author: WILL, District Judge.

text:
    MARCO HOLDING COMPANY, an Illinois corporation, Plaintiff, v. LEAR SIEGLER, INC., a Delaware corporation, d/b/a National Twist Drill & Tool Company; Chicago Hi-Speed Tool Company and Supply, an Illinois corporation; Serson Supply Inc., an Illinois corporation, Defendants.
    No. 82 C 4417.
    United States District Court, N.D. Illinois, E.D.
    Feb. 14, 1985.

      Nathan H. Lichtenstein, Greenberg, Keele, Lunn & Aronberg, Robert S. Atkins, Robert E. Williams, Robert S. Atkins & Assoc., Chicago, 111., for plaintiff.
    Ronald Butler, James Rubin, Brigett Bell, Butler, Rubin, Newcomer, Saltarelli & Boyd, Chicago, 111., for Serson Supply.
    Marc A. Primack, Alan S. Ganz, Rooks, Pitts, Fullagar & Poust, Chicago, 111., for Lear Siegler.
    Loren J. Mallon, Roy L. Bernstein, Gottlieb & Schwartz, Chicago, 111., for Chicago Hi-Speed.
   MEMORANDUM OPINION

WILL, District Judge.

Before us in this heavily litigated ease are (1) defendants’, Lear Siegler, Inc. (Lear Siegler), Chicago Hi-Speed Tool Company and Supply, Inc. (Chicago Hi-Speed), and Serson Supply, Inc. (Serson Supply), motion for summary judgment on count III of Marco Holding Company’s (Marco) third amended complaint, alleging a violation of Section 1 of the Sherman Antitrust Act, 15 U.S.C. § 1, and Section 3 of the Clayton Act, 15 U.S.C. § 14, and (2) Marco’s motion under Fed.R.Civ.P. 12(f) to strike count II of Lear Siegler’s counterclaim, alleging “fraudulent and deceitful misrepresentation” and its first and second affirmative defenses or, alternatively, for summary judgment, Fed.R.Civ.P. 56, and for sanctions under Fed.R.Civ.P. 11. For the reasons hereinafter stated we (1) deny Lear Siegler’s motion for summary judgment on count III of the third amended complaint and deny plaintiff’s request for sanctions and (2) grant Marco’s motion for summary judgment on Lear Siegler’s counterclaim, and first and second affirmative defenses, but deny its request for sanctions, fees and expenses with regard to this particular motion.

In addition to the pleadings on the motions before us, the voluminous record includes many exhibits and extensive deposition testimony of the following persons involved in this litigation: William S. Lazich (Lazich), currently division president of National Twist Drill & Tool Company (National Twist); Charles A. Kremser (Kremser), vice president of sales of National Twist; Robert D. Pedigree (Pedigree), one of three regional sales managers of National Twist; Wilfred A. Ferzacca (Ferzacca), another regional sales manager of National Twist; Leon Rosen (Rosen), president of Chicago Hi-Speed; John J. Serson (Serson), president of Serson Supply; Wesley Barnes (Barnes), vice president of Serson Supply; Mark Douglas Friefeld (Friefeld), president of Manufacturers’ Industrial Suppliers Corporation (MIS) during the relevant time period; Barry R. Friefeld, of Field Tool Supply Co. (Field Tool); Sidney Friefeld, co-owner with Edward Friefeld of MIS and Field Tool; Samuel A. Robbins (Robbins), certified public accountant and accountant for MIS and Field Tool; and Robert E. Templeton (Templeton), salesman for National Twist. Many of these persons have been deposed, redeposed and deposed yet again. Additionally, the record also includes affidavits from some of the above-named gentlemen.

From the above, we have determined that the following facts, relevant to the motions before us, are, apparently, not disputed. Lear Siegler, through its National Twist division, manufactures cutting tools, including end mills, drills, and taps. It sells them under various brand names, including “National”, “Standard”, and “Max-Line”. Apparently, the items are substantially identical, although they are put into different packages and the Max-Line brand tools are less expensive than the National and Standard brands. The industry generally perceives the Max-Line brand to be inferior to National and Standard. Max-Line does not have the “image” that National has. Lazich Dep. at 169 (July 23, 1983) Lear Siegler sells the cutting tools through a network of distributors, some of whom sell to other distributors, while others sell to end users.

In August, 1976, Lear Siegler made Serson Supply a master distributor of the National brand; it had previously been a Standard distributor. (A “master distributor” is one who sells solely to other distributors and not to end-users or consuming accounts.) Lear Siegler also made Chicago Hi-Speed a master distributor of Standard. In 1981 and 1982, Serson Supply and Chicago Hi-Speed were “considered good dollar volume” distributors and the largest distributors in the Chicago metropolitan area. Kremser Dep. at 229-230 (Dec. 6, 1984).

In June, 1981, Ferzacca, sales manager for Lear Siegler’s Chicago area region, contacted MIS concerning the possibility that MIS become a distributor of Lear Siegler cutting tools. Ferzacca was interested in MIS, as he understood it sold to small distributors and Lear Siegler was interested in having such a distributor. Lear Siegler was losing small orders and needed an aggressive master distributor. Ferzacca Dep. at 25 (Mar. 23, 1983); Pl.Ex. 0 (Ferzacca Weekly Summary Report of Nov. 7, 1981).

In November, 1981, Mark D. Friefeld and Barry Friefeld went to National Twist’s headquarters in Rochester, Michigan to effect an “arrangement”, see Lear Siegler Br. at 2, or a “contract”, see Marco brief at 4, by which Lear Siegler would sell cutting tools to MIS who would, in turn, resell to other distributors. At the meeting, Lear Siegler issued MIS a “quotation number”, see Lear Siegler Br. at 2, or a “purchase order”, see Marco Br. at 5, pursuant to which products were delivered to MIS in December, 1981. The exact terms of the “arrangements” or “contract” between MIS and Lear Siegler are, as we shall see, in dispute. Apparently, there was no written contract.

In January, 1982, MIS sent a “Trans-O-Gram”, drafted by Friefeld, to all distributors on its mailing list. The message stated that “National Twist Drill Brand” was “Now a Stocked Line at M.I.S.” and quoted the following prices: (1) under $200 list: discount less 50 percent; (2) $200 list and over: discount 50 percent and 10 percent. National Twist’s Distributor Discount Schedules, dated effective September 4, 1981, June 21, 1982, May 9, 1983, and March 12, 1984, announce that distributor discounts on certain listed items were: (1) orders for $500 or more at list price, minus 50 percent; (2) orders for less than $500 at list price minus 45 percent. Thus, even assuming that the percentage discounts remained the same as between MIS’ and National Twist’s price schedules, those discounts were available to MIS customers for much smaller orders: $200 as opposed to $500.

A copy of the Trans-O-Gram was sent to Kremser at National Twist. Other distributors, including Chicago Hi-Speed and Serson Supply also received the Trans-O-Gram. Chicago Hi-Speed and Serson Supply contacted Lear Siegler. They inquired, Def.Br. at 3, or complained, Pl.Br. at 6, about the pricing schedule of National products. Other companies contacted Lear Siegler as well and complained. Lazich Dep. at 154 (July 25, 1983). It appears, however, that the “complaints” of Chicago Hi-Speed and Serson Supply were the most vigorous.

At his deposition, Kremser testified that after one of the calls he did not “know how he pacified him. He was very angry — [,] was going to discontinue doing business with us or diminish our sales.” He told the caller “[n]ot to do anything drastic and just hold his fire for awhile until I have a chance to talk and find out why they are going out to National distributor organizations.” Kremser Dep. at 153 (July 26, 1983). Rosen, of Chicago Hi-Speed called Pedigree and said “[i]f National is going to continue to sell Field Tool, then I won’t be able to continue to represent Standard tool.” Pedigree Dep. at 94 (Oct. 19, 1983). Kremser was sure that the “problem” “wouldn’t go away” and that Lear Siegler was “in jeopardy with some of our good distributors.” Kremser Dep. at 165. See also Rosen Confidential Dep. at 107 (Nov. 9, 1984); Serson Confidential Dep. at 26 (Oct. 22, 1984).

Defendants state that Kremser advised representatives of Serson Supply and Chicago Hi-Speed that Lear Siegler “would look into the “situation” and “was dealing with that matter.” Def.Motion (Appendix) at 4, Fact ## 10, 11.

Kremser and Pedigree met with MIS in Chicago to try to convince it to carry the Max-Line brand. During the same trip, after meeting with MIS, they met with Bosler Supply, Serson and Chicago Hi-Speed. Pedigree Dep. at 106-107 (Oct. 19, 1983). When asked, “Are you still dealing with Field Tool?”, Kremser allegedly responded, “We are still trying to resolve the issue.” Id. at 108-109. The decision to terminate MIS as a National brand distributor was made at the meeting at which Mark Friefeld, Barry Friefeld, Pedigree, Kremser and another unnamed person were present. Id. at 100. Lazich made the decision to terminate MIS as a National distributor. Id. at 102. But Lear Siegler offered to have MIS act as a distributor of its Max-Line tools. Def.Br. at 6; Pl.Br. at 7.

Both Kremser and Lazich testified that absent the complaints of other distributors, including Serson Supply and Chicago Hi-Speed, and other problems in the future, Lear Siegler would not have terminated MIS. Kremser Dep. at 170; Lazich Dep. at 166.

Prior to 1979, MIS and Field Tool were separate corporations. MIS sold only to other distributors, while Field Tool sold both to distributors and consuming accounts (end users). Both corporations were owned by Sidney Friefeld and Edward Friefeld. In 1979, acting on advice of their accountant, Samuel A. Robbins, the corporations were merged, allegedly for tax purposes. The Articles of Merger were filed with the Secretary of State. Lear Siegler Mem., Letter from F.R. Buoscio to Samuel A. Robbins (Feb. 26, 1979). At this time, MIS was dissolved and reincorporated to preserve its name. Id. In 1983, Mark D. Friefeld, the owner and president of Marco Holding, purchased all the assets of Field Tool and MIS. In 1981, he was president of MIS.

On July 15, 1982, MIS filed a complaint against Lear Siegler alleging breach of contract — promissory estoppel (count I), breach of contract — part performance (count II), and fraud and misrepresentation (count III). On May 2, 1984, MIS filed a second amended complaint, adding defendants Chicago Hi-Speed and Serson Supply and an antitrust claim (count III). On April 12, 1984, Serson filed a counterclaim and cross claim against MIS and Lear Siegler which it voluntarily dismissed on July 31, 1984. On September 13, 1984, Marco Holding, the successor corporation to Field Tool and MIS, filed a third amended complaint alleging breach of contract — promissory estoppel (count I), breach of contract — part performance (count II), antitrust violation — group boycott (count III), and tortious interference with the reasonable expectation of economic advantage (count IV). Counts I and II are directed solely against Lear Siegler. Count IV is directed solely against Chicago Hi-Speed and Serson Supply. Count III is brought against Lear Siegler, Chicago Hi-Speed and Serson Supply.

