author: EDWARD C. REED, Jr., District Judge.

text:
    Margaret WASILCHUK, Plaintiff, v. HARVEY’S WAGON WHEEL, INC.; Edward E. Stevenson; William B. Ledbetter; Dominic Tanzi; Ann Beinert; Beverlee Ledbetter; Jessica L. Ledbetter; Richard Kudrna; Bill Ratto; Jack Morgan; and Charles Scharer, Defendants.
    No. CV-R-84-517-ECR.
    United States District Court, D. Nevada.
    June 5, 1985.

      Ernest E. Adler and Robert T. Johnston, Carson City, Nev., for plaintiff.
    Milton Manoukian, Carson City, Nev., and Robert L. Murphy and Robert L. Platt, Los Angeles, Cal., for defendants.
   MEMORANDUM DECISION AND ORDER

EDWARD C. REED, Jr., District Judge.

The defendants have moved pursuant to Fed.R.Civ.P. 12(b)(1) and (6) to dismiss the complaint. In the alternative, they have moved under Fed.R.Civ.P. 12(f) to strike paragraph 21 of the complaint, which alleges that the plaintiff is entitled to damages for emotional distress and illness caused by the defendants’ discriminatory conduct. The complaint itself alleges claims for relief based on the Age Discrimination in Employment Act of 1967 (ADEA), especially 29 U.S.C. § 626, and sex discrimination in violation of Title VII of the Civil Rights Act of 1964, found at 42 U.S.C. § 2000e, et seq. The pleading contends that the plaintiff, a woman in her early fifties, was denied a promotion from Assistant Slot Manager to Slot Manager and was forced to quit her job by reason of age and sex discrimination.

Failure of the plaintiff to exhaust administrative remedies requires dismissal of her Title VII claim, according to the defendants. They note that the Notice of Charge of Discrimination prepared by the Equal Employment Opportunity Commission (EEOC) has an “x” in the ADEA block, but the Title VII block has been left blank. The plaintiff, in opposition to the motion, points out that the claim form that she filed with the Nevada Equal Rights Commission and which was later transferred to the EEOC, as well as the formal charge of discrimination prepared by the EEOC and signed by her, both allege sex discrimination in addition to age discrimination. Thus, the failure to “x” the Title VII block in the Notice is attributable to an error of omission by the EEOC.

A district court’s subject matter jurisdiction in a Title VII action extends only to claims made before the EEOC. Serpe v. Four-Phase Systems, Inc., 718 F.2d 935, 936 (9th Cir.1983); Shah v. Mt. Zion Hospital & Medical Ctr., 642 F.2d 268, 271 (9th Cir.1981). Here, the record reveals that the plaintiff did raise her sex discrimination claim before the EEOC. She should not be penalized for the EEOC’s oversight. Watson v. Gulf & Western Industries, 650 F.2d 990, 994 (9th Cir.1981). This Court has jurisdiction over her sex discrimination claim.

The defendants next argue that the ten individual defendants should be dismissed from the lawsuit because they were not charged with discrimination in the plaintiff’s charges made to the EEOC. Those defendants are sued in the complaint both individually and in their capacities as officers or officials of defendant Harvey’s Wagon Wheel, Inc. In response, the plaintiff notes that the claim form she filed with the Nevada Equal Rights Commission lists defendant Jack Morgan as her Supervisor and declares that defendant William B. Ledbetter said that “they wanted to demote me.” Further, on the same claim form the plaintiff listed both Mr. Ledbetter and defendant Edward E. Stevenson as witnesses who have specific information about events leading to her discharge.

On the same general issue, the defendants contend that the complaint contains no factual allegations from which it can be inferred that any of the ten individual defendants engaged in conduct violative of the ADEA or Title VII. The plaintiff, in turn, urges that these defendants should not be dismissed if her charge to the EEOC would support an expectation that they would be involved in that Commission’s investigation of the charge. Further, she insists that defendants William B. Ledbetter and Edward E. Stevenson had the authority to hire and fire, and that they discriminatorially exercised that power against her. The complaint itself alleges that all of the defendants refused her promotion and harassed her into quitting because of her age and sex.

29 U.S.C. § 630(b) authorizes the treatment of agents of an employer as employers for the purposes of the ADEA. Barkley v. Carraux, 533 F.Supp. 242, 245 (S.D.Tex.1982). Officials of an employer are not treated differently. Dague v. Riverdale Athletic Ass’n, 99 F.R.D. 325, 327 (N.D.Ga.1983). Nevertheless, the general rule is that a plaintiff may not maintain an action against a defendant whom the plaintiff has not named previously in a charge filed with the EEOC; the rule applies both in ADEA actions, Rio v. Presbyterian Hosp. in City of New York, 561 F.Supp. 325, 326 (S.D.N.Y.1983), and in Title VII actions, Dague v. Riverdale Athletic Ass’n, supra at 326. This rule affords notice to the charged person and an opportunity to resolve the problem through conciliation before being exposed to liability. Id.; Rio, supra at 326.

In any event, failure to name some defendants in the EEOC charge does not deprive a district court of subject matter jurisdiction. Loiseau v. Dept. of Human Resources of State of Or., 558 F.Supp. 521, 527 (D.Or.1983); Pauls v. Elaine Revell, Inc., 571 F.Supp. 1018, 1020-1 (N.D.Ill.1983). It has been held that inclusion of a person in the factual statement made to the EEOC is sufficient to permit his inclusion as a defendant in a subsequent judicial proceeding. Watson v. Gulf & Western Industries, 650 F.2d 990, 993 (9th Cir.1981). Where a defendant was involved in the acts giving rise to the EEOC charge, so that he should have anticipated being named in the subsequent lawsuit, he is not entitled to a dismissal from the suit. Wrighten v. Metropolitan Hospitals, Inc., 726 F.2d 1346, 1352 (9th Cir. 1984); Chung v. Pomona Valley Commu nity Hospital, 667 F.2d 788, 792 (9th Cir. 1982). The Dague opinion, 99 F.R.D. at 326-7, explains that the general rule (that a person not named in the EEOC charge may not be made a defendant in the lawsuit that follows) makes no sense where the objecting person had responsibilities as to the employment practices, had actual notice of the EEOC charge and an had opportunity to be involved in the conciliation process. Therefore, it is necessary to ascertain whether any particular defendant, who was not named in the EEOC charge, participated in employment decisions, had actual notice of the EEOC charge and had an opportunity to participate in an attempted resolution of it; in the absence of a factual record from which to make such an ascertainment, dismissal would be inappropriate. Id. at 327; Rio v. Presbyterian Hosp. in City of New York, supra at 326. There is an insufficient factual record here. The EEOC’s Notice of Charge of Discrimination was addressed to the “Chief Executive Officer” of Harvey’s Casino. The complaint alleges that defendant William B. Ledbetter is the Chief Executive Officer. Since no answer has been filed, it remains merely an allegation. Development of a factual record, perhaps in connection with a motion for summary judgment, may establish that some or all of the individual defendants are entitled to dismissal. Such an order would be premature at this time, however.

The defendants, in their motion to dismiss, contend that the plaintiff’s claim for damages based on becoming sick and ill must be dismissed because the Nevada Industrial Insurance Act provides the exclusive remedy available to an employee against her employer for any accident arising out of and in the course of employment. See NRS 616.370(1). The plaintiff denies that her alleged illness was caused by a work-related accident. She contends that the defendants’ actions were intentional, not accidental.

“ ‘Accident’ means an unexpected or unforeseen event happening suddenly and violently, with or without human fault, and producing at the time objective symptoms of an injury.” NRS 616.020. In order for an incident to qualify as an “accident,” the following elements must be present: (1) an unexpected or unforeseen event; (2) happening suddenly and violently; and (3) producing at the time objective symptoms of injury. American Intern. Vacations v. MacBride, 99 Nev. 324, 661 P.2d 1301, 1303 (1983). The MacBride opinion gives broad interpretations of elements (1) and (2) that could encompass the situation of the plaintiff herein. However, “injury” is defined by statute as meaning “a sudden and tangible happening of a traumatic nature____” NRS 616.110(1). What happened to the plaintiff does not pertain to a wound or physical injury as seems to be required for the happening to be deemed “traumatic.” See Periss v. Nevada Industrial Commission, 55 Nev. 40, 24 P.2d 318, 319 (1933); American Intern. Vacations v. MacBride, supra at 661 P.2d 1304. Workmen’s compensation laws aren’t designed to relieve the consequences of losing one’s job; other social legislation and recognized torts provide remedy. Kern v. Ideal Basic Industries, 101 N.M. 801, 689 P.2d 1272, 1273 (App.1984). In any event, the plaintiffs allegations that her sickness and illness lie outside the purview of the Nevada Industrial Insurance Act is sufficient to avoid dismissal for failure to state a claim for relief. McGinnis v. Consol. Casinos Corp., 94 Nev. 640, 584 P.2d 702, 703 (1978). A claim will not be dismissed unless it appears beyond doubt that the plaintiff can prove no set of facts which would entitle her to relief. United States v. City of Redwood City, 640 F.2d 963, 966 (9th Cir.1981).

Finally, the defendants ask that the plaintiff’s claim for damages based on mental anguish, mortification, humiliation, shame and illness be stricken. In paragraph 21 of her complaint, the plaintiff indicates that she will seek to amend her pleading to conform to the proof as to the damages she has sustained for such emotional and physical distress. No such damages are recoverable under either Title VII or the ADEA. James v. Kid Broadcasting Corp., 559 F.Supp. 1153, 1157 (D.Ida.1983); see also Padway v. Palches, 665 F.2d 965, 968 (9th Cir.1982) (Title VII); Naton v. Bank of California, 649 F.2d 691, 698 (9th Cir.1981) (ADEA). The provision for liquidated damages found in 29 U.S.C. § 626(b) is the intended remedy for willful violations of the ADEA, which are the type that more likely would cause pain and suffering in addition to economic harm. Ginsberg v. Burlington Industries, Inc., 500 F.Supp. 696, 701 (S.D.N.Y.1980); see also Fellows v. Medford Corp., 431 F.Supp. 199, 202 (D.Or.1977).

IT IS, THEREFORE, HEREBY ORDERED that the portion of paragraph 21 of the plaintiffs complaint that claims damages for emotional and physical distress be STRICKEN.

IT IS FURTHER ORDERED that the defendants’ motion to dismiss the complaint be DENIED.


source: Caselaw Access Project

author: CARL 0. BUE, Jr., District Judge.

license: Public Domain

text:
    UNITED STATES of America v. Eranier Diana LAKEY.
    Crim. No. H-84-138.
    United States District Court, S.D. Texas, Houston Division.
    June 5, 1985.
    Nancy Holley, Asst. U.S. Atty., Houston, Tex., for the government.
    Marjorie Meyers, Asst. Federal Public Defender, Houston, Tex., for defendant.
   FINDINGS OF FACT AND CONCLUSIONS OF LAW

CARL 0. BUE, Jr., District Judge.

