text:
    Anna E. AQUINO v. PUBLIC FINANCE CONSUMER DISCOUNT COMPANY.
    Civ. A. No. 84-0641.
    United States District Court, E.D. Pennsylvania.
    April 11, 1985.

      Henry J. Sommer, Philadelphia, Pa., for plaintiff.
    Robert Lapowsky, Philadelphia, Pa., for defendant.
   OPINION

JOSEPH S. LORD, III, Senior District Judge.

Anna E. Aquino has filed suit against the Public Finance Consumer Discount Company (“Public”), alleging that Public failed to meet its obligations under § 125(b) of the Truth in Lending Act (“TILA”), 15 U.S.C. § 1601 et seq., following her notice of rescission. Plaintiff seeks the following relief: (1) a declaration that the transaction was properly rescinded; (2) the return of all money or property received by Public from plaintiff in this transaction; (3) a declaration that Public has forfeited its right to receive any additional money or property from plaintiff; (4) statutory damages; and (5) attorney’s fees. Both parties have filed summary judgment motions on which I heard oral argument. For the reasons that follow, both motions will be granted in part and denied in part.

I. The Facts

In October, 1981, plaintiff purchased a used car from Sheehy Ford. The purchase price was financed with a $5,000 loan from Public. The loan was secured by a mortgage on Aquino’s home, a lien on the car and a security interest in Aquino’s household goods.

In January, 1983, Public repossessed plaintiff’s car. On February 10, 1983, plaintiff sent a letter to Sheehy and Public demanding rescission of the loan pursuant to § 1635(a). Defendant initially declined to accept the rescission demand, whereas Sheehy settled out of court. Sometime in July, 1983, after reexamining the records of the Aquino transaction, Public acknowleged Aquino’s right to rescind and can-celled the mortgage on her home.

Section 125(b) of the TILA required Public to “take any action necessary or appropriate to reflect the termination of any security interest created under the transaction”, and also required Public to return any money or property paid by Aquino in connection with the transaction, both within twenty days after receiving Aquino’s notice of rescission. 15 U.S.C. § 1635(b). Public, however, waited approximately five months before taking any action to reflect the termination of Aquino’s mortgage, and has yet to return its security interest in Aquino’s household goods or any of the money paid by her in connection with the transaction.

II. Plaintiffs Right to Rescind

There is no doubt that Public is correct in acknowledging Aquino’s right to rescind. Whenever a consumer credit transaction results in a creditor acquiring a security interest in an obligor’s home, § 1635(a) gives the obligor “the right to rescind the transaction until midnight of the third business day following the consummation of the transaction or the delivery of the disclosures required under this section and all other material disclosures required under this part, whichever is later ...” 15 U.S.C. § 1635(a) (1976) (amended in other respects effective Oct. 1, 1982). Moreover, § 1635(a) requires the creditor to disclose this right to rescind in accordance with regulations promulgated by the Federal Reserve Board. Id. According to the Board’s regulations, creditors are required to provide customers with a notice of their right to rescind that specifies the precise date upon which the three day rescission period expires. 12 C.F.R. 226.9(b) (1982) (replaced effective Oct. 1, 1982). Although Public provided the proper notice form, it failed to specify the date upon which the three day period expired. Since Public failed to make this required disclosure, Aquino had the right to rescind the transaction.

III. The Validity of Plaintiffs Rescission Notice and of Defendant’s Response

Public, however, argues that its tardy acknowledgement of plaintiff’s right to rescind should not be construed as a violation of the TILA. After receiving plaintiff’s notice of rescission, Public undertook a “thorough review” of its records but failed to discover any disclosure violation which would have justified rescission. When Public discovered the defective notice it had provided Aquino, it acted promptly to fulfill its obligations under § 1635(b). Since Aquino did not specify any particular disclosure violation which she believed entitled her to rescind the transaction, Public argues that it would be inequitable to penalize it for failing to ascertain the validity of her rescission notice within the twenty day period provided by § 1635(b).

Neither the law nor the facts of this case support Public’s position. Section 1635(a) only requires the obligor to notify the creditor of his or her intention to rescind in accordance with regulations promulgated by the Board. See § 1635(a). If Congress had wished either to place an additional burden on the obligor or to grant the creditor additional time to respond to this type of rescission notice, it would have done so. Congress believed that § 1635(b)’s initial ten day response period was too short for creditors to ascertain the validity of a rescission notice, and that is one of the reasons why it increased the response period to twenty days. S.REP. NO. 96-368, 96th Cong., 2d Sess. 29 reprinted in 1980 U.S. CODE CONG. & AD.NEWS 236, 264. I do not have the authority to second guess Congress and increase the response period further. Similarly, the Board’s regulations simply require the customer to notify the creditor of his or her intention to rescind the transaction. See 12 C.F.R. § 226.-23(a)(2) (1983). The only court to consider this issue held that a notice of rescission was effective even though it failed to notify the creditor of the alleged grounds upon which the rescission was based. Jackson v. Universal Guardian Consumer Discount Co., 15 Clearinghouse Rev. 863 (C.A. No. 80-1191, M.D.Pa. Oct. 27, 1981).

Public’s equitable argument is also undercut by it complete lack of initiative in seeking to determine its rights and obligations under the TILA. For no apparent reason, Public failed to contact plaintiff’s counsel and inquire into the alleged basis of her notice of rescission. Although aware of the twenty day deadline, Public also failed to petition the court for a declaration of its rights and obligations under the TILA. A party’s appeal to the court’s conscience to excuse its delay in fulfilling statutory obligations must fall upon deaf ears when that party failed to take obvious steps to fulfill those obligations in a timely fashion.

Public also argues that Aquino’s notice of rescission constituted an anticipatory breach of her obligations under the TILA, thereby relieving Public of its obligation to perform.

Public acknowledges that upon notice of rescission § 1635(b) requires the creditor to return to the obligor “any money or property given as earnest money, down payment, or otherwise,” but notes that upon performance of its obligations § 1635(b) then requires the obligor to tender to the creditor any property the creditor has delivered to the obligor. According to Public, Aquino would therefore be required to return the $5,000 loan.

Aquino, however, in her notice of rescission, implied that she would not comply with Public’s interpretation of § 1635(b). She stated that her only obligation under § 1635(b) was to return the car she had received in the underlying transaction. Since Public had already repossessed the car, she felt that her obligations under § 1635(b) were satisfied.

In support of its position, Public points to Powers v. Sims and Levin, 542 F.2d 1216 (4th Cir.1976), where a divided panel of the Fourth Circuit held “that when rescission is attempted under circumstances which would deprive the lender of its legal due, the attempted rescission will not be judicially enforced unless it is so conditioned that the lender will be assured of receiving its legal due.” Id. at 1222. More specifically, the court held that a creditor could ignore its obligations under § 1635(b) when it is no longer assured of receiving its legal due from debtors who have announced their intention to make only partial restitution. Id. at 1221.

Rescission is an equitable doctrine, and there is nothing in the statutory provision of the right of rescission or in § 1635(b)’s provision of the procedural steps in effecting the right of rescission which limits the power of a court of equity to circumscribe the right of rescission to avoid the perpetration of stark inequity ...

Id,.

Several courts of appeals have agreed with “the gist” of the Powers case and held that “[although the right to rescind is statutorily granted [by the TILA], it remains an equitable doctrine subject to equitable considerations.” Brown v. Nat. Permanent Fed. Sav. & Loan Ass’n, 683 F.2d 444, 447-48 (D.C.Cir.1982) (cases cited therein). When equity demands it, a rescission may be conditioned upon the return of property by the obligor. Id. at 447-48.

Equity also permits a creditor to offset the amount owed to it by an obligor pursuant to § 1635(b), rather than tendering those sums and awaiting a court’s conditioning of rescission upon the return of property by the obligor.

Nothing in section 1635(b) prevents the creditor from offsetting the value owed to it by the obligor from the sum it initially tenders to the obligor. Such an arrangement prevents a perfunctory exchange of funds and protects the lender from a dissipation of the money while it is in the hands of the obligor.

Harris v. Tower Loan of Mississippi, Inc., 609 F.2d 120, 123 (5th Cir.), cert. denied, 449 U.S. 826, 101 S.Ct. 89, 66 L.Ed.2d 30 (1980).

However, courts in their effort to insure a just result should not forget that the TILA “was passed primarily to aid the unsophisticated consumer,” Thomka v. A.Z. Chevrolet, Inc., 619 F.2d 246, 248 (3d Cir.1980), and that “courts have consistently recognized [that] the act is intended to balance scales thought to be weighed in favor of lenders and is thus to be liberally construed in the favor of borrowers.” Bizier v. Globe Financial Services, Inc., 654 F.2d 1, 3 (1st Cir.1981) (cases cited therein).

Upon notice of rescission, § 1635(b) clearly places the burden of first performance on the creditor, the party who has violated the law. Under most circumstances a creditor is not permitted “to refuse to perform unless or until the obligor tenders payment.” Harris v. Tower Loan of Mississippi, Inc., supra, at 123. Only when it is necessary to prevent a “stark inequity” or to guarantee a creditor its “legal due,” should a creditor be allowed to ignore its obligations under § 1635(b).

