author: NEWCOMER, District Judge.

text:
    SPRING GARDEN UNITED NEIGHBORS, INC., Neftali Feliano, John Jamieson, Roland Vargas, on behalf of themselves and all others similarly situated v. CITY OF PHILADELPHIA; Gregore Sambor, individually and as Police Commissioner of the City; (first name unknown) Cruz, (first name unknown) Margolis and John Doe and Richard Roe, individually and as police officers of the City of Philadelphia.
    Civ. A. No. 85-3209.
    United States District Court, E.D. Pennsylvania.
    June 12, 1985.
    David Kairys, Kairys & Rudovsky, and Stefan Presser, American Civil Liberties Union/Foundation of Pa., Philadelphia, Pa., for plaintiffs.
    Armando A. Pandóla, Jr., Chief Deputy City Sol., Law Dept., City of Philadelphia, Philadelphia, Pa., for defendants.
   NEWCOMER, District Judge.

BENCH OPINION

This is the case of Spring Garden United Neighbors, Inc., Neftalí Feliano, John Jamieson, Roland Vargas, on behalf of themselves and all others similarly situated v. City of Philadelphia; Gregore Sambor, individually and as Police Commissioner of the City of Philadelphia; (first name unknown) Cruz, (first name unknown) Margolis and John Doe and Richard Roe, individually and as police officers of the City of Philadelphia, Civil Action No. 85-3209. The Court issues the follow memorandum opinion from the bench.

In this civil rights action, filed on June 6, 1985, the plaintiffs, a Spring Garden community group organized to alleviate problems and improve community life in the Spring Garden area of Philadelphia as a result of the gentrification of the area, individual members and residents of Spring Garden, on their own behalf and on behalf of all others similarly situated, are presently before this Court seeking a preliminary injunction restraining the defendants from conducting unlawful stops, searches, detentions, arrests and assaults of persons of Puerto Rican ancestry in the Spring Garden area. For reasons which follow, this motion will be granted in accordance with the order accompanying this opinion. The following is issued as my findings of fact and conclusions of law, following a full hearing, arguments of counsel and a study of legal briefs submitted by both sides under Federal Rule of Civil Procedure 52.

On or about May 28, 1985, Officer Thomas Trench was killed by a gun and found in his police car at Spring Garden and 17th Streeets in Philadelphia. As a result of this lamentable and tragic incident, the police department began an investigation to find the person or persons who killed Officer Trench.

The evidence adduced by the plaintiffs at yesterday’s hearing demonstrates that this police investigation included a persistent and ongoing practice of stopping, searching, detaining, frisking, handcuffing and questioning plaintiffs without any probable cause, reasonable suspicions or warrants. There were no charges levied against any of the plaintiffs who testified. This practice can only be described as a “sweep” of the Spring Garden neighborhood.

Most striking at the hearing was that all of the testimony presented by the plaintiffs was unrebutted and that the defendants’ cross-examination of plaintiffs’ witnesses left the testimony wholly intact.

The unrebutted evidence demonstrated a repeated, persistent pattern of unconstitutional stops, detentions, seizures and frisks, leading me to the inescapable conclusion that the police were conducting a “sweep” in their. overzealous efforts to determine who had killed Officer Trench. These “sweeps” are documented for a one-week period, May 28, 1985 through June 5, 1985. Each witness who testified that he was subjected to the “sweep” encountered the same basic scenario. He was sitting or walking in the Spring Garden neighborhood when, without provocation or explanation, the police would handcuff him, frisk him, and take him away in a van or paddywagon to the Ninth District Precinct. There the subject would be kept from approximately two to ten hours, before being ultimately released.

All of those picked up were of Puerto Rican origin, none were charged with a crime at any time, none had any material information bearing on Officer Trench’s death, and all were eventually released after a photograph and attached statement were taken. No explanation by the police officers was given when the persons were picked up, despite evidence that the persons often inquired as to the reason for the police frisking, cuffing and detaining them. No requests were made for the individual voluntarily to come to the police headquarters, although nearly all testified that they would have.

No evidence was produced showing that any of the individuals had a prior police record, or even fitted a profile that was being investigated.

No evidence was introduced that records created as a result of the pictures and statements were expunged or that any official apology for the infringements on the Spring Garden residents has been forthcoming.

These “sweeps” affected the entire community. The witnesses who were picked up and detained ranged in age from 16 years to 65 years old. Evidence adduced at the hearing demonstrated that a minimum of 100 people were picked up and detained during the “sweep” of the Spring Garden neighborhood. A couple of instances were unbearably egregious:

Sixty-five-year-old Margarro Serrano was ordered out of his house at 9 a.m. on Monday, June 3,1985, while cooking for himself and his invalid wife. The police officers refused to let him turn off the oven, inform his wife of his hasty departure, or even notify sons across the street that he was being taken to the police station. The officer assured Mr. Serrano that he would return in 15 to 20 minutes. Instead he was detained in a small room for approximately seven hours, during which time he was given no food and only one drink of water. As with the others who testified, no explanation was given and no charges brought against Mr. Serrano. Further, Mr. Serrano had no information on Officer Trench’s death.

Plaintiffs’ counsel argued that Mr. Serrano’s detention was in retaliation for statements made by his son Raul against the police treatment of the Spring Garden residents resulting from the Trench investigation. Tellingly, the defendants conducted no cross-examination of Mr. Serrano.

On June 5, 1985, one day before this suit was filed, Jose Rosario was picked up by two detectives at 8:30 a.m. Mr. Rosario was walking with a bag of groceries, when he was picked up and he was forced to leave the bag on the sidewalk. He was cuffed, frisked and taken to the police station for two hours, questioned and released, after the police determined that he had no information on the Trench death.

During the investigation, City Councilman Angel L. Ortiz, also Chair of the Public Safety Committee, concerned about the rising tension between Spring Garden residents and the police department, and concerned about the mounting fears and frustrations of the Spring Garden residents resulting from the “sweep,” spoke with May- or Goode on May 30, 1985 and received the Mayor’s assurance that if undue detentions and harassment were occurring, he would order the police to cease and desist.

A meeting between Mr. Ortiz and Deputy Police Commissioners Armstrong and Crudup the next day, May 31, 1985, resulted in similar reassurances and a walk through the Spring Garden “barrio” by Deputies Armstrong and Crudup, with Mr. Ortiz, to solidify their support and reassurance to the community, and to signal an end to the “sweeps.”

Nonetheless, much to the dismay of Mr. Ortiz and Spring Garden residents, the “sweep” continued, as evidenced by the testimony, at least through June 5, 1985. Thus, these “sweeps” continued for at least one week after Officer Trench’s death and for a substantial period of time after the community, through Councilman Ortiz, received assurances from Deputy Commissioners Crudup and Armstrong that these “sweeps” would cease immediately.

