, it may be logically reasoned, the priority of certain ownership interests in relation to a conflicting security interest may depend upon specific perfection steps or protective measures provided for that particular type of interest in other areas of local law, as well as the application of Article 9 provisions to the perfection of the security interest.

In conjunction with its contention that Article 9 does not apply to the resolution of its conflict with CNB, JCF vigorously argues that Article 3 of the Uniform Commercial Code controls the dispute giving JCF a superior interest in the Aspen-ridge note and deed of trust. JCF’s continued insistence on the application of Article 3 is a bit puzzling because CNB has not elected to assert its rights as a holder in due course of the Aspenridge note and deed of trust, but rather, it claims superiority only as a secured party with a perfected security interest under Article 9. I agree with CNB that its ability to qualify as a holder in due course is irrelevant to the question of its priority in the instruments as a secured party. For this reason, JCF’s arguments regarding CNB’s status as a holder in due course and the negotiability of the Aspenridge note and deed of trust will not be addressed.

This is the law to be applied to the facts before the court in this summary judgment proceeding. Under Rule 56(c), Fed.R.Civ.P., a moving party is entitled to judgment as a matter of law only if no genuine issue of material fact is presented. The moving party must demonstrate beyond a reasonable doubt that there are no disputed facts or reasonable inferences to be drawn that would require a court’s ultimate resolution. Norton v. Liddel, 620 F.2d 1375, 1381 (10th Cir.1980). I find that the facts presented by CNB which are undisputed by JCF establish that CNB has a security interest in the Aspenridge note and deed of trust, which are personal property under Colorado law and covered by Article 9. MMC and CNB manifested their intent to create a security interest in the instruments through the execution of the Loan Agreement. Under § 4-9-204(1), CNB’s security interest attached on April 29, 1982. On that date, MMC, the debtor, obtained rights in the collateral when it closed the construction loan with Aspen-ridge Development and took the instruments as collateral. CNB gave value for the purposes of § 4-9-204(1) when it made its first advance for the Aspenridge project on April 29, 1982.

The undisputed facts also establish that CNB perfected its security interest in the Aspenridge note and deed of trust on April 29, 1982, when it took possession of the instruments from MMC. Under § 4-9-304(1), a security interest in instruments “can be perfected only by the secured party’s taking possession.” No steps beyond taking possession are required to accomplish perfection. Therefore, summary judgment that CNB had a perfected security interest in the Aspenridge note and deed of trust on April 29, 1982, is appropriate.

However, the issue of CNB’s priority with respect to JCF’s interest cannot be resolved on summary judgment. Application of the proper priority rules to the facts of this case requires a determination of the nature of JCF’s interest in the instruments and the nature of JCF’s interest remains in dispute. If JCF is a secured party, the priority rules of § 4-9-312 may apply. If JCF is indeed an owner or a lienor, the rules embodied in § 4-9-301 may apply alone or in conjunction with local law governing the authority of MMC to encumber property which it does not own to secure its debts.

JCF has not established beyond a reasonable doubt that it acquired an ownership interest, as opposed to a security interest or other right, in the Aspenridge note and deed of trust. The mere existence of a participation agreement is not conclusive proof of the creation of an ownership interest on behalf of the participant. Despite JCF’s assertions to the contrary, the nature of the interest created by participation agreements and the legal consequences of those agreements are not well established. H.C. Franklin v. Commissioner of Internal Revenue, 683 F.2d 125, 128 (5th Cir.1982). Six possible relationships between the participant and the lead lender have been defined: debtor-creditor, assignment, tenancy in common, joint venture, agency, and trust. See, Hutchins, “What Exactly Is A Loan Participation?”, 9 Rut.Cam.L.J. 447, 448 (1978). The proper characterization of a participant’s interest depends upon a case-by-case analysis of the terms of the agreement in question and the intentions of the parties in executing the agreement. JCF points to specific language in the Master Participation Certificate which states that MMC “sold” a participation to JCF to support its claim of an ownership interest in the Aspenridge note and deed of trust. However, other language in the document is consistent with the identification of JCF as a secured creditor. For example, the only specific reference to the note and deed of trust from Aspenridge Development identifies the instruments as “collateral security.” Thus, the exact nature of JCF’s interest is unclear from the face of the Master Participation Certificate. The intentions of the parties with respect to the agreement must, therefore, be examined at trial. Furthermore, JCF also claims a superior interest through the creation of an equitable lien or a constructive trust with respect to the instruments, but it has failed to demonstrate that the undisputed facts establish existence of either a lien or trust. Because the nature of JCF’s interest is a question of law to be resolved upon proof of fact, summary judgment on the nature of JCF’s interest and on the relative priorities of the interests claimed by JCF and CNB will be denied.

Accordingly, it is

ORDERED that defendant Colorado National Bank’s motion for summary judgment is denied in part and granted in part. It is by judgment declared that Colorado National Bank has a security interest in the Aspenridge note and deed of trust which was perfected on April 29, 1982, and that Colorado National Bank’s status as a holder in due course is irrelevant to the determination of the priority of that security interest. Summary judgment that CNB’s interest is superior to any interest claimed by Jackson County Federal Savings and Loan is denied.

FURTHER ORDERED that plaintiff Jackson County Federal Savings and Loan’s motion for partial summary judgment and request for a hearing on its motion are denied.

