author: JOHNSTONE, District Judge.

text:
    Ronald W. CONNER and/or Beverly B. Conner, Plaintiffs, v. SHELTER MUTUAL INSURANCE COMPANY, Defendants.
    Civ. A. No. 82-0035-P.
    United States District Court, W.D. Kentucky.
    Aug. 21, 1984.

      Charles A. Williams and Rodger Lofton of Williams, Housman, Sparks & Franklin, Paducah, Ky., for plaintiffs.
    Richard C. Roberts of Whitlow, Roberts, Houston & Russell, Paducah, Ky., for defendants.
   MEMORANDUM OPINION

JOHNSTONE, District Judge.

Ronald and Beverly Conner (Conner) sued Shelter Mutual to recover on a fire insurance policy. Shelter Mutual denied coverage, claiming that Conner had made material misrepresentations in his application for insurance and that the misrepresentations acted to void the policy. The case was ultimately tried before a jury on February 8 and 9, 1984. At the close of proof, three issues went to the jury. First, was Conner responsible for the alleged misrepresentations or was the application signed in blank and completed by a Shelter Mutual agent? Second, if Conner did make the misrepresentations, would Shelter Mutual have issued the policy anyway; in other words, were the misrepresentations “material?” Third, depending on the outcome of the first two issues, did Shelter Mutual act in bad faith in refusing to pay Conner’s claim? These issues were presented to the jury through the following interrogatories:

1. Do you believe from the evidence that at the time Ronald Conner signed the application the answer to question No. 4, as it appears above his signature on exhibit No. 7, was blank?
2. Do you believe from the evidence that the defendant would have issued the homeowners’ policy if it had known of Mr. Conner’s prior convictions?
3. Do you believe from the evidence that the defendant breached its duty of good faith in effecting a fair and reasonable settlement of plaintiffs’ claim?

The jury concluded that Conner was responsible for the misrepresentations, but that Shelter Mutual would have issued the policy even if it had known the true facts. Thus, the verdict was for Conner on the policy. The jury also concluded that Shelter Mutual acted in bad faith in failing to pay the Conner claim and awarded Conner Twenty Thousand Dollars in additional damages. In response to the court’s entry of judgment, Shelter Mutual, pursuant to Federal Rule of Civil Procedure 50(b), has timely moved for a judgment notwithstanding the verdict. In the alternative, Shelter Mutual seeks a reduction of the damages awarded for its alleged bad faith denial of payment. Conner has timely moved, pursuant to Federal Rule of Civil Procedure 59(e), to alter the judgment to include an award of pre-judgment interest.

A.

Shelter Mutual seeks a judgment n.o.v. both on the contract claim and on the unjustified denial of payment claim. “Judgments n.o.v. are legally equivalent to directed verdicts, and the same standards govern the consideration of either.” Warkentien v. Vondracek, 633 F.2d 1, 6 (6th Cir.1980). Thus, the question is whether there was sufficient evidence to allow the jury to properly return a verdict in favor of the party opposing the motion. See Patrick v. South Central Bell Tel. Co., 641 F.2d 1192, 1197 (6th Cir.1980). In diversity cases, this court must look to Kentucky law to determine whether the evidence is sufficient to withstand a motion for judgment n.o.v. Warkentien, 633 F.2d at 6. Finally, when ruling on a motion for judgment n.o.v., the court must consider the evidence in the light most favorable to the party opposing the motion. Upton v. Western Life Insurance Company, 492 F.2d 148, 149 (6th Cir.1974).

In Kentucky a misrepresentation voids an insurance policy if the misrepresentation is material to the acceptance of the risk or if the insurance company would not have issued the policy if the true facts had been known. Ky.Rev.Stat. Section 304.14-110. In the present case, the jury found that Shelter Mutual would have issued the policy even if it had known of Conner’s past criminal convictions. Shelter Mutual argues that this conclusion is not supported by the evidence before the jury. Indeed, Shelter Mutual contends that the only evidence on materiality was provided by its own underwriters and is conclusive on the issue. The underwriters stated that Shelter Mutual, pursuant to established underwriting rules, would not have issued the policy if it had known of Conner’s convictions. In response to Shelter Mutual’s contentions, Conner argues that there was evidence before the jury upon which the jury could properly rely in reaching a decision in favor of Conner. At the close of testimony the court determined that the issue should go to the jury. The question then, as previously stated, is whether there was sufficient evidence to allow the jury to return a verdict on the issue of materiality. For the reasons given below, the court concludes that there was sufficient evidence.

Ten days after it issued Conner’s homeowner’s policy, Shelter issued Conner an automobile policy. Before issuing this policy, however, Shelter Mutual, through its representative agent, was aware that Conner had been convicted of driving while intoxicated. This evidence was the strongest evidence in Conner’s favor on the issue of materiality. Even though it involved a different type of policy, and even though only one of Conner’s convictions was revealed, it did demonstrate that Shelter Mutual issued insurance even when it knew of an applicant’s prior convictions. Moreover, the evidence contradicted testimony from Shelter Mutual’s underwriters and provided a basis for disbelieving the underwriter’s testimony.

There was also testimony by Shelter Mutual’s agent, Richard Yasseur, that if Conner’s convictions had been revealed in his fire insurance application Shelter Mutual would have merely looked into the matter rather than immediately informing Conner that he could not be insured. (Vasseur was the only one to testify to this effect at trial. According to the court reporter’s notes, Mr. McCubbin’s deposition was not read to the jury). This testimony provides further support for Conner’s contention that past criminal convictions were not, contrary to Shelter Mutual’s position, automatically conclusive on whether insurance would be issued. Even though Vasseur was merely a Shelter Mutual field agent, the court finds that his testimony is relevant to how Shelter Mutual deals with applicants with criminal convictions. Vasseur may not be responsible for the ultimate issuance of the policy, but his position does provide him knowledge on how Shelter Mutual deals with applicants.

The court finds the above evidence was sufficient for the jury to return a verdict on the issue of materiality. Pursuant to the court’s instructions, the jury weighed the evidence, decided credibility, and reached a decision in favor of Conner. The court is not free to weigh the evidence in its own manner, insert its own views on credibility or, in view of its holding on the sufficiency of the evidence, to alter the jury’s decision. Shelter Mutual’s motion for a judgment n.o.v. must be denied on Conner’s claim on the fire insurance policy.

In addition to the contentions discussed above, Conner presented other evidence and contentions in support of his position that there was sufficient evidence to allow the jury to return a verdict on materiality. For example, Conner argued that the fact that Shelter Mutual did not investigate his past until after the fire occurred supports a finding that Conner’s past convictions were not material. The court concludes, however, that Shelter Mutual was under no duty to perform an investigation prior to the fire and, therefore, the lack of an investigation j.was not relevant to materiality. The remainder of Conner’s contentions suffer from similar problems. Because of these problems, the court has not relied upon the contentions in denying the judgment n.o.v. as to the verdict on the insurance policy. Moreover, because the evidence discussed earlier was sufficient to allow the issue of materiality to be decided by the jury, there is no need to rely upon the other contentions.

B.

The Kentucky Court of Appeals recently held that an insurance company can be liable for damages if it “unjustifiably” denies payment to an insured, under an insurance contract with that insured. Feathers v. State Farm Fire & Casualty Co., 667 S.W.2d 693 (Ky.Ct.App.1983), discretionary review denied (Ky.1984). Shelter Mutual does not dispute that this is now the law of Kentucky; however, it argues that the evidence presented in this case does not support a finding that it unjustifiably denied Conner’s claim.

Although Feathers establishes a cause of action for unjustified denial of payment it offers no clear guidance on the standards for proving such a claim. Feathers deals with “unjustified” denial of payment. Read literally, this could mean that whenever an insurance company’s basis for denying payment is found to have been incorrect, the company is then liable for its denial of payment. See K. Harvey & T. Wiseman, First Party Bad Faith: Common Law Remedies and a Proposed Legislative Solution, 72 Ky.L.J. 141, 173-174 (1983-84). Such an interpretation is possible; however, given that the opinion merely deals with whether a claim for denial of payment is possible and not with the specifics of presenting such a claim, this court will not expand the Feathers language in deciding the level of proof necessary to recover for a denial of payment. Instead of adopting a literal reading of Feathers, the court concludes that in order to establish a claim for unjustified denial of payment, a claimant must show that the denial was made in “bad faith” and not just that the denial was incorrect. This conclusion is supported by Kentucky cases dealing with situations where an insurance company breaches its duty to settle claims made against its insured. Those cases require that the insurance company’s failure be in “bad faith.” See Manchester Ins. & Indem. Co. v. Grundy, 531 S.W.2d 493 (Ky.1975), cert. denied, 429 U.S. 821, 97 S.Ct. 70, 50 L.Ed.2d 82 (1976). See generally Harrod v. Meridian Mutual Ins. Co., 389 S.W.2d 74 (Ky.1964); Hoskins v. Aetna Life Ins. Co., 452 N.E.2d 1315 (Ohio 1983).

The court can find no evidence in the record to indicate that Shelter Mutual’s denial of payment was made in “bad faith.” Although a workable definition of bad faith has not been developed by the Kentucky courts for claims under Feathers, it is clear that “bad faith” requires some unreasonable action and that mere negligence is not sufficient. See Grundy, 531 S.W.2d at 497-501. Moreover, a claimant cannot recover merely by showing that the basis for the denial was incorrect. In the present case, Shelter Mutual denied payment after learning that Conner had misrepresented himself by failing to reveal on his application that he had ten previous felony convictions. In the light of the jury’s verdict on materiality, the denial was incorrect; however, there was nothing to indicate that it was unreasonable. Since Conner failed to present any evidence of an unreasonable or “bad faith” denial of payment, the court erred in not directing a verdict for Shelter Mutual.

There is an additional reason why the jury’s verdict on unjustified denial of payment cannot stand. The court has concluded that the claim requires a showing of “bad faith.” Kentucky has held that in third-party situations, situations where the insurance company is alleged to have acted in “bad faith” in failing to settle a claim against an insured, the question of “bad faith” is for the court and not the jury. Grundy, 531 S.W.2d at 500-501. Although the issue has not been addressed in the first-party situation presented by Feathers, where the claim involves failing to pay a claim made by an insured, the same considerations should apply. See generally Grundy, 531 S.W.2d at 500-501. Under this reasoning, Conner’s claim of unjustified denial of payment should have been decided by the court and not the jury. Since the court has concluded that there was no evidence indicating “bad faith” on the part of Shelter Mutual, the court should have granted judgment to Shelter Mutual and not submitted the issue of “bad faith” to the jury.

The court will correct its errors by granting Shelter Mutual’s motion for judgment n.o.v. on the claim for unjustified denial of payment.