When offsetting by a creditor will clearly protect its legal due, a creditor will not be permitted to ignore its obligations under the TILA, even if an obligor has made a technical error in demanding rescission. If a creditor feels uncomfortable about its ability to calculate properly the offset, it is free to petition the court within the twenty day statutory period to determine the rights and obligations of the parties under § 1635(b).

Public, however, chose to ignore its obligations under the TILA for more than four months. It failed to calculate an offset or petition the court for a declaration of its rights and obligations. When it finally decided to calculate the difference between what it owed plaintiff and what she would have owed Public if it had performed its obligations under § 1635(b), it properly concluded that its security interest in Aquino’s home was unnecessary to protect its legal due..

I therefore hold that Public’s failure to take steps “necessary or appropriate to reflect the termination” of its security interest in plaintiff’s home within the twenty day period prescribed by statute, constituted a violation of § 1635(b).

IV. Statutory Damages and Attorney’s Fees

Section 130(a) of the TILA clearly states that any creditor who violates § 1635(b) is liable for statutory damages and attorney’s fees.

Except as otherwise provided in this section, any creditor who fails to comply with any requirement imposed under this part, including any requirement under section 1635 of this title, ... with respect to any person is liable to such person in an amount equal to the sum of—
(2) (A)(i) in the case of an individual action twice the amount of any finance charge in connection with the transaction, ... except that liability under this subparagraph shall not be less than $100 nor greater than $1,000; ...
(3) in the case of any successful action to enforce the foregoing liability or in any action in which a person is determined to have a right of rescission under section 1635 of this title, the costs of the action, together with a reasonable attorney’s fee as determined by the court.

15 U.S.C. § 1640(a) (1982). Since the finance charge for this transaction was well over $500.00, Aquino is entitled to the maximum damage award of $1,000.00. Independent of Aquino’s entitlement to statutory damages, an award of attorney’s fees is mandated since her right to rescind was acknowledged by Public only after she filed this lawsuit.

Despite the clear language of § 1640(a), Public claims that Aquino is not entitled to an award of damages. In October, 1982, Aquino instituted suit against Public seeking damages under § 1640(a) for alleged disclosure violations of the TILA. That suit was settled out of court. Aquino later rescinded the transaction and filed this suit after Public failed to honor her notice of rescission. Public argues that because Aquino has already recovered damages under § 1640(a) for a disclosure violation, she is barred from recovery under the same section for Public’s failure to honor her rescission demand. In support of its position Public points to §§ 1640(d) and (g) and argues that both subsections show that an obligor is only entitled to one statutory damage award per transaction.

Subsection (d) states that “[w]hen there are multiple obligors in a consumer credit transaction ... there shall be no more than one recovery of damages under subsection (a)(2) of this section for a violation of this subchapter.” 15 U.S.C. § 1640(d) (1982).

The meaning of this subsection seems clear. If two or more obligors, such as a husband and wife, enter into a transaction in which the creditor fails to make a required disclosure, they are entitled to only one award of statutory damages for that violation. This subsection clearly does not limit obligors to one award of statutory damages per transaction. Since it does not even state that obligors are confined to one award for multiple disclosure violations, it is hard to understand how it could be read to limit an obligor to one recovery for two different types of violations: (1) failure to disclose, and (2) failure to honor a valid rescission.

Subsection (g) reads as follows:

The multiple failure to disclose to any person any information required ... to be disclosed [under the TILA] ... shall entitle the person to a single recovery under this section but continued failure to disclose after a recovery has been granted shall give rise to rights to additional recoveries. This subsection does not bar any remedy permitted by section 1635 of this title.

15 U.S.C. § 1640(g) (1982).

Although subsection (g) clearly limits obligors to one recovery for multiple disclosure violations, nothing in that subsection limits obligors to one recovery per transaction if there is later a failure to acknowledge a valid rescission. Congress is certainly aware of the difference between disclosure violations and rescission violations. In 1982, § 1640(a) was amended to confirm the position of certain courts that obligors are entitled to statutory damages for rescission violations even when their claims for disclosure violations are time-barred. Compare 15 U.S.C. § 1640(a) (1976) with 15 U.S.C. § 1640(a) (1982); see, e.g., Reid v. Liberty Consumer Discount Co. of Pa., 484 F.Supp. 435, 441 (E.D.Pa.1980). Clearly, if Congress wished to prohibit awards of statutory damages for rescission violations whenever an obligor had previously recovered damages for a disclosure violation, it could have easily said so.

Pursuant to the TILA, an obligor who has previously collected damages for a disclosure violation can later discover a more egregious violation and, more than two years after the first lawsuit, rescind the transaction. Although Congress enacted a one year statute of limitations for disclosure violations, it permitted rescission up to three years from the date of the underlying transaction. See 15 U.S.C. §§ 1640(e) and 1635(f) (1982). Not permitting an additional recovery of statutory damages for a subsequent violation of § 1635(b), however, would severely undermine a creditor’s incentive to honor a valid rescission demand. Yet Congress explicitly allowed for rescission suits after disclosure suits and explicitly provided a statutory damages penalty for rescission violations. Stretching the language of subsection (g) to prevent a later recovery for a rescission violation, as defendant proposes, would undercut the penalty Congress clearly decided to impose and I refuse to do so.

V. Equitable Conditioning Rescission

After a creditor has performed its obligations pursuant to a valid rescission, the obligor must tender to the creditor any property the creditor has previously delivered to the obligor. 15 U.S.C. § 1635(b). Public claims that this requires Aquino to return the $5,000.00 she was loaned and requests that I condition rescission upon the return of those funds. Aquino argues that the only property she received in the transaction was the car, and since that was already repossessed by Public, her obligations under § 1635(b) are complete. Both parties can point to courts of appeals opinions in support of their position. Unfortunately, no court of appeals has explicitly acknowledged these varying approaches nor convincingly explained why one approach should be adopted over another.

Aquino’s position might be valid in a “credit sale” context where the seller is also the creditor. See 15 U.S.C. § 1602(g) (1982). In that situation a seller is simply giving the obligor credit so that he or she can purchase one of the seller’s commodities. Allowing the obligor to return the property purchased instead of the monetary equivalent of the credit extended would still return the parties to the status quo.

The transaction between Aquino and Public, however, was quite different. Public did not sell a car to Aquino and it had no incentive to see that Aquino purchased a car from one dealer rather than another, so long as she arranged for credit through Public. There is simply no evidence that Public was so intimately involved with Sheehy that it should be considered the seller’s alter ego. In this context I see no reason why an obligor should be permitted to return the property purchased with the proceeds of the credit transaction rather than the monetary equivalent of the credit extended. If an obligor were permitted to return the purchased property, then a creditor would suffer the consequences of an obligor’s poor consumer decision. As stated by my Brother Bechtle in an analogous ease, “the Court sees no reason to penalize the lender for the unsatisfactory services performed by a third party.” Bookhart v. Mid-Penn Consumer Discount Co., 559 F.Supp. 208, 212 (E.D.Pa.1983).

Rescission will therefore be conditioned upon plaintiff’s return of that portion of the loan proceeds she has not already paid to the defendant in the form of money or property. More specifically, the amount Aquino has already paid Public ($1,768.03), plus the amount for which Aquino’s repossessed car was sold by Public ($2,550.00), a total of $4,318.03, shall be deducted from the $5,000.00 in loan proceeds, leaving a balance of $681.97 that Aquino is required to tender to Public. See 15 U.S.C. § 1635(b). An appropriate order follows.

      . When an obligor exercises his right to rescind under subsection (a) of this section, he is not liable for any finance or other charge, and any security interest given by the obligor, including any such interest arising by operation of law, becomes void upon such a rescission. Within 20 days after receipt of a notice of rescission, the creditor shall return to the obligor any money or property given as earnest money, downpayment, or otherwise, and shall take any action necessary or appropriate to reflect the termination of any security interest created under the transaction. If the creditor has delivered any property to the obligor, the obligor may retain possession of it. Upon the performance of the creditor’s obligations under this section, the obligor shall tender the property to the creditor, except that if return of the property in kind would be impracticable or inequitable, the obligor shall tender its reasonable value. Tender shall be made at the location of the property or at the residence of the obligor, at the option of the obligor. If the creditor does not take possession of the property within 20 days after tender by the obligor, ownership of the property vests in the obligor without obligation on his part to pay for it. The procedures prescribed by this subsection shall apply except when otherwise ordered by a court.
      15 U.S.C. § 1635(b) (1982).

      . Amendments to the Truth in Lending Act and revised regulations issued by the Federal Reserve Board became effective on October 1, 1982. Relevant facts in this case occurred both before and after October 1, 1982. Plaintiffs notice of rescission and defendant’s response to that notice both took place after October 1, 1982, and must therefore be governed by the statute and regulations presently in effect. The disclosure violation which underlies plaintiffs right to rescind occurred before October 1, 1982, and must theefore by governed by the statute and regulations previously in effect. All citations will be to the statute and regulations in effect when the event at issue took place.