FURTHER ORDERED that Colorado National Bank’s motion to supplement the response to JCF’s motion for summary judgment (filed September 18, 1984) is granted.

      . The parties vigorously argue the issue of their respective priorities because the proceeds of the sale are apparently inadequate to pay off both interests in full.

      . This is but a brief summary of plaintiff's allegations, which cover 106 paragraphs as the basis for 18 claims for relief in the complaint.

      . "Last in-first out” refers to the order of disbursement and subsequent repayment of funds. MMC was to disburse its share (50%) of the loan funds to Aspenridge Development before JCF disbursed any funds. JCF was to be fully repaid its share of the principal before MMC received a repayment of principal.

      . CNB argues that JCF acquired its interest, if any, on May 1, 1982, at the earliest, when the Master Participation Certificate was executed. CNB also contends that JCF’s interest may have arisen as late as October 1982 when JCF first disbursed funds under the agreement.

      . JCF argues, in the alternative, that its arrangement with MMC gave rise to a equitable lien or a constructive trust on its behalf, either of which is superior to CNB's interest.

      . JCF apparently believes that Article 9 is inapplicable as well to a determination of the priority of its interest as a lienor through the creation of an equitable lien or as the beneficiary of a constructive trust.

      . Section 4-9-104(j) excludes from Article 9 "the creation or transfer of an interest in or a lien on real estate, including a lease or rents thereunder.”

      . Due to the assumption that the note was severed from the deed of trust, Carroll Dairy did not present the problem created by applying Article 9 rules to perfection of a security interest in a note and local real estate law to perfection of the deed of trust securing the note. That is, a creditor could have priority in the note but an inferior interest in the collateral securing the note. This is precisely the kind of situation that Article 9 was designed to prevent. See Shaw, Security Interests in Notes and Mortgages: Determining the Applicable Law," 79 Col.L.Rev. 1414 (1979).

      . JCF contends that steps to protect or perfect a participation interest in a note and deed of trust are unnecessary because it is the normal practice in the secondary mortgage market to leave the lead lender in possession of instruments taken as security for the loan. It further argues that, since most participation arrangements involve several lenders, it would be illogical to require perfection of each participant’s interest. The usual manner of perfecting an interest in instruments is possession by one claiming an interest and only one of the several lenders involved can be in possession of the instruments at any one time. I am not persuaded, however, that the customs of the mortgage market or the participation of several lenders in a loan dictates that perfection of participation interests is unnecessary or requires that the instruments securing the loan be left with the lead lender. Where perfection by possession is appropriate under applicable law, the instruments could be delivered to a third party as an agent for all the participants. See, Hutchins, "What exactly is a Loan Participation?”, 9 Rut.Cam.L.J. 447, 460 (1978).

      . This is not to say that the issue of CNB’s knowledge or notice of JCF’s interest when CNB took possession of the instruments is entirely irrelevant to the ultimate outcome of this case. If § 4-9-112 applies to the controversy, the state of CNB’s knowledge may determine its duties toward JCF. Notice or knowledge may be relevant to the relative rights of the parties under rules of law outside of Article 9 if such rules are found to be applicable to this dispute.

      . The exact point at which JCF acquired any interest it claims also remains to be resolved. JCF maintains that it acquired its interest on April 8, 1982, upon the execution of the Letter Agreement. CNB argues that JCF’s interest could not have arisen until the Master Participation Certificate was signed on May 1, 1982, at the earliest. Resolution of the issue may be crucial to a determination of the relative priorities of the interests.


author: CARRIGAN, District Judge.

text:
    Clara B. YOCH, as Personal Representative of the Estate of James J. Yoch, Plaintiff, v. BURLINGTON NORTHERN RAILROAD COMPANY, a Delaware corporation, Defendant.
    Civ. A. No. 84-C-1070.
    United States District Court, D. Colorado.
    May 13, 1985.

      John J. Rossi, Morrisard & Rossi, Aurora, Colo., for plaintiff.
    C. William Kraft, III, Gen. Counsel Denver Region, C. Willing Brown, Hall and Evans, Denver, Colo., Richard Knudsen, Lincoln, Neb., for defendant.
   MEMORANDUM OPINION AND ORDER

CARRIGAN, District Judge.

On April 13, 1984, James Yoch was killed in a train collision near Wiggins, Colorado. Plaintiff Clara Yoch, James Yoch’s widow, filed this action against the defendant Burlington Northern Railroad pursuant to the Federal Employers Liability Act (FELA), 45 U.S.C. § 51 et seq. (1982) and the Boiler Inspection Act 45 U.S.C. § 23 (1982). Clara Yoch has alleged that the defendant railroad’s negligence caused her husband’s death and has prayed for $2 million in damages. Burlington Northern has filed a counterclaim for $5 million in property damages resulting from the collision, asserting that James Yoch’s negligence caused the collision and resulting damage to its property.

Plaintiff has moved to dismiss the defendant’s counterclaim arguing that it is a “device” intended to exempt the defendant from liability and to intimidate other railroad employees so they will not furnish information about the collision. Defendant has responded. The parties have briefed the issues thoroughly and oral argument would not assist in resolving them. Jurisdiction is based on 28 U.S.C. § 1331 (1982).

