author: COHEN, Senior District Judge:

text:
    Hon YIP a/k/a Yip Hon, Plaintiff, v. Clinton L. PAGANO, Defendant.
    Civ. A. No. 84-3066.
    United States District Court, D. New Jersey.
    April 26, 1985.

      Samuel M. Sprafkin, David C. Sprafkin, New York City, and Gomes & Gould by Harris Gould, Newark, N.J., for plaintiff.
    Irvin I. Kimmelman, Atty. Gen. of New Jersey by Eugene J. Sullivan, Asst. Atty. Gen. of New Jersey, Nancy B. Stiles, Deputy Atty. Gen. of New Jersey (Argued), Trenton, N.J., for defendant.
    Steven R. Ross, Gen. Counsel to the Clerk of the U.S. House of Representatives by Charles Tiefer, Deputy Gen. Counsel to the Clerk (Argued), Michael L. Murray, Asst. Counsel to the Clerk of the U.S. House of Representatives, Washington, D.C., for amicus curiae the Leadership Group of the House Committee on the Judiciary.
   COHEN, Senior District Judge:

This defamation action is presently before the Court on the motion of defendant, Colonel Clinton L. Pagano, Superintendent of New Jersey State Police, for summary judgment pursuant to Fed.R.Civ.P. 56(b). Prior to ruling on this motion, however, we must consider the requests put forth by the Leadership Group of the United States House of Representatives Committee on the Judiciary (the Leadership Group) to appear as amicus curiae in this matter and to have the Court waive Local Rule 4(C) which would require that out of state attorneys be admitted pro hac vice and appear with local counsel. United States District Court, District of New Jersey General Rule 4(C).

I

This action arises from remarks made by defendant, Colonel Pagano, in his opening statement before the House Subcommittee on Crime (Subcommittee) which, on February 10, 1984, conducted a hearing in Atlantic City, New Jersey concerning the alleged use of casinos to launder profits realized by alleged organized crime members and drug traffickers. In his opening remarks defendant stated that Hon Yip, plaintiff herein, was an alleged international drug smuggler who had laundered nearly $400,000 in two Atlantic City casinos.

On July 26, 1984 plaintiff instituted the instant action in which he seeks $70,000,-000.00 in compensatory damages and $10,-000,000.00 in punitive damages. As the sole basis for the present motion, defendant maintains that statements made before a legislative body are absolutely privileged provided they regard a subject properly within that body’s jurisdiction and have some relation to legitimate legislative business. Due to the potential impact that our decision may have on the principles governing the testimony of Congressional witnesses, the Leadership Group seeks the Court’s permission to appear as amicus curiae. Defendant has submitted a letter brief in support of this request; plaintiff has submitted a brief in opposition.

II

At the trial level, where issues of fact as well as law predominate, the aid of amicus curiae may be less appropriate than at the appellate level where such participation has become standard procedure. Accordingly, “the privilege to be heard as an amicus curiae rests within the discretion of the court [which] may grant or refuse leave, according as it deems the proffered information timely and useful or otherwise.” 3A C.J.S. Amicus Curiae § 3 (1973). See Leigh v. Engle, 535 F.Supp. 418 (N.D.Ill.E.D.1982). Leigh involved a request by the Secretary of Labor to participate in that matter as amicus curiae. There, the court denied the request for two reasons. First, it noted that the Secretary’s position was more accurately termed a friend of the plaintiff than a friend of the court. Second, the court expressed its legitimate concern that a grant of the Secretary’s request after more than three years of proceedings, of which he had been aware, would cause delay in further consideration of the matter. Such is not the case here. Plaintiff filed his action in July of 1984, less than seven months prior to the Leadership Group’s request. With the exception of the summary judgment motion presently before us, there have been very few proceedings to date. In opposing the Leadership Group’s motion, plaintiff relies on Casey v. Male, 63 NJ.Super. 255, 164 A.2d 374 (Essex County Ct.1960), wherein the Publishers Bureau of New Jersey and the New Jersey Press Association were denied permission to appear as amici because they sought to assume an advocatory rather than advisory role. “Where a petitioner’s attitude toward the litigation is patently partisan, he should not be allowed to appear as amicus curiae.” Id. at 259, 164 A.2d 374.

Casey, however, is readily distinguishable from the case at bar. In Casey, the groups seeking to appear as amici represented business interests which would be ultimately and directly affected by the court’s ruling on the substantive matter before it. Here, however, the Leadership Group will only be indirectly affected by our ruling on the substantive issue of witness immunity. The Leadership Group’s interest in this matter is nonetheless compelling due to the need of the legislative branch of government to readily obtain information in aid of its law making function. Any ruling by this Court limiting the scope of this immunity will affect the ability of Congress to obtain adequate information in an efficient manner. For example, were we to conclude that only statements made by a witness who had been subpoenaed to testify would be within the immunity, Congress would likely be forced to subpoena all of its witnesses, a cumbersome procedure, or rely on information from fewer witnesses. As a result, the goal of formulating legislation on a well informed basis would be impaired.

The brief proffered by the Leadership Group, although in parts adversarial, nonetheless presents a helpful analysis of the law of legislative immunities and of the functions and procedures of Congressional committees. We do not find that those aspects of the Leadership Group’s brief which advocate defendant’s position so taint it as to outweigh its usefulness. Cf. Keenan v. Board of Chosen Freeholders of Essex Cty., 106 NJ.Super. 312, 255 A.2d 786 (App.Div.1969) (expression of opinion as to appropriate outcome by amicus curiae is proper). Therefore, we shall allow the Leadership Group to appear as amicus curiae on defendant’s motion for summary judgment. As amicus curiae is counsel to the United States House of Representatives, a coordinate branch of the government, we shall waive the requirements of Local Rule 4(C). See United States District Court, District of New Jersey General Rule 4(F) (allowing appearance by attorneys for the United States).

Ill

Fed.R.Civ.P. 56(c) provides that summary judgment will 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.” The moving party bears the burden of demonstrating that there is clearly no genuine issue of fact and all doubts will be resolved against him. Adickes v. Kress & Co., 398 U.S. 144, 157, 90 S.Ct. 1598, 1608, 26 L.Ed.2d 142 (1969); Janek v. Celebrezze, 336 F.2d 828, 834 (3d Cir.1964). Once a movant has supported his motion with affidavits or with other evidence as permitted under Fed.R.Civ.P. 56, the party opposing the motion must adduce “specific facts showing that there is a genuine issue for trial.” Fed.R.Civ.P. 56(e).

In support of his motion, defendant contends that “statements made before a legislative body on a subject properly within its jurisdiction and with some relation to legitimate legislative business are absolutely privileged.” Defendant’s Brief at p. 6.

A

Plaintiff concedes that the absolute privilege noted above exists in the common law of many jurisdictions. We must first consider, however, whether we should apply an absolute privilege under federal or state common law. Only two cases have been published recently dealing with Congressional witness immunity. In the first, Bio/Basics International Cory. v. Ortho Pharmaceutical Cory., 545 F.Supp. 1106 (S.D.N.Y.1982), the district judge thoroughly considered the various requirements for the creation of a federal common law and concluded that the issue of immunity was best determined under state law principles. In the other, Webster v. Sun Company, Inc., 731 F.2d 1 (D.C.Cir.1984), neither the court of appeals nor the district court considered the issue of federal versus state common law. The district judge merely applied what she termed the common law immunity found in the Restatement (Second) of Torts § 590A. Because the court of appeals never questioned the choice made by the district court, Webster is uninstructive.

We note at this point the contention of amicus curiae that it is unnecessary for us to reach this choice of law issue because both New Jersey and federal common law provide essentially the same privilege. Although we agree with the substance of this contention, we believe it to be more appropriate to establish whether we are applying state or federal common law due to the unclear status of New Jersey’s law of legislative witness immunity. See Rogozinski v. Airstream By Angell, 152 NJ.Super. 133, 149-50, 377 A.2d 807 (Law Div.1977).