I. Defendants’ Motion for Summary Judgment on the Antitrust Claim

In considering a summary judgment motion, we note that a party moving for summary judgment has the burden of clearly establishing the non-existence of any genuine issue of fact material to a judgment in its favor. Cedillo v. International Association of Bridge & Structural Iron Workers, Local Union No. 1, 603 F.2d 7, 10 (7th Cir.1979). Any doubts concerning material facts must be resolved against the moving party. Moutoux v. Gulling Auto Electric, Inc., 295 F.2d 573, 576 (7th Cir.1961). On the other hand, any inferences to be drawn from the underlying facts must be viewed in favor of the non-moving party. Korfv. Ball State University, 726 F.2d 1222, 1226 (7th Cir.1984).

In the particular context of antitrust actions the applicable tests for the propriety of granting summary judgment are the same, subject to the following analyses. It is certainly as true in an antitrust case as in any other that “[i]f after completion of pretrial discovery, it is clear that the plaintiff will not be able to establish at trial an essential element of his claim, the defendant is entitled to have the complaint dismissed on summary judgment; a trial would be a waste of time.” Products Liability Insurance Agency, Inc. v. Crum & Forster Insurance Companies, 682 F.2d 660, 663 (7th Cir.1982). A plaintiff must present enough evidence of conspiracy to resist defendant’s motion for summary judgment. Id. at 662.

However, in many antitrust actions — “where motive and intent play leading roles, the proof is largely in the hands of the alleged conspirators, and hostile witnesses thicken the plot” — summary disposition is inappropriate. American Dermatologists’ Medical Group, Inc. v. Collagen Corporation, 595 F.Supp. 79, 81 (N.D.Ill.1984), citing Poller v. Columbia Broadcasting System, Inc., 368 U.S. 464, 473, 82 S.Ct. 486, 491, 7 L.Ed.2d 458 (1962) (footnote omitted). Poller stands for the proposition that, “if a claim under the antitrust laws has been adequately set forth in the complaint, the highly factual and subjective questions of intent and purpose should be resolved after discovery and trial.” Car Carriers, Inc. v. Ford Motor Co., 745 F.2d 1101, 1106 (7th Cir.1984) (citation omitted) (affirming the district court’s grant of defendants’ 12(b)(6) motion). And in order to deny a motion for summary judgment, a court need not affirmatively find that a conspiracy exists, but only that there are factual issues concerning such a conspiracy. American Dermatologists’, supra, 595 F.Supp. at 81. This is precisely the situation here.

Lear Siegler contends that its termination of MIS as a distributor was an independent, unilateral act, that the termination had no adverse effect on competition, and that there is no evidence of a price-fixing conspiracy so as to warrant the application of a per se analysis. We need not, however, and do not reach the question whether a per se or rule of reason analysis should be employed here, although Marco claims that even under a rule of reason analysis, the evidence sets forth a violation of the Sherman Act.

Defendants further argue that Lear Siegler’s “independent decision” to terminate MIS was based on the fact that MIS had agreed to submit its mailing list for review by Lear Siegler to allow it to “purge” from the list the names of existing Lear Siegler distributors. Not surprisingly, MIS claims that no such “purge” request was ever agreed upon. There is, of course, greatly conflicting deposition testimony on the purge issue. Cf. (for Lear Siegler) Lazich Dep. at 127, 128; Kremser Dep. at 96-97, 142, 230; Pedigree Dep. at 66 with (for MIS/Marco) Mark Douglas Friefeld Dep. at 57, 73, 77, 83. Given the various views of the arrangements between MIS and Lear Siegler and drawing inferences favorably to the non-moving party, Marco, summary judgment is clearly inappropriate to resolve these disputed issues of material fact. Lear Siegler’s explanation (or motive) for terminating MIS does not necessarily obviate MIS’ contention that Lear Siegler agreed, with some of its distributors, to terminate MIS, to exclude it from the market, thereby protecting and stabilizing resale prices to both the end user market, as well as the distributor market.

Defendants argue that the Supreme Court’s recent decision in Monsanto Company v. Spray-Rite Service Corporation, — U.S. -, 104 S.Ct. 1464, 79 L.Ed.2d 775 (1984) mandates the grant of summary judgment on Marco’s antitrust claim. In Monsanto, the Court considered the standard of proof required to find a vertical price-fixing conspiracy in violation of Section 1 of the Sherman Act. We note, though, that the court’s analysis was directed to that standard of proof which a plaintiff must satisfy in order to prevail ultimately, not to defeat a motion for summary judgment. See American Dermatologists’, supra, 595 F.Supp. at 82 n. 2.

In Monsanto, the Court reiterated the two important distinctions at the center of any distributor-termination case. First, Section 1 does not proscribe “independent” action. A manufacturer can refuse to deal with whomever it likes, as long as it does so independently. Second, the Court distinguished between concerted action to set prices and concerted action on nonprice restrictions; the former are subject to a per se standard, while the latter are judged under the rule of reason. Monsanto, supra, 104 S.Ct. at 1469. The Court cautioned against permitting the inference of an agreement “merely from the existence of complaints, or even from the fact that termination came about ‘in response to’ complaints____” Something more than evidence of complaints is needed, such as evidence that “tends to exclude the possibility that the manufacturer and nonterminated distributors were acting independently.” Id. at 1470-71. “[Tjhere must be direct or circumstantial evidence that reasonably tends to prove that the manufacturer and others had a conscious committment to a common scheme designed to achieve an unlawful objective.” Id. at 1473.

In the context of Lear Siegler’s motion for summary judgment, we believe that plaintiff has produced enough evidence so that a trier of fact might reasonably decide that it meets the Monsanto standard. See American Dermatologists’, supra, 595 F.Supp. at 82. Given the timing and practically undisputed vehemence of Serson Supply’s and Chicago Hi-Speed’s complaints, the attendant threats to reduce or eliminate business with Lear Siegler, the timing of the termination, and the different discount price schedules offered by MIS and Lear Siegler, Marco is entitled to present its antitrust claim to the jury.

This is not to suggest that plaintiff will ultimately prevail on count III. To do so, Marco must present sufficient evidence for a jury to reasonably conclude that Lear Siegler and some of its distributors, Chicago Hi-Speed and Serson Supply, were parties to an agreement or conspiracy to maintain resale prices and to terminate price cutters, such as MIS, and where the termination was part of the agreement. Monsanto, supra, 104 S.Ct. at 1471. We conclude only that there remain genuine issues of material fact with respect to a conspiracy under the Sherman Act so as to warrant the denial of defendants’ summary judgment motion.

Sanctions

Plaintiff claims that the “frivolity” of defendants’ summary judgment motion requires that sanctions be awarded. It claims that not only have defendants filed a motion which has no basis in law, but also one in which fact statements claimed to be “undisputed” seriously conflict with deposition testimony. See Pl.Ex.B (Analysis of Defendants’ “Undisputed” Facts). Additionally, at a status hearing on November 29, 1984, when Lear Siegler’s counsel indicated it would be filing a summary judgment motion on the antitrust count, we, in no uncertain terms, informed defendants’ counsel that if the motion was “spurious”, we would assess costs and sanctions. By “spurious”, we meant that if defendants relied on deposition testimony of the alleged co-conspirators denying an illegal conspiracy and that testimony did not, indeed, “prove anything”. Tr. at 11-14 (Nov. 29, 1984).

Defendants’ motion has resulted in the submission of hundreds of pages of deposition testimony, as well as the briefs. The clear impression with which we are left after carefully examining all of the various documents is that a fair reading of the deposition testimony of Lear Siegler’s own officers and employees, Kremser, Lazich, and Pedigree, and Serson and Rosen of Serson Supply and Chicago Hi-Speed, tends, if anything, to undermine rather than to support defendants’ contention that there are no material issues of fact relating to a conspiracy. And, in several instances, defendants artfully mischaracterize this testimony, as plaintiff calls to our attention in its Exhibit B.

Nevertheless, although defendants were warned about putting the Court and the other side through unnecessary exercises, Tr. at 14, we are somewhat hesitant about imposing costs and sanction either under Fed.R.Civ.P. 11 or 28 U.S.C. § 1927 as a result of their bringing this motion.

Fed.R.Civ.P. 11 in relevant part provides:

Rule 11. Signing of Pleadings, Motions and Papers, Sanctions
Every pleading, motion, and other paper of a party represented by an attorney shall be signed by at least one attorney of record in his individual name, whose address shall be stated---- The signature of an attorney or party constitutes a certificate by him that he has read the pleading, motion, or other paper; that to the best of his knowledge, information, and belief formed after reasonable inquiry it is well grounded in fact and is warranted by existing law or a good faith argument for the extension, modification, or reversal of existing law, and that it is not interposed for any improper purpose, such as to harass or to cause unnecessary delay or needless increase in the cost of litigation____ If a pleading, motion, or other paper is signed in violation of this rule, the court, upon motion or upon its own initiative, shall impose upon the person who signed it, a represented party, or both, an appropriate sanction, which may include an order to pay to the other party or parties the amount of the reasonable expenses incurred because of the filing of the pleading, motion, or other paper, including a reasonable attorney’s fee.

(As amended Apr. 28, 1983, eff. Aug. 1, 1983).

The standard to be applied under the new version of Rule 11 is one of reasonableness; it is more strigent than the original good faith formula and it is expected that a wider range of circumstances will trigger its violation. SFM Corporation v. Sunstrand Corporation, 102 F.R.D. 555, 556 (N.D.Ill.1984). Rule 11 sanctions are not, however, intended to chill an attorney’s enthusiasm or creativity in pursuing factual or legal theories and a court should avoid using the wisdom of hindsight in examining the attorney’s conduct at the time of the pleading. Fed.R.Civ.P. 11, Notes of Advisory Committee.

We must conclude that, though this is an extremely close case and our initial inclination is to assess costs and sanctions, defendants’ legal theories are not so unreasonable nor the deposition testimony so devoid of their interpretation as to justify sanctions under Rule 11.

We reach a similar conclusion with respect to an award of fees against defendants’ counsel based on 28 U.S.C. § 1927. That section provides:

§ 1927. Counsel’s liability for excessive costs
Any attorney or other person admitted to conduct cases in any court of the United States or any Territory thereof who so multiplies the proceedings in any case unreasonably and vexatiously may be required by the court to satisfy personally the excess costs, expenses, and attorneys’ fees reasonably incurred because of such conduct.

(As amended Sept. 12, 1980, Pub.L. 96-349, § 3, 94 Stat. 1156.)

Section 1927 might support an award of fees against defendants’ counsel. See Suslick v. Rothschild Securities Corp., 741 F.2d 1000, 1006 (7th Cir.1984). The Seventh Circuit holds that there are two prerequisites for the imposition of fees under section 1927; (1) the actions by the attorney must multiply the proceedings; and (2) these actions must be vexatious and unreasonable. The second prong requires subjective bad faith by the attorney. While the lack of merit of an action is evidence of bad faith, “the claim must lack even a colorable basis in the law to justify an award of fees.” Id. (citations omitted).

