author: ASPEN, District Judge:

text:
    Marshall C. SPIEGEL, Individually and as a Representative of a Class of Persons Similarly Situated, Plaintiff, v. CONTINENTAL ILLINOIS NATIONAL BANK, Robert Paulsen, Samuel Hunt, Charles R. Hall, Edward Bottum and Unknown Defendants, Defendants.
    No. 84 C 8255.
    United States District Court, N.D. Illinois, E.D.
    April 16, 1985.
    Kenneth Ditkowsky, Ditkowsky & Contorer, Chicago, Ill., for plaintiff.
    Scott J. Davis, Patricia R. McMillen, Mayer, Brown & Platt, Chicago, Ill., for defendants.
   MEMORANDUM OPINION AND ORDER

ASPEN, District Judge:

This is a “civil RICO” action, filed under 18 U.S.C. §§ 1961 et seq. In brief, the complaint alleges that the defendants Continental Bank (“Continental”) and several bank officials used a pattern of mail fraud to hide Continental’s use of trust income for its own benefit. The plaintiff Marshall Spiegel (“Spiegel”) is the sole income beneficiary of the “Oscar Spiegel Trust” (“the Trust”), and he has sued on behalf of a purported class of trust beneficiaries similarly defrauded by Continental. Continental moved to dismiss the case as barred by res judicata. In a minute order the Court previously reserved decision on the res judicata issue and directed the parties to file supplemental memoranda about whether the complaint states a claim upon which relief can be granted. The parties have done so. For the reasons stated below, the Court grants Continental’s motion to dismiss, basing the dismissal in part on the doctrine of res judicata and in part on Spiegel’s failure to state a claim for relief under RICO.

I.

The following undisputed history is taken from the complaint and from the papers submitted by the parties. In 1972 Spiegel’s father Oscar created a trust which named Spiegel as sole income beneficiary. Continental and a private individual were named as Trustees. Spiegel was to become a trustee upon reaching age 25, which he did in 1981. During that year Spiegel stated that he wanted to act as sole trustee. Continental refused to yield its position as corporate trustee, citing a provision of the trust agreement requiring a corporate trustee.

This dispute spawned suits. In December 1981 Spiegel filed a replevin action against Continental in the Circuit Court of Cook County. Continental reacted by filing a suit in Circuit Court, seeking a declaration that the Trust Agreement required there to be a corporate trustee. The two suits were consolidated, and Spiegel counterclaimed, alleging various breaches of fiduciary duty by Continental. These alleged breaches of fiduciary duty overlap the allegations of fraud in this case.

The Circuit Court upheld Continental’s position that the Trust Agreement required a corporate trustee. Spiegel appealed, lost, and the Illinois Supreme Court denied him leave to appeal to that court. So far as we know, Spiegel’s fiduciary duty counterclaims are still pending in state court.

On June 15, 1988, while the state court appeal was pending, Spiegel sued Continental in federal court (“Spiegel I”), basing jurisdiction on RICO. Like the complaint in this case (“Spiegel II”), the complaint there alleged that the defendants engaged in a pattern of racketeering activity in violation of 18 U.S.C. § 1962(c). Spiegel’s theory was that the trustees, in effect, converted trust funds for the benefit of Continental. They did this by transferring trust income to principal quarterly. During any given quarter, Continental would use this available income for its own benefit. Spiegel charges that this scheme to use such “float” money was not disclosed to him, and that when he later learned of it, defendants made misleading statements to cover up.

Spiegel I was heard by Judge Roszkowski, who granted Continental's motion for summary judgment on the basis that the complaint failed to state a claim for relief under RICO. Spiegel now concedes that Judge Roszkowski was right in that respect. See Spiegel’s Response to Memorandum in Support of Motion to Dismiss at 4. In particular, the Court held that Spiegel had not alleged “a pattern of racketeering activity.” Spiegel’s RICO claim was predictated solely on alleged violations of the federal mail fraud statute, 18 U.S.C. § 1341. The Court found that Spiegel had not alleged two or more acts of mail fraud and thus had not satisfied RICO’s requirement that a violation be based on at least two acts of racketeering activity within a ten-year period. See 18 U.S.C. § 1961(5). The Court assumed that a letter written by defendant Paulsen, concerning Continental’s policy of reinvesting trust income quarterly, was a predicate act of mail fraud, but held that this act was the only one alleged.

After the Spiegel I complaint had been filed, counsel for both parties had exchanged correspondence relating to the state court suit, which we will detail later. Spiegel argued to Judge Roszkowski that two of the letters penned by Continental’s counsel were predicate acts of mail fraud. The Court rejected these arguments because the statements were not alleged in the complaint. It added in dictum that false statements made between attorneys in the context of pending litigation fall outside the scope of the mail fraud statute. Spiegel I, slip op. at 11.

On September 13,1984, the court in Spiegel I denied Spiegel’s motion to reconsider the previous dismissal. Eight days later, Spiegel filed Spiegel II. The complaint essentially mirrors that of Spiegel I, except that it alleges two additional predicate acts of mail fraud — the two letters written by Continental’s lawyer Scott Davis (“Davis”). Continental promptly moved to dismiss Spiegel II, claiming that it was res judicata in light of the recent dismissal of Spiegel I.

II.

Although this case does have an aura of deja vu about it, we cannot agree with Continental that the complaint on its face is barred by res judicata. Res judicata, or “claim preclusion,” contains three elements: (1) the final judgment in the previous case must have been “on the merits”; (2) the parties or their privies to the two suits must be identical; (3) the causes of action in both suits must be identical. See, e.g., Mandarino v. Pollard, 718 F.2d 845, 849 (7th Cir.1983), cert, denied, — U.S. —, 105 S.Ct. 116, 83 L.Ed.2d 59 (1984); Green v. Illinois Dept. of Transportation, 609 F.Supp. 1021, 1024 (N.D.Ill. 1985) (Aspen, J.). While the first and second elements were met in this case, the third one was not. “‘[A] cause of action consists of a single core of operative facts which givefs] the plaintiff a right to seek redress for the wrong concerned.’ ” Green, 609 F.Supp. at 1024, quoting Lee v. City of Peoria, 685 F.2d 196, 200 (7th Cir.1982). Res judicata bars claims for relief which were actually raised in the first suit and also claims which could have been raised. Id.

The problem with Continental’s res judicata defense is that Spiegel II is based on acts which occurred after Spiegel I was filed. These acts could not have been raised in the Spiegel I complaint, and indeed, Judge Roszkowski prevented Spiegel from relying on these acts in contesting the summary judgment motion. In Green we rejected a proposed rule of res judicata that would impose on a plaintiff a duty to amend a suit to include new causes of action as they accrue. 609 F.Supp. at 1025-1026. While Continental is correct that the Court of Claims imposes a duty to amend in cases before it, we rejected that rule as unsound. Id.; see generally 18 C. Wright, A. Miller & E. Cooper, Federal Practice & Procedure, § 4409 (1981) at 76-77. In sum, then, we believe that the doctrine of res judicata does not bar Spiegel II to the extent it is based on acts which occurred after Spiegel I was filed.

However, the only thing sparing Spiegel II from clutches of res judicata is the allegation of two new predicate acts of mail fraud. In all other relevant respects, Spiegel II is a reincarnation of Spiegel I and satisfies the three elements of res judicata. As noted earlier, Judge Roszkowski remarked in dictum that those two alleged predicate acts of mail fraud could not be the basis of a mail fruad violation and, it follows, a RICO claim. In light of that strong dictum, and of the fact that this suit survives only by virtue of those two alleged acts, we directed the parties to brief the issue. The parties agree that this issue is one of first impression. We conclude below that Judge Roszkowski was essentially right.

III.

Before discussing the two letters in issue, we need to describe the context in which the letters were written. In early 1983, after Spiegel had lost in Circuit Court, but while his appeal was still pending, he asked that Continental transfer the Trust assets to another corporate trustee, the First National Bank of Highland Park (“FNB”). Continental agreed to do so. However, Continental wanted to be reimbursed from the Trust’s assets for attorneys’ and trustees’ fees spent in litigating the issue of whether the Trust Agreement required a corporate trustee. Continental believed that Illinois law entitled it to such reimbursement. On June 29, 1983, it petitioned the Circuit Court to award it fees, but the court denied the petition, holding that it lacked jurisdiction during Spiegel’s pending appeal.

Continental resorted to a self-help remedy. It decided to deduct some $40,000 of its claimed $60,000 in fees and expenses from the Trust’s assets just before transferring them to FNB. Continental’s counsel Davis sent Spiegel’s lawyer a letter dated July 13,1983, which mostly discussed the mechanics of the transfer of assets. However, the letter also discussed the deduction of fees and expenses. In relevant part, Davis wrote:

You asked in your letter about the disposition of the Albuquerque, New Mexico municipal bond due on July 1, 1983. That maturing bond was collected on July 1, 1983 and the proceeds credited to the Trust’s account. Continental will shortly send a check (or checks) to FNB and Marshall Spiegel for the Trust’s cash as of the date the check or checks are mailed. (If any dividends are collected on the Trust’s securities (other than municipal bonds) prior to their reregistration and transfer, we will send those dividends as well. We will also send the amount collected for the coupon on the Oregon State bond.) However, much of the Trust’s cash was used to pay some of Continental’s attorneys’ and trustees’ fees and expenses. Continental will shortly send to Marshall Spiegel a final cash statement showing the amount so used.
We do not expect you to agree that this payment of fees and expenses was proper. On the other hand, we believe that Continental is (and will in the future be) entitled to receive from the Trust’s assets substantially more than the amount already taken for fees and expenses. We intend to promptly file with the Chancery Court a petition covering fees and expenses. This is a matter that ultimately must be decided by Judge Holzer.