Plaintiff argues that the defendant’s counterclaim violates 45 U.S.C. §§ 55 and 60. Section 55 provides,

“Any contract, rule, regulation or device whatsoever, the purpose or intent of which shall be to enable any common carrier to exempt itself from any liability created by this act, shall to that extent be void____”

Section 60 states,

“Any contract, rule, regulation, or device whatsoever, the purpose, intent, or effect of which shall be to prevent employees of any common carrier from furnishing voluntarily information to a person in interest as to the facts incident to the injury or death of any employee, shall be void....”

The issue here is whether Burlington Northern’s counterclaim is a “device” within the meaning of either § 55 or § 60, or both. The arguments on both sides have been fully developed in two leading opinions that reach opposite results. Cavanaugh v. Western Maryland Ry. Co., 729 F.2d 289 (4th Cir.1984) (allowing a railroad counterclaim in a FELA action) (Judge Hall dissenting) and Stack v. Chicago, M. St. P. & P. R. Co., 94 Wash.2d 155, 615 P.2d 457 (1980) (dismissing a railroad counterclaim in a FELA action). Stack and Judge Hall’s dissent in Cavanaugh appear to me to present the more realistic and less legalistic view.

For the reasons developed by Judge Hall, dissenting in Cavanaugh, and by the unanimous Washington Supreme Court in Stack, I hold that where an injured railroad worker, or one who claims in his right if he is killed, asserts personal injury or wrongful death claims under the FELA, a railroad defendant may not counterclaim for damages to its property caused in the occurrence which gave rise to the employee’s injuries or death.

Accordingly,

IT IS ORDERED that the plaintiff’s motion to dismiss the defendant’s counterclaim is granted.


author: BARBOUR, District Judge.

text:
    Jessie WILLIAMS, Elsie Ruth Hence and Lofty Wright, individually and on Behalf of all other similarly situated, Plaintiffs, v. The ADAMS COUNTY BOARD OF ELECTION COMMISSIONERS; T. Waring Bennett, Bruce Lewis, Mrs. J.R. Willard, Mrs. Katye M. Dukes and Mrs. Mable McMillan, in their capacities as members of the Adams County Board of Election Commissioners, Defendants.
    Civ. A. No. W83-0184(B).
    United States District Court, S.D. Mississippi, Jackson Division.
    May 14, 1985.
    Jere Krakoff, Nausead Stewart, Jackson, Miss., and William L. Robinson, Lawyers’ Committee for Civil Rights Under Law, Washington, D.C., for plaintiffs.
    Lucien C. Gwin, Natchez, Miss., for Adams Co. Bd. of Election Com’rs.
    Robert E. Sanders, Sp. Asst. Atty. Gen., Jackson, Miss., for defendants.
   ORDER

BARBOUR, District Judge.

This action is before this Court on the Motion of the Plaintiffs pursuant to Rule 52(b) of the Federal Rules of Civil Procedure requesting this Court to amend the previous Judgment entered on March 14, 1985, which Judgment was consistent with a Memorandum Opinion entered on that same date. The basis of this Court’s Judgment was that the Plaintiffs who are low income voters of Adams County were determined to have no standing to challenge the freeholder requirements contained in the Constitution of the State of Mississippi and the statute enacted pursuant to that provision of the State Constitution.

This Court has reviewed the cases cited by the Plaintiffs and determined that the decision made with respect to the standing of the Plaintiffs was incorrect. It is clear from the cases controlling this decision that the voters themselves have a palpable injury which may form the basis for challenging a restriction on the eligibility of candidates. O’Hair v. White, 675 F.2d 680 (5th Cir.1982). Accordingly, this Court will grant the Motion of the Plaintiffs and vacate the last paragraph of the previous Memorandum Opinion in so far as it states that the Plaintiffs have no standing to attack the freeholder requirement. In all other respects the previous Memorandum Opinion of this Court stands and is the basis for this Opinion which reaches the merits of the issue presented by the cross-motions for summary judgment and stipulation of the parties.

The United States Supreme Court has directly addressed the constitutionality of requiring one who seeks public office to be a freeholder. In Turner v. Fouche, 396 U.S. 346, 90 S.Ct. 532, 24 L.Ed.2d 567 (1970) the Court addressed a Georgia statute limiting the membership of the school board to freeholders. After a summary discussion the court determined that even judged against the traditional test for denial of equal protection, such “classification rests on grounds wholly irrelevant to the achievement of a valid state objective.” Id. at 362, 90 S.Ct. at 541. School board membership was not an elective office under the Georgia scheme. This distinction does not in any way limit the scope of the ruling of that court. In Bullock v. Carter, 405 U.S. 134, 92 S.Ct. 849, 31 L.Ed.2d 92 (1972) the United States Supreme Court struck a Texas statute assessing fees against candidates in primary elections. The purpose of the statute assessing such fees was to distribute the costs of the elections among the candidates themselves instead of the cost falling upon the political subdivision. The court struck this statute as violative of the equal protection clause stating that “the State of Texas has erected a system that utilizes the criterion of ability to pay as a condition to being on the ballot, thus excluding some candidates otherwise qualified and denying an undetermined number of voters the opportunity to vote for candidates of their choice.” Id. at 149, 92 S.Ct. at 859.