Section 1927, because of its penal nature, has been strictly construed. The power to assess costs on opposing counsel arises in response to a “ ‘serious and studied disregard for the orderly process of justice.’ ” Badillo v. Central Steel & Wire Co., 717 F.2d 1160, 1166 (7th Cir. 1983) (citations omitted). Although it is clear that the summary judgment motion is without merit, we are unable to find the requisite degree of culpability on the part of defendants’ counsel or a complete lack of plausible basis for the motion or a showing of intentional misconduct. Knorr Harbill Brake Corp. v. Harbil, Inc., 738 F.2d 223, 227 (7th Cir.1984). We, therefore, conclude that the facts and circumstances of this case do not merit the extreme sanction of awarding fees and costs against defendants’ counsel.

II. Plaintiffs Motion to Strike or in the Alternative for Summary Judgment and Sanctions

On September 24, 1984, somé ten days after plaintiff filed its third amended complaint, Lear Siegler filed a counter-claim against Marco Holding, Field Tool, MIS, and Mark D. Friefeld, alleging that Friefeld misrepresented the “true situation” of the relationship between MIS and Field Tool (count II of the counterclaim). Lear Siegler contends that Friefeld’s statements were made in order to influence Lear Siegler to sell tools to MIS and that the statements were material to the Lear Siegler decision to do business with MIS. It claims that it did not want to enter into a comparable arrangement with Field Tool because, among other reasons, Field Tool sold directly to consumers. Lear Siegler alleges that it unintentionally and unknowingly dealt with Field Tool and was damaged as a result of the “fraudulent and deceitful misrepresentation.”

Lear Siegler’s first affirmative defense states that plaintiffs claims are barred because of the “fraudulent and inequitable conduct of MIS and Field Tool.” Lear Siegler’s second affirmative defense alleges that MIS, a claimant in the various counts of the third amended complaint, was not the real party in interest for the matters alleged because it existed in all relevant respects only as a division of Field Tool.

Plaintiff moves under Fed.R.Civ.P. 12(f) for an order striking count II of Lear Siegler’s counterclaim and first and second affirmative defenses or, alternatively, for summary judgment under Fed.R.Civ.P. 56, and for sanctions under Fed.R.Civ.P. 11. Initially, we must determine the proper procedural approach to the resolution of the issues raised by plaintiff’s motion.

Plaintiffs Rule 12(f) motion to strike defendant’s first and second affirmative defenses alleges that they are insufficient and immaterial. Rule 12(f) permits the court, on its own initiative or upon motion by a party, to order stricken from any pleading any insufficient defense or any redundant, immaterial, impertinent, or scandalous matter. Ordinarily, a Rule 12(f) motion is decided on the basis of the pleadings alone. Here, however, both plaintiff and defendant have submitted exhibits and deposition testimony in support of their positions.

Unlike a Rule 12(b)(6) motion, there is no comparable provision for “converting” a 12(f) motion to strike an insufficient defense into a Rule 56 motion for summary judgment. However, several commentators suggest that, if matters outside the pleadings are presented and considered, especially those testing the legal sufficiency of a defense, a Rule 12(f) motion can be transformed into a motion testing the factual and evidentiary, as well as the legal, basis for the challenged pleading and would serve much the same function as a motion for summary judgment. See C. Wright & A. Miller, 5 Federal Practice & Procedure, § 1380 at 789 (1969).

Although some courts conclude that matters outside the pleadings should never be considered when ruling on a motion to strike, see, e.g., Krauss v. KeiblerThompson Corp., 72 F.R.D. 615, 617 (D.Del.1976), other courts have done so in the course of “converting” a 12(f) motion into one for partial summary judgment. See, e.g., Morrill v. Becton, Dickenson and Company, 216 U.S.P.Q. 550, 552 (E.D.Mo.1981) and cases cited therein; General Dynamics Corp. v. United States, 558 F.2d 985, 989, 214 Ct.Cl. 607 (1977). We believe that this is the better approach, especially here where the challenge is directed at the substance, rather than at the form of defendant’s pleading. See The Motion to Strike an Insufficient Defense— Rule 12(f) of the Federal Rules of Civil Procedure, 11 Rutgers-Camden L.J. 441, 443, 457 (1980). See also Wright & Miller, supra (the conversion provisions in 12(b)(6) and 12(c) were inserted at the same time as the motion to strike an insufficient defense was formally recognized and the possibility of extending the practice to 12(f) may have been’ overlooked); Report of the Advisory Committee on Federal Rules of Civil Procedure Recommending Amendments, 5 F.R.D. 339, 345 (1946) (the failure to draft a conversion clause similar to that in 12(b)(6) and 12(c) was unintentional). We will, therefore, treat plaintiff’s 12(f) motion as one for partial summary judgment, as it alternatively requests, and will apply the same standard for summary judgment as delineated earlier in this opinion.

Lear Siegler contends that there are genuine issues of material fact relating to “the fundamental point that had Lear Siegler been informed that it was inadvertently dealing with Field Tool instead of MIS, it would not have entered into the transactions resulting in this litigation.” In support of its contention, Lear Siegler offers the recent affidavits of Lazich (Nov. 27, 1984), Kremser (Nov. 27, 1984), and Ferzacca (Nov. 28, 1984). Plaintiff argues that by these affidavits Lear Siegler is attempting to create issues of fact, that in certain instances the statements made in the affidavits do not gibe with those made in deposition testimony taken more than a year prior to the affidavit, and that this discrepancy between affidavit statements and deposition testimony is, in any event, insufficient to defeat its summary judgment motion because it is not material. We agree.

Indicative of Lear Siegler’s unpersuasive attempt is Lazich’s deposition testimony of December 6, 1984, taken after his November 27, 1984 affidavit, which plaintiff characterizes as a classic “where’s the beef?” or “distinction without a difference” situation. When questioned with respect to the intricacies of the relationship between MIS and Field Tool, the following exchange took place:

Q I refer you to paragraph 9 of your affidavit which states that in November, 1981, National Twist did not want to sell cutting tools under the arangements entered into with M.I.S. for a business that was controlled by Field Tool. What do you mean by “controlled by Field Tool”?
A Controlled or owned, I guess it would be.
Q What is the difference between Field Tool owning M.I.S. or the owners of Field owning M.I.S.?
A Again, I would go back to the separate operation in the preceding paragraph. '
Q I am not asking about operations now. I am asking you about what is the difference between being controlled by Field Tool or that the owners of Field Tool owned M.I.S.?
A Being controlled means that they are not operating separately.
Q So what? What is the difference? What is the difference between being controlled by Field Tool and between Field Tool owning M.I.S.? Or what is the difference between M.I.S. being controlled by Field Tool and the owners of Field Tool owning M.I.S.?
A There was no M.I.S.
Q Well, you say that they were controlled by Field Tool. I am asking what is the difference____
A We didn’t want to do business with Field Tool.
Q But you know they had the same owners?
A Common owners but separate corporations is the way it was described to us.

Lazich Dep. at 238-239 (Dec. 6, 1984). The colloquoy continues for several more pages.

There is substantial deposition testimony to the effect that in 1981 Lear Siegler knew that MIS was part of Field Tool and did not then regard that as material, being concerned mainly that MIS, in contrast to Field Tool, would sell to other distributors and not to end users. See, e.g., Pl.Ex.5, Ferzacca Dep. at 18 (Mar. 23, 1983); Pl.Ex.10, Kremser Dep. at 175 (July 26,1983) (apparently, in early 1982, a meeting took place at Field Tool in which “Bob” (Robert Pedigree, most likely) and Kremser tried to sell to MIS the Max-Line products after telling Friefeld that Lear Siegler would not accept orders for National Products); id. at 99 (“I wasn’t aware of the connection with Field Tool ... they [Friefelds] explained that that was part of their or there was interlocking ownership or whatever, they were affiliated in some way or another____ it came out that Field Tool and MIS were intertwined in some way or another.”) When questioned whether he had any concerns about that, Kremser replied: “Concerned if they may sell to Field Tool? It was not a major concern. It was something I was interested in.” Id. See also id. at 171 (when Kremser and Lazich arrived at MIS in Chicago they were told to go to Field Tool); Pl.Ex.11, Lazich Dep. at 126 (July 25,1983) (at the Rochester, Michigan meeting attended by Lazich, Kremser, Barry Friefeld and Mark Friefeld, MIS’ relationship with Field was discussed); Pl.Ex.15, Kremser Dep. at 209 (Dec. 6, 1984) (When asked whether he knew in November, 1981, that MIS was going to sell National products to Field Tool, Kremser replied that he was not sure but he “assumed that there would be some product sold to FTS” and that he had had a discussion with MIS about their relationship with Field Tool and about their selling products to Field Tool); Pl.Ex.16, Lazich Dep. at 252-3 (Dec. 6, 1984) (Lazich was aware that MIS would be selling National products to Field Tool); Pl.Ex.12, Blanket Quotation (Nov. 20, 1981) and attached document signed “approved” by Kremser on review dated May 19, 1982, naming “F.T.S.” as consumer.

We have considered carefully Lear Siegler’s fact statements and citations to the record therein. We are unable to conclude that the MIS/Field Tool relationship was, in any way material to the events occurring in 1981 and 1982, which are the subject matter of this lawsuit. Further, we question whether affidavits, submitted only after plaintiff’s summary judgment motion, which attempt to recharacterize circumstances extensively covered in prior deposition testimony more than one year earlier, can aid Lear Siegler in its attempt to show genuine issues of material fact requiring a trial.

At least two courts have commented on this practice. In Radobenko v. Automated Equipment Co., 520 F.2d 540, 543-44 (9th Cir.1975), the court noted that on a summary judgment motion a court does not try issues of fact, but rather it examines the entire record and first decides the limited question whether any factual issues exist. In that case, the Ninth Circuit pointed out that if there existed any issue of fact, it existed only because of the inconsistent statements made by a person as a deponent and a person as an affiant. The court rejected appellant’s efforts to characterize issues of fact as “genuine issues” of fact and affirmed the District Court’s grant of summary judgment. Id. at 544, citing Perma Research & Development Co. v. Singer Co., 410 F.2d 572, 578 (2d Cir.1969).

In Perma Research, the Second Circuit similarly considered the situation where inconsistent statement are made by one as a deponent and by the same one as an affiant. Noting that deposition testimony is usually more reliable than an affidavit statement since the deponent is at least available for cross examination, the court nevertheless concluded that a court may not exclude the affidavit from consideration to determine whether there is any genuine issue as to any material fact. The court affirmed the grant of summary judgment and voiced concerns about the same type of situation as exists here. “If a party who has been examined at length on deposition could raise an issue of fact simply by submitting an affidavit contradicting his own prior testimony, this would greatly diminish the utility of summary judgment as a procedure for screening out sham issues of fact____ a party who resists summary judgment cannot hold back his evidence until the time of trial.” Id. at 578 (citations omitted). See also Barwick v. Celotex Corp., 736 F.2d 946, 960 (4th Cir.1984); Chrysler Credit Corp. v. Burton, 599 F.Supp. 1313 (M.D.N.C.1984).

That is precisely what Lear Siegler has attempted to do here. Our reaction is the same. Plaintiff’s motion for summary judgment on Lear. Siegler’s counterclaim is granted.

Sanctions

Plaintiff also requests that we assess fees and costs under Fed.R.Civ.P. 11 against Lear Siegler. It claims that since the July 12, 1984, deposition of Samuel Robbins, where Lear Siegler allegedly first learned of the Merger of MIS and Field Tool, Lear Siegler has wasted judicial time and has pursued oppressive discovery to substantiate its “fraud” defense.