Exhibit 5 attached to Spiegel’s Complaint at 2-3. Spiegel’s complaint alleges that this deduction of fees and the letter sent describing it amounted to a predicate act of mail fraud. On September 13, 1983, after working out more of the mechanics of the transfer of the assets, Davis sent a letter to both Spiegel’s counsel and William Eifrig, an officer at FNB. Again, the letter discussed a variety of mundane business matters, and then repeated Continental’s position on fees:

As noted in Continental’s June 29,1983 motion for approval of its account and for payment of fees and expenses and its Fee Petition of September 13, 1983, (copies of which are enclosed to Mr. Eifrig), the Trust owes Continental a substantial amount of attorneys’ fees and expenses. As of June 6, 1983, the total amount of attorneys’ and extraordinary trustees’ fees and expenses incurred by Continental was $102,881.65; of this amount, Continental was entitled under Illinois law to receive immediately $61,-138.58. On July 1, 1983, Continental deducted from the Trust’s assets $40,409.31 for fees and expenses, which was substantially less than the $61,138.58 it was entitled to receive immediately as of June 6, 1983. These deductions were reflected in the cash statements sent by Robert Paulsen to Mr. Eifrig on July 19, 1983.
As the Fee Petition reflects, there has been extensive activity in the state and federal litigation since June 6, 1983. Continental has incurred additional attorneys’ fees and expenses of $66,375.60 from my firm alone for the period from June 7, 1983 through August 18, 1983. Continental intends to use every means at its disposal to recover these amounts, as well as the unpaid amount of $62,-472.34 that it previously incurred. The total amount of unpaid fees and expenses stands as of August 18, 1983 at $128,-847.94.
For the reasons set forth in Continental’s June 29 motion and September 13 Fee Petition, Continental is presently entitled to be reimbursed from the Trust for $53,917.07 in fees and expenses and is very likely to be entitled to the remaining $74,930.87 in unpaid fees and expenses at the close of the litigation between Marshall Spiegel and Continental. Continental demands that the $128,847.94 which it has incurred in fees and expenses and for which it has not been paid be deducted from the Trust’s assets and placed in escrow within FNB pending termination of the litigation.
Because of the high cost of the litigation, Continental further demands that FNB maintain the non-real estate holdings of the Trust in a secure, liquid form in order to satisfy the ultimate amount of fees and expenses which the Trust will owe to Continental when the litigation terminates. Given the manner in which Marshall Spiegel is conducting the litigation, it is very likely that all of the Trust’s non-real estate assets will be consumed for such fees and expenses. Moreover, it would not be surprising if one or both parcels of the Trust’s real estate had to be sold to satisfy fee bills if this litigation continues at the present pace. Continental holds FNB responsible for ensuring that the Trust’s assets are available to pay Continental’s fees and expenses. Continental will proceed against FNB itself for these fees and expenses if the Trust’s assets are not available. In light of these facts, it would be prudent for FNB to refuse to permit substantial amounts of the Trust’s assets to be placed into risky ventures or transferred away from FNB.

Exhibit 4 to Spiegel’s Complaint at 2-3. A copy of this letter was sent to Circuit Judge Holzer, who was presiding over the state court case and fee dispute. Spiegel claims that this letter was another predicate act of mail fraud. The issue is whether these two letters are indeed predicate acts of mail fraud.

Judge Roszkowski had this to say in dictum about the issue:

In the view of the court, false statements made between attorneys in the context of pending litigation are outside the scope of the mail fraud statute. No fiduciary duty exists and the parties are dealing at arm’s length. See, e.g., Pit Pros, Inc. v. Wolf, 554 F.Supp. 284 (N.D.Ill.1983) and Salisbury v. Chapman, 527 F.Supp. 577 (N.D.Ill.1981). The appropriate remedy in such a case would, be to lodge a complaint with the appropriate disciplinary body or apply to the court for assistance. A RICO action for treble damages is hardly an appropriate solution.

Spiegel I, slip op. at 11. We agree in general with this statement, although — because it was briefly made in a passing dictum— it needs some elaboration and refinement.

The mail fraud statute punishes schemes to defraud where the mails were used to further the schemes. See, e.g. Pereira v. United States, 347 U.S. 1, 8, 74 S.Ct. 358, 362, 98 L.Ed. 435 (1954). It is not clear to us what “scheme” Spiegel is alleging was furthered by the two letters at issue. It appears (so we will assume) that the “scheme” was one to embezzle thousands of dollars of trust assets under the guise of claiming it as attorneys’ fees. We do not think the mail fraud statute was intended to embrace this purported scheme.

First of all, we find it hard to fathom exactly how the scheme was “fraudulent” in any typical sense of the word. As Spiegel notes in his memorandum, fraudulent schemes typically involve covering up illicit acts through false pretenses, failing to disclose material facts when there is some duty to do so, making false statements or ones with reckless disregard to their truth. See, e.g., United States v. Bush, 522 F.2d 641, 646 (7th Cir.1975). As we read the letters in the context of the record before us, we find that Continental’s lawyer twice wrote Spiegel’s lawyer asserting Continental’s purported right to fees concerning a pending case between the parties. So far as we can tell, no lies were told and nothing was hidden. Indeed a copy of the second letter was sent to the judge presiding over the pending litigation, and the first letter invited confrontation on the issues: “We do not expect you to agree that this payment of fees and expenses were proper____ We intend to promptly file with the Chancery Court a petition covering fees and expenses. This is a matter that ultimately must be decided by Judge Holzer.” The impropriety, if any, was the act itself of deducting the fees from the trust assets. But this was fully and promptly disclosed to Spiegel’s lawyer and to the judge. If this act of self-help was improper or unlawful, the court in that case had power to order repayment of the fees and possible sanctions on counsel. Even assuming the act was improper, it was not, we believe, a violation of the mail fraud statute. Congress could not have intended that the mail fraud statute sweep up correspondence between attorneys, dealing at arm’s length on behalf of their parties, concerning an issue in pending litigation, especially where the presiding judge is aware of the alleged scheme and will ultimately rule on the acts in question.

Although this is a case of first impression, several cases and established principles bolster our holding. Fraudulent schemes which might arguably fall within the language of the mail fraud statute are still outside of its embrace if Congress did not intend that the statute apply to such schemes. See United States v. Boffa, 688 F.2d 919, 929 (3d Cir.1982) (scheme to defraud employees of National Labor Relation Act not within mail fraud statute where Congress intended NLRA to be exclusive), cert, denied, 460 U.S. 1022 103 S.Ct. 1272, 75 L.Ed.2d 494 (1983). Subjecting the letters in issue to the mail fraud statute would chill an attorney’s efforts and duty to represent his or her client in the course of pending litigation. It also would, as it did here, give birth to collateral suits. Where, as here, the court in the first, pending case can fully protect the rights of the parties from abuse or unethical conduct, we see no reason to torture the limits of the mail fraud statute to allow such collateral suits. We do not think Congress intended such a result where alternate remedies exist. Cf. United States v. Gallant, 570 F.Supp. 303, 309-10 (S.D.N.Y. 1983) (scheme to sell bootleg records through mails not within mail fraud act where, inter alia, copyright laws adequately deal with offense). Finally, such a collateral suit would require this Court to touch upon issues which are pending already in the state court suit. We think that concerns of comity counsel against reading the mail fraud statute broadly to cover this context. Cf. Colorado River Water Conserv. Dist. v. United States, 424 U.S. 800, 817-19, 96 S.Ct. 1236, 1246-47, 47 L.Ed.2d 483 (1976) (abstention due to pending state litigation). This was simply a case of lawyers aggressively pursuing their client’s interests in pending litigation, and fully disclosing to their adversaries and the Court what they had done. We express no opinion on the propriety of deducting attorneys’ fees from the trust corpus. Even if this act can be viewed as “pulling a fast one,” it is not the proper subject of a collateral RICO suit in federal court predicated on an extremely broad reading of the mail fraud act.

Spiegel’s contentions to the contrary, that the parts of the letters he objects to were not written in the context of pending litigation, are unpersuasive. We also find his reliance on Schacht v. Brown, 711 F.2d 1343 (7th Cir.1983), cert, denied, — U.S. —, 104 S.Ct. 508, 78 L.Ed.2d 698 (1983), misplaced. Schacht involved a RICO claim against, among others, accountants who allegedly played an active part of the fraudulent scheme. Here the attorneys are not principals in the scheme. More importantly, it is significant (as we have emphasized) that the attorneys wrote the letters in the context of pending litigation. Policy reasons, including protecting the attorney-client relationship, preventing collateral litigation, and respecting concerns of comity, led us to find that these letters fell outside of the mail fraud statute. Simply labelling accountants and attorneys as “professionals,” as Spiegel does, does not prove that Schact is controlling or even relevant.

This is not to say that if a client somehow induced an unwary lawyer to write a letter which furthered a fraudulent scheme that the client would necessarily escape the mail fraud statute. Nor should our opinion be read to immunize lawyers who are principals in a fraudulent scheme. But this is not such a.case. Moreover, we are aware of and agree with cases which have read RICO broadly to encompass many varieties of unscrupulous conduct. See Haroco v. American National Bank & Trust Co., 747 F.2d 384 (7th Cir.1984) (RICO does not require allegation of “racketeering injury”), cert, granted, — U.S. —, 105 S.Ct. 902, 83 L.Ed.2d 917 (1985); Schact v. Brown, 711 F.2d at 1353-56 (RICO may embrace “ordinary” business frauds). But RICO still must be predicated on, in this context, two or more mail fraud violations. And the mail fraud statute, while also broad, does not extend to this case.