In order for the plaintiffs to sustain their burden of proof on the request for a preliminary injunction, the plaintiffs must show, first, a reasonable likelihood of success on the merits; and second, irreparable injury and the inadequacy of the legal remedies. In addition, I must consider and balance the equities involved: the possibility of harm to the defendants or the plaintiffs from the grant or denial of the injunctive relief sought, and the public interest. Vine Street Concerned Citizens, Inc. v. Dole, 604 F.Supp. 509, 512 (E.D.Pa.1985).

Here the plaintiffs have demonstrated a reasonable likelihood of success on the merits. They have demonstrated a pattern and practice of illegal stops, seizures, detentions and frisks aimed at Puerto Rican persons in the Spring Garden community. The policy or custom is reasonably inferred at this stage from the organization and extent of the “sweep” adduced by unrebutted testimony and from the testimony that the Mayor and the Deputy Police Commissioners had knowledge of and failed to halt the unlawful conduct.

I believe it reasonable to infer similar knowledge of Commissioner Sanbor at this stage, given the clear understanding and apparent imprimatur by those directly above and below him. No evidence was offered that in any way suggested these were isolated instances by a few policemen, or that they occurred without official sanction, or that there were any reliable indicia to justify the “sweep” of the neighborhood. In fact, no evidence was offered to show that the police believed the suspect is of Puerto Rican origin or that he or she is from the Spring Garden neighborhood.

As to the next element, irreparable injury, the defendants strenuously argued that this case was moot, essentially because the Ninth District investigation has stopped and the inquiry has been switched to the Homicide Division of the Philadelphia Police Department.

From the testimony I conclude that any cessation of this “sweep” was either, one, a result of filing this suit; or two, a natural petering out, based on the police officers’ completion of the “sweep,” unrelated to any official command to stop. It appeared that the “sweep” was resulting in a waste of time and effort, since the residents either did not know anything, or were not cooperating as a result of the fear instilled by the “sweep.”

In either event, the defendants alleged halt to these disgraceful activities does not render the request for a preliminary injunction moot.

“It is settled that an action for an injunction does not become moot merely because the conduct complained of has terminated, if there is a possibility of recurrence, since otherwise the defendants ‘would be free to return to (their) old ways.’ ”

Allee v. Medrano, 416 U.S. 802, 810-11, 94 S.Ct. 2191, 2198, 40 L.Ed.2d 566 (1974) (cited cases omitted).

Under either the “possibility of recurrence” test, or the stronger standard suggested by the language of “substantial threat of future violations,” plaintiffs have met their burden. First, the plaintiffs have shown a continuous and persistent pattern from May 28, 1985 through June 5, 1985. Second, the City has, in recent history, conducted other “sweeps,” notably a drug “sweep” known as “Operation Cold Turkey.”

This Court, by Judge Van Artsdalen, entered a Consent Decree on April 11, 1985 ordering a halt to the use of impermissible “sweeps” by the City in designed “high crime” areas, for the purpose of reducing street narcotics activity. Yet, not even two months later, the City conducts another “sweep,” albeit under different circumstances. Moreover here it is clear that the “sweep” is aimed at a specific neighborhood which is predominantly of Puerto Rican descent.

Apparently the City and the Philadelphia Police Department continue under the misapprehension that they can randomly “sweep” certain ethnic and racial groups with impunity, provided the goals sought are laudable in and of themselves. This “sweep,” following closely on the heels of Operation Cold Turkey, makes it clear to me that the defendants would conduct a “sweep” again if they believed they could escape unscathed. To permit that would make a mockery of our constitutional right to be free from undue restraint in our daily lives, on the street, in front of our homes and inside our homes.

Moreover, the person or persons who killed Officer Trench have not been apprehended. There is no assurance that the “sweeps” are not still occurring and will not likely recur in the near future. On this point, once again, the lack of any evidence on behalf of defendants is disturbing. There was not even any evidence that an order was issued by anyone connected with the City government to halt the illegal practices.

The defendants claim that any injunction will impede their investigation by the Homicide Division. I believe that the argument, for which the defendants offered no evidence, is unpersuasive. The injunction will, of course, permit all lawful methods of investigation to continue in accordance with constitutional precepts.

Moreover, as plaintiffs recognize, determining who killed Officer Trench and apprehending that person or persons is critical to a restoration of peace in the community and to the easing of tensions between the police and Spring Garden residents, notwithstanding any court actions. It is actually in the interests of the police department to provide reassurance to the citizens of Spring Garden that law abiding citizens will not be randomly subjected to the unrestrained infringement of their constitutional rights in an effort to uncover who killed Officer Trench.

At the same time, issuance of the injunction is a sign to the Spring Garden community that their rights as citizens have meaning, and that they will be protected. The testimony revealed that residents fear walking in the neighborhood or sitting on steps in the neighborhood, believing they are continually subject to unexplained pick ups and detentions by the police.

The Fourth Circuit case of Lankford v. Gelston, 364 F.2d 197 (4th Cir.1966) is particularly instructive, insightful and applicable to the facts of this case, recognizing the importance of a preliminary injunction to the health of a community where there have been clear constitutional trespasses without any offer of apparent justification or reason to believe they will cease.

“The grave character of the department’s conduct places a strong obligation on the court to make sure that similar conduct will not recur.
“It is of the highest importance to community morale that the courts shall give firm and effective reassurance, especially to those who feel they have been harassed by reason of their color or poverty.
“After so vast a demonstration of disregard of private rights, the complainants are entitled to a clear response. While the immediate pressure of wholesale raids has been withdrawn, the practice of indiscriminate searches of homes has been renounced only obliquely, if at all, and the danger of repetition has not been removed. The sense of impending crisis in police-community relations persists, and nothing would so directly ameliorate it as a judicial decree forbidding the practices complained of.” ■ Id. at 203, 204.

Lankford was cited with approval in the Supreme Court case of Rizzo v. Goode, 423 U.S. 362, 373 Note 8, 96 S.Ct. 598, 605 note 8, 46 L.Ed.2d 561 (1976).

Here the situation is similar. The unrebutted testimony reveals that the police engaged in a pattern of persistent civil rights violations by “sweeping” the Spring Garden neighborhood in search of Officer Trench’s killer. Tragic and lamentable as the killing was, the crisis is not an excuse or justification for the willful disregard of citizens’ constitutional rights. There is no assurance that this will not recur in the future, and in fact, the history of this ease and the recent “Operation Cold Turkey” case demonstrate the contrary position; namely, that the police and the City are willing to engage in the use of illegal “sweeps” in place of investigations in accordance with the Constitution.

Finally, issuing an injunction will serve to restore community confidence in the guarantees of protection of an individual’s rights, without harming the police investigation.