The requirement that one be a freeholder in order to be a candidate for membership on a county board of supervisors is argued by the state in its briefs on much the same basis urged by Georgia in Turner v. Fouche, 396 U.S. at 361-64, 90 S.Ct. at 540-42. This contention was summarily dealt with by the United States Supreme Court.

The objectives of Mississippi in maintaining the integrity of county government and insuring that competent individuals having personal interests in the welfare of the community are elected to the boards of supervisors of the counties in this state are valid objectives. The Constitution of the United States does not prohibit the state from enacting laws to further these goals. The decision of the Supreme Court of the State of Mississippi in McHenry v. State, 119 Miss. 289, 80 So. 763 (1919) interprets the freeholder requirement as having the object of elevating the office of supervisor and placing “the commission in the hands of a frugal and intelligent person, identified with the best interest of his district.” Id., 80 So. at 765.

However, the adoption of the freeholder requirement to assure the quality of those elected as members of the boards of supervisors created an arbitrary classification based on economic factors. Under the analysis of the United States Supreme Court in Turner v. Fouche, 396 U.S. 346, 90 S.Ct. 532, 24 L.Ed.2d 567 this is impermissible. Accordingly, it is the determination of this Court that Article 6, Section 176 of the Constitution of the State of Mississippi and Miss. Code Ann. § 19-3-3 (1972) are unconstitutional, being in violation of the equal protection clause of the Constitution of the United States.

Consistent with the above it is the decision of this Court that the Motion of the Plaintiffs to amend the judgment of this Court pursuant to Rule 52(b) of the Federal Rules of Civil Procedure is well taken and should be and hereby is granted.

The parties are directed to confer and agree if possible on an appropriate award of attorney’s fees. If no agreement is reached within thirty days the Plaintiffs are directed to file a motion with the appropriate supporting affidavits for attorney’s fees or their rights, if any, to attorney’s fees will be deemed to have been waived. If the filing of a formal motion is necessary because of the lack of agreement between the parties, the Defendant is directed to respond to the Plaintiff’s motion and supporting affidavits within ten days of the date of its filing, stating with specificity the objections to the award of attorney’s fees. The Plaintiff may make a reply within five days of the Defendant’s response. A judgment consistent with Rule 58 of the Federal Rules of Civil Procedure will be entered declaring the unconstitutionality of the provision of the Mississippi State Constitution and the statute enacted pursuant to it.

      . Article 6, Section 176 of the Constitution of the State of Mississippi provides as follows:
      No person shall be a member of a board of supervisors who is not a resident freeholder in the district for which he is chosen. The value of real estate to be owned to qualify persons in the several counties to be members of said board shall be fixed by law.
      Miss. Const. art. 6, § 176.
      The statute enacted pursuant to this provision of the Mississippi Constitution provides as follows:
      A person shall not be a member of the board of supervisors who is not a resident freeholder in the district for which he is chosen, and the owner of real estate of the value of $1,500.00.

        Miss.Code Ann. § 19-3-3 (1972).


author: NANGLE, Chief Judge.

text:
    Douglas R. BENGE and Pulson Corporation, Plaintiffs, v. SOFTWARE GALERIA, INC., Defendant.
    No. 85-254C(1).
    United States District Court, E.D. Missouri, E.D.
    May 14, 1985.

      Mark A. Brittingham, Robert A. Useted, St. Louis, Mo., for plaintiffs.
    Daniel T. Rabbitt, Brown, James & Rabbitt, St. Louis, Mo., for defendant.
   MEMORANDUM

NANGLE, Chief Judge.

This case is now before this Court on several motions filed by defendant. First, defendant moved to dismiss plaintiffs’ complaint for lack of personal jurisdiction. Second, defendant moved to transfer this case to the United States District Court for the Northern District of California on two (2) grounds: 1) a forum selection clause in an agreement between plaintiffs and defendant; 2) the doctrine of forum non conveniens. Finally, defendant moved to dismiss Count V of plaintiffs’ complaint, which count purports to assert a claim under the Racketeer Influenced and Corrupt Organizations Act (hereinafter “RICO”), 18 U.S.C. § 1961 et seq., for failure to state a claim upon which relief can be granted. After reviewing the allegations in plaintiffs’ complaint, this Court will consider these motions seriatim.

I. PLAINTIFFS’ COMPLAINT

Plaintiffs’ claims arise out of a franchise agreement that they entered into with defendant on or about September 16, 1983. Plaintiff Douglas R. Benge (hereinafter “Benge”) is President of plaintiff Pulson Corporation (hereinafter “Pulson”). Plaintiffs’ complaint alleges that they entered into a franchise agreement with defendant Software Galería, Inc., a California corporation with its principal place of business in the State of California, on or about September 16, 1983. Pulson is a Missouri corporation with its principal place of business, i.e., the “Software Galería” franchise, in St. Louis County, Missouri. Subject matter jurisdiction of Counts I through IV is based on diversity of citizenship, 28 U.S.C. § 1332, and subject matter jurisdiction over Count V is based on 18 U.S.C. §§ 1961-64. The allegations concerning this Court’s in personam jurisdiction over defendant are contained in paragraph 5 of plaintiffs’ complaint, as follows:

[Defendant] transacts business, has made a contract, and has committed a tortious act within the State of Missouri all within the meaning of § 506.500.1(1), (2), and (3), R.S.Mo. and this Court may therefore assert personal jurisdiction over [defendant].