Although there typically exists “no federal general common law,” Erie Railroad Co. v. Tompkins, 304 U.S. 64, 78, 58 S.Ct. 817, 822, 82 L.Ed. 1188 (1938), certain exceptions have been recognized. Such exceptions “fall into essentially two categories: those in which a federal rule of decision is ‘necessary to protect uniquely federal interests,’ and those in which Congress has given the courts the power to develop substantive law.” Texas Industries, Inc. v. Radcliff Materials, Inc., 451 U.S. 630, 640, 101 S.Ct. 2061, 2067, 68 L.Ed.2d 500 (1981) (citations omitted). It is clear that the instant issue of witness immunity does not fall within the latter exception. See id. at 641, 101 S.Ct. at 2067; Bio/Basics, 545 F.Supp. at 1111. Although the question of whether this issue fits within the exception for the protection of uniquely federal interests is less clear, see Webster, 731 F.2d at 4, we believe that it does not. As in Bio/Basics, there are legitimate, yet conflicting policy interests involved in the granting of an absolute privilege for legislative witnesses. As a result, it is impossible to identify a single substantive federal policy that would be served by the creation of a particular substantive rule of federal common law. First of all, there is a distinct need for witnesses to testify without the fear of facing private defamation actions. By allowing an absolute privilege, the legislature will be aided in obtaining full and frank testimony. Conversely, it is essential to protect innocent third parties from misuse of the committee, and its immunity, by unscrupulous witnesses. These conflicting interests “require an independent policy determination for their resolution.” Bio/Basics, 545 F.Supp. at 1113. Further, “[s]uch an independent policy determination is, absent a paramount federal interest in a uniform rule of law, not to be made by a federal district judge through the creation of federal common law.” Id. See also In re Agent Orange Product Liability Litigation, 635 F.2d 987, 994-95 (2d Cir.1980), cert. denied, 454 U.S. 1128, 102 5. Ct. 980, 71 L.Ed.2d 116 (1981). If a federal rule of law is necessary, we leave it to Congress to enact. Absent such legislation, we shall proceed in an unexceptional manner and apply the substantive laws of the individual states.

B

Having concluded that state law should supply the legal principle in this matter, we now consider whether it is the law of New Jersey, or of some other state, which controls. In deciding this question, we apply New Jersey’s choice of law rules. Klaxon Co. v. Stentor Electric Mfg. Co., 313 U.S. 487, 61 S.Ct. 1020, 85 L.Ed. 1477 (1941). New Jersey has adopted a conflict of law rule in tort cases whereby the courts look “to the law of the jurisdiction ‘having the most significant relationship and closest contacts with the occurrence and the parties.’ ” Rohm and Haas Co. v. Adco Chemical Co., 689 F.2d 424, 429 (3d Cir.1982) (quoting Rose v. Port of New York Authority, 61 N.J. 129, 140, 293 A.2d 371 (1972)).

Although this may be a complicated matter in defamation cases, neither of the parties contends that any state’s law other than New Jersey’s should apply. Therefore, our consideration of this question shall be brief. We find that the application of New Jersey law is most appropriate due to the following factors: (1) the hearing at which defendant made his statement took place in Atlantic City, New Jersey; (2) each of the casinos mentioned in defendant’s statement is located in Atlantic City, New Jersey; (3) defendant is a resident of New Jersey and is the Superintendent of the New Jersey State Police; (4) plaintiff, a citizen of Hong Kong, China, has visited Atlantic City casinos on a number of occasions; and (5) New Jersey has a very substantial interest in the regulation of Atlantic City’s casinos and in ensuring that they remain free of the corruption inherent in any involvement with organized crime and the illegal drug trade. Clearly, these factors outweigh any interests which could be put forth relating to other states’ policies. We turn now to a determination of the relevant New Jersey law.

C

In his brief supporting his motion, defendant urges this Court to adopt the privilege as it is defined in Restatement (Second) of Torts § 590A which reads as follows:

Witness in Legislative Proceedings.
A witness is absolutely privileged to publish defamatory matter as part of a legislative proceeding in which he is testifying or in communications preliminary to the proceeding, if the matter has some relation to the proceeding.

The comment to this section indicates that this privilege is similar in all respects to that granted to witnesses in judicial proceedings and that the comments to that section are applicable to § 590A as well.

It is well established that New Jersey has adopted the Restatement (Second) position relating to judicial immunities. See Rainier’s Dairies v. Raritan Valley Farms, Inc., 19 N.J. 552, 558, 117 A.2d 889 (1955). Thus, we shall consider the reasons for the adoption of the judicial immunity provision and determine their applicability to legislative hearings. Primary among these reasons is the necessity for full disclosure by witnesses in order to further the administration of justice. The identical reason exists in the present context because it is essential that the legislature be fully informed in order to enact appropriate legislation. See Eastland v. United States Serviceman’s Fund, 421 U.S. 491, 95 S.Ct. 1813, 44 L.Ed.2d 324 (1975). Additionally, because of the potential for a judicial body to compel a witness to testify, the need for an absolute privilege becomes all the more necessary. It would be entirely unfair to require one to testify and, as a result, subject him or her to a private suit for defamation. Likewise, the United States House of Representatives has the authority to compel witness testimony thus causing the same potential hardship and resultant necessity for immunity.

Because of the compelling nature of the rationale supporting witness immunity in a judicial setting and the similarity of both the necessity and practicality of the immunity in the legislative setting, we anticipate that the New Jersey Supreme Court would adopt the absolute immunity for statements to legislative bodies being sought by defendant. Finally, we shall consider plaintiff’s attempt to pierce this immunity and the factors relevant thereto.

IV

We find that in order to be absolutely privileged, a statement made to a legislative body must be (1) related to the subject matter (2) of legislative proceedings (3) which are either (a) being conducted or (b) being contemplated in good faith, and (4) which are within the jurisdiction of the legislative body conducting them.

Plaintiff contends that defendant has lost this absolute privilege because he voluntarily appeared at the hearing and made the defamatory statement without being placed under oath. Moreover, plaintiff maintains that defendant’s statement was not made in response to any specific question and bore no relation to the subject matter of the hearing. We note that none of these contentions raise factual issues which would render summary judgment inappropriate.

Even though the Subcommittee has the ability to compel testimony from witnesses, it is not necessary that a witness be subpoenaed in order to receive the protection of the privilege. See Restatement (Second) of Torts § 588, Comment c. See also Webster, 731 F.2d at 4 (unsolicited statements); Bio/Basics, 545 F.Supp. at 1108 (specific request that someone from Ortho testify). Were we to conclude that testimony was privileged only when compelled, we would impose a very significant burden upon both the legislature and potential witnesses. The instant case is factually similar to Bio/Basics where there was a specific request for testimony from Ortho Pharmaceutical but no individual was named in the informal request. Id. In the instant case, the Subcommittee initially invited Lt. Colonel J.J. Dintino, currently Deputy Superintendent of the State Police, to testify. Dintino informed defendant, his superior, of this request who then determined that he was the proper individual to appear at the hearing. (Pagano Affidavit ¶ 2). Therefore, plaintiff cannot contend that defendant’s testimony was entirely unsolicited. Nevertheless, provided that all other relevant factors are satisfied, even unsolicited statements to a legislative body should be privileged. See Webster, 731 F.2d at 4.

We conclude, as well, that the fact that defendant was not under oath at the time he made his statement is not dispositive. See Restatement (Second) of Torts § 588, Comment b. It would be arbitrary and illogical to require that a witness be placed under oath in order to obtain the privilege while allowing his unsworn statements, communicated to the legislature prior to its hearing, to be privileged. Likewise, we find it irrelevant that defendant’s statement was not made in response to a specific question. Id. at Comment c. Any potential for abuse caused by allowing witnesses to make statements prior to any questioning is countered by the relevancy requirement which is central to the privilege itself. We note also that any abuse of the immunity by unsworn witnesses is likely to be tempered by their sincere desire to be recognized as knowledgeable and credible in their testimony. Such legitimate desires strongly support the allowance of the privilege despite the lack of an oath.

Finally, plaintiff contends that the statement made about him was “not relevant to the Subcommittee’s inquiry and [that] such lack of relevancy was conceded when the Subcommittee granted” defendant’s request that all reference to plaintiff be removed from the record. Plaintiff’s brief at 1. As with the relevancy requirement in judicial immunity cases, the standard here is not of “technical legal relevancy, such as would, necessarily, justify insertion of the matter in a pleading or its admission into evidence, but rather a general frame of reference and relationship to the subject matter of the action.” Fenning v. S.G. Holding Corp., 47 NJ.Super. 110, 118, 135 A.2d 346 (App.Div.1957) (emphasis added). The issue of relevance is one for the trial court’s determination. Id. at 119, 135 A.2d 346. Cf. Webster, 731 F.2d at 5 (“So long as the statement has some objective pertinence to the legislative issue it was meant to address, it meets the [relevancy] ... test.”)

Within the jurisdiction of the Subcommittee on Crime are the following areas: “Prevention of Crime, Drug Enforcement, Problems of Criminal Offenders, other appropriate matters as referred by the Chairman, and relevant oversight.” Rule VI(a)(6), Rules of the Committee on the Judiciary. In furtherance of its obligation to investigate matters within its jurisdiction and to make legislative recommendations to the Judiciary Committee, the Subcommittee held the February 10, 1984 hearing in Atlantic City, New Jersey. The subject matter of the Subcommittee’s inquiry is best summarized in the opening statement of Subcommittee Chairman Hughes which, in pertinent part, follows.”