Earlier in this opinion we discussed the applicability of Rule 11 sanctions, which we denied, with respect to defendants’ summary judgment motion. We are inclined to adopt the same approach for purposes of plaintiff’s motion here. Even with the easing of the Rule 11 standard by changing the discretionary language to the directive that a court “shall impose”, it does not follow that Rule 11 sanctions should be imposed in every instance a motion is denied, a pleading struck, or summary judgment granted. We note, for instance, that even though the Seventh Circuit quoted the “new” language of Rule 11 in a recent case, the court seemed to be applying the “old” “subjective bad faith” requirement, stressing the “colorable nature” of the claim. Suslick v. Rothschild Securities Corp., 741 F.2d 1000, 1003 n. 3, 1006 (7th Cir.1984).

Wherever the line of demarcation may ultimately be drawn as to Rule 11 sanctions, we surmise that Lear Siegler is treading very close to it. We are, however, unable to conclude that its litigation strategy has clearly transgressed that line. We, therefore, deny Marco’s request for sanctions against Lear Siegler for bringing count II of its counterclaim and first and second affirmative defenses.

Conclusion

Defendants’ summary judgment motion is denied. Plaintiff’s request for sanctions in conjunction with that motion is denied. Plaintiff's motion for summary judgment on count II of Lear Siegler’s counterclaim and first and second affirmative defenses is granted. Plaintiff’s request for fees and costs necessitated by Lear Siegler’s pleadings is denied. An appropriate order will enter.

      . Because of the multiple depositions taken of several persons involved in this case, for the sake of clarity we will indicate the date of the deposition as we refer to it.

      . Defendants’ reliance on Computer Place, Inc. v. Hewlett-Packard Co., 1984-2 Trade Cases ¶ 66,254 (N.D.Cal.1984) and Gillette Tire Jobbers of Louisiana, Inc. v. Appliance Industries, Inc., 596 F.Supp. 1277 (E.D.La.1984) is unavailing. Those cases do not persuade us that summary judgment is appropriate here. In fact, the court’s discussion in Computer Place of the relative burdens to be carried on a summary judgment motion lends weight to our conclusion. The court stated:
      Once the allegations of conspiracy made in the complaint are rebutted by probative evidence supporting an alternative interpretation of a defendant’s conduct, if the plaintiff fails to come forward with specific factual support of its allegations of conspiracy, summary judgment for the defendant becomes proper.

        Id. at 67,100. Cf. Moore v. Boating Industry Ass’ns, 754 F.2d 698, 710 (7th Cir.1985) (refusing to overturn a jury verdict where there is "sufficient evidence in the record to demonstrate that the members [of the association] acted in response to the threat by the defendants to revoke the members’ certificate of approval if they used [plaintiffs’] Model 701____”)
      In this case, plaintiff has proffered specific factual support of its allegations of conspiracy through the deposition testimony of officers and employees of defendants and exhibits of price discount schedules. And in Gillette, the court relied on the language in Monsanto which we have previously stated does not support a grant of summary judgment under the facts of this case.

      . We have also considered and rejected Lear Siegler’s argument that MIS is not the real party in interest here and lacks the corporate standing to pursue the action. See Fed.R.Civ.P. 17(a), (b). In December, 1983, Marco purchased the assets of MIS and Field Tool and in September, 1984, plaintiff was granted leave to amend its complaint and substitute Marco as plaintiff. See Pl.Motion for Leave to File Instanter, ¶ 1 (Sept. 13, 1984). Further, Lear Siegler’s reliance on Moore v. Matthew’s Book Co., 597 F.2d 645 (8th Cir.1979) is misplaced. There, the corporation had forfeited its corporate existence by failing to file its annual registration and antitrust reports with the State of Missouri. In that instance, only all of the statutory trustees, not the corporation, could bring suit. Here, however, MIS was a registered corporation at all relevant times, regardless whether, as Lear Siegler claims, it existed in "name" only.


source: Caselaw Access Project

author: SHADUR, District Judge.

license: Public Domain

text:
    James W. McCRIMMON, et al., Plaintiffs, v. KANE COUNTY, etc., et al., Defendants.
    No. 83 C 7884.
    United States District Court, N.D. Illinois, E.D.
    Feb. 20, 1985.

      Herbert Hill, Aurora, 111., for plaintiffs.
    Patricia Johnson Lord, Asst. State’s Atty., Geneva, 111., for defendants.
   MEMORANDUM OPINION AND ORDER

SHADUR, District Judge.

James McCrimmon (“McCrimmon”) and Terri Gillis (“Gillis”) filed this 42 U.S.C. § 1983 (“Section 1983”) action against Kane County (“County”), its Sheriff George Kramer (“Kramer”), Deputy Sheriff Kenneth Ramsey (“Ramsey”) and other Deputies (“Deputies”), County’s State’s Attorney’s Office (“Office”), State’s Attorney Robert Morrow (“Morrow”) and Assistant State’s Attorneys Gary Johnson (“Johnson”) and John Barsanti (“Barsanti”). Plaintiffs seek compensatory and punitive damages for alleged violations of their Fourth and Fourteenth Amendment rights in connection with a search of premises in Aurora Township and the later filing of various state charges against plaintiffs. Defendants now move under Fed.R.Civ.P. (“Rule”) 12(b)(6) to dismiss the Complaint in its entirety for failure to state a claim on which relief can be granted. For the reasons stated in this memorandum opinion and order, that motion is granted in part and denied in part.

Facts

At 2:45 a.m. November 7, 1981 Ramsey and unidentified Deputies executed a warrant (the “Warrant,” PI. Mem. Ex.) for the search of a house owned by plaintiffs at 151 Edgewood in Aurora Township. Because issuing Judge John Krause had found probable cause to suspect gambling and the keeping of a gambling place on the premises, the Warrant authorized a search of the entire house and of any persons found there. In addition the officers were authorized to seize:

Gambling devices, paraphernalia used in the act of gambling, cash monies, liquor to be sold at retail, documentation reference liquor sales, documentation reference gambling activities and proceeds, indicia of residency.

As the return on the Warrant reflected, the officers did seize a felt-covered table, dice and a dice cup, a juke box and other items contemplated by the Warrant’s terms. But the return did not reflect the seizure of (1) $1,000 cash in a sealed envelope and a pair of diamonds (both items found in a drawer in Gillis’ bedroom) or (2) a 1973 Kawasaki motorcycle discovered when the officers extended their search from the house to an unattached garage. Moreover the officers damaged the garage in the process of gaining entry. Various items of food and beverage were destroyed during the search of the house. In conjunction with their execution of the Warrant the officers arrested 63 persons, including plaintiffs, on gambling charges.

Each plaintiff was charged with (1) distribution of alcoholic liquor without a license, (2) keeping a gambling place and (3) maintaining a public nuisance. In addition McCrimmon was charged with unlawful possession of a motor vehicle. Plaintiffs— then defendants — moved in Kane County Circuit Court for a dismissal of all charges against them. That motion was granted and the property seized pursuant to the Warrant returned to plaintiffs (excluding presumably such contraband items as containers of suspected marijuana and cocaine). But the $1,000 cash, diamond earrings and motorcycle were not returned.

Nearly one year to the day after they filed their original complaint in this action, plaintiffs filed a four-count First Amended Complaint (the “Complaint”), which is the focus of the present motion. Count I charges County, Kramer, Ramsey and Deputies with violations of plaintiffs’ rights under the Fourteenth Amendment’s Due Process and Equal Protection Clauses in connection with the execution of the Warrant. Count II charges the same defendants with constitutional violations in the arrest of, and filing of charges against, plaintiffs. Count III claims a conspiracy on the part of the same defendants to prosecute charges against plaintiffs as alleged in Count II. Count IV asserts Fourteenth Amendment violations by Johnson, Barsanti, Morrow and Office in the execution of the Warrant.

Count I

Parratt v. Taylor, 451 U.S. 527, 535, 101 S.Ct. 1908, 1913, 68 L.Ed.2d 420 (1981) states the operative considerations here:

Accordingly, in any § 1983 action the initial inquiry must focus on whether the two essential elements to a § 1983 action are present: (1) whether the conduct complained of was committed by a person acting under color of state law; and (2) whether this conduct deprived a person of rights, privileges, or immunities secured by the Constitution or laws of the United States.

Defendants do not deny they acted under color of state law in searching plaintiffs’ house. Rather they contend plaintiffs have failed to allege any deprivation of their Fourteenth Amendment rights to equal protection and due process.

Defendants are right as to the alleged equal protection violation. As Briscoe v. Kusper, 435 F.2d 1046, 1052 (7th Cir.1970) teaches:

The Equal Protection Clause has long been limited to instances of purposeful or invidious discrimination rather than erroneous or even arbitrary administration of state powers. The gravamen of equal protection lies not in the fact of deprivation of a right but in the invidious classification of persons aggrieved by the state’s action.

Of course an individual alleging purposeful discrimination on the part of state officials may constitute a “class” of one for equal protection purposes. But absent allegations of deliberately having been singled out for disparate treatment from others similarly situated, a plaintiff fails to state an equal protection claim. No facts in the Complaint depict McCrimmon and Gillis as victims of such intentional or purposeful discrimination. While improper execution of the Warrant represented erroneous and arbitrary conduct by state officials, there is nothing to indicate that conduct was motivated by purposeful disparate treatment. Contrast Ossler v. Village of Norridge, 557 F.Supp. 219, 223-24 (N.D.Ill.1983).

Plaintiffs’ Count I due process claim requires a bit more analysis. Leaning heavily on Parratt, 451 U.S. at 543-44, 101 S.Ct. at 1916-17, defendants’ Count I Mem. 7 argues plaintiffs have alleged no Fourteenth Amendment violation in that respect (emphasis in original):

In the case at hand, plaintiffs do not allege that they were not given a hearing and an opportunity to be heard regarding the deprivations alleged in their Complaint.
Nor can plaintiffs assert that they should have been given a hearing prior to the execution of the search warrant.

But plaintiffs claim more than a violation of their procedural rights. They assert (see Complaint H 2) the execution of the search — in particular its extension to the garage, the seizure of property not contemplated by the Warrant and the destruction of certain property in the course of the search — violated their right to be free from unreasonable searches and seizures. That Fourth Amendment guaranty .is made applicable to the states through the due process clause of the Fourteenth Amendment. And as Guenther v. Holmgreen, 738 F.2d 879, 882-83 (7th Cir.1984) teaches (citations omitted):

Parratt is inapplicable where the plaintiff asserts a violation of substantive constitutional guarantees — e.g., Fourth Amendment protections — as distinguished from a violation of his procedural due process rights____ Thus far, the Supreme court has not retrenched from its seminal holding in Monroe v. Pope, 365 U.S. 167, 183, 81 S.Ct. 473, 481, 5 L.Ed.2d 492 (1961), that a substantive Fourth Amendment violation gives rise to a cognizable § 1983 action regardless of the existence of state tort remedies.