Count I of plaintiffs’ complaint is a claim for fraud in the inducement of the franchise agreement and seeks, inter alia, rescission of said agreement and damages. Plaintiffs allege in Count I that defendant made certain representations to plaintiffs in both the agreement itself and in the Franchise Information Guide given to plaintiffs prior to execution of the agreement. Plaintiffs further allege that defendant knew that said representations were false and that defendant had no intention of fulfilling said representations at the time they were made. In addition to rescission, plaintiffs seek actual damages in the amount of $124,898.00 and punitive damages in the amount of $500,000.00. Count II states a claim for breach of contract and seeks both rescission of the agreement and $124,-898.00 in damages. Count III states a claim for conversion and/or prima facie tort with respect to the actions of defendant and seeks $124,898.00 in actual damages and $500,000.00 in punitive damages. Count IV states a claim for violation of the California Franchise Investment Law, Cal. Corp.Code § 31000, et seq., and seeks both rescission of the agreement and $124,-898.00 in damages.

Count V purports to state a claim under the Federal RICO statute. Plaintiffs allege that defendant is a “person” and an “enterprise” as those terms are used in the statute. 18 U.S.C. §§ 1961(3), (4). In addition, plaintiffs’ complaint alleges, as follows:

[Defendant] did willfully, unlawfully and knowingly conduct its affairs through a pattern of racketeering activity as defined in 18 U.S.C. § 1961(5), in violation of 18 U.S.C. § 1962(c), in that they committed acts in violation of 18 U.S.C. § 1341 (mail fraud) and 18 U.S.C. § 1343 (wire fraud), in that said misrepresentations were made as part of a fraudulent scheme or artifice to defraud and deceive plaintiffs and to induce them to enter into the Agreement and while attempting to, and for the purpose of, executing this artifice and scheme to defraud and deceive plaintiffs, [defendant], its representatives, agents, and employees, in the course and scope of their employment, contacted plaintiffs by telephone and through the use of the United States Postal System on more than two (2) occasions.

Plaintiffs’ Complaint ¶ 47. Plaintiffs further allege in Count V that defendant’s scheme injured them in their business and property in the amount of $124,898.00 and they seek damages, trebled in accordance with 18 U.S.C. § 1964(c), in the amount of $124,898.00.

II. PERSONAL JURISDICTION

Defendant first moved to dismiss plaintiffs' complaint on the ground that this Court lacks in personam jurisdiction over defendant. Defendant is a non-resident and it was served with process under Missouri’s long-arm statute.

In passing on a motion to dismiss for lack of jurisdiction over a non-resident, a federal diversity court is required to engage in a two-step inquiry: first, whether defendant committed one of the acts enumerated in the long-arm statute; and second, whether the exercise of personal jurisdiction over defendant violates the due process clause of the fourteenth amendment. The Land-O-Nod Company v. Bassett Furniture Industries, Inc., 708 F.2d 1338 (8th Cir.1983); Scullin Steel Co. v. National Railway Utilization Corp., 676 F.2d 309, 312 (8th Cir.1982). Plaintiff, the party that is seeking to invoke federal jurisdiction, has the burden of establishing that jurisdiction exists, and this burden may not be shifted to the party challenging the jurisdiction. Mountaire Feeds, Inc. v. Agro Impex, S.A., 677 F.2d 651, 653 (8th Cir.1982). While the facts are viewed in the light most favorable to the plaintiffs, “there must nonetheless be some evidence upon which a prima facie showing of jurisdiction may be found to exist____” Aaron Ferer & Sons Co. v. Diversified Metals Corp., 564 F.2d 1211, 1215 (8th Cir.1977) (citations omitted). See also Data Disc, Inc. v. Systems Technology Associates, Inc., 557 F.2d 1280, 1285 (9th Cir.1977) (plaintiff need only make a prima facie showing of jurisdictional facts through submission of affidavits plus discovery materials); Greycas, Inc. v. Anderson, 584 F.Supp. 894, 895-96 (E.D.Mo.1984); 4 Wright & Miller, Federal Practice and Procedure: Civil § 1068 at 250 (1969).

Missouri’s Long-Arm statute provides:

1. Any person or firm, whether or not a citizen or resident of this state, or any corporation, who in person or through an agent does any of the acts enumerated in this section, thereby submits such person, firm, or corporation, and, if an individual, his personal representative, to the jurisdiction of the courts of this state as to any cause of action arising from the doing of any such acts:
(1) The transaction of any business within this state;
(2) The making of any contract within this state;
(3) The commission of a tortious act within this state;
(4) The ownership, use, or possession of any real estate situated in this state;
(5) The contracting to insure any person, property or risk located within this state at the time of contracting.
2. Only causes of action arising from acts enumerated in this section may be asserted against a defendant in an action in which jurisdiction over him is based upon this section.

§ 506.500, R.S.Mo. (1982).