The subcommittee on crime this morning is examining a situation that is of great importance not only to the people of New Jersey, but this country: the alleged use of our casinos by elements of organized crime and drug traffickers to launder the profits of their crimes.
To understand what this hearing is about, it is important to realize a crucial fact about drug trafficking and organized crime. The enormous volume of money generated by these criminal enterprises cannot simply be pocketed by the criminals. The money seems to come in faster than it can be spent. Spending large sums of cash by persons such as drug traffickers, who are without any visible means of support, often generates suspicion.
The goal of every major criminal is to create an ostensibly legitimate source for the wealth they are acquiring and spending, and to invest the proceeds in legitimate as well as illegitimate enterprises. This is the essential objective of money laundering and its importance has been recognized by organized crime experts for decades____
The regulations of the Treasury Department do not place upon casinos the responsibility of reporting these transactions of more than $10,000. Over the last year, however, the Treasury Department has been studying this exemption, and discussing ways to end it____
This hearing is designed to look into the problem of money laundering through casinos, and how best it can be solved. We want to know what the impact is on New Jersey and the Nation of the availability of the casinos for organized crime figures and/or traffickers to use to launder their cash. We want to know what the Treasury Department, after a year of study, is going to propose that will close the money láundering loophole that the reporting exemption for casinos has created. We want to know what the effect upon the casino industry might be if the reporting requirements are implemented____

Hearings before the Subcommittee on Crime of the House Committee on the Judiciary, 98th Cong.2d Sess. 1-4 (1984).

There can be little doubt, after reading this opening statement, that defendant’s remarks were relevant to the subject matter of the hearing. The Subcommittee met to consider the use of casinos by members of organized crime and drug traffickers as a means to launder their profits. In commencing his testimony, defendant read a brief statement wherein he related instances where a dozen individuals, including plaintiff, deposited cash in various Atlantic City casinos with the purpose of laundering it. Defendant also identified each of these individuals as either a member of organized crime or a narcotics trafficker. Such specific examples of money laundering are entirely within the subject of the Subcommittee’s inquiry and are, thus, absolutely privileged.

Plaintiff, not surprisingly, maintains that the statement concerning him was irrelevant which, he contends, was conceded when it was removed from the hearing record at defendant’s request. We disagree. Defendant sought to have all reference to plaintiff stricken from the record in response to plaintiff’s request and in an attempt to obtain a general release from liability. These are legitimate tactical reasons for removal which, given the cumulative nature of defendant’s statement relating the activities of eleven other individuals, do nothing to detract from the statement’s relevance to the Subcommittee’s hearing.

When asked at oral argument whether defendant’s statement would be relevant if true, plaintiff’s counsel maintained that the Court’s question was irrelevant because Pagano’s statement was, in fact, false. Counsel has missed the point of the question and the import of the absolute privilege. Certainly, where an absolute privilege is claimed, the truth or falsity of a statement is immaterial. If truth were the only factor which made a statement relevant, and thus within the ambit of the privilege, there would be no need for the privilege at all as, in most instances, truth is a complete defense to a defamation action. See W. Prosser, Law of Torts § 116 at 797 (4th Ed.1971). The central principle of the privilege is to tolerate defamatory remarks in order to further interests which are, on balance, of greater importance to the overall legislative, or judicial, design than are those interests which would favor the imposition of liability.

We conclude that Col. Pagano’s statement pertaining to Hon Yip related to the subject matter of the legislative proceedings being conducted in Atlantic City, New Jersey and that these proceedings were well within the jurisdiction of the House Subcommittee on Crime. We are aware that summary judgment is an extraordinary remedy which is granted only infrequently by the courts. However, in a case such as this, where there are no factual issues in dispute and a solely legal issue is presented for disposition, summary judgment is appropriate. Defendant’s motion shall be granted.

The Court shall enter an appropriate order.

      . The Leadership Group consists of the Honorable Peter W. Rodino, Jr., of New Jersey, and the Honorable Hamilton Fish, of New York, respectively chairman and ranking minority member of the Committee and the Honorable William J. Hughes, of New Jersey, chairman of the Subcommittee on Crime of the House Committee on the Judiciary.

      . In a prepared statement submitted to the Subcommittee prior to the hearing, defendant wrote:
      "Yip Hon, an international narcotics smuggler from Hong Kong, China, deposited $110,-000.00 in cash at the Golden Nugget Casino and $280,000.00 at Caesar’s Casino.” (Plaintiffs complaint ¶ 5).
      At the hearing itself, defendant made the same statement except that he inserted the word “alleged” prior to "international narcotics smuggler.” (Plaintiff’s complaint ¶ 7).

      . In support of his summary judgment motion defendant initially submitted the affidavit of Hayden Gregory, Esquire. Mr. Gregory, who is counsel to the Subcommittee, provided information in his affidavit relative to the circumstances surrounding defendant’s testimony. In an attempt to depose Gregory, plaintiff obtained a subpoena which Gregory moved to quash in the district court for the District of Columbia. In order to resolve the dispute over that deposition the parties here have agreed to the withdrawal of the Gregory affidavit. Plaintiff contends, however, that the Leadership Group is attempting to replace the Gregory affidavit with its brief. On the other hand, the Leadership Group maintains that the issue of defendant's desired immunity can be resolved without the Gregory affidavit by reliance only upon the public information it has provided. We note here that our decision on the merits of this motion in no way rests on the Gregory affidavit.

      . The United States Supreme Court has used the opening statement of the Committee chairman as a guide in determining the subject of the hearing inquiry. See Hutcheson v. United States, 369 U.S. 599, 601-603, 82 S.Ct. 1005, 1006-1007, 8 L.Ed.2d 137 (1962).
      In addition to Chairman Hughes’ opening statement, amicus curiae has provided us with a report on the Money Laundering Penalties Act of 1984, H.R.Rept. No. 984, 98th Cobng., 2d Sess., Part 1 (1984), wherein the Judiciary Committee identified the subject of the Atlantic City Hearing:
      the Committee has investigated the problems of the significant volume of currency transactions at gaming casinos (which are not currently subject to the reporting requirements) involving the proceeds of drug trafficking and other criminal activity.

        Id. at 3. (emphasis added).


source: Caselaw Access Project

author: STUART, Chief Judge.

license: Public Domain

text:
    BLUE CROSS OF IOWA and Blue Shield of Iowa, Iowa Nonprofit Corporation, Plaintiffs, v. Bruce W. FOUDREE, Insurance Commissioner of Iowa, Defendant, and Health Policy Corporation of Iowa, et al., Intervenors.
    Civ. No. 84-597-A.
    United States District Court, S.D. Iowa, C.D.
    May 2, 1985.

      L. Call Dickinson, Jr. and Craig F. Graziano, Dickinson, Throckmorton, Parker, Mannheimer & Raife, Des Moines, Iowa, for plaintiffs.
    Thomas J. Miller, Atty. Gen., State of Iowa, Fred M. Haskins, Asst. Atty., Iowa Ins. Dept., for defendant.
    Edwin N. McIntosh, Davis, Hockenberg, Wine, Brown & Koehn, Des Moines, Iowa, for intervenors.
   RULING AND ORDER

STUART, Chief Judge.

Plaintiffs, Blue Cross of Iowa [hereinafter “Blue Cross”] and Blue Shield of Iowa [hereinafter “Blue Shield”], brought this action against defendant, the Insurance Commissioner of the State of Iowa, on August 16, 1984. In their complaint, plaintiffs sought rulings (1) that Iowa Code Section 514.4 (1985) and Iowa Administrative Code § 510 — 34.7 violate the due process clauses, taking clauses, and contract clauses of the United States and Iowa Constitutions, and (2) that Iowa-Administrative Code § 510 — 34.7 is invalid as a matter of administrative rulemaking authority and statutory construction. Plaintiffs also moved for a preliminary injunction against enforcement of the challenged law and regulation on August 16.

On August 22, 1984, the Health Policy Corporation of Iowa, the Iowa Federation of Labor, and three Blue Cross-Blue Shield subscribers moved to intervene in order to defend the constitutionality of the challenged law and regulation. The motion to intervene was granted on August 31, 1984.

The Court heard arguments on plaintiffs’ motion for preliminary injunction on August 31, 1984. At the hearing, the parties agreed that the federal constitutional issues could be deemed fully submitted without further hearing pursuant to Federal Rule of Civil Procedure 65(a)(2). The parties were given time to brief the federal constitutional issues and the issue whether the pendent state law questions should be certified to the Iowa Supreme Court. The Court granted the motion for preliminary injunction at the close of the hearing.