The defendant was charged in an eighty-six count indictment with forty-three counts of filing false claims for income tax refunds, in violation of 18 U.S.C. § 287 (1982), and forty-three counts of making false statements to a government agency, in violation of 18 U.S.C. § 1001 (1982). The defendant was tried before the Court without a jury, upon execution of a proper waiver of a jury trial.

Having heard the testmimony, and having reviewed the documentary evidence, the Court finds Ms. Lakey not guilty of all eighty-six counts of the indictment under the applicable law of legal insanity.

Findings of Fact

1. The following Findings of Fact are based in part on conflicting testimony, and the Court in making these findings, has assessed the credibility and demeanor of the witnesses and the inherent probabilities and inconsistencies in the testimony received in evidence. The Court’s resolution of such credibility issues is determinable, where not specifically stated, from the facts found.

2. The defendant is Eranier Diana La-key.

3. Ms. Lakey resided at 5611 Grace Point Lane, Houston, Texas, during the period of the alleged offenses.

4. From on or about February 10, 1982 until on or about April 10, 1982, the defendant, Eranier Diana Lakey, filed forty-three claims for income tax refunds with the Internal Revenue Service, (Government’s Exhibits 1-43), in violation of 18 U.S.C. § 287. Attached thereto were forty-three W-2 Wage and Tax Statements, (Government’s Exhibits 1-43), in violation of 18 U.S.C. § 1001.

5. Each income tax claim reflected the address of defendant, the same amount of earned income ($19,000.00) for 1981, the identical amount of federal taxes withheld, ($8,781.04), as well as the same amount of refund ($5,312.04). Moreover, the names and social security numbers listed on each return were variations of Ms. Lakey’s own name and social security number. Government’s Exhibits 1-43.

6. Each W-2 Wage and Tax Statement indicated Sharpview Nursing Home as the employer for 1981. The various names on each income tax claim corresponded with the name on the W-2 form. Government’s Exhibits 1-43.

7. Ms. Lakey was not employed by Sharpview Nursing Home during 1981. Moreover, none of the taxpayers listed on the W-2 forms which were attached to the income tax claims were employed by Sharp-view Nursing Home during 1981. Government’s Exhibit 78.

8. Ms. Lakey typed the W-2 forms and attached each form to the forty-three claims presented to the Internal Revenue Service. Testimony of Jack Calvert.

9. The defendant, Eranier Lakey, willfully presented forty-three false claims to the Internal Revenue Service, an agency of the United States, knowing the claims were false, in violation of 18 U.S.C. § 287 and 2.

10. The defendant, Eranier Lakey, willfully and knowingly filed forty-three false W-2 forms with the Internal Revenue Service, an agency of the United States, in violation of 18 U.S.C. § 1001 and 2. The statements contained in the W-2 forms were material.

11. Ms. Lakey was diagnosed as suffering from chronic paranoid schizophrenia. Defendant’s Exhibits 7, 8; Government’s Exhibits 81, 82, 84; testimony of Dr. Milton Altschuler; testimony of Dr. Sallye Webster; testimony of Dr. Jerome Brown; testimony of Dr. John Nottingham.

12. Chronic schizophrenia can be controlled with medication if taken as prescribed. Testimony of Dr. Altschuler.

13. The “active” phase of schizophrenia, when the symptoms of the disease are at its height, is classified as an acute phase. The onset of an acute attack of schizophrenia can occur at any given time. Testimony of Dr. Altschuler.

14. Ms. Lakey was not taking her medication at regular intervals as prescribed during the time frame charged in the indictment. Testimony of Mrs. Green; testimony of Eranier Lakey; testimony of Sally Fisher.

15. Ms. Lakey exhibited signs of entering an acute phase during the month of March, 1982. Defendants’ Exhibit 1, Government’s Exhibit 74; testimony of Dr. Altschuler; testimony of Mary Thompson.

16. Defendant’s intellectual capacity and ability to correctly calculate income tax forms did not have any correlation with the onset of an acute schizophrenia attack. Testimony of Dr. Altschuler.

17. Defendant had substantial capacity at the time of the acts charged in the indictment to appreciate the wrongfulness of her conduct. Testimony of defendant; testimony of Dr. Nottingham; testimony of Dr. Brown; testimony of Dr. Webster; testimony of Dr. Altschuler; testimony of Mary Thompson.

18. Defendant did not have substantial capacity, as a result of a mental disease or defect, at the time of the acts charged in the indictment, to conform her conduct to the requirements of law. Testimony of Dr. Altschuler.

Conclusions of Law

1. Eranier Lakey was charged in an eighty-six count indictment. In counts one through forty-three, the defendant was charged with violation of 18 U.S.C. § 287 and 18 U.S.C. § 2 (1982), and in counts forty-four through eighty-six the defendant was charged with violation of 18 U.S.C. § 1001 and 18 U.S.C. § 2 (1982).

2. In order to establish a violation of 18 U.S.C. § 287, the government must prove beyond a reasonable doubt (a) that Eranier Lakey willfully presented a claim to an agency of the United States; (b) that the claim was false, fraudulent and, (c) that Eranier Lakey knew the claim was false.

3. Moreover, in order to establish a violation of 18 U.S.C. § 1001 the government must prove beyond a reasonable doubt: (a) that the defendant made a false statement, or made use of a false document; (b) that such false statement or false document related to a material matter within the jurisdiction of an agency of the United States; (c) that the defendant acted willfully and knowingly.

4. Defendant maintains that she was legally insane at the time of the charged offense.

5. At the outset, this Court must determine the applicable legal standard for insanity. Until April, 1984, the law in this Circuit with regard to insanity was outlined in Blake v. United States, 407 F.2d 908 (5th Cir.1969) (en banc). Essentially, the “test” for insanity consisted of a cognitive and volitional prong; that is, a person would not be criminally responsible for his/her acts if “at the time of the conduct and as a result of mental disease or defect, [she] lacked substantial capacity either to appreciate the wrongfulness of [her] conduct or to conform [her] conduct to the requirements of the law.” Id., at 916. On April 16, 1984, the Circuit Court decided United States v. Lyons, 731 F.2d 243 (5th Cir.1984) (en banc), cert. denied, — U.S. -, 105 S.Ct. 323, 83 L.Ed.2d 260 (1984). In that opinion the Court left the burden of proof intact, but eliminated the volitional prong of the Blake test. In other words, a person could no longer claim insanity based on the allegation that he/she lacked substantial capacity to conform his/her conduct to the law. Now, the standard employed by the Fifth Circuit as grounds for insanity is “if at the time of that conduct, as a result of a mental disease or defect, he is unable to appreciate the wrongfulness of that conduct.” Lyons, 731 F.2d at 248.

On October 12, 1984, the Comprehensive Crime Control Act of 1984 was passed which contained the Insanity Defense Reform Act of 1984. The Act narrowed the definition of insanity by eliminating the volitional prong of the insanity defense. Moreover, the Act altered the allocation of burden of proof. Now, the burden of proof is on the defendant to prove by clear and convincing evidence that a severe mental disease or defect resulted in the defendant’s inability to appreciate the nature and quality or the wrongfulness of [his/her] acts.

Defendant argues that the application of either the standard announced in the Insanity Defense Reform Act of 1984, or the Lyons standard would be violative of the ex post facto clause of the United States Constitution. This Court agrees. See United States v. Kowal, 596 F.Supp. 375 (D.C.Conn.1984).

An ex post facto law is one which “punishes as a crime an act previously committed, which was innocent when done; ... or which deprives one charged with crime of any defense available ... at the time when the act was committed ...” Beazell v. Ohio, 269 U.S. 167, 169-70, 46 S.Ct. 68, 70 L.Ed. 216 (1925) (emphasis added). The government contends that any change is merely procedural and is, therefore, not violative of the ex post facto clause. This Court does not agree. The standards as set forth in Lyons and the Insanity Defense Reform Act of 1984 would be violative of the ex post facto clause found in Article I, § 9, Clause 3, and Article I, § 10, Clause 1 of the U.S. Constitution. The newly created standards would deprive Ms. Lakey of a defense available according to the law in 1982.

Moreover, even though the change effected may appear procedural, “[Alteration of a substantial right ... is not merely procedural, even if the statute takes a seemingly procedural form.” Kowal, 596 F.Supp. at 377, citing, Thompson v. Utah, 170 U.S. 343, 354-355, 18 S.Ct. 620, 624, 42 L.Ed. 1061 (1898). The District Court in Kowal further noted the apparent difficulties in applying the ex post facto clause to retroactive procedural changes that occur when the burden of proof is lightened or shifted. Id,.

While this Court recognizes the Lyons standard as the new test for insanity in this Circuit, this Court is compelled to distinguish the present case from the Lyons precedent, particularly in light of the ex post facto argument raised by defense.

In conclusion, this Court determines that, due to ex post facto considerations, this Court must apply the standard outlined in Blake. Therefore, while the government proved beyond a reasonable doubt that Ms. Lakey was able to appreciate right from wrong (Finding 17), this Court determined that the government failed to meet its burden of proof on the volitional prong (Finding 18). In other words, by reason of insanity, Ms. Lakey lacked substantial capacity to conform her conduct to the law.

Defendant suffers from chronic paranoid schizophrenia, with lapses into the acute phase. Finding 13. The lapses into the acute phase occurred when defendant was not taking her medication as prescribed. During the relevant periods charged in the indictment, defendant was not taking her medication as prescribed. Finding 14. As a result, Ms. Lakey began entering an acute phase of her disease. This conclusion was based on exhibition of symptoms, such as agitation, which were consistent with a pattern of the defendant’s past occurrences of acute paranoid schizophrenia.

Accordingly, this Court concludes that Ms. Lakey was legally insane at the time of the offenses and is, therefore, not guilty of the charges as alleged in the indictment.

It is so ORDERED.

      . While the Fifth Circuit applied the Lyons standard retroactively, there is no indication that an ex post facto consideration was briefed or reviewed by the Circuit or the Supreme Court. As to the issue of retroactive application, the Circuit stated, "It would be unfair, however, to remit him retroactively to our newly restricted insanity defense without allowing him the opportunity to plan a defense bearing its contours in mind____ As for other cases, today’s holding shall have prospective application." Lyons, 731 F.2d at 250.

      . The Fifth Circuit in Lyons did not alter the burden of proof.

      . Moreover, this Court agrees with the dissenting judge in Lyons. As Judge Johnson noted, "the timing of this action seems particularly inappropriate.” Lyons, 731 F.2d at 255.