The due process clause of the fourteenth amendment places limits upon the power of a court to exercise personal jurisdiction over a non-resident defendant. The due process clause requires that a defendant have certain minimum contacts with the forum state such that the maintenance of the suit does not offend “traditional notions of fair play and substantial justice.” International Shoe Co. v. Washington, 326 U.S. 310, 316, 66 S.Ct. 154, 158, 90 L.Ed. 95 (1945); Land-O-Nod, 708 F.2d at 1340. Accord World Wide Volkswagen Corp. v. Woodson, 444 U.S. 286, 100 S.Ct. 559, 62 L.Ed.2d 490 (1980); Kulko v. California Superior Court, 436 U.S. 84, 98 S.Ct. 1690, 56 L.Ed.2d 132 (1978). “In judging minimum contacts, a court properly focuses on ‘the relationship among the defendant, the forum, and the litigation.’ ” Calder v. Jones, — U.S. -, 104 S.Ct. 1482, 1486, 79 L.Ed.2d 804 (1984) (citations omitted). See also Helicopteros Nacionales de Colombia S.A. v. Hall, — U.S. -, 104 S.Ct. 1868, 1872, 80 L.Ed.2d 404 (1984). The defendant’s contacts with the forum state must be purposeful and such that defendant “should reasonably anticipate being haled into court there.” World Wide Volkswagen, 444 U.S. at 297, 100 S.Ct. at 567. See also Hanson v. Denckla, 357 U.S. 235, 253, 78 S.Ct. 1228, 1239, 2 L.Ed.2d 1283 (1958).

In this circuit, the due process standard has devolved into a consideration of five factors:

(1) the nature and quality of the contacts with the forum state; (2) the quantity of the contacts with the forum state; (3) the relation of the cause of action to the contacts; (4) the interest of the forum state in providing a forum for its residents; and (5) the convenience of the parties.

Aaron Ferer & Sons Co. v. Diversified Metals Corp., 564 F.2d 1211, 1215 (8th Cir.1977). See Land-O-Nod, 708 F.2d at 1340. The first three factors are of primary importance and the last two are of secondary importance. Id.

Plaintiffs argue that personal jurisdiction over defendant is authorized under the long-arm statute, specifically the “transacting business” clause of said statute. Plaintiffs alleged that they are franchisees of defendant franchisor and that they operate said franchise in the State of Missouri. In State ex rel. Newport v. Wiesman, 627 S.W.2d 874 (Mo. banc 1982), the Supreme Court of Missouri held that an airplane manufacturer transacted business in the State of Missouri, for purposes of the long-arm statute, where said manufacturer had established two (2) franchised dealers for the purpose of sale and service of aircraft in the State of Missouri. Id. at 877, citing Ponder v. Aamco Automatic Transmission, Inc., 536 S.W.2d 888 (Mo.Ct.App.1976). Under Wiesman, defendant is transacting business in the State of Missouri through its franchisee, plaintiffs. This result is particularly compelling, given the extent of dominion and control that defendant was to exert over plaintiffs’ business under the franchise agreement. Under the agreement, plaintiffs promised to pay defendant a royalty of 6% of the monthly gross revenues, to maintain defendant’s trademark or service mark on the front of their store and all products sold by plaintiffs, to submit regular reports to defendant, to allow regular inspections by defendant and its field representatives, and to be subject to defendant’s right to limit the products and services which plaintiff could offer for sale. In addition, plaintiffs were required to adhere to defendant’s “Standard Operating Procedure Manual”, to submit to defendant’s wishes concerning plaintiffs’ corporate governance, and to comply with defendant’s limits on plaintiffs’ business activity in Missouri. Under these circumstances, defendant is clearly subject to this Court’s in personam jurisdiction under Missouri’s long-arm statute.

This Court is also satisfied that the exercise of personal jurisdiction over defendant in this case comports with the minimum requirements of due process. Although defendant appears to have avoided actually “stepping foot” in Missouri, defendant has engaged in systematic and continuous contacts with the State of Missouri by virtue of the establishment of the franchise that is the subject matter of this action. These contacts were clearly purposeful. It cannot be maintained that it would be unfair for defendant to defend this action in Missouri when defendant’s products are sold and advertised in Missouri, when defendant’s trademark is required by defendant to be displayed at plaintiffs’ business, and when defendant exercises a great deal of control over plaintiffs’ business. In addition, plaintiffs’ cause of action relates directly to defendant’s contacts with the State of Missouri and the State of Missouri has a very strong interest in providing a forum for its residents who are allegedly harmed as franchisees by an out of state franchisor. Under these circumstances, maintenance of this suit in Missouri does not offend “traditional notions of fair play and substantial justice.”

Accordingly, defendant’s motion to dismiss for lack of personal jurisdiction must be denied.

III. PROPER FORUM

Defendant argues that the venue of this case is improper and that this case should be transferred to the United States District Court for the Northern District of California for two (2) reasons. First, defendant argues that the forum selection clause in the franchise agreement is enforceable and requires plaintiffs to sue only in California. Second, defendants argue that a transfer is warranted under the doctrine of forum non conveniens as codified in 28 U.S.C. § 1404(a).

The forum selection clause in the franchise agreement provided, as follows:

This franchise agreement and the construction thereof shall be governed by the laws of the State of California. The parties agree that to the extent any action is brought in law or in equity, the parties covenant, agree and stipulate that such action may be brought only in the United States District Court for the District of California or the Superior Court of the State of California, in and for the County of Santa Clara. Both parties hereby stipulate to the jurisdiction of said courts. The parties further stipulate that the judgment of either of said courts shall be enforceable in law or equity and any jurisdiction within the United States, its territories or possessions, or in accordance with the laws and courts of any foreign jurisdiction.