Defendant filed a motion to dismiss all state law claims from the complaint on the morning of the preliminary injunction hearing. After the motion had been resisted, the Court granted the motion to dismiss all state law claims on October 30, 1984. The Court was concerned that the Reserved Powers Clause of the Iowa Constitution might have been interpreted by the Iowa Supreme Court as an independent limitation on the Iowa Legislature’s power to amend corporate charters. Thus, the Court indicated in its October 30 Order that it would stay its consideration of the federal constitutional issues, and that the preliminary injunction would extend sixty more days, allowing plaintiff time to seek a preliminary injunction in state court under the Reserved Powers Clause.

On November 13, 1984, plaintiff moved the Court to reconsider its determination that the Reserved Powers Clause was an independent limitation. A hearing on the plaintiffs motion was held on December 13, 1984. After hearing the statements of counsel, the Court reconsidered its prior determination, and determined that the Reserve Powers Clause was not an independent limitation. In addition,' the Court found that the federal constitutional issues were fully submitted, and extended the preliminary injunction until a decision on the merits was made.

Blue Cross was incorporated as a nonprofit corporation in 1939. Since 1939, Blue Cross has at all times been authorized to do business as a hospital service plan under the provisions of Iowa Code Chapter 514. Blue Shield was incorporated as a nonprofit corporation in 1945. At all times since 1945, Blue Shield has been authorized to do business as a medical and surgical service plan under the provisions of Iowa Code Chapter 514. Plaintiffs were established through private initiative, with a relatively small amount of seed money being provided by health care providers.

Plaintiffs were incorporated for the express purpose of establishing, maintaining, and operating a nonprofit hospital service plan (Blue Cross) and a nonprofit medical and surgical service plan (Blue Shield) whereby health care services would be provided at the corporation’s expenses to those entering into contracts with the corporation (subscribers). According to plaintiffs’ President, D. Eugene Sibery, plaintiffs’ purpose is to provide subscribers with high quality health care coverage at affordable costs, while working with providers to accomplish the purpose.

As special nonprofit health care corporations, plaintiffs have throughout their existence been subject to a much higher degree of state regulation than have commercial health insurers or other corporations. Plaintiffs’ articles of incorporation must be approved by defendant before they are effective. To assist the plaintiffs in meeting their purpose of providing health care services to Iowans, the State of Iowa has given plaintiffs several advantages over their commercial competitors. These advantages include an exemption from both the state insurance premium tax and all other provisions of the state insurance laws.

Plaintiffs had been required by former Iowa Code Section 514.4 to maintain at least a simple majority of health care providers on their respective boards of directors. Nomination of board members had been by the boards themselves, the boards’ nominating committees, or the members of the corporation. Subscribers have often comprised a substantial portion of plaintiffs’ boards. In fact, plaintiffs’ President testified that currently eleven-twenty-thirds of the Blue Shield board are subscribers, and subscribers comprise the majority of the Blue Cross board.

Both Blue Cross and Blue Shield membership is effectively controlled by providers who have contracts with the corporations. With few exceptions, plaintiffs’ members have at all times been health care providers under contract with plaintiffs. Plaintiffs’ members do not invest any funds in plaintiffs in order to obtain membership. The sole pecuniary interest of the members is a very limited exposure for corporate losses.

Plaintiffs have come to be the largest health insurance organizations in Iowa. They operate throughout the state, and have over 700,000 contracts providing coverage for over 1.4 million Iowans. Blue Cross controls over thirty-eight percent of the Iowa hospital services insurance market. Blue Shield controls approximately thirty-five percent of the Iowa medical and surgical services insurance market.

In order to provide insurance, plaintiffs enter into contracts with members of the public, known as subscribers, and health care providers, such as hospitals and physicians. A subscriber contract binds plaintiffs to pay for the subscriber’s health care services in return for the subscriber’s payment of established premiums. A provider contract requires a health care provider to provide services to plaintiffs’ subscribers in return for the provider’s agreement to accept certain amounts as payment in full for services. Plaintiffs, therefore, control a large share of the health care insurance market and are in the position to negotiate with subscribers and providers to establish premiums and payments for health care services.

In 1978, the Subcommittee on Oversight and Investigations of the United States House of Representatives’ Committee on Interstate and Foreign Commerce found that there was a serious conflict of interest problem created by physician domination of most Blue Shield boards of directors. Physicians were found to comprise a majority of the boards of forty-four of the sixty-nine Blue Shield plans. In addition, the Subcommittee found that many nonphysician board members were persons selected by physicians or persons with close ties to the health care industry. This led the Subcommittee to conclude that the common practices of the Blue Shield plans permitted

physicians to dominate Blue Shield plans to affect their reimbursement. It also prevents the plans from making effective independent decisions aimed at controlling costs and prevents policyholders from exercising an effective voice in determining the types of providers able to be reimbursed, the scope, and the cost of health care coverage.

Subcommittee on Oversight & Investigations of the House Comm, on Interstate & Foreign Commerce, 95th Cong., 2d Sess., Conflicts of Interest on Blue Shield Boards of Directors 3 (Comm. Print 1978). The Subcommittee also found that there was little effective state regulation of the conflicts of interest on the boards of the Blue Shield plans, and that the national Blue Shield Association was doing little to eliminate the conflicts of interest.

As recently as this year, the Michigan Supreme Court found that the board of Michigan’s Blue Cross and Blue Shield plan has been the target of controversy because of its conflicts of interest. The Court found that the Michigan plan has been unresponsive to consumers’ interests and lackadaisical in its cost-containment efforts. The primary reason for these deficiencies is that the Michigan Blue Cross and Blue Shield board had been the subject of undue and excessive provider influence. Blue Cross & Blue Shield v. Milliken, 422 Mich. 1, 367 N.W.2d 1, 11, 19-20, 32 (1985).

The Iowa Governor’s Commission on Health Care Costs found that the State was experiencing serious problems caused by rapidly increasing health care costs. According to the Commission, health care costs in Iowa had grown at a rate nearly twice that of the general rate of inflation. This increase in health care cost was determined to be detrimental to the Iowa public, and Iowa government and business.

Acting under the reserved power clause, Iowa Const., art. VIII, § 12, and Iowa Code § 491.39 (1983), the 1983 and 1984 Sessions of General Assembly of Iowa, enacted legislation intended to maintain the quality of health care services in Iowa, while improving the cost efficiency of the health care services industry. The new legislation was passed because the Legislature found there was an urgent need to abate the rapid rise in health care costs so as to keep health care accessible to all Iowans. One provision of the new legislation, Iowa Code § 514.4 (1985), requires a two-thirds subscriber majority on the boards of directors of all nonprofit health service corporations, including plaintiffs’ boards.

Section 514.4, as amended, requires defendant to promulgate rules establishing a process for nomination of subscriber-nominees for nonprofit health service corporation boards. Defendant is directed to provide for each corporation an independent subscriber nominating committee, comprised of subscribers, to select all subscriber nominees and provider nominees until the two-thirds subscriber board majority requirement has been met. Section 514.4 also provides that after the two-thirds majority requirement is met, the board of directors will select all subscriber and provider nominees. Although Section 514.4 allows for petitioning for nomination by both subscribers and providers, it has been interpreted by defendant to vest veto power over such petitions for nomination in the independent subscriber nominating committee until the two-thirds subscriber majority is in place and, subsequently, in the boards of director. Section 15 of the new law, Act of April 26, 1983, Ch. 27, § 15, 1983 Iowa Acts 46, requires that each nonprofit health service corporation shall have a simple subscriber board majority by August 1, 1984, and a two-thirds subscriber board majority by August 1, 1985.

The national Blue Cross and Blue Shield Association has for several years espoused the position that subscribers should be in the majority on Blue Cross and Blue Shield boards of directors. After the enactment of Section 514.4, both plaintiffs’ management and executive committees recommended to plaintiffs’ boards that, for various business- and policy-related reasons, plaintiffs comply with Section 514.4. Nonetheless, the plaintiffs’ boards decided to go forward with litigation.

I. Substantive Due Process

Plaintiffs contend that enforcement of Section 514.4 would deprive them of their property without due process of law, in violation of the Fourteenth Amendment of the United States Constitution. According to plaintiffs, the new law requiring subscriber majorities on plaintiffs’ boards effectively divests plaintiffs and plaintiffs’ members of the assets of the corporation, the financial investments of the corporate members, and the members’ right to select corporate management and control the plaintiffs’ policies.

At the outset, the Court finds that plaintiffs do not accurately characterize the effect of enforcement of Section 514.4. The corporations will retain possession of their assets. The new law does not vest the state or a group of subscribers with possession. Rather, the law shifts control of the plaintiffs’ boards of directors from providers to subscribers. The reason for this reapportionment of board memberships is discussed more fully below.