I must remark in closing that this case sadly brought to mind a famous line from the well-known movie “Casablanca”: “Major Strasser’s been shot! ... Round -up the usual suspects.” However, in the movies the farce is humorous and draws chuckles. In this case, I believe the line is appropriate but devoid of any humor. I have therefore issued the following order:

AND NOW, this 12th day of June, 1985, after an evidentiary hearing on plaintiffs’ motion for a preliminary injunction and consideration of the arguments presented by plaintiffs and defendants, it is hereby Ordered that plaintiffs’ motion is GRANTED and defendants are enjoined as follows:
1. Police officers shall not stop, frisk, question, threaten, search the person or property of, detain, take into custody, arrest or use physical force against any person in the Spring Garden community without meeting the requirements of the Constitution of the United States.
2. Police officers shall not take any of the actions itemized in paragraph one against any person based only on his Puerto Rican or Hispanic ancestry and/or his presence in the Spring Garden community.
3. Nothing in this order shall diminish or interfere with the authority of police officers to enforce the criminal laws; to make arrests, searches and inquiries; and to conduct investigations, as consistent with constitutional requirements.
4. Defendants shall take all steps necessary to see that this order is enforced, including informing all officers in the Ninth Police District of its existence and terms forthwith.

And it is so ordered.


source: Caselaw Access Project

author: LIMBAUGH, District Judge.

license: Public Domain

text:
    INMAN FREIGHT SYSTEMS, INC., Jim S. Green, Trustee, Plaintiffs, v. OLIN CORPORATION, Defendant.
    No. 84-1182 C (5).
    United States District Court, E.D. Missouri, E.D.
    June 28, 1985.

      Steven Weiss, Ronald M. Hill, Chicago, Ill., and Richard L. Geissal, Jr., St. Louis, Mo., for plaintiffs.
    Joseph H. Mueller, St. Louis, Mo., and Ross L. Thorfinnson, Hopkins, Minn., for defendant.
   MEMORANDUM OPINION

LIMBAUGH, District Judge.

This court-tried case involves a dispute between a carrier and the consignee (i.e. recipient of the shipments) over undercharges of shipments of projectile parts and radioactive material.

This Court has personal jurisdiction of the parties and subject jurisdiction of the cause of action pursuant to the Revised Interstate Commerce Act, 49 U.S.C. § 10101 et seq.

Plaintiff carrier is the trustee in bankruptcy of Inman Freight Systems, Inc., a Missouri domestic corporation which was adjudicated a bankrupt on December 8, 1981. All references hereinafter to plaintiff shall be deemed to include the trustee or Inman Freight Systems, Inc., as the context may require.

At all relevant times, plaintiff was a motor carrier operating pursuant to authority issued by the Interstate Commerce Commission (ICC), and defendant Olin Corporation was a corporation existing under the laws of the State of Virginia and doing business in both Illinois and Missouri. Wintz Motor Freights, Inc., was a motor carrier operating pursuant to authority issued by the ICC.

Honeywell, Inc., and defendant were consignor and consignee, respectively, on a contract covering the delivery of the subject shipments.

The problem arises from the transportation by Wintz and plaintiff, for Honeywell, of shipments of freight, between September 4, 1980 and June 22, 1981. These shipments were tendered by Honeywell to Wintz at New Brighton, Minnesota for delivery to defendant in Marion, Illinois. Wintz interchanged all of the subject shipments with plaintiff in St. Louis, Missouri. Plaintiff completed the delivery to defendant in Marion, Illinois.

All the shipments were shipped by Honeywell as consignor (and defendant as consignee) on prepaid bills of lading showing a routing by Wintz. Wintz billed Honeywell $100,401.82 for transporting the shipments and Honeywell prepaid that amount.

When plaintiff was declared bankrupt, an audit of its freight bills was conducted. The audit revealed the alleged undercharges for the Honeywell-Olin shipments. Plaintiff contends that the original rate applied was incorrect; the correct rate is the class rate published in ICC MWB 501 series. Defendant, however, argues that it is not liable for any undercharges because Wintz should have protected the low commodity rate by interchanging with another carrier in Chicago, instead of with plaintiff in St. Louis. Defendant further avers that Honeywell, pursuant to the contract between defendant and Honeywell, is liable for all freight charges.

The Middlewest Motor Freight Bureau Tariff 200-series (ICC MWB 200) established the commodity rate for freight shipments from New Brighton, Minnesota to Marion, Illinois. A commodity rate (which establishes freight charges from a specific origin to a specific destination) is normally lower than the class rate (the freight charges for general delivery). The commodity rate is a preferential rate and the court testimony indicates that the carrier is expected to route the shipment in order to preserve the commodity rate, if at all possible. The MWB 200 tariff was a publication for the benefit of several carriers who agreed to be a party to it. It contained a schedule of freight charges, applicable rules, and governing regulations. The MWB 200 tariff not only established the commodity rate, but also included routing instructions pursuant to the MWB 121 tariff. Another tariff, referred to as NMF 100-G, governed the MWB 200 series tariff with regard to the transportation of hazardous materials. It requires the movement of such shipments along the “shortest available route”.

The testimony by the several expert witnesses was somewhat conflicting as to the application of certain regulations propounded by the ICC. The particular regulations in question appear to be 49 C.F.R. § 1300.64 and 49 C.F.R. § 1162.4(3). 49 C.F.R. § 1300.64 normally entitles the consignor to the benefit of the commodity rate. However, plaintiff’s expert Mr. Byes (on direct) and defendant’s expert Mr. Ruben-stein (on cross) did agree that if the applicable tariff has routing instructions, then the tariff supercedes the C.F.R. Since the MWB 200 series tariff did have routing instructions, the Court finds that the MWB 200 series tariff governs.

The experts’ next major dispute was whether another carrier, Associated Truck Lines (ATL), could have been used as the destination carrier in order to preserve the commodity rate. In order to preserve the commodity rate of MWB 200 for a joint route, both the origin and destination carriers must be a party to the tariff. Plaintiff was not a party to the tariff, while Wintz and ATL were both parties to the tariff.

Although ATL was a party to the MWB 200 series tariff, its ability to participate in a joint route with Wintz, during the relevant time period, was questionable. The Court finds that the criteria for a joint route is 1) the origin carrier must have authority to deliver to the transfer point; 2) the transfer/destination carrier must have authority to deliver to the final destination point; and 3) a bi-lateral concurrence (an interchange agreement) must be published by both carriers. The credible evidence supports a finding that ATL could not be a party to the joint route because it had permanent authority to serve both the origin and destination points and the bilateral concurrence (between ATL and Wintz) was published too late to preserve a commodity rate for the shipments.

The confusion as to ATL’s capacity to participate in the joint route stemmed from its authority to serve St. Paul/Minneapolis. The parties vehemently differed as to the type of authority ATL had while serving St. Paul/Minneapolis. If it were temporary authority, then ATL could serve Marion, Illinois because its service to St. Paul/Minneapolis could not be “tacked on” to its service to Marion, thereby creating a direct route. Such “tacking on” is prohibited by 49 C.F.R. § 1162.4(3). However, if the authority is permanent, ATL would be prohibited from participating in a joint route under the MWB 200 series tariff because a carrier which serves both origin and destination cannot be a party to a joint route between the origin and destination.