      . This Court notes the policy considerations outlined in the Handbook on the Comprehensive Crime Control Act of 1984 and Other Criminal Statutes Enacted by the 98th Congress provided by the Department of Justice. In that handbook, the Department specifically addresses Lyons and states that the new statutory standard and burden of proof are not applicable for offenses occurring prior to October 12, 1984. However, in cases where the defendant presents a clear danger of serious violence and where there exists a likelihood of acquittal under the two-prong Blake test but a likelihood of conviction under the Lyons test, then the government could argue that the Lyons test should apply. While this Court does not give the policy handbook any credence as to the applicable legal standards of insanity, it is interesting to note that in this case the government would fail to meet the first prong of the handbook test; that is, clear danger of serious violence. While the evidence shows that defendant has had episodes of violence, it is evident that her violent periods can be controlled with medication. Moreover, testimony elicited indicates that defendant is currently taking her medication on a regular basis.

      . Moreover, while defendant was able to calculate the tax returns accurately and was assessed as an intelligent person, these factors did not reflect whether or not the mental disease was in an acute phase. Finding 16. In other words, a person could be suffering from an acute phase and still be able to perform mathematical computations.

      . While testimony elicited from Dr. Shamsi, Dr. Nottingham, and Dr. Brown indicated Ms. La-key was not entering an acute phase, this Court notes that Dr. Shamsi did not have any significant contact with defendant other than in a medication group. To the contrary, Ms. Mary Thompson saw Eranier Lakey on a regular basis and was confided in by Ms. Lakey. The defendant was hesitant to talk with Dr. Shamsi, and essentially "told him what he wanted to hear” in an effort to avoid hospitalization.
      Moreover, Drs. Nottingham and Brown based their opinion on Dr. Shamsi's reports, as opposed to Drs. Webster and Altschuler who based their reports on Ms. Thompson’s reporting. Therefore, this Court concludes that the defense experts under the circumstances, are more credible than the government’s experts.


author: DEVITT, District Judge.

text:
    PABST BREWING COMPANY, a Delaware corporation, Plaintiff, v. Leo J. ANGER, Carol L. Arneson, Leon E. Babcock, Raymond F. Bakula, Robert E. Barduson, Germaine L. Blazek, David Brindley, Nancy Brown, Frances Drzoznowski, William A. Campbell, Gladys M. Carlson, Paul F. Chuchel, Karen M. Corbo, Francis Coulter, Estelle R. Czech, Robert E. Dorfner, Mary E. Engebretson, John D. Ericson, William J. Farrar, Patricia L. Fleishauer, Richard B. Gebauer, William A. Gillick, Steven A. Goemer, Donald R. Gooch, Roy Gosselin, Jr., Curtis A. Greer, Marian Guinn, Jerome S. Haggenmiller, Troy Hendrickson, Bernhard E. Hill, Wallace E. Hilling, Charles Hirschorn, Deborah Hockenberger, Vernon G. Hophan, Caroline R. Horwath, Inez Hunter, Dorothy Jahn, Clinton T. Johnson, Eugene W. Kern, James L. Kieger, Mary Ellen J. Kowsky, Alois A. Kubes, Robert J. Kujawski, Geraldine M. Kustelski, Ronald J. Laaksonen, Donald E. Larsen, Yolanda Latvala, James Lavorato, Evelyn M. Lecher, Vincent J. Lechman, Jeanne Ledman, Fred D. Lettengarver, James S. Lovell, Robert E. Luckow, Arthur E. Luger, Charles R. McBrayer, Eleanore McDonough, Michael W. McGee, Thomas J. McKenzie, Lilian C. Messenger, Herman P. Meysembourg, Peter P. Meysembourg, Carl E. Hohn, Donald N. Monson, Jr., Glenn W. Moore, Thomas L. Murphy, Corinne Page, George J. Paul, David L. Putz, Angeline A. Quitter, Curtis J. Reeves, Eugene W. Rogers, Gwen M. Rulli, Aaron Russ, III, Laura M. Sahlberg, Ardis A. Schwalbach, Herbert W. Schwarz, Francis H. Sommer, Richard W. Stark, Margaret M. Stelter, Donald W. Stevens, Patrick F. Sullivan, George Taylor, Jack F. Thurner, Janice M. Timmers, Dorothy Tuchner, Gerrit W. Van Pykersen, Herbert M. Virnig, Esther A. Voss, Warren Wallgren, Michael Whalen, Raymond A. Wiesner, Georgia Wilhelmi, Ronald L. Williams, Ernest W. Yoch, Ousik Yu, and The Stroh Brewery Company, Defendants.
    Civ. No. 3-84-461.
    United States District Court, D. Minnesota, Third Division.
    June 6, 1985.

      Clifford M. Greene, Minneapolis, Minn., for plaintiff.
    Terence P. Durkin, St. Paul, Minn., for individual defendants.
    Geoffrey P. Jarpe, St. Paul, Minn., for defendant Stroh Brewery.
   MEMORANDUM & ORDER

DEVITT, District Judge.

The court has considered the parties’ memoranda and supporting exhibits and affidavits, the arguments of counsel, and all of the files, records and proceedings in the case.

Plaintiff filed this action after receiving and denying claims for severance benefits following the exchange of its Saint Paul brewery for a Stroh’s brewery in Tampa, Florida. The individual defendants were salaried, non-union employees of Pabst before the exchange, and hired by Stroh’s at the time of the exchange. The individual defendants were never unemployed as a result of the exchange; in fact, most were retained in their same jobs at the same salary. These defendants argue that they are entitled to severance benefits because, as a result of the exchange, they were terminated from employment with Pabst. Stroh’s is named as a defendant on a contribution or indemnity theory. Plaintiff seeks a declaration of its rights as to all defendants, pursuant to 29 U.S.C. § 1132(a)(3)(B). The individual defendants have filed counterclaims for the recovery of severance benefits, any applicable penalties, punitive damages and attorney’s fees.

Pabst acquired this Saint Paul brewery in 1982 as a result of a merger with Olympia Brewing Company, which was then operating the brewery. As part of the agreement of this merger, Pabst agreed to abide by Olympia’s Separation From Employment Policy (SFEP) for a period of one year following the merger. A copy of this policy is attached to this order, and the terms of the policy are incorporated herein by reference. Exactly one year from the date of the merger, on September 30, 1983, Pabst and Stroh’s executed an exchange agreement. Pabst acquired a Stroh’s brewery in Tampa, Florida, in exchange for its brewery' in Saint Paul. As part of the agreement, Stroh’s promised to

continue the Olympia severance program for St. Paul salaried employees through March 18, 1984. This program gives credit for all years of service since Olympia acquired the St. Paul brewery and gives two weeks of pay and benefits plus another week of pay and benefits for each full year of service.

The individual defendants in this action seek severance benefits under the Olympia/Pabst SFEP. They argue that, at the time Pabst traded the brewery to Stroh’s, they were laid off from Pabst within the meaning of the SFEP and therefore entitled to severance benefits. There is no dispute that these defendants were, at the time of the exchange, terminated from Pabst. Pabst argues, however, that since these employees were immediately rehired by Stroh’s they are not entitled to severance benefits because such benefits are designed to provide financial assistance to former employees during periods of unemployment.

This case is appropriate for summary judgment. All parties filed mbtions seeking summary judgment. All counsel stated orally at the hearing that summary judgment is appropriate in this ease. The court finds that there are no genuine issues of material fact.

The individual defendants’ argument that summary judgment in favor of plaintiff is precluded by the case of Blau v. Del Monte Corp., 748 F.2d 1348 (9th Cir.1984) is unpersuasive. Plaintiff’s severance policy was anything but secret, and the alleged ERISA violations, if true, do not reach the severity of those found in Blau. Further, defendants’ “accrued benefits” argument, first raised at the hearing on these motions, is likewise inapposite. Dhayer v. Weirton Steel Division of National Steel Corporation, 571 F.Supp. 316 (N.D.W.Va.), affd sub nom Sutton v. Weirton Steel Division of National Steel Corporation, 724 F.2d 406 (4th Cir.1983), cert. denied, — U.S. -, 104 S.Ct. 2387, 81 L.Ed.2d 345 (1984).

The Employee Retirement Income Security Act (ERISA), 29 U.S.C. § 1001, et seq. governs this action and preempts state claims. Despite some alleged procedural defects, it is clear that ERISA applies. Donovan v. Dillingham, 688 F.2d 1367 (11th Cir.1982). Accordingly, jurisdiction is proper in this court, and the standard of review applicable in ERISA cases shall be applied. The application of ERISA preempts the parties’ contract claims. 29 U.S.C. § 1144; Dependahl v. Falstaff Brewing Corporation, 653 F.2d 1208 (8th Cir.1981).

Defendants’ claims that plaintiff has failed to comply with certain procedural provisions of ERISA warrant comment. Such claims are largely unsubstantiated and in any case fall short of the level of secrecy and noncompliance found in Blau v. Del Monte Corp., 748 F.2d 1348. Assuming, arguendo, that all of defendants’ allegations are true, such would not warrant not applying ERISA to the present case. Donovan v. Dillingham, 688 F.2d at 1372.

Applying ERISA to this action, the court cannot interfere with plaintiff’s administration of its severance plan, including its interpretation of plan provisions, unless plaintiff’s action is “arbitrary, capricious, or an abuse of discretion.” Quinn v. Burlington Northern Inc. etc., 664 F.2d 675, 678 (8th Cir.1981).

Plaintiff’s denial of severance benefits was not, as a matter of law, arbitrary, capricious or an abuse of discretion. Reading the SFEP as a whole, plaintiff reached a logical conclusion when it determined that severance benefits for laid off employees were intended for employees who suffered at least some period of unemployment.

Section IV.B. of the SFEP deals with severance procedures in the instances of layoff. Subsection 1 provides that a laid off employee shall continue to be covered under the employer’s insurance plans. Subsection 4 states that laid off employees shall be considered eligible for rehire. Subsection 5 allows laid off employees access to the employer’s secretarial and telephone services “to aid in their job search.” Reading the SFEP with particular attention to these provisions, it is clear that a laid off employee is one who is unemployed, uninsured, and looking for work. Such is not the case with the individual defendants here. See, Sly v. P.R. Mallory & Co., Inc., 712 F.2d 1209 (7th Cir.1983).

Additionally, plaintiff’s interpretation of the plan avoids the obvious windfall that the employees would otherwise receive. The court is mindful that these defendants have lost credit for their period of employment with Olympia and Pabst, and that in some cases this is a substantial period. But these are speculative losses which, assuming continued good service on the part of the employee, have questionable present values and, if the employee works until retirement, have no value at all.