Plaintiffs are nonprofit corporations organized to offer the public reasonably priced health insurance. The corporate members are not expected to benefit individually from their membership. The financial investments of the members in the corporations are small and the risks of loss are limited. Any economic benefit derived from the individual membership comes from the provider contract, not corporate membership. Although the assets of the corporations are substantial, the members of the corporation have no vested interest in them. Dissolution, if it should occur, would be supervised by the insurance commissioner. In the Court’s opinion the traditional property rights protected by the due process clause of the federal and state constitution are not violated or compromised by the legislation in issue. There is a significant factual distinction between plaintiffs and its commercial competitors and other highly-regulated corporations such as public utilities.

Section 514.4 is a regularly-enacted law adjusting the burdens and benefits of economic life in Iowa. The law comes to this Court with a strong presumption of constitutionality. Plaintiffs bear the burden of showing that Section 514.4 has no reasonable relationship to a proper legislative purpose, or is arbitrary and discriminatory in nature. Ferguson v. Skrupa, 372 U.S. 726, 728-32, 83 S.Ct. 1028, 1029-32, 10 L.Ed.2d 93 (1963); Williamson v. Lee Optical Co., 348 U.S. 483, 491, 75 S.Ct. 461, 466, 99 L.Ed. 563 (1955); Minnesota Ass’n of Health Care Facilities, Inc. v. Minnesota Dep’t of Public Welfare, 742 F.2d 442, 447 (8th Cir.1984); see National Railroad Passenger Corp. v. Atchison, Topeka & Santa Fe Ry., — U.S.-,---, 105 S.Ct. 1441, 1458-59, 84 L.Ed.2d 432 (1985) (Fifth Amendment analysis).

The Court finds that the Iowa Legislature was eminently rational in concluding that requiring a subscriber majority on nonprofit health service corporation boards would bring about more effective health care cost containment by the corporations, thus better serving the purpose for which plaintiffs were organized. The conflicts of interest presented by the continuation of provider majorities had been disclosed by the Congressional Subcommittee in 1978. Health care costs had grown very rapidly notwithstanding efforts by government, employers, and the health care industry to contain them. The Iowa Legislature, therefore, sought to utilize direct subscriber input in nonprofit health service corporation policymaking, by requiring subscriber majorities, to make the corporations more responsive to the cost-containment concerns of the subscribers and other non-provider entities. Section 514.4 is also neither arbitrary or discriminatory. In conclusion, the enforcement of Section 514.4 would not violate the Due Process Clause of the Fourteenth Amendment.

II. Taking of Property Without Just Compensation

Plaintiffs contend that enforcement of Section 514.4 would effect a taking of every piece of corporate property without just compensation. According to plaintiffs, placing a subscriber majority on plaintiffs’ boards transfers plaintiffs’ property to what are in substance new and different corporations. This violates the per se rule prohibiting takings without compensation announced in Loretto v. Teleprompter Manhattan CATV Corp., 458 U.S. 419, 441-42, 102 S.Ct. 3164, 3179-80, 73 L.Ed.2d 868 (1982), because the State has carried out a permanent, physical occupation of all the corporations’ property, according to plaintiffs.

The Court again rejects plaintiffs’ characterization of the effect of enforcement of Section 514.4. As stated above, the corporations will retain possession of their assets. The reason for plaintiffs’ corporate existence — maintaining health insurance plans that provide subscribers with access to high quality health care at affordable costs, with input from providers — will also remain unchanged. Enforcement of the new law, therefore, will not result in the type of physical appropriation addressed by the Loretto court. Blue Cross & Blue Shield v. Milliken, 422 Mich. 1, 367 N.W.2d 1, 25 (1985).

Furthermore, plaintiffs and other nonprofit health service corporations have always been subject to more state regulation than private commercial corporations. Part of that regulation was the requirement that all nonprofit health service corporations maintain a provider board majority. The Iowa Legislature repealed the provider majority requirement and replaced it with a subscriber majority requirement for the purpose of allowing subscribers direct input into plaintiffs’ cost-containment policymaking process. Plaintiffs cannot contend that they had a vested right, based on the repealed law, in the Iowa Legislature continuing its mandate of provider board majorities. National Railroad Passenger Corp. v. Atchison, Topeka & Santa Fe Ry., — U.S. -, -, 105 S.Ct. 1441, 1450-52, 84 L.Ed.2d 432 (1985). The State’s efforts to ensure that subscriber board nominees are unbiased does not significantly increase the degree of state intervention. State government plays no more direct role in effecting the subscriber majority requirement than it did in effecting the provider majority requirement.

In summary, the Court concludes that enforcement of Section 514.4 will not bring about a permanent, physical invasion of plaintiffs’ property. Rather, Section 514.4 is government regulation intended to affect the corporate structure of the plaintiff corporations in order to provide subscribers input into the corporations’ policy-making processes. The Court will analyze the constitutionality of Section 514.4 as such.

In Penn Central Transportation Co. v. New York City, 438 U.S. 104, 98 S.Ct. 2646, 57 L.Ed.2d 631 (1978), the United States Supreme Court set forth the standard for deciding whether a government action so burdens certain persons’ exercise of property rights as to require compensation under the Takings Clause. The Court must, as done above, analyze the character of the government action. “A taking may more readily be found when the interference with property can be characterized as a physical invasion by government ... than when interference arises from some public program adjusting the benefits and burdens of economic life to promote the common good.” Id. at 124, 98 S.Ct. at 2659. (citation omitted). In addition, the Court must analyze the economic impact of the regulation and, particularly, the extent to which the regulation has interfered with distinct, investment-backed expectations. Id. The Court has already determined that Section 514.4 is more in the nature of a regulation intended to adjust the benefits and burdens of economic life for the common good than a physical taking.

Plaintiffs have not presented much evidence showing the predicted economic impact enforcement of Section 514.4 will have on them. Plaintiffs' President has indicated that the corporations will continue to function if Section 514.4 is enforced. In fact, a member-selected subscriber majority currently sits on the Blue Cross board.

Eight other states have enacted laws similar to Section 514.4 and nonprofit health service plans have not been shown to have suffered economic losses as a result. There is no evidence before the Court that a board with a subscriber majority will make less well-reasoned business judgments, resulting in economic losses to plaintiffs. Plaintiffs’ members’ small investment in plaintiffs will be as secure with a subscriber majority on plaintiffs’ boards as with a provider majority. See also Blue Cross & Blue Shield v. Milliken, 422 Mich. 1, 367 N.W.2d 1, 25 (1985) (finding plan members have no significant investment and no investment-backed expectations).

Accordingly, the Court concludes that enforcement of Section 514.4 will not effect a taking of plaintiffs’ property. The subscriber board majority requirement is substantially related to the general welfare, and has not been shown to be likely to have an adverse economic impact on plaintiffs.

III. Impairment of Contractual Obligations

Plaintiffs contend that Section 514.4 so impairs plaintiffs’ corporate charter that the law must be held invalid under the Contract Clause, Art. I, § 10, cl. 1. According to plaintiffs the result on this issue is controlled by Trustees of Dartmouth College v. Woodward, 17 U.S. (4 Wheat.) 518, 4 L.Ed. 629 (1819), and its progeny. Plaintiffs state that the cases uniformly hold that a “fundamental” change in a corporate charter is constitutionally invalid, that the State’s enforcement of Section 514.4 would transfer control of them to persons other than those specified in the charter, and that such would be a “fundamental” change.

To support the fundamental change standard, plaintiffs cite several United States Supreme Court cases; one 1883 lower federal court opinion; and several state supreme court opinions, only one of which was handed down in this century. The Court is not certain that the fundamental change standard retains any vitality. Blue Cross & Blue Shield v. Milliken, 422 Mich. 1, 367 N.W.2d 1 at 12 (1985). Compare Miller v. New York, 82 U.S. (15 Wall.) 478, 498, 21 L.Ed. 98 (1872) with Energy Reserves Group, Inc. v. Kansas Power & Light Co., 459 U.S. 400, 410-13, 103 S.Ct. 697, 704-06, 74 L.Ed.2d 569 (1983). The Court, finds, however, that Section 514.4 is valid under either the fundamental change standard or the modern balancing standard for contracts clause analysis.

A. Fundamental Change Standard

In The Dartmouth College Case, the United States Supreme Court determined that a charter from a state to a private corporation is a contract, within the meaning of the contract clause. Consequently, the Court ruled unconstitutional a New Hampshire statute increasing the number of trustees of Dartmouth College as fixed by its charter, and providing for the appointment of a majority of the trustees by the executive government of New Hampshire. Justice Story, in his concurring opinion, declared that, if state legislatures intended to exercise the power to take away corporate powers or franchises, the legislatures must reserve such power in granting corporate charters. After The Dartmouth College Case, many states inserted, either in their statutes or in their constitutions, a provision that charters thereafter granted would be subject to amendment or repeal at the pleasure of the legislature. The effect of such reserved power provisions is to reserve to the legislature the power to amend any corporate charter in any manner the legislature deems necessary to effect the purposes of the grant; to protect the interests of the public, the corporation, its shareholders or creditors; or to promote the due administration of corporate affairs; provided the purpose of the grant and any right vested under the grant is not impaired. Miller v. New York, supra, at 498.