Thus the question is whether the alleged extension of the search beyond the Warrant’s authority was unreasonable in Fourth Amendment terms. While the $1,000 cash falls within the express terms of the Warrant, the diamond earrings and the motorcycle do not. If officers armed with a duly issued search warrant could disregard its limitations with impunity in deciding what to seize, the constitutional guaranty (see Katz v. United States, 389 U.S. 347, 357, 88 S.Ct. 507, 514, 19 L.Ed.2d 576 (1967)) would be impermissibly diluted. Defendants have not even advanced an argument that the seizures were reasonable. Indeed the reasonableness inquiry itself poses questions of fact irresolvable on a Rule 12(b)(6) motion. By the same token, while damage to property may be unavoidable in the execution of a search warrant (Dalia v. United States, 441 U.S. 238, 258, 99 S.Ct. 1682, 1693, 60 L.Ed.2d 177 (1979)), it too must be measured by standards of reasonableness.

In short, it is not clear from the Complaint that plaintiffs can prove no set of facts indicating unreasonable execution of the Warrant. Under the liberal pleading standard of Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 101-102, 2 L.Ed.2d 80 (1957), recently reaffirmed in Hishon v. King & Spalding, — U.S.-, 104 S.Ct. 2229, 2233, 81 L.Ed.2d 59 (1984), defendants’ motion must be denied as to the Count I due process claims.

Count II

Unlawful arrest and detention will support a remedy under Section 1983 if they entail constitutional deprivations perpetrated under color of state law. Joseph v. Rowlen, 402 F.2d 367, 370 (7th Cir.1968). That last element — under color of state law — is assuredly present. Accordingly the only question is whether plaintiffs make sufficient allegations of unconstitutional arrest — arrest, that is, without probable cause, thus infringing rights under the Fourth Amendment (via the Fourteenth).

On that score plaintiffs allege they were not engaged in the commission of any offense at the time of their arrest. But that is not the standard (Michigan v. DeFillippo, 443 U.S. 31, 36, 99 S.Ct. 2627, 2631, 61 L.Ed.2d 343 (1979)): Instead the arresting officer need only have probable cause to believe the suspect’s conduct violated the law (id.). Moreover for a Section 1983 claim based on false arrest or malicious prosecution (Lenard v. Argento, 699 F.2d 874, 884 (7th Cir.1983) quoting Brubaker v. King, 505 F.2d 534, 536-37 (7th Cir.1974)):

The validity of the arrest does not depend on whether the suspect actually committed a crime; the mere fact that the suspect is later acquitted of the offense for which he is arrested is irrelevant to the validity of the arrest.

This court has held that under a charge of a § 1983 violation, the test is “... not whether the arrest was constitutional or unconstitutional or whether it was made with or without probable cause, but whether the officer believed in good faith that the arrest was made with probable cause and whether that belief was reasonable.”

Plaintiffs have made no allegations indicating a lack of probable cause. In fact the discovery on the premises of 63 people, a craps table and other gambling paraphernalia, and substantial amounts of hard liquor and beer obviously gave the arresting officers reason to suspect plaintiffs were engaged in the offenses of gambling and keeping a gambling place (Ill.Rev.Stat. ch. 38, ¶¶ 28-1, 28-3) as set out in the Warrant. Nor have plaintiffs alleged anything even approaching the Lenard standard. And under DeFillippo the later dismissal of the charges against them does not itself invalidate the arrest.

In much the same way, plaintiffs’ allegations of unreasonable detention incident to the arrest are insufficient to state a constitutional claim. Plaintiffs simply say they “were deprived of liberty for a substantial period of time.” In the absence of allegations indicating a lack of probable cause for arrest, that vague assertion, even under the liberal Conley-Hishon standard, does not state a claim for unconstitutional detention.

That is enough to sustain the present motion. However, the prospect of repleading justifies a bit more elaboration (among other reasons, to minimize the risk of a possible Rule 11 claim if plaintiffs try again). Eugene Buldak, director of the Kane County Corrections Complex, has submitted an affidavit indicating that as a result of their November 7 arrests (1) Gillis was never incarcerated and (2) McCrimmon spent a total of an hour and fifteen minutes in jail on two occasions well after the date of his arrest — from 10:35 a.m. to 10:50 a.m. on November 11,1981 and from 9 a.m. to 10 а. m. on December 1. Plaintiffs neither challenge that evidence nor allege facts indicating substantial detention at the time of their arrest. Rule 11 makes “probable cause” of a different kind (the plaintiffs’ and their lawyer’s “probable cause” to assert a claim) relevant if, under such circumstances, plaintiffs were to reallege a deprivation of liberty sufficient in Fourth Amendment terms to sustain a Section 1983 claim for false arrest.

As to plaintiffs’ malicious prosecution claim, Cameo Convalescent Center, Inc. v. Senn, 738 F.2d 836, 845 (7th Cir.1984) has recently again outlined the applicable considerations:

Whether abuse of legal process or malicious prosecution rises to the level of a constitutional violation actionable under 42 U.S.C. § 1983 depends on whether, “acting under color of state law, the defendant has subjected the plaintiff to a deprivation of constitutional magnitude.” Hampton v. Hanrahan, 600 F.2d [600, 630 (7th Cir.1979), rev’d in part on other grounds, 446 U.S. 754, 100 S.Ct. 1987, 64 L.Ed.2d 670 (1980) ]. However, “conduct which merely engenders common law tort liability, without infringing on constitutionally protected interests, is not a sufficient basis to support a cause of action under Section 1983.” Beker Phosphate Corporation v. Muirhead, 581 F.2d 1187, 1189 (5th Cir.1978). “[T]he common law tort of misuse of legal procedure, without more, does not rise to the level of Constitutional wrong remedied by Section 1983.” Id.

Plaintiffs clearly have the burden of alleging a deprivation of constitutional proportions in connection with the prosecution of charges against them.

In an effort to do so, plaintiffs assert the charges against them were brought “in order to ‘cover-up’ and justify the unlawful confiscation and theft of Plaintiffs’ property.” They identify no particular constitutional deprivation in connection with that conduct, simply stating plaintiffs “were denied their right to be free from malicious prosecution by persons acting under color of state law in violation of 42 U.S.C. § 1983.” In the face of that legally nonsensical statement, yet mindful of the Conley-Hishon mandate to construe a complaint liberally, this opinion proceeds on the assumption plaintiffs are claiming a violation of their Fourteenth Amendment right to due process.

In this Circuit Parratt has been held applicable to claims like plaintiffs’. Guenther, 738 F.2d at 882-83 indicates a general Fourteenth Amendment due process claim falls within the ambit of Parratt, while a substantive Fourteenth Amendment due process claim (for example, one implicating First or Fourth Amendment rights) does not. Plaintiffs make no allegations suggesting a substantive violation in connection with the filing of charges against them. At most they have undertaken something of a bootstrapping operation, seeking to found their malicious prosecution claim on the alleged constitutional violations connected with the search. But even if defendants had hoped that, as a by-product of the prosecution, any irregularities in the execution of the Warrant would be overlooked, that would not make the prosecution constitutionally suspect in Section 1983 terms — at least in the absence of allegations indicating defendants did not believe in good faith they had cause otherwise to bring the charges. Lenard, 699 F.2d at 884.

Plaintiffs’ malicious prosecution claim thus states only a general due process claim subject, under Guenther, to analysis in Parratt terms. This Court must therefore first consider whether plaintiffs have sufficiently alleged a deprivation of life, liberty or property. See Wolf-Lillie v. Sonquist, 699 F.2d 864, 871 (7th Cir.1983). If that question is answered “yes,” the next step will be to consider whether plaintiffs have an adequate remedy under state law (id.).

There can be no doubt of an affirmative answer to the first question, at least in pleading terms. McCrimmon (though not Gillis) suffered a liberty deprivation, spending a total of 1 hour and 15 minutes in jail on two occasions following his arrest. While the precise circumstances of those detentions do not emerge from the Complaint, it is entirely possible they were connected with the filing of charges against McCrimmon. So, too, plaintiffs have adequately alleged they were deprived of property seized during the search for longer than would have been the case had charges not been filed. Some of that property has yet to be returned, and plaintiffs may be able to prove the charges were brought in the hope the disappearance of the earrings, cash and motorcycle would get lost in the shuffle. Finally, plaintiffs allege they have incurred attorneys’ fees in fighting the unlawful prosecution. Inasmuch as defendants’ allegedly malicious filing of charges imposed those expenses on plaintiffs — expenses they might recover as compensatory damages were they to prevail in a state action for malicious prosecution— the fees also represent a property deprivation.

However, plaintiffs’ liberty and property interests have not been infringed without due process of law. Guenther, 738 F.2d at 882, makes plain that under Parratt the availability of a state tort remedy for malicious prosecution satisfies the Fourteenth Amendment due process requirement. Illinois recognizes an action for damages proximately caused to person, property or reputation by an unsuccessful criminal proceeding prosecuted without probable cause and with malice. Freides v. Sani-Mode Manufacturing Co., 33 Ill.2d 291, 295, 211 N.E.2d 286, 288 (1965). By resort to their state law remedy plaintiffs are in a position to recover for any harm suffered as a consequence of defendants’ conduct. Accordingly they have not been denied their general right to due process under the Fourteenth Amendment and are consequently unable to state a claim for malicious prosecution under Section 1983. See also Bretz v. Kelman, 722 F.2d 503, 505-06 (9th Cir.1983).

In summary, the Count II claims cannot survive for varying reasons. That Count is dismissed in its entirety.

Count III

Count III, really an extension of Count II, alleges a conspiracy among defendants “to ‘cover-up’ the Defendants’ destruction, confiscation and theft of Plaintiffs’ property, and focus attention away from said acts” (Complaint ¶ 31, incorporating Paragraph 33 of the original complaint). Whatever plaintiffs’ purposes in adding the conspiracy count — to expand the scope of liability, to bolster their allegations of malice or otherwise — they have no relevance except as appendages to plaintiffs’ malicious prosecution claim. Because that claim may not go forward on the present allegations, Count III founders as well.

Count IV

Plaintiffs try to cast the net of liability still wider by stating a cause of action against Johnson and Barsanti for their role in execution of the Warrant. Both were present at the time of the raid on plaintiffs’ house, and according to Complaint 1135 they “advised, allowed, permitted, condoned and acquiesec [sic] in the knowingly unlawful extension of a search warrant into impermissible areas contrary to the provisions of the Fourth and Fourteenth Amendments to the Constitution of the United States.” Barsanti and Johnson respond they are absolutely immune from liability under Imbler v. Pachtman, 424 U.S. 409, 430-31 & n. 33, 96 S.Ct. 984, 994-95 & n. 33, 47 L.Ed.2d 128 (1976). At the very least they claim to have acted in good faith and to be entitled to a qualified immunity from Section 1983 liability.

Imbler, id. at 427, 96 S.Ct. at 993, held a prosecutor, in his role as advocate for the State, is absolutely immune from suit under Section 1983. But the Court expressly refrained from deciding whether such broad immunity extends to “those aspects of the prosecutor’s responsibility that cast him in the role of an administrator or investigative officer rather than that of advocate” {id. at 430-31, 96 S.Ct. at 994-95). For that purpose, the prosecutor’s advocacy role, rather than the role of investigator, embraces such preparatory activities as “the obtaining, reviewing, and evaluating of evidence” {id. at 431 n. 33, 96 S.Ct. at 995, n. 33). Barsanti and Johnson claim their involvement in the search falls within that provision, not within the ambit of Hampton, 600 F.2d at 631-32, which held a prosecutor acting qua investigator was entitled only to a qualified immunity.