      . Except as otherwise provided in this section, in the case of any consumer credit transaction (including opening or increasing the credit limit for an open end credit plan) in which a security interest, including any such interest arising by operation of law, is or will be retained or acquired in any property which is used as the principal dwelling of the person to whom credit is extended, the obligor shall have the right to rescind the transaction until midnight of the third business day following the consummation of the transaction or the delivery of the information and rescission forms required under this section together with a statement containing the material disclosures required under this subchapter, whichever is later, by notifying the creditor, in accordance with regulations of the Board, of his intention to do so. The creditor shall clearly and conspicuously disclose, in accordance with regulations of the Board, to any obligor in a transaction subject to this section the rights of the obligor under this section. The creditor shall also provide, in accordance with regulations of the Board, appropriate forms for the obligor to exercise his right to rescind any transaction subject to this section. 15 U.S.C. § 1635(a) (1982).

      . The putative waiver of the right of rescission entered into evidence by Public is irrelevant since it is not dated as required by the Board’s regulations. See 12 C.F.R. § 226.9(e)(3) (1982) (replaced effective Oct. 1, 1982).

      . Powers is distinguishable from the case presently before me. In Powers the obligors explicitly stated that they would not tender some of the property they obtained in the transaction, i.e., funds expended by the lender to pay their prior mortgage and taxes. 542 F.2d at 1220 n. 11. Aquino, on the other hand, did not object to returning all of the property she received in the transaction. Aquino and Public, however, could not agree on how to characterize what property was received in the transaction.

      . Congress has agreed that nothing in § 1635(b) prevents a court of equity from modifying the exchange procedures specified in that section. The 1982 amendments to the TILA give courts the power to alter the procedures prescribed by § 1635(b). 15 U.S.C. § 1635(b) (1982).

      . The technical error lay in Aquino’s belief that the car, rather than the loan proceeds, was the only property she received in the transaction with Public. See infra pp. 511-512.

      . "[W]ithout a fixed penalty, there will be many instances where actual damages alone will provide little or no effective remedy for the consumer____” S.REP. NO. 96-368, supra at 32, reprinted in 1980 U.S.CODE CONG & AD NEWS at 267.

      . See, e.g., Brown v. Nat. Permanent Fed. Sav. & Loan Ass’n, supra at 449 (remanded to determine whether rescission should be conditioned on the return to bank by obligor of fair value of work on obligor’s home); Rudisell v. Fifth Third Bank, 622 F.2d 243, 254 (6th Cir.1980) (rescission conditioned on the return to bank by obligor of value of aluminum siding purchased with loan proceeds); Gerasta v. Hibernia Nat. Bank, 575 F.2d 580, 585 (5th Cir.1978) (bank is entitled to a return of loan proceeds).

      . Since Aquino did not offer to tender the remaining loan proceeds, I reject plaintiffs position that Public has forfeited its right to this money. See 15 U.S.C. § 1635(b).


source: Caselaw Access Project

author: SWEET, District Judge.

license: Public Domain

text:
    HECCO VENTURES and Paul O. Koether, Plaintiffs, v. AVALON ENERGY CORP., Tri-South Investments, Inc., and Deltec Panamerica, S.A., Defendants.
    85 Civ. 2438 (RWS).
    United States District Court, S.D. New York.
    April 11, 1985.

      Koether Harris & Hoffman, New York City, Kohn, Milstein, Cohen & Hausfeld, Washington, D.C., for plaintiffs; Natalie I. Koether, Mathew E. Hoffman, New York City, Herbert E. Milstein, Steven J. Toll, Lisa M. Mezzetti, 'Washington, D.C., of counsel.
    Sullivan & Cromwell, New York City, for defendant Avalon Energy Corp.; Robert J. Katz, David B. Tulchin, Richard R. Howe, Theodore 0. Rogers, Jr., Hyman L. Schaffer, David H. Kagan, New York City, of counsel.
    Weil, Gotshal & Manges, New York City, for defendant Tri-South Inv., Inc.; Dennis J. Block, Nancy E. Barton, Joseph S. Allerhand, Sanford F. Remz, Marjorie L. Cohen, New York City, of counsel.
   OPINION

SWEET, District Judge.

Plaintiffs Hecco Ventures (“Hecco”) and Paul 0. Koether (“Koether”) (collectively “Hecco”) brought this action on March 29, 1985 charging defendants Avalon Energy Corp. (“Avalon”), Tri-South Investments Inc. (“Tri-South”) and Deltec Panamerica S.A. (“Deltec”) with violations of the Securities Exchange Act of 1934 in connection with the solicitation of proxies by the boards of directors of Avalon and Tri-South for approval of the merger of Tri-South with and into Avalon, as well as certain other violations of state law. By order to show cause, Hecco moved this court for a preliminary injunction enjoining the April 15, 1985 meeting of the shareholders of Avalon and Tri-South to vote on the proposed merger. Expedited discovery was conducted and a hearing on the motion was held on April 10,1985. For the reasons set forth below, Hecco’s motion for a preliminary injunction is denied.

The Parties

Hecco is a California limited partnership whose general partners are Cinerama, Inc., a New York corporation, and James J. Cotter, Ltd., a limited partnership whose sole general partner is James J. Cotter. It presently owns approximately 187,400 shares of Tri-South common stock. Koether is a resident of Far Hills, New Jersey. He presently owns approximately 50,000 shares of Tri-South common stock.

Avalon was incorporated in Maryland in 1984, and is a successor to CMT Investment Company, a California corporation incorporated in 1980. Avalon’s principal executive offices are located in New York. Avalon owns mortgages and equity interests in real properties and is in the process of redeploying certain of its assets into the domestic energy business.

Tri-South, incorporated in Georgia in 1980, is the successor to Tri-South Mortgage Investors, a Massachusetts business trust. Tri-South’s principal executive offices are located in Atlanta, Georgia. TriSouth is engaged in the acquisition, ownership, management, development and sale of real properties and the administration of its mortgage loan portfolio.

Deltec is a corporation organized under the laws of Panama with its principal office in Nassau, Bahamas. As of March 12, 1985, Deltec was the beneficial owner of 33.6% of Avalon’s common stock, 60.2% of Avalon’s preferred stock, and 41.4% of TriSouth’s common stock. The president of its wholly-owned subsidiary, Deltec Securities Corporation (a New York based securities brokerage firm), Arthur E. Byrnes (“Byrnes”) is chairman of the board of Avalon and has been a director of Tri-South since October 1983. Although Deltec is named as a defendant, it has not been served.

As of March 12, 1985, four of Avalon’s eight directors, including its chairman of the board, Byrnes, and its president Howard A. Knight (“Knight”) were directors of Deltec. This includes Joseph G. Cacioppo (“Cacioppo”) who is also executive vice president of Deltec and president of the Deltec Banking Corporation Limited, a wholly-owned subsidiary of Deltec. As of March 12, 1985, three of Tri-South’s ten directors, Byrnes, Cacioppo and Knight, were directors of Avalon and Deltec.

The Facts

In 1983 Tri-South filed a complaint against Deltec alleging certain securities act violations. The dispute was resolved shortly thereafter and the complaint withdrawn. In August 1984 Avalon initiated discussions with Tri-South concerning a potential merger between Avalon and TriSouth. On October 18, 1984, after negotiation, the boards of directors of Tri-South and Avalon unanimously approved a merger in principle, subject to the preparation of a definitive agreement, the receipt of fairness opinions from independent investment banking firms and various other conditions. The terms of the proposed merger were that Tri-South would be merged with and into Avalon which would be the surviving corporation, and that holders of outstanding Tri-South shares (other than Avalon) would be entitled to receive 1.18 shares of Avalon for each share of Tri-South held by them.

On January 11,1985, the definitive merger agreement was unanimously approved by Avalon’s board of directors, and on January 18 Tri-South’s board also unanimously approved the agreement, immediately following which it was executed and delivered. Each company was advised by its investment banker (Kidder, Peabody & Co. Incorporated for Avalon and Robinson Humphrey/American Express, Inc. for TriSouth) that the merger agreement was fair to the respective shareholders of each company from a financial point of view. The fairness advice given by the independent investment banking firms, initially oral, was later confirmed by their written opinions.

Commencing March 15, Avalon and TriSouth distributed a joint proxy statement to their shareholders, which Hecco now charges constitutes a violation of the securities laws (the “Proxy Statement”). Included as exhibits are the text of the merger agreement, the fairness opinions of the investment bankers, and the text of the proposed amended and restated Avalon Articles of Incorporation which its shareholders are being asked to approve as a predicate to their acting on the merger proposal. The Proxy Statement advises that each company will hold a shareholders’ meeting on April 15 to vote on these matters.

The Proxy Statement also states that the Avalon directors and seven other Avalon shareholders own 20.1% of Avalon’s common and preferred stock which they intend to vote in favor of the merger. When added to Deltec’s Avalon ownership, 63.3% of the shares are committed to the merger, and the affirmative votes of only an additional 3.4% of Avalon’s outstanding common and preferred stock will be needed. Taking into account the 41.4% of TriSouth’s outstanding shares owned or controlled by Deltec, the affirmative votes of an additional 8.6% of the common stock of Tri-South will be necessary.