In this case the Iowa Legislature enacted Section 514.4 for a legitimate reason. The purpose for the corporate existence of plaintiffs is not impaired. Rather, plaintiffs will continue to seek to provide high quality health care to subscribers at affordable rates, with provider input. In addition, the plaintiffs do not have a vested right in continuation of provider board majorities.

One of the cases cited by plaintiffs, Miller v. New York, supra, indicates that Section 514.4 is constitutionally sound under the fundamental change standard. In Miller, the New York state legislature had enacted a general railroad act authorizing the formation of railroad corporations, subject to both state constitutional and statutory reservations of power. The stock subscribed to the railroad in Miller amounted to 9775 shares. By statute amending the city charter of the City of Rochester, the City was authorized to purchase 3000 shares of the railroad stock. The legislature also granted the City the power to elect a minority of the railroad board of directors (4 of 13) to correlate with its expected interest in the corporation.

Only 5,552 shares of the railroad subscription, however, was ever sold and actually paid for. Thus, although the City held the majority of shares fully paid, it was in the minority on the railroad board. The New York Legislature, due to the changed circumstances, enacted a law vesting the City with the authority to elect a majority (7 of 13) of railroad board members.

The City elected its seven new board members. The non-city stockholders, denying the validity of the new act, elected nine directors as permitted by the old law. The City sued to enforce the new law.

The Miller Court applied the fundamental change standard. Rather than strike down the new law, however, the court rejected the non-city stockholders’ claims that they had vested rights in retaining a board majority. The Miller Court determined that the state legislature had the power, under its reserved power, to change the apportionment of the board “as the ends of justice or the best interest of all concerned may require.” Id. at 498. The Miller holding was followed in Looker v. Maynard, 179 U.S. 46, 21 S.Ct. 21, 45 L.Ed. 79 (1900).

The Court cannot see a principled distinction between the facts in Miller and facts presented here. Plaintiffs do not have a vested right in continuation of a provider board majority. Changed circumstances have resulted in the Iowa Legislature deciding to change the apportionment of providers and directors on plaintiffs’ boards for what the Legislature found to be the best interest of the public. In summary, the Court concludes that, even under the more favorable fundamental change standard advanced by plaintiffs, Section 514.4 does not violate the Contract Clause.

B. Balancing Standard

Although the Contract Clause is absolute in terms, in modern times its prohibition has been construed to accomodate the police powers of the State to safeguard the interests of its people. The threshold inquiry of Contract Clause analysis is whether the challenged statute has operated as a substantial impairment of a contractual relationship. A critical factor to be considered in determining the extent of impairment is whether the industry the complaining party has entered has been regulated in the past. Energy Reserves Group, Inc. v. Kansas Power & Light Co., 459 U.S. 400, 410-411, 103 S.Ct. 697, 704-05, 74 L.Ed.2d 569 (1983). If the state law constitutes a substantial impairment, the statute is still valid if the state (1) has a significant and legitimate public purpose for enacting the law, and (2) the means adopted to implement the law are reasonably related to the public purpose. Id. at 411-13, 103 S.Ct. at 704-06. .

The Court finds that enforcement of Section 514.4 will not operate as a substantial impairment of plaintiffs’ charters or other contractual relationships. The law will only cause a change in the proportion of providers and subscribers on the boards of directors. As stated above, this change in apportionment will not in any way change the purpose of plaintiffs or impede plaintiffs’ ability to manage their business affairs. In addition, plaintiffs have always been two of only a few nonprofit health service corporations subject to a very high degree of state regulation. The provider-subscriber composition of plaintiffs’ boards has always been dictated by statute, and defendant’s approval has always been required before plaintiffs’ articles of incorporation were effective. Because plaintiffs have always been subject to very high degree of state regulation and the enforcement of Section 514.4 does not change the purpose or detrimentally affect plaintiffs’ management capabilities, the Court finds that enforcement of Section 514.4 will not operate as a substantial impairment of plaintiffs’ charter or other contractual relationships. See Blue Cross & Blue Shield v. Milliken, 422 Mich. 1, 367 N.W.2d 1, 19, 22-23 (1985).

Even were the Court to find that enforcement of Section 514.4 operates as a substantial impairment, it would still uphold the constitutionality of the law under the second prong of the balancing standard. The Court has already stated that Section 514.4 has a significant and legitimate public purpose: providing for input from unbiased subscribers in plaintiffs’ policymaking. The method selected by the legislature and defendant is designed for rapid, efficient implementation, and to guarantee that the subscriber nominees to be selected by plaintiffs’ members are not biased toward provider interests. The method is reasonably related to the Iowa Legislature’s purpose. See Blue Cross & Blue Shield v. Milliken, 422 Mich. 1, 367 N.W.2d 1, 19-20, 23 (1985). Accordingly, the Court concludes that enforcement of Section 514.4 would not violate the Contract Clause under the balancing standard.

In conclusion, the Court rejects all plaintiffs’ challenges to the validity of Section 514.4. The Court, therefore, lifts the preliminary injunction and denies plaintiffs’ request for permanent injunctive relief.

IT IS SO ORDERED.

IT IS FURTHER ORDERED that the Clerk of Court is hereby authorized to enter judgment for costs against the plaintiffs and in favor of the defendant.

      . To whatever extent the Court’s holding differs from the holding in Board of Regents v. Trustees of the Endowment Fund, 206 Md. 559, 112 A.2d 678, 686, cert. denied, 350 U.S. 836, 76 S.Ct. 72, 100 L.Ed. 746 (1955), the Court finds that the facts in Board of Regents are distinguishable. The Board of Regents Court found that the very purpose of the corporation was defeated by the statute, and that the statute was arbitrary, unreasonable and without any justification arising out of the State's police power. Id. at 686. Here, the court finds that the purpose of plaintiffs is not affected, and that Section 514.4 is a reasonable exercise of the State’s police power.


author: McMANUS, Chief Judge.

text:
    WEST CENTRAL COOPERATIVE, Plaintiff, v. UNITED STATES of America, Defendant.
    1C 81 3029.
    United States District Court, N.D. Iowa, C.D.
    Dec. 21, 1983.
    On Motion to Amend Feb. 21, 1984.
    John A. Gerken, Thomas W. Polking, Jefferson, Iowa, for plaintiff.
    Evan Hultman, U.S. Atty., Cedar Rapids, Iowa, Daniel Ross, Dept, of Justice, Tax Div., Washington, D.C., for defendant.
   ORDER

McMANUS, Chief Judge.

This action for refund of income taxes and interest was tried to the court on July 18, 1983. All proposed findings of fact and conclusions of law have been received and considered along with the entire record and the court now makes the following:

FINDINGS OF FACT

1. Plaintiff is a capital stock marketing and purchasing farmers’ cooperative organization with its principal place of business in Ralston, Carroll County, Iowa.

2. At all times material plaintiff was a fiscal year taxpayer engaged in the purchase of grain, including corn and beans, from its members and sale to grain buyers. It also purchases farm supplies such as livestock feed, fertilizer, herbicides, pesticides, and seed which it sells to its members. Plaintiff owns and operates grain storage facilities as a federally licensed warehouse under 7 U.S.C. § 241 et seq.

3. Prior to its fiscal year ending January 31, 1974 (FY 74), the Internal Revenue Service (IRS) recognized plaintiff as an exempt farmers’ cooperative under 26 U.S.C. § 521(b)(2).

4. During FY 74 plaintiff had outstanding 2,887 shares of voting common stock limited to one share per member.

5. During said fiscal year 2,418 members or 83.75% of the holders of plaintiffs voting stock were producers who marketed some of their products or purchased some of their supplies and equipment through plaintiff.

6. Prior to FY 74, plaintiff had the capability and did in fact review its membership’s business activity on an annual basis. However, during FY 74 it failed to review the business activity of its members to determine current patronage.

7. On January 23, 1978, plaintiff’s tax exemption under 26 U.S.C. § 521(b)(2) for FY 74 was withdrawn by IRS. In 1978 and early 1979, defendant assessed plaintiff for additional income taxes for FY 74 in the total amount of $57,459.00, including interest and penalty which has been paid. More than six months have passed since plaintiff filed a valid and timely claim for refund.