C.

Conner seeks to alter the judgment to include an award of pre-judgment interest. Kentucky law permits such an award where the action is based upon a liquidated claim. Alford v. Continental Casualty Co., 376 F.Supp. 237, 238 (E.D.Ky.1974). The court will alter its judgment to include an award of pre-judgment interest on the judgment on the contract, i.e., on the amount of $58,529.11. This will not result in a double recovery for Conner. The court must now determine the time from which the interest is to be calculated. “As a general rule, interest on the amount payable under an insurance policy commences to run from the time when the loss is payable by the terms of the policy.” Travelers Ins. Co. v. Hawks, 517 S.W.2d 740, 741 (Ky.1974). Under the contract between Conner and Shelter Mutual, Conner’s loss was payable sixty days after proof of loss. Proof of loss was received on November 28, 1981, and the sixty day period passed on January 27, 1982. On December 18, 1981, however, Shelter Mutual denied Conner’s claim. When an insurance company denies liability before occurrence of a prerequisite for payment, the company waives the requirement and incurs an obligation to pay from the date of denial. See Hawks, 517 S.W.2d at 740-741. The court concludes that interest should run from December 18, 1981, the date Shelter Mutual denied Conner’s claim.

Having granted a judgment n.o.v. on the claim for unjustified denial of payment, the court need not consider Conner’s request for interest on the $20,000.00 awarded on that claim.

An appropriate order will be entered.


source: Caselaw Access Project

author: ROBERT H. HALL, District Judge.

license: Public Domain

text:
    Melinda MAYS, Plaintiff, v. LAURANT PUBLISHING, LTD., and Vicki Khuzami, Defendants.
    Civ. A. No. C83-2541A.
    United States District Court, N.D. Georgia, Atlanta Division.
    Aug. 29, 1984.
    John S. Graettinger, Jr., Frankel, Hard-wick, Tanenbaum, Fink & Clark, Atlanta, Ga., for plaintiff.
    Daryll Love, Powell, Goldstein, Frazer & Murphy, Atlanta, Ga., for defendants.
   ORDER

ROBERT H. HALL, District Judge.

This action is presently before the court on defendant Khuzami’s motion to dismiss. Federal jurisdiction is predicated upon diversity of citizenship, 28 U.S.C. § 1332. For the reasons stated herein, defendant’s motion is DENIED.

FACTS

In this action plaintiff seeks to recover damages allegedly resulting from the unauthorized publication of her likeness in Oui Magazine (“Oui”). Oui, published by defendant Laurant Publishing, Ltd (“Laurant”), is circulated nationally. Defendant Khuzami is a freelance artist who has, in the past, supplied pornographic paintings to Jeff Goodman, presently the editor of Oui, for use in national magazines.

On Friday, January 7, 1983, Goodman and Oui’s art director, Joel Ponzan, asked Khuzami to do a pornographic painting to accompany a story for the April, 1983 issue of Oui. Khuzami read the story and was told by Laurant’s agent to paint a picture of a beautiful blond in a science fiction background.

Khuzami began by looking through several magazines, including the February, 1983 issue of Playboy. She selected a picture of the plaintiff, Melinda Mays, from Playboy. Khuzami used a machine to project an image of the photograph onto a piece of white paper, she then painted a picture of the plaintiff, portraying her using a vibrator for sexual stimulation.

On January 10, 1983, Laurant paid Khuzami $450 for the painting. The painting was accepted by Laurant on January 12, 1983, after certain specified changes had been made. The painting was published in the April, 1983 issue of Oui.

Plaintiff, Playboy’s Miss February, 1983, is a resident of Conyers, Georgia. Her complaint alleges causes of action for defamation and invasion of privacy, and seeks punitive damages and attorney’s fees. Defendant Khuzami has made a Rule 12(b) motion on the ground that this court lacks in personam jurisdiction over her. Further facts will be disclosed as necessary for the discussion of the motion.

DISCUSSION

Plaintiff contends that defendant Khuzami is subject to the jurisdiction of this court under Ga. Off’l Code Ann. § 9-10-91 (1982), the Georgia Long-Arm Statute. In order to confer jurisdiction over non-residents, § 9-10-91 requires that the defendant either:

1) transacts any business within this state; or
2) commits a tortious act or omission within this state, except as to a cause of action for defamation of character arising from the act; or
3) commits a tortious injury in this state caused by an act or omission outside this state if the tort-feasor regularly does or solicits business, or engages in any other persistent course of conduct, or derives substantial revenue from goods used or consumed or services rendered in this state; or
4) owns, uses, or possesses any real property situated within this state.

The evidence is undisputed that Khuzami is not a resident of Georgia, has never transacted any business in Georgia, and has never owned, used, or possessed any property in Georgia. Additionally, there is no evidence that Khuzami “does or solicits business ... engages in any other persistent course of conduct, or derives substantial revenues from goods ... or services” so as to come within paragraph (3). The issue becomes, therefore, whether paragraph (2) provides a basis for in personam jurisdiction over defendant Khuzami.

Defendant contends that paragraph (2) cannot provide a basis for jurisdiction because this subsection expressly excepts causes of action for defamation. If plaintiff’s entire complaint was based on an allegation of defamation, defendant would be correct that paragraph (2) would be inapplicable. However, plaintiff has also stated a cause of action for invasion of privacy, specifically false light and appropriation of name or likeness. If the court has personal jurisdiction as to the privacy claims it has jurisdiction as to all claims. Mack Truck, Inc. v. Arrow Aluminum Castings Co., 510 F.2d 1029 (5th Cir.1975).

In order for this court to have personal jurisdiction over defendant the court must find that plaintiff’s invasion of privacy claims allege the commission of a tortious act within the state of Georgia, pursuant to paragraph (2).

Paragraph (2) of the Long Arm Statute has been interpreted to provide jurisdiction where the tortious act occurs outside the state if the damage resulting therefrom occurs within the state. Spelsberg v. Sweeney, 514 F.Supp. 622 (S.D.Ga.1981); Timberlake Equipment, Ltd. v. Jones, 146 Ga. App. 589, 246 S.E.2d 709 (1978). As both parties acknowledge, the leading case interpreting paragraph (2) is Shellenberger v. Tanner, 138 Ga.App. 399, 227 S.E.2d 266 (1976). In Shellenberger the court held that a non-resident defendant may be subject to the jurisdiction of a Georgia court under this section only when:

(1) The nonresident has purposefully done some act or consummated some transaction with or in the forum (but the actual act or omission resulting in the injury here need not have occurred in this state). The defendant need not be physically within the forum when this act or transaction occurs and a single such instance may suffice; (2) The Georgia plaintiff must have a legal cause of action in tort against the nonresident, which arises out of, or results from, the purposeful activity of the defendant involving this state; a resident is a victim of a “tortious act” when he suffers an injury here due to an act or omission of negligence occurring outside this state; and (3) If the requirements of (1) and (2) are satisfied, the exercise of jurisdiction over the nonresident must be “reasonable.”

Id. at 407, 227 S.E.2d at 273.

Defendant argues that plaintiffs allegations fail to meet the “purposeful activity” requirement mandated by Shellenberger. This court disagrees. Plaintiff has alleged that defendant Khuzami painted a portrait of plaintiff which defamed plaintiff and invaded her privacy, and then sold such painting to a magazine which is published on a nationwide basis. Defendant admits painting the picture and selling it to Oui. These actions amount to a purposeful and intentional infusion of defendant’s product into the nationwide stream of commerce. This is not a case where by chance defendant’s painting was seen by an audience for whom it was not intended. Although all defendant’s activities occurred in New York, defendant knew and intended that her product would be transmitted into the state of Georgia.

In support of its argument defendant cites Coopers & Lybrand v. Cocklereece, 157 Ga.App. 240, 276 S.E.2d 845 (1981). In this case defendant was a Bahamian partnership of certified public accountants which prepared an audit of a Bahamian Company and provided the audit to two investors. Using the audit these investors extracted $30,000 from plaintiff Cocklereece, a citizen of Georgia, as an investment in the audited Bahamian Company. Plaintiff alleged that the defendant firm had fraudulently prepared the audit and that the firm was subject to the jurisdiction of Georgia courts under paragraph (2) of the Long Arm Statute. The court dismissed the case as to the defendant firm for lack of in personam jurisdiction. The reason for such conclusion, however, was that plaintiff had failed to produce any evidence that defendant had injected the audit into the “stream of commerce” directed to the State of Georgia with the expectation that it would be purchased or used by Georgia citizens or consumers. Plaintiff’s only evidence showed that defendant may have intended the introduction of the audit into Louisiana, New York, and possibly Florida. Id. at 244, 276 S.E.2d at 848. As such, Cocklereece is clearly distinguishable from the present case in which defendant should have fully expected Oui, a nationally published magazine, to reach Georgia citizens and consumers.

For these reasons the court finds that it does have personal jurisdiction over defendant Khuzami and therefore DENIES her motion to dismiss.

      . Defendant's motion also alleged insufficiency of service of process but such defense was not argued by defendant. The court concludes that defendant abandoned this theory.

      . The court recognizes plaintiff's conspiracy argument regarding jurisdiction. Because of the court’s determination that paragraph (2) provides in personam jurisdiction, the court need not reach this argument.

      . The court notes that the parties dispute whether Khuzami knew plaintiff was a Georgia citizen. Without resolving this issue, the court finds that such “fact” is not material to its conclusion. The crucial point is that defendant knew, or had every reason to know, that Oui is published on a nationwide basis.

      . The court sees no merit to defendant’s argument that her product "reached Georgia only after a third party, here Laurant Publishing, Ltd., independently transmitted the same to this state.” (Defendant’s Reply Brief at p. 8).

      . See also Bradlee Management Services v. Cassells, 249 Ga. 614, 292 S.E.2d 717 (1982), in which plaintiff sued defendant, an individual reporter, for defamation allegedly arising from a report taped by defendant reporter and broadcast by defendant television station. In Casselb the court stated that defendant reporter’s contacts with Georgia "might be sufficient to satisfy the general requirements of due process," id. at 618, 292 S.E.2d at 720, however, there was no jurisdiction under § 9-10-91(2) because the cause of action was for defamation.


author: MEREDITH, District Judge.

text:
    Alex A. ABOUSSIE and Alice Aboussie, Plaintiffs, v. UNITED STATES of America, Defendant. Robert G. ABOUSSIE and Linda M. Aboussie, Plaintiffs, v. UNITED STATES of America, Defendant.
    Nos. 83-1710C(C), 83-1711C(C).
    United States District Court, E.D. Missouri.
    Sept. 14, 1984.
    On Motion to Alter or Amend Judgment Oct. 19, 1984.