Franchise Agreement at 63. Plaintiffs admit that, if valid, the forum selection clause requires this Court to grant defendant’s motion to transfer. However, plaintiffs argue that said clause is invalid and unenforceable.

Because the source of subject matter jurisdiction in this case is diversity of citizenship , the initial question before this Court is whether State or Federal law provides the rule for determining the enforceability of the forum selection clause in the agreement in question, cf. ECC Computer Centers v. Entre Computer Centers, 597 F.Supp. 1182, 1184 (N.D.Ill.1984) (issue need not be reached because State and Federal law produce the same result). In Dick Proctor Imports, Inc. v. Sumitomo Corporation of America, 486 F.Supp. 815 (E.D.Mo.1980), this Court held that Federal law governs the issue, as follows:

Federal Courts are bound to follow forum law with respect to matter of substance, ...; Federal Courts are not so bound as to other matters. The issue of whether the venue limitation in question is substantive has split the courts which have decided it so far. See, Taylor v. Titan Midwest Constr. Corp., 474 F.Supp. 145 (N.D.Tex.1979), and cases cited therein. This Court must agree, however with Taylor, id.
In a sense, the validity of a venue limitation provision is a matter of contract law. In a larger sense, however, this issue concerns the proper venue in the Federal Court system. Venue is clearly a matter of procedure, and, as such, governed by Federal law____ The provision does not alter existing rules of contract enforcement or interpretation, but rather, alters the venue provisions as set out in the relevant statutes. The venue statutes of Missouri do not apply in this Court, and the provision therefor alters only the Federal statutory scheme as to venue. This attempted alteration of the Federal venue provision should be governed by Federal law.

Dick Proctor, 486 F.Supp. at 818 (citations omitted). The holding of Dick Proctor is supported by the weight of authority and has been followed by other courts. Crewe Tractor and Equipment Co., Inc. v. Deutz Corp., 574 F.Supp. 139, 142 (E.D.Va.1983) (discusses Dick Proctor with approval); C. Pappas Co. v. E. & J. Gallo Winery, 565 F.Supp. 1015, 1017 (D.Mass.1983) (enforcement of forum selection clauses to be decided under Federal law); Hoffman v. Burroughs Corporation, 571 F.Supp. 545, 548 (N.D.Tex.1982) (federal common law determines enforceability of forum selection clause); Quick Erectors, Inc. v. Seattle Bronze Corp., 524 F.Supp. 351, 355-57 (E.D.Mo.1981) (applies Federal law to determine validity of forum selection clause); Richardson Engineering Co. v. International Business Machines Corp., 554 F.Supp. 467, 469 n. 3 (D.Vt.1981); Cutter v. Scott & Fetzer Co., 510 F.Supp. 905 (E.D.Wisc.1981); Taylor v. Titan Midwest Const. Corp., 474 F.Supp. 145, 147 (N.D.Tx.1979) (Federal law applies to determine validity of forum selection clause); St. Paul Fire & Marine Insurance Co. v. Travelers Indemnity Co., 401 F.Supp. 927 (D.Mass.1975); Gaskin v. Stumm Handel GmbH, 390 F.Supp. 361 (S.D.N.Y.1975). In the opinion of this Court, Dick Proctor was correctly decided and continues to be good law. The enforceability of forum selection clauses is “primarily a matter of venue and not a matter of contract law.” Taylor, 474 F.Supp. at 148 n. 2. Accordingly, Federal law provides the principles for determining the validity of the forum selection clause at issue herein.

The Federal rule governing the enforceability of forum selection clauses was set out in The Bremen v. Zapata Off-Shore Co., 407 U.S. 1, 92 S.Ct. 1907, 32 L.Ed.2d 513 (1972). Under The Bremen, freely negotiated forum selection clauses are enforceable and valid unless enforcement would be unreasonable and unjust, the clause was inserted in the contract through fraud or overreaching, or “enforcement would contravene a strong public policy of the forum in which suit is brought, whether declared by statute or by judicial decision.” The Bremen, 407 U.S. at 15, 92 S.Ct. at 1916. The party challenging the enforceability of the clause bears the burden of persuasion that one of these exceptions exist. Id. See also Bense v. Interstate Battery System of America, 683 F.2d 718, 721-22 (2d Cir.1982); Dick Proctor, 486 F.Supp. at 818.

In the case at bar, plaintiffs do not suggest that there was any fraud or overreaching with respect to the forum selection clause. Plaintiffs do allege that defendant engaged in various acts of fraud prior to execution of the franchise agreement, but said allegations go to the promises made in the franchise agreement rather than the forum selection clause itself. See Hoffman v. Burroughs Corporation, 571 F.Supp. 545, 548 (N.D.Tx.1982) (“a forum selection clause will be unenforceable only if it is shown that ‘the inclusion of that clause in the contract was the product of fraud or coercion’.”). In addition, plaintiff Benge is not an uneducated person. He holds an MBA Degree from Boston University, is the President of Pulson Corporation, and worked for three (3) years as a Group Manager of McDonnell Corporation. Plaintiffs have not provided any evidence that they agreed to the forum selection clause other than knowingly and intelligently.