Even if the mail fraud statute could somehow be stretched to cover this case, we think that no claim for relief has been stated since the mailings could not have “furthered” the scheme. When the July 13, 1983 letter had been sent, Continental had already deducted the fees, and the letter simply disclosed the fait accompli. Where a mailing is made after a scheme has reached its fruition, it does not “further” the scheme and cannot support a mail fraud conviction. See United States v. Maze, 414 U.S. 395, 401-02, 94 S.Ct. 645, 649, 38 L.Ed.2d 603 (1974); United States v. Ledesma, 632 F.2d 670, 677-78 (7th Cir.), cert, denied, 449 U.S. 998,101 S.Ct. 539, 66 L.Ed.2d 296 (1980). It is true that mailings “made to promote the scheme,” or “which relate to the acceptance of the proceeds of the scheme,” or “which facilitate concealment of the scheme” are exceptions to this rule. See Ledesma, 632 F.2d at 677-78 n. 11. But this case does not fall within any of these exceptions. Indeed, far from “concealing the scheme” the two letters fully disclosed the already accomplished “scheme,” one of them disclosing it to a judge. The mailings did not lull Spiegel (or counsel) into false security, cause delay or otherwise further the scheme; rather, the disclosure increased the possibility that the scheme — if unlawful — would be remedied, and thus it cannot as a matter of law be said to have furthered the scheme. See Maze, 414 U.S. at 403, 94 S.Ct. at 650.

In sum, then, we conclude that the two letters fall outside the scope of the mail fraud statute. We are thus, as Judge Roszkowski was, left with one alleged predicate act of mail fraud. The rest of the RICO claim must be dismissed as barred by res judicata, since it is Spiegel I revisited. Because the RICO claim was the only federal claim in the suit, our pendent jurisdiction over the state law claims is dissolved, and the complaint as a whole must be dismissed. See United Mine Workers v. Gibbs, 383 U.S. 715, 716, 86 S.Ct. 1130, 1139, 16 L.Ed.2d 218 (1966). It is so ordered.

      . "RICO” is the common acronym for the "Racketeering Influenced and Corrupt Organization Act,” 18 U.S.C. § 1961 et seq.

      . Because we looked beyond the face of the complaint in deciding this motion, we convert it to one for summary judgment under Fed.R. Civ.P. 56. See Fed.R.Civ.P. 12(b).

      . While the alleged scheme is more complex than indicated by this thumbnail sketch, additional elaboration is not needed for the purposes of this opinion.

      . Judge Roszkowski, like this Court, converted a motion to dismiss into one under Rule 56.

      . RICO redresses injuries "to business or property," 18 U.S.C. § 1964(c), by reason of "a pattern of racketeering activity” conducted by "any enterprise.” 18 U.S.C. § 1962. A "pattern of racketeering activity” means at least two acts of such activity within ten years. 18 U.S.C. § 1961(5). "Racketeering activity” includes several state law offenses, as well as several ones which fall under Title 18. Thus, in general, civil RICO actions must be predicated on two or more specific indictable offenses. See generally Haroco v. American National Bank & Trust Co., 747 F.2d 384, 386-87 (7th Cir.1984), cert, granted, — U.S. —, 105 S.Ct. 902, 83 L.Ed.2d 917 (1985).

      . Although the first suit was dismissed for failure to state a claim upon which relief could be granted, such dismissals are generally considered to be "on the merits” for res judicata purposes. See Federated Dept. Stores, Inc. v. Moitie, 452 U.S. 394, 399 n. 3, 101 S.Ct. 2424, 2428, 69 L.Ed.2d 103 (1981); Cannon v. Layola University, 609 F.Supp. 1010, 1015-1016 (N.D.Ill. 1985) (Aspen, J.), generally 18 C. Wright, A. Miller & E. Cooper, Federal Practice & Procedure, § 4439 (1981) at 354-62. Because Judge Roszkowski plainly addressed the merits of the Speigel I complaint, that dismissal could have res judicata effect under the first prong of the test. As for the second factor, the parties do not dispute that they were themselves in Spiegel I.

      . See, e.g., Everett Plywood Corp. v. United States, 512 F.2d 1082, 1087 (Ct.C1.1975).

      . Continental relies on several Illinois cases in support of its position. See Hamilton v. Nielsen, 678 F.2d 709, 714 (7th Cir.1982) (interpreting Illinois law); Templeton v. Continental Illinois National Bank, 429 F.Supp. 1294, 1303-04 (N.D. Ill.1977) (same); Northern Trust Co. v. Continental Illinois Natl Bank, 43 Ill.App.3d 169, 200-02, 1 Ill.Dec. 767, 356 N.E.2d 1049 (1976), aff'd in relevant part, 68 Ill.2d 502, 12 Ill.Dec. 248, 369 N.E.2d 1262 (1977). We of course express no opinion on Continental's purported right to fees, but we do note that on the basis of these cases it at least appears to have a good faith basis for requesting those fees.

      . Paragraph 9 of the Complaint alleges that the first three sentences of the July 13 letter excerpt were "not true as the funds from this bond were embezzled by the defendants herein and not furnished to [FNB].” This allegation certainly strains credulity, since the rest of the letter, which was not quoted in the complaint — clearly discloses that some of the funds were deducted. It is thus hard to see what is “untrue” or at all misleading about the first three sentences.

      . The Complaint also implies that the scheme was fraudulent in that the amount claimed for fees is allegedly exaggerated and unwarranted. See Paragraph 8(c).

      . The complaint does allege several material non-disclosures concerning the September 13 letter. See Paragraph 7. Even if these "non-disclosures" were somehow material, they were "omitted” from a letter of one attorney to opposing counsel in the context of adversarial litigation. Several of the "omissions” were obviously already known to opposing counsel. As for any others, we see no duty to disclose such facts given the context of opposing attorneys dealing at arm’s length. Spiegel has failed to show that Continental's counsel had any fiduciary or other duty to disclose those facts in that context.

      . In light of our holding, we need not decide whether there is a genuine issue of fact about whether the letters were mailed.


source: Caselaw Access Project

author: HAND, Chief Judge.

license: Public Domain

text:
    UNITED STATES of America v. Gary A. GREENOUGH.
    Crim. No. 84-00097.
    United States District Court, S.D. Alabama, S.D.
    April 18, 1985.

      J.B. Sessions, U.S. Atty., Mobile, Ala., for plaintiff.
    E.B. Ball, Bay Minette, Ala., for defendant.
   ORDER

HAND, Chief Judge.

This cause came before the Court on defendant Gary A. Greenough’s motion for bail pending appeal. Greenough was convicted on all counts of a fourteen count indictment charging him with the following violations of the United States Code: aiding and abetting George Juzang and David Gwin to commit mail and wire fraud in violation of 18 U.S.C. §§ 2, 1341, and 1343; conspiracy to commit mail and wire fraud in violation of 18 U.S.C. § 371; and violation of the Hobbs Act, 18 U.S.C. § 1951. Following his conviction, Greenough was sentenced to a term of imprisonment of twenty-five (25) years, and received a substantial fine. After reviewing defendant’s motion, and for reasons stated below, the Court has concluded that the motion is due to be DENIED.

As a preliminary matter, the Court notes that in his original motion for bail pending appeal, Greenough challenged the constitutionality of 18 U.S.C. § 3143(b) (the Bail Reform Act of 1984), as well as asserting in the alternative that he was entitled to bail under the terms of the statute. In his brief filed several weeks after the motion, the defendant does not address the constitutionality of the Bail Reform Act, but instead limits his argument solely to the question of whether he is entitled to bail pending appeal under the terms of the statute. The Court therefore concludes that the defendant has abandoned his constitutional challenge, and addresses itself solely to the merits of the question of whether the defendant is entitled to bail pending appeal under the terms provided for by the Bail Reform Act.

I.

Title 18, Section 3143(b) of the United States Code provides:

The judicial officer [of a court of original jurisdiction over an offense, or of a Federal appellate court] shall order the person who has been found guilty of an offense and sentenced to a term of imprisonment, and who has filed an appeal or a petition for a writ of certiorari, be detained, unless the judicial officer finds—
(1) by clear and convincing evidence that the person is not likely to flee or pose a danger to the community or any person if released pursuant to sections 3142(b) or (c); and
(2) that the appeal is not for purpose of delay and raises a substantial question of law or fact likely to result in reversal or an order for a new trial.
If the judicial officer makes such findings, he shall order the release of the person in accordance with the provisions of section 3142(b) or (c).

Thus, a court must find four factors before granting bail pending appeal. First, the Court must find that the defendant is not likely to flee, and does not pose a danger to the safety of any person or to the community. Second, the Court must conclude that the appeal is not for purpose of delay. Third, the appeal must raise a substantial question of law or fact. Fourth, the Court must conclude that if the substantial question is determined favorably to the defendant on appeal, that decision is likely to result in reversal or an order for a new trial of all counts on which imprisonment has been imposed. United States v. Giancola, 754 F.2d 898, 901 (11th Cir.1985). The burden of establishing these factors is on the convicted defendant. Id.

As to the first factor, this Court previously found at the hearing on bail pending sentencing that the defendant was not a danger to the community or to any person and that he was not likely to flee. The Court sees no reason to change that determination.

The second factor requires an inquiry into whether the purpose of the appeal is for delay. The Court concludes that the appeal is not taken for delay.

The third factor requires the Court to determine whether a substantial question of law or fact has been raised. In United States v. Giancola, supra, at 900, the Eleventh Circuit adopted the reasoning of the Third Circuit Court of Appeals decision in United States v. Miller, 753 F.2d 19 (3d Cir.1985). In Miller, the Third Circuit held that a substantial question “... is one which is either novel, which has not been decided by controlling precedent, or which is fairly doubtful.” Id. at 23. The Third Circuit further explained that the fourth factor, that is, “the likely to result in reversal” language

must be read as going to the significance of the substantial issue to the ultimate disposition of the appeal. A question of law or fact may be substantial but may nonetheless, in the circumstances of a particular case, be considered harmless, to have no prejudicial effect, or to have been insufficiently preserved. A court may find that reversal or a new trial is “likely” only if it concludes that the question is so integral to the merits of the conviction on which defendant is to be imprisoned that a contrary appellate holding is likely to require reversal of the conviction or a new trial.