Based on the foregoing,

IT IS ORDERED:

1. Plaintiff’s motion for summary judgment is granted.

2. The individual defendants’ motion for summary judgment is denied.

3. Defendant Stroh Brewing Company’s motion for summary judgment is denied as moot.

4. The individual defendants’ counterclaim against plaintiff is dismissed.

5. The individual defendants’ motion for attorney’s fees is denied.

      . The court’s consideration of defendants’ claims that plaintiff has failed to comply with various ERISA provisions is limited to the extent that such violations might preclude the granting of summary judgment in plaintiffs favor. See Blau v. Del Monte Corp., 748 F.2d 1348 (9th Cir.1984). The record is sufficiently well established to satisfy the court that the alleged violations, even if true, fall short of those found in Blau and do not, in any case, warrant the denial of plaintiff’s motion. The court does not reach the merits of defendants' claims. Plaintiff is admonished, however, that in light of the fact that it is now seeking the protections accorded it under the Act, it should, at a minimum, comply with the Act's procedural and administrative requirements.


author: ARONOVITZ, District Judge.

text:
    UNITED STATES of America and Frank M. Odom, Special Agent, Internal Revenue Service, Petitioners, v. Mitchell ARONSON, Respondent.
    No. 84-3003-Civ-Aronovitz.
    United States District Court, S.D. Florida, Miami Division.
    June 6, 1985.

      Elizabeth Stein, Asst. U.S. Atty., Miami, Fla., Alvarez L. LeCesne, Jr., Tax Div., Dept, of Justice, Washington, D.C., for petitioners.
    Joel Hirschhorn, P.A., Miami, Fla., for respondent.
   ORDER GRANTING PETITION TO ENFORCE INTERNAL REVENUE SERVICE SUMMONS WITH MEMORANDUM OPINION

ARONOVITZ, District Judge.

THIS CAUSE came before the Court upon a Petition to Enforce Internal Revenue Service (“IRS”) Summons (filed December 26, 1984) and Respondent’s claim of attorney-client privilege thereon. Said Petition sought enforcement of an IRS summons issued upon Respondent Attorney MITCHELL ARONSON for failure to produce certain documents and give testimony regarding an IRS investigation into the tax liabilities of two individuals by the names of David Sawyer and Delores Sawyer. The subject summons in the instant case sought information pertaining to two corporations in which either one or both of the Sawyers had an interest. Those two corporations are Ventaric Associated, Inc. and Inversiones Perico, S.A. It is not disputed that Respondent represents in his capacity as an attorney an undisclosed person, hereinafter referred to as ROE, who has some interest in the two above-named corporations, Ventaric Associated, Inc. and Inversiones Perico, S.A.

Pursuant to the instant Petition, this Court issued an Order to Show Cause on January 3, 1985, wherein Respondent was ordered to either appear before the IRS and comply with the subject summons or “file a written response to the petition, supported by appropriate affidavits as well as any motion the respondent desires to make.” On January 15, 1985, Respondent filed his Response to Order to Show Cause and to Petition to Enforce Internal Revenue Service Summons and Request to Vacate Order to Show Cause and Dismiss Proceedings claiming that if he complied with the IRS summons, such compliance would force him to reveal the identity of his client, thereby violating the attorney-client privilege. An evidentiary hearing as to Respondent’s claim of privilege was conducted on Monday, March 18, 1985, at which time the Court heard oral argument of counsel and received evidence in the nature of testimony and documentary exhibits. Thereafter, pursuant to the Court’s directive, the parties filed supplemental memoranda on the applicability of the attorney-client privilege to the facts at bar. (Respondent’s initial supplemental memorandum was filed on March 26, 1985. Petitioner’s responsive supplemental memorandum was filed on April 17, 1985, and Respondent’s reply memorandum was filed on May 1, 1985.) The Court has carefully considered the entire record of the cause including the various memoranda filed by both parties, the evidence and testimony presented at the March 18th hearing, the applicable law, and being otherwise fully advised in the premises, it is thereupon

ORDERED AND ADJUDGED that the Petition to Enforce Internal Revenue Service Summons be, and the same is, hereby GRANTED. Respondent’s Request to Dismiss Proceedings is accordingly DENIED. For the reasons outlined below, Respondent MITCHELL ARONSON is hereby ORDERED AND DIRECTED to obey the summons issued to him in each and every requirement; to appear before Special Agent Frank M. Odom or any other proper official of the Internal Revenue Service at such time and place as may hereafter be fixed by Special Agent Odom or any other proper officer of the Internal Revenue Service; to produce for examination and copying the information, books, papers, files, records and other data described in the summons; and to give testimony as demanded in the summons.

The IRS has the power to issue summons like the one at bar pursuant to its enabling statute in the United States Code. Title 26, United States Code, Section 7602(a) provides in pertinent part:

For the purposes of ascertaining the correctness of any return, making a return where none has been made, determining the liability of any person for any internal revenue tax of the liability at law or in equity of any transferee or fiduciary of any person in respect of any internal revenue tax or collecting any such liability, the Secretary is authorized—
(1) to examine any books, papers, records, or other data which may be relevant or material to such inquiry;
(2) to summon * * * any person having possession, custody, or care of books of account containing entries relating to the business of the person liable for tax or required to perform the act, or any other person the Secretary may deem proper, to appear before the Secretary at a time and place named in the summons and to produce such books, papers, records, or other data, and to give such testimony, under oath, as may be relevant or material to such inquiry; and
(3) to take such testimony of the person concerned under oath, as may be relevant or material to such inquiry.

Pursuant to this rather broad grant of authority, the IRS issued the subject summons to Respondent requesting certain documents. When Respondent appeared and failed to completely comply with the summons and produce the requested documents, the Government instituted the instant action. In actions to enforce such summons, like the one at bar, the Government’s initial burden of proof entails fulfilling four distinct criteria. This four-pronged burden of proof has been articulated by the Supreme Court and adopted by the Eleventh Circuit in Matter of Newton, 718 F.2d 1015 (11th Cir.1983), cert. denied, — U.S. -, 104 S.Ct. 1678, 80 L.Ed.2d 153 (1981) (“Newton ”):

The Supreme Court in United States v. Powell, 379 U.S. 48, 85 S.Ct. 248, 13 L.Ed.2d 112 (1964) defined the minimal showing that the IRS must make when seeking an order to enforce its summons. Id. at 57-58, 85 S.Ct. at 255. It must show that
the investigation will be conducted pursuant to a legitimate purpose, that the inquiry may be relevant to that purpose, that the information sought is not already within the Commission’s possession, and that the administrative steps required by the Code have been followed.

718 F.2d at 1019. Accord: United States v. Davis, 636 F.2d 1028 (5th Cir.1981), cert. denied, 454 U.S. 862, 102 S.Ct. 320, 70 L.Ed.2d 162 (1981) (“Davis ”). It is generally accepted that this burden can be met through the filing of an affidavit by the prosecuting IRS agent which attests to fulfillment of the four-pronged standard. Newton, supra at 1019. In the instant case, the four-part burden of proof has been fulfilled through the affidavits and testimony of the prosecuting IRS agent, Mr. Frank Odom, at the evidentiary hearing in this cause. The testimony and affidavits attest that the investigation is conducted pursuant to the legitimate purpose of assessing the tax liability of David and Delores Sawyer. The Government has also demonstrated that the instant summons may be relevant to this purpose because the information sought through issuance of the subject summons concerns the conveyance of two certain lots of land from David Sawyer to land trusts established on behalf of Inversiones Perico, S.A., the corporation which Respondent claims is owned in part by his client ROE. Furthermore, IRS Agent Odom testified that the information sought is not currently within the IRS’ possession and finally, there is nothing in the record to indicate that the administrative steps required by the Code have not been followed.

Clearly, the IRS has met its burden of establishing a prima facie case and indeed, Respondent does not dispute this. Once the government makes the minimal showing, the burden shifts to the taxpayer to disprove one of the elements of the government’s case or to show that enforcement of the summons would be an abuse of the court’s process. Newton, supra at 1019; Davis, supra at 1034. Rather than contest the government’s establishment of a prima facie case, Respondent has accepted the challenge of meeting the shifting burden of proof through assertion of the attorney-client privilege.

The broad summons power authorized under 26 U.S.C. § 7602 has been limited by the Supreme Court under circumstances where “traditional privileges and limitations” exist. A classic example of such a privilege is the attorney-client privilege which Respondent claims applies in the case sub judice. In Upjohn Company v. United States, 449 U.S. 383, 398, 101 S.Ct. 677, 687, 66 L.Ed.2d 584 (1981) (“Upjohn ”), the Supreme Court held that the attorney-client privilege and the work product doctrine limited the scope of the IRS summons power. The burden of proving the attorney-client privilege rests in the party asserting the privilege, however. United States v. Ponder, 475 F.2d 37, 39 (5th Cir.1973). It must further be stressed that the attorney client privilege is limited to confidential communications between the lawyer and client made for the purposes of securing legal advice. United States v. Melvin, 650 F.2d 641 (5th Cir.1981); United States v. McDonald, 313 F.2d 832 (2d Cir.1963).

In the instant case, Respondent claims that the “privileged” information which would be revealed upon compliance with the IRS summons is the identity of his client. Respondent’s client has asked Respondent to invoke the attorney-client privilege on the client’s behalf so that his or her identity will not be disclosed in any event. Both the Eleventh and Fifth Circuit Courts of Appeals, following the lead of other circuits, have held that the identity of a client is not information which would normally fall within the scope of the attorney-client privilege. In re Grand Jury Proceedings, (Robert Twist, Sr.), 689 F.2d 1351 (11th Cir.1982) (“Twist ”); United States v. Ponder, supra; Frank v. Tomlinson, 351 F.2d 384 (5th Cir.1965), cert. denied, 382 U.S. 1028, 86 S.Ct. 648, 15 L.Ed.2d 540 (1966).

There is an exception to this general rule of disallowing a client’s identity to fall within the scope of the attorney-client privilege. That exception has been articulated in the Eleventh Circuit opinion of Twist, supra, wherein the Court stated:

Ordinarily, the attorney-client privilege applies only to the content of communications made for the purpose of securing legal advice. The identity of a client or matters involving the receipt of fees from a client are not normally within the privilege. United States v. Ponder, 475 F.2d 37, 39 (5th Cir.1973). A narrow exception to this rule obtains when disclosure of a client’s identity by his attorney would supply the last link in an existing chain of incriminating evidence likely to lead to the client’s indictment.

689 F.2d at 1352-1353. The Twist Court determined that the facts before it did not embody the “last link” exception and held that the attorney-client privilege was not violated by requiring counsel to produce records of dates, places or times of meetings and communications with clients.

