author: MURRAY M. SCHWARTZ, Chief Judge.

text:
    Warren V. HOPKINS, Plaintiff, v. The CITY OF WILMINGTON, et al., Defendants.
    Civ. A. No. 82-677 MMS.
    United States District Court, D. Delaware.
    Aug. 20, 1985.

      Sheldon N. Sandler, Young, Conaway, Stargatt & Taylor, Wilmington, Del., for plaintiff.
    Jeffrey S. Goddess, Saul, Ewing, Remick & Saul, Wilmington, Del., for defendants.
   MEMORANDUM OPINION

MURRAY M. SCHWARTZ, Chief Judge.

Plaintiff Warren A. Hopkins has brought this civil rights action under 42 U.S.C. § 1983 challenging his dismissal from the Wilmington Police Department (“the Department”). Defendants are the City of Wilmington and three Police Department employees—John Johnson, George Lam-born, and Dennis Regan. All are sued in their individual and official capacities.

The seeds for this action were sown on March 26, 1982, when Hopkins was arrested on drug charges and immediately suspended without pay from his position as sergeant on the police force. After an administrative hearing and appeal, the Department concluded that Hopkins had violated the police conduct code and that termination from the Department was in order. Hopkins thereafter filed this action for injunctive, declaratory, and monetary relief on the ground that his suspension and dismissal were effectuated in violation of his constitutional rights.

Several of the issues raised in plaintiff’s complaint were previously disposed of on cross motions for summary judgment. Specifically, the Court found that the police department conduct regulation under which Hopkins was charged was not unconstitutionally vague. The Court determined, however, that Hopkins was suspended from the force without proper notice and a timely hearing in violation of his right to procedural due process. The Court also decided that the Department tribunal which ordered Hopkins’ dismissal mistakenly acted upon information not presented at his hearing, thus depriving Hopkins of his right to a hearing before a fair and impartial decision maker. Hopkins v. Mayor & Council of Wilmington, 600 F.Supp. 542 (D.Del.1984). That decision shifted to defendant the burden of establishing at trial whether an impartial police tribunal would have found Hopkins guilty of the internal charges against him and whether the penalty of dismissal would have been imposed. Resolution of Hopkins’ substantive due process and equal protection claims was reserved for trial along with questions of defendants’ official immunity and the damages due Hopkins for the violations of his procedural rights. These issues were tried to the Court from March 11-14, 1985, and post-trial briefing followed. This Opinion constitutes the Court’s findings of fact and conclusions of law as required by Rule 52 of the Federal Rules of Civil Procedure.

I. Background Facts

Plaintiff began his employment with the Wilmington Police Department on November 14, 1966 and was promoted to sergeant in 1972. At the time of his discharge on June 29, 1982, he was assigned to the Detective Division of the Department.

In September, 1981, Hopkins began dating a woman named Nancy Carter. Sometime thereafter, Hopkins’ colleague, Charles Warrick, informed Hopkins of rumors that Carter was involved with drugs. Hopkins denied both his and Carter’s drug involvement and continued his relationship with Carter.

About the same time, the Department was investigating Hopkins and Carter for possible drug violations. As a result of that investigation, a warrant was issued to search Carter’s residence at 2319 N. Pine Street, Wilmington, Delaware. The warrant was executed early in the morning of March 26, 1982, after police first made certain Hopkins was at the residence with Carter. The police went upstairs to the room where the couple was sleeping and found in plain view an ashtray containing a burnt marijuana cigarette or “roach” and a shoe box lid holding a bag of marijuana and some rolling papers. Also discovered in various places in the room were a vase holding 261 roaches, a mirror with a small quantity of white powder later determined to have come from Carter’s diet pills, and some related drug paraphernalia. Hopkins and Carter were arrested and charged with possession with intent to deliver controlled substances—marijuana and amphetamines. The charges against Hopkins were later reduced to simple possession and eventually a nolle prosequi was entered on that charge.

At approximately 9:30 a.m. on the morning of Hopkins’ arrest, Captain George Lamborn, acting under orders of Inspector Johnson, suspended Hopkins without pay pending an administrative hearing. Hopkins was neither advised of the internal charges against him nor given an opportunity to explain his side of the story.

On April 20, 1982, twenty-five days after his suspension, Hopkins received written notification that he had been charged with violation of Rule 201, the general conduct provision of the Bureau of Police Rules and Regulations. The charge stated:

[O]n 26 March 1982, members of Wilmington Dept. of Police Vice Unit executed a search warrant on the premises of 2319 N. Pine St. While conducting the search of the premises Sgt. Warren Hopkins, (off duty) along with Nancy Carter was observed in a second floor bedroom in possession of a quantity of marijuana. Such conduct being prejudicial to the good order and best interests of the Department of Police as well as in violation of Title 16 Section 4754 of the Del.Crim.Code.

A hearing was scheduled for April 28,1982, but was postponed at the request of Hopkins’ attorney until May 13,1982. After an additional postponement to May 25, an evidentiary hearing was held before a Department Complaint Hearing Board (“the Board”). The Board was composed of Simon Edwards, Joseph Pennell and Stanley Friedman, all originally named, but subsequently dismissed, as defendants in this lawsuit. The Board was empowered to make a recommendation, based on the evidence presented at the hearing, as to whether Hopkins had committed the offenses charged and, if so, what penalty was appropriate. At the close of the hearing, the Board concluded Hopkins had violated the conduct code and recommended that he be dismissed from the Department.

Shortly thereafter, Hopkins was given an opportunity to present his position to a three member “appeal” panel composed of Dennis Regan, then Chief of Police, Randolph De Campli, then Vice President of the Fraternal Order of Police, and Albert Carter, Deputy Director of Personnel. The panel was authorized under Department rules to make a final determination of Hopkins’ fate in the Department. The panel failed, however, to review the tape or a transcript of the evidence presented to the Board. Moreover, as this Court observed on summary judgment, Chief Regan evaluated Hopkins’ presentation under the misconception that the Complaint Hearing Board had concluded Hopkins was selling and using drugs. Given this misapprehension, the Court held that the appeal panel did not comport with the level of fairness demanded by the Constitution and ordered that a trial be conducted to determine whether an appeal panel not operating under a misconception would nevertheless have reached the same conclusion. Hopkins v. Mayor & Council of Wilmington, 600 F.Supp. at 553, 555.

II. The Issues Presented

The Constitution generally requires that before a permanent public employee may be terminated from his or her position, some type of hearing must be held. Cleveland Board of Education v. Loudermill, — U.S. —, 105 S.Ct. 1487, 84 L.Ed.2d 494 (1985). When the responsibility for conducting the hearing is delegated to someone other than the actual decision maker, there must be “some assurance that the information tendered [at the evidentiary hearing] was before the decision-maker in some form prior to the decision.” Hawkins v. Board of Public Education, 468 F.Supp. 201, 210 (D.Del.1979); cf. Guerrero v. State of New Jersey, 643 F.2d 148 (3d Cir.1981) (per curiam) (administrative decision maker may render final decision based upon delegated official’s finding of facts and conclusions of law, coupled with plaintiff’s written objections and oral argument). With this principle in mind, trial of this matter began with the playing of the tapes of Hopkins’ evidentiary hearing. The information contained in these tapes, together with the tangible evidence introduced during the administrative proceedings, provide the basis for the Court to determine whether the outcome of Hopkins’ case would have been the same had proper procedural safeguards been employed.

A. Evidence of the Conduct Violation

Hopkins maintains that the uncontroverted evidence presented at his hearing establishes that he was neither personally involved with drugs nor aware of Nancy Carter’s marijuana use or possession. He contends that but for the flaws in the Police Department procedures, he would not have been found guilty of the internal charges against him in the face of testimony absolving him of any wrongdoing. Hopkins’ argument assumes that the testimony presented in his favor was worthy of the decision maker’s belief. To the contrary, the Court finds that an impartial decision maker would reject Hopkins' explanation as untrue and find his witnesses lacking credibility.

At the hearing, Hopkins testified he was confident Nancy Carter was not engaging in unlawful drug activity because he was with her “constantly” during his off-duty hours. Given the extent of their time together, it is unreasonable to believe that Hopkins, a veteran police officer, would be unaware of Carter’s five “joint” per day marijuana habit. Certainly Hopkins would have recognized that Carter was often “high” and would have detected the smell of marijuana smoke in his midst. Indeed, one would have expected Hopkins to be particularly sensitive to these signs of Carter’s drug use in light of his knowledge of Carter’s prior relationship with a neighborhood drug dealer, and given the warning Hopkins received from his friend, Charles Warrick, concerning Carter’s continued involvement with drugs.