Id.

With these definitions in mind, the Court now addresses itself to the issues which the defendant has stated he will raise on appeal.

II.

Defendant raises three issues. First, he asserts this Court’s order denying his motion for recusal is erroneous. Second, he claims the Court made two comments during the trial which were so prejudicial to the defendant that he is entitled to a new trial. Third, he argues that the Court committed error when it failed to grant his motion for a directed verdict.

Considering the claims in reverse order, the Court concludes its denial of the motion for a directed verdict fails to raise a substantial question. “The test for determining whether the district judge erred in refusing to grant a motion for acquittal is whether, considering the evidence in the light most favorable to the Government, reasonable persons might find the evidence inconsistent with every reasonable hypothesis of innocence.” United States v. Rackley, 724 F.2d 1463, 1469 (11th Cir.1984), quoting United States v. Sanders, 639 F.2d 268, 270 (5th Cir.1981).

The indictment alleges that the defendant was guilty of conspiring with Gwin and Juzang and others to violate the mail and wire fraud statutes. It is well established that

[t]he elements of a conspiracy under 18 U.S.C. § 371 are: (1) an agreement between two or more persons, (2) an unlawful purpose, and (3) an overt act committed by one of the conspirators in furtherance of the conspiracy____ The existence of a conspiracy may be established through direct evidence or through inference. As stated by this court in United States v. Mulherin:
While mere presence or association with others involved in a criminal scheme is not sufficient to prove participation in a conspiracy, the essential elements of a conspiracy can be proved by inference from the actions of the parties or by circumstantial evidence. Direct evidence of an agreement to join a criminal conspiracy is rare, so a defendant’s assent can be inferred from acts "furthering the conspiracy’s purpose. The government is not required to prove that each alleged conspirator knew all the details of the conspiracy; it is enough to establish that a defendant knew the essentials of the conspiracy.
710 F.2d 731, 738 (11th Cir.1983), cert. denied, — U.S. —, 104 S.Ct. 1305, 79 L.Ed.2d 703 (1984) (citations omitted).

United States v. Perkins, 748 F.2d 1519, 1527 (11th Cir.1984). The Government must establish that “the defendant knew of the conspiracy, and that the defendant intended to join or associate himself with the objective of the conspiracy.” United States v. Gold, 743 F.2d 800, 824 (1984). It must be shown that the defendant was aware of the “essential nature and scope of the criminal enterprise, although it is not necessary that the individual members of the conspiracy know all the details of its operations.” Id. Finally, “[a] defendant may be found guilty of conspiracy even if he did not join it until after its inception, and even if he played only a minor role in the total scheme.” United States v. Clark, 732 F.2d 1536, 1539-40 (11th Cir.1984).

It is clear that the Government presented sufficient evidence to send this case to the jury. In its case in chief, the United States presented evidence from which a jury could find or infer that there was a conspiracy, that its purpose was to defraud the City of Mobile, artists, performers and agents of monies due them, and that numerous overt acts were committed by one of the conspirators in furtherance of the conspiracy. There was also evidence to indicate that Greenough knew of the conspiracy and actively participated in and benefited from it. In particular the evidence showed that Greenough was the City of Mobile’s Finance Commissioner, was aware generally of the nature of the operations at the auditorium, (although he may not have known the exact nature of the skimming operation, i.e., double billing) that he received funds that he knew were being illegally siphoned off from the auditorium, and that he had been receiving funds from as early as the middle or late 1970’s. Other evidence was presented from which it could have been inferred that he actively participated in an attempt to prevent an investigation into irregularities at the auditorium (the James incident) so as to cover up the activities of Gwin and Juzang, protecting both them and himself. There was overwhelming testimony showing that Gwin and Juzang furthered this scheme by use of the mails and by various wire communications. Under the test of United States v. Rackley, 724 F.2d at 1469, it is clear that the Government met its burden, and that the defendant’s motion for directed verdict was properly denied.

Similarly, the defendant has failed to establish a “substantial” question on the five aiding and abetting counts. Those counts allege that the defendant aided and abetted Gwin and Juzang and others to violate 18 U.S.C. §§ 1341 and 1343 (mail and wire fraud). “In order to be convicted of aiding and abetting, a defendant must associate himself with the venture, participate in it as something he wishes to bring about, and seek by his action to make it successful.” United States v. Carter, 721 F.2d 1514, 1533 (11th Cir.1984). It is the burden of the Government to “... show that the accused shared in the principal’s criminal intent as to all the necessary statutory elements of the offense.” United States v. Kriesser, 731 F.2d 1509, 1516 (11th Cir.1984). Direct or circumstantial evidence may be used to prove the essential elements of aiding and abetting. United States v. Pantoja-Soto, 739 F.2d 1520, 1525 (11th Cir.1984). In United States v. Brantley, 733 F.2d 1429, 1435 n. 9 (11th Cir.1984), the court stated:

The aiding and abetting requirement of shared intent between the aider and abettor and the principal, sometimes referred to as the “community of unlawful intent,” see, e.g., United States v. Austin, 585 F.2d 1271, 1277 (5th Cir.1978), is similar to the requirement in conspiracy cases that there be an “agreement”. However, shared intent need not rise to the level of agreement. United States v. Cowart, 595 F.2d 1023, 1031 (5th Cir. 1979). The fact that here [defendant] and [co-conspirator], although not charged with conspiracy, were almost certainly conspirators in fact, emphasizes the strength of “the community of unlawful intent” between [the defendants].

And where a defendant has conspired in a scheme to defraud others, a jury could find that he expected and encouraged the individual communications which constituted the substantive offenses, and would make the defendant an aider and abettor under the substantive counts. United States v. Owen, 492 F.2d 1100, 1104 (5th Cir.1974), cert, denied, 419 U.S. 965, 95 S.Ct. 227, 42 L.Ed.2d 180, and cert, denied 419 U.S. 1019, 95 S.Ct. 493, 42 L.Ed.2d 292.

Under the evidence presented at trial, it is clear that the defendant associated himself with Gwin and Juzang, participated in and benefited from the defrauding of the auditorium, and sought by- his actions to make it successful, particularly in attempting to protect the schemes from discovery and by aiding Gwin and Juzang in the formation of their own promotion firm. The evidence also showed that the defendant was the Finance Commissioner of the City of Mobile, and was aware of the operations of the auditorium. A jury could infer that he was aware of the fact that auditorium bookings were accomplished by mail and wire communications, and therefore a jury could find that he expected and encouraged the individual communications which constituted the substantive offenses. United States v. Owen, supra. Thus, there was more than sufficient evidence to establish that the defendant was a member of a “community of unlawful intent” and that he expected communications by wire and mail which were calculated to defraud talent, agents and the City of Mobile.

The Court, having concluded that the defendant has failed to raise a “substantial” question on the conspiracy, mail fraud and wire fraud convictions, need not address the issues on the Hobbs Act convictions, because even if defendant were to prevail on appeal on the Hobbs Act issues, he would still be required to serve the sentences imposed under the conspiracy, mail fraud and wire fraud convictions. United States v. Giancola, supra, at 901; United States v. Miller, 753 F.2d at 24 (a favorable appeal must result in reversal or order for a new trial on all counts upon which imprisonment has been imposed).

Nevertheless, the Court will add this. Greenough’s assertion that the Government had to prove that Juzang and Gwin were in fear of the defendant in order to sustain the Hobbs Act convictions is incorrect. Greenough was a public official. Proof of threat, fear or duress is not required where a public official is involved, because “[t]he coercive nature of the official office itself provides that necessary inducement, taking the place of fear, duress or threat____ There is no need for a showing of fear in order to sustain a conviction of extortion by a public official____” United States v. Glass, 709 F.2d 669, 674 (11th Cir.1983), reh. and reh. en banc; United States v. O’Malley, 707 F.2d 1240, 1248-49 (11th Cir.1983); United States v. Williams, 621 F.2d 123, 124 (5th Cir.1980), cert, denied 450 U.S. 919, 101 S.Ct. 1366, 67 L.Ed.2d 346 (1981).

Defendant’s claim that no quid pro quo was involved between Gwin and Juzang is also without merit. The obvious quid pro quo, assuming one is necessary under the Government’s theory in this case, is that Greenough got money for his election campaigns and personal benefit, and Gwin and Juzang received peace of mind, future security in their jobs, the ability to carry on their skimming operation, and protection from Greenough (the James incident). For example, in other counts the president of Southeast Wrestling (the victim) testified that he made contributions to Greenough’s campaign in order to insure flexibility of dates, and also received kickbacks from Gwin and Juzang. As for the Roach Prufe incidents, Greenough “extorted” money from the City of Mobile through Gwin and Juzang, which was given to Gary Cooper’s wife in the form of a purchase of unneeded materials. A jury could infer that Greenough did this to help insure the continued political support of Cooper, a longtime political ally, and an admittedly politically influential figure in the City of Mobile’s Black community.

Even so, under the Government’s theory, Greenough was charged with extortion through color of his office to induce the giving of benefits to him to which neither he nor his office would otherwise be entitied. There is a question as to whether under such a theory a traditional quid pro quo is required. See United States v. Margiotta, 688 F.2d 108,133 (2d Cir.1982), cert, denied, 461 U.S. 913, 103 S.Ct. 1891, 77 L.Ed.2d 282; United States v. O’Grady, 742 F.2d 682, 687 (2d Cir.1984); United States v. Trotta, 525 F.2d 1096 (2d Cir. 1975), cert, denied 425 U.S. 971, 96 S.Ct. 2167, 48 L.Ed.2d 794; See also the discussion of the Trotta case in United States v. Dozier, 672 F.2d 531 (5th Cir.1982), and the Court’s discussion of United States v. Glass, United States v. O’Malley and United States v. Williams, supra.