At the evidentiary hearing of March 18, 1985, Respondent’s attorney represented to the Court that he had been informed that Respondent’s undisclosed client ROE is currently the subject of a separate IRS investigation. Therefore, according to Respondent, disclosure of ROE’s identity in the matter at bar would constitute “the last link in an existing chain of incriminating evidence.” (Respondent’s initial supplemental memorandum, filed March 26, 1985, at p. 7.) Respondent has failed to carry his burden of proof on the applicability of the “last link” exception to the facts before the Court. Only legal argument by Respondent’s counsel has been offered in support of this “fact” of the IRS investigation directed toward ROE. No proof, in the form of affidavits or otherwise, have been submitted to the Court, which attest to the separate IRS investigation into ROE’s affairs. Moreover, even if such phoof had been offered, the fact of a separate IRS investigation is not enough to convince the Court that revelation of ROE’s identity in the instant case would necessarily be the “last link in an existing chain of evidence likely to lead to the client’s indictment.” This is the test enunciated under Twist and it is a difficult test to meet. The testimony does not show and the Court therefore is not satisfied that disclosure of ROE’s identity would subject him in any way to criminal repercussions, much less be the last link to the institution of criminal charges. Respondent has not fulfilled his burden of proof and the Court finds that the “last link” exception does not attach in the instant case. Accordingly, ROE’s identity is not information which falls within the protective ambit of the attorney-client privilege.

Respondent further asserts that the documents sought pursuant to the IRS summons represent privileged legal communications between Respondent, ROE and the two corporations. Although this assertion was not the primary focus of the evidentiary hearing on March 18th, it has been briefed extensively in the supplemental memoranda and bears consideration here. As noted previously, the burden of proving the existence of the attorney-client privilege rests on the party asserting the privilege. United States v. Ponder, supra. Respondent has not alleged any facts which supports his contention that the summons calls for the production of records protected by the attorney-client privilege. Basically, the summons requests documents regarding legal fees and the corporate records of Ventaric Associated, Inc. and Inversiones Perico, S.A. The requests which Respondent focuses upon as embracing privileged material are Request Number 1 and Request Number 2. These requests encompass:

All documents pertaining to purchases, leases, and/or sales of real and personal property to include contracts, memos, deposit receipts, lease and sub-lease agreements, closing statements, deeds, mortgages, liens, assignment satisfactions, subordinations and financial statements. All records of escrow and trust funds including deposits, disbursements, can-celled checks, deposit slips, ledger cards, cash receipts and transmittal correspondence.

These types of records have been held to constitute information outside of the attorney-client privilege. The Fifth Circuit so held in United States v. Davis, supra at 1044, stating:

Many of the documents summoned from Orr similarly must relate to matters other than the giving of legal advice, and hence are outside the attorney-client privilege as well. Financial transactions between the attorney and client, including the compensation paid by or on behalf of the client,____are not within the privilege except in special circumstances not present here. United States v. Finley, 5 Cir.1970, 434 F.2d 596, 597; In re Grand Jury Proceedings (United States v. Jones), 5 Cir.1975, 517 F.2d 666; In re Walsh, 7 Cir.1980, 623 F.2d 489, 494-495; see also 2 J. Weinstein’s Evidence U 503(a)(4) [02], at 503-32 n. 1 (1980). An attorney who acts as his client’s business advisor or, his agent for receipt or disbursement of money or property to or from third parties ... is not acting in a legal capacity, and records of such transactions are not privileged. Colton v. United States, 2 Cir.1962, 306 F.2d 633, 638, cert. denied, 1963, 371 U.S. 951, 83 S.Ct. 505, 9 L.Ed.2d 499; Pollock v. United States, 5 Cir.1953, 202 F.2d 281, 285-86, cert. denied, 1953, 345 U.S. 993, 73 S.Ct. 1133, 97 L.Ed. 1401.

Similarly, this Court considered and rejected an unsupported assertion of the attorney-client privilege in The Matter of the Canadian Tax Liability of Mario Controneo, et. al., Case No. 83-764-Civ-SMA (S.D.Fla.1983). The privilege was asserted in that case in a petition to quash proceedings which was filed as a defense to the enforcement of an Internal Revenue Service summons. The IRS summons there sought testimony and records similar to the records sought in the instant case.

Respondent has testified that his services were engaged for the purposes of acquiring two lots of land from one or both of the Sawyers on behalf of Inversiones. He has further testified that he participated in the formation of the two corporations of Inversiones and Ventaric. In that capacity, Respondent established a land trust.

In United States v. McDonald, 313 F.2d 832 (2d Cir.1963), the appellant, an attorney, was served with an IRS summons requiring him to produce “copies of closing statements and sales contracts relative to all real estate closings in which William G. Lytle was involved that were closed through him or his office.” 313 F.2d at 833. The appellant unsuccessfully asserted in the trial court proceedings that the documents were protected by the attorney-client privilege. On appeal, the Second Circuit held there was no merit to the claim of privilege because the client necessarily contemplated divulging the information requested to other parties at the closing.

Clearly, based on the nature of the functions that Respondent performed and the holdings in the above cited cases, the documents requested, to the extent they exist, are not protected by the attorney-client privilege. As to Request Number 1, encompassing purchases, leases, and other documents regarding the disposition of real and personal property, such documents fall squarely within the holding of United States v. McDonald, supra, in that they consist of matters which, by their very nature contemplate disclosure to third parties. With respect to Request Number 2, concerning records, receipts and other documents regarding trust and escrow accounts, such documents are embraced within the holding of United States v. Davis, supra, inasmuch as they memorialize record keeping and administrative tasks performed by Respondent. Moreover, Respondent has not demonstrated that these documents embrace or relate to confidential communications made to an attorney by a client for the purpose of rendering legal advice. Absent this showing by Respondent the attorney-client privilege cannot be invoked in order to avoid compliance with the instant IRS summons. Accordingly, pursuant to the above-cited authority, Respondent is ORDERED AND DIRECTED to comply with the subject IRS summons issued to him and produce the requested documents.

      . Respondent claims that pursuant to Upjohn, the two corporations in which ROE claims an interest, Ventaric and Inversiones, can claim an attorney-client privilege as to confidential communications between corporate representatives and corporate counsel. The Government does not address this point in its memoranda. Quite clearly, Upjohn does authorize invocation of the attorney-client privilege in a corporate context. Still, the invocation of the attorney-client privilege by Ventaric and Inversiones does not affect the Court’s ruling herein inasmuch as the requisite showings for invocation of the privilege have not been demonstrated by Respondent in any event, whether said privilege is claimed on behalf of the two corporations or ROE.

        . The applicability of the Fifth Amendment privilege against self-incrimination to the proceedings at bar was raised at the evidentiary hearing in this cause. In his post-hearing memorandum, Respondent disavows that he is claiming a Fifth Amendment privilege in response to the IRS summons. (Respondent’s Reply to Petitioner’s Memorandum, filed May 1, 1985, at pp. 1-2.) Accordingly, the Fifth Amendment issue is not now before the Court and therefore, is not addressed herein.

      . In fact, denial of the relief requested by Respondent is predicated upon the Court’s belief that Respondent has utterly failed to carry his burden of proof with respect to all issues pertinent to the disposition of the instant petition.

      . Respondent relies heavily upon the Third Circuit decision of United States v. Liebman, 742 F.2d 807 (3d Cir.1984). That case held that enforcement of an IRS summons would violate the attorney-client privilege based on an unusual set of circumstances. In that case, the IRS sought a list of clients who had been advised that they could deduct legal fees on income for certain years. The Third Circuit Court of Appeals reasoned that disclosure of these names would violate the attorney-client privilege because disclosure of the identities coupled with the fact that the IRS knew that these people all received legal advice regarding the deductibility of legal fees would provide all there was to know about the confidential communication between the clients and their attorneys. The case at bar consists of an inapposite set of facts. The IRS summons at bar does not specify the type of legal advice provided ROE, but rather seeks information about the corporate entities in which ROE possesses an interest. In the instant case, Respondent has not shown any “unusual circumstances” which would except the case from the general rule that disclosure of a client's identity is not within the attorney-client privilege.


author: RYAN, District Judge.

text:
    In the Matter of the Complaint of Stanton L. DIEHL and Betty Ann Diehl, Owners of a 1973 Clark sailboat, for Exoneration from or Limitation of Liability. PACIFIC POWER & LIGHT COMPANY, a Maine corporation, Plaintiff, v. Stanton L. DIEHL, the Estate of Steven N. Diehl, and Clark Boat Co., a Washington corporation, Defendants.
    Civ. No. 83-3032.
    United States District Court, D. Idaho.
    June 6, 1985.

      Jack S. Gjording, Elam, Burke, Evans, Boyd & Koontz, Boise, Id., for plaintiff.
    Brian K. Julian, Quane, Smith, Howard & Hull, Boise, Id., for defendants Diehl.
    Christopher Burke, Howard Humphrey, Clemons, Cosho & Humphrey, P.A., Boise, Id., for defendant Clark Boat Co.
   MEMORANDUM OPINION

RYAN, District Judge.

This matter is before the court on Defendant Clark Boat Company’s (Clark) Motion for Summary Judgment. The parties have fully briefed the issues raised by Clark’s motion. The court entertained oral argument and, having taken the matter under review, has had an opportunity to thoroughly review the memoranda and arguments of counsel. For the reasons set forth below, the court finds that Clark’s Motion for Summary Judgment should be granted.

FACTS

The operative facts in this matter as they relate to Clark’s motion are undisputed. On the evening of September 4, 1982, Steven and Jonie Diehl, Mark and Kathy Heumann, and William and Kathryn Yost were sailing a San Juan 21 sailboat manufactured by Clark on Lake Pend Oreille, a navigable body of water located in North Idaho. The sailboat was owned by Stanton L. Diehl, Steve Diehl’s father. As the evening’s excursion drew to a close, the craft with its occupants returned to dock at Steve Diehl’s slip. For reasons unimportant to the present motion, it was determined that the sailboat should be docked at a neighboring slip. En route to this destination, the mast of the sailboat came in contact with a high-voltage power line in an area of the lake known as Shaw Bay. The mast of the San Juan consisted of an aluminum pole supported by stainless steel stays. Aluminum masts began to be used by sailboat manufacturers in the early 1960’s, and became the “standard” for the industry by 1970. The San Juan which is the subject of this suit was manufactured in 1973. The power line involved was owned and operated by Pacific Power and Light Company (PP & L) and was strung approximately 25 feet above the surface of the water. As a result of the collision with the power line, an explosion and/or fire erupted on board the sailboat, causing it to burn and eventually sink in the bay. Five of the six persons on board perished. Kathy Heumann was the sole survivor. Following these tragic events, PP & L settled claims with the heirs of the deceased.

Subsequently, Stanton Diehl, the owner of the sailboat, instigated this action seeking protection and exoneration from liability under 46 U.S.C. § 183. PP & L answered Stanton Diehl’s Complaint and filed a counterclaim. In addition, PP & L filed its own Complaint naming the Estate of Steven Diehl (Estate) and Clark. In PP & L’s Complaint against Clark, PP & L seeks contribution from Clark for part of the settlement proceeds paid by PP & L to the heirs of the deceased. In support of its claim for contribution, PP & L alleges that Clark was negligent in the design of the San Juan 21 and that the sailboat was defective and unreasonably dangerous in various particulars. Clark has moved for summary judgment maintaining that it was not negligent in the design of the sailboat and that the sailboat was not unreasonably dangerous.