Hopkins’ proclaimed ignorance of the drugs in Nancy Carter’s room is belied by the existence of marijuana in plain view. Carter’s attempt to explain the presence of the marijuana is unconvincing. According to Carter, she and Hopkins were asleep when her sister Shirley awakened her in the early morning and asked her to share a joint. Carter obliged, and the two allegedly smoked the drug in Shirley’s bedroom. Carter then returned with the marijuana roach in an ashtray, purportedly intending to rejoin her sister for a second joint after she made certain Hopkins was asleep. Instead, she set the ashtray on the floor next to Hopkins’ side of the bed and unwittingly dozed. She also left a shoe box lid with a quantity of marijuana and rolling papers in plain sight on a shelf next to the bed. Ordinarily, Carter stated, these items were hidden under the bed, out of Hopkins’ sight. But on that morning, when the police entered the room, the ashtray and the box top were still where she had left them—in plain view next to where Hopkins was sleeping. Such careless conduct on the part of Carter is hardly consistent with her claim that she took great pains to prevent Hopkins from learning of her marijuana use and appears to be a poor attempt to refute the obvious inference that there was no need to hide the drugs because Hopkins was aware of their presence.

The substantive weakness of Hopkins’ defense was exacerbated by the absence of conviction among the witnesses who testified on his behalf. Their overall lack of veracity was most apparent when they were questioned about the frequency of Hopkins’ visits to the Carter residence. Both Nancy and Shirley Carter testified that Hopkins spent the night there no more than once or twice per week. When Shirley was asked why she had previously stated Hopkins spent three or four nights per week at the Carter home, she replied that the earlier statement must have been a lie. Similarly, Nancy Carter was unable to explain where Hopkins stayed when he did not sleep at her house and could only respond that Hopkins stayed “everywhere.”

Hopkins himself averred that when he was not sleeping at Nancy’s he stayed “here and there”—with his grandmother, his ex-wife, his former girlfriends and his co-worker, Charles Warrick. Warrick testified, however, that although Hopkins had keys to his house, he had seen Hopkins there perhaps four or five times during the six months preceding Hopkins’ arrest, that after January, 1982, his house had no furniture in it, and that if he wanted to find Hopkins he would look for him at Carter’s residence. Finally, Hopkins’ claim that he stayed with his ex-wife and past girlfriends contradicts his contention that he and Nancy were together constantly.

In short, one is left with the clear impression that the testimony presented at Hopkins’ hearing was little more than a series of lies and half-truths. It follows, then, that in the absence of a plausible defense, the members of an impartial Department tribunal would draw the obvious conclusion that Hopkins knew of the drugs in his presence and failed to act, in light of that knowledge, in a manner befitting a police officer.

B. The Appropriate Penalty

Plaintiff argues that even if an impartial tribunal would have found him in violation of the police conduct code, it would not have ordered him dismissed from the force. Hopkins contends he was dismissed only because the panel that reviewed his case erroneously believed he had been selling and using drugs. He submits that based on his years of service on the force and his passive role in the events which precipitated his arrest, an impartial decision maker would have imposed a more lenient penalty. The Department argues, however, that drug offenses always require dismissal without regard for the degree of involvement or length of service of the employee.

At trial, both parties introduced evidence of the treatment afforded other officers who had violated the conduct code. This evidence provides only a rudimentary basis for comparison since the Department presented no evidence of a case on all fours with Hopkins’ circumstances. To the extent that the evidence admits of some generalization, two patterns emerge. First, at least in non-drug related cases, the Department has weighed longevity of service in the officer’s favor in assessing a penalty for a conduct code infraction. No case was proffered where an officer with more than seven years of service was severed from the force unless he was permitted to retire on pension based on years of service or disability. In contrast, a number of junior officers were discharged for a range of offenses.

Second, in every case where drugs were involved, the officer was either forced to resign or terminated from the police force. However, none of the drug-related cases involved an officer with more than six years of service. Hopkins’ case is unique in that it involves a relatively minor drug offense committed by a long-term employee.

Other testimony elicited at trial is indicative of how Hopkins would have been treated by an impartial Department decision maker. The evidence establishes that members of the Department generally perceived drug offenses to be more serious than other offenses and understood that the former warranted dismissal from the Department irrespective of length of service. The most telling evidence of this fact comes from Hopkins’ own testimony. On cross-examination, Hopkins was asked whether he knew he would lose his job if he was found in possession of marijuana. He responded, “Yes, if it were my marijuana and I possessed and knowed [sic] it was there, then I would have expected I would have lost my job.” Hopkins testified further that he knew he could be fired for possession of marijuana, even in the absence of witnesses establishing he had the drug on his person.

Similarly, Officer Hickman, the Commanding Officer of the Internal Affairs Division, which coordinates and supervises internal disciplinary matters, testified he was virtually certain an officer would be fired for any involvement with drugs, be it use, possession, or sale. Hickman explained that a drug offense was considered more serious than other conduct code violations because it not only involved unlawful conduct, but necessarily required at least one other individual to facilitate the illegal activity. Moreover, Hickman believed an officer engaging in any type of drug activity was exposed to a “different element” of people and compromised his or her ability to perform police duties.

Inspector Friedman and Captain* Pennell, both of whom served on the Complaint Hearing Board, expressed similar views. According to their testimony at trial, they believed that if either charge against Hopkins was substantiated, they would have no choice but to recommend his dismissal. Their testimony, as well as the testimony of Hopkins and Hickman, is consistent with the Department’s unblemished history of terminating employees who were found to be in any way involved with drugs.

In sum, the evidence as a whole compels the conclusion that Hopkins would have been discharged even if proper procedures had been followed.

C. Equal Protection and Substantive Due Process

Hopkins contends that his dismissal from the Department violates his right to equal protection of the laws and substantive due process. He argues that the Department is required under the Constitution to treat those similarly situated equally. Hopkins maintains that he must be compared to other long-term employees disciplined for conduct code violations and not to other more junior employees discharged for substantially more significant drug activity. .Since the Department has never dismissed an employee in the former group, Hopkins urges that his dismissal constitutes a denial of equal protection and substantive due process.

While Hopkins is correct in his assertion that those similarly situated must be treated equally, the Constitution does not require that they be treated identically. Zeigler v. Jackson, 638 F.2d 776 (5th Cir. 1981). So long as the distinction is not based upon a suspect classification and does not affect a fundamental right, it is only necessary that the difference in treatment be fair, not arbitrary, and be predicated on some rational purpose. See Lewis v. Delaware State College, 455 F.Supp. 239 (D.Del.1978); see also Massachusetts Board of Retirement v. Murgia, 427 U.S. 307, 312, 96 S.Ct. 2562, 2566, 49 L.Ed.2d 520 (1976) (no fundamental right to government employment).

In this case, defendants have shown that the Department has assessed penalties for conduct violations based on a variety of factors including years of service and the nature and severity of the offense. Members of the Department have explained that drug offenses warrant dismissal from the force, irrespective of an officer’s seniority. Plaintiff can point to no case where an officer charged or convicted of a drug offense has received more moderate treatment. His assumption that he has been treated differently from others “similarly situated” is therefore questionable.

Even if plaintiff is compared to other senior officers, rather than to other drug offenders, it cannot be said that the distinction in treatment lacks a rational relationship to effective Department operations. The imposition of varying punishments for varying offenses requires a value judgment that this Court is not at liberty to make. As defendants’ witness noted in his testimony, possession of drugs almost inevitably involves at least one other individual and means that the officer has ignored the criminal conduct of another. Given these distinctions between drug-related violations and other infractions of the conduct code, it is apparent that the Department’s policy to dismiss all drug offenders, regardless of years of service or the severity of the particular drug offense, bears a rational relationship to the legitimate objective of maintaining a competent, law-abiding police force. It follows that Hopkins’ dismissal violates neither his right to equal protection nor his right to substantive due process.

D. Official Immunity

On summary judgment, plaintiff prevailed on his claim that his right to procedural due process was violated, both because his suspension without pay was effectuated without notice of the charges against him or a timely hearing, and because the hearing which he finally received was constitutionally deficient. Before the Court may address plaintiff’s claim for damages for these procedural infractions, it must first consider whether any of the individual defendants are immune from liability.

Under the standard articulated by the Supreme Court in Harlow v. Fitzgerald, 457 U.S. 800, 102 S.Ct. 2727, 73 L.Ed.2d 396 (1982), “government officials performing discretionary functions, generally are shielded from liability for civil damages insofar as their conduct does not violate clearly established statutory or constitutional rights of which a reasonable person would have known.” Id. at 818, 102 S.Ct. at 2738. That standard requires the Court to delve separately into the procedural violations that occurred.