According to the defendants, on January 4, 1985 plaintiff Koether met, at his request, with Knight and Byrnes, each of whom serves as a director of Avalon, TriSouth and Deltec. At that meeting, the defendants claim, Koether stated that he and an unidentified group of Tri-South stockholders for whom he professed to speak, and who collectively held nearly 5% of the outstanding Tri-South shares, were opposed to the proposed merger. He offered to purchase all Tri-South shares held by Avalon and Deltec, at $7.25 per share. In the alternative, he demanded that he and his group be bought out for $7.25 per share. Tri-South’s common stock closed on the New York Stock Exchange that day at $6,125. According to the defendants, Knight and Byrnes refused to meet Koether’s terms.

Conclusions

The complaint and the motion for preliminary injunction allege violations of section 10(b), 14(a) and 20(a) of the Exchange Act, Section 11 of the Securities Act of 1933, and breach of fiduciary duty. In particular, Hecco contends that the Proxy Statement fails to make full and accurate disclosure of the active trading pattern of Deltec in the common stock of Avalon and the effect of this trading on the exchange rate and market price of Avalon’s shares, the degree to which Avalon, Tri-South and Deltec are intertwined, the nature of the relationship between Avalon, Deltec, and The Moonie Oil Company, Ltd. (“Moonie”), the true reasons for the merger, the actual financial position of Avalon, the true purposes of the proposed amendments to Avalon’s Articles of Incorporation, and the basis of the analysis done by Tri-South and Avalon’s investment bankers.

The Applicable Standard

To prevail on a motion for a preliminary injunction, a plaintiff must demonstrate 1) that he will suffer irreparable harm if the transaction takes place, and either 2) that he is likely to succeed on the merits, or 3) that he has raised sufficiently serious questions going to the merits and that a balance of hardships tips decidedly in favor of equitable relief. See, e.g., Mitchell v. Cuomo, 748 F.2d 804, 806 (2d Cir.1984); Norlin Cory. v. Rooney Pace, Inc., 744 F.2d 255 (2d Cir.1984). Injunctive relief is “an extraordinary and drastic remedy which should not be routinely granted”, Medical Society of New York v. Toia, 560 F.2d 535, 538 (2d Cir.1977), and the plaintiff seeking such relief bears a heavy burden of proof. See, e.g., State of New York v. Nuclear Regulatory Commission, 550 F.2d 745, 750 (2d Cir.1972).

Section 14(a) of the Securities Exchange Act of 1934, 15 U.S.C. § 78n(a), prohibits the making of any statement in connection with a proxy statement “which, at the time and in the light of the circumstances under which it is made, is false and misleading with respect to any material fact, or which omits to state any material fact necessary in order to make the statements therein not false or misleading____” SEC Rule 14a-9(a), 17 C.F.R. § 240.14a-9(a).

The standard of materiality in the proxy disclosure context has been stated in TSC Industries v. Northway Inc., 426 U.S. 438, 449, 96 S.Ct. 2126, 2132, 48 L.Ed.2d 757 (1976):

An omitted fact is material if there is a substantial likelihood that a reasonable shareholder would consider it important in deciding how to vote ... Put another way, there must be a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the “total mix” of information made available.

In determining the likelihood of Hecco succeeding on its underlying claims, each of the various misstatements and omissions alleged by Hecco must be evaluated in the light of the cited authorities.

1. Deltec’s Transactions in Avalon’s Common Stock

Hecco contends that the Proxy Statement is misleading because it fails to disclose the active trading pattern of Deltec in the common stock of Avalon. Hecco asserts that from October 1984 through February 26, 1985, Deltec purchased at least 33,870 Avalon common shares, approximately 41.85% of all Avalon common shares purchased for the period, and that between January 1, 1985 and February 26, 1985 the Avalon common shares purchased by Deltec represented approximately 71% of all Avalon common shares purchased. Although Deltec’s holding of Avalon stock was disclosed, the details of these purchases were not. Hecco contends that these purchases represent a concerted program by Deltec to support the market price of Avalon’s common stock at a time when Avalon’s financial position was deteriorating and claims that the consistent level of the market price of Avalon’s common stock during this period is proof of Deltec’s manipulations.

According to Hecco “the exchange ratio which was originally announced in October 1984 could not possibly remain the same given Avalon’s deteriorating financial condition and Tri-South’s improving financial condition were it not for the active buying by Deltec, Avalon’s controlling shareholder, of Avalon’s stock” (Plaintiff’s memorandum at 7) and without Deltec’s support, “it may be reasonably anticipated that the price of Avalon stock will tumble.” (id at 3). Further, Hecco suggests that this trading activity affected the market price of Avalon shares as of March 13, 1985, the price disclosed in the proxy statement. For these reasons, Hecco claims a material omission in the failure to disclose the details of Deltec’s trading in Avalon shares.

Of course, Deltec’s purchases were disclosed in Deltec’s Schedule 13-D filings and no SEC rule or regulation has been cited requiring disclosure of the timing and amount of Deltec’s purchases and the Proxy Statement does quantify Deltec’s record-date positions in Tri-South and Avalon in accordance with SEC Schedule 14A and Regulation S-K. (Proxy Statement at cover page and pp. 3, 6-7, 15-17). The issue presented, therefore, is the factual question of materiality in view of the total mix of information available. TSC Industries v. Northway, Inc., supra, 426 U.S. at 449, 96 S.Ct. at 2132 (1976).

However, Hecco has failed to demonstrate that Deltec’s purchases had any impact on the price of Avalon stock. Hecco’s own expert witness, George Sozek (“Sozek”), testified that he saw no specific pattern to the trading by Deltec between October 1984 and February 1985. Although Deltec’s trades overall constituted approximately 40% of the sales during this period, presumably as reported in the pink sheets, Sozek stated that the market price of Avalon shares remained stable throughout the entire period and was unable to attribute any effect on the price of Avalon common shares to Deltec’s purchases during the period. The Avalon market price remained stable even following the release of information as to Avalon’s unfavorable fourth quarter results. There was no evidence presented to connect this stability with the Deltec purchases. Hecco speculates that the reason Avalon’s stock did not fall following the release of these results was Deltec’s manipulation of its price. However, Deltec last traded Avalon’s shares on February 26, six days after the release of these figures. Between February 26 and March 13, the date on which the stock price reported in the Proxy is based, the price of Avalon common stock actually rose. As of April 4, the closing asking price was Vs point higher than the price paid on February 26. The fall in price which Hecco stated would follow if Deltec ceased purchasing Avalon stock has yet to materialize.

Based on the evidence submitted, Hecco has failed to prove that Deltec’s purchases were a material factor affecting the market price of Avalon’s stock at any time. There is no basis, therefore, for requiring the disclosure of these purchases.

2. Relationships Between Deltec, TriSouth and Avalon

Hecco contends that the Proxy Statement fails to fully disclose the degree of involvement between the management of Deltec, Tri-South and Avalon, the so-called “web.” It claims that the statement “falsely describes certain Tri-South officers and directors as independent” and suggests that the Proxy Statement should have disclosed the existence and history of certain agreements between Tri-South and Deltec that were entered into following the conclusion of the lawsuit brought by Tri-South against Deltec in 1982 and the details of the controlling interests and management of Deltec.

The Proxy Statement makes certain disclosures concerning the interests and relationships of the Tri-South and Avalon officers and directors with Deltec and each other, see Proxy Statement at pp. 7, 10-11, 12-13, 28, 40-41, and explicitly states that “By reason of its substantial stock ownership and representation on the Boards of Directors of Avalon Energy and Tri-South, Deltec may have the ability to control both companies.” (Proxy Statement at 7). The Proxy Statement thus discloses that in January 1985, Howard Knight, who has been president and chief executive and a director of Avalon since June 1984, was elected a director of Deltec.

‘ However, Hecco points to the failure to disclose that, as he testified at his deposition, Knight had acted as a consultant to Deltec since April of 1984 and in the capacity of a managing director of Deltec since August of 1984. This failure to disclose fully the time at which Knight’s involvement with Deltec began was a significant omission but does not constitute a material omission, given the “total mix” of information provided. Taken as a whole, the Proxy Statement set out the nature and extent of the relationship between Avalon, Tri-South and Deltec and the degree to which Deltec might be able to control Avalon after the proposed merger. While the complete disclosure of Knight’s role as a Deltec consultant during the Avalon/TriSouth negotiation and during the period in which the Avalon board decided to invest in the Deltec Energy Fund, a fund administered by Knight, might have been advisable, it is not so significant that a reasonable stockholder would consider it important in deciding how to vote, even given the obvious interest and significant position of Deltec throughout.

As to the agreements arising out of the litigation between Deltec and Tri-South, Hecco has not succeeded in proving that this information was material. The two successive agreements that constituted and followed the settlement of the lawsuit TriSouth commenced against Deltec and the termination nearly a year ago of the successor agreement, were contemporaneously disclosed to Tri-South shareholders in Deltec’s various pertinent 13D amendments, which included copies of the two agreements and the termination agreement themselves. (See Byrnes Aff. 114 and Exh. B). The litigation was settled two years ago, and the resulting agreements were terminated nearly one year ago and have no continuing operating effect. While Hecco’s desire to have Tri-South’s earlier negative opinion of Deltec prominently disclosed is understandable, there is no reason why the prior position of Tri-South’s management, briefly held and abandoned, should affect a reasonable shareholder’s decision.