The credible evidence supports this Court’s finding that ATL had permanent authority to serve both origin and destination as of publication in April, 1981. Although ATL was serving St. Paul/Minneapolis before April, 1981, neither parties’ experts could testify with certainty that ATL had permanent authority prior to the publication. Secondly, ATL and Wintz did not have a bilateral concurrence until it was published in November, 1980.

It appears then, to the Court, that Wintz could not have used ATL in order to preserve the commodity rate for the shipments prior to November, 1980 and after April, 1981. Furthermore, Wintz was under a duty to use the shortest available route because of the material being shipped. All the evidence and testimony concurred that the route through St. Louis was shorter than the route through Chicago.

The Court finds that the evidence is insufficient to support defendant’s contention that plaintiff intentionally “misrouted” the shipments in order to avoid the lower commodity rate. Plaintiff could not have preserved the commodity rate by using ATL before November, 1980 and after April, 1981 because ATL was prohibited from participating in the joint route. As regards shipments between November, 1980 and April, 1981, the Court believes that plaintiff had an obligation to abide by the spirit and intent of the NMF 100-G tariff to consider safety foremost in routing the shipments of hazardous materials. It was necessary to sacrifice the commodity rate in order to move the shipments along the shortest available route.

Plaintiff contends that the class rate published in ICC MWB 501 series must apply to the subject shipments because MWB 501 is the only tariff published for the account of Wintz and plaintiff. The Court agrees with plaintiff and finds that the amount due and owing on the subject shipments is $150,885.28.

Defendant next argues that if this Court should find that plaintiff did not misroute the shipment, it still is not liable for the undercharges because the bills of lading from the consignor were marked “prepaid”; the freight charges were fully paid by Honeywell when submitted by Wintz; and the contract between Honeywell and defendant included the freight charges (per the bills of lading) which defendant fully paid. Defendant contends that these facts estop plaintiff from seeking to collect the undercharges from defendant.

Interstate common carriers are required by law to charge only the rate specified in the applicable published tariff, 49 U.S.C. § 10761(a), and this rule applies even if the carrier mistakenly charges a lower rate or misquotes the applicable tariff to the shipper. Louisville & Nashville R. Co. v. Mead Johnson & Co., 737 F.2d 683, 685-86 (7th C 1984); Western Transportation Co. v. Wilson & Co., 682 F.2d 1227, 1229 (7th C 1982). Thus, a carrier not only may, but must sue to recover the difference. If, by mistake, it charged a lower rate, the carrier must sue to recover the undercharge. Southern Pacific Transportation Co. v. Commercial Metals Co., 456 U.S. 336, 343, 102 S.Ct. 1815, 1820, 72 L.Ed.2d 114 (1982); Louisville & Nashville R.R. v. Central Iron & Coal Co., 265 U.S. 59, 65, 44 S.Ct. 441, 442, 68 L.Ed. 900 (1924); Louisville & Nashville R.R. v. Maxwell, 237 U.S. 94, 97, 35 S.Ct. 494, 495, 59 L.Ed. 853 (1915); Mead Johnson, at 686; Western Transp., 682 F.2d at 1229.

Plaintiff has a lawful obligation to sue for recovery of the undercharges, but the question still remains as to who is liable for payment of the undercharges.

Although the bills of lading are marked “prepaid” and this normally signifies payment of the freight charges by the shipper/consignor, such a factor does not relieve the consignee of its obligation to pay the freight charges when it accepts delivery of the shipments). Early decisions of the U.S. Supreme Court connote a strong unwillingness to recognize a consignee’s estoppel defense. N.Y. Central & Hudson River Ry. v. York & Whitney Co., 256 U.S. 406, 41 S.Ct. 509, 65 L.Ed. 1016 (1921); Pittsburgh, Cincinnati, Chicago & St. Louis Ry. Co. v. Fink, 250 U.S. 577, 40 S.Ct. 27, 63 L.Ed. 1151 (1919). In Fink, the Court permitted the carrier to recover a $15.00 undercharge from the consignee because it reasoned that the consignee becomes “prima facie liable for the payment of the freight charges when he accepts the goods from the carrier.” Id., at 581, 40 S.Ct. at 27. The court rejected the consignee’s estoppel defense because to do otherwise would thwart the anti-discrimination purpose behind Section 10761 (Section 10761 codifies the prior section referred to as 49 U.S.C. § 6(7)). Id, at 583. The court clearly stated its reason for the rejection: “Estoppel could not become the means of successfully avoiding the requirement of [49 U.S.C. § 6(7) ] as to equal rates... ”. Id., at 583, 40 S.Ct. at 28.

The Eighth Circuit has followed this strong inclination to disfavor the estoppel defense. In Central Warehouse Co. v. Chicago, R.I. & P. Ry., 20 F.2d 828 (8th C 1927), the bills of lading were mistakenly marked prepaid. When the plaintiff carrier found the shipper to be insolvent, it sought payment from the defendant consignee. The Eighth Circuit rejected defendant’s estoppel defense because if the defendant escaped its obligation to pay the freight charges, then the carrier would not be fulfilling its duty to collect the lawful rate, thereby effecting a discrimination in violation of the Interstate Commerce Act. Id., at 829-830.

In 1972, the Eighth Circuit reviewed the Fink, York & Whitney, and Central Warehouse decisions as they applied to a “freight prepaid” case wherein the consignee has reimbursed the shipper for freight charges. In Southern Pacific Transportation Co. v. Campbell Soup Co., 455 F.2d 1219 (8th C 1972), the court held that where the carrier delivered to consignee under bills of lading marked prepaid, and the consignee, in reliance on the shipper’s representation that it would pay the carrier, reimbursed the shipper for the full amount of freight charges, but the shipper did not pay the carrier, the consignee was entitled to the defense of estoppel in the carrier’s suit to collect the freight charges.

In this case, defendant Olin relies heavily on Southern Pacific Transportation v. Campbell Soup to support its claim that it is not liable for the undercharges. A careful reading of Southern Pacific reveals that it is inapplicable to the present case.

The Southern Pacific court reached its decision based upon whether the estoppel defense, under the facts at hand, would contravene the anti-discriminatory purpose of § 6(7) [as already noted, § 6(7) has been codified by § 10764]. The Court simply reasoned that this would not be a conflict between recognition of the estoppel defense and the anti-discriminatory purpose of § 6(7) because the consignee had already paid the full freight charges to the shipper. The court found such a situation different from that present in the Fink and Central Warehouse cases, where the consignee had not paid the full freight charge. Southern Pacific Transportation v. Campbell Soup, at 1221. In 1982, the Eighth Circuit went even further in distinguishing between those cases such as Southern Pacific Transportation v Campbell Soup. (“freight prepaid” case) and “undercharge” cases. Missouri Pacific Railroad Co. v. Rutledge Oil Co., 669 F.2d 557 (8th C 1982). In Missouri Pacific, the court found that the unpaid demurrage charges case-at-hand “resembles those involving the misquotation of rates and subsequent undercharge in which courts have consistently refused to recognize estoppel defenses.” Id, at 559. The Eighth Circuit reasoned that in such cases, estoppel would result in a rate preference. Id, at 559. The Eighth Circuit affirmed the district court’s rejection of the estoppel defense.