First, Hopkins was suspended without pay immediately after his arrest on drug charges. His suspension, and ultimately his dismissal, were based on the fact that his conduct was in violation of the police conduct code, yet notification of that fact was not offered until some three and one-half weeks after his suspension. Moreover, an opportunity for Hopkins to air his side of the story did not arise until May 25, 1982. By that time, Hopkins had been without salary for two months.

The Court finds that the Department’s handling of the matter violated Hopkins' clearly established constitutional rights. While the law has never required that a full evidentiary hearing be held before a municipal employee may be suspended, it has long been recognized that at least some form of notice and a hearing, tailored to the specific demands of the situation, must be afforded prior to or immediately after deprivation of a significant property interest. See Boddie v. Connecticut, 401 U.S. 371, 379, 91 S.Ct. 780, 786, 28 L.Ed.2d 113 (1971). Indeed, even when the suspension from employment is only temporary in nature, at least an informal confrontation has been deemed necessary to pass constitutional muster. See Hayes v. City of Wilmington, 451 F.Supp. 696 (D.Del.1978); Aiello v. City of Wilmington, 426 F.Supp. 1272 (D.Del.1976). Here plaintiff was without salary for twenty-five days before he was notified of the charges against him and was compelled to wait an additional five weeks before any sort of hearing was finally held. The law was sufficiently clear at the time of these events that a reasonable person would have known that this deprivation violated Hopkins’ constitutional rights. It therefore follows that defendants Lamborn and Johnson, the officers responsible for Hopkins’ suspension, are not shielded from liability under the doctrine of qualified immunity.

Chief Regan’s immunity defense must similarly fail. On summary judgment, it was determined that Chief Regan reviewed Hopkins’ case under the belief that the Complaint Hearing Board recommended Hopkins be fired for selling and using drugs. However, Hopkins had never been charged internally with either the sale of use of drugs. At trial, Chief Regan admitted he neither listened to the tape recordings of the evidentiary hearing nor reviewed the physical evidence that had been presented. The logical inference to be drawn from these facts is that Regan failed to familiarize himself with the circumstances of Hopkins’ suspension and the terms of the trial board recommendation. He instead attended the review proceedings armed only with the prior knowledge he had obtained from his involvement in the criminal investigation against Hopkins. Regan’s disqualification on the appeal panel stems not from his role in the criminal investigation per se, but from the fact that he acted upon unsubstantiated information gathered from the investigation, rather than on the information presented at the hearing. As the Court noted on summary judgment, and as has been clear under the law for some time, the decision to deprive one of a constitutionally protected interest must be made only on the facts of record. Goldberg v. Kelly, 397 U.S. 254, 90 S.Ct. 1011, 25 L.Ed.2d 287 (1970); In re Murchison, 349 U.S. 133, 75 S.Ct. 623, 99 L.Ed. 942 (1955). As a corollary, where the final administrative arbiter chooses to delegate the responsibility of holding an evidentiary hearing and analyzing the facts, he or she retains a duty to become acquainted with the evidence prior to rendering a final decision. Hawkins v. Board of Public Education, 468 F.Supp. 201, 210 (D.Del.1979). Since these principles were well established prior to the events in this case, Chief Regan is not immune from liability.

E. Damages

Plaintiff seeks substantial compensatory and punitive damages for the violation of his constitutional rights. Since the Court has concluded that plaintiff’s dismissal from the Wilmington police force was justified, plaintiff is entitled only to those damages which flow directly from the procedural due process violations. Carey v. Piphus, 435 U.S. 247, 266, 98 S.Ct. 1042, 1053, 55 L.Ed.2d 252 (1978). The parties agree that plaintiff is entitled to an award of back pay for the period during which plaintiff was suspended without notice and an opportunity to be heard. Plaintiff himself delayed the hearing for an additional eleven work days beyond the delay caused by the Department. He is therefore entitled to recover his salary only for the remaining thirty-one work days lost before a hearing was finally held. The parties have stipulated that plaintiff would have been paid during the period of his suspension at an annual salary of $24,455 or $470.29 per 5-day work week. Plaintiff is therefore entitled to $2,915.80 in compensatory damages.

In addition, plaintiff is entitled to a nominal award for the procedural flaws in conducting the police appeal panel. The Court is not convinced, however, that any further compensatory damages are due. Although plaintiff has testified to his severe emotional distress, the Court is unpersuaded that any significant injury may be fairly attributed to the procedural violations themselves. Plaintiff has indicated he was generally aware of the reasons for his suspension despite the lack of formal notice and that in light of the pending criminal proceedings against him, he would have refrained from responding at an informal hearing had one been provided. Moreover, plaintiff testified that he believed the evidentiary hearing which resulted in a recommendation of his dismissal was diligently conducted. Plaintiff has failed to establish that his emotional upset was proximately caused by the imperfection in the Department appeal panel review. Rather, it is evident from the testimony that any emotional distress stems from plaintiffs dismissal and his attendant financial and social difficulties and not from the procedural violations themselves.

Finally, while punitive damages may be awarded under section 1983 against municipal officials, City of Newport v. Fact Concerts, Inc., 453 U.S. 247, 271, 101 S.Ct. 2748, 2762, 69 L.Ed.2d 616 (1981); Abraham v. Pekarski, 728 F.2d 167 (3d Cir.), cert. denied, — U.S. —, 104 S.Ct. 3513, 82 L.Ed.2d 822 (1984), the Court finds insufficient basis for an award of punitive damages on these facts. Punitive damages are recoverable only upon proof by a preponderance of the evidence that the defendant acted with ill will or reckless indifference to another’s federally protected rights. Smith v. Wade, 461 U.S. 30, 103 S.Ct. 1625, 75 L.Ed.2d 632 (1983); Abraham v. Pekarski, 728 F.2d at 173. Plaintiff in this case has failed to satisfy that burden.

In sum, plaintiff is entitled to back pay totalling $2,915.80 for the period of his suspension and to an additional nominal award of one dollar for the denial of a constitutionally adequate hearing. His other claims for damages have not been substantiated and shall not be awarded.

An order will be entered consistent with this Opinion.

      . The complaint originally named "The Mayor & Council of the City of Wilmington" as defendants to this action. In the pretrial order, plaintiff substituted "The City of Wilmington” as defendant. Docket Item ("D.I.”) 79 at 12.

      . Claims against defendants Simon Edwards, Stanley Friedman, and Joseph Pennell were withdrawn just prior to trial. Trial Transcript ("Tr.") Volume A at 6 ("A-6"). Plaintiffs claim against Albert Carter was withdrawn in post-trial briefing. Plaintiff's Post-Trial Brief, D.I. 87 at 39.

      . Pre-Trial Order, D.I. 79, Admitted Fact 1.

      . Defendants’ Exhibit ("DX") 1, Testimony of Charles Warrick at 28-30. DX 1 is the transcript of selected portions of Hopkins’ hearing before the police complaint board. The tape of that hearing was played at trial and the parties have stipulated that DX 1 shall serve both as a trial exhibit and as the official transcript for the portion of the trial when the recording was played. See D.I. 80. References to DX 1 will hereinafter indicate the name of the witness testifying and the pertinent page(s) of the transcript.

      . Tr. at D-45.

      . Tr. at B-41 to 42, E-102.

      . DX 1, Huston at 4, Nancy Carter at 6, 16.

      . Plaintiff's Exhibit (“PX”) 4.

      . DX 1, Huston at 8-9; Tr. at C-29 to 33.

      . Tr. at E-96.

      . Rule 201 states: "No member of the Department of Police shall engage in any conduct specifically prohibited in these rules, or contrary to lawful written or verbal orders or memorandum, or which is prejudicial to the good order, discipline or efficiency of the Department of Police." PX 5.

      . PX 5. Hopkins was also charged with possession of phentermine, a controlled substance. The members of the administrative hearing board concluded that this charge was not substantiated. That determination is not at issue in this litigation.

      . The Board's finding declares that the charge was "substantiated, that being the preponderance of evidence presented indicating Sgt. Hopkins’ location and availability of the drug, marihuana, and testimony of witnesses in his defense indicating use of this drug. Recommendation of the Board is dismissal from the Department of Police." DX 5A.