ISSUES PRESENTED

The issues raised by Clark’s motion are as follows:

(1) Was the San Juan 21 sailboat defective and unreasonably dangerous due to (a) its failure to include an insulating feature in its mast designed to avoid electrical shock, or (b) its failure to include a warning on its mast designed to apprise users of the dangers posed by high-voltage overhead power lines?

(2) Was Clark negligent in its design of the San Juan 21 for (a) failing to insulate the mast to avoid electrical shock, or (b) failing to warn purchasers of the dangers posed by high-voltage overhead power lines? The court notes that the concerns raised by the first ISSUE PRESENTED focus on the condition of the product following the manufacturing process, whereas the concerns raised by the second ISSUE PRESENTED focus on the conduct and behavior of the manufacturer.

(3) The court raises a third issue of its own volition concerning whether considerations of public policy prohibit PP & L from seeking contribution or reducing its liability for injuries caused, in the most part, by its failure to properly locate, maintain, and monitor its high-voltage power lines. This concern is particularly relevant in this case since the power line in question was located in an area where PP & L was fairly charged with the knowledge that sailboats were present and that its line posed a significant hazard to the users of those boats.

ANALYSIS

Standard of Review

Initially, the court notes that under Rule 56, Clark’s Motion for Summary Judgment should be granted only where there are no material issues of fact in dispute and where Clark is entitled to judgment as a matter of law. In this case, Clark admits that the mast of the sailboat was not insulated and that there was no warning attached to the mast advising of the danger posed by overhead power lines. These facts are not in dispute. Nevertheless, Clark maintains that, even given these facts, the court should hold as a matter of law that Clark was not negligent in its design of the sailboat and that the sailboat was not in an unreasonably dangerous or defective condition following manufacture. The determination of negligence or whether a product is unreasonably dangerous or defective is generally left to the trier of fact. However, where the facts are undisputed and only one conclusion may reasonably be drawn from them, these determinations become questions of law. Flying Diamond Corp. v. Pennaluna & Co., Inc., 586 F.2d 707, 713 (9th Cir.1978); Lutz v. United States, 685 F.2d 1178, 1185 (9th Cir.1982). In appropriate cases, the court must rule as a matter of law on these issues relating to negligence or product defect. The present is such a case.

Strict Products Liability

The Ninth Circuit has adopted for use in maritime tort cases the doctrine of strict products liability as expressed in the Restatement (Second) of Torts § 402-A (1965). See Pan-Alaska, Etc. v. Marine Construction & Design Co., 565 F.2d 1129 (9th Cir.1977). Section 402-A provides in pertinent part:

(1) One who sells any product in a defective condition unreasonably dangerous to the user or consumer or to his property is subject to liability for physical harm thereby caused to the ultimate user or consumer, or to his property____

PP & L alleges the San Juan sailboat was unreasonably dangerous and thereby defective based on two design characteristics of the sailboat. First, PP & L argues that the mast failed to incorporate any insulating feature designed to prevent the conduction of electricity. Second, PP & L alleges that the sailboat was unreasonably dangerous because its design did not include a warning on its mast identifying the dangers posed by overhead power lines.

Comment g to Section 402-A defines “defective condition.” That comment states:

The rule stated in this Section applies only where the product is, at the time it leaves the seller’s hands, in a condition not contemplated by the ultimate consumer, which will be unreasonably dangerous to him.

According to Comment g, a product is “defective” when it is in a condition not contemplated by the consumer which makes the product “unreasonably dangerous.” Thus, an “unreasonably dangerous” product is a “defective” product. However, a product that poses dangers in its contemplated condition may not be unreasonably dangerous. Comment i, which defines “unreasonably dangerous,” recognizes this possibility. That comment states:

The rule stated in this Section applies only where the defective condition of the product makes it unreasonably dangerous to the user or consumer____ The article sold must be dangerous to an extent beyond that which would be contemplated by the ordinary consumer who purchases it, with the ordinary knowledge common to the community as to its characteristics.

(emphasis added) Comment j recognizes that in some cases the seller may be required to give directions or warnings in order to prevent his product from being deemed “unreasonably dangerous.” However, the comment recognizes that a seller “is not required to warn with respect to products ... when the danger, or potentiality of danger, is generally known and recognized.” Where the danger posed is obvious and known objectively, a failure to warn of the dangers does not render the product defective.

A fair reading of Section 402-A and its comments reveals that open and obvious dangers inherent in some products do not necessarily make them “unreasonably dangerous.” Rather, only latent dangers, not reasonably discoverable or not contemplated by consumers, render products defective. In Coast Catamaran Corp. v. Mann, 171 Ga.App. 844, 321 S.E.2d 353 (1984), affd, 326 S.E.2d 436 (1985), the Georgia Court of Appeals was faced with a factually and theoretically similar case. That court applied Georgia’s statutes which imposed strict liability upon manufacturers who produced products unsuited for their intended use. The court interpreted the language of the statute as requiring plaintiff to establish that the product was defective when sold by the manufacturer. The Georgia court was, in essence, applying a statutory scheme substantially similar to the provisions of Section 402-A. In Coast Catamaran, the appellate court stated:

Generally, if a manufacturer does everything necessary to make the machine function properly for the purpose for which it is designed, if the machine is without any latent defect, and if its functioning creates no danger or peril that is not known to the user, then the manufacturer has satisfied the law’s demands. We have not yet reached the state where a manufacturer is under the duty of making a machine accident proof or foolproof____ [H]e is under no duty to guard against injury from a patent peril or from a source manifestly dangerous.

Id., 321 S.E.2d at 356, citing Poppell v. Waters, 126 Ga.App. 385, 387, 190 S.E.2d 815 (1972). In a similar vein, the Ninth Circuit, in applying Idaho law under Section 402-A, held:

Failure to warn results in liability only in situations where the danger is not obvious to the user, and the manufacturer has reason to believe that the danger might result from the foreseeable use of the product.

See Bryant v. Technical Research Co., 654 F.2d 1337, 1344 (9th Cir.1981).

In the present case, as in Coast Catamaran, the injuries suffered were caused by an electrical shock which was transmitted down the mast of a sailboat. The court in Coast Catamaran determined that the danger posed by the design of the sailboat and the overhead power line was open and obvious. This court concurs in that determination. Indeed, the court finds that the danger posed by the sailboat’s mast and power line was so open and obvious that reasonable minds could not conclude that this danger rendered the sailboat unreasonably dangerous or defective. It was patently obvious that the aluminum mast incorporated in the design of the boat could and would readily conduct electricity. There was nothing latent about the danger posed by the uninsulated power lines. Under these circumstances, the court must hold as a matter of law that the San Juan sailboat was not defectively designed due to its failure to incorporate insulating properties within its mast configuration. For the same reasons, the court must find that the sailboat was not unreasonably dangerous or defective due to its failure to incorporate a warning label apprising users of the dangers associated with electric power lines. A product is not unreasonably dangerous for failure to warn of open and obvious dangers.

Negligence

In this case, only semantics distinguishes the cause of action for negligence and the cause of action for strict products liability. As previously indicated, the only significant difference is that negligence focuses on the conduct of the manufacturer, while strict products liability focuses on the condition of the product. The Idaho Supreme Court recognized in Henderson v. Cominco American, Inc., 95 Idaho 690, 518 P.2d 873 (1973), that:

Whether a cause of action is based on warranty, negligence or strict products liability, the plaintiff has the burden of alleging and proving that (1) he was injured by the product, (2) the injury was the result of a defective or unsafe product, and (3) that a defect existed when the product left the control of the manufacturer.

Id. at 696, 518 P.2d 873. Under this standard, in order to establish negligence, it must be shown that Clark acted unreasonably in designing the San Juan and that these actions resulted in a defective product. The court has already determined as a matter of law that the San Juan was not defective in any way. Therefore, Clark could not have breached its duty of reasonable care in the design of the sailboat.

Public Policy Considerations

Finally, the court notes with concern the public policy that would be fostered if PP & L prevailed in its quest for contribution from Clark. It has long been established in Idaho that the highest degree of care must be exercised by those engaged in the generation and transmission of electric energy. Probart v. Idaho Power Co., 74 Idaho 119, 258 P.2d 361 (1953). Electricity is recognized as one of the most destructive agencies we have, and the highest degree of care and diligence is required by those who are operating electrical plants in order to avoid injury to person and property. Russell v. City of Idaho Falls, 78 Idaho 466, 305 P.2d 740 (1957). Sound public policy demands that PP & L, in operating its transmission lines, exercise the highest degree of care possible. If PP & L is remiss in meeting this grave responsibility, public policy prohibits an outcome which would allow PP & L to escape the total brunt of the liability and resulting economic damage. This is particularly true where PP & L .seeks contribution from an alleged joint tort-feasor whose negligence, if any, was merely passive. Assuming arguendo that some culpability did lie with Clark, though the court has found to the contrary, that culpability must be characterized as mere passive negligence. If Clark Boat Company was culpable, it was culpable of failing to discover and warn or insulate against an extremely dangerous condition created and maintained by PP & L. The fact that the danger posed by the sailboat’s design was open and obvious does not transform Clark’s hypothetical passive culpability to one of active negligence. PP & L had the better opportunity to prevent this accident. Indeed, had PP & L been exercising the highest duty of care required of it by law, the tragedy of this accident could have been completely avoided.

This outcome is not inconsistent with the court’s earlier refusal to grant the Estate’s Motion for Summary Judgment. The Estate of Steven Diehl is in a different position. Juxtaposed to Clark’s hypothetical passive culpability is the relative fault of Steven Diehl, the owner pro hac vice and skipper of the vessel. Mr. Diehl’s actions were more than passive in that he chose to skipper the excursion after dark in an area where he knew or should have known overhead high-voltage power lines were present. Though the court has found that the danger posed by overhead power lines and the design of the sailboat was open and obvious, the ability to avoid the danger thus posed was significantly reduced by Steven Diehl’s choice to sail after dark. His choice may in no way be attributed to Clark.

Finally, the court notes that nothing stated in this section in any way diminishes the court’s opinion or ruling on the issues relating to Clark’s negligence or whether the sailboat was defectively designed. The court merely wishes to add its comments and observations as they relate to what the court perceives as a fundamental public policy consideration lying, ultimately, at the heart of its jurisprudence.

CONCLUSION

Based on the foregoing, the court finds there are no material facts in dispute relating to the historical facts before the court. Rather, the only issue in dispute is whether the sailboat in question was defective or negligently designed. As indicated, normally those questions are for the trier of fact. However, in this case, the court finds that reasonable minds could not conclude that the sailboat was unreasonably dangerous or that Clark was negligent in its design of the boat. Based upon this conclusion, the court must, as a matter of law, enter judgment for Clark.