Based on the above, the Court concludes that the defendant’s asserted errors on the Court’s ruling on his directed verdict fail to raise a substantial question, because the issues involved are not novel, are subject to controlling precedent, and are not doubtful. That is, this cause was properly sent to the jury for its consideration because the Government did introduce sufficient evidence, based upon the law as discussed above to create a jury issue. The evidence presented was inconsistent with every reasonable hypothesis of innocence. United States v. Rackley, 724 F.2d at 1469.

The Court also concludes that the two comments made by the Court, which the defendant claims were prejudicial and which entitle him to a new trial, fail to raise a substantial question. In the alternative, if the comments do constitute error, the Court concludes they are not likely to lead to a reversal or a new trial.

The incident involving the Court’s statement that Greenough had made inconsistent statements is discussed wholly out of context. First, the comment was made during an exchange involving the prosecutor’s attempt to cross-examine the defendant. Counsel for the defendant objected to the line of cross-examination, and the Government asserted it had the right to go into the subject matter because the defendant had made inconsistent statements. There was further argument, and the Court ruled that the defendant had made inconsistent statements, and allowed the line of cross-examination to continue. The defendant moved for a mistrial, which motion was overruled. The Court then gave a curative instruction, informing the jury that under Federal law, a judge may comment on the evidence, but that the jury was the sole judge of the facts, was not bound by the Court’s comments, and it was to take the facts as it remembered them. Similar instructions were given to the jury during the Court’s jury charge at the close of trial.

In determining whether a substantial question has been raised, or whether a new trial required, it is important to remember that “a judge’s comments must be studied in the context of the entire proceeding and only if, taken as a whole, these comments ‘are so prejudicial as to amount to denial of a fair trial’ will the constitution require a new trial.” See Allen v. Montgomery, 728 F.2d 1409, 1415-16 (11th Cir.1984), quoting United States v. Preston, 608 F.2d 626, 636 (5th Cir.1979), cert, denied 446 U.S. 940, 100 S.Ct. 2162, 64 L.Ed.2d 794 (1980).

Under these circumstances, including massive evidence of the defendant’s guilt, the Court concludes the defendant was not denied a fair trial. First, since the defendant had made prior inconsistent statements, there was no error in making such a statement within the context of an evidentiary ruling. See, e.g., United States v. Klusman, 607 F.2d 1331, 1334-35 (10th Cir.1979). Second, the jury was given a cautionary instruction on two occasions. Finally, although it is true that jurors might attribute great weight to judicial comments, Allen v. Montgomery, 728 F.2d at 1415, it is also true that courts presume that jurors follow their instructions. See, e.g., Marshall v. Lonberger, 459 U.S. 422, 103 S.Ct. 843, 853 n. 6, 74 L.Ed.2d 646 (1983); Parker v. Randolph, 442 U.S. 62, 73, 99 S.Ct. 2132, 2139, 60 L.Ed.2d 713 (1979); Adams v. Wainwright, 709 F.2d 1443, 1447 (11th Cir.1983).

The defendant also claims that the Court committed reversible error when it made a “statement” during a “pause” in the course of the direct examination of David Gwin. The defendant alleges that the statement or comment was made in the form of a question by the Court to David Gwin: “So, in other words, Mr. Gwin, what you are telling us is that the defendant gave you a license to steal.” The Court has reviewed recently completed, but unedited portions of the transcript, and has been unable to find any such statement in the transcript.

The Court did find a question at the end of the second redirect (page 1050, unedited transcript), in which it asked, “Mr. Gwin, do I understand from your testimony that the city gave little or no supervision to your and Mr. Juzang’s operation at that point?” And Gwin responded, “I think that the operation was totally Mr. Juzang’s and myself with practically no influence as far as direct control from the Finance Department at all.” The Court has been informed by the court reporter that it did say, in denying the defendant’s motion for a directed verdict, that the jury could find that the defendant had given Gwin and Juzang a license to steal, and they had exercised it. That statement was, however, made out of the presence of the jury.

Based on the Court’s review of the transcript, and having no present recollection of when or where any such question was asked, it concludes that the statement alleged by the defendant was not made, and, in the alternative, that the colloquy quoted, which was in the transcript, supra, was not prejudicial. Accordingly, the Court concludes the defendant has failed to raise a substantial question on that issue.

Finally, the defendant has asserted that this Court’s ruling on his motion to disqualify is erroneous, essentially because this Court denied his motion for a hearing on the disqualification issue. The denial of the motion for a hearing was based on counsel’s affidavit, in which he revealed the substance of an in camera discussion he had with Alabama Circuit Court Judge Robert Hodnette. The gist of that discussion was that this Court was noncommittal on how Judge Hodnette ought to handle a motion raised in State Court. Based upon that portion of the affidavit, and a reading of the alleged reply of Sandra Baxley Taylor, the Court concluded no hearing was necessary. An analysis of Taylor’s statements as alleged indicates they were contradictory: first stating maybe she was there, and maybe she wasn’t, then stating the information came from sources. This is not exactly the kind of showing which this Court believes entitles the defendant to a hearing on the disqualification issue. Moreover, the defendant has not pointed to, nor has this Court found, any statutory or case law entitling a party to, or requiring a court to hold a hearing under proceedings pursuant to 28 U.S.C. § 455(a).

As to the merits of the recusal issue, the Court has written to that issue, citing to a case directly on point. In Re United States, 666 F.2d 690 (1st Cir.1981). See Order dated November 21, 1984. (Tab 37)

The Court therefore concludes that the defendant has failed to raise a substantial question on the disqualification issue.

Accordingly, it is hereby ORDERED that defendant’s motion for bail pending appeal is due to be and is hereby DENIED.

      . Treating this issue as a claim that there was insufficient evidence to convict, the same holding would result. The test for reviewing the sufficiency of the evidence to support a conviction is whether in viewing the evidence and the inferences that may be drawn from it in a light most favorable to the Government, a reasonable trier of fact could find the evidence establishes guilt beyond reasonable doubt. United States v. Carrodeguas, 747 F.2d 1390, 1396 (11th Cir. 1984). There was clearly sufficient evidence under this standard to convict. The defendant's directed verdict claim, or a claim or insufficiency of the evidence, should not, in this Court’s opinion, normally be considered a "substantial” question under the Bail Reform Act. If that were the case, then any time a defendant moved for a directed verdict or stated that he would raise a sufficiency question on appeal, he would be entitled to bail. This Court is of the opinion that he would have to establish a "substantial” question by clearly showing the lack of evidence on an element of the offense, or some similar fault with the Government’s case in chief.

      . Defendant Greenough’s acceptance of the fruits of the crime, i.e., payoffs from Juzang and Gwin generated through the skimming operation, is evidence of his intent to aid and abet in the conspiracy, wire and mail fraud counts. United States v. Hurley, 755 F.2d 788, at 790 (11th Cir. 1985).

      . "For purposes of the mail fraud statute, one ‘causes’ the mails to be used when one commits an act with knowledge that the use of the mails will follow in the ordinary course of business, or where one can reasonably foresee such use, even though it may not actually be intended.” United States v. O'Malley, 707 F.2d 1240, 1246 (11th Cir.1983).

      . The defendant's Hobbs Act claims would also fail under an attack on the sufficiency of the evidence. See footnote 1, supra.

      . In United States v. Hope, 714 F.2d 1084, 1088 (11th Cir.1983), during jury deliberations a judge, in response to a jury question, commented on the evidence, but also gave an instruction warning the jurors that, although he was allowed to comment on the evidence, his comments did not constitute evidence, and a jury was to rely on its own recollection of the evidence presented. The Court of Appeals affirmed, holding that a trial judge could comment on "the evidence as long as he instructs the jury that it is the sole judge of the facts and that it is not bound by his comments and as long as the comments are not so highly prejudicial that an instruction to that effect cannot cure the error.” Id.


author: SPELLMAN, District Judge.

text:
    EXPOIMPE, a Panamanian Corporation, Plaintiff, v. UNITED STATES of America, and Forty Two Thousand Seven Hundred Ninety Eight and 95/100 Dollars in United States Currency ($42,798.95), Defendants.
    No. 83-2983-Civ-Spellman.
    United States District Court, S.D. Florida, Miami Division.
    April 24, 1985.

      Jorge Rodriguez-Chomat, Miami, Fla., for plaintiff.
    Richard F. Mitchell, Tax Div., Dept, of Justice, Washington, D.C., for defendants.
   MEMORANDUM OPINION AND ORDER GRANTING MOTION TO DISMISS AND ORDER OF DISMISSAL

SPELLMAN, District Judge.

This case was filed as a “Petition for Remission” by Expoimpe, a Panamanian corporation. According to the petition, Ex-poimpe buys and sells various currencies including United States dollars. Expoimpe seeks the return of $42,798.95 seized by the Drug Enforcement Administration from an account at Banco de Iberoamérica in Miami, Florida, pursuant to a Seizure Warrant dated June 29, 1982, issued by a United States Magistrate. No forfeiture proceedings were ever instituted and Ex-poimpe requests an immediate return of the funds.

The United States filed a motion to dismiss in which it argued that this Court did not have jurisdiction over the currency in question and that any action by Expoimpe to recover the funds is barred by the statute of limitations. According to the United States, approximately one week after the seizure, the Internal Revenue Service levied the funds based on a tax assessment of a woman named Susie Schuster. In accordance with this Court’s Order of February 14, 1985, the United States has submitted affidavits establishing that the funds in question were indeed levied by the Internal Revenue Service on July 7, 1982.