The anti-discrimination provision of § 19764 is steadfastly protected by the courts and generally recognition of the estoppel defense has been a rare exception. A suit to recover freight undercharges does not constitute a rare exception. Although defendant has paid the freight charges as provided by the bills of lading, it has not been relieved of its duty to pay the full freight charges. The “full” freight charges are those proscribed by the applicable lawful tariff. Even though plaintiff was mistaken in its calculation of the original freight charges, defendant still is obligated to make up the difference in rate charges. To estop plaintiff from seeking to recover the lawful rate, would be to allow freight rate discrimination.

Defendant’s argument that its contract with Honeywell relieves its obligation to pay the undercharges appears to be irrelevant. The validity and effect of that contract is not what is at issue before this Court. Defendant’s liability for the undercharges is a matter of law. Once defendant accepted the shipments, it became liable for freight charges under the applicable lawful tariff. Whether or not defendant has the right to seek reimbursement from Honeywell is another matter.

Plaintiff is under a duty to recover the undercharges. Defendant is obligated to pay the full freight charges upon receipt of the shipments. Since only a portion of the freight charges were paid pursuant to the prepaid bills of lading, defendant is liable for the remainder.


author: IRVING, District Judge.

text:
    SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. Richard L. BURNS and David L. Watt, Defendants.
    Civ. No. 84-0454-JLI(M).
    United States District Court, S.D. California.
    June 28, 1985.

      Patricia G. Bell, Mitchell J. Albert, S.E.C., Los Angeles, Cal., for plaintiff.
    Joseph J. Wheeler, Latham & Watkins, San Diego, Cal., for defendants.
   AMENDED MEMORANDUM DECISION AND ORDER DISMISSING COUNT V WITHOUT PREJUDICE

IRVING, District Judge.

I.

INTRODUCTION

This action was brought by the Securities and Exchange Commission seeking injunctive relief for alleged violations of the federal securities laws by Richard L. Burns and David W. Watt. Watt consented to the entry of a permanent injunction and the case has proceeded against Burns. Burns moves, pursuant to Fed.R.Civ.P. 56, for summary judgment on Count V of the complaint, which charges him with violations of Rule 10b-6, 17 C.F.R. § 240.10b-6 (1980). Count V alleges Burns induced other persons to purchase common stock of Nucorp Energy, Inc. (“Nucorp”), while a distribution of Nucorp common stock was in progress. At the time of the alleged inducement, Burns was Chairman of the Board of Directors and Chief Executive Officer of Nucorp.

II.

MOTION TO AMEND THE JUDGMENT

By memorandum decision and order entered September 7,1984, this court granted Burns’ motion for summary judgment. On September 17,1984, the Commission moved to amend the judgment pursuant to Fed.R. Civ.P. 15(a), 59(e). Having considered the pleadings, memoranda, and oral argument of counsel, the court now finds the motion to amend should be granted.

In its motion to amend, the Commission seeks leave to amend its complaint to allege Burns acted with scienter when he allegedly violated Rule 10b-6. This motion is properly brought pursuant to Fed.R. Civ.P. 59(e). Sierra On-Line, Inc. v. Phoenix Software, Inc., 739 F.2d 1415,1419 (9th Cir.1984) (motion for reconsideration based upon grounds previously raised properly brought under Rule 59(e)); Sidney-Vinstein v. A.H. Robins Co., 697 F.2d 880, 885 (9th Cir.1983) (Rule 59(e) motion proper to amend summary judgment). The Commission’s motion was made on the tenth day after judgment was entered, and is timely. See Fed.R.Civ.P. 59(e), 6(a). A motion to amend the judgment is addressed to the discretion of the court. Huff v. Metropolitan Life Insurance Co., 675 F.2d 119, 122 (6th Cir.1982); C. Wright & A. Miller, Federal Practice and Procedure § 2803. See Natural Resources, Inc. v. Wineberg, 349 F.2d 685, 691 (9th Cir.1965), cert. denied, 382 U.S. 1010, 86 S.Ct. 617, 15 L.Ed.2d 525 (1966). For the reasons expressed infra at III. D. the court exercises its discretion to grant the motion to amend. The memorandum decision and order entered September 7, 1984, will be vacated, and this memorandum decision and order substituted in its place.

III.

MOTION FOR SUMMARY JUDGMENT

Burns moves for summary judgment on two grounds. First, Burns argues Rule 10b-6 does not apply to individual officers and directors of an issuer of a stock. Second, Burns argues Rule 10b-6 requires that scienter be proved as an element of the violation, and the Commission has not adequately alleged scienter. Having considered the pleadings, memoranda, and oral argument of counsel, the court finds Section 10(b) of the Securities Exchange Act of 1934 requires the Commission to plead and prove scienter in a Rule 10b-6 claim, and the Commission’s complaint does not sufficiently allege scienter. The court further finds the Commission should be allowed to amend its complaint to allege scienter, and such amendment would not be fruitless, because Rule 10b-6, as it existed prior to amendment in 1983, applies to officers and directors of an issuer.

Section 10 of the Securities Exchange Act of 1934 provides in part:

It shall be unlawful for any person, directly or indirectly
(b) [t]o use or employ, in connection with the purchase or sale of any security registered on a national securities exchange or any security not so registered, any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors.

15 U.S.C. § 78j.

Pursuant to its rulemaking power, the Commission has promulgated Rule 10b-6. Count V concerns acts that allegedly occurred during 1980. See Complaint 1111 54-58, 75. During this period, Rule 10b-6 provided in part:

It shall constitute a manipulative device or contrivance as used in Section 10(b) of the [Securities Exchange] Act [of 1934] for any person,
who is the issuer or other person on whose behalf a distribution is being made,
to bid for or purchase for any account in which he has a beneficial interest, any security which is the subject of such distribution, or any security of the same class and series, or any right to purchase any such security or to attempt to induce any person to purchase any such security or right until after he has completed his participation____

17 C.F.R. § 240.10b-6 (1980).

A. SCIENTER

In his second ground Burns argues Section 10(b) of the 1934 Act requires proof of scienter, and therefore, Rule 10b-6 must also contain that requirement. The Supreme Court has held scienter must be shown to prove violations of Rule 10b-5 in an injunctive proceeding. Aaron v. Securities and Exchange Commission, 446 U.S. 680, 100 S.Ct. 1945, 64 L.Ed.2d 611 (1980). See also Ernst & Ernst v. Hochfelder, 425 U.S. 185, 96 S.Ct. 1375, 47 L.Ed.2d 668 (1976) (scienter required in private action under Rule 10b-5). In Aaron and Hochfelder, the Court reasoned Section 10(b), by its language “manipulative or deceptive device,” evidenced Congressional intent to proscribe only “knowing or intentional misconduct.” Aaron, 446 U.S. at 690, 100 S.Ct. at 1952 (quoting Hochfelder, 425 U.S. at 197, 96 S.Ct. at 1383). In Hochfelder the Court stated that the statutory language “so clearly connotes intentional misconduct” that “further inquiry may be unnecessary.” 425 U.S. at 201, 96 S.Ct. at 1384. Nevertheless, the Court looked to the legislative history of the 1934 Act and found that this history supported the Court’s reading of Section 10(b). 425 U.S. at 201-06, 96 S.Ct. at 1384-87.