The court notes that PP & L has not alleged any contribution based on the theory that the San Juan was not “crashworthy.” Since PP & L has not asserted this theory of recovery, the court will not reach the merits of this theory, if any. The court being fully advised in the premises,

IT IS HEREBY ORDERED that Clark’s Motion for Summary Judgment should be, and hereby is, GRANTED IN ALL RESPECTS.

IT IS FURTHER ORDERED that PP & L’s Complaint for contribution from Clark should be, and hereby is, DISMISSED.


author: JOE J. FISHER, District Judge.

text:
    Jim AUSTIN and Aulemic, Inc. v. SERVAC SHIPPING LINE, LTD., Hassan A. Gaafar, Individually and Lexington Insurance Company.
    Civ. A. No. B-83-436-CA.
    United States District Court, E.D. Texas, Beaumont Division.
    June 6, 1985.

      David S. Prince, Wayne Adams, Lorance & Thompson, William A. Durham, East-ham, Watson, Dale & Forney, Houston, Tex., for plaintiffs.
    Daniel V. Flatten, Mehaffy, Weber, Keith & Gonsoulin, Beaumont, Tex., Joel L. Hodes, Jonathan P. Nye, Whiteman, Osterman & Hanna, Albany, N.Y., for defendants, Servac Shipping Line, Ltd. and Hassan Gaafar.
    H.S. Morgan, Jr., Richard L. Lagarde, Vinson & Elkins, Houston, Tex., for defendant, Lexington Ins. Co.
   MEMORANDUM OPINION

JOE J. FISHER, District Judge.

Plaintiffs, JIM AUSTIN and AULEMIC, INC., brought this admiralty suit against LEXINGTON INSURANCE COMPANY to recover for the loss of their vessel, the M/V Amazon Trader, which was insured under an American Institute Time Hull Policy issued by Lexington. Plaintiffs also sought statutory penalties for unfair claims handling practices in violation of TEX.INS.CODE ANN. art. 21.21 (Vernon 1981).

Plaintiffs sued SERVAC SHIPPING LINE, LTD. and HASSAN A. GAAFAR, Individually, to recover for the breach of a charter party for the M/V Amazon Trader. Servac Shipping Line, Ltd. counterclaimed against Jim Austin, individually, for breach of the same agreement.

Both the charter party and insurance policy are maritime contracts within the admiralty jurisdiction of the Court. Because the charter and insurance contracts were both Texas contracts which were to be performed in whole or in part by the parties in Texas, the Court has in personam jurisdiction of the Defendants. Lexington’s policy of insurance was issued to and is payable to Plaintiffs in Beaumont, Texas. The policy was, therefore, a Texas contract per Tex.Insur.Code Ann. art. 21.42 (Vernon 1981). The charter party was received and signed by Austin in Beaumont, Texas. Under the charter, Austin paid the monthly mortgage payments on the vessel to the Parkdale Bank in Beaumont. Servac was required to and Gaafar did report to Austin in Beaumont on the vessel’s performance and made an offer for a long-term charter. The Court concludes that the Defendants were “doing business” in the state of Texas, within the meaning of art. 2031b, Tex.Rev.Civ.Stat.Ann. (Vernon 1964 and Supp. 1985).

The parties tried the ease to the Court, sitting in admiralty. The Court heard the testimony of nineteen (19) witnesses, both live and by deposition. In addition, all parties submitted extensive pre-trial and post-trial briefs.

After careful review of the evidence, the Court finds and concludes that at all material times prior to June 16, 1982, the M/V Amazon Trader was seaworthy and reasonably fit for its intended use; that the damage to the vessel was caused by the negligence of the master and crew, which peril was insured under the insurance policy; and that Lexington Insurance Company has engaged in “unfair and deceptive acts or practices” in the handling of Plaintiffs’ claims in violation of TEX.INS.CODE ANN. art. 21.21. Consequently, judgment will be entered for Plaintiffs against Lexington Insurance Company.

The Court further concludes that Plaintiffs should take nothing by reason of their suit against Servac Shipping Line, Ltd. and Hassan A. Gaafar, and that Servac Shipping Line, Ltd. take nothing by reason of its counterclaim against Jim Austin.

A. THE VESSEL

Jim Austin is the sole owner of Aulemic, Inc., a Cayman corporation having its principal place of business in Beaumont, Texas. Aulemic, Inc. bought the M/V Amazon Trader in December 1981. Aulemic had the vessel surveyed and refurbished, spending in excess of $200,000 to make it fit for transoceanic refrigerated cargo voyages. Extensive surveys by at least three marine surveyors found the vessel fit for duty and it was so certified. Among other things, the surveyors inspected certain of the devices which later failed at sea from misuse.

B. THE CHARTER PARTY

In early May 1982, Hassan Gaafar, President of Servac, contacted Austin at his residence in Beaumont, Texas for the purpose of chartering the vessel to carry frozen cargo to Alexandria, Egypt from Tampa, Florida. Austin and Gaafar agreed to enter into a charter party and on June 2, 1982, Austin, on behalf of Aulemic, received and signed in Beaumont a charter party with Servac. Performance of the parties’ obligations under the charter agreement was guaranteed by both Austin and Gaafar in their individual capacities.

In that charter party, Austin did not charge a freight rate or hire for use of the vessel. Instead, Austin entered the charter party so Servac could evaluate the vessel in anticipation of entering into a long-term charter. Under the charter party, Servac agreed to pay all expenses of the vessel during the charter from June 1st until the vessel returned to Tampa.

C. THE INSURANCE POLICY

Plaintiffs’ insurance broker, Frank B. Hall & Co. of Florida, placed hull insurance on the Amazon Trader on February 10, 1982 with Lexington Insurance Company. Lexington’s policy of marine insurance was issued to Plaintiffs in Texas on July 1, 1982. Lexington insured Plaintiffs’ vessel in the amount of $1,000,000 against loss and damage for the period from February 10, 1982 to February 10, 1983. Lexington had been instructed to name James D. Austin, the principal of Aulemic, Inc., as an additional insured and Parkdale Bank of Beaumont as mortgagee.

D. THE VOYAGE

On June 13, 1982, the Amazon Trader sailed from Tampa, with a master and crew hired by Austin, on a round-trip voyage to Alexandria, Egypt carrying the cargo of Servac: many tons of frozen turkeys. The captain, David • Ashbee, was . qualified to serve as master of the vessel. His nine crewmen were qualified in their jobs and the Amazon Trader was properly manned, equipped and supplied and reasonably fit for the voyage to Alexandria, Egypt.

Three days out of Tampa the captain stopped the vessel’s engine to repair a slipping clutch. The vessel was then located approximately 70 to 80 miles off the east coast of Florida and within its trading warranty. The chief engineer gave the Captain two options: Either call a seatug to take her back to port for proper repairs, or weld the clutch into a solid unit.

Captain Ashbee made a serious error in judgment by ordering the chief engineer to weld the clutch into a solid unit without first consulting the owner. The welding of the clutch caused a misalignment of the vessel’s main engine power train. The continued operation of the vessel in that condition resulted in extensive damage to the vessel’s main engine, clutch, thrust-bearing and tail shaft. In addition to the mechanical problems noted above, the vessel suffered a fire and its generators were damaged by contaminated fuel.

Ashbee knew the repairs to the clutch were temporary and that the chief engineer recommended proper repairs in the next available port. But he continued on to Alexandria because the Charterer’s agent advised him “to continue to Egypt and in Egypt we’d have all the’ major repairs corrected when you discharge the cargo.” Moreover, Gaafar gave Ashbee an arrival deadline before the vessel left Florida. The vessel arrived in Alexandria on July 15 and discharged its cargo.

Prior to the vessel’s arrival in Alexandria, Plaintiffs received, in Beaumont, Servac’s favorable evaluation of the vessel’s performance and an offer for a long-term 30 month charter. Under this proposed charter party, Plaintiffs were to realize at least $13,000 a month clear net profit for the 30 months of the charter, resulting in at least $390,000 profit from the long-term charter of the vessel to Servac.

Before addressing the dispute with Lexington, the Court will dispose of the cross claims of Austin and Gaafar and of their companies. Both Austin and Gaafar allege breaches of their charter party agreement by the other’s company. The Court concludes that it was the intention of the parties that Servac pay all expenses, including repairs to the vessel, incurred in shipping its product to Egypt. That was simply the consideration for using the vessel.

Because Servac actually paid the expenses of the vessel during the charter, the Court concludes that Gaafar and Servac did not breach the charter party.

Servac’s allegations that Plaintiffs failed to exercise due diligence and breached the implied warranty of seaworthiness are without merit. The damages Servac seeks from Austin in its counterclaim, by the admission of Servac’s President, Gaafar, are either related to an earlier charter party for which Servac indemnified Aulemic or are expenses incurred in operating the vessel.

Maritime law permits parties to assume liabilities in contracts as they choose. J.B. Effenson Co. v. Three Bays Corporation, Ltd., 238 F.2d 611 (5th Cir.1956). The Court concludes that Servac’s position is contrary to the plain reading of the contract and to Servac’s earlier course of action. Accordingly, the Court holds there was no breach by Austin.

E. THE DAMAGE CLAIMS AND DENIALS

The balance of the lawsuit concerns the refusals of Lexington to pay claims under the marine insurance policy and its liability to Austin for its failure to pay claims.

1. THE AUGUST 1982 DAMAGE CLAIM AND DENIAL

On August 3, 1982, Austin reported to Frank B. Hall & Co. two claims for main engine damage and a fire which occurred on the vessel while en route from Florida to Egypt. Frank B. Hall & Co. immediately notified Lexington of the two claims under the policy. The policy contained a trading warranty which insured the vessel only while within the Western Hemisphere. Lexington refused to pay, insisting that Aulemic breached that warranty and thereby voided the coverage.

The Court finds that all the damage to the Amazon Trader occurred in the Western Hemisphere and within the vessel’s trading warranty. The Court further finds that Lexington failed to conduct a reasonable investigation under the circumstances and summarily denied both claims on August 4, 1982. Frank B. Hall & Co. advised Lexington on August 5, 1982 that the main engine damage occurred within the vessel’s trading warranty, as stated in the policy, but Lexington continued to deny coverage and closed both claims files on August 23, 1982.

Among other perils insured by Lexington in the policy were those contained in the “Inchmaree” clause, which provides in part: “Subject to the conditions of this policy, this insurance also covers loss of or damage to the vessel directly caused by the following: Negligence of Masters, Officers, Crew or Pilots, provided such loss or damage has not resulted from want of due diligence by the Assured, the Owners or Managers of the vessel, or any of them.” The Court finds and concludes that the damage to the Amazon Trader fell within the Inchmaree Clause of the insurance policy issued by Lexington.