CONCLUSIONS OF LAW

1. The court has jurisdiction of the parties and the subject matter pursuant to 28 U.S.C. § 1346(a)(1) and 26 U.S.C. § 7422(a).

2. In an action for refund of income taxes, the burden is on the taxpayer to prove that the assessment is wrong and the amount he is entitled to recover. Lewis v. Reynolds, 284 U.S. 281, 52 S.Ct. 145, 76 L.Ed. 293 (1932). It is not enough for the taxpayer to demonstrate that the assessment of tax for which refund is sought is erroneous in some respects. United States v. Janis, 428 U.S. 433, 440, 96 S.Ct. 3021, 3025, 49 L.Ed.2d 1046 (1976).

3. Special tax exemptions are to be strictly construed against the taxpayer. Helvering v. Northwest Steel Rolling Mills, Inc., 311 U.S. 46, 61 S.Ct. 109, 85 L.Ed. 29 (1940); Luehrmann’s Estate v. Commissioner of Internal Revenue, 287 F.2d 10 (8th Cir.1961).

4. The provisions of 26 U.S.C. § 521 impose strict requirements on cooperatives which must be satisfied in order for the cooperative to qualify for tax exemption. Farmers Union Co-op Co. of Guide Rock v. Commissioner of Internal Revenue, 90 F.2d 488, 493 (8th Cir.1937); Producers’ Creamery Co. v. United States, 55 F.2d 104, 106 (5th Cir.1932).

5. Plaintiff has failed to prove by a preponderance of the evidence that substantially all its voting stock was owned by producers who marketed their products or purchased their supplies and equipment through the cooperative on a current basis. 26 U.S.C. § 521(b)(2); Cooperative Grain & Supply Co. v. Commissioner of Internal Revenue, 407 F.2d 1158, 1164 (8th Cir.1969); Cooperative Grain & Supply Co. v. Commissioner, 32 TCM (CCH) 795, 798 (1973).

6. Rev.Rul. 73-248, 1973-2 C.B. 295 requiring that at least 85% or more constitutes “substantially all” of a cooperative’s voting stock is reasonable and in keeping with the congressional mandate embodied in the language of § 521(b)(2). United States v. Correll, 389 U.S. 299, 307, 88 S.Ct. 445, 449, 19 L.Ed.2d 537 (1967).

7. Defendant’s retroactive revocation of plaintiff’s exemption was not an abuse of discretion. Stevens Bros. Foundation, Inc. v. Commissioner of Internal Revenue, 324 F.2d 633, 641 (8th Cir.1963), citing Automobile Club of Mich. v. Commissioner, 353 U.S. 180, 77 S.Ct. 707, 1 L.Ed.2d 746 (1957).

It is therefore

ORDERED

Dismissed.

ON MOTION TO AMEND

This matter is before the court on plaintiff’s unresisted motion to amend, enlarge or supplement the court’s findings of fact and conclusions of law. The motion was served on December 30, 1983 and filed January 5, 1984. Denied.

Plaintiff’s request for amendment is directed to the court’s Finding of Fact No. 5. It seeks enlargement of the finding by having it refer to specific portions of plaintiff’s Exhibit 1 and its post-trial brief. It also asks the court to address three specific categories of members that were not included in the court’s computation of active members by reference to the pre-trial order and plaintiff’s Exhibit 9. Finally, it asks the court to delete the term “some” from the finding.

Whether to grant or deny this motion is a matter addressed to the court’s discretion. FRCP 52(b). In the court’s view, Finding of Fact No. 5 is adequately explained in footnote no. 2 of the court’s order. There it is stated what categories of members, as identified by the plaintiff, have been included in the court’s calculation of active members. All other categories have by negative implication been excluded. The location of this information in the record is apparent and no purpose is served by the requested amendments.

With respect to plaintiff’s request for deletion of language from Finding of Fact No. 5, plaintiff argues that use of the word “some” may imply the existence of evidence suggesting that certain active producers marketed a portion of their products or purchased a portion of their supplies and equipment through entities other than plaintiff. The existence of such evidence is hereby expressly denied. Plaintiff did not, however, offer any evidence to negate this possibility, so the court declines the suggested amendment.

It is therefore

ORDERED

Denied.

      . Duplicate accounts for 3 members have been deleted.

      . Here and in connection with Finding of Fact No. 5 supra, since plaintiff claims that the 50% of production or purchases standard required by Rev.Proc. 73-39, 1973-1 C.B. 502 is unreasonable, the court has included in the number of active members any shareholder-producer that did "some” business with plaintiff during FY 74. In addition, the court has included those members doing business through an agent and those members who were precluded from current patronage by sickness, disability or death. This determination is in keeping with the exceptions to the current patronage requirement recognized by the Eighth Circuit in Cooperative Grain & Supply Co. v. Commissioner of Internal Revenue, 407 F.2d 1158, 1164 (8th Cir.1969) and subsequently applied by the Tax Court in Cooperative Grain and Supply Co. v. Commissioner, 32 TCM (CCH) 795 (1973) on reipand.
      The court has not included those members who sold no grain; stored their grain on farm; stored their grain with plaintiff; or fed all their grain based on the following rationale from the Eighth Circuit:
      [3] The pertinent part of the statute under consideration recites in plain and unequivocal language that substantially all of the voting stock must be owned by producers "who market their products or purchase their supplies and equipment through the association.” There are no exceptions, and as we read the crucial phrase we are unable to discern any intent on the part of Congress to grant a cooperative exempt status if its stockholding producers market their products or purchase their supplies through the association only at such times as the producers may determine that it is expedient for them to do so. If Congress had not intended to impose a patronage requirement upon the stockholder-producers there would have been no reason to include in the statute the language under scrutiny. Congress in the enactment of a statute is presumed to have used no superfluous words. Tabor v. Ulloa, 323 F.2d 823 (9th Cir.1963); Born v. Allen, 110 U.S.App.D.C. 217, 291 F.2d 345 (1960).

        Cooperative Grain & Supply Co., 407 F.2d at 1162.
      Nor has the court included those members who did business with plaintiff in six out of seven years. This argument was previously raised before the Tax Court and rejected on the following basis:
      A mere continuing business relationship without the actual yearly participation is not a sufficient basis upon which to find current shareholder participation of business with the cooperative. Cooperative Grain & Supply Co., 32 TCM (CCH) at 798.

      . Rev.Rul. 73-248, the 85% requirement, was promulgated in light of various court opinions interpreting the “substantially all” language of § 521(b)(2). The lowest amount held by a court to constitute substantially all is 91%. Farmers Cooperative Creamery v. Commissioner, 21 BTA 265 (1930). The highest percentage held not to constitute substantially all is 78%. Cooperative Grain & Supply Co. v. Commissioner, 32 TCM (CCH) 795 (1973). It appears necessary for the Service to establish some guideline and the 85% standard is a reasonable construction of the phrase.


author: BRYAN, District Judge.

text:
    Helen R. SHARPE, Executrix of the Estate of Howard W. Sharpe, Plaintiff, v. UNITED STATES of America, Defendant.
    Civ. A. No. 83-936-A.
    United States District Court, E.D. Virginia, Alexandria Division.
    March 30, 1984.
    Order May 11, 1984.
   MEMORANDUM OPINION

BRYAN, District Judge.

This case is before the court on the plaintiff’s motion for attorney’s fees made pursuant to 26 U.S.C. § 7430.

This action for a refund of estate taxes was filed, pursuant to 28 U.S.C. § 1346(a), on September 12, 1983. The United States filed its answer denying liability on November 17, 1983. By agreement of counsel at the February 16, 1984 pretrial conference the case was to be submitted on stipulation and briefs and oral argument heard March 23, 1984. Plaintiff filed its brief with the court February 29, 1984. On March 16, 1984, defendant’s brief was sent to plaintiff’s counsel, although it was not filed with the court, and on March 19, 1984, defendant’s counsel notified plaintiff’s counsel that the government conceded the case.

The case involved the issue whether the plaintiff/decedent who was the testamentary beneficiary of a trust for life and named as a co-trustee of that trust, had, by imputation, a general power of appointment in-cludable in his estate under 26 U.S.C. §§ 2033, 2041, which he relinquished when he resigned on July 8, 1977, a period within three years of his death and thus includa-ble as part of his taxable estate pursuant to 26 U.S.C. § 2035; notwithstanding the fact that plaintiff/decedent could not participate in any decision by the trustees to use the income or invade the corpus of the trust for his benefit. Because the government has conceded the tax issue, the sole question before the court is whether the position taken by the government in this proceeding was unreasonable. In the opinion of the court this question turns on the reasonableness of the government’s contention that, by imputation, a general power of appointment existed in the plaintiff/decedent as those powers are defined in 26 U.S.C. § 2041(b).