      . While the summary judgment motions were pending, defendants submitted a letter brief informing the Court that the Unemployment Insurance Appeal Board had determined as a factual matter that Hopkins had been in knowing possession of marijuana. The letter also noted that the Unemployment Appeal Board’s decision had been affirmed by the Superior Court of Delaware. See Hopkins v. Unemployment Insurance Appeal Board, No. 83A-OC-13 (Del.Super. Oct. 25, 1984). Defendants contended that the Superior Court's decision should be given preclusive effect against several of the issues pending in this forum. The Court observed that the question of issue preclusion had not been subjected to the adversarial process and should await trial on the merits. Hopkins v. Mayor & Council of Wilmington, 600 F.Supp. at 555 n. 34. In defendants’ post-trial brief, this issue was relegated to a footnote alerting the Court to the fact that issue preclusion was still a live issue. Defendants' Answering Post-Trial Brief, Dkt. 88 at 4 n. **. While I question how seriously defendants make this argument given its cursory treatment in the briefing, I note that the issue decided by the Unemployment Appeal Board and affirmed by the Delaware Superior Court is not the issue that faces this Court. The Unemployment Appeal Board independently adjudged whether Hopkins knowingly possessed marijuana based on evidence presented at an Unemployment Board hearing. This Court must now decide whether an impartial police review board would have concluded Hopkins knowingly possessed marijuana and would have ordered his dismissal. While the distinction may be slight, it is sufficient to prevent the application of any preclusion doctrine in this case.

      . DX 1, Hopkins at 12, 20.

      . DX 1, Nancy Carter at 68.

      . Shirley Carter, Nancy’s sister, testified she was sure Hopkins didn’t know Nancy had marijuana ”[b]ecause every time that we would be smoking a joint or something and he like comes up toward the door, my sister would break her neck trying to hide it from him.” DX 1, Shirley Carter at 6. It is inconceivable that a police officer could repeatedly walk into a room where people had just been smoking marijuana and not appreciate what had been going on. Moreover, it is difficult to believe that Nancy succeeded in hiding the marijuana from Hopkins on all but the one occasion when the police entered the scene.

      . DX 1, Hopkins at 12, 20, 43.

      . When police entered the room they found in plain view an ashtray containing one roach, a shoe box lid holding a bag of marijuana and another marijuana cigarette, and some white powder on a mirror on top of Carter’s dresser. Other items were less readily visible. A small vase containing 261 roaches was found on a shelf near the bed. The shelf was cluttered with items and it was difficult to see into the vase itself because of its narrow neck. A plastic milk crate stood next to the bed on the side where Hopkins was sleeping. Pushed to the back of the crate among several other items was a peanut can containing marijuana seeds and bits of a marijuana plant. Police also found two closed shoe boxes containing manila envelopes, small clear plastic bags, straws, pipes, and a weighing spoon. A small scale was also found on top of Carter’s dresser, again in the midst of other belongings. DX 1, Huston at 4-7; Nancy Carter at 21-22. Hopkins denied ever having seen any of these items.

      . One cannot help but wonder why, if Carter was checking to see if Hopkins was still asleep, she would have carried the joint and ashtray back to her bedroom, rather than leave it hidden with her sister. Certainly if she feared Hopkins might have awakened, and if she truly did not want her marijuana habit to be detected, she would not have risked being caught "red handed” as she walked into the bedroom carrying the contraband.

      . DX 1, Nancy Carter at 5-6, 16-18.

      . Id. at 17.

      . DX 1, Shirley Carter at 11, Nancy Carter at 7-8, 78-80.

      . DX 1, Shirley Carter at 12-13.

      . DX 1, Nancy Carter at 80.

      . DX 1, Hopkins at 21.

      . DX 1, Warrick at 17, 22, 24.

      . DX 1, Hopkins at 20, 21.

      . Captain Preston J. Hickman, commanding officer of the Internal Affairs Division of the Department was deposed at length concerning prior conduct code violations. See PX 9. He testified, for example, that three officers with service varying from nine to twelve years had falsified time records to show they were working when in fact they were not. Two of the three were given penalty time and the third and most senior of the group was reduced in rank and eventually retired on pension. Id. at 46-50. Another officer was found to have stolen bullets while performing an off-duty bank security job. He had eleven years of past service and was suspended for a period without pay and given penalty time. Id. at 43-44; E-4. A relatively senior officer involved in alcohol-related offenses was permitted to resign and collect a disability pension based on his alcoholism, PX 9 at 26-30, E-13; and a twenty-year veteran who submitted approximately $1000 worth of false overtime claims repaid the money, retired, and began receiving his pension, PX 9 at 50-58, Tr. at E-15. Hopkins does not deny that these officers were entitled to the pensions they received and that unlike the officers mentioned above, Hopkins did not satisfy the disability or longevity requirements to entitle him to a pension at the time of his discharge.

      . See, e.g., PX 9 at 62-64 (seven-year veteran fired after twice having been found engaging in sexual relations during work hours); Id. at 66-67, Tr. at E-14 (officer with one year of service forced to resign after patronizing a prostitute while off-duty); PX 9 at 69-70 (three-year veteran forced to resign after playing with loaded revolver during roll call).

      . PX 1 at 7-12; Tr. at E-4 to 13, 48.

      . Captain Hickman reported one case which was similar to the Hopkins matter except with respect to years of service. In that case, an officer who had served on the force for three years attended a party where others (including two fellow police officers) were smoking marijuana. The officer was faulted for his failure to report that offense as well as for making sexual advances to a woman at the party. He resigned at the Department’s urging and the case was never brought for an administrative hearing. PX 9 at 7-10, E-48. The two officers who were with him at the party and who were seen to have been smoking marijuana were also forced to resign. They had three and five years of past service, respectively.

      . Tr. at D-64.

      . Tr. at D-77.

      . PX 9 at 34.

      . Id. at 35.

      . In addition to the marijuana charge, Hopkins had also been charged with possession of phentermine. See supra note 12.

      . Tr. at E-65, 73, 81, 117.

      . Hopkins has withdrawn his claim that the Department violated his right to privacy. The basis for any remaining substantive due process claim is not clearly set forth in his post-trial briefs. It appears that his substantive due process and equal protection arguments are intertwined and have therefore been dealt with simultaneously by the Court.

      . The Harlow case involved a federal official sued directly under the Constitution. The Supreme Court noted, however, that there was essentially no distinction between the qualified immunity standard applied in such a case and the standard applied in an action against an official sued under section 1983. Harlow, 457 U.S. at 818 n. 30, 102 S.Ct. at 2738 n. 30.

      . Once it is determined that the applicable law was clearly established at the time the violation occurred, the qualified immunity defense will "'ordinarily fail,' unless the defendant ‘claims extraordinary circumstances and can prove that he neither knew nor should have known of the relevant legal standard.’ ” Czurlanis v. Albanese, 721 F.2d 98, 108 (3d Cir.1983) (quoting Harlow, 457 U.S. at 818-19, 102 S.Ct. at 2738-39); see also Meding v. Hurd, 607 F.Supp. 1088 (D.Del.1985). Defendants have not attempted to prove that "extraordinary circumstances” are applicable with respect to any of the defendants in this case.

      . Tr. at D-96.


source: Caselaw Access Project

author: EDWARD WEINFELD, District Judge.

license: Public Domain

text:
    A.P.N. HOLDINGS CORP., Plaintiff, v. Ronald HART, Thelma Hart and Barbara Bergen, as Trustees of the Testamentary Trust of Mark M. Hart, deceased; Beatric Hart, as Custodian for Penny Hart and Dean Hart, Infants, Under the New York Uniform Gifts for Minors Act; Ronald Hart and Thelma Hart, Defendants, Counterclaim Plaintiffs, and Third Party Plaintiffs, v. Abe J. LIEBER; Miriam P. Lieber; Amford Bank & Trust Company, Ltd.; ABT Investments, Limited; Amdall Properties, Inc.; London Capital Corporation; Logistics Control Group International, Ltd., Third Party Defendants.
    No. 83 Civ. 4397 (EW).
    United States District Court, S.D. New York.
    Aug. 22, 1985.

      Pollack & Kaminsky, New York City, for plaintiff and counterclaim defendant and third party defendants; Frederick P. Schaffer, New York City, of counsel.
    Hayt, Hayt & Landau, Great Neck, N.Y., for defendants and counterclaim plaintiffs and third party plaintiffs; Clifford J. Chu, Ralph Pernick, Great Neck, N.Y., of counsel.
   OPINION

EDWARD WEINFELD, District Judge.

This action arises from the 1982 sale of a controlling interest in the American Plan Corporation (“American Plan” or the “Company”), a New York corporation engaged through its subsidiaries in the property and casualty insurance business. Defendants Ronald, Thelma, and Beatrice Hart and Barbara Bergen, individually and in representative capacities, collectively controlled 520,691 shares, approximately thirty-five percent of the outstanding stock of American Plan. On June 25, 1982, plaintiff A.P.N. Holdings Corp. and defendants executed a stock purchase agreement (the “Agreement”) whereby plaintiff agreed to purchase defendants’ interest at a price of $10 per share, which totalled $5,206,910. Plaintiff paid defendants $520,000 when the Agreement was executed; an additional $1,230,000 when the transaction closed on October 5, 1982; and executed a promissory note for the balance of $3,456,910, which is unpaid and now past due.