      Gerald Zafft, St. Louis, Mo., for plaintiffs.
    Ludwig Adams, Tax Div., Dept. of Justice, Washington, D.C., for defendant.
   FINDINGS OF FACT AND CONCLUSIONS OF LAW

MEREDITH, District Judge.

This case is before the court upon a filing of a claim for refund and the denial thereof.

After consideration of the pleadings, the testimony and exhibits introduced at trial, the credibility of the witnesses, the parties’ supplemental briefs and the applicable law, the Court makes the following additional and further findings of fact and conclusions of law. Any finding of fact equally applicable as a conclusion of law is adopted as such, and conversely, any conclusion of law equally applicable as a finding of fact is so adopted.

Findings of Fact

1. This is an action for the refund of federal individual income taxes.

2. Plaintiffs Alex A. Aboussie and Alice Aboussie, husband and wife, reside at 6736 Eichelberger Avenue, St. Louis, Missouri 63109.

3. Plaintiffs Robert G. Aboussie and Linda Aboussie, husband and wife, reside at 9849 Sunset Greens Drive, St. Louis, Missouri 63127.

4. On their timely-filed Form 1040 return for 1978, Alex A. and Alice Aboussie reported a tax liability of $63,802.00. The tax was paid in full as of April 15, 1979 and the tax was assessed on August 6, 1979.

5. On their timely-filed Form 1040 return for 1978, Robert G. and Linda Aboussie reported a tax liability of $9,447.00. The tax was paid in full as of April 15,1979 and the tax was assessed on August 6, 1979.

6. On August 15, 1981, Alex A. and Alice Aboussie filed a Form 1040X amended return for 1978 seeking refund of $5,227.00 in tax based upon their distributive share of an alleged loss of the partnership Bevo Place Associates.

7. On August 15, 1981, Robert G. and Linda Aboussie filed a Form 1040X amended return for 1978 seeking refund of $3,742.00 in tax based upon their distributive share of an alleged loss of the partnership Bevo Place Associates.

8. By letters dated May 2, 1983, the claims for refund were disallowed by the Internal Revenue Service.

9. Bevo Place Associates is a Missouri limited partnership formed pursuant to an Agreement of Limited Partnership dated July 19, 1978 for the stated purposes, among others, of acquiring, owning, developing, improving, maintaining and operating an apartment complex in accordance with the provisions of Section 221(d)(4) of the National Housing Act (12 U.S.C. § 1701 et seq.) and Section 8 of the U.S. Housing Act of 1937 (42 U.S.C. § 1437f et seq.).

10. The partners of Bevo Place Associates and their respective partnership interests were:

Name Percentage
Bevo Place, Inc. (Gen. Partner) 1.0%
Medigroup, Inc. (Ltd. Partner) 49.5%
Alex A. Aboussie (Ltd. Partner) 24.75%
Robert G. Aboussie (Ltd. Partner) 24.75%

11. In 1977, Gershman Investment Corp. applied to the Missouri Housing Development Commission (hereinafter referred to as “MHDC”) for a loan of $4,950,-000.00 to finance low-income housing for the elderly. On December 21,1977, MHDC issued a Conditional Commitment to lend $4,764,800.00 for the project. On September 20,1978, MHDC issued a Firm Commitment to lend $4,950,000.00. The Commitment provided that the interest rate on the construction loan was 6% per annum and the interest rate on the permanent loan was 772% per annum. The Commitment further provided for the payment of a financing fee of 2% of the amount of the loan and a permanent loan fee of 172% of the amount of the loan, and for the payment of 1% processing fee to Gershman Investment Corp. at initial endorsement, subject to the assignment of FHA’s Firm Commitment by Gershman to MHDC.

12. On August 17, 1978, the U.S. Department of Housing and Urban Development, Federal Housing Administration (“FHA”) issued its Commitment for Insurance of Advances to Gershman Investment Corp. On September 28, 1978, Gershman Investment Corp. assigned the Commitment to Bevo Place Associates.

13. Also on September 28, 1978, various other documents were executed, including a Building Loan Agreement between MHDC and Bevo Place Associates under the terms of which the following items, among others, were to be paid from the proceeds of the building loan.

a. Interest during construction $222,749.00
b. Real estate taxes 5,000.00
c. FHA mortgage insurance premium 49,500.00
d. Initial service charge 99,000.00
e. MHDC fee 74,250.00
f. Legal, organization & cost certification 32,500.00
g. Supplementary management fund 19,800.00

The term of the loan was from September 28, 1978, through August 1, 2020, bearing interest at 6% through Final Endorsement for the construction portion of the loan and 772% thereafter for the permanent portion of the loan.

14. Subsequent to September 28, 1978, construction commenced and was substantially complete on June 11, 1980.

15. On or about July 14, 1981, a loan closing (“Final Endorsement”) was held.

16. Pursuant to draw requests made by Bevo Place Associates, and approved and funded by MHDC, Missouri Title Company disbursed during 1978 the following amounts, among others:

Description Payee Amount
a. Interest MHDC $ 7,468.00
b. Taxes St. Louis 2.434.00
c. Mortgage Insurance FHA 24.750.00
d. Service Charge MHDC 99,000.00
e. MHDC Fee MHDC 74.250.00
f. Legal Fees Medigroup, Inc. 5,000.00
g. Management Fee Medigroup, Inc. 4.950.00

Out of the initial service charge of $99,-000.00 paid to MHDC, MHDC paid Gershman Investment Corp. a processing fee of $49,500.00.

17. Plaintiffs have conceded that no portion of the $74,250.00 paid to the MHDC is deductible in 1978 and this court so finds.

18. The suits for refund were filed on July 19, 1983. Plaintiffs claim deductibility in 1978 of items a, b, and g, and portions of items c, d, e, and f, set forth in paragraph sixteen above.

Conclusions of Law

1. This court has jurisdiction over this action pursuant to 28 U.S.C. 1346(a)(1).

2. The expenses at issue in this case are expenses incurred in the construction and acquisition of a capital asset and, therefore, are not deductible in 1978, but must be capitalized and amortized over the life of the Bevo Place Apartments beginning in 1980 when the asset was placed in service. Under 26 U.S.C. 263(a)(1) no deduction is allowable for amounts paid out for new buildings or for improvements made to increase the value of any property. Legal, brokerage, accounting and similar costs incurred in the acquisition or disposition of capital assets are capital expenditures. Woodward v. Commissioner, 397 U.S. 572, 576, 90 S.Ct. 1302, 1305, 25 L.Ed.2d 577 (1970); Blitzer v. United States, 684 F.2d 874, 893, 231 Ct.Cl. 236 (Ct.Cl.1982). The capitalization rule set forth in Section 263(a) serves to prevent a taxpayer from utilizing currently a deduction properly attributable, through amortization, to later years when the capital asset becomes income producing. Commissioner v. Idaho Power Company, 418 U.S. 1, 16, 94 S.Ct. 2757, 2766, 41 L.Ed.2d 535 (1974). “Capital expenditures” include the cost of acquisition of buildings. The items for which plaintiff seeks a deduction were costs of acquisition and construction. Therefore, the expenses at issue must be amortized over the longer life of the capital facility constructed.

3. The Mortgage insurance premium ($24,750.00), the MHDC fee ($74,250.00) and the management fee ($4,950.00) are construction related expenses and as such must be capitalized under the rule of Idaho Power, supra. The term of amortization is the entire life of the Bevo Place Apartments.

4. The term of amortization of the construction loan financing fee ($99,000.00) is the entire forty-two year life of the permanent loan. The Court finds that the taxpayers negotiated for a single loan with a construction period (6% interest) and a permanent period (71/2% interest) even though the loan shows separate interest rates for each period. In Lay v. Commissioner, 69 T.C. 421 (1977) and Wilkerson v. Commissioner, 70 T.C. 240 (1978), rev’d on other grounds, 655 F.2d 980 (9th Cir.1981), the court permitted amortization only over the entire term of the loan even though both eases involved separate construction and permanent periods of the loan, separate closings, and separate fees for the construction and permanent periods of the loan. Noble v. Commissioner, 79 T.C. 751 (1982) does not apply because it involved negotiations with two separate lenders, and two separate mortgages, while the case at bar involves only one lender, one mortgage, and one loan and note. It does not appear that the taxpayers have engaged in sufficiently separate and distinct negotiations for construction and permanent financing so as to have bargained for and obtained separate construction and permanent loans. The court in Lay, supra at p. 436, explains its decision by stating that

“regardless of the number of loans, the payments were essential to secure the financing needed for each project. It is a logical extension of this premise that the period benefited as a result of these fees is not confined to the year of payment. This is because the fees were for purpose of obtaining long-term financing for each project; therefore, the entire financing period has profited.”

The case at bar presents such a situation and attendant benefit. Therefore, the taxpayer will not be allowed to amortize the fee allowable to the construction period over the shorter term. The term of amortization will be the entire forty-two year life of the permanent loan, the period which was benefited.

5. Under 26 U.S.C. § 162(a) a deduction is allowed to ordinary and necessary expenses incurred in carrying on any trade or business. The court finds that Bevo Place Associates’ rental business had not started to function in 1978 and, therefore, the FHA mortgage insurance premium and the construction loan financing fee incurred by the taxpayers must be capitalized as “pre-opening expenses.” See Bennett Paper Corp. v. Commissioner, 699 F.2d 450, 452-453 (8th Cir.1983); Richmond Television Corp. v. United States, 345 F.2d 901, 907 (4th Cir.1965), remanded on other issues, 382 U.S. 68, 86 S.Ct. 233, 15 L.Ed.2d 143 (1965); Hoopengarner v. Commissioner, 80 T.C. 538, 540 (1983). Even though a taxpayer has made a firm decision to enter into a business and over a considerable period of time spent money in preparation for entering that business, he still has not “engaged in carrying on any trade or business” within the intent of Section 162(a) until such time as the business has begun to function as a going concern and performed those activities for which it was organized. Richmond, supra at 907. The U.S. Court of Appeals for the Federal Circuit in El Paso Company v. United States, 694 F.2d 703, 714 (1982) cited Blitzer v. United States, 684 F.2d 874, 880, 231 Ct.Cl. 236 (1982) where the Court of Claims decided that expenses incurred before the start of revenue producing operations were deductible under § 162 if not “in the nature of start-up costs or intended to produce benefits extending beyond the year in question.” Plaintiffs’ expenses are not normal recurring expenses to maintain the apartments but were clearly expended to begin operation of the apartments. In the case at bar the expenses were intended to produce benefits extending beyond the year in question. Such benefits were the capital assets, the apartments themselves, and the continued rental income which they would produce. The Bevo Apartments were organized to provide income through tenant’s rental payments. No such payments could accrue until renting began and the benefits will continue as long as the apartments are being rented: the life of the apartment building. Therefore, the expenses were in the nature of start-up cash and as such non-deductible in 1978. All expenses were for start-up costs and are applicable to the capitalization of assets from which the benefits would flow, starting beyond the year in question.