The United States contends that since the funds were levied by Internal Revenue Service, Expoimpe’s request for the return of the money is governed by the statutory provisions concerning wrongful levy and that this action is barred by the time limitations contained in 26 U.S.C. § 6532(c). For the reasons stated below, this Court agrees.

The exclusive remedy for a third party who claims an interest in property that has been levied by the United States, is an action for wrongful levy pursuant to 26 U.S.C. § 7426. That provision waives sovereign immunity and defines the kind of relief that can be granted. The doctrine of sovereign immunity would bar suit except under this provision. Since it has been established that the funds were levied by the I.R.S., the only way that this Court could have jurisdiction to grant the requested relief is if Expoimpe’s “petition” is considered an action for wrongful levy.

Suits for wrongful levy are governed by the time limitations in Section 6532(c) which provides that suit must be filed within nine months of the date of levy unless a request is made for return of the property. If such a request is made, the time within which to file suit is extended to the shorter of twelve months from the filing of the request or six months from notification of the denial of the request.

In the present case, the date of levy was July 7, 1982. Expoimpe did not bring suit until December 7, 1983, well beyond the nine month limitation. The only contact that Expoimpe had with the Internal Revenue Service during this period was a letter written by its attorney to the I.R.S. dated August 20, 1982 in which he protests that the “levy on the bank account ‘Ex-poimpe’ is wrongful ...” Even if this could be considered a formal request for return of property which would toll the statute of limitations, it could not hold the statute beyond 12 months of its submission, or beyond August 20, 1983. Thus under the statutory provisions governing wrongful levy, the instant action is time-barred.

Expoimpe argues that it should not be barred from pursuing this suit for several reasons. First, it argues that the provisions of the I.R.S. Code should not govern this action. According to Expoimpe, the real issue here is the failure of the United States to institute forfeiture proceedings. Because such proceedings were not instituted, and the United States did not receive the Court’s permission to otherwise disburse the funds, Expoimpe is entitled to their return. Under this theory, the Internal Revenue Service had no authority to levy funds that were being held by the DEA subject to forfeiture. The Court finds that this argument is completely without merit.

When a taxpayer fails to pay his taxes within 10 days of notice and demand, the Internal Revenue Service is authorized to collect the tax “by levy upon all property and rights to property (except property as is exempt under section 6334) belonging to such person or on which there is a lien provided ...” 26 U.S.C. § 6331. The exemptions to this provision are listed in Section 6334(a) of Title 26 and include such items as wearing apparel, personal effects, unemployment compenstion and workers compensation. The all-pervasive reach of the power to levy is underscored by subsection 6334(c) which provides that “[njotwithstanding any other law of the United States, no property or rights to property shall be exempt from levy other than the property specifically made exempt in subsection (a).” Thus, the power of the I.R.S. to levy “reaches all property whether in possession of the owner or in the possession of third parties or agencies.” Field v. United States, 263 F.2d 758, 763 (5th Cir.), cert, denied, 360 U.S. 918, 79 S.Ct. 1436, 3 L.Ed.2d 1534 (1959). See also United Sand and Gravel Contractors v. United States, 624 F.2d 733, 734, 736-37 (5th Cir. 1980) (levy authorization reaches property which is in the hands of an agency of the United States). It therefore was not improper for the I.R.S. to levy funds that had been previously seized by the Drug Enforcement Administration.

Because the funds were levied by the I.R.S., there is no longer a need to institute forfeiture proceedings. The United States is not claiming any right to maintain the funds on the basis of the original seizure. Rather, its claim rests entirely upon the levy by the Internal Revenue Service. Accordingly, whether the United States properly has the funds depends upon the validity of the of the levy and must be tested in procedures properly instituted pursuant to the Internal Revenue Laws. See United States v. Freedman, 444 F.2d 1387, 1388 (9th Cir.1971).

Expoimpe also argues that the statute of limitations should not bar this action because it did not receive notice that its funds had been levied by the I.R.S. Indeed, Ex-poimpe claims that it first learned that its money had been seized by the I.R.S. when its attorney received a copy of the Motion to Dismiss filed by the United States. This argument is also without merit.

There is no duty upon the United States to notify possible third party claimants when property has been levied. Dieckmann v. United States, 550 F.2d 622, 624 (10th Cir.1977). Rather, the law imposes a duty upon property owners to exercise reasonable care in protecting it. “Congress in fixing the nine-month period in section 6532 within which an action may be brought assumed that owners of property would exercise reasonable diligence in looking after it.” Id. The nine month period provides an opportunity for someone of reasonable diligence to discover a levy and to lay claim to the property. The limitations period begins to run from the date of levy and “exceptions or expansion of consents to be sued are not to be implied.” Id. Because there is no duty to give notice, the lack of knowledge of a third party does not toll the statute of limitations.

Moreover, notwithstanding the representations made by Expoimpe in its pleadings that it did not know of the I.R.S. levy, the record in this matter indicates that it was on notice of the levy. The attorney that Expoimpe hired to represent the corporation in this matter, Mr. Raymond Takiff, wrote a letter to the Internal revenue Service in August of 1982 in which he complained of the levy on the Expoimpe bank account. Thus, Expoimpe’s agent had notice but apparently failed to take the proper steps to present Expoimpe’s claim.

In sum, this Court finds that this “petition” must be treated as a suit for wrongful levy pursuant to 26 U.S.C. § 7426. Because Expoimpe failed to bring this action within the time provided by section 6532(c), this Court does not have jurisdiction. Accordingly, the defendant’s Motion to Dismiss is GRANTED and this cause is DISMISSED. In light of this ruling, all other motions that are presently pending are moot.


author: GILES, District Judge.

text:
    JAMES E. McFADDEN, INC. v. BALTIMORE CONTRACTORS, INC., et al.
    Civ. A. No. 83-1905.
    United States District Court, E.D. Pennsylvania.
    May 1, 1985.
    Barbara L. Farley, Philadelphia, Pa., for James E. McFadden, Inc.
    Jeanne Ward Ryan, Stradley, Ronon, Stevens & Young, Philadelphia, Pa., for United States Fidelity & Guaranty Co.
   MEMORANDUM

GILES, District Judge.

James E. McFadden, Inc. (“McFadden”) brought this diversity action against several defendants to recover monies allegedly due it for construction work performed as a subcontractor at the Limerick Generating Station Project. Named as the principal defendants were Bechtel Power Corporation (“Bechtel”), the general contractor, Baltimore Contractors, Inc. (“Baltimore”), the contractor with whom McFadden entered into the subcontract agreement, and United States Fidelity and Guaranty Company (“USF & G”), a bonding company. A default judgment was entered against Baltimore in July, 1983. Summary judgment was entered in favor of Bechtel in May, 1984. Thus, the only remaining defendant at this juncture is USF & G. USF & G did not bond Baltimore on the Limerick job. However, McFadden has proceeded against USF & G on a theory that USF & G took control of Baltimore in 1980. Under plaintiff’s theory, Baltimore was a mere instrumentality of USF & G and therefore USF & G should be held liable for the debts of Baltimore. USF & G has filed a motion for summary judgment arguing that the undisputed material facts show that Baltimore was not the instrumentality of USF & G. For the reasons which follow, USF & G’s motion shall be granted.

FACTS

USF & G bonded Baltimore for numerous construction projects. However, the Limerick project, on which McFadden worked, was not one of them. Baltimore began experiencing severe financial difficulties in 1979-80 because of a loss it incurred on one of its major projects. During this time, Baltimore and its affiliated company, the Empire Construction Company, had USF & G bonded jobs in various stages of completion, having an aggregate contract amount of $142,000,000. USF & G stood to lose up to $50,000,000 in excess of the remaining contract payments, liquidated damages and claims if it took over the jobs and completed them for Baltimore. In order to minimize its risks, USF & G entered into a Supplemental Agreement with Baltimore on April 22, 1980.

Under this Agreement, USF & G loaned about $20,000,000 to Baltimore to fund Baltimore’s continued operation and the completion of bonded jobs. The agreement contained many conditions that had to be met by Baltimore. It also provided that failure to comply with these conditions could result in USF & G’s terminating further bonding and/or foreclosure. Some of these conditions were:

1. Transferring to USF & G all funds paid to Baltimore under various construction contracts bonded by USF & G.
2. Turning over all profits from any joint venture to USF & G to be applied to reduce the line of credit.
3. Promptly paying all sums due and owing for labor in a manner acceptable to USF & G.
4. Furnishing USF & G with documentation justifying overhead expenses upon requesting USF & G to pay such expenses.
5. Allowing USF & G to pay directly for suppliers’ claims or take whatever action necessary to settle such claims upon Baltimore’s failure to pay them.
6. Allowing USF & G to complete projects it had bonded in Baltimore’s name and at Baltimore’s expense if Baltimore failed to complete them.
7. Providing USF & G prompt access to all project sites bonded by it and to Baltimore’s books, records and other job accounts.
8. Installing an accounting system satisfactory to USF & G and providing monthly financial statements to USF & G.
9. Assigning collateral, listed in an attachment to the agreement, to USF & G.
10. Providing that USF & G was the holder in due course of certain promissory notes made by Baltimore.
11. Authorizing USF & G to give instructions to subcontractors, suppliers, etc. necessary in USF & G’s opinion to effectuate the provisions of the agreement.
12. Risking foreclosure if it failed to cooperate in the completion of construction contracts bonded by USF & G or attempted to commence bankruptcy proceedings.
13. Promising not to enter into any new construction contracts except cost plus contracts not in excess of $100,000, make any loans or any investments, purchase any real estate, etc.
14. With respect to unbonded work— providing a monthly accounting to USF & G and holding all funds received from unbonded work in trust to (a) pay for labor and materials, etc. used in completing unbonded work, (b) pay for indirect overhead incurred in unbonded work and (c) pay USF & G as a credit against advances made by USF & G for work bonded by it after all existing unbonded work was completed.
Summary Judgment Standard
Summary judgment may be granted if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law.