Hecco also argues that the Proxy Statement should have more fully disclosed the interests and individuals who control Deltec. However, Hecco has supplied no authority for the proposition that a proxy statement must disclose not only the entity having a significant interest in the two parties to a proposed merger but also the stockholders or controlling interests of that entity. There was no requirement that the Proxy Statement do more than set forth the relationship between Avalon, Tri-South and Deltec and no evidence that such a disclosure would affect the decision of the Tri-South shareholders. Although Hecco is undoubtedly frustrated by the veil produced by Deltec’s off-shore incorporation and management, that characteristic is fully disclosed. The Proxy Statement adequately discloses the extent of Deltec’s involvement with the proposed merger, and Avalon and Tri-South need not have set forth any additional information about Deltec’s management or owners.

3. Relationships Between Avalon, Deltec and Moonie Oil

Hecco argues that the Proxy Statement misrepresents the relationship between Avalon and Moonie Oil. The Proxy Statement explains that the relationship between the companies arose from Avalon’s acquisition of a substantial number of shares of Moonie Oil stock from seven Moonie Oil shareholders, the simultaneous purchase by those Moonie Oil shareholders of a substantial number of Avalon shares from Avalon, and an exchange of board of directors representation between the two companies, and states that the companies viewed their relationship as long term. (Proxy Statement at p. 24). Hecco challenges the accuracy of this statement as the basis of the fact that earlier this year Avalon filed a shelf registration statement with the SEC covering the Avalon shares that Avalon had conveyed to the seven Moonie Oil shareholders. Hecco also suggests that certain undisclosed agreements exist between Moonie Oil shareholders and Avalon by which these shareholders assigned their Avalon shares to Deltec.

Hecco has failed to prove that the failure to mention this shelf registration in the Proxy was a material omission. The shelf registration to be kept in effect for three years was filed by Avalon pursuant to its undertaking to each of the Moonie Oil shareholders, contained in the letter agreements pursuant to which the Avalon shares were transferred to them in the first place. There was no showing that the shelf registration was related to the merger or resulted from any known intention of any of the Moonie Oil shareholders in fact to dispose of any of their Avalon shares in a fashion to effect the merger. (Knight Aff. 117 and Exh. B).

As to the purported agreement between Moonie Oil shareholders and Avalon relating to an assignment to Deltec, Hecco has failed to refute Avalon’s assertion that no such agreements exist.

4. Other Alleged Non-disclosures and Misrepresentations

The remaining claims made by Hecco in its complaint and motion papers were not raised at oral argument and need only be discussed briefly.

.Hecco asserts that “the reasons for the merger are falsely portrayed ... as, in part, benefitting the Tri-South shareholders by giving them the opportunity to diversify their investment into the energy business” (Cplt. 1133a). They charge that the “true undisclosed reason” for the merger is to shore up the “worsening financial condition” of Avalon by using Tri-South’s cash and assets {id.)

Hecco has failed to provide a factual basis for its accusation that pertinent sections of the Proxy Statement, such as the discussion of the “Background of and Reasons for the Merger” and the “Business of the Surviving Corporation” set forth at pages 8-10 and 11-12, are in any respect false or misleading. The only purported basis for this conclusion is Hecco’s lawyers’ expressed opinion that the reasons for the merger set forth in the proxy statement “make no sense” because it is to them “incomprehensible” that Tri-South would wish to invest in the currently undervalued energy marked (plaintiff’s memorandum at 5-6). This claim is no more than an attempt by Hecco to substitute its business judgment for the Tri-South directors’ as to the direction the company should take.

Furthermore, the basis of its assertion that Avalon’s financial situation is “worsening” are those earnings results disclosed in the proxy statement itself. Even assuming that Avalon’s financial position was deteriorating, there was no need for the parties to the merger to disclose that the merger would result in Avalon’s obtaining the benefit of Tri-South’s assets. Avalon fully disclosed its financial picture, and a reader could easily determine that one of the advantages of this deal might be that Avalon would gain additional assets. See Richland v. Crandall, 262 F.Supp. 538, 554 (S.D.N.Y.1967) (“corporations are not required to address their stockholders as if they were children in kindergarten.”). Nor is there any duty to disclose Hecco’s pejorative characterizations of the merger. See Rodman v. Grant Foundation, 608 F.2d 64, 71 (2d Cir.1979). The material facts were disclosed, and the parties had no obligation to offer additional speculations as to why the merger might be considered particularly attractive from the perspective of Avalon.

In its complaint, Hecco also asserts that the Proxy Statement “fails to disclose the fourth quarter [1984] financial results of Avalon.” (Complaint II35). Similarly, its brief asserts that the Proxy Statement “makes only a vague reference to Avalon’s fourth quarter results” and that “there is no disclosure in the Joint Proxy Statement of Avalon’s poor fourth quarter financial results” (Pl.Mem. at 7, 8). However, the fourth quarter results of both Avalon and Tri-South are disclosed in their respective financial statements, at pages 77 and 96 of the Proxy Statement. Moreover, Avalon’s fourth quarter earnings results are specifically mentioned in the “Management Discussion” section which states that “[t]he trend toward lower operating income is expected to continue for the near future.” (Proxy Statement at p. 23).

Hecco also claims that the Proxy Statement fails to accurately disclose the purpose and intent of the proposed amendments to and restatement of Avalon’s Articles of Incorporation. Annex D to the Proxy Statement sets forth the full text of the proposed amended and restated Articles of Incorporation of Avalon, which its shareholders are being asked to adopt prior to and as a predicate to voting on the proposed merger. The operation and potential consequences of the proposed charter amendments, including possible impacts on efforts to influence or change control over the corporation, are discussed at length (Proxy Statement at pp. 45-56). Hecco has not pointed to a single inaccuracy in the discussion of the reasons for and potential effects, of the proposed charter amendments. Moreover, even if the purported ill motives of “locking up” and entrenching Deltec’s control lay behind the proposals, there would be no resulting disclosure duty. See Rodman v. Grant Foundation, supra 608 F.2d at 71.

Hecco alleges that the Proxy Statement “fails to disclose that the equity reported on Avalon’s Oklahoma joint venture is likely to be substantially, if not entirely, written off” (See Cplt. U 33g, Pl.Mem. at 8). The only support that Hecco offers for this allegation is the argument that the funds internally generated by the joint venture will allegedly be insufficient to pay off $12 million in debt due in 1986. As the defendants point out, however, this is a speculative assertion, since other possibilities for satisfying debt, such as injection of external funds, refinancing of the loan, or sale of the underlying property, are numerous. More important, Hecco has failed to challenge any specific elements of the discussion of the Oklahoma joint venture in the text of the Proxy Statement. The financial results of the Oklahoma joint venture and the debt due in 1986 are set forth in footnote 3 to Avalon’s financial statements (Proxy Statement at pp. 67-68). The Proxy Statement includes sufficient information so that the individual shareholder could exercise his own judgment concerning the venture and Hecco has failed to establish any material omission.

Finally, Hecco contends that the Proxy Statement fails to disclose what analysis of a possible liquidation of Tri-South was done by Robinson Humphrey/American Express in connection with the Proxy Statement. It argues that the Proxy Statement should have disclosed any independent asset appraisals provided to Robinson Humphrey in connection with its analysis of the fairness of the merger and in addition should have stated what Tri-South shareholders could have expected to receive in a liquidation of Tri-South’s remaining real estate assets as opposed to what they will receive in the merger.

Robinson Humphrey/American Express was retained for a fixed fee by the TriSouth board, as an independent investment banker, to render an opinion on the fairness of the merger to Tri-South shareholders from a financial point of view. The Proxy Statement states that “[t]he TriSouth Board of Directors also considered the uncertainties of being able to realize fair value for the remaining Tri-South real estate assets in a liquidation and were advised that Robinson Humphrey/American express had considered the alternative of a liquidation in reaching that firm’s conclusion that the Merger was fair to the TriSouth shareholders.” (Proxy Statement at 9).

The above statement constitutes adequate disclosure. In certain rare situations courts have required the disclosure of such “soft” information or asset valuations, see Flynn v. Bass Brothers Enterprises, Inc., 744 F.2d 978, 988 (3d Cir.1984) (laying out factors to be considered). A consideration of the factors relevant to such a decision, however, reveals that this is not a case in which such speculative disclosure should be required as it would be neither relevant nor material. See South Coast Services Corp. v. Santa Ana Valley Irrigation Co., 669 F.2d 1265, 1271 (9th Cir.1982). Nor was there any need for the defendants to have engaged in speculation as to the possible liquidation value of Tri-South. Id.

Hecco has failed to meet its burden of proving probable success on any of its claims. In addition, it has failed to raise sufficiently serious questions going to the merits of the case. With respect to irreparable harm, the defendants have not advanced any particularized harm that would result from enjoining the proposed merger other than the expense and difficulty that would result from additional mailings and delay and, more significantly, the harm arising from a conclusion that a company has violated the securities laws. However, in light of the fact that Hecco has been unable to meet the required showing for a preliminary injunction, its motion is denied.

IT IS SO ORDERED.