2. THE OCTOBER 1982 DAMAGE CLAIM AND DENIAL

While in port in Alexandria, the Amazon Trader underwent repairs to a rear shaft bearing. Captain Ashbee knew the repairs were only temporary and that the vessel required major repairs to the main engine, clutch, thrust-bearing, tail-shaft and generators. In September, 1982, the vessel was moved to Malaga, Spain for complete repairs. Frank B. Hall & Co. again notified Lexington of Plaintiffs’ claims. In October, 1982, Austin inspected the vessel with the owners of two similar vessels. The vessel owners estimated the reasonable cost of repairs to be $400,000. Frank B. Hall & Co. made demand in that amount on Lexington. Lexington continued to deny Plaintiffs’ claims and failed to provide Plaintiffs a reasonable explanation of the basis in the policy, in law, or in fact for the denial of the claims.

3. THE FEBRUARY 1983 SURVEY AND DENIAL

In January, 1983, Plaintiffs employed a marine surveyor, Percy Overman, to conduct a damage survey. In his damage survey report, Overman concluded that the reasonable cost of repairs to the Amazon Trader was $373,600. Lexington’s survey- or from the Salvage Association, John Riley, initially agreed the damage was caused by crew negligence and so stated in his survey report dated February 9, 1983. Despite this information, Lexington continued to deny Plaintiffs’ claims and refused to approve a shipyard for repairs. In late February, 1983,. Lexington was advised that because Plaintiffs’ claims were being denied, Plaintiffs would be forced to sell the vessel in its distressed condition. Plaintiffs sold the Amazon Trader, unrepaired, on April 12, 1983 for $30,000 in mitigation of their damage.

As a result of Lexington’s failure to conduct a reasonable investigation and to properly and fairly handle the claims, Plaintiffs incurred $109,748.88 in expense for crew wages, port expenses, agents, inspections and costs while seeking repair approval from Lexington and prior to the sale of the vessel. In addition, Plaintiffs sustained $390,000 lost profits on the long-term 30 month charter of the vessel to Servac. The Court finds that Plaintiffs would have earned these profits, had Lexington authorized and paid for the necessary repairs on a timely basis.

F. COVERAGE UNDER THE POLICY

Lexington denies coverage of the Amazon Trader, claiming the vessel was unseaworthy at the attachment of the policy and upon its departure from Key West and Tampa because Plaintiffs failed to exercise due diligence to prepare the vessel; because the master and crew were unqualified; and because Plaintiffs misrepresented the nature of the risk insured.

The law presumes that every vessel is seaworthy until the contrary is proved, and the burden of proving that a vessel is unseaworthy lies upon the insurance company. Hanover Fire Insurance Company v. Holcombe, 223 F.2d 844 (5th Cir.1955).

A shipowner’s obligation under a hull policy is extremely limited. The vessel must be seaworthy at the attachment of the insurance, but henceforth, the seaworthiness obligation is a sort of negative warranty, i.e. the owner or those in privity with him must not fail to exercise due diligence and send the vessel to sea in a deficient condition. Tropical Marine Products, Inc. v. Burmingham Fire Insurance Company, 247 F.2d 116 (5th Cir.1957), cert. denied, 355 U.S. 903, 78 S.Ct. 331, 2 L.Ed.2d 260 (1957).

A shipowner’s warranty of seaworthiness is not. that a vessel shall continue absolutely to be kept in a seaworthy condition, or even that she be so at the inception of each voyage or before departure from each port during the policy term. Saskatchewan Government Insurance Office v. Spotpack, Inc., 242 F.2d 385 (5th Cir. 1957).

Although the Inchmaree Clause of a hull policy refers to “due diligence” of the owner to keep the vessel seaworthy, it was not intended as a restriction of coverage, but was intended to broaden coverage in response to the practical business needs of the shipping world in the face of adverse court decisions. Id. at 391. Tropical Marine Products, Inc. v. Burmingham Fire Insurance Company, 247 F.2d at 122 (5th Cir.1957). An Inchmaree Clause does in fact underwrite unseaworthiness of many types, such as that occasioned by the negligence of the master or that resulting from a latent defect in hull or machinery. Id. at 123.

The Court concludes that Plaintiffs exercised due diligence and that the Amazon Trader was in a seaworthy condition and reasonably fit for its intended use at all material times prior to June 16, 1982. The vessel was properly manned with a qualified master and crew. Contrary to Lexington’s allegation that the nature of the risk was misrepresented, the Court concludes that Lexington knew who and what it was insuring. Lexington has failed to sustain its burden on any contention to vitiate coverage. The Court finds therefore that the policy was in effect and provided coverage for the loss under the Inchmaree Clause. The damage to the Amazon Trader occurred in the Western Hemisphere and within the vessel’s trading warranty. Plaintiffs are entitled to recover for all damage sustained by the vessel as a result of the master’s and crew’s negligence.

G. APPLICATION OF TEXAS LAW

The Supreme Court has ruled that state law should be applied in the field of marine insurance, at least where entrenched Federal precedent is lacking, with respect to a specific issue. Wilburn Boat Company v. Fireman’s Fund Insurance Company, 348 U.S. 310, 75 S.Ct. 368, 99 L.Ed. 337 (1962). As a Texas contract, the insurance policy is governed by Texas law, including all pertinent provisions of the Texas Insurance Code. Article 21.21, sec. 16 of the Code provides that a cause of action for treble damages may be brought by any person who has been “injured” by another’s acts and conduct amounting to “unfair and deceptive acts or practices” in the business of insurance as declared in the lawfully promulgated rules and regulations of the State Board of Insurance. Royal Globe Insurance Co. v. Bar Consultants, 577 S.W.2d 688 (Tex.1979).

Plaintiffs sought relief under Sec. 16 of art. 21.21 for violations of Insurance Board Order 41060 Sec. .003 and .003(b) and argued that Lexington “engaged in unfair and deceptive acts or practices” in the handling of its claims, in violation of See. 3(i) and 3(o) of Insurance Board Order 27085. Plaintiffs also argued that Lexington violated Insurance Board Order 41060 Sec. .004(4).

The Texas State Board of Insurance previously adopted Board orders which prohibited, inter alia, misrepresentation of an insurance policy and unfair claim settlement practices, the latter including failure to reasonably explain a claim’s denial and refusal to pay claims absent a reasonable investigation. Board Orders 41060 (July 22, 1982), 27085 (May 17, 1974).

The Court concludes that Lexington has violated Insurance Board Order 41060 Sec. .003 by committing “unfair and deceptive acts or practices” in violation of Sec. 3(i) and 3(o) of Insurance Board Order 27085. Lexington’s wrongful denial of Plaintiffs’ claims on August 4, 1982 and thereafter was based its failure to conduct a reasonable investigation. Lexington knew or could have learned that the loss occurred in the Western Hemisphere and within the confines of the vessel’s trading warranty, yet persistently insisted there had been a breach of that warranty which voided coverage. Lexington has also violated Insurance Board Order 41060 Sec. .003 by its misrepresentation of the insurance policy, which amounts to “unfair and deceptive acts or practices” in the business of insurance. The Court further concludes that Lexington has violated Insurance Board Order 41060 Sec. .004(4). Plaintiffs have been “injured” by Lexington’s egregious conduct and are entitled to recover damages resulting from Lexington’s violations of art. 21.21 Sec. 16 and the above-noted rules and regulations of the Texas State Board of Insurance.

Having determined that there was coverage for the loss and that Lexington has violated TEX.INS.CODE ANN. art. 21.-21, the Court must now ascertain Plaintiffs’ damages. It was undisputed that if repairs had been carried out in Malaga, Spain on the Amazon Trader, the sound market value of the vessel would have been $480,000. The vessel was sold unrepaired for $30,000 less Plaintiffs’ survey cost of $9,578 resulting in a depreciation in value of $459,758. The testimony of Plaintiffs’ surveyor, Percy Overman, established the reasonable value of repairs was $373,600. The Court concludes that Plaintiffs are entitled to recover $373,600 minus the policy deductible of $12,500, for a total of $361,-100. Plaintiffs are also entitled to the return of unearned layup premiums of $6,492 for the four consecutive 30 day periods the vessel was in Malaga not under repair. Plaintiffs are therefore entitled to recover the sum of $367,592 under the policy, with prejudgment interest on this sum from the date of the denial of Plaintiffs’ loss, August 4, 1982.

Plaintiffs’ actual damages caused by Lexington’s violations of TEX.INS.CODE ANN. art. 21.21, however, go beyond the mere costs of repairing the vessel, owed under the policy. As a direct result of Lexington’s “unfair and deceptive acts or practices” in the handling of their claims, Plaintiffs incurred $109,749 in expenses for crew wages, port expenses, agents, inspections and costs while seeking repair approval and in the sale of the vessel. Moreover, Plaintiffs undisputably lost $390,000 by being unable to contract for the long-term charter of the vessel to Servac. That loss of profit was proximately caused by Lexington’s violations of Article 21.21. To the above amounts must be added the costs of repair payable under the policy: $361,100.

The Court finds that Plaintiffs’ actual damages caused by Lexington’s violations of the Insurance Code total $860,849. Plaintiffs are entitled to receive, the Court concludes, punitive damages three times that amount: $2,582,547. Plaintiffs may also recover reasonable attorneys’ fees and costs of court.

CONCLUSION

In summary, the Court concludes that there was coverage under the policy for the damage to Plaintiffs’ vessel and that Plaintiffs are entitled to recover the reasonable cost of repairs and statutory penalties caused by Lexington’s violation of TEX. INS.CODE ANN. art. 21.21. It is therefore

ORDERED, ADJUDGED and DECREED that judgment be entered for Plaintiffs, JIM AUSTIN and AULEMIC, INC., against Defendant, LEXINGTON INSURANCE COMPANY, in the sum of $367,592 for amounts owed under the insurance policy, plus prejudgment interest of ten percent (10%) of said sum, accruing from August 4, 1982; and $2,582,547 in punitive damages for Lexington’s violations of TEX.INS.CODE ANN. art. 21.21. Plaintiffs shall also recover reasonable attorney’s fees and costs of court. The parties will be expected to stipulate the amount of attorney’s fees, but not that said attorney’s fees are recoverable, and advise the Court within fifteen (15) days from the date of entering of this Memorandum Opinion. If the parties cannot agree, the Court will determine the amount. Interest on the judgment shall accrue at the rate of 9.15% from this date until paid in full.

It is further ORDERED, ADJUDGED and DECREED that Plaintiffs JIM AUSTIN and AULEMIC, INC. recover nothing against the Defendants, HASSAN A. GAA-FAR, individually, and SERYAC SHIPPING LINE, LTD., and that Defendant SERYAC SHIPPING LINE, LTD. recover nothing against Plaintiff JIM AUSTIN, individually.