The Agreement was negotiated by Abe Lieber, plaintiff’s principal shareholder, president, and chairman of the board, and Ronald Hart, then a director and paid consultant of American Plan and formerly its president and chairman of the board, who acted on behalf of all defendants. Plaintiff claims that Lieber and Hart agreed upon a purchase price of $10 per share with the understanding that such price was approximately twice the book value per share of American Plan stock as reflected in the Company’s then most recent financial statements filed with the Securities and Exchange Commission (“SEC”); that Hart denied plaintiff access to the Company’s books and records prior to the closing date but assured it that the SEC filings fairly and accurately represented the Company’s financial condition and, indeed, so warranted in the Agreement; and that after the closing date when plaintiff gained access to the Company’s books and records it discovered that the true book value of American Plan prior to the closing date was $0.51 per share, more than five dollars less than that reflected in the Company’s most recent financial statements. In short, plaintiff charges that in assessing the Company’s book value, which the parties allegedly understood was the basis of the $10 per share purchase price, it had no choice but to rely entirely upon the Company’s publicly filed financial statements and that these statements were inaccurate and incomplete and far overstated the book value of American Plan.

Plaintiff seeks to recover damages of $4,675,805, the difference between the purchase price of $10 per share of American Plan stock and the alleged true value of that stock. In the alternative, plaintiff seeks reformation of the Agreement to reflect a purchase price of $1.02 per share, or twice the Company’s alleged true book value of $0.51 per share, and restitution in the amount of $1,218,895, the difference between the purchase price as reformed and the amount plaintiff previously paid defendants as of the closing date. Defendants, in addition to a general denial of plaintiff’s claims, emphasize that under paragraph 3.1(c) of the Agreement plaintiff disclaimed reliance upon any representation or warranty by defendants concerning the financial condition of American Plan other than a limited warranty that, to the best of defendants’ knowledge, no material adverse change had occurred after the first quarterly report was filed in 1982. Defendants also assert a counterclaim to recover $3,456,910, the balance of the agreed purchase price, from plaintiff under its promissory note and a third party claim against Abe Lieber, his wife, and various affiliates who executed a guaranty of payment by plaintiff (the “Guarantors”).

The complaint alleges federal claims under sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and section 17(a) of the Securities Act of 1933 and state claims for breach of contract, breach of warranty, mistake of fact, common law fraud, negligent misrepresentation, and violation of section 352-c of the New York General Business Law. These claims involve different standards of culpability. For example, defendants may not be held liable under section 10(b) of the Securities Exchange Act of 1934 without proof of “scienter,” whereas they may be held liable for damages caused by a breach of warranty upon proof that the warranted facts did not exist. Yet, despite these differences, all these claims essentially rest upon the factual charge that the Company’s publicly filed financial statements, upon which plaintiff allegedly relied in agreeing to pay defendants $10 per share for their interest in American Plan, contained errors that misrepresented the Company’s book value. Thus, to recover upon any of the asserted grounds, plaintiff must establish by a preponderance of the evidence that the financial statements at issue in fact contained the errors as charged.

Plaintiff’s claims in large measure center about the application of accounting principles in the insurance industry and alleged errors in American Plan’s financial filings, which served as the basis for restating those statements in subsequent filings. The specific financial statements in issue are those contained in the Company’s Form 10K for 1981 (“1981 10K”) and Forms 10Q for the first three quarters of 1982 (“1982 lOQ’s”). All parties acknowledge that annual and quarterly financial statements filed with the SEC must be prepared in accordance with generally accepted accounting principles (“GAAP”). Plaintiff contends that after it took control of the Company, new management and outside auditors discovered, during two successive audits, that these financial statements contained errors under GAAP. First, in conducting the 1982 annual audit, new management and the accounting firm of Alexander Grant & Company (“Alexander Grant”) allegedly found the 1982 lOQ’s in error with respect to the adequacy of the Company’s loss and loss adjustment expense reserves and to bad debts owed the Company by two of its agents. Thereafter, in conducting the 1983 annual audit, new management and Peat, Marwick, Mitchell & Company (“Peat, Marwick”), retained in place of Alexander Grant, allegedly found errors in the 1981 10K and additional errors in the 1982 lOQ’s. These alleged errors concerned reinsurance recoverable by the Company, contingent commissions owed to a leading agent, and the way the Company accounted for two surplus relief treaties, discussed hereafter.

Plaintiff further contends that all of these discoveries were based upon information that was available to old management when it prepared the 1981 10K and 1982 lOQ’s and that therefore, under GAAP, they constituted “errors” and warranted restatements of the financial statements contained in those filings. As a result of these restatements, which new management included in the Company’s Form 10K for 1982 and Form 10K for 1983, the book value of American Plan for the nine months ended September 30,1982—the last statement date before the closing—allegedly dropped more than $5 per share to $0.51 per share.

An observation is warranted at the outset. After the occurrence of events in issue, Abe Lieber called in one “expert” after another who scrutinized the Company’s financial statements and whose efforts, one is justified in concluding, were directed to turning up some “error” that would sustain plaintiff’s claim that the book value of American Plan had been overstated. Many of the views of these experts who testified were highly conceptualized and were based upon their opinions as accountants. Against this testimony was that of American Plan’s officers, who had been active in the day to day management of the Company’s affairs and were familiar with the Company’s insurance experience record, accounting practices and requirements. The fact that plaintiff’s experts opined as to what they believed were errors in the Company’s various financial projections and assignments of debits and credits does not entitle their views to greater consideration than that to be accorded lay persons who demonstrated á thorough understanding of the basic facts in issue. Their credibility as witnesses is subject to appraisal by the same standards as those applied to ordinary witnesses. The Court accepts in substance the judgment of the Company’s officers who had the experience of many years in evaluating the various financial matters to which the plaintiff’s attack is directed. They were the day to day workers in the vineyard.

Based upon the Court’s trial notes, which include its contemporaneous appraisal of each witness, a word by word reading of the stenographic transcript of the trial, the demeanor of the witnesses,' an evaluation of their credibility—which in this case played a critical role—and the reasonable inferences to be drawn from established facts and surrounding circumstances, the Court concludes that plaintiff has failed to discharge its burdén of proof on the central factual charge in the complaint. It has not established that the old management of American Plan—and thus defendants—acted without justification in preparing the financial statements under attack or that these statements contained the errors charged. As to defendants’ counterclaim, and third party claim, there is no dispute that plaintiff has defaulted on two installments of its promissory note. Its only defense—and that of the Guarantors—is the central charge set forth in the complaint, that the 1981 10K and 1982 lOQ’s contained errors under GAAP that misrepresented the book value of American Plan. Plaintiff’s failure to sustain this charge is therefore dispositive of all claims, counterclaims and third party claims.

LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES

After the closing, Richard Pluschau, a certified public accountant who had served as the Company’s outside auditor for over ten years and had considerable experience in the field of insurance, was engaged by new management of American Plan as chief financial officer. He conducted a statistical analysis of the Company’s historical claim activity for several prior years in order to determine whether the Company’s reserves for unpaid losses and loss adjustment expenses were adequate. Pluschau concluded that as of December 31, 1982 the reserves were inadequate and should be increased by between $2 million and $2.5 million. Thereafter, at Pluschau’s suggestion, Huggins & Co., Inc. (“Huggins”), an actuarial firm, was retained by the Company to conduct an independent review of the reserves and it issued an opinion certifying the adequacy of the reserves as revised upward by Pluschau. The question then arose whether this revision should be reflected solely in the fourth quarter of 1982 or also in the first three quarters of that year, as to which the financial statements had already been filed. Pluschau specifically requested Alexander Grant, retained to conduct the 1982 annual audit, to determine whether the Company’s financial statements in the 1982 lOQ’s filed previously should be restated in view of the revision of reserves. Alexander Grant concluded that the financial statements for the first two quarters of 1982 should be restated to reflect an increase in reserves of $774,108 and $1,322,130, respectively.

Plaintiff contends that the restatements were warranted under GAAP because the inadequacy of the reserves could have been discovered by old management when it prepared the 1982 lOQ’s. Pluschau so concluded because he found no evidence that old management had conducted an analysis of the company’s “formula” reserves during the 1982 quarterly financial statement periods. Formula reserves, as distinct from case reserves, which are based upon individual claims already filed with the Company, are estimates of losses incurred but not yet reported to the Company (“IBNR’s”), the cost of settling claims (“loss adjustment expense”), and the inflationary impact upon the case reserves. Unlike the case reserves, which are set on a case by case basis as claims are filed with the Company, formula reserves are determined by applying certain formulae to historical claim data; they require an empirical judgement about the likelihood that past loss experience will be repeated. In Pluschau’s view, had old management reviewed the formula reserves as of September 30, 1982, it would have found them inadequate. Dominic Esposito, the Alexander Grant partner in charge of the 1982 annual audit, also found no evidence that old management had conducted an overall review of the formula reserves during 1982 and concurred in Pluschau’s decision to restate the 1982 lOQ’s, although he also would have concurred in confining the revision to the final quarter of 1982.