6. The expenses in question in the case at bar must be capitalized and amortized beginning in 1980 when the asset was placed in service. Section 1-167 of the Treasury Regulations on Income Tax (1954 Code).

JUDGMENT

Findings of fact and conclusions of law dated this date are hereby incorporated in and made a part of this judgment.

IT IS HEREBY ORDERED, ADJUDGED AND DECREED that plaintiffs are entitled to no tax refunds for the calendar year 1978. Plaintiffs’ complaints be and the same are hereby dismissed with prejudice.

ON MOTION TO ALTER OR AMEND JUDGMENT

This matter is before the court upon plaintiffs’ motion to alter or amend judgment or to award a new trial. For the reasons set forth below, this motion will be denied.

Plaintiffs brought this action against defendant United States for a refund of their federal income taxes. Plaintiffs alleged that the Commissioner of Internal Revenue erroneously denied certain deductions pertaining to the construction of low income housing by plaintiffs’ limited partnership. By a judgment dated September 4, 1984, this Court determined that plaintiffs were not entitled to tax refunds for the year 1978 and dismissed plaintiffs’ complaints with prejudice. Plaintiffs seek reconsideration of that judgment.

The court determined that the expenses in issue were properly characterized as expenses incurred in the construction or acquisition of a capital asset, the Bevo Place Apartments. Because of their capital nature, most of the expenses must be capitalized and amortized over the life of the asset, beginning in the year the asset was placed into service, 1980. These expenses are therefore not deductible in 1978. Plaintiffs assert that this determination is erroneous; they have not, however, made any novel arguments in support of their motion.

Under § 263(a)(1) of the Internal Revenue Code, no deduction is allowed for costs incurred for the acquisition or construction of capital assets. These costs are regarded as capital expenditures and must be amortized over the life of the asset. Commissioner v. Idaho Power Co., 418 U.S. 1, 12-13, 94 S.Ct. 2757, 2764-2765, 41 L.Ed.2d 535 (1974); Woodward v. Commissioner, 397 U.S. 572, 575, 90 S.Ct. 1302, 1304, 25 L.Ed.2d 577 (1970). This method assures a proper matching of revenue and expense over the periods benefitted by the asset. See Idaho Power, supra, 418 U.S. at 10-11, 94 S.Ct. at 2763-2764. Further, a capital expenditure cannot be deducted as “ordinary and necessary” business expense under § 162 of the Code or as an expense of “management, conservation, or maintenance” under § 212. Woodward, supra, 397 U.S. at 575, 90 S.Ct. at 1304.

The court correctly determined that all of the expenses at issue were directly related to the construction or acquisition of the Bevo Place Apartments and as such must be capitalized under the rule of Idaho Power. With the exception of the construction loan financing fee, these costs must be amortized over the life of the Bevo Place Apartments. The legal fees are capital expenditures and will be amortized over the same period as the other construction-related expenses. See Blitzer v. United States, 684 F.2d 874, 893-4, 231 Ct.Cl. 236 (1982); Cagle v. Commissioner, 539 F.2d 409, 415-6 (5th Cir.1976).

Plaintiffs claim that the interest and taxes incurred for the project should be deducted in the year of payment, rather than capitalized and amortized. This claim is without merit. They argue that section 189 of the Code preempts Idaho Power regarding such expenses accrued or paid to construct low-income housing, but produce no authority in support of this proposition. Moreover, this argument was considered by this court before and rejected.

The court also determined that the construction loan financing fee must be amortized over the 42 year life of the permanent loan. Plaintiffs again argue for an amortization period based on the life of the construction loan. Relying on Noble v. Commissioner, 79 T.C. 751 (1982), they claim that separate construction and permanent loans exist. The court expressly found a single loan was entered into because the transaction involved only one lender, one mortgage, and one note. Plaintiffs did not engage in sufficiently separate and distinct execution and negotiation on the loan to warrant separate loan treatment. The fee was essential to obtaining long-term financing and the entire financing period has profited thereby. Lay v. Commissioner, 69 T.C. 421, 436 (1977). See also, Wilkerson v. Commissioner, 70 T.C. 240 (1978), rev’d on other grounds 655 F.2d 980 (9th Cir.1981). Therefore, the term of amortization must be the life of the permanent loan, the period which was benefitted.

There has been no error shown in the court’s Findings of Fact or Conclusions of Law and the Judgment based thereon. All of plaintiffs’ arguments had been previously presented to this court. Accordingly, plaintiffs’ motion to alter or amend judgment or to award a new trial will be denied.


author: AGUILAR, District Judge.

text:
    Jose MOULES, Plaintiff, v. Margaret M. HECKLER, Secretary of Health and Human Services, Defendant.
    No. C-83-1155 RPA.
    United States District Court, N.D. California.
    Oct. 3, 1984.
    As Corrected Oct. 17, 1984.

      Robert Taren, Santa Cruz, Cal., for plaintiff.
    George C. Stoll, Asst. U.S. Atty., San Francisco, Cal., for defendant.
   ORDER

AGUILAR, District Judge.

Plaintiff brings this action under 42 U.S.C. § 405(g) and 42 U.S.C. § 1383(c)(3) seeking judicial review of the adverse decision of the Secretary of H.H.S. denying plaintiff’s application for disability benefits. Plaintiff moves for summary judgment or, alternatively, to remand this case for further administrative proceedings because the Secretary used improper procedures and standards in reaching her decision. The Secretary makes a cross-motion for summary judgment.

The issue before this Court is whether the Secretary’s decision is supported by “substantial evidence.” This quantum of evidence has been defined by the Supreme Court as meaning “such relevant evidence as a reasonable mind might accept as adequate to support a conclusion” Richardson v. Perales, U.S. 389, 401, 91 S.Ct. 1420, 1427, 28 L.Ed.2d 842 (1971). This conclusion “must be based on the record as a whole.” Craun v. Califano, 454 F.Supp. 383 (N.D.Cal.1978).

Plaintiff is a 53 year old male who was born in the Azores. Plaintiff came to the United States when he was about 44 years of age. He has no formal education and is illiterate in both his native Portuguese and in English. Plaintiff found employment as an agricultural worker, pruning trees and picking and sorting apples. He left work in 1977 when he began to experience pain in his lower back. Two years later, Plaintiff was able to resume work for a period of seven to eight months. However, because of continued pain in his back, hips and legs, plaintiff found it impossible to work. Plaintiff has not worked since May 1981.

Plaintiff filed an application for Supplemental Security Income (S.S.I.) benefits in July 1981 because of alleged severe and debilitating back pain. The Social Security Administration (“SSA”) denied plaintiff’s application on September 17, 1981, on the grounds that plaintiff did not meet the “disability” requirement. Upon reconsideration, the SSA again denied plaintiff’s application on October 7, 1981.

An Administrative Law Judge (“ALJ”) conducted a hearing on plaintiff’s claim on July 26, 1982. The ALJ concluded that plaintiff was not disabled within the meaning of the Social Security Act (“the Act”). The ALJ found that plaintiff’s “medical condition is not severe as it does not significantly limit his ability to perform basic work-related functions.” (Tr. 24) On January 19, 1983, the Appeals Council affirmed the ALJ’s decision making this the “final decision” of the Secretary of Health and Human Services.

Section 1614(a)(3)(A) of the Act defines “disability” as the inability to “engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or which has lasted or can be expected to last for a continuous period of not less than 12 months.” 42 U.S.C. § 1382c(a)(3)(A). In addition, Section 1614(a)(3)(B) of the Act provides that an individual is determined to be under a disability only if his mental or physical impairment(s) are of “such severity that he is not only unable to do his previous work but cannot, considering his age, education, and work experience, engage in any kind of substantial gainful work which exists in the national economy.”

Evidence presented on behalf of the plaintiff at the administrative hearing includes medical reports from plaintiff’s attending physician and consulting medical specialists, testimony from the plaintiff himself, corroborating testimony from his wife and neighbor and reports from vocational rehabilitation specialists. The Court reviews plaintiff’s condition and plaintiff’s ability to resume previous work-related activity.

Plaintiff contends that he has a physical impairment that prevents him from engaging in his previous occupation of sorting apples. The Act defines physical and mental impairment as an impairment that results from “anatomical, physiological, or psychological abnormalities which are demonstrable by medically acceptable clinical and laboratory diagnostic techniques.” 42 U.S.C. § 1382c, (a)(3)(C). Plaintiff produced medical evidence that shows that he has a history of chronic lower back pain. (Tr. 127) Records indicate that plaintiff was hospitalized from February 28, 1977 until March 4, 1977 for febrile illness. (Tr. 132) X-rays taken at that time showed only mild ordinary osteoarthritis. (Tr. 132) Plaintiff’s alleged lower back pain persisted and on June 16, 1977, another x-ray was taken. Dr. Kalman Czeuz, a neurological surgeon and plaintiff’s attending physician, stated that the x-ray showed “moderate compression of the L5 vertebra.” (Tr. 131) According to a consultation report by Dr. William Stearns, dated November 10, 1978, lumbar spine x-rays revealed “osteolytic destruction of the 5th lumbar vertebra with marked compression ...” (Tr. 132) At that time, a physician advised plaintiff to have his condition operatively explored. Plaintiff decided not to heed this advice.