Burns argues, and this court agrees, that the same reasoning should apply to the interpretation of Rule 10b-6. Because Rule 10b-6 and Rule 10b-5 derive from the same enabling statute, namely Section 10(b), the Commission’s rulemaking power in enacting Rule 10b-6 must include the same scienter requirement the Court has required in Rule 10b-5.

The Commission argues an inquiry into the defendant’s state of mind is necessary in Rule 10b-5 because that rule contains general prohibitions against employing any “artifice to defraud,” or engaging in acts which, “would operate as a fraud or deceit upon any person.” The Commission then asserts that because Rule 10b-6 proscribes specific, narrowly-defined acts, scienter should not be required. This argument fails because it ignores the fact that the basis for the Supreme Court’s implication of a scienter requirement in Hockfelder and Aaron was an interpretation of Section 10(b), not an interpretation of Rule 10b-5. The Court in Hockfelder rejected the Commission’s argument that Rule 10b-5, as promulgated by the Commission, intended to reach negligent conduct. 425 U.S. at 212-14, 96 S.Ct. at 1390-91. The Court emphasized that the Commission could not promulgate rules under Section 10(b) that did not include the elements which Congress intended to require for a violation of that section. The Court stated:

More importantly, Rule 10b-5 was adopted pursuant to authority granted the Commission under § 10(b). The rule-making power granted to an administrative agency charged with the administration of a federal statute is not the power to make law. Rather, it is “ ‘the power to adopt regulations to carry into effect the will of Congress as expressed by the statute.’ ” Thus, despite the broad view of the Rule advanced by the Commission in this case, its scope cannot exceed the power granted the Commission by Congress under § 10(b).

425 U.S. at 212-14, 96 S.Ct. at 1390-91 (citations omitted).

The Commission’s argument implies because the Commission has determined the specific acts proscribed in Rule 10b-6 are inherently manipulative .or deceptive, this court should not require a showing of scienter. The Fifth Circuit has suggested that it finds this argument contrary to the Supreme Court’s holdings in Hockfelder and Aaron.

The SEC has maintained that it can enact prophylactic rules, such as Rule 1 Ob-6, which brand particular practices illegal per se without the necessity of proving scienter. However, Ernst & Ernst and Aaron have sharply circumscribed the SEC’s power to enact such rules since both held that the SEC cannot discard statutorily defined elements of a cause of action under Rule 10b-5.

Chemetron Corp. v. Business Funds, Inc., 682 F.2d 1149, 1164 n. 39 (5th Cir.1982), vacated on other grounds, 460 U.S. 1007, 103 S.Ct. 1245, 75 L.Ed.2d 476 (1983) (citations omitted).

This court agrees with that statement and sees no principled distinction for reaching a different decision under Rule 10b-6 than the Supreme Court’s decision under Rule 10b-5.

In summary, the court finds the Congressional intent embodied in Section 10(b) of the Securities Exchange Act of 1934 requires the Commission to allege and prove scienter as an element of a violation of Rule 10b-6.

B. VALIDITY OF RULE 10b-6

Burns argues Rule 10b-6, as written, is fatally defective and unenforceable. Burns asserts a scienter requirement may not be fairly implied in Rule 10b-6, and therefore, this court’s implication of such a requirement in Rule 10b-6 would constitute judicial rulemaking. He concludes such a construction is prohibited by Shea v. Vialpando, 416 U.S. 251, 257, 94 S.Ct. 1746, 1751, 40 L.Ed.2d 120 (1974). Shea is not applicable here. In that case, the State of Colorado had promulgated a regulation which was directly contrary to the express requirements of the statute. 416 U.S. at 260, 94 S.Ct. at 1753. In the present case, the Commission has promulgated a rule which does not expressly include a requirement that is impliedly required by statute. In such a case, the court believes it is proper to construe the regulation to require scienter. See Ramirez v. Immigration and Naturalization Service, 550 F.2d 560, 564 (9th Cir.1977) (regulation should not be annulled unless palpably inconsistent with law) (quoting from Boske v. Comingore, 177 U.S. 459, 470, 20 S.Ct. 701, 705, 44 L.Ed. 846 (1900)). See also United Telecommunications, Inc. v. Commissioner, 589 F.2d 1383, 1390 (10th Cir.1978), cert. denied, 442 U.S. 917, 99 S.Ct. 2839, 61 L.Ed.2d 284 (1979) (construe regulation consistent with intent of underlying statute). Accordingly, the court will construe Rule 10b-6 to require that a person be shown to have acted with scienter before a violation may be found.

C. SUFFICIENCY OF THE SCIEN-TER ALLEGATIONS

The Commission argues it has sufficiently alleged scienter in its complaint. It points to the portions of its complaint where it alleges Burns “induced” the sales and “authorized” loans to finance purchases. The Commission asserts the element of scienter is sufficiently pled by allegations of “knowing and intentional” conduct, relying primarily on Aaron, 446 U.S. at 694, 100 S.Ct. at 1954, and that the Commission has alleged knowing and intentional conduct by its use of the terms “induced” and “authorized.”

Burns’ position is scienter requires “a mental state embracing intent to deceive, manipulate, or defraud,” relying primarily on Hochfelder, 425 U.S. at 194 n. 12, 96 S.Ct. at 1381 n. 12. Burns asserts the Commission has not alleged this element of scienter, and therefore, he is entitled to summary judgment.

The court finds the Commission’s allegations deficient under either standard. The Commission’s pleading contains no allegation of intent. Although intent may be alleged generally, Fed.R.Civ.P. 9(b), it must be at least alleged in a “short and plain statement of the claim.” Fed.R.Civ.P. 8(a). “The court does not think it inappropriate ... to require plaintiff to make a genera] averment of scienter in connection with the conduct of [Burns] of which plaintiffs complain.” Haynes v. Anderson & Strudwick, Inc., 508 F.Supp. 1303, 1317 (E.D.Va.1981).

D. LEAVE TO AMEND

1. Sufficiency of the Scienter Allegations

Despite the deficiency in its pleading, the Commission asserts summary judgment is improper because there is a question of material fact as to whether Burns acted with scienter. The Commission seeks leave to amend its complaint to add the words “with scienter” to its allegations that Burns induced stock purchases while a distribution was in progress. See Proposed First Amended Complaint ¶ 75. Burns attacks the sufficiency of the proposed amendment, continuing to argue the Commission must plead “intent to deceive, manipulate, or defraud.” The Commission continues to assert scienter may be proved by showing Burns induced purchases “knowingly and intentionally,” but also asserts that by its allegation that Burns acted “with scienter,” the Commission has sufficiently alleged Burns’ mental state under either standard.