Plaintiffs also failed to carry their burden of persuasion that enforcement of the forum selection clause would be unjust or unreasonable in this case. The contract in question was executed in California and the negotiations that led up to said contract were conducted in California. Plaintiffs did not find it too inconvenient to create this 'contract in California and, therefore, logic suggests that they will not find it too inconvenient to litigate in California. Plaintiffs’ witnesses may be in Missouri, but defendant’s witnesses are in California. As in Dick Proctor, “[a]ny inconvenience to plaintiff[s] should have been foreseen when the agreement was signed.” Dick Proctor, 486 F.Supp. at 818 (citation omitted). “This Court cannot say ‘that trial in the contractual forum will be so gravely difficult and inconvenient that [plaintiffs] will for all practical purposes be deprived of [their] day in court'.” Id. (citation omitted).

Finally, plaintiffs argue that the forum selection clause is unenforceable, because enforcement of said clause would contravene a strong public policy of Missouri, namely, its prohibition against the enforcement of such clauses. In Dick Proctor, in dicta, this Court questioned the continuing validity of Reichard v. Manhattan Life Insurance Co., 31 Mo. 518 (1862), because Reichard was contrary to the growing modern trend to enforce forum selection clauses and no recent Missouri Court had followed Reichard. Dick Proctor, 486 F.Supp. at 817-18. However, in State ex rel. Gooseneck Trailer Manufacturing Co., Inc. v. Barker, 619 S.W.2d 928 (Mo.Ct.App.1981), a Missouri Court of Appeals rejected the holding in Dick Proctor, followed Reichard, and held that forum selection clauses are void in Missouri as against public policy. Plaintiffs argue that Goose-neck is evidence of Missouri’s strong public policy against the enforcement of forum selection clauses and that, under the Federal rule, enforcement of the forum selection clause in this case would contravene that policy. This argument must be rejected for two (2) reasons. First, this Court is not convinced that Reichard and Gooseneck represent a “strong” public policy of Missouri. Reichard is over 100 years old and contrary to the modern trend. Gooseneck is a single, isolated decision of a Missouri Court of Appeals and the opinion does not contain any meaningful discussion of the reasons for or against the validity of forum selection clauses. In addition, a recent decision by another Missouri Court of Appeals, State ex rel. Marlow v. Hess, 669 S.W.2d 291 (Mo.Ct.App.1984), while distinguishing Gooseneck and Reichard from the facts before it, impliedly expressed approval of the modern trend. Id. at 293. Second, acceptance of plaintiffs’ argument would lead to an absurd result. If a State’s rule with respect to the enforceability of forum selection clauses is a relevant public policy under The Bremen, then there would be no need to apply Federal law, because the Federal rule would then be the forum rule in every case. In the opinion of this Court, the public policy that is relevant under The Bremen must be some policy that is independent of the forum’s view of forum selection clauses. See Quick Erectors, Inc., 524 F.Supp. at 356-57 (enforcement of forum selection clause would contravene Missouri’s policy against agreements that contractually shorten the limitations period provided for by statute). Therefore, enforcement of the forum selection clause in this case would not contravene any strong public policy of Missouri.

Accordingly, the forum selection clause in the franchise agreement is enforceable and defendant’s motion to transfer this case to the United States District Court for the Northern District of California must be granted. It is not necessary to consider defendant’s alternative argument that this case should be transferred under the doctrine of forum nonconveniens. In addition, this Court will not consider defendant’s motion to dismiss plaintiffs’ RICO count. This motion is best left to the Court that receives this case upon transfer.

      . The parties in this case have briefed the forum selection clause issue as if this is purely a diversity case. However, an argument can be made that Count V of plaintiffs' complaint is a Federal question claim and that Counts I through IV are pendent State law claims. Under the latter analysis. Federal law would clearly supply the rule of decision with respect to the enforceability of the forum selection clause. Because neither plaintiffs nor defendant have treated the issue in these terms, this Court will not do so.

      . By treating the issue as one governed by Federal law, further inquiry into complex and detailed legal issues is avoided. Taylor, 475 F.Supp. at 147 n. 2. For example, if the validity of the forum selection clause at issue herein were a substantive matter for which State law provided the rule of decision, then the initial question faced by this Court would be which State’s law applies. Under Klaxon Co. v. Stentor Electric Manufacturing Co., 313 U.S. 487, 61 S.Ct. 1020, 85 L.Ed. 1477 (1941), this Federal diversity Court must follow the choice-of-law rules of Missouri, the forum State, to determine which State’s law applies. See generally, Hansen v. Sears, Roebuck & Co., 574 F.Supp. 641, 643 (E.D.Mo.1983). However, in this case the analysis is complicated by the presence of a choice-of-law clause in the franchise agreement which stipulated that California law will be applied. Assuming that Missouri substantive law applies to determine the validity of the choice-of-law clause, Missouri courts would likely enforce the clause and apply California substantive law. Central States, Southeast and Southwest Areas Pension Fund v. Aalco Express Co., Inc., 592 F.Supp. 664, 666 (E.D.Mo.1984). The parties in this case failed to brief these possibilities and it is not clear whether the forum selection clause would be enforceable under California law.