      . There is a suggestion that Deltec’s 13-D filings setting forth the purchases may not be complete, but no evidence is offered to buttress this suggestion.

      . The Hecco claim that the exchange ratio for Avalon and Deltec stock was adversely affected by Deltec’s purchases between August and October has not been pressed in view of the fact that only 700 shares were involved. Further, the Proxy Statement indicated that stock market values were one factor that was considered in setting the exchange rate and stated that:
      While market capitalizations were not a primary consideration, the exchange rates closely approximates the relative average market values of the two companies for the 60 trading days immediately preceding the announcement of the merger on October 18, 1984.
      Proxy Statement at p. 8.


author: GEORGE E. WOODS, District Judge.

text:
    Doral V. PAULEY and Jane M. Pauley, Plaintiffs, v. UNITED OPERATING COMPANY, et al., Defendants. Doral V. PAULEY and Jane M. Pauley, Plaintiffs, v. Robert G. CORACE, Jr., et al., Defendants. GORDIAN-NOTT PROMOTIONS CO., a Michigan corporation, Plaintiff, v. Robert G. CORACE, Jr., et al., Defendants.
    Civ. A. Nos. 79-74734, 81-72941 and 82-74303.
    United States District Court, E.D. Michigan, S.D.
    April 11, 1985.

      C. William Garratt, Mark D. Evans, Bloomfield Hills, Mich., for plaintiffs.
    Roger H. Leemis, Southfield, Mich., Frederick J. Amrose, Bloomfield Hills, Mich., Steven M. Lesinski, Detroit, Mich., Daniel F. Berry, Birmingham, Mich., for defendants.
   OPINION AND ORDER ACCEPTING MAGISTRATE’S REPORT AND RECOMMENDATION

GEORGE E. WOODS, District Judge.

This matter is before the Court on defendants’ objections to the Magistrate’s recommendation that this Court grant default judgments against defendants, strike their counterclaims, and award attorney fees pursuant to F.R.Civ.P. 37(b). Because this Court is firmly convinced that defendants’ abuse of the discovery process in the above-captioned cases warrants the imposition of such drastic sanctions, the Magistrate’s Report and Recommendation is hereby ACCEPTED.

The Magistrate’s Report and Recommendation is appended to this Opinion and Order and need not be set out at any length herein. For present purposes, it is sufficient to note the Magistrate’s determination that defendants have not complied with any of the following orders:

1. Order Regarding Pending Discovery Motions (docketed 3-22-84) (Magistrate Rhodes);
2. Second Order Regarding Pending Discovery Motions (docketed 3-26-84) (Magistrate Rhodes);
3. Third Order Regarding Pending Discovery Motions (docketed 3-26-84) (Magistrate Rhodes);
4. Order regarding the copying of documents (docketed 3-27-84) (Magistrate Rhodes);
5. Order regarding the marking of documents produced by defendant Co-race (docketed 3-27-84) (Magistrate Rhodes);
6. Order of this Court memorializing rulings made at an August 1, 1984 status conference requiring defendants to forthwith supply all answers to interrogatories and documents requested by plaintiffs and further requiring defendant Corace to appear and submit to depositions (docketed 8-20-84) (Judge Woods); and
7. Order Requiring Defendant Corace to Appear and Scheduling Hearing (docketed 1-15-85) (Magistrate Rhodes).

As the Magistrate correctly notes, orders numbered one through five above were affirmed by this Court on appeal on August 21, 1984. Defendants thus need to excuse seven instances in which they failed to abide by the orders of this Court. A review of their justification for these failures, embodied in their Objections to the Magistrate’s Report and Recommendation, does not persuade the Court that the sanctions recommended by the Magistrate are overly harsh.

Defendants first object that the Magistrate was without authority to enter the Report and Recommendation at issue because this Court only referred plaintiffs’ Motion for Sanctions for hearing and determination pursuant to 28 U.S.C. § 636(b)(1)(A). They also contend that the Magistrate acted in excess of his authority by considering the “supplements” to plaintiffs’ motion which, unlike the motion itself, sought “case-dispositive relief.” Put simply, defendants challenge the Magistrate’s authority to recommend dispositive relief when the Court’s Order of Reference only referred plaintiffs’ motion under the subsection of the Magistrate’s Act providing for reference of non-dispositive matters.

Had the Magistrate issued an order granting plaintiffs a default judgment, this objection would obviously be well-taken and there would be no doubt he had exceeded his authority. The Magistrate, however, acted properly by issuing a Report and Recommendation instead of an order when it became apparent that dispositive relief was called for. Plaintiffs suggest in their response to Defendants’ Objections that defendants have waived the right “to argue about the statutory subsection under which this matter was referred to the Magistrate” by virtue of their failure to raise the issue sooner. Alternatively, plaintiffs suggest that “if this Court is influenced by Defendants’ technical hair-splitting, this Court should sua sponte amend the order of reference nunc pro tunc ...” Plaintiffs’ Response to Defendants’ Objections To and Appeal From “Magistrate’s Report and Recommendation,” Dated January 22, 1985, at p. 3 [hereinafter Plaintiffs’ Response]. While the Court is persuaded that this objection does not warrant the rejection of the Magistrate’s Report and Recommendation, plaintiffs’ suggestion that the order of reference be amended nunc pro tunc to request a Report and Recommendation under 28 U.S.C. § 636(b)(1)(B) is a sufficient means of endorsing the Magistrate’s course of action in this matter and will be followed.

Defendants next object that Magistrate Rhodes erred by ordering defendant Corace to appear at the January 18, .1985 hearing. The Court concludes, however, that the Magistrate acted within the authority conferred upon him by Local Rule C-l(i)(9), which authorizes a Magistrate to “[i]ssue ... other orders necessary to obtain the presence of parties, witnesses or evidence needed for court proceedings.” As previously noted, the Magistrate had been given an order of reference as to all pretrial discovery proceedings and, to an extent not inconsistent with Article III of the United States Constitution, was acting for this Court. Having seen almost every legitimate discovery order go unheeded by defendant Corace, the Magistrate was understandably interested in hearing from this defendant himself as to why discovery was not forthcoming. In short, the Court is not satisfied that this objection should alter the Magistrate’s recommendation in any way.

Defendants next argue that conflicting orders of this Court should excuse their failure to, comply with Court-imposed discovery demands. In particular, defendants contend that the Court’s order of August 20, 1984, calling for them to submit to depositions, and produce documents in Michigan, conflicted with the Magistrate’s order requiring the same depositions and document production in Florida and that “[i]t would have been impossible to comply with the terms of both Orders.” They also assert that an “additional problem” made compliance with this Court's order of August 20, 1984 impossible:

Therein, Defendants were ordered to comply with Plaintiffs’ requests for production of documents by August 10, 1984. Stated otherwise, Defendants were ordered to perform an act ten (10) days before the Order compelling them to do so was entered. It would have been physically impossible to comply with that Order. As soon as it was entered, Defendants were ten (10) days late in complying with it.
Recognizing that it would be impossible to comply with the Orders of August 20 and 21, 1984, Defendants timely filed a Motion for Reconsideration of this Court’s Order of August 20, 1984. That Motion is still pending before this Court.

Defendants’ Objections at p. 6.

The first element of this objection was best dealt with in plaintiffs’ Response:

In March, 1984 Defendants were directed, first, to produce documents for inspection and copying in Florida and, then, to submit Defendant Corace to deposition in Florida. That discovery was ordered to occur in March. Although Defendants objected to and appealed from the Magistrate's March, 1984 Orders (which orders were affirmed by this Court on August 21, 1984) Defendants do not dispute (and, therefore, concede) the propriety of the Magistrate’s finding that they refused to obey those Orders. Defendants concede that four months later Judge Woods had to order from the bench on August 1, 1984 that Defendants file interrogatory answers and submit documents to the Court on or before noon on August 10, 1984 and that Corace appear for his deposition in Michigan. Discovery was expiring on August 31st. Disingenuously, Defendants now argue that, because the March, 1984 Orders requiring compliance in Florida were affirmed and because Judge Woods ordered that some of the same discovery be provided in Michigan, Defendants could not comply with both orders. Therefore, Defendants argue that they were justified in refusing to comply with either order. Notably, Defendants never mentioned this purported ‘conflict’ until after Magistrate Rhodes submitted his Report and Recommendation.
Of course, Defendants’ argument is pure sophistry and defies common sense and logic. If Defendants had ever complied with the March, 1984 discovery Orders, this Court would never have had to require Defendants (over four (4) months later at the close of discovery) to provide the same discovery in Michigan, where discovery disputes could be more quickly resolved. If Defendants had really been genuinely concerned with this alleged ‘conflict’ among the discovery Orders, Defendants could have complied with both or either or could have filed a motion for clarification. Instead, Defendants simply ignored all of the Court’s Orders, including Judge Woods’ Order from the bench which was later embodied in a written Order entered August 20, 1984.

Plaintiffs’ Response at pp. 11-13 (emphasis in original).