The court agrees with the Commission that its allegation Burns acted “with scienter” may lead to a reasonable inference that Burns acted with intent to deceive, manipulate, or defraud. Because this is a reasonable inference, and such an inference is certainly sufficient to meet the requirement of scienter, the court declines to rule at this time on whether a showing that Burns acted knowingly and intentionally, but without an intent to deceive, manipulate, or defraud, is sufficient to meet the scienter requirement in a Rule 10b-6 claim. The court will not issue what is in effect an advisory opinion, when the Commission asserts it can prove Burns’ conduct satisfied the more stringent scienter standard.

Therefore, the court finds the Commission’s proposed first amended complaint sufficiently alleges scienter.

2. Application of Rule 10b-6 to Officers and Directors

Burns argues amendment of the complaint to cure defective allegations of scienter would be futile, because Rule lob-6, as it existed prior to its 1983 amendment, does not apply to officers and directors of an issuer.

The Commission clearly had the power to enact a rule prohibiting officers of issuers from purchasing or inducing purchases while a distribution was in progress. Section 10(b), from which the Commission derives its rule-making authority, applies to “any person.” 15 U.S.C. § 78j. The question is whether the Commission exercised that power when it promulgated Rule 10b-6 in 1955.

The Rule on its face does not apply to officers and directors of issuers. The Commission urges the court to construe the Rule to apply to officers and directors because the Rule prohibits issuers from acting “directly or indirectly.” The Commission reasons that this language makes officers, directors and other affiliates of issuers primarily liable for violations of the Rule.

The Commission has consistently interpreted Rule 10b-6 to apply to officers and directors. See Securities Exchange Act Release No. 19565 23 (March 4, 1983); Disclosure Requirements of Public Companies and Insiders 136 (J. Plom, B. Garfinkel, J. Freund ed. 1967) (statement by Irving M. Pollock, Director, Division of Trading and Markets, SEC). This interpretation of the Rule by the Commission is entitled to great weight.

When faced with a problem of statutory construction, this Court shows great deference to the interpretation given the statute by the officers or agency charged with its administration____ When the construction of an administrative regulation rather than a statute is in issue, deference is even more clearly in order.

Udall v. Tollman, 380 U.S. 1, 16, 85 S.Ct. 792, 801, 13 L.Ed.2d 616 (1965). The Commission’s interpretation should be upheld unless it is unreasonable. Id. Cf. Carlyle Compressor v. Occupational Safety and Health Review Commission, 683 F.2d 673, 675 (2d Cir.1982) (rejecting interpretation as unreasonable).

Initially, Burns argues the interpretation advanced by the Commission in this case is not entitled to any deference, because the interpretation was adopted only by the Division of Market Regulation. Burns suggests judicial deference is only due formal opinions adopted by the Commission. Burns cites no authority in support of this proposition, and the court declines to accept it. Moreover, it appears the Commission has at least ratified the interpretation of the Division of Market Regulation. See Securities Exchange Act Release No. 19565 at Additional Information III. A (“Historically, the prohibitions of Rule 10b-6 have been interpreted to apply to distribution participants and to all affiliates of such participants.”). Therefore, this court must determine whether the Commission’s interpretation is a reasonable one.

At least two courts have been willing to permanently enjoin individual officers and directors from violating Rule 10b-6. See SEC v. Georgia-Pacific Corp., [1964-66 Transfer Binder] Fed.Sec.L.Rep. (CCH) n 91,680, 91,692 (S.D.N.Y.1966); SEC v. Electronics Security Corp., 217 F.Supp. 831 (D.Minn.1963). However, in both cases the defendants consented to the entry of judgment against them. Because the issue of coverage was not in dispute, the courts’ judgments were not conclusive determinations on the merits.

Only two cases have had the opportunity to address the issue. In Pappas v. Moss, 393 F.2d 865 (3d Cir.1968), the court reversed the trial court’s ruling that defendants had violated Rule 10b-6. Defendants were directors of an issuer, and they purchased stock while a distribution was in progress. The Commission in that case filed an amicus brief urging the court of appeals to find the district court erred because the officers purchased stock that was part of the distribution. The Commission argued Rule 10b-6 “does not prohibit purchases in the course of the distribution; otherwise almost every distribution would violate the rule.” See Brief for the Securities and Exchange Commission, Amicus Curiae (Albert Declaration Exhibit “H”) 17. The individual defendants filed a brief urging the court of appeals to reverse the trial court. One argument advanced was that Rule 10b-6 did not apply to officers and directors. See Brief for Director-Defendants (Wheeler Declaration Exh. “A”) 17 n. 19. The court of appeals found the trial court erred, but explicitly reserved the question of whether the Rule would apply “were some other distribution in progress.” 393 F.2d at 869. Therefore, the Pappas case is simply inconclusive on the question presented here.

In re Gap Stores Securities Litigation, 457 F.Supp. 1135 (N.D.Cal.1978) involved private multi-district securities fraud litigation. Plaintiffs had stated claims against an individual officer of an issuer for violations of Rules 10b-5, 10b-6, and 10b-7. The court granted summary judgment on all claims. The only statement regarding the 10b-6 claim was as follows:

Regulations 10b-6 and 10b-7 have no apparent application to Powell since he was neither an underwriter, issuer, broker, dealer, nor other participant in a distribution of [sic] stabilization of a security.

457 F.Supp. at 1140.

This brief statement supports Burns’ contention. The court seems to have read Rule 10b-6 literally, and held that the officer simply did not fall into any of the categories of persons who were prohibited from purchasing while a distribution was in progress. While this court agrees that officers of issuers do not fall within the literal language of Rule 10b-6, the court is in disagreement with the result in Gap Stores, and declines to follow that decision.

The administrative rule-making history of Rule 10b-6 supports the Commission. The Rule as quoted above was promulgated in 1955. In 1956, the Commission proposed an amendment to specifically include officers and directors within the class of persons subject to the Rule. The Commission stated the purpose of the amendment was:

to make it clear that officers, directors, and persons controlling the issuer or other person on whose behalf a distribution is made would also be subject to the prohibitions of the rule.

Securities Exchange Act Release No. 5415 (Albert Declaration Exhibit “F”) col. 1, ¶ 2 (Dec. 5, 1956). The proposed amendment was withdrawn in 1965. The Commission’s release announcing the withdrawal referred to a number of proposals collectively, stating:

The proposals were withdrawn in light of the effect of the Report of the Special Study of the Securities Markets which resulted in action by self-regulatory agencies and changes in practices in the securities industry, and administrative proceedings and judicial rulings, which obviated the necessity for the proposals.