Fed.R.Civ.P. 56; Hollinger v. Wagner Mining Equipment Co., 667 F.2d 402, 405 (3d Cir.1981). See also Continental Insurance Co. v. Bodie, 682 F.2d 436, 438 (3d Cir.1982). Any doubts as to the existence of a genuine issue of fact and any inferences drawn from the evidence submitted must be resolved in favor of the party opposing the motion. Continental Ins. Co., 682 F.2d at 438, quoting Hollinger, 667 F.2d at 405 (other citations omitted). Although summary judgment has been “ ‘[characterized as both a ‘drastic’ and ‘extreme’ remedy,” it should be granted when doing so would “ ‘avoid waste of time and resources of both the litigants and the Court where trial would be a useless formality.’ ” Associated Film Distribution Corp. v. Thornburgh, 520 F.Supp. 971, 977 (E.D.Pa.1981), quoting Hollinger v. Wagner Mining Equipment Corp., 505 F.Supp. 894, 896-98 (E.D.Pa.1981).

DISCUSSION

There is no dispute that USF & G loaned Baltimore $20,000,000 which was memorialized in a Supplemental Agreement that made certain requirements regarding the securing of this loan and the completion of projects bonded by USF & G. There is a dispute whether by imposing these requirements, USF & G took total and actual control over Baltimore, rendering it USF & G’s instrumentality. This dispute is a question of law' to be decided by this court. The instrumentality theory has been most thoroughly discussed by the Fifth Circuit in Krivo Industrial Supply Co. v. National Distillers and Chemical Corp., 483 F.2d 1098 (5th Cir.1973), modified, 490 F.2d 916 (5th Cir.1974). To establish liability under an instrumentality theory, “[f]irst, the dominant corporation must have controlled the subservient corporation, and second, the dominant corporation must have proximately caused plaintiff harm through misuse of this control.” Krivo, 483 F.2d at 1103. Generally, “the mere loan of money by one corporation to another does not automatically make the lender liable for the acts and omissions of the borrower.” Id. at 1104 (citations omitted). However, if the “lender becomes so involved with its debtor that it is in fact actively managing the debtor’s affairs, then the quantum of control necessary to support liability under the ‘instrumentality’ theory may be achieved.” Id. at 1105. A “strong showing” is required to establish “actual, participating [and] total control of the debtor” by the creditor. Id. Taking “an active part in the management” does not alone constitute control under the instrumentality theory. Id. For example, in Chicago Mill & Lumber Co. v. Boatmen’s Bank, 234 F. 41 (8th Cir.1916), the court held that there was no total and actual control where the creditor corporation elected one of its officers or employees as president of the debtor corporation who then along with the president of the creditor corporation gave directions to the debt- or corporation. In those cases where liability has been applied under an instrumentality theory, the debtor or subservient corporation had, in reality, no separate corporate purpose from that of the creditor or dominant corporation. Krivo, supra, 483 F.2d at 1105; E.C. Ernst, Inc. v. Baltimore Contractors, Inc., No. 81-3887, slip op. at 5 (E.D.Pa. Aug. 4, 1983). See Edwards Co., Inc. v. Monogram Industries, Inc., 700 F.2d 994 (5th Cir.1983); Baltimore & O. Tel. Co. of Baltimore County v. Interstate Tel. Co., 54 F. 50 (4th Cir.1893).

Here, the evidence taken in the light most favorable to plaintiff shows not that USF & G took absolute and total control of Baltimore, but rather that it took steps to minimize its risks as a major creditor of Baltimore. The Supplemental Agreement by which USF & G loaned the additional $20,000,000 to Baltimore spells out the terms of the loan. It does not transfer total control of Baltimore Contractors to USF & G.

Plaintiff points to several sections of the Supplemental Agreement as evidence of domination by USF & G of Baltimore. It calls attention to (1) the requirement that Baltimore assign to USF & G all funds remaining to be paid to Baltimore under various construction contracts bonded by USF & G including payments for work already performed and materials supplied and payments for future work and materials (Supplemental Agreement 1) and (2) the agreement that “all funds received from the aforesaid construction contracts, including claims for damages and extra work claims against obligees” were to be paid to USF & G “in the manner designated by USF & G.” (Supplemental Agreement j[ 2(a)). With respect to the requirements of paragraph 2, however, plaintiff fails to mention that these funds were to be placed in a trust by USF & G to be applied

first toward the reimbursement of USF & G for any payments made by it to persons supplying labor and/or materials in the prosecution of the work, second for any funds advanced or loaned to PRINCIPALS pursuant to this Agreement, third for all other loss, costs and expenses it has incurred in the discharge of its duties as surety on said BONDS, and fourth to interest on funds advanced or loaned to PRINCIPALS pursuant to this Agreement.

Supplemental Agreement, 2(a). These requirements were imposed by USF & G to insure payment on the loan and do not manifest total and actual control over Baltimore.

Paragraphs 3(a) and (b) of the Agreement required Baltimore to seek USF & G’s approval for all payments advanced for labor, materials, overhead, insurance premiums, taxes, attorney’s fees and consultant's fees and USF & G could withhold payment if it did not approve of the payment. These requirements must be read with the introduction to paragraph 3(a) of the agreement in mind. It reads:

Prompt payment of all sums due and owing by PRINCIPALS for labor, including to their own employees working in the. field, and for materials furnished to PRINCIPALS for use in the prosecution of the work on all construction contracts bonded by USF & G, is the essence of this agreement, and PRINCIPALS agree that they will proceed promptly to pay said accounts and shall not arbitrarily or capriciously delay in paying them.

Reading the paragraphs in question in conjunction with the introduction shows that the requirements contained therein were a means of insuring that Baltimore used the funds loaned to it by USF & G for completing the bonded jobs only.

In paragraph 7(a), Baltimore agreed to assign to USF & G stocks, real estate, other securities, life insurance policies and other assets. Plaintiff states that the collateral assigned to USF & G “far exceeded the value of the $20,000,000” loaned. Although the collateral listed in the Agreement appears to be substantial, no dollar amount has been affixed to it. Assuming the value of the collateral is relevant, it is incumbent upon plaintiff in opposing this summary judgment motion to put forth evidence as to the relevance and value of the collateral. It is unclear what significance the amount of collateral plays in proving that Baltimore was USF & G’s instrumentality especially since USF & G would obtain legal ownership in the collateral only upon Baltimore’s default.

USF & G agreed, in paragraph 10, not to demand payment of interest or principal prior to the expiration of thirty-six months from February 29, 1980 if: (1) Baltimore cooperated fully with USF & G in completing all construction contracts, defending all litigation involving contracts bonded by USF & G and in recovering USF & G’s advance of funds; (2) Baltimore did not “attempt to commence any federal bankruptcy proceedings, avail themselves of any state insolvency law ... or permit [itself] to be adjudicated insolvent or bankrupt;” and (3) Baltimore did not permit assets securing the “Promissory Note to be sold, assigned or otherwise disposed without the written consent of USF & G, or further encumbered by any subsequent security interest,” or the like. Plaintiff characterizes this paragraph as forcing Baltimore to give up the right to declare bankruptcy. However, this paragraph provided that Baltimore would not have to begin repayment of its loan for a period of three years unless it attempted to go into bankruptcy or do one of the other activities listed in that paragraph. Given that USF & G was the creditor, it clearly had the right to make a reasonable demand for repayment. An attempt by Baltimore to avoid repaying its loan by declaring bankruptcy or an attempt to sell assets marked as collateral for USF & G provide reasonable cause for USF & G to demand repayment by Baltimore.

Plaintiff also focuses the court’s attention on paragraph 10(b)(1) in which USF & G conditioned, among other things, Baltimore’s entering into any new construction contracts in excess of $100,000 on obtaining USF & G’s written consent. Failure to obtain this consent could result in foreclosure proceedings. Again, this provision is indicative of USF & G’s desire to minimize its risk. Should Baltimore enter into any new contracts and fall further into debt, USF & G’s risk would have been that much greater.

With respect to the unbonded jobs, plaintiff emphasizes that in paragraph 14 of the Agreement, USF & G required Baltimore to (1) furnish a monthly accounting, (2) hold all funds received from unbonded work in trust and use them to pay (a) for the labor and material costs and the costs of taxes and insurance incurred in completing unbonded work, (b) for the indirect overhead incurred for unbonded work and (c) USF & G as a credit against advances made by USF & G on the bonded work after all of the unbonded work is completed. Furnishing USF & G with a monthly accounting of the unbonded jobs does not amount to Baltimore’s relinquishing control over them. Rather, it is evidence that USF & G wanted to monitor Baltimore’s accounts. Moreover, the inclusion of a provision in the Supplemental Agreement to insure that Baltimore pay labor, material and other costs on unbonded jobs undercuts plaintiff’s theory that USF & G took control over Baltimore “to keep Baltimore going long enough to complete its bonded obligations and settle as many claims as possible before USF & G pulled the financial plug on Baltimore.” Essential to establishing liability under an instrumentality theory is showing that “fraud or injustice proximately result[ed] from a misuse of this [actual and total] control by the dominant corporation.” Krivo, supra, 483 F.2d at 1106. It is true that actual fraud need not be shown and “courts may decline to recognize corporate existence whenever recognition of the corporate form would extend the principle of incorporation ‘beyond its legitimate purposes and [would] produce injustices or inequitable consequences.’ ” Id. at 1106, quoting, Forest Hill Corp. v. Latter & Blum, Inc., 249 Ala. 23, 29 So.2d 298 (1947). Nevertheless, it cannot be said that USF & G’s attempts to insure that Baltimore fulfill its obligations on its unbonded jobs, which may have included the Limerick project, produced “injustices or inequitable consequences” to plaintiff.