Defendants’ assertion that it would have been impossible to satisfy the “conflicting” orders was not raised in their Motion for Reconsideration of Orders Entered August 20, 1984, but was briefly touched upon in the Brief in Support of that motion. As plaintiffs point out in the portion of their response set out above, this argument is disingenuous and need not detain the Court long. This same Motion for Reconsideration which defendants suggest is still pending was never really properly before the Court because of its untimeliness, the Court having ruled from the bench on August 1,1984 and the Motion for Reconsideration having been filed on August 30, 1984.

Defendants next contend that the Magistrate was wrong in determining that they had failed to comply with “any” of the pertinent orders of this Court. A de novo review of the facts supports the Magistrate’s assessment. The assertions made at pages 7 through 9 of Defendants’ Objections are effectively deflated by Plaintiffs’ Response at pages 14 through 19 and will not be dissected here other than to note defendants’ concession that

[i]f it were true that “... the defendants have not complied with any ...” of this Court’s discovery orders, then perhaps Magistrate Rhodes would be justified in recommending the extremely harsh sanctions he has.

The facts establish — and defendants do not dispute — that any effort they made to provide the requested discovery came after the discovery cut-off date had passed. Putting aside for the moment that much of this effort may have been illusory (see, for example, the affidavit of Mark D. Evans, attached as Exhibit A to Plaintiffs’ Response) its gross untimeliness gives fresh currency to the Magistrate’s assessment. Viewed in this context, defendants should recognize the propriety of the Magistrate’s recommendation.

Nor can this Court place too much emphasis on defendant Corace’s purported travel restrictions. Since he was not indicted until July 31,1984, this excuse obviously cannot extend to that portion of the discovery period which preceded his indictment. Further, even if this excuse were to be accepted at face value, its frailty is exposed by the fact that it in no way can excuse the failure to answer interrogatories during that period. For these reasons, and those set out in Plaintiffs’ Response, the Court is not persuaded that the Magistrate erred in concluding defendants had failed to comply with any of the orders at issue.

Defendants’ final argument suggests that the “most severe sanction of default should not be imposed against defendants when their alleged discovery failures were not willful, and when plaintiffs have ignored defendants’ discovery requests and continue to violate this Court’s July 31, 1984 order.” In view of the foregoing discussion, the Court is persuaded that the element of willfulness permeates defendants’ conduct throughout the entire course of discovery in these matters and thus justifies the imposition of the sanctions recommended. This Court agrees that a consideration of the equities involved should temper the severity of the sanctions, but a review of the course of discovery does not reveal any conduct on the part of plaintiffs which should be held to excuse defendants’ obstructionist tactics in these cases.

The rules of discovery contained in the Federal Rules of Civil Procedure were designed to operate with a minimum of judicial interference. This same spirit is found in this Court’s Local Rules, where, for example, Rule 17(a) requires counsel to seek the concurrence of his or her opponent before requesting the Court’s intervention and also requires that counsel meet prior to any hearing on a discovery motion “in a good faith effort to narrow the areas of disagreement.” The rationale behind this spirit of self-determination is not that the Court is too busy to be bothered with discovery disputes, nor that discovery is not an important enough element of litigation to warrant judicial attention, but that the rules lay out broad and liberal guidelines in a search for the truth so that even opponents in the heat of the fray can step back and acknowledge that relevant information must be shared.

There are times when reasonable minds can differ as to the discoverability of certain information, and in such cases the Court accepts without complaint its role as arbitrator of such disputes. There are also, lamentably, occasions when one side or another decides it will not abide by the spirit of the rules but will make an opponent fight for every scrap of information it seeks. In either case, once the Court is called upon to rule on the dispute, it expects the parties to obey its resulting rulings. This point was effectively underscored by this Court at the status conference on August 1, 1984 when the Court informed counsel that it would not tolerate any further lack of cooperation and acrimony between the parties in the area of discovery.

The Court’s expectation that its discovery rulings will be obeyed is justified under the federal rules, which allow the Court to punish non-compliance with its discovery orders by ordering the

striking out [of] pleadings or parts thereof, or staying further proceedings until the order is obeyed, or dismissing the action or proceeding or any part thereof, or rendering a judgment by default against the disobedient party.

F.R.Civ.P. 37(b)(2)(C). The same rule also provides:

In lieu of any of the foregoing orders or in addition thereto, the court shall require the party failing to obey the order or the attorney advising him or both to pay the reasonable expenses, including attorney’s fees, caused by the failure, unless the court finds that the failure was substantially justified or that other circumstances make an award of expenses unjust.

F.R.Civ.P. 37(b)(2)(E).

The Court does not consider itself to be acting precipitously in deciding to accept the Magistrate’s recommendation, and it acts with full appreciation of the harshness of the sanctions applied here. A review of the pertinent considerations which should occupy the Court before passing on such an issue only serves to convince this Court of the propriety of the Magistrate’s recommendation.

The Court has considered the extent of defendants’ culpability and concludes that defendants have acted willfully in ignoring the Court’s orders and the reasonable discovery requests of plaintiffs. In considering this important prong of the required analysis, see, e.g., B.F. Goodrich Tire Co. v. E.H. Lyster, 328 F.2d 411, 415-416 (5th Cir.1964), the Court cannot ignore the fact that the principal defendant, Robert G. Corace, Jr., is an attorney and thus an officer of the Court. This is not a case, then, where a naive litigant is misled by his unschooled conviction as to the merits of his position into ignoring a Court order. On the contrary, defendant Corace is charged with knowing that he could not simply ignore Court-ordered discovery. If, for example, he felt his Fifth Amendment rights would be jeopardized by answering interrogatories in these civil cases, he also knew that the proper remedy was to assert his privilege on a question-by-question basis rather than merely ignoring plaintiffs.

This examination into the extent of defendants' culpability must of necessity consider any mitigating factors. As discussed previously, the Court cannot place much emphasis on defendant Corace’s purported inability to travel freely. Nor does it agree that the “equities” of this matter should militate in favor of lesser sanctions because plaintiffs have not been one hundred percent compliant in submitting to discovery themselves. That the Pauleys may not yet have answered all the interrogatories submitted to them should not be regarded as putting the parties on an equal footing in terms of culpability. The record of these cases indicates the Pauleys have submitted to depositions and did not reveal any great reluctance on their part to cooperate until it became apparent that discovery was becoming a one-way street.

The Court has also considered as a possible mitigating factor the fact that defendants’ August 30, 1984 Motion for Reconsideration has never been formally denied. This motion was filed in this Court while the undersigned Judge was sitting by designation on the Sixth Circuit Court of Appeals. As noted above, it was filed on August 30, 1984 in an attempt to re-argue the Court’s unequivocal determination that defendant Corace had to submit to depositions by August 10, 1984, and in violation of this Court’s admonition that it did not wish to hear anything further in opposition to its demand that defendant Corace cooperate within the next ten days. While better practice may have been to sift more carefully through the flood of pleadings routinely submitted by defendants and re-memorialize this Court’s denial of requests submitted by defendants solely for the purpose of delay, the Court cannot conclude under the totality of the circumstances that defendants legitimately believed they could once again forestall the operation of this Court’s orders by moving for reconsideration again.

The Court also concludes that an examination into the extent of the harm caused by defendants’ misconduct must weigh in favor of accepting the Magistrate’s recommendation. Beside the detriment to plaintiffs’ case in being thwarted in almost every attempt to secure basic, legitimate discovery, the Court must consider the harm done to the Court itself. Whether they refused to ignore an order of this Court or of the Magistrate, defendants have caused harm consistent with the harshness of the sanctions now ordered. Viewed in terms of the deterrence functions of Rule 37, see, e.g., National Hockey League v. Metropolitan Hockey Club, 427 U.S. 639, 643, 96 S.Ct. 2778, 2781, 49 L.Ed.2d 747 (1976), the harm which would result were defendants to go unpunished would be the unspoken endorsement of flagrant disregard for this Court’s orders. Consequently, the sanction of default judgments is not considered overly harsh.

The Court is similarly persuaded that the effect of these sanctions, beside protecting the integrity of its orders, would not unduly punish defendants out of proportion to their misconduct. It is no exaggeration to venture that the amount of these default judgments will be comparable to the dollar value of the time spent by this Court, the Magistrate and supporting staffs as a result of defendants’ misconduct.

Finally, this is not a case where an innocent party will be made to suffer by the procedural mistakes of counsel. This Court is aware — and may even have remarked on the record at one point — that defendants’ various counsel are not to be overly faulted for the defendants’ having found themselves in this situation. With the exception of several instances in which this Court has had to recommend that counsel make greater efforts to act professionally, defendants have no one to blame but themselves for the fatal flaws in their discovery strategy.

This conclusion is reached without any further oral hearings in this matter. This Court has already provided defendants with ample time to air their positions and also made it clear at the August 1, 1984 status conference that continued delay in submitting to discovery would result in drastic sanctions. The Court is also satisfied from defendant Corace’s failure to appear before the Magistrate as ordered that defendants obviously have nothing more to say that does not appear in their pleadings.

All of these factors suggest to the court that this is an appropriate situation within which to accept the Magistrate’s recommendation. Accordingly, IT IS ORDERED that the Magistrate’s Report and Recommendation be and the same is hereby ACCEPTED as the findings and conclusions of the Court.

Let judgment enter accordingly.

So ordered.