Dr. Cseuz examined plaintiff for his persistent lower back pain on September 20, 1978. The examination revealed that plaintiff was “able to reach to within 3 inches from the floor, with a slower than normal recovery phase and 5 degree extension. Straight leg raising to 80 degrees bilaterally with sciatica .,.” (Tr. 131) On November 9, 1978, plaintiff was admitted to the hospital for further evaluation of the “destructive process in the 5th lumbar vertebra.” (Tr. 132)

Both Dr. Cseuz and Dr. Stearns tentatively diagnosed plaintiff’s condition as suspected osteomyelitis, 5th lumbar vertebra (body L5). (Tr. 131, 132) According to the November 20,1978 Dismissal Diagnosis report dated by Dr. Charney and Dr. Stearns, a biopsy of the body of the L5 revealed enterococcus. After Plaintiff was treated with prescribed medications, he showed “favorable improvement.” On November 20, 1978 he was discharged from the hospital with directions to use a back brace and to continue taking the medications. The report indicates that the “prognosis appears favorable.” (Tr. 130)

For approximately the next two years, there was no apparent change in plaintiff’s physical condition. Subsequent medical examination reports made by Dr. Stephen Teng on September 4, 1979 and July 28, 1981 indicated no significant change in plaintiff’s condition. (Tr. 128, 129) Dr. Cseuz’s examination of plaintiff on August 3, 1981 also revealed no significant change in plaintiffs condition. (Tr. 127) Plaintiff still complained of “end-phase low back pain” and displayed difficulty bending and limited movement and agility. (Tr. 127) On the basis of his physical examination of the plaintiff, Dr. Cseuz concluded that “... this patient cannot engage in a physically demanding occupation ...” (Tr. 127) Almost six months later, on January 26, 1982, Dr. Cseuz again examined the plaintiff. He found that the plaintiff’s physical condition had deteriorated since his previous examination. Dr. Cseuz noted “a limited range of motion, bending stiffly, with a slower-than-normal recovery phase and bilateral straight leg raising to 45 degrees with accompanying end-phase low back pain.” (Tr. 137) Dr. Cseuz also noted that plaintiff’s condition became aggravated by activities that required some flexibility and movement. Dr. Cseuz concluded that “[theoretically, plaintiff could engage in ‘light work’ as defined in Guidelines for Work Related Disabilities by State of California...” (Tr. 137)

Medical reports given by Dr. Cseuz and other consulting medical specialists support plaintiff’s subjective complaints of pain and confirm that plaintiff’s osteomyelitis would restrict his ability to perform work-related activities. Dr. Cseuz’ medical findings indicate that plaintiff may be able to engage only in “light work” due to the pain in his lower back and subsequent physical restrictions that tend to aggravate plaintiff’s condition.

Dr. Cseuz’ conclusions, as plaintiff’s attending physician, are drawn from his own continuous clinical observations and medical findings, and are supported by other medical care specialists. The general rule is that “[w]hile the Secretary is not bound by the opinion of a claimant’s treating physician, that opinion is entitled to great weight for it reflects an expert judgment based on a continuing observation of the patient’s condition over a prolonged period of time.” Mitchell v. Schweiker, 699 F.2d 185, 187 (4th Cir.1983). Further, an AU is not bound by uncontroverted expert opinion, but he must state clear and convincing reasons for rejecting the evidence. Day v. Weinberger, 522 F.2d 1154, 1156 (9th Cir.1975).

The ALJ did not state specific reasons for rejecting the medical evidence. The ALJ focused instead on Dr. Cseuz’s statements regarding plaintiff’s prospects in finding available work due to his limited communication skills and his other limited resources. (Tr. 137) The ALJ found that the doctor’s conclusions were not based on medical findings and were outside the scope of the doctor’s expertise. The ALJ appears to be correct about this. However, it appears that when the ALJ rejected the doctor’s opinion about plaintiff’s ability to find work, the ALJ also disregarded the doctor’s objective medical findings as well. The ALJ does not refer to any medical evidence in the record that contradicts the physician’s opinion.

Plaintiff’s testimony — of severe lower back pain and difficulty in bending, walking, lifting and standing for any length of time — also deserves consideration in determining plaintiff’s ability to resume previous work activity. Talifson v. Secretary of Health and Human Services, 554 F.Supp. 575, 580 (D.MT.1982). Plaintiff’s physicians made repeated notations about plaintiff’s pain and pain associated with movement. Plaintiff’s complaints of chronic back pain are documented in the medical reports and pain is generally known to accompany the condition of osteomyelitis. The ALJ accepted plaintiff’s subjective complaints with reservations, stating that they were unsubstantiated by objective medical findings. This is an unsupportable conclusion in this case where there is medical evidence to substantiate plaintiff’s complaints of pain and no contrary evidence in the record. Chism v. Secretary of Health, Education and Welfare, 457 F.Supp. 547, 557 (C.D.Cal.1978).

Further, the ALJ did not give proper weight to the objective professional findings of vocational rehabilitation specialists Judith A. White and Maria Quintero. When determining the issue of disability, the AU must consider not only plaintiff’s ability to resume his previous occupation, but “... his age, education and work experience,” as relevant factors that indicate plaintiff’s ability to engage in “any kind of substantial gainful work which exists in the national economy.” (20 CFR § 404.-1561)

Based on objective medical findings and her specialized knowledge of vocational rehabilitation, Ms. White concluded that: “I am quite certain that plaintiff would be unable to return to his former employment with M.V. Pista, either pruning trees in the orchards or even sorting apples.” After interviewing plaintiff and taking into consideration plaintiff’s physical limitations, age, work experience and lack of communication skills, Ms. White found that the plaintiff’s “transferable skills are very limited, and when you combine the fact that he is 51 years old and is illiterate, in conjunction with his physical limitations of no prolonged standing, sitting, walking and very minimal lifting and carrying, I do believe that Mr. Moules is unemployable in the competitive labor market.” (Tr. 147-148)

Consistent with Ms. White’s findings, is the report from Maria Quintero, Rehabilitation Counselor for Department of Rehabilitation: “Given today’s competitive labor market, the ready supply of able-bodied and qualified applicants available to employers, Mr. Moules possibilities of employment are at best slim.” (Tr. 134)

Substantial weight must be given to a report by a vocational specialist who fully considers a claimant’s physical limitations, illiteracy and work experience and determines that such individual is incapable of returning to any kind of gainful employment. Neal v. Schweiker, 1981 Unempl. Ins.Rptr. CCH 17, 977 (M.D.Tenn.1981). The ALJ should consider the entire record including the expert testimony of vocational rehabilitation specialists in making his final decision.

In addition to the medical and vocational evidence presented in the record, the use of the Listing of Medical-Vocational Guidelines in Appendix 2 is also helpful in a case such as this, “where a person is not doing vocationally relevant past work.” 20 CFR § 404.1569 (1983). According to the evaluation guide, Table No. 2, Rule 202.09, where an individual is closely approaching advanced age (50-54), is “illiterate or unable to communicate in English” and is unskilled, that individual is determined as a matter of law to be “disabled.” Even though the statutory scheme of SSA contemplates that disability hearings will be individualized determinations based on all evidence presented at the administrative hearing, the Supreme Court has approved of the Secretary’s use of and reliance on medical-vocational guidelines. Heckler v. Campbell, 461 U.S. 458, 103 S.Ct. 1952, 76 L.Ed.2d 66 (1983).

“The initial burden of establishing a prima facie case of disability is on the claimant, and he must show his inability to return to his former work.” Lopez v. Califano, 481 F.Supp. 392 (N.D.Cal.1979). The ALJ found that plaintiff “has a condition which would prevent him from engaging in physically demanding activity than those he engaged in as an agricultural laborer.” Thus, the ALJ concluded that plaintiff’s physical impairment was severe enough to prevent him from doing past relevant work activity. In other words, plaintiff met his burden of establishing a prima facie case. Once this burden is met, “the Secretary must assume the burden of coming forward with evidence as to skills of the particular claimant and the availability of specific jobs which correspond with those skills.” Lightfoot v. Mathews, 430 F.Supp. 620, 621-22 (N.D.Cal.1977). The ALJ seems to have determined that plaintiff is capable of doing less stressful and demanding work activities than required in his previous employment. However, the ALJ did not refer to any document or evidence to show that other work exists that a person with the plaintiff’s particular background and physical condition could perform. Because there is no substantial evidence in the record to support the Secretary’s findings that the plaintiff is not disabled with respect to certain unspecified “less physically demanding” work, this Court cannot uphold the Secretary’s decision.

The Court finds that plaintiff established that he suffers from a severe physical impairment that prevents him from returning to his previous employment as an agricultural laborer. Thus, in light of the medical evidence offered by the plaintiff, the ALJ’s failure to consider relevant determinations made by vocational specialists and the failure to apply the appropriate medical-vocational guidelines, the ALJ failed to meet the burden of showing that plaintiff can perform other work available in the national economy. Therefore, the ALJ’s finding that plaintiff is not disabled is not supported by substantial evidence and must be reversed.

For the reasons stated above, this Court grants the plaintiffs Motion for Summary Judgment and the Secretary is ordered to pay benefits under Title XYI of the Social Security Act in accordance with plaintiff’s application.

IT IS SO ORDERED.

      . According to Dorlands Illustrated Medical Dictionary, "sciatica" is “a syndrome characterized by pain radiating from the back into the buttock and into the lower extremity along the posterior or lateral back.”

      . Osteomyelitis is “an inflamation of bone caused by a progenie (pus-producing) microorganism, and may be acute or chronic." Gray’s Attorney's Textbook of Medicine, 3rd Ed., 2 Chapter 41.


author: ACOSTA, District Judge.

text:
    Benita Sanchez Vda. DE COSME, et al., Plaintiffs, v. SEA CONTAINERS, LTD., et al., Defendants. Fausto Soriano FARDONK, et al., Plaintiffs, v. SEA CONTAINERS, LTD., et al., Defendants and Third-Party Plaintiffs, v. MARITIMA DEL CARIBE, INC., Third-Party Defendant.
    Nos. 77-0561(RLA), 78-2394(RLA).
    United States District Court, D. Puerto Rico.
    Oct. 3, 1984.
    Gustavo A. Gelpí, Feldstein, Gelpi & Hernández, San Juan, P.R., Calixto Juval Rivera, Rio Piedras, P.R., for plaintiffs.
    J. Ramón Rivera-Morales, José Antonio Fusté, Jiménez & Fusté, Charles A. Cordero, Cordero & Colón, San Juan, P.R., Luis Sánchez-Betances, Cepeda & Sánchez-Betances, Hato Rey, P.R., for defendants.
   OPINION AND ORDER

ACOSTA, District Judge.

On March 21, 1977, three longshoremen were injured as a result of an accident which occurred while the motor vessel “Hustler Cheyenne” was being unloaded at Pier 15 in San Juan, Puerto Rico. One of the stevedores eventually died from his injuries. Subsequently, the above-captioned consolidated actions were filed. The defendants and third-party plaintiffs are the owners of the vessel, Sea Containers, Ltd. (Sea Containers); its protection and indemnity insurer, The London Steamship Owners Mutual Insurance Association, Ltd. (London); the employer of the longshoremen, Marítima del Caribe, Inc. (Marítima); the owner of the crane involved in the accident, R. Mediavilla & Sons, Inc.; the manufacturer of the crane, Manitowoc Engineering Corp.; and an inspector of the crane, Antonio Vélez.