As part of the Agreement, an irrevocable power of attorney was given to USF & G employees, Ray Britt, Ronald Wohlust and Steven Trecker. This power of attorney allowed USF & G to insure the completion of work bonded by it. Nothing empowers the USF & G employees to control Baltimore’s activities or management decisions with respect to Baltimore’s unbonded projects or to any projects Baltimore may have had that were bonded by sureties other than USF & G.

Contrary to plaintiff’s contentions, total control over Baltimore by USF & G is not evidenced by the lack of a scheduled repayment plan. The Supplement Agreement did provide that Baltimore had three years before it would have to begin repayment. In addition, the Agreement was replete with provisions requiring Baltimore to put funds in trust which would go towards payment to USF & G after other obligations had been fulfilled.

Plaintiff attached several letters and USF & G internal memoranda in its opposition to USF & G’s motion for summary judgment from which this court is to draw the inference that USF & G was controlling the hiring at Baltimore and that USF & G was secretly controlling Baltimore in general. However, plaintiff’s interpretation of this correspondence greatly exaggerates USF & G’s power over Baltimore. In fact, this correspondence reveals that Baltimore retained its management powers. For example, Victor Frenkil, Chief Executive Officer of Baltimore, wrote to the vice president of USF & G: “You have also been made privy to the substantive changes we have made in our organization____ We feel confident that these changes are in the best interest of our Company.” Plaintiff’s Memorandum in Opposition to the Motion for Summary Judgment, Exhibit F. Thus it appears that it was Baltimore that was responsible for the organizational changes made within the company. These changes may have been subject to review by USF & G but there is no evidence from which it can be inferred that they occurred under USF & G’s control. In this same letter Mr. Frenkil complained that, “[u]nless we are given immediate authority to start bidding work, we will be forced out of business.” Rather than showing control of Baltimore by USF & G, this plea evidences an attempt by Mr. Frenkil to modify the Supplemental Agreement which had in part conditioned Baltimore’s receiving the $20,000,000 loan on its not accepting any more construction projects worth over $100,000. This condition appears a reasonable method of insuring that Baltimore would spend its efforts and resources completing the jobs bonded by USF & G rather than taking on new projects and perhaps finding itself further in debt.

Plaintiff also makes much of USF & G’s refusal to consider requests by Baltimore for the bonding of new contracts until Baltimore had “ ‘on board’ a new Chief Executive Officer.” Plaintiff’s Exhibit G. However, USF & G made it clear that Mr. Frenkil would be selecting the new officer, not USF & G. USF & G added that if it was “to consider bonds for Baltimore Contractors, Inc. and its subsidiaries, [it] must have confidence in the new Chief Executive Officer.” Plaintiff’s Exhibit G. This notification is not indicative of control nor is it unusual. Given Baltimore’s precarious financial situation, conditioning bonding for future projects on confidence in the new chief executive officer was a justifiable position for USF & G to take. Thus, as in Krivo, any control being exercised over Baltimore’s personnel decisions, was by virtue of USF & G’s power to bond or not bond future projects. See Krivo, supra, 483 F.2d at 1110. This type of control is too tangential to be characterized as actual and total.

As further evidence of USF & G’s control, plaintiff points to a letter in which USF & G more or less demanded to be kept informed of joint ventures entered into by Baltimore — especially those where the joint venturer was not going to accept full responsibility for bonding and financing. Plaintiff’s Exhibit J. This letter evidences a concern on the part of USF & G that it may have to bond any such projects. Given this potential responsibility, it undoubtedly wanted to be involved in the negotiations from the very beginning. Thus once again, the letter relied upon by plaintiff merely evidences USF & G’s attempts to lessen its risks with respect to bonded projects, not an attempt to assume total and actual control over Baltimore.

Mr. Frenkil's opinion that USF & G’s president and chairman of the board could “with the bend of [his] little finger ... pull B/C out of this tailspin” is nothing more than unsubstantiated opinion and does not suffice as evidence of total control by USF & G of Baltimore. Nor does James McFadden’s affidavit, in which he states Mr. Frenkil told him: “Don’t let a bonding company take you over like USF & G took us over.” This statement amounts to nothing more than hearsay.

Largely irrelevant to the issue whether USF & G had taken total control over Baltimore are two USF & G interoffice memoranda written during or after the time that USF & G foreclosed on Baltimore. Plaintiff cites these memoranda to refute USF & G’s claim that it “was always above board and that no activities were intentionally withheld from the general public.” In the first memorandum, Mr. Wohlust informed USF & G’s president and chief operating officer that USF & G was moving quickly toward foreclosure on assets of Baltimore and that notices would be published in two weeks regarding the sale by trustees. Pri- or to this publication, USF & G wanted to keep the foreclosure from the media. Reading further it appears that USF & G wanted this two week period in order to prepare an accurate statement to be released to the entire press at the same time. The desire to have an accurate statement for release appears reasonable inasmuch as Baltimore was a major employer and its demise was undoubtedly a newsworthy event. The second memorandum discusses the route USF & G should take in settling or litigating claims by subcontractors against Baltimore. Mr. Wohlust noted that: “If the full extent of BCI’s financial weakness becomes known, the subs will ‘train their guns’ on us. We are a more attractive, less defensible target, and settlement values will rise.” It can be inferred from this statement that USF & G was again taking steps to minimize its losses.

Taken separately or together, the provisions of the Supplemental Agreement and the other evidence in the record show that as in Krivo, the control exercised over Baltimore by USF & G was nothing more than USF & G’s ability to decide whether to continue extending the loan and when to demand its repayment. The Agreement put Baltimore on notice as to which of its activities were likely to result in acceleration or foreclosure. Moreover, there has been no showing of fraud on the part of USF & G. Consequently, there is no evidence that USF & G took total and actual control over Baltimore and plaintiff’s mere instrumentality must fail.

An appropriate order follows.

ORDER

AND NOW, this 1st day of May, 1985, for the reasons stated in the accompanying memorandum, it is hereby ORDERED that United States Fidelity and Guaranty Company’s motion for summary judgment is GRANTED.

      . The other defendants, BCI Contractors, Inc., Victor Frenkil and BCI Huarte & CIA, S.A., were dismissed per stipulation between the parties.

      . Instrumentality is a concept basically routed in state law. The controversy in Krivo involved a corporation whose principal place of business was Alabama. Consequently the Fifth Circuit looked principally to Alabama law. However, its discussion of instrumentality was a general one which examined several other states’ treatment of the concept. Here, both Baltimore and USF & G are Maryland corporations authorized to do business in Pennsylvania. McFadden is a Pennsylvania corporation. The Limerick project was located in Pennsylvania. Pennsylvania and Maryland have both applied or considered the appropriateness of applying the instrumentality theory, although not necessarily to the same fact scenario as the one here. See Baltimore & O. Tel. Co. of Baltimore County v. Interstate Tel. Co., 54 F. 50 (4th Cir.1893); RC. Ernst, Inc., et al. v. Baltimore Contractors, Inc., et al., No. 81-3887 (E.D.Pa. Aug. 4, 1983); Allen v. Philadelphia Co., 265 F. 807 (W.D.Pa.1919), aff’d, 265 F. 817 (3d Cir.1920); Botwinick v. Credit Exchange, Inc., 419 Pa. 65, 213 A.2d 349 (1965); Rumig v. Ripley Manufacturing Corp., 366 Pa. 343, 77 A.2d 360 (1951); Ambridge Borough v. Philadelphia Co., 283 Pa. 5, 129 A. 67 (1925). Thus reliance on Krivo is appropriate.

      . Plaintiff relies on the decision in E.C. Ernst, supra, for the proposition that a material issue of fact exists and the case should be allowed to go to trial. In E.C. Ernst, the plaintiff, like McFadden, was a subcontractor on a project on which Baltimore was the general contractor. E.C. Ernst had brought USF & G into the action as a defendant charging, in effect, that USF & G had taken control over Baltimore and had thereby fraudulently deprived plaintiff of payment. USF & G's motion for summary judgment was denied because the court believed ‘‘[tjhe issue of whether BCI became a mere instrumentality of USF & G is best determined on a fully developed factual record at trial.” E.C. Ernst, supra, slip op. at 7. However, after the record was more fully developed at trial, the court granted USF & G’s motion for a directed verdict. Although this outcome in favor of USF & G in E.C. Ernst cannot be given res judicata or collateral estoppel effect, because McFadden was not a party to that action, it does serve to bolster this court’s finding that there has been and can be no showing that USF & G made Baltimore its mere instrumentality.

      . Further evidence of USF & G’s lack of involvement in Baltimore’s personnel decisions is found in Mr. Frenkil’s letter to Ronald Wohlust, Assistant Vice President at USF & G. Plaintiffs Exhibit H. In this letter, Mr. Frenkil expressed dismay that the hiring of a particular individual "would not result automatically in bonding for B/C Inc., but that all requests for bonding would be decided on the basis of the particular job and the status of B/C at the time of our application.” This passage, with the other evidence in the record, tends to show that USF & G felt that if Mr. Frenkil continued as Baltimore’s chief executive officer, the risk would be too great to justify USF & G’s bonding future projects. It also appears that there were two people considered to replace Mr. Frenkil in whom USF & G had more confidence. However, there was no promise that their being hired would result in immediate bonding. Rather, the bonding of projects would depend on the project to be bonded and on the overall financial status of Baltimore. Apparently there was some discussion to the effect that if another individual being considered for the chief executive officer position was hired, USF & G would guarantee his contract. During an interview with this individual, USF & G promised to provide bonding worth $25 million to Baltimore. For reasons not made clear in the record, this individual’s name was withdrawn as a candidate.