Securities Exchange Act Release No. 7515 (Albert Declaration Exhibit “G”) (Jan. 22, 1965). Beyond this ambiguous statement, there is only speculation about the reasons for the withdrawal. But see Disclosure Requirements, supra, at 136. In 1983, the Commission amended Rule 10b-6 to explicitly include “affiliated purchasers” within its coverage. See Securities Exchange Act Release No. 19565 (Albert Declaration Exhibit “C”) at Additional Information III. A (Mar. 4, 1983); 17 C.F.R. § 240.10b-6 (1984). The Commission described the amendment as narrowing the scope of coverage, because the new Rule would cover not all affiliates, but only those affiliates who act “in concert with” the issuer, who control the issuers’ purchases, whose purchases are controlled by the issuer, or whose purchases are under common control with those of the issuer. Release N. 19565 (Albert Declaration Exhibit “C”) at Additional Information III. A (Mar. 4, 1983); 17 C.F.R. § 240.10b-6(c)(6) (1984).

Burns argues the proposed amendment of the Rule in 1956, and subsequent withdrawal of the proposed amendment in 1965 indicate the substance of the proposed amendment is not incorporated into the Rule. While such a construction may be generally appropriate, see, e.g., Gossnel v. Spang, 84 F.2d 889, 891 (3d Cir.) cert. denied, 299 U.S. 605, 57 S.Ct. 233, 81 L.Ed. 446 (1936), the fact that the Commission referred to the 1956 proposed amendment as a clarification, and described the 1983 amendment as narrowing the Rule’s coverage convince this court that such an inference is not appropriate in this case. Because the reasoning behind such a construction is that withdrawal of an amendment clarifies the intent of the agency which did not adopt the amendment, the descriptions noted above, if anything, indicate the intent of the Commission was that Rule 10b-6, as drafted and promulgated in 1955, apply to an officer such as Bums. Thus the administrative history of Rule 10b-6 simply reinforces the fact, noted above, that the Commission interprets Rule 10b-6 to include officers and directors of an issuer. The history does not support Burns’ contention that such an interpretation is unreasonable.

The Commission asserts its interpretation is consistent with the Supreme Court’s declaration that the securities laws should be construed “not technically or restrictively, but flexibly to effectuate their remedial purposes.” Affiliate Ute Citizens v. United States, 406 U.S. 128, 151, 92 S.Ct. 1456, 1471, 31 L.Ed.2d 741 (1972) (quoting SEC v. Capital Gains Research Bureau, 375 U.S. 180, 195, 84 S.Ct. 275, 284, 11 L.Ed.2d 237 (1963)). Burns opposes this argument with his own canon of construction. Burns argues because Rule 10b-6 includes penal sanctions, any doubts about its construction must be resolved against coverage, relying on such authority as Dunn v. United States, 442 U.S. 100, 112, 99 S.Ct. 2190, 2197, 60 L.Ed.2d 743 (1979). See also Busic v. United States, 446 U.S. 398, 406, 100 5. Ct. 1747, 1752, 64 L.Ed.2d 381 (1984). Burns notes although the Commission is not seeking to impose criminal sanctions in this case, the court must still strictly construe the Rule, because the civil reach of the Rule should be co-extensive with its criminal reach. See Duke v. University of Texas at El Paso, 663 F.2d 522, 527 (5th Cir.1981); United States v. Charnay, 537 F.2d 341, 348 (9th Cir.1976).

Burns’ argument, while initially compelling, is not persuasive because the policy behind the principle of strict construction of penal statutes is not present in this ease. The rationale of construing criminal statutes in favor of leniency is that the state must give its citizens “clear and unequivocal warnings, in language that people generally would understand, as to what actions would expose them to liability for penalties and what the penalties would be.” 3 Sands, Sutherland Statutory Construction § 59.03 at 7 (4th ed. 1974). However, in this case, the notice function of the rule was satisfied by the Commission’s consistent public declaration that it would interpret the Rule to apply to officers and directors. See, e.g., L. Loss, Securities Regulation 3770-71 (Supp.1969); Wolfson, Rule 10b-6: The Illusory Search for Certainty, 25 Stan.L.Rev. 809, 829 (1973). The position was sufficiently well known that many persons applied to the Commission for an exemption from the Rule, including Nucorp itself. See Nucorp Energy, Inc. (Nov. 28, 1981) (Albert Declaration Exhibits “D”, “E”); See also Albert Supplemental Declaration. Moreover, because of the fact that issuers are explicitly covered by Rule lob-6, an officer of a corporate issuer would certainly know he could not violate Rule 10b-6 in his corporate capacity, without subjecting the corporation to liability. The complaint in this case alleges Burns induced officers of Nucorp subsidiaries to purchase stock with money advanced by Nucorp. If proven, the actions of Burns could subject Nucorp itself to liability. Thus, even under Burns’ construction of Rule 10b-6, Burns had adequate notice that his conduct was prohibited.

Because this court is satisfied that the policy behind the rule of strict construction for penal statutes is satisfied, the court is inclined to follow the Commission’s suggestion that Rule 10b-6 be construed broadly to encompass an officer and director such as Burns. As a practical matter, the ability of the Commission to enforce Rule 10b-6 against individual officers and directors prevents those individuals from perpetrating securities fraud through various corporate entities, and is consistent with the rule’s policy of preventing fraudulent manipulation of the securities markets during distributions.

The court finds it is not unreasonable to conclude that when the Commission prohibits an issuer from indirectly inducing purchases, it also imposes liability on the actors through which the issuer acts. Therefore, the court finds Rule 10b-6 as it existed in 1980 can be used to impose liability upon an officer and director of an issuer.

The proposed amended complaint states a valid claim against Burns in Count V, and the proposed amendment would not be futile.

3. Conclusion

Leave to amend “shall be freely given when justice so requires.” Fed.R.Civ.P. 15(a). Absent compelling reasons, the court should exercise its discretion to allow leave to amend. See Foman v. Davis, 371 U.S. 178, 83 S.Ct. 227, 9 L.Ed.2d 222 (1962); Mayes v. Leipziger, 729 F.2d 605, 608-09 (9th Cir.1984). Burns has not advanced any reason why allowing leave to amend would prejudice him, nor does he assert improper motive. Burns only argues the proposed amendment would be futile. Because this court finds the proposed amendment would not be futile, the Commission will be granted leave to amend its complaint.

IY.

SUMMARY

In summary, this court finds Section 10(b) requires proof of scienter before a violation of Rule 10b-6 can be found. But the Rule, as drafted, is not invalid. The Commission has not sufficiently alleged scienter in its complaint. Therefore, summary judgment is appropriate dismissing Count V of the complaint. However, the Commission’s proposed amended complaint sufficiently alleges scienter, and the court finds the Commission should be allowed to amend its complaint. Such amendment would not be futile, because Rule 10b-6 applies to officers and directors of an issuer.

Accordingly,

V.

ORDER

IT IS ORDERED that defendant’s motion for partial summary judgment is granted. Count V of the complaint is dismissed without prejudice. Plaintiff is granted leave to amend its complaint. Plaintiff shall file its first amended complaint within ten days after the date this order is entered.