On March 21, 1980 defendants Sea Containers and London filed a motion for summary judgment on the grounds that the complaint failed to state a claim for which relief may be granted as to them. It was submitted that Sea Containers was entitled to the “statutory employer” immunity of the Puerto Rico Workmen’s Accident Compensation Act (PRWACA), 11 L.P.R.A. §§ 1-42, specifically §§ 19 and 21. In addition, it was averred that since no cause of action lies against its insured, codefendant London was also entitled to a dismissal.

The motion was opposed on grounds that Marítima was not an insured employer under PRWACA at the time of the accident because it had failed to pay the insurance premiums. As a result of this dispute, administrative proceedings were brought before the State Insurance Fund and the Puerto Rico Industrial Commission. A final decision was issued by the Industrial Commission on June 28, 1983, finding the employer Marítima to be covered under PRWACA.

Thereafter, defendants Sea Containers and London renewed their motion for summary judgment based on the statutory employer defense.

Plaintiffs again opposed the motion, with an argument not heretofore presented. The thrust of plaintiffs’ new contention is that the laws of the Commonwealth of Puerto Rico, specifically PRWACA, do not apply to the area where the accident occurred. They aver that Pier 15 forms part of the United States naval drydock and repair facility, which is reserved for public purposes. As such, plaintiffs argue it is subject to the Federal General Maritime Law and partial summary judgment should be entered to this effect.

LAW APPLICABLE TO PIER 15

Plaintiffs’ primary claim is that Pier 15 is a federal enclave where only federal law may be applied to the exclusion of all local laws. Underlying plaintiffs’ argument is the fact that the land in question was acquired from the Government of Puerto Rico through Law 77 of May 1, 1941.

Defendants aver that although the United States may be the owner of the property where the accident occurred, plaintiffs have failed to prove that the United States has exclusive jurisdiction over the property. It is their position that under the express language of 40 U.S.C. § 255 when the United States fails to make a formal acceptance of exclusive jurisdiction “it shall be conclusively presumed that no such jurisdiction has been accepted.” Id. See, United States v. Gliatta, 580 F.2d 156, 158 (5th Cir.), cert. denied, 439 U.S. 1048, 99 S.Ct. 726, 58 L.Ed.2d 708 (1978).

Plaintiffs advance two arguments against this theory: that Section 255 is not applicable because Puerto Rico is not a State; and that the United States has exclusive jurisdiction under Section 5 of the February 16,1903 Act of the Legislature of Puerto Rico.

Defendants contend that even if the area in question were a federal enclave where federal law applies exclusively, jurisdiction reverted to Puerto Rico through the “proviso” clause of Section 5 of the February 16, 1903 Act.

The land object of this dispute was acquired by the United States from the Government of Puerto Rico pursuant to Law 77 of May 1, 1941, which reads as follows:

Section 1. — The Governor and the Commissioner of the Interior of Puerto Rico are hereby authorized to sell, in the name and in representation of The People of Puerto Rico, to the Government of the United States of America, for national-defense purposes, the graving dock constructed pursuant to Act No. 29, approved April 18,1936, as amended by Act No. 2, approved June 29, 1936, and Act No. 7, approved September 2, 1938; Provided, That the selling price shall not be less than the total cost incurred by The People of Puerto Rico in the construction of said work; And provided, further, That the proceeds of the sale authorized by this Act shall be set aside by the Treasurer of Puerto Rico and be covered into a special fund devoted to pay any debt of The People of Puerto Rico for the construction of said work.
Section 2. — In order to carry out the purposes of this Act, the Governor and the Commissioner of the Interior of Puerto Rico, are further authorized to enter, in the name of The People of Puerto Rico, into such negotiations with the Government of the United States of America as may be necessary, and to execute the corresponding deed or deeds of conveyance.
Section 3. — All laws or parts of laws in conflict herewith are hereby repealed. Section 4. — It is hereby declared that an emergency exists which makes necessary the immediate taking effect of this Act, and it shall therefore take effect immediately upon its approval.

Law 77 is silent as to the type of jurisdiction transferred. Therefore, to determine the applicability of the United States’ statutes within Pier 15, we have to refer to Section 5 of the February 16, 1903 Act of the Legislature of Puerto Rico {supra at n. 5), which was the law in force at the time of the transfer. This section conferred exclusive federal jurisdiction to property acquired by the United States Government for “naval, military or other purposes” provided that the federal government did not alienate any land so acquired. In case of alienation, the jurisdiction would revert to Puerto Rico.

In Puerto Rico Drydock v. Secretary of the Treasury, 85 P.R.R. 707 (1962), the Supreme Court of Puerto Rico made an analysis of the term “alienation” within the context of Law 77. The Court concluded that since the Act was originally drawn-up in English, the interpretation of the term “alienation” should prevail over the meaning of the Spanish translation “enajenación”. Id. at 710. The Court stated that in its broadest sense the term “alienation” is identified with the possession and control over the property itself, and further “that in a leasehold it is the lessee who has this control and possession.” Id. at 711.

The record shows that before Sea Train leased the pier, it had been utilized by Gulf-Puerto Rico Lines and Alcoa Steamship Company. In 1969, the federal government issued the Puerto Rico Ports Authority (PRPA) a license for non-federal use of the land in question, as a commercial shipping terminal. The PRPA in turn leased the premises under preferential use contract to Gulf-Puerto Rico Lines.

At the time of the accident object of this action, the land in question was leased to Puerto Rico Drydock and Marine Terminals, Inc. pursuant to 10 U.S.C. §§ 2662 and 2667. This statute authorizes the secretary of a military department to lease property which is not for the time needed for public use. This being so, it cannot be said that the Pier 15 area was occupied or being used by the United States for military or naval purposes during 1977.

It is evident that this facility was being used instead for commercial ends and not for the purpose for which it was acquired, in accordance with the spirit of the February 16, 1903 Act.

It is interesting to note that Law 62 of 1955, 28 L.P.R.A. § 57, which superseded the 1903 Act, was drafted in terms of the “use” of the land for purposes of jurisdiction.

Given the fact that the federal government had “alienated” the property in question to the extent of having, at one time, entrusted a supervisory role to the local agency directly in charge of all such activity within the Commonwealth of Puerto Rico, it is difficult to accept the argument that Pier 15 was a federal enclave or that the federal government considered it as such. We believe that by its own acts, the Government of the United States had “alienated” the land in question to the point where the jurisdiction over said parcel had reverted to the Commonwealth of Puerto Rico at the time the accident occurred. Without a stronger showing that federal law was exclusive in this property, we are reluctant to go so far. Having resolved this issue, we need not go into the parties’ other arguments.

In concluding that the injured longshoremen have no cause of action against the ship-owner, it being an immune statutory employer under PRWACA, we must necessarily rule that there is no cause of action against the ship-owner’s insurer. Ruiz Rodríguez v. Litton Industries Leasing Corp., 574 F.2d 44 (1st Cir.1978).

Based on the foregoing, defendants’ motion for summary judgment is granted and the amended complaint is hereby dismissed against defendants Sea Containers, Ltd. and The London Steamship Owners Mutual Insurance Association, Ltd.

Given the conclusions reached herein, plaintiffs and third-party defendant Marítima del Caribe, Inc. are granted a term of fifteen (15) days to show cause why the complaint should not be dismissed against the third-party defendant.

IT IS SO ORDERED.

      . Civil Action No. 77-0561 commenced on April 14, 1977. Civil Action No. 78-2394 commenced on November 30, 1978.

      . Laws of Puerto Rico (1941), pp. 670 and 672.

      . 40 U.S.C. § 255 states in pertinent part:
      Notwithstanding any other provision of law, the obtaining of exclusive jurisdiction in the United States over lands or interests therein which have been or shall hereafter be acquired by it shall not be required; but the head or other authorized officer of any department or independent establishment or agency of the Government may, in such cases and at such times as he may deem desirable, accept or secure from the State in which any lands or interests therein under his immediate jurisdiction, custody, or control are situated, consent to or cession of such jurisdiction, exclusive or partial, not theretofore obtained, over any such lands or interests as he may deem desirable and indicate acceptance of such jurisdiction on behalf of the United States by filing a notice of such acceptance with the Governor of such State or in such other manner as may be prescribed by the laws of the State where such lands are situated. Unless and until the United States has accepted jurisdiction over lands hereafter to be acquired as aforesaid, it shall be conclusively presumed that no such jurisdiction has been accepted.

      . Laws of Puerto Rico (1903), p. 110:
      Section 5. — That consent be and is hereby given to the United States to acquire for naval, military or other public purposes, by purchase or condemnation any lands within the island of Porto Rico, and when so acquired and possession thereof shall have been taken by the United States, all jurisdiction over such lands by The People of Porto Rico shall cease and determine; Provided however, that upon the subsequent alienation by the United States of any land so acquired The People of Porto Rico shall again have jurisdiction thereover. (Emphasis added.)

      . Section 5 of the February 16, 1903 Act was repealed on June 10, 1955 by Law No. 63 and replaced by Law No. 62, 28 L.P.R.A. §§ 54-57.

      . Accord, Secretary of the Treasury of Puerto Rico v. Esso Standard Oil Co., 332 F.2d 624 (1st Cir.1964).

      . Although plaintiff claims this case applies exclusively to tax law, we do not read it in such a restrictive vein.

      . In the federal blueprints and other documents presented as exhibits by defendants, the area in question is referred to as the “Alcoa Pier”.

      . License NF(R)6382.

      . 28 L.P.R.A. § 57, pertaining to lands over which the United States has acquired jurisdiction:
      The jurisdiction granted shall continue only while the United States is the proprietor or is in possession of the lands and the lands are used for the naval, military, or other public purposes for which they were acquired. In the event that the United States ceases to be the proprietor of the lands or to be in possession of same, or in the event that they are not used for the purposes for which they were acquired, the Commonwealth of Puerto Rico shall again have jurisdiction over same. (Emphasis added.)


author: HENRY WOODS, District Judge.

text:
    Annie STRONG, Lillie Jackson, Adeline King, Sandra Brooks, Jerry Rodgers, Helen Ham, Brenda Brake, Blanche Sutton, Yvonne Fowler, David Lane, Doyle Coker, Jr., and Barbara Bledsoe, Individually and on behalf of all others similarly situated, Plaintiffs, Noma M. Bowman and Gary Bowman, Intervenors, v. NATIONAL CREDIT MANAGEMENT COMPANY a/k/a National Collection Group, a/k/a National Collections Systems, Inc., Defendant.
    No. J-C-83-10.
    United States District Court, E.D. Arkansas, Jonesboro Division.
    Oct. 17, 1984.
    James O’Connor, East Arkansas Legal Services, Blytheville, Ark., for plaintiffs.
    Bill Bristow, Jonesboro, Ark., and Oscar Fendler, Blytheville, Ark., for intervenors.
    N.M. Norton, Jr., Wright, Lindsey & Jennings, Little Rock, Ark., for defendant.
   ORDER

HENRY WOODS, District Judge.