Count IV alleges Barsanti’s and Johnson’s conduct during the search was largely passive: They “advised, allowed, permitted, condoned and acquiesed.” Read broadly, however, those allegations could charge the prosecutors’ active participation in the conduct of the raid. They may have functioned more as Sheriff’s deputies than as Assistant State’s Attorneys. If so, they may be entitled to no more than qualified immunity under both Imbler and Hampton. Plaintiffs must be given an opportunity to prove the extent and nature of the prosecutors’ involvement in execution of the Warrant.

If Barsanti and Johnson may claim only a qualified immunity, plaintiffs must allege and prove the prosecutors did not act in good faith. Lenard, 699 F.2d at 884. Both prosecutors have submitted affidavits reflecting good faith actions, at least so far as the extension of the search to the unattached garage was concerned. But a Rule 12(b)(6) motion limits this Court to the facts as stated in the Complaint. It is not clear plaintiffs will be unable to prove any set of fact supporting Barsanti and Johnson’s lack of good faith as to the illegal aspects of the search. For the moment— though admittedly it may turn out to be a brief one — Barsanti and Johnson must remain as defendants.

Plaintiffs’ attempt to draw Morrow and Office into the suit turns on the allegation that Morrow did not train his employees to respect the constitutional guaranty against unreasonable searches and seizures. That allegation is not so well-crafted as one might like, but it conveys clearly enough the claim that Morrow, through poor training, hiring and supervision, has encouraged Assistant State’s Attorneys routinely to become involved in illegal searches. That allegation (1) identifies a policy or custom and (2) indicates how it caused the complained-of behavior and plaintiffs’ resulting harm. It suffices to state a claim under Monell against Morrow. See Padilla, 580 F.Supp. at 406. Of course the vagueness of plaintiffs’ allegations raises doubt as to whether their claim Can survive anything more than a Rule 12(b)(6) motion, but that is all they must do at present (subject again to the caveat in n. 11).

Punitive Damages

Defendants have moved to strike plaintiffs’ punitive damages claims against Morrow and Kramer in their official capacities and against County. Defendants correctly observe that after City of Newport v. Fact Concerts, Inc., 453 U.S. 247, 271, 101 S.Ct. 2748, 2762, 69 L.Ed.2d 616 (1981), a local governmental body is immune from punitive damages under Section 1983. Moreover, the suits against Morrow and Kramer in their official capacities are merely suits against County, Wolf-Lillie, 699 F.2d at 870, so the punitive damages claims against them must be dismissed as well.

Shotgun Naming of Defendants

Finally defendants seek to dismiss the Complaint against 19 Sheriff’s officers whose names were added on amendment of the original complaint. It appears that rather than refer to unknown deputies who participated in the search with Ramsey, plaintiffs have chosen to name all officers who work for Kramer. Accordingly defendants’ motion is granted as to any of the named officers who did not participate in the execution of the Warrant. Department is ordered to supply a list of those officers to plaintiffs on or before March 4, 1985.

Conclusion

Defendants’ motion to dismiss is denied as to:

1. plaintiffs’ Count I unreasonable search and seizure claims; and
2. plaintiffs’ Count IV claims against Barsanti, Johnson and Morrow.

Defendants’ motion to dismiss is granted as to:

1. plaintiffs’ Count I equal protection claims;
2. Count II in its entirety;
3. Count III in its entirety;
4. plaintiffs’ claims for punitive damages against (a) Morrow and Kramer in their official capacities and (b) County;
5. Office; and
6. any Deputies who did not participate in execution of the Warrant.

Defendants are ordered to answer the surviving portions of the Complaint on or before March 4, 1985.

      . As always with respect to a motion to dismiss, the well-pleaded factual allegations of the Complaint are taken as true, with all reasonable factual inferences drawn in plaintiffs’ favor. Wolfolk v. Rivera, 729 F.2d 1114, 1116 (7th Cir.1984). That approach of course involves no actual findings of fact.

      . This Court’s April 3, 1984 memorandum opinion and order denied County’s motion to dismiss under Monell v. Department of Social Services of the City of New York, 436 U.S. 658, 694, 98 S.Ct. 2018, 2037, 56 L.Ed.2d 611 (1978). That denial was based on the reasoning set out in Padilla v. D’Avis, 580 F.Supp. 403, 406 (N.D.Ill. 1984).

      . Plaintiffs’ Mem. 3,6 suggests the Warrant itself was invalid. No allegation to that effect appears in Complaint Count I, nor have plaintiffs alleged facts raising even a hint of such invalidity. This opinion must deal with plaintiffs’ claims as pleaded, not with their by-the-way characterizations of those claims.

      . None of those items has been returned to plaintiffs even though the charges against plaintiffs have been dismissed. Any Fourth Amendment violation connected with the seizure of those items is thus continuing. Of course were plaintiffs suing only to recover items seized pursuant to a lawful search, their claim would be subject to Parratt attack, for they have a remedy in that respect under Illinois law. See n. 5.

      . Plaintiffs do have a state action for recovery of the cash, earrings and motorcycle — the only objects seized that have not been returned. See Keen v. City of Chicago, 130 Ill.App.2d 300, 264 N.E.2d 721 (1st Dist.1970) (action in detinue to recover property seized in the course of a search). But Parratt does not preclude plaintiffs’ Section 1983 action because of the mere availability of that partial remedy. Because the property was seized in violation of substantive Fourth Amendment rights (and indeed continues to be held), plaintiffs may proceed under Section 1983.

      . To the extent plaintiffs ground their Section 1983 action for false arrest exclusively on their right to due process under the Fourteenth Amendment (rather than on their incorporated Fourth Amendment rights), our Court of Appeals has stated the Parratt rationale applies. Guenther, 738 F.2d at 882. Because Illinois provides a tort remedy for claims of false arrest, Illinois “has done all that the Fourteenth Amendment requires in this context to guarantee ... procedural due process” (id.). See also the discussion of plaintiffs' malicious prosecution claims immediately following in the text of this opinion.

      . As an added possibility (certainly not clear from the Complaint), plaintiffs may also be claiming the institution of charges violated their Fourteenth Amendment right to equal protection of the laws. Such a claim has no foundation (see the earlier discussion of plaintiffs' Count I allegations). Indeed the thrust of plaintiffs' Monell claim on the malicious prosecution count is that they were treated in the same way as every other person who had been subjected to an illegal search.

      . This result, though plainly compelled in our Circuit by Guenther, is still an open matter in Supreme Court jurisprudence. For a concise discussion of the problems it raises — or, its critics say, overlooks — see Judge Fletcher's dissenting opinion in Bretz, 722 F.2d at 506-07. And for a more extended analysis, the application of which to this case would lead to a different result, see Wells & Eaton, Substantive Due Process and the Scope of Constitutional Torts, 18 Georgia L.Rev. 201 (1984). This Court’s colleague Judge Moran accurately predicted our Court of Appeals’ view of the matter in his well-considered discussion in Koch v. Schneider, 550 F.Supp. 846, 850-52 (N.D.Ill.1982). As in this case, the key question in Koch was the current authority of our Court of Appeals’ decision in Hampton. That case implied — but without any specific discussion — that malicious prosecution was actionable under Section 1983 where the prosecution was designed to cover-up a prior constitutional deprivation. Hampton, 600 F.2d at 622, 630. Judge Moran questioned whether that implicit holding — if it were a holding at all — survived more recent cases specifically addressing the relationship between Section 1983 and “traditional common law torts for which there are obvious and adequate state court remedies.” Koch, 550 F.Supp. at 851. Guenther indicates — though again not definitively — that the Hampton holding does not survive.

      . Defendants have made two added alternative motions challenging Count II. They urge (1) plaintiffs have failed to allege the requisite elements of malicious prosecution and (2) plaintiffs’ allegations of malicious prosecution are insufficient as against County, Kramer, Ramsey or Deputies. Because Count II fails in any event, those alternative motions need not be addressed.

      . This opinion therefore need not resolve the parties’ dispute over the adequacy of the Complaint’s allegations purporting to include County and Kramer in the conspiracy on account of “their policies and customs of ignoring misbehavior such as complained of here, with knowledge that it would deprive Plaintiffs of their rights...’’ (Complaint ¶ 33, incorporating Paragraph 35 of the original complaint).

      . This Court of course recognizes its right (but not the obligation) to convert a Rule 12(b)(6) motion into one for summary judgment (see the last sentence of Rule 12(b)). Because this action is still in the discovery stages, this Court has elected not to do so. See Grove School v. Guardianship and Advocacy Comm'n, 596 F.Supp. 1361, 1363 n. 4 (N.D.Ill.1984). However, plaintiffs and their counsel must be mindful of their responsibilities under Rule 11, already suggested somewhat cryptically in the text at n. 6. See In re Ronco, 105 F.R.D. 493, 494-97 (N.D.Ill.1985). If at any point they can no longer advance their claim against the prosecutors (or any other surviving claim) in good conscience (determined objectively, not as a matter of conscious bad faith), they will become duty bound to abandon that claim on peril of "appropriate sanctions” under Rule 11.

      . Morrow, as State’s Attorney, is a Kane County officer, not an officer or agent of the State of Illinois. See 4 I.L.P. Attorney General & State's Attorneys § 2, at 3. But there is no such legal entity as the "State’s Attorney’s Office," as distinct from the State’s Attorney himself. 111. Const, art. 6, § 19. Consequently Office is dismissed from this action.


author: MOYE, Chief Judge.

text:
    John W. THORPE, Plaintiff, v. Robert R. DAUGHERTY, Jr.; Robert R. Daugherty as Guardian ad litem for Robert R. Daugherty, Jr. a minor; Elizabeth Daugherty; Coleman Company, Inc.; and Robert F. Daugherty, Defendants.
    No. C84-2507A.
    United States District Court, N.D. Georgia, Atlanta Division.
    Feb. 20, 1985.
    John E. Ontal, Jack Morse, McCord, Cooper & Kimbrough, Atlanta, Ga., for plaintiff.
    Robert R. Daugherty as guardian ad litem for Robert R. Daugherty, Jr., a minor.
    Glenn Frick, Lokey & Bowden, Atlanta, Ga., for Elizabeth Daugherty and Coleman Co., Inc.
    J. Kenneth Moorman, Long, Weinberg, Ansley & Wheeler, Atlanta, Ga., for defendant Robert F. Daugherty.
   ORDER

MOYE, Chief Judge.

The above-styled products liability action is before the Court on the plaintiff’s motion to remand this case to the Superior Court of DeKalb County, Georgia. This action was originally filed in the Superior Court of DeKalb County against Robert R. Daugherty, Jr., Robert R. Daugherty, Sr., and Elizabeth Daugherty (Daugherty defendants) and the defendant nonresident corporation, The Coleman Company, Inc. (Coleman). The plaintiff voluntarily dismissed the action as against the Daugherty defendants, whereupon Coleman removed the case to this Court.