The conclusion of Pluschau, Huggins, and Alexander Grant that the 1982 loss and loss adjustment expense reserves were inadequate was disputed by Murray Lemonik, who was president, chief executive officer, and chairman of the board of American Plan prior to the closing and has been in the service of the Company for fifteen years. While Lemonik did not participate in the reserves review conducted by new management, he opposed the decision to increase the 1982 reserves for two reasons. First, the New York State Department of Insurance had only recently, in mid-1980, completed its triennial examination of the Company and reported that the reserves were adequate, as Lemonik put it, “very close” to being “on the button.” Since there had been no change in the Company’s personnel who analyzed the case and formula reserves, no change in the instructions given them, and no change in the Company’s operations, Lemonik saw no reason to believe that a reserve adjustment was necessary.

Second, new management did not conduct a review of “stale” claims in 1983. Stale claims are reported claims as to which the Company has set reserves but which are no longer active and may be closed out. In Lemonik’s view, had new management conducted a case by case review of reported claims in order to identify stale claims, as had been done routinely by old management and as he urged new management to do in 1983, a large number of case reserves would have been reduced or eliminated. Lemonik asserted that his belief had been borne out when new management finally conducted a stale claim review in 1984 and found that case reserves should be reduced by approximately $3.5 million. Based upon prior Company experience, Lemonik stated, some sixty-five to seventy-five percent of that reduction would have related back to claims filed in 1982 or earlier. Lemonik also emphasized that in comparison to case reserves, which new management had not reviewed for stale claims, the formula reserves were only a small part of the Company’s total reserves.

In charging that the 1982 lOQs were in error concerning loss and loss adjustment expense reserves, plaintiff assumes that old management reasonably should have conducted a review of formula reserves in 1982. However, in view of Lemonik’s testimony, which was highly persuasive, plaintiff has failed to show that old management acted without justification. Essentially, the Court is presented with a difference of opinion, that of the so-called experts from outside the Company, Pluschau, Huggins, and Alexander Grant, and that of Lemonik, an insider who, while not a certified public accountant, was involved in the day to day operations of the Company for fifteen years and had a realistic view of loss potential based upon his experience. As already noted, the Court is satisfied that this credibility issue should not be resolved in plaintiff’s favor.

Plaintiff’s further argument that old management conducted a “one way” review of stale claims in the spring of 1982— that is, a review designed to eliminate reserves on inactive claims without assessing the adequacy of reserves on active claims— adds nothing to its charge that the 1982 reserves were inadequate. Alan Brinn, the head of the Company’s liability claims department in 1982, testified that such reviews were conducted routinely, though normally at year-end, and that this one was conducted in the usual and ordinary manner. The purpose and effect of such reviews are to bring the Company’s reserves up to date to enhance their accuracy, at least with respect to case reserves. Nor is there any significance to Brinn’s statement that sometime in 1982 he came to believe that the reserves set for claims under special multiperil policies “might have been a bit light,” perhaps by as much as $750,000. He acknowledged that his belief was based upon “speculation” and that “nothing specifically [was] done” to verify it.

In sum, plaintiff has failed to prove that the reserves for losses and loss adjustment expenses reflected in the 1981 10K and 1982 lOQ’s were inadequate.

BAD DEBTS OWED BY ESSEX AND BANKERS WAY

Plaintiff charges that prior to the closing date, the Company should have established reserves to cover premiums owed by two agents, Essex Insurance Brokers, Inc. (“Essex”) and Bankers Way Insurance Agency, Inc. (“Bankers Way”), that were not collectible. Because such reserves were not set up, plaintiff contends, the 1982 lOQ’s failed to reflect a potential loss of $650,000 in bad debts. Based upon the information available in 1982, however, the Court finds that old management did not act unreasonably in concluding that the bulk of these debts was collectible.

As to Essex, new management and its auditors determined that a $400,000 reserve should have been set up during the third quarter of 1982 to cover premiums owed to American Plan by Essex when the agency was placed in conservatorship by the California Department of Insurance on August 20, 1982. Those involved in the day to day operations of the Company at that time, however, estimated that Essex’s premium balance totalled between $250,000 and $300,000 and was fully collectible—a view that had substantial support. The principals of Essex had personally guaranteed payment of the agency premium balance, their guarantee was covered in part by an errors and omissions insurance policy, and they had posted collateral to secure some $118,000 of that balance. Moreover, the premiums in issue had been deposited into a trust account in favor of an American Plan subsidiary.

In May 1982, Richard Sumner, then a vice president of American Plan, learned that Bankers Way had ceased producing business for the Company and that its principal, who had personally guaranteed the agency agreement with the Company, “had been removed from the Bankers Way corporate picture.” The following month, Sumner met with the principals of the successor corporation and, after determining that the Bankers Way premium balance totalled as much as $200,000, entered into an agreement with them whereby they promised to pay $50,000 to American Plan and to guarantee payment of an additional $50,000 if the premium balance could not be collected from the former principal of the agency. The Company in fact received the initial $50,000 under this agreement during the next eight months; previously, in June 1982, it had commenced an action to recover the remaining balance from the former principal who, in Lemonik’s view, was not judgment proof.

Plaintiff has offered no evidence to undermine old management’s judgment that the Bankers Way debt was collectible. Rather, it relies solely on new management’s contrary judgment that a reserve of $250,000 was necessary to cover the debt. Neither judgment is inherently unreasonable and both may be appropriate under GAAP. GAAP requires that a loss be recognized and a reserve established in a financial statement only when

[information available prior to issuance of the financial statements indicates that it is probable that an asset had been impaired or a liability had been incurred at the date of the financial statements. It is implicit in this condition that it must be probable that one or more future events will occur confirming the fact of the loss.

This standard leaves considerable room for judgment in deciding whether a reserve is needed. Indeed, Alexander Grant emphasized that estimating when a loss occurs for GAAP purposes is a difficult task and that new management had taken a “conservative approach” to both the Essex and Bankers Way debts. Plaintiff has not shown it was probable in 1982 that the Essex and Bankers Way debts were uncollectible and that the 1982 lOQ’s should have reflected a reserve for bad debts.

REINSURANCE RECOVERABLE FROM SECURITY MUTUAL

In December 1981, the Security Mutual Insurance Co. (“Security Mutual”), one of American Plan’s reinsurers, was placed in liquidation by the Illinois Department of Insurance. Despite this fact, American Plan continued to carry reinsurance recoverable from Security Mutual on its books throughout 1982. Peat, Marwick, which American Plan had retained in place of Alexander Grant to conduct the 1983 annual audit, concluded after an investigation that no reinsurance was recoverable from Security Mutual as a result of the liquidation. Accordingly, the auditors concurred in new management’s determination that a net receivable of $329,178 listed on American Plan’s books as reinsurance due from Security Mutual for losses incurred by the Company prior to the liquidation should have been written off during 1982. In addition, Peat, Marwick concurred in new management’s determination that the Company had failed to take account of the fact that these prior losses would continue to develop and would involve loss adjustment expense, and thus would cost the Company even more in terms of unrecoverable reinsurance. Accordingly, Peat, Mar-wick found proper new management’s conclusion that a total of $746,465 should have been written off during 1982 as a result of the liquidation of Security Mutual. The auditors further concluded that, because the write-off was based upon information available in 1982, new management’s decision to restate the 1982 quarterly financial statements a second time, now in the Company’s Form 10K for 1983, was proper and in accordance with GAAP.

Members of the Company’s old management who were familiar with the Security Mutual reinsurance treaty testified that the liquidation of the reinsurer did not have a negative effect on American Plan. According to Luther Williams—who had been with the Company for thirty years, most recently as president and then vice chairman of the subsidiaries, and had primary responsibility for reinsurance—and Murray Lemonik, the Security Mutual treaty provided that when the loss ratio on the reinsured portfolio reached a certain level the Company became obligated to pay an additional, or. penalty, premium to the reinsurer until such time as the total premium paid reached a maximum point. This penalty premium, referred to as the “burn cost,” amounted to $1.33 for every $1.00 of losses recoverable as reinsurance from Security Mutual. Since the loss experience on the reinsured portfolio had placed the Company in a “penalty situation” at the time of the liquidation, the Company was required under the treaty to pay Security Mutual $1.33 in premiums for every $1.00 of reinsurance it otherwise would have received after the liquidation date, at least until the total premiums paid by the Company reached the maximum. Old management determined, therefore, that any reinsurance receivable from Security Mutual was more than offset by the penalty premiums payable to Security Mutual, so that on balance the amount of reinsurance no longer recoverable from Security Mutual did not represent a net loss to American Plan and did not require a reserve.