Plaintiffs filed their complaints alleging that certain practices utilized by the defendant in its debt collection efforts violated the Fair Debt Collection Practices Act (FDCPA) 15 U.S.C. § 1692 et seq. They seek declaratory and injunctive relief as well as an award of damages. Plaintiffs seek certification of a (Rule 23(b)(2)) class composed of:

All consumers who reside in the State of Arkansas and who had received within one year of the filing of plaintiffs complaint, or who could be expected to receive, in the foreseeable future, communications from defendant seeking to collect a “debt” as defined in 15 U.S.C. § 1692a(5).

Defendant, a Missouri Corporation and “debt collector” as that term is used in 15 U.S.C. § 1692a(6), resists certification asserting that (1) private individuals may not pursue injunctive relief under the FDCPA and (2) the requisites of Rule 23 have not been satisfied by plaintiffs. (Originally, plaintiffs also sought certification of a class with regard to damages, but now only seek certification of a class for injunctive purposes.) Briefs have been filed by the parties and a class certification hearing was held by the court on October 11, 1984. Based on the record as developed by the parties the court is now prepared to render its decision on the class certification issue.

Plaintiffs proceed under 15 U.S.C. § 1692k and while this does not specifically authorize private parties to seek injunctive relief, plaintiffs argue that this court’s broad remedial powers permit it to entertain private injunctive actions. The FDCPA specifically authorizes the Federal Trade Commission (FTC) to seek injunctive relief (15 U.S.C. § 16921) and defendant persuasively argues that this is a strong indication of Congress’ intent to limit private actions to damage claims. The only two reported decisions addressing this issue have reached this conclusion. Sibley v. Fulton DeKalb Collection Service, 677 F.2d 830 (11th Cir.1982); Duran v. Credit Bureau of Yuma, 93 F.R.D. 607 (D.C.Ariz.1982).

In another consumer protection statutory scheme (Truth in Lending Act, 15 U.S.C. § 1601 et seq.) which this circuit has recognized as analogous to the FDCPA, Peterson v. United Accounts, Inc., 638 F.2d 1134 (8th Cir.1981), a private right of injunctive relief has been disallowed. Jordan v. Montgomery Ward Co., 442 F.2d 78 (8th Cir.1971). Similarly, this court concludes that no private right to seek injunctive relief should be implied under the FDCPA. Since certification is sought only with respect to proposed injunctive relief certification must be and is hereby denied.


text:
    Clyde BROWN, Jr., Plaintiff, v. UNITED STATES, Defendant.
    Civ. A. No. C82-0075-O(J).
    United States District Court, W.D. Kentucky, Owensboro Division.
    Oct. 18, 1984.
    Jesse T. Mountjoy of Holbrook, Gary, Wible & Sullivan, Owensboro, Ky., for plaintiff.
    David T. Gray, Asst. U.S. Atty. for the Western District of Ky., Louisville, Ky., and Michael J. Salem of the U.S. Dept, of Justice, Tax Division, Washington, D.C., for defendant.
   MEMORANDUM OPINION

JOHNSTONE, District Judge.

The Internal Revenue Service audited Plaintiff Clyde Brown and assessed an income tax deficiency of $57,397.86 on his 1976 tax return. Brown paid the deficiency and filed for a refund of $26,624.31 which was disallowed by the Commissioner of Internal Revenue (Commissioner). He then filed this suit against the United States under 28 U.S.C. § 1346(a)(1) for recovery of Internal Revenue taxes and interest erroneously and illegally assessed against him. Both parties have filed motions for summary judgment pursuant to Rule 56 of the Federal Rules of Civil Procedure. These motions are now before the court.

Jurisdiction over this case exists under 28 U.S.C. § 1346(a).

Rule 56 provides that summary judgments shall be rendered if there is no genuine issue of material fact and the moving party is entitled to judgment as a matter of law. After a thorough review of the record, the court has determined that there is no material factual issue in dispute. There remains only a question of tax law to be determined by the court. For the reasons set forth below, the court finds that the law is in favor of the defendant United States. Therefore, plaintiff’s motion for summary judgment is DENIED, and defendant’s motion for summary judgment is SUSTAINED.

Clyde Brown is a coal miner and entrepreneur. During the years 1970 through 1976, Brown entered into six different coal mining leases. In each case, Brown acquired the mineral rights to particular tracts of land in exchange for a certain sum of money per month in advance minimum coal royalties. These royalties were to be credited against future earned royalties. After 1976 and before Brown had mined any of these tracts of land, he assigned or . subleased each of the six coal mining leases.

This tax dispute arises out of Brown’s treatment of the minimum advance royalty payments he made to his lessors in 1976. He treated them as ordinary losses and deducted them from his ordinary income under I.R.C. § 162(a)(3). That section permits taxpayers to deduct rental and other payments required to be made as a condition to the continued use and possession of property used in trade or business.

The Commissioner claims that the nature of Brown’s payments is governed by I.R.C. §§ 631, 272, and 1231. Under these provisions, the royalties are not ordinary losses. Instead, they are expenses which must be taken into account in computing Brown’s capital gain or ordinary loss. The court agrees with the Commissioner.

The Code sections involved here are somewhat complicated. Generally, royalties are taxed as ordinary income rather than capital gain. However, I.R.C. § 631(c) transforms some royalties into capital gain. Section 631(c) applies to lessors of mining rights who receive royalties based upon the value of minerals mined. This includes lessors who receive a minimum royalty despite the actual value of the coal mined. The Code deems that these lessors retain an economic interest in the minerals. Once the lessor has held that interest for more than one year, any disposition of the interest is a sale or exchange under the auspices of section 1231. The net “amount realized ... shall be considered as though it were a gain or loss, as the case may be, on the sale of such coal ....” I.R.C. § 631(c). I.R.C. § 1231 is the Code’s capital gains provision.

If § 631 applies to a particular transaction then I.R.C. § 272 comes into play. It provides that if the disposal of coal is covered by § 631, overhead and administrative costs may be factored into the capital gains and ordinary loss equation but are otherwise not deductible. Thus, § 272 treats administrative costs as part of the cost of disposing of the coal, and prohibits their deduction as ordinary losses.

Although owners and lessors of mineral rights are controlled by the taxing provisions in § 631 and § 272, lessees of such rights are governed by the general taxing provisions. Simply put, lessees must report their gains as ordinary income and their losses as ordinary losses.

The dispute in this case arises out of the fact that in 1976, Brown was a lessee under the leases in issue here. However, subsequent to 1976, he became a sublessor. As such, the Commissioner argues, Brown must follow the dictates of I.R.C. §§ 631, 272, and 1231.

Internal Revenue Regulation section 1.631 — 3(b)(3)(ii)(a) provides:

However, a lessee who is also a sublessor may dispose of coal or iron ore as an ‘owner’ under section 631(c). Rents and royalties paid with respect to coal or iron ore disposed of by such a lessee under section 631(c) shall increase the adjusted depletion basis of the coal or iron ore and are not otherwise deductable.

The regulations continue by giving an example of such a lessee/sublessor arrangement:

Example. B is a sublessor of a coal lease; A is the lessor; and C is the sublessee. B pays A a royalty of 50 cents per ton. C pays B a royalty of 60 cents per ton. The amount realized by B under section 631(c) is 60 cents per ton and will be reduced by the adjusted depletion basis of 50 cents per ton, leaving a gain of 10 cents per ton taxable under section 631(c).

Thus, under the regulations, Brown as a sublessor may not deduct from ordinary income the minimum advance royalties he has paid as a lessee.

Brown claims that in 1976 he was solely a lessee. Thus, the royalties he received as a lessee in that year should not be affected by section 631. The tax court has addressed this argument in Davis v. Commissioner of Internal Revenue, 74 T.C. 881 (1980). In that case the court faced a set of facts somewhat similar to these. The taxpayers were the partners in a joint venture designed to enter coal mining leases, and then to sublease or assign them. Each of the leases required taxpayers to pay minimum advance royalties until there were earned royalties. The advance royalties would later be credited against the earned royalties. When taxpayers filed their tax returns they deducted the royalties they paid as ordinary losses, and the profits they received as capital gains. After an exhaustive examination of the statutes and regulations, the Davis court held “that none of the advanced or earned royalties paid by Cumberland (taxpayer) may be deducted from petitioners’ ordinary income. All royalties paid must be taken into account in computing net royalty income or loss under section 631(c).” Id. at 899. This holding encompassed royalties paid on leases prior to their sublease. The court reasoned that the taxpayer had operated from the beginning as. a sublessor, and the regulations specifically excluded sublessors from lessee treatment. Also, the tax court noted that “regardless of the actual time interval, in each instance, lease and subsequent sublease may be viewed as one transaction.” Id. Thus, royalties paid by a sublessor cannot be deducted from ordinary income even though the sublease arose in years after those royalties were paid.

Brown correctly asserts that this case can be distinguished from Davis. In Davis the taxpayers were in the business of leasing and subleasing mineral rights. They did not mine coal themselves. All of the mineral rights that they leased were subleased; thus, the court determined that the taxpayers at all times operated as sublessors. On the other hand, Brown has engaged in coal mining operations and claims that he intended to mine the coal held under some leases at issue in this case.

Nevertheless, neither party has cited, nor can the court find authority other than Davis on this issue. Text writers agree that Davis established the rule that royalties paid by a sublessor are not deductible as ordinary losses. This includes advance royalties paid before subleasing or before commencement of mining operations. Fed. Tax Coordinator 2d, § N-7008; 1984 P.H. Fed. Tax, § 22,765 at 22,436; 6 Fed. Tax Reporter (CCH) § 42,571 (1984).

Thus, the court will follow the only cited authority and find that under the Code and the regulations a lessee who becomes a sublessor cannot deduct advance minimum royalties that he has paid as ordinary losses. Rather, he falls into the purview of § 631 and must take into account all advance royalties paid in computing net royalty income.

Therefore, the Commissioner did not erroneously or illegally assess Brown a tax deficiency for 1976.

Brown also asserts that the regulation 1.631-3 is invalid. The court notes that regulations shall be held valid unless they are irrational and plainly inconsistent with the statute. Fulman v. United States, 434 U.S. 528, 98 S.Ct. 841, 55 L.Ed.2d 1 (1978). We find that this regulation is reasonable and consistant, and decline to hold it invalid.