The plaintiff contends that the case was improperly removed because, among other reasons, Coleman failed to give prompt written notice to the Daugherty defendants of its petition for removal. Following the filing of the original complaint, arising out of an injury caused by a BB gun Coleman manufactured, Coleman filed a cross-claim against its co-defendants the Daugherty defendants for any judgment awarded against it. Subsequently, the Daugherty defendants cross-claimed against Coleman, alleging that Coleman should indemnify them for any liability adjudged against them and for contribution, should a judgment be awarded against them. Counsel for the Daugherty defendants, fearing that the cross-claim has not survived owing to Coleman’s failure to include them in the removal petition, informed the Court that he intends to file a motion to intervene and, in addition, that he does not object to this Court’s exercise of removal jurisdiction. The Daugherty defendants, presumably wish this cross-claim to survive because the settlement with the plaintiff is not yet complete.

The plaintiff premises his argument on 28 U.S.C.A. § 1446(e) (West Supp.1984), which provides in pertinent part that “[pjromptly after the filing [of the removal petition] the defendant or defendants shall give written notice thereof to all adverse parties ...” The plaintiff contends that Coleman’s failure to notify the Daugherty defendants is in clear violation of the statute. In addition, the plaintiff contends that all defendants must join in the removal petition for it to have validity. Since the Daugherty defendants did not join the petition, it is therefore invalid. The plaintiff further contends that since the Daugherty defendants are residents of the State of Georgia, removal is improper. The relevant provision prohibits removal if any of the defendants is a citizen of the state in which the action is brought. 28 U.S.C.A. § 1441(b) (West 1974).

The issues before the Court are as follows: (1) is a cross-claimant under these circumstances an “adverse party” for purposes of 28 U.S.C. § 1446(e), and if so, does the defendant’s failure to notify him deprive the Court of removal jurisdiction; (2) must this cross-claimant join in the removal petition in order for it to have validity; and (3) does the status of this cross-claimant as a resident and domiciliary of Georgia divest the Court of removal jurisdiction.

“Adverse parties” within the meaning of section 1446(e) have been described thus:

This will usually be the plaintiff or plaintiffs. But there may be others, in certain situations. Co-defendants must sometimes be served, as where a defendant removes an action on the basis of a separate claim____ Careful practice dictates written notice to all real parties in interest, who did not join in the removal petition, at least if feasible to give such notice to them.

1A J. Moore & B. Ringle, Moore’s Federal Practice ¶ 0.168[.3-8-2] n. 7 (2d ed. 1983). The plaintiff cites no authority for the proposition that the Daugherty defendants are “adverse parties” under the statute. Logically speaking, they are not, because their actual interest is contingent upon Coleman’s liability. Indeed, if Coleman is not found liable in this action, their claim would be moot. The plain meaning of the statutory language would suggest that “adverse party” in this context refers to the plaintiff, who was certainly notified. In addition, failure to give such notice is a curable defect, see id. U 0.168[3.-1] n. 11 (referring to the legislative history of § 1441(b): “ ‘this amendment clarifies the intent of section 1446(e) ... to indicate that notice need not be given simultaneously with the filing, but may be given promptly thereafter’ ”), rather than a condition precedent to jurisdiction. It is also probable that this defect falls in the category of waivable procedural irregularities, see id. 110.157[ll.-4], and that only the Daugherty defendants could raise such an objection to this Court’s exercise of jurisdiction. Certainly, a writing would only be formality at this stage anyway, since notice has obviously been achieved. In any event, this Court holds that the Daugherty defendants are not “adverse parties” within the meaning of section 1446(e), and therefore written notice to the Daugherty defendants was not essential to removal of this action.

The plaintiff also contends that the Daugherty defendants, as properly served and joined defendants to his complaint, ought to have joined in the petition for removal with Coleman pursuant to the requirement of section 1446(a). The general principle has been stated thus: “Before the plaintiff’s choice of the state forum can be avoided, unanimity among all parties substantively entitled to remove is required.” Id. II 0.168[3.-2-2], at 549 (emphasis added). Are the Daugherty defendants “substantively entitled to remove” on the basis of their cross-claim? The short answer is no.

It would also seem proper to hold that a cross-claim defendant is not a defendant as that term is used in § 1441. The Supreme Court in the Shamrock decision held that a plaintiff who was a ‘defendant’ to a counter-claim could not remove. And we believe the ratio decidendi of the case fully applies to cross-claim defendants____ And this view fully comports with the firmly embedded principle to construe narrowly the right of removal.

Id. 110.167[9], at 506-07 (citing Shamrock Oil & Gas Cory. v. Sheets, 313 U.S. 100, 61 S.Ct. 868, 85 L.Ed. 1214 (1941). By this reasoning, if a cross-claim defendant could not himself remove the action, then he is not required to join in a petition for removal under the removal provisions.

Finally, the plaintiff contends that the Court lacks jurisdiction because the inclusion of the Daugherty defendants destroys complete diversity of all parties. It is well established that claims brought pursuant to Federal Rule of Civil Procedure 13(g) fall within the Court’s ancillary subject matter jurisdiction, 6 C. Wright & A. Miller, Federal Practice and Procedure § 1433 (1971); thus, the presence of the Daugherty defendants in this case does not destroy the Court's removal jurisdiction.

For the foregoing reasons, the plaintiff’s motion to remand is DENIED.


author: HUNGATE, District Judge.

text:
    Sherwin L. STEINBERG, Ida G. Steinberg, Plaintiffs, v. UNITED STATES of America, Defendants.
    No. 84-0864C(3).
    United States District Court, E.D. Missouri, E.D.
    Feb. 22, 1985.
    As Amended March 12, 1985.

      Blumenfeld, Sandweiss, Marx, Tureen, Ponfil & Kaskowitz, P.C., Philip G. Kaplan, St. Louis, Mo., for plaintiffs.
    Ludwig H. Adams & Mary Frances Clark, Trial Atty., Tax Div., Dept, of Justice, Washington, D.C., Wesley Weidemeyer, Asst. U.S. Atty., St. Louis, Mo., for defendants.
   MEMORANDUM

HUNGATE, District Judge.

This matter is before the Court on the parties’ cross-motions for summary judgment. Plaintiffs’ motion for partial summary judgment will be treated as a motion for summary judgment because the parties have stipulated to the facts and only questions of law remain before the Court.

Plaintiffs bring this action pursuant to 28 U.S.C. § 1346(a)(1) to recover income taxes they allege were illegally assessed and collected.

On December 27, 1984, counsel for the parties appeared before the Court and oral argument was heard on the unsettled questions of law. The parties have stipulated to the following facts giving rise to this dispute.

Stipulation of Facts

1. Plaintiffs are husband and wife and reside in the County of St. Louis, State of Missouri. This action was commenced against defendant United States of America, seeking a refund of $7,090.00 of income tax paid for 1978.

2. At all times pertinent to this action, plaintiff Sherwin L. Steinberg was vice-president of sales of Carboline Company (Carboline). At that time, the common stock of Carboline was traded on the over-the-counter market.

3. On February 6, 1974, pursuant to a qualified stock option plan under Section 422(b) of the Internal Revenue Code, Carboline granted plaintiff a written stock option to purchase 5,000 shares of its common stock at $7.75 per share. The option price was equal to 100 percent of the price at which Carboline’s stock was traded on the over-the-counter market on the date the option was granted. The option could not be exercised until February 8, 1976, and continued for a period of three years or until plaintiff terminated his employment with Carboline.

4. In order for the transaction to be exempt from the registration requirements of the Securities Act of 1933, plaintiff, at the time the option was granted to him, executed an “investment letter.” Under the pertinent rulings of the Securities and Exchange Commission, the effect of the investment letter was to prohibit plaintiff, for a period of two years after the stock was purchased, from selling the acquired shares except in a private placement, unless a registration statement was in effect with respect to the shares or certain other conditions were met. No registration statement was ever in effect with respect to the option stock.

5. In February of 1976, there was a three for two stock split of Carboline common stock. Due to that split, plaintiff’s option to purchase Carboline stock was amended and the number of shares subject to the option was increased to 7,500. Since the number of shares increased by one-third, the option price was reduced by one-third, to $5.17 per share.

6. On February 13, 1978, plaintiff exercised his rights under the option by purchasing 7,500 shares of Carboline common stock. The market value on the over-the-counter market of these shares on the date of purchase was $141,525.00. The option price paid by plaintiff was $38,775.00.

7. The Carboline common stock received upon exercise of the option had a legend imprinted on the common stock certificates restricting the sale of the stock for a period of two years.

8. For 1978, Carboline, as plaintiffs employer, filed with the Internal Revenue Service a Form 3921, Exercise of a Qualified or Restricted Stock Option, reporting $102,-750.00 as a tax preference item for plaintiff. The amount of $102,750.00 represents the difference between the option price paid by plaintiff and the market value of the shares on the date of exercise. The market value was determined by computing the mean of the bid and asked price in the over-the-counter market of Carboline common stock. A copy of the Form 3921 was filed by plaintiff with his 1978 federal income tax return.

9. In a typed statement accompanying his federal income tax return for 1978, plaintiff acknowledged that Carboline had filed the Form 3921 with the Internal Revenue Service, but alleged that the fair market value of the option stock exercised did not exceed the option price of the stock.

10. The Commissioner determined that the fair market value of the option stock was the mean between the bid and asked prices of stock on the date of the exercise of the option. The Commissioner claimed that the difference between that value and the option price was an item of tax preference. Thus, a deficiency was determined under the minimum tax provisions by including the $102,750.00 as a tax preference item.

11. Plaintiffs paid the deficiency on October 14, 1980.

12. On October 12, 1982, plaintiffs timely filed a claim for the refund of $7,090.00. The claim for refund asserted that the amount of minimum tax due for 1978 should be $6,448.00, not $13,578.00. Plaintiffs asserted that the market value of the stock should be reduced by one-third to reflect restrictions on the sale of the stock.

13. Plaintiffs received an Internal Revenue Service notice dated June 22, 1983, allowing $7,076.51 of their claim and disallowing $13.49.

14. Thereafter, the Internal Revenue Service sent a notice dated December 22, 1983, allowing $13.49 of plaintiffs’ claim and disallowing $7,076.51.

The parties do not dispute that plaintiffs’ exercise of the stock option resulted in an item of tax preference subject to the minimum tax provisions of 26 U.S.C. § 56. At the time this transaction took place, Section 57 of the Internal Revenue Code provided that the measure of plaintiffs’ item of tax preference resulting from the exercise of a qualified stock option is “the amount by which the fair market value of the share at the time of exercise exceeds the option price.” (emphasis added). 26 U.S.C. § 57(a)(6).

Plaintiffs argue that the rate at which comparable stock was being traded on the day the option was exercised is an inappropriate measure of the fair market value of their stock because it does not take into consideration the restrictions on its transfer.

Defendant’s authority for determining the fair market value of plaintiffs’ stock, without regard to the restrictions thereon, is Treasury Regulation § 1.57-l(f)(3) which provides that such restrictions should not be considered unless, by their terms, they will not lapse.