APPENDIX

MAGISTRATE’S REPORT AND RECOMMENDATION

22 Jan. 1985

As Amended 24 Jan. 1985

STEVEN W. RHODES, United States Magistrate.

This matter is before the Court on a motion for sanctions filed by the plaintiffs Doral V. Pauley and Jane M. Pauley on April 12, 1984. The defendants filed a response on May 9, 1984. On that day, the Pauleys filed a supplement to their motion and the defendants filed a response to this supplement on June 8, 1984. On August 27, 1984, the Pauleys filed a second supplement to their motion, followed by a third supplement on August 28, 1984, and a fourth supplement on October 5, 1984. On December 20, 1984, the defendants filed a response to these supplements. On January 7, 1985, the Pauleys filed a reply to the defendants’ response.

Hearings were held on the motion on November 26, 1984, January 8, 1985, and January 18, 1985.

The Pauleys contend that because the defendants have failed to comply with the several discovery orders entered in these cases, the Court should enter default judgments against them, strike their counterclaims, and grant attorney fees. For the reasons set forth below, it will be recommended that the motion be granted.

Rule 37(b)(2), upon which the Pauleys rely, provides that if a party fails to obey an order to provide discovery, the Court may make such orders in regard to the failure as are just, and among others the following:

(C) An order striking out pleadings or parts thereof, or staying further proceedings until the order is obeyed, or dismissing the action or proceeding or any part thereof, or rendering a judgment by default against the disobedient party.
This subrule further provides:
In lieu of any of the foregoing orders or in addition thereto, the court shall require the party failing to obey the order or the attorney advising him or both to pay the reasonable expenses, including attorney’s fees, caused by the failure, unless the court finds that the failure was substantially justified or that other circumstances make an award of expenses unjust.

Specifically the Pauleys contend that the defendants have failed to comply with the following discovery orders:

1. On March 21,1984, the Court entered an order entitled, “Order Regarding Pending Discovery Motions”. Among other things, this order required defendant Co-race to appear for his deposition at certain specified dates and times.

2. On March 22,1984, the Court entered an order entitled, “Second Order Requiring Pending Discovery Motions”. This order required the defendants to answer the Pauleys’ first interrogatories by March 28, 1984.

3. On March 23,1984, the Court entered an order entitled “Third Order Regarding Pending Discovery Motions”. This order required the defendants to comply with the Pauleys’ first and second requests for production of documents by March 26, 1984.

4. On March 27,1984, the Court entered an “Order” regarding the copying of the defendants’ documents.

5. On March 27,1984, the Court entered a second “Order” regarding the marking of documents produced by Corace.

6. On August 1, 1984, during a status conference, the Court ordered that all answers to interrogatories and documents requested by the Pauleys be furnished by August 10, 1984, and further ordered that Corace appear for his continued deposition at certain specified times and places. These orders were restated in a written order entered on August 10, 1984.

In addition, Corace failed to comply with an order requiring him to appear personally in Court at the third hearing on this motion which was held on January 18, 1985. This order was entered on the record in open court at the second hearing on January 8, 1985, and re-stated in an order entitled “Order Requiring Defendant Corace To Appear and Scheduling Hearing on Motions,” entered on January 14, 1985. This order was entered for the stated purpose of giving the Court an opportunity to “address the defendant Corace concerning his attitude and intention regarding the outstanding discovery demands of the plaintiffs and the Court’s orders.” At the hearing, Corace’s counsel appeared and indicated that Corace did not intend to appear.

A fair review of the record indicates that the defendants have not complied with any of these orders, and that the violations are continuing. Specifically, the orders regarding the interrogatories, documents, and Co-race’s deposition have never been complied with. In this regard it must also be noted that discovery closed as of August 31, 1984.

In opposition to the motion, the defendants contend that the Pauleys also have not complied with their discovery requests; that the Pauleys’ counsel has been unreasonable and difficult to deal with; that they had a right to delay compliance with the Magistrate’s orders pending appeal to the District Judge; and that Corace’s indictment obstructed their efforts to comply-

These contentions are largely frivolous and serve only to corroborate the conclusion that the defendants’ failures to comply with the Court’s orders were willful and in bad faith.

It must be recognized that the sanctions recommended herein are the most extreme sanctions that the Court can impose upon the defendants’ ability to proceed in these cases and that therefore they must be reserved for use only as a last resort. There is a strong policy favoring trial on the merits. See: Matter of MacKeekin [MacMeekin], 722 F.2d 32, 36 (3rd Cir.1983); Zavala Santiago v. Gonzalez Rivera, 553 F.2d 710, 712 (1st Cir.1977); and Flaksa v. Little River Marine Constr. Co., 389 F.2d 885, 888-89 (5th Cir.1968), cert. denied, 392 U.S. 928 [88 S.Ct. 2287, 20 L.Ed.2d 1387] (1968).

Nevertheless the record demonstrates that the defendants have made a trial on the merits impossible, due to their failure to provide discovery. Thus, these sanctions are fully justified by the defendants’ conduct; no less severe sanctions can possibly remedy the results of the defendants’ violations. Cf: Insurance Corp. of Ireland, Ltd. v. Compagnie des Bauxites de Guinee, 456 U.S. 694, 700 [102 S.Ct. 2099, 2103, 72 L.Ed.2d 492] (1982); and McCloud R.R. Co. v. Sabine River Forest Products, Inc., 735 F.2d 879, 883 (5th Cir.1984). The Court must not permit the defendants to profit in any way from their willfully wrongful conduct. Cine Forty-Second Street Theatre Corp. v. Allied Artists Pictures Corp., 602 F.2d 1062, 1066 (2nd Cir.1979).

Moreover, these sanctions are required to deter others contemplating abusive conduct, Roadway Express, Inc. v. Piper, 447 U.S. 752, 763-64 [100 S.Ct. 2455, 2462-63, 65 L.Ed.2d 488] (1980), and National Hockey League v. Metropolitan Hockey Club, Inc., 427 U.S. 639, 643 [96 S.Ct. 2778, 2781, 49 L.Ed.2d 747] (1976), reh’g denied, 429 U.S. 874 [97 S.Ct. 197, 50 L.Ed.2d 158] (1976), and are required to preserve the dignity and authority of the court. In re Gustafson, 650 F.2d 1017, 1023 (9th Cir.1981) (en banc). Again any lesser sanction will undermine these important policy considerations.

Accordingly, it is recommended that the Pauleys’ motion for sanctions be granted, that the Court grant default judgments against the defendants, that the Court strike the defendants’ counterclaims, and that the Court award attorney fees pursuant to Rule 37(b), Federal Rules of Civil Procedure.

The parties are advised that any objections to this Magistrate’s Report and Recommendation must be filed within, ten (10) days. Otherwise, any appeal from this Court’s judgment is waived.

      . This Court’s order of reference as to all pretrial discovery proceedings, entered on March 23, 1984, puts to rest defendants’ assertion that "Magistrate Rhodes took it upon himself to report and recommend upon the subsequent 'supplements,' ...” Defendants’ Objections To and Appeal From "Magistrate’s Report and Recommendation,” Dated January 22, 1985, p. 4 [hereinafter "Defendants’ Objections”].

      . Plaintiffs’ response was filed on March 28, 1985, together with a "6(b) Motion for One Day Enlargement of Time to File Brief.” That motion is hereby GRANTED and the response is properly before the Court.

      . This objection is adopted by reference from defendants’ "Objections to Order and Determinations of Magistrate, which Order and determinations are embodied in ‘Order Requiring Defendant Corace to Appear and Scheduling Hearing on Motions,’ Dated January 14, 1985” Defendants' Objections, Exhibit B.

      . While it is true that this order was not reduced to writing nor signed by the Court until August 20, 1984, the Court’s order was given from the bench on August 1, 1984 and required complianee by August 10. Defendants were instructed to prepare a memorialization of the Court’s orders and should not be allowed to profit by their dilatoriness. Had the Motion for Reconsideration been timely, it would have had to have been denied, as it merely presented the same issues previously ruled upon by the Court and did not "demonstrate a palpable defect by which the Court and the parties have been misled [nor did it] show that a different disposition of the case must result from a correction thereof.” Local Rule 17(k)(3).

      . Defendants raise additional arguments in their "Further Objections to Magistrate’s Report and Recommendation Dated January 22, 1985,” but they are essentially cumulative or else are so lacking in merit as to require no discussion. Their objection that there is no connection between the discovery sought and a trial on the merits, for example, is an awkward way of objecting to the relevance of plaintiffs’ discovery requests. For the most part, such objections have already been rejected by this Court in ordering that discovery proceed. Their suggestion that the Court erred in refusing to adopt a plan of discovery is also frivolous as it ignores the central inquiry now before the Court concerning their failure to abide by the "plan” of discovery that evolved from this Court’s orders.

      . All of the foregoing orders were entered by the Magistrate on reference from the District Judge, who affirmed the orders on appeal on August 21, 1984.

      . On July 31, 1984, Corace was indicted by a Federal Grand Jury in Detroit on charges of mail fraud and false statements.

      . Without objection from the parties, the eight other outstanding motions identified in the scheduling order of January 14, 1985, have been ordered held in abeyance pending the Court’s disposition of the motion for sanctions.