According to Paul Zucconi, the Peat, Marwick partner in charge of the 1983 audit, and Robert McCausland, who joined American Plan in 1983 and served as the Company’s liaison with Peat, Marwick during the 1983 audit, their determination that a reserve should have been established for reinsurance receivable but no longer recoverable from Security Mutual did take account of the burn cost—that even after a setoff in favor of American Plan, the net receivable from Security Mutual still amounted to $746,465, which should have been written off. However, several factors weaken the force of this testimony. First, and most important, neither Zucconi nor McCausland had the experience that Lemonik and Williams had in calculating the burn cost under the Security Mutual treaty over a period of many years. Although Zucconi stated that he was familiar with this type of reinsurance treaty, his testimony raised doubt about whether he fully understood the significance of the burn cost and how premiums payable were calculated under the treaty. As to McCausland, his accounting background did not include any work with insurance companies when he joined American Plan in 1983. The expertise of these men as certified public accountants is no substitute for a thorough understanding of the Security Mutual treaty, which Lemonik and particularly Williams demonstrated by their testimony.

Second, Alexander Grant, which had conducted the 1982 audit for new management, disagreed with Peat, Marwick’s determination that a reserve should have been set up with respect to Security Mutual. Thus, the dispute here is not only a battle between old management and new but in some instances a battle among plaintiff’s own experts as well, each of whom plaintiff has chosen to rely on at different times and for different reasons. It should be noted that accounting principles themselves are by no means fixed or immutable. At times they are the subject of sharp controversy between the accounting profession and the business community and are revised accordingly from time to time. This fact calls into question not only the authoritativeness of these experts’ opinions but also, as was observed previously, the motives of plaintiff in retaining first one accounting firm and then another. Ultimately, plaintiff’s claim that old management erred in failing to include a reserve for reinsurance unrecoverable from Security Mutual in the 1982 lOQ’s arises from a difference of opinion that the Court must resolve on the basis of evaluation of the witnesses. In this instance, the experience of Lemonik and Williams carries at least as much weight as the expertise of Zucconi and McCausland. Thus, it cannot be said that plaintiff has carried its burden of proof that old management acted unreasonably or erroneously in its treatment of the Security Mutual reinsurance treaty.

CONTINGENT COMMISSIONS PAYABLE TO MARKET

In the late 1960’s, an American Plan subsidiary and Market Insurance Corp. (“Market”), a California based insurance agent, entered into an agency agreement that provided for a contingent commission payable to Market based upon the profitability of the book of business Market produced for the Company. Under this agreement, known as a retrospective commission agreement, Market retained thirty percent of the premiums it produced as a provisional advance commission and paid the remainder to American Plan, which allocated fifteen percent for profit and expenses and the remaining fifty-five percent for prospective payment of claims. Whatever portion of this fifty-five percent was not needed to pay claims was paid back to Market as an additional, or contingent, commission; conversely, if claims exceeded fifty-five percent of premiums, Market was required to return a portion of its provisional advance commission to the Company to make up the difference. Thus, Market’s commission depended on the loss experience of the business it produced for the Company.

In or about 1979, a dispute arose between the Company and Market over the determination of the contingent commission. Essentially, Market disagreed with the Company’s projections as to losses on the Market book of business that had been incurred but not yet reported. Market believed that the reserves set by the Company for these so-called IBNR losses were excessive and should be reduced and that it was entitled to additional commissions. This dispute persisted until at some point in 1982 Market withdrew a major portion of its business from American Plan and the Company issued a notice of termination of the agency agreement. Thereafter, the termination became effective and Market took legal action against the Company to recover contingent commissions.

. In conducting the 1983 annual audit, new management and Peat, Marwick determined that the IBNR reserves set by the Company on the Market book of business in 1981 and 1982 were excessive in view of the loss experience on that book in prior years. As of December 31, 1982, they concluded, the Market IBNR reserves should have been reduced by approximately $1.23 million. Had the reserves been set at the proper levels, they determined, the Company’s financial statements for 1981 and 1982 would have reflected contingent commissions payable to Market. Instead, the financial statements reflected no such payables in 1981 or 1982 and, indeed, in 1982 allegedly showed commissions receivable from Market in the amount of $780,000. Because the prior loss history on which this reserve adjustment was based was available to the Company in 1981 and 1982, new management and Peat, Marwick concluded, the financial statements were in error under GAAP for failing to reflect contingent commissions payable in 1981 and 1982 and for showing commissions receivable in 1982. Consequently, the fourth quarter results in both years were restated in the 1983 Form 10K to reflect a reduction in earnings of $389,000 and $841,000, respectively.

The charge that old management erred by overstating the IBNR reserves on the Market book, and thereby failing to show contingent commissions payable to the agent in either year and showing commissions receivable from it in 1982, is without merit. The essential premise of the charge is that old management’s projections as to losses incurred but not reported on the Market book were unjustified. Paul Zucconi, the Peat, Marwick audit partner, testified that the Company had available in 1981 and 1982 a lengthy history of claims actually reported on the Market book over a period of many years, and that this history indicated a steady reduction in loss ratio after 1979. In view of this trend, he asserted, old management should have set lower IBNR reserves. As Zucconi acknowledged, however, setting an IBNR reserve is a matter of judgment based upon historical experience—a projection must be made as to the frequency and severity of future claims. Consequently, in determining whether the Market IBNR was justified, the personal familiarity with the Market book of those who set the IBNR reserves and their reasoning are crucial factors to be considered.

According to Murray Lemonik, the 1981 and 1982 IBNR reserves reflected the lessons that old management had learned as a result of past mistakes. In or about 1976, the Company had paid Market contingent commissions of approximately one million dollars only to see the loss ratio on the Market book rise steadily thereafter and place the Company for a long period in the position of having to seek recovery of the contingent commissions back from the agent. Old management had found the history of claims actually reported to be an unreliable indicator of future experience. Lemonik explained that because of the nature of the Market book—surety bond coverage—claims often were not reported until many years after the losses had been incurred. Thus, the Market loss experience matured slowly—for instance, what appeared to be a very favorable loss ratio of two percent in 1973 had risen to fifty or fifty-five percent by 1979. In order to protect itself against this phenomenon, known as the “long tail,” the Companj decided back in 1976, after prematurely paying contingent commissions to Market, to set up a very high supplemental reserve to cover claims incurred but not reported. In short, old management set the reserves for unreported claims at the disputed levels precisely because it had found the history of reported claims—the very history new management and Peat, Marwick relied upon in determining that the IBNR reserves were excessive—to be misleading.

Indeed, Richard Pluschau, who joined new management in 1983, described old management’s decision in 1976 to increase the Market IBNR reserves substantially as “a prudent business decision to make sure that the agent was not going to continue to receive contingent commission payments where the reserves might be underestimated.” While new management recognized that these reserves might have been redundant as of December 31, 1982, it, too, was reluctant to eliminate the potential redundancy in order to pay Market contingent commissions. Thus, even new management realized, at least initially, that the Company’s only hedge against the “long tail” on the surety bond business was to set the IBNR reserves at a high level.

Paul Zucconi emphasized that the loss ratio on the Market book had declined between 1979 and 1982, but Lemonik stated that this ratio had not “matured” enough to be reliable in 1981 and 1982. Whether old management should have changed its view of the Market loss history between 1979 and 1982 is a matter of business judgment. Plaintiff has not shown that old management acted without justification in continuing to set the Market IBNR reserves at higher levels as they did in 1981 and 1982.

THE SURPLUS RELIEF TREATY WITH CONTINENTAL

This dispute centers about the accounting treatment given two treaties, or contracts, between American Plan and Continental Casualty Insurance Company (“Continental”) in American Plan’s 1981 10K and 1982 lOQ’s. In preparing the 1983 annual audit, new management determined, and Peat, Marwick concurred, that these treaties should not have been accounted for as reinsurance treaties because they did not provide for a transfer of risk from American Plan to Continental as required under GAAP—that they did not, as a practical matter, obligate Continental to indemnify the Company for losses the Company incurred under the policies covered by the treaties. In effect, they assert that the economic substance of the transactions governs rather than the terms of the treaty. In the view of new management and Peat, Marwick, the Continental treaties were intended merely to provide surplus relief, not reinsurance, and should have been accounted for as such. They furthér determined that by accounting for the treaties as if reinsurance were in effect with Continental, the Company was able to defer more acquisition costs—costs such as taxes and commissions payable upon issuing the policies covered by the treaties— than was proper under GAAP, thereby overstating its earnings by $1,230,000 as of December 31, 1981 and by $2,433,000 as of December 31, 1982.