Since the court has ruled that Brown was not entitled to treat these royalties as ordinary losses, it need not address the separate issue of Brown’s option to sublease the Old Ben mining lease.


author: BRETT, District Judge.

text:
    BIGHEART PIPELINE CORPORATION, an Oklahoma corporation, Plaintiff, v. The UNITED STATES of America (Internal Revenue Service); Homestead Oil Company, Inc., His Industries, Inc.; Duncan Petroleum, Core Energy, Inc.; Delores Brightwell; Herman Wilson; and Charles Duggar, Defendants.
    No. 83-C-891-B.
    United States District Court, N.D. Oklahoma.
    Oct. 18, 1984.

      R. Louis Reynolds, Lynwood A. Wells, Prichard, Norman & Wohlgemuth, Tulsa, Okl., for plaintiff.
    Larry B. Bach, Forney, Tex., for Homestead Oil Co., Inc.
    Robert T. Mowrey, Benny D. Campbell, Lisa B. Graivier, Locke, Purnell, Boren, Laney & Neely, Dallas, Tex., Stephen H. Brammell, Tony M. Davis, Conner & Winters, Tulsa, Okl., for Core Energy.
    Layn Phillips, U.S. Atty., Tulsa, Okl., Cary L. Jennings, Atty., Tax Div., Dept, of Justice, Dallas, Tex., for U.S.A.
    Jeffrey N. Sheehan, Forney, Tex., for Duncan Petroleum, Core Energy, Bright-well, Wilson and Duggar.
   ORDER

BRETT, District Judge.

This matter comes before the Court on cross motions for summary judgment filed by defendant United States of America and defendant Core Energy, Inc. A hearing on the motions has been held. For the reasons set forth below, the motion for summary judgment of Core Energy, Inc., is overruled and the motion for summary judgment of the United States of America is sustained.

This is an interpleader action filed by Bigheart Pipe Line Corporation, the purchaser of oil runs from the “Hammer K” lease in Mayes County, Oklahoma, to determine entitlement to proceeds from the oil purchases. Defendants all claim some right to proceeds from the sale of oil to Bigheart.

The lawsuit has its origin in the failure of Homestead Oil Co. to pay certain federal employment taxes owed for its taxable quarters in 1981, 1982, and 1983. These unpaid taxes were assessed against Homestead by the Internal Revenue Service on the following dates and in the following amounts:

Date of Assessment Tax Period Type of Tax Principal Amount
11/1/82 4th Qtr/1981 FICA/Withholding $62,368.69
11/1/82 1st Qtr/1982 FICA/Withholding 39,119.34
11/1/82 2nd Qtr/1982 FICA/Withholding 43,845.81
11/22/82 3rd Qtr/1982 FICA/Withholding 20,648.49
2/21/83 4th Qtr/1982 FICA/Withholding 31,416.74
2/21/83 4th Qtr/1982 FUTA 6,169.13
7/4/83 1st Qtr/1983 FICA/Withholding 10,138.71

Homestead is currently indebted to the United States for the total sum of $247,-532.37, plus statutory additions as allowed by law.

On November 17, 1982, Homestead assigned to Core Energy a 78.125 percent interest in an undeveloped oil and gas lease in Mayes County, named the “Hammer K” lease. On November 29, 1982 and December 27, 1982, the United States filed of record Notices of Federal Tax Lien against all property or rights to property of Homestead with the County Clerk, Mayes County, Oklahoma, in connection with the federal tax liabilities of Homestead. On January 20, 1983 — after the filing of the Notice of Federal Tax Lien — the assignment from Homestead to Core Energy was filed of record with the County Clerk, Mayes County, Oklahoma.

Core Energy commenced drilling on the property on May 1, 1983. Production of oil from the lease began in June 1983. All crude oil produced on the lease was sold to Bigheart Pipe Line Corporation from June through November 1983.

On August 31, 1983, the Internal Revenue Service served a Notice of Levy upon Bigheart with respect to funds in its possession covering the purchase price of the crude oil sold to it by Core Energy. On October 21, 1983, Bigheart filed this inter-pleader action, depositing $27,271.59 with the Clerk of the Court, and requesting a Court determination of proper distribution of the funds. Defendants Core Energy and the United States of America have filed cross motions for summary judgment on the issue of whether the general federal tax lien filed by the Internal Revenue Service attached to the funds paid into the Court.

Effect Of Federal Tax Lien

The Internal Revenue Code, 26 U.S.C. § 6321, provides:

“If any person liable to pay any tax neglects or refuses to pay the same after demand, the amount (including any interest, additional amount, addition to tax, or assessable penalty, together with any costs that may accrue in addition thereto) shall be a lien in favor of the United States upon all property and rights to property, whether real or personal, belonging to such person.” (Emphasis added)

The lien arises at the time the tax is assessed, and continues until the liability is satisfied or becomes unenforceable. 26 U.S.C. § 6322.

Under 26 U.S.C. § 6323, the United States, through filing of its tax lien, may obtain priority over other claimants to the same property except for certain protected parties such as purchasers. To qualify as a protected “purchaser” under § 6323, a third party who acquires an interest in property of the taxpayer must be protected against subsequent purchasers without actual notice under local law. § 6323(h)(6). The parties agree that Core Energy, having failed to file its assignment of record until after the United States filed its Notice of Federal Tax Lien, did not qualify as a “purchaser” under § 6323 until after January 20, 1983, the date it filed the assignment of record. Thus, the only question for resolution is whether the tax liens can attach to monies in the Registry of the Court as “property or rights to property” of Homestead under § 6321.

The Government may not take one person’s property to satisfy another person’s tax obligations, and unless it is established that the taxpayer, at the time the tax lien was filed, was the owner of or had some interest in the property on which the levy is sought to be made, the government cannot enforce the lien against such property. United States v. Kaufman, 267 U.S. 408, 45 S.Ct. 322, 69 L.Ed. 685 (1925); In re Carlson, 580 F.2d 1365, 1369 (10th Cir.1978). The question then becomes whether and to what extent a taxpayer had “property” or “rights to property” to which the lien could attach under § 6321. Aquilino v. United States, 363 U.S. 509, 80 S.Ct. 1277, 4 L.Ed.2d 1365 (1960). In answering this question, courts must look to state law. In re Carlson, supra, 580 F.2d at 1368-69. The tax lien statute creates no property rights, but it does attach consequences, which are federally defined, to rights created under state law. United States v. Durham Lumber Co., 363 U.S. 522, 80 S.Ct. 1282, 4 L.Ed.2d 1371 (1960).

The parties have agreed that under Oklahoma law, an oil and gas lessee has an incorporeal interest known as a profit a prendre. A lease does not vest in the lessee the title to the oil and gas in the land, but is simply a grant of a right to prospect for oil and gas, no title vesting until the oil or gas is reduced to possession by extracting the same from the earth. Kolochny v. Galbreath, 26 Okl. 772, 110 P. 902 (1910); Frank Oil Co. v. Belleview Gas & Oil Co., 29 Okl. 719, 119 P. 260 (1911). Therefore, the parties agree, the right to prospect for oil and gas, as defined by Oklahoma law, is a “contingent interest.” The dispute between the parties centers on whether the federal tax lien could attach to a contingent interest.

The Court believes under § 6321 and applicable case law, a federal tax lien clearly may attach to a contingent interest. The statute itself provides a lien in favor of the United States can attach upon all property or “rights to property,” In Randall v. H. Nakashima & Co., 542 F.2d 270 (5th Cir.1976), the court held a taxpayer’s contract right was a property interest to which a federal lien could attach. In so ruling, the court stated:

“Because the taxpayer’s contract right was a valuable and transferable interest, it would be scholastic indeed to deny that it was a property interest to which the federal tax lien might attach. The statutory purpose of assuring collection strongly suggests that such interests should be subject to the lien to discourage transfers by the taxpayer aimed at defeating the rights of the government.”

Id. at 274. As further support of its decision, the court stated:

“In holding that the taxpayer’s contract right was property or a property right for purposes of 26 U.S.C. § 6321, we recognize that property is an expanding concept. Modern commercial transactions have spawned species of rights that the common law of years anon could not have envisaged. The era of seisen and tail has long vanished. Puts and calls, hedges and options are, analytically, property insofar as their possessor may realize something from their transfer. ‘Property’ is not to be confined in a juridical straitjacket.
******
“The drafters of the § 6321 were wise in using the words ‘property ... or rights to property’ instead of enumerating attributes or varieties of property rights. By this device, they allowed the words that expansiveness, flexibility, and potential for growth with which our commercial world endows them in the marts of trade. A contingency that conditions acquisition of legal title does not render empty or valueless a contract right in the property sought to be acquired. The concept of property is not bound to the present. Congress, in enacting § 6321, knew that the forms and varieties of property would remain in flux, and that a definition capable of precisely capturing those valuable interests for the tax gatherers’ harvest would elude it.
“Congress did not attempt to define the commercial cosmos. Rather, it was perfectly willing to let contemporary transactions be analyzed to determine whether or nor (sic) the delinquent taxpayer had any part of a bundle of rights of commercial value, to which the tax lien would then attach.”

Id. at 277-278. Other courts have also held a federal tax lien can attach to contingent interests. See United States v. Trigg, 465 F.2d 1264, 1268 (8th Cir.1972); Seaboard Surety Company v. United States, 306 F.2d 855, 859 (9th Cir.1962); Atlantic National Bank v. United States, 536 F.2d 1354, 1356, 210 Ct.Cl. 340 (1976); Nevada Rock and Sand Company v. United States, 376 F.Supp. 161 (Nev.1974); George W. Ultch Lumber Co. v. Hall Plastering, Inc., 477 F.Supp. 1060 (W.D.Mo.1979).

The fact situation here is analogous to that of Randall, supra. The taxpayer had under the terms of the lease the right to drill for and produce oil and gas. Although the right might not be “property” in a strict sense, it was a valuable, transferable interest and thus was an “interest in property” under the terms of § 6321. Therefore, the federal tax liens filed by the Internal Revenue Service attached to the right transferred from Homestead to Core, and the government has priority over Core with respect to the funds interplead in this Court. Core could have established its priority by timely filing its assignment in keeping with 16 O.S. § 15 but did not do so.

Rule 56 of the Federal Rules of Civil Procedure provides summary judgment is proper where no genuine issue of material fact remains and the moving party is entitled to judgment as a matter of law. Bruce v. Martin-Marietta, 544 F.2d 442, 445 (10th Cir.1976). The Court hereby concludes the United States of America is entitled to summary judgment on its claim that the general federal tax liens filed by the Internal Revenue Service attached to the proceeds from production paid into this Court. Therefore, the motion for summary judgment of the United States is sustained; the motion for summary judgment of Core Energy is overruled.

Entry of judgment in this matter will be delayed pending resolution of the claims of remaining parties. This matter is set for status conference October 25, 1984, at 8:30 a.m.