Plaintiffs rely on two decisions of the tax courts which hold, in relevant part, that the treasury regulation relied upon by defendant is inconsistent with the meaning of fair market value as contemplated by the Internal Revenue Code, and is therefore invalid, and any reduction in value caused by restrictions on transfer (even if temporary) are properly considered when determining the fair market value of such stock. Gresham v. Commissioner, 79 T.C. 322 (1982); McDonald v. Commissioner, 83 T.C. T.C.M. (P-H) ¶ 83, 197 (1983).

Defendant further points out that Congress has recently adopted the position of the disputed treasury regulation disregarding temporary restrictions on transfer when determining fair market value in circumstances such as this. Deficit Reduction Act, Pub.L. No. 98-369 (amending IRC § 57(a)). Plaintiffs counter that Congress’s apparent ratification of defendant’s position is not retroactive.

The parties have further agreed that if the Court determines that Treasury Regulations Section 1.57 — 1(f)(3) is invalid or inapplicable to this case, the fair market value of the Carboline stock in question would be determined by discounting the mean trading price of the stock on the date of the exercise of the option by one-third, and plaintiffs will be entitled to the amount prayed for in their petition.

Since this Court heard oral argument on this matter, the United States Court of Appeals for the Tenth Circuit reviewed the position taken by the Tax Court in the Gresham case which was relied on by plaintiffs. Estate of Gresham v. Commissioner, 752 F.2d 518 (10th Cir.1985). In a well-reasoned opinion, the Tenth Circuit agreed with the Tax Court and found that Treasury Regulations Section 1.57-l(f)(3) is invalid or inapplicable in cases such as the one before this Court. The appellate court held that the traditional willing buyer/willing seller test of fair market value is the appropriate measure in cases arising before 26 U.S.C. § 57 was amended. Id., at 523.

After careful consideration of the arguments and memoranda of the parties, the Court is persuaded that the position taken by the Tax Court and the Tenth Circuit on this issue represents the better law. Accordingly, the Court finds that Treasury Regulations Section 1.57 — 1(f)(3) is inapplicable to this case.

As the parties have stipulated to the result should the Court so find, plaintiffs’ motion for summary judgment will be granted in the amount prayed for in plaintiffs’ petition.

ORDER

A memorandum dated this day is hereby incorporated into and made a part of this order.

IT IS HEREBY ORDERED that defendant’s motion for summary judgment be and the same is denied.

IT IS HEREBY FURTHER ORDERED that plaintiffs’ motion for summary judgment be and the same is granted.

IT IS HEREBY FURTHER ORDERED that judgment be and the same is entered in favor of plaintiffs in the amount of $7,076.51 plus prejudgment interest at the rate of 9.09% per annum, and costs.

AMENDED ORDER

Comes now the Court nunc pro tunc and sua sponte, and amends its order of February 22, 1985, as follows:

IT IS HEREBY ORDERED that prejudgment interest be and the same is awarded to plaintiffs in the amount established by the Secretary, pursuant to 26 U.S.C. § 6621.


author: McGOVERN, Chief Judge.

text:
    BOARD OF TRUSTEES OF the WESTERN CONFERENCE OF TEAMSTERS PENSION TRUST FUND, Plaintiff, v. H.F. JOHNSON and Midland Terminal, Inc., Defendant,
    No. C83-1281M.
    United States District Court, W.D. Washington.
    Feb. 28, 1985.
    On Motion for Supplemental Judgment April 2, 1985.

      John H. Binns, Jr., Michael F. Mogan, Seattle, Wash., for plaintiff.
    Jon E. Doak, Billings, Mont., for defendant.
   MEMORANDUM AND ORDER

McGOVERN, Chief Judge.

THIS MATTER comes on before the undersigned Judge of the above-entitled court on the parties’ cross motions for summary judgment. The Court has considered the pleadings filed by both parties and the remainder of the record.

Plaintiff maintains and administers the Western Conference of Teamsters Pension Plan (the Plan), which is a defined benefit multiemployer pension plan under the Employee Retirement Income Security Act (ERISA), 29 U.S.C. § 1301 (1982) and the Multi-Employer Pension Plan Amendments Act (MPPAA), 29 U.S.C. §§ 1383-1461 (1982). Defendant Johnson is a Montana corporation engaged in the transportation of bulk petroleum.

Under these two Acts, when an employer withdraws from a Plan, it is assessed “withdrawal liability” to cover its pro rata share of the unfunded vested benefit liability. The Plan sends each withdrawing employer a notice and demand for payment of withdrawal liability. 29 U.S.C. § 1382. If the employer wishes to contest the withdrawal liability determination, it must request review within 90 days of notice. § 1399(b)(2)(A). The employer may then seek arbitration of the review determination within 60 days after (1) the date he receives the review determination or (2) 120 days after he first requests review, whichever is earlier. 29 U.S.C. § 1401(a)(1). If the employer fails to seek arbitration within those time limits, the amount and schedule for payment set forth in the review determination are applicable and the Plan may seek enforcement in Federal court. 29 U.S.C. § 1401(b)(1).

For many years, Johnson had signed successive collective bargaining agreements with the Teamsters. The last contract expired June 30, 1981. Contract negotiations continued until November 1, 1981 when Johnson’s employees went on strike. By February 1982 the picket lines were withdrawn and Johnson continued to operate without a contract.

On December 13, 1982, Plaintiff sent Johnson notice and demand for payment of withdrawal liability of approximately $287,-000 to be paid in 48 monthly payments. Johnson responded by letters of January 20 and 24, 1983 requesting review of some of the figures. Johnson also stated that these discrepancies were minor compared to the serious financial trouble that would be caused if required to pay the withdrawal liability. Johnson stated that it might be forced into bankruptcy if required to pay.

On June 6, 1983, the Plaintiff sent a response letter to Johnson’s letter of January 20. The letter stated that Plaintiff had conducted an audit and recalculated the withdrawal liability determination. The new figures were $302,000 owed over the course of 48 months. Plaintiff also stated that it required documentation of Defendant’s ability to pay the withdrawal liability because if it couldn’t pay, under ERISA and the Plan’s Rules, the whole amount could be due immediately. Finally, Plaintiff stated that this new letter and the accompanying withdrawal liability determination form “supersedes and replaces” the earlier letter and determination form. Plaintiff then demanded the revised amount.

On August 10, Johnson sent a letter to Plaintiff asking review as to: (1) why the liability began in November 1981 when Defendant’s employees were still on strike; (2) why the “trucking industry exception” of 29 U.S.C. § 1383(d) did not apply; and (3) whether payments could be spread out over 100 months. On August 29, Plaintiff sent a letter to Defendant stating that Defendant was in default and accelerated the payments. Defendant responded by letter of September 1 asking why Plaintiff had ignored its August 10 letter. On September 9, Plaintiff filed this suit to enforce the determination.

The cross motions for summary judgment revolve around one central issue. Defendant contends that the June 6 notice constituted a new and separate notice and demand and therefore began again the time limit in which to seek review and arbitration pursuant to § 1401(a). In support of its claim, Defendant notes that the June 6 letter contained all of the requisites of a notice and demand under § 1399(b); it contained a different withdrawal liability amount than the December 13 notice, a' different schedule of payments, a different date for commencement of payments, and it moved the site for arbitration from Denver to Seattle. Moreover, the letter stated that the June 6 determinations form superseded and replaced the December 13 form. Finally, the June 6 letter specifically “demanded” the revised amount pursuant to § 1399(b)(1)(B).

While the MPPAA is silent regarding successive or multiple demands for payment and there is no guiding case law, it is apparent that the June 6 letter did not constitute a new demand. - Section 1399(b)(2)(B)(iii) provides that after an employer requests review of a withdrawal liability determination, the plan sponsor shall notify the employer of “the reason for any change in the determination of the employer’s liability or schedule of payments.” The MPPAA thus contemplates that the Plan may change the determination after review. Executing such a change does not create an entirely new demand. The June 6 letter was nothing more than notice of a change pursuant to § 1399(b)(2)(B)(iii) and did not constitute an entirely new determination.

Moreover, the fact that the “determinations form” was “superseded and replaced” is of no significance. The “determinations form” is not required by the MPPAA. It is simply a form provided by the Plaintiff in this case to its withdrawing employers to aid them in understanding the Plan’s computations. Indeed, the fact that the old one was superseded and replaced merely stated the obvious. Upon Defendant’s request for review, Plaintiff altered the amount of withdrawal liability and the new form was simply a reflection of that change pursuant to § 1399(b)(2)(B)(iii).

Finally, the June 6 letter clearly states that it is a “reply” to Defendant’s January 20 and 24 “[request] for review.” The letter expressly states that “After reasonable review, the Fund’s findings with respect to the matters set forth in your letter are as follows____” Any confusion caused by the Plan’s “demand” under the June 6 letter is insignificant when compared to the entirely plain statement establishing the letter as a response to Defendant’s request for review. Summary judgment in favor of Plaintiff is appropriate in light of Defendant’s failure to institute arbitration within the time limits prescribed by the MPPAA.

The other major issue presented by Defendant in its motion concerns the date upon which the withdrawal liability arose. Under 29 U.S.C. § 1383(a)(1) a withdrawal occurs when the employer permanently ceases to have an obligation to contribute to the plan. Plaintiff contends that Defendant withdrew on November 1, 1981 when Defendant’s employees went on strike. Defendant contends, on the other hand, that the withdrawal was not permanent until the strike terminated in February of 1982. If Defendant’s withdrawal was not permanent until February, then Plaintiff’s notice and demand for withdrawal liability incorporated the wrong starting date.

This issue, however, is moot since Defendant failed to initiate arbitration within the time limit. Section 1401(a)(1) states that “any dispute ... concerning a determination ... shall be resolved through arbitration.” Section 1401 goes on to require an employer to initiate arbitration within 60 days after the employer receives the Plan’s review determination or within 120 days after review is first requested, whichever is earlier. Whether a labor dispute existed and when the withdrawal liability arose are issues subject to arbitration. Defendant is precluded from litigating these claims now in light of its failure to initiate mandatory arbitration.

Therefore, it is hereby ORDERED:

(1) Plaintiff’s Motion for Summary Judgment is GRANTED;

(2) Defendant’s Motion for Summary Judgment is DENIED; and

(3) The Clerk of the Court shall direct uncertified copies of this Order to counsel of record.

ON MOTION FOR SUPPLEMENTAL JUDGMENT

This matter having come on for consideration before the Court, Honorable Walter T. McGovern, United States District Judge, presiding, upon plaintiff’s motion for a supplemental judgment pursuant to Rule 59(e) of the Federal Rules of Civil Procedure, and the issues having been duly considered and a decision having been duly rendered,

IT IS HEREBY ORDERED AND ADJUDGED that defendants H.F. Johnson, Inc. and Midland Terminal, Inc., as joint and several obligers, pay to plaintiff the following:

(1) $302,194.76 as withdrawal liability;
(2) $56,999.98 as interest through February 28, 1985, plus $93.68 per day thereafter until payment of the withdrawal liability;
(3) $60,438.95 as liquidated damages;
(4) $10,291.30 as plaintiff’s attorneys’ fees; and
(5) $725.62 as plaintiff’s costs and disbursements.