Paul Zucconi and Robert McCausland testified that whether or not a transfer of risk occurs under GAAP is to be determined by examining the substance of a treaty rather than its form: A theoretical possibility that indemnification will occur under the treaty is not sufficient; GAAP requires that it be likely or probable. Both men found that no indemnification was likely because, while the terms of the treaties provided for indemnification under certain circumstances, none had occurred since at least 1970. Murray Lemonik, a member of old management, confirmed this history. During this prior period, Zucconi found, the only funds that had been transferred between American Plan and Continental had involved interest payments by the Company to Continental in return for surplus relief. In addition, McCausland calculated that under the terms of the treaties the indemnification provisions could not have come into play in 1981 or 1982 unless the loss ratios on the reinsured policies in those years had been double the historical average dating back to the mid-1970’s. He further noted that, because Continental’s .obligation to indemnify the Company depended upon the cumulative loss experience on the reinsured portfolio, indemnification became less and less likely with each passing year of favorable loss experience.

Murray Lemonik, Luther Williams, and Richard Pluschau, each of whom, as previously noted, had worked with the Continental treaties over a period of years, unequivocally testified that the treaties involved a transfer of risk. They all emphasized that just because no indemnification had occurred in the past did not mean that none could occur in the future and that it could occur if losses on the reinsured policies exceeded certain limits. Pluschau calculated that Continental would have incurred an underwriting loss under one of the treaties had the loss ratio on its own exposure exceeded approximately seventy percent. He acknowledged that the loss ratio as to American Plan’s exposure would have to be higher because of the deductibles the Company was required to pay under the treaties, and he did not indicate whether the seventy percent figure reflected annual or cumulative loss experience. Nevertheless, even if indemnification would have occurred only when the annual losses reached unusually high levels, even double the historical average, as McCausland claimed, it is not unrealistic to conclude that such levels could be reached in the event of a catastrophic loss such as might result from a flood, landslide, lightening storm, or brushfire, with which, it may be noticed, certain parts of the country have recently been plagued. Plaintiff's witnesses did not address this possibility.

It is also significant that the New York State Department of Insurance, to which the Continental treaties were submitted for regulatory approval, had in 1978 refused to approve one of them because in effect it did not provide for a transfer of risk. The treaty was redrafted in light of the Department’s objections and thereafter was approved. Prior to the closing the most recent approval given by the Department was in 1981. Paul Zucconi emphasized that state regulators apply statutory accounting principles and are not concerned about transfer of risk, which is significant for accounting purposes only under GAAP. Nevertheless, that state regulators may not be concerned about transfer of risk in general does not mean that when they do consider the issue, as they did here, their views are entitled to no weight.

As in many of the matters discussed herein, the dispute over the accounting treatment given the Continental treaties is, at bottom, one of opinion. Each side presented evidence that contradicted and in some degree weakened the force of the other side’s position but ultimately did not disprove it. As noted earlier, the business judgment and personal experience of those responsible for managing the Company’s affairs on a daily basis carry considerable weight when their conduct of those affairs is at issue. The Court finds that plaintiff has not shown that the accounting treatment given the Continental treaties was erroneous.

In sum, plaintiff has failed to carry its burden of proof on the central factual charge in the complaint—that the 198110K and 1982 lOQ’s contained errors that misrepresented American Plan’s book value. Thus, the degree of defendants’ personal involvement, if any, in the preparation of those financial statements and of plaintiff’s reliance upon them need not be determined. For the reasons that plaintiff has failed to sustain its claims, it and the Guarantors have failed to establish their affirmative defenses to defendants’ counterclaim and third party claim. Judgment may be entered in defendants’ favor, therefore, on the principal claims, the counterclaim against plaintiff, and the third party claim against the Guarantors in accordance with the terms of the guaranty.

The foregoing shall constitute the Court’s findings of fact and conclusions of law. Judgment may be entered accordingly.

      . 15 U.S.C. §§ 78j(b), 78t(a).

      . 15 U.S.C. § 77q(a).

      . N.Y.Gen.Bus.Law § 352-c (McKinney 1984).

      . Ernst & Ernst v. Hochfelder, 425 U.S. 185, 96 S.Ct. 1375, 47 L.Ed.2d 668 (1976).

      . See Metropolitan Coal Co. v. Howard, 155 F.2d 780, 784 (2d Cir.1946); Pittsburgh Coke & Chemical Co. v. Bollo, 421 F.Supp. 908, 928 (E.D.N.Y. 1976), aff’d, 560 F.2d 1089 (2d Cir.1977).

      . See Salem v. United States Lines Co., 370 U.S. 31, 35, 82 S.Ct. 1119, 1122, 8 L.Ed.2d 313 (1962) (quoting United States Smelting Co. v. Parry, 166 Fed. 407, 415 (8th Cir.1909)).

      . These restatements were included in note 13 to the Form 10K for 1982. Plaintiff’s exhibit 6, at 43-44.

      . Later in 1983, a second actuarial firm, Tillinghast & Co. (“Tillinghast"), was retained to evaluate the adequacy of the reserves as of December 31, 1982 and concluded that they should be increased an additional $1.5 million beyond the increase recommended by Pluschau and Huggins. Tillinghast based its conclusion, however, on information that was not available until 1983. Record at 753 (testimony of Robert McCausland).

      . Id. at 412 (testimony of Murray Lemonik).

      . Id. at 106-07, 116-17 (testimony of Alan Brinn).

      . Id. at 173 (testimony of Richard Sumner).

      . Standards of Financial Accounting & Reporting, § 4311.08(a) (1978) (quoted in plaintiff's exhibit 10(a), at 1046) (footnote omitted).

      . Plaintiff's exhibit 10(a), at 1045, 1052; see record at 152 (testimony of Dominic Esposito).

      . This second restatement of the 1982 lOQ’s was contained, along with the restatement of the 1981 10K, in note 2 to the 1983 Form 10K. Plaintiffs exhibit 7, at 84-88. The evidence does not indicate precisely when the information on which the Security Mutual write-off was based became available or which of the quarterly statements for 1982 were in error and by how much. Note 2 to the 1983 Form 10K states that according to current management a reserve of one million dollars should have been established in the first quarter of 1982 as a result of the Security Mutual liquidation. Id. at 84-85. However, the work papers prepared by Peat, Marwick in connection with the 1983 audit focus on whether or not the information on which the Security Mutual write-off was based was available to the Company "at the time the 12/31/82 financial statements were being prepared” and conclude that “an oversight of information available in March 1983 appears to have occurred.” Plaintiffs exhibit 11(a) (emphasis added). In view of these work papers, it is unclear whether the “oversight” was that of old management or of new management and its prior auditors, Alexander Grant, or of both groups.

      . Although neither side offered a precise calculation, Murray Lemonik estimated that once in the penalty situation the Company could incur losses amounting to hundreds of thousands of dollars and pay penalty premiums in the corresponding amount before the maximum would be reached. Absent other evidence, it cannot be assumed that the premiums paid were at or near the maximum and that the burn cost was not a significant factor in this instance.

      . Of course, as both Lemonik and Williams noted, the Company would still carry a net payable to Security Mutual in the amount of $0.33 for every dollar of reinsured loss incurred, to which the liquidator could lay claim. Plaintiff did not inquire into whether the Company had properly accounted for this net payable, although Lemonik indicated that the Company did have adequate funds and reserves to make good any claim by the liquidator. In any event, although the testimony is hazy on this point, it appears that as long as the Company was in the penalty situation it would have had to carry the $0.33 net payable on its books whether or not reinsurance was recoverable from Security Mutual. Based on old management’s calculation of the burn cost, the mere fact of liquidation did not appear to have a negative effect upon the Company’s financial condition.

      . For a recent example of the periodic controversies over accounting procedures, see N.Y. Times, Aug. 18, 1985, § 3 (Business), at 4.

      . Record at 677 (testimoney of Richard Pluschau).

      . Id. at 519 (testimony of Murray Lemonik).

      . A surplus relief treaty is a form of reinsurance treaty whereby the insurance company cedes a portion of a policy to a reinsurer in return for a ceding commission that minimizes the drain on the ceding company’s surplus and allows it to write more policies. The ceding company pays the reinsurer a guaranteed profit—or interest—over the term of the ceded policy. Generally, surplus relief treaties do not provide for a transfer of risk.