In this case the government has admitted that:

... [I]n each instance in the will where the Trustees are empowered to invade corpus or use income for the benefit of Howard, his wife, or children, Howard is prohibited from participating as Trustee.

(Govt. memo, at 14.)

The government contended however that the powers vested in the other trustees were so broad and unfettered, in.conjunction with the lack of interests adverse to Howard’s, amounted to creation of a general power of appointment in Howard under 26 U.S.C. § 2041 and that the resignation of the trusteeship was a release of that power made taxable by that section and its regulations, under 26 U.S.C. § 2035.

In this case the decedent, as co-trustee, did not have a power of appointment over trust property exercisable in his favor. The case of First Virginia Bank v. United States, 490 F.2d 532 (4th Cir.1974), is inap-posite because there the widow/decedent had a life estate and the power to dispose of the stock unlimited by an ascertainable standard. Likewise, the cases cited by the defendant for the proposition that where an appointee can exercise a power to provide for his own comfort, that power is a general power of appointment under 26 U.S.C. § 2041(b)(1)(A), are not applicable to this case.

Here Howard was not empowered to act jointly with the other trustees; dispositions for his benefit were within the sole discretion of the other trustees. While there is no evidence that the other trustees had interests in the trust property adverse to dispositions in favor of the decedent, none were required. The adverse interest rule is properly applicable to cases where the appointee acts jointly with others in exercising the power in his own favor. 26 U,S.C. § 2041(b)(l)(C)(ii). In this case the decedent could request a disposition but could not participate in the decision or the grant itself.

As stated above, Howard could not jointly make a disposition in his own favor. Nor could he require the trustees to make such dispositions as was the case in Ewing v. Rountree, 346 F.2d 471 (6th Cir.1965), cited by the defendant. In that case the trustee was “directed” to sell stock at the decedent widow’s request. Id at 472. Likewise, the case of Peoples Trust Company of Bergen County v. United States, 412 F.2d 1156 (3d Cir.1969), is clearly inapplicable as the will creating the trust stated of the uses and purposes of the trust:

“C. To pay to my wife ... during her lifetime such amounts out of the principal as my said wife may require; she to be the sole judge as to the amounts and frequency of such principal."

Id. at 1158 n. 3, emphasis in original.

In the case Estate of Janice McNear Towle, 54 T.C. 368 (1970), cited and attached by the defendant, the will creating the trust provided that the decedent/beneficiary:

“[M]ay draw down in one lump sum all of the principal sum retained ... under such contracts provided The First National Bank of Chicago consents and participates in such withdrawal....”

Id. at 369, emphasis added. The court found that this power to withdraw was not modified by any other language contained in the will, id. at 373, and declared that the decedent had a general power of appointment over the contract proceeds. In Towle the terms of the will were unmistakeable; the decedent, it stated, “may withdraw” the entire principal, making her a “co-holder” of the power; see id. at 371. The trustee was relegated to the status co-participant; its consent to the withdrawal subject to no control or direction, id. at 372.

In the instant case the terms of the will provided, and the government has admitted, that the decedent could not participate in any way in dispositions in his favor. Having no power to appoint in his own favor, the ascertainable standard exception of 26 U.S.C. § 2041(b)(1)(A) is never brought into play. Nor did the decedent have a power, to dispose of trust property in his own favor, excercisable only in conjunction with another person in order to trigger the adverse interest analysis under 26 U.S.C. § 2041(b)(l)(C)(ii).

Under the terms of the instrument in this case, and under the existing law on the issues presented, the court is of the opinion that the position of the government in this proceeding; that a general power of appointment should have been imputed to the plaintiff/decedent, was unreasonable; and that the plaintiff as the prevailing party is entitled to reasonable litigation costs incurred in this proceeding under 26 U.S.C. § 7430. Another fact considered by the court in reaching the determination that the government’s position in this proceeding was unreasonable, is that the Internal Revenue Service had recommended an administrative refund of the full tax and interest sued for. While such a recommendation is not binding on the Department of Justice, and the refusal, alone, to follow the recommendation would not control the issue of the reasonableness of the government’s position in this case, it is a factor to be considered. See Tyler Business Services Inc. v. N.L.R.B., 695 F.2d 73, 76 (4th Cir.1982), on 28 U.S.C. § 2412. The court, even after examining the authorities cited by the government, just cannot find that its position is even arguably supportable, and concludes that that position was unreasonable.

The court is persuaded that the term reasonable litigation costs under 26 U.S.C. § 7430 includes in this case costs and fees incurred at the administrative level including costs incurred in attempting to negotiate the claimed refund; and in the preparation of the protest letter and claim for refund. The defendant contends that the language “the position of tfie United States in the civil proceeding was unreasonable,” 26 U.S.C. § 7430(c)(2)(A), as applied to this case means the position adopted in the action before this court, and would necessarily preclude the award of any fees incurred at the administrative level. This argument is unpersuasive.

In Tyler Business Systems v. N.L.R.B., supra, the court considered similar language in 28 U.S.C. § 2412(d)(1)(A), the predecessor to the statute at issue here. The court stated that the language “should be read to mean the government’s position as a party in prosecuting or defending the litigation at whatever level is under review for the award of attorney’s fees.” Id. at 75. After adverting to the legislative history of the statute the court stated that:

For example the government’s preliminary decision to institute an administrative proceeding may not justify an award of attorney’s fees. This circumstance, however, would not preclude an award, if at subsequent stages of the administrative process or upon judicial review it appears that the government’s position at these levels was not substantially justified.” Id. at 75, 76.

While the court denied an award of costs and fees for the administrative proceedings, its refusal was based on other grounds. Id. at 76, 77.

The decision in Tyler, supra, was based, in part, on the fact that “the act clearly distinguishes between proceedings at the agency level and proceedings on judicial review....” No such distinction is present in 26 U.S.C. § 7430.

That section does not contain a provision similar to 28 U.S.C. § 2412(d)(3). However, neither the legislative history nor precedent indicates that § 7430 was intended to do more than supplant the Equal Access to Justice Act as regards tax matters. Indeed, the dearth of legislative history is another indication of that fact. The House Report on the Equal Access to Justice Act states that § 2412(d) awards are “analogous to the awards authorized in adversary adjudications under § 3 [5 U.S.C. § 504(a)] of this bill,” H.R.Rep. No. 96-1418, 96th Cong., 2d Sess. 17, reprinted in 1980 U.S.Code Cong. & Ad.News 4953, 4997. Of § 504 the report states:

In part, the decision to award fees only in adversary adjudications reflects a desire to narrow the scope of the bill in order to make its costs acceptable. It also reflects a desire to limit the award of fees to situations where participants have a concrete interest at stake but nevertheless may be deterred from asserting or defending that interest because of the time and expense involved in pursuing administrative remedies. In these situations, in order to insure that individuals will actively seek to protect their rights vis-a-vis the government, they must have the opportunity to recover the costs of litigating. An administrative remedy in these circumstances cannot be truly effective unless a prevailing party is made whole. Id. at 4993.

As stated earlier there is no indication that Congress intended to change the existing standards for awards by enacting 26 U.S.C. § 7430. In light of the legislative history quoted above, the requirement that administrative remedies be exhausted contained in 26 U.S.C. § 7430(b) militates against such an interpretation. Because 28 U.S.C. § 2412(e) states that § 2412 does not apply to proceedings to which § 7430 applies, a restrictive interpretation of § 7430 would produce the harsh result that a litigant could be subjected to meritless opposition at the administrative level without having a remedy for that expense once a proceeding was commenced in a court of the United States. No authority is cited to support such a result. In addition, 26 U.S.C. § 7430(C)(3) states that “The term civil proceeding includes a civil action.” Such a definition implies, and rather strongly so, that the term civil proceeding encompasses more than civil actions alone. Further the fact that plaintiff may have been entitled to fees and costs under 5 U.S.C. § 504 is not at issue, nor has it been considered here.

It is the decision of the court that 26 U.S.C. § 7430(a) allows for the recovery of attorney’s fees and costs at both the administrative and judicial level where the prevailing party instigated a civil proceeding on the administrative level that was resisted by the government, which maintained an unreasonable position; and where suit was brought and the government again unreasonably asserted the same position held at the administrative level.

The government has not suggested that the attorney’s fees and costs are unreasonable in amount or inflated. They will, therefore, be allowed in full.

ORDER

For the reasons set forth in the Memorandum Opinion this day filed, it is hereby

ORDERED that the plaintiff is awarded reasonable litigation costs, as defined in 26 U.S.C. § 7430(c)(1), in the amount of $4,416.24.

ORDER

The court being of the opinion, in light of the legislative history furnished to it by the United States, that its award of fees and costs for services other than those incurred in this court was in error, and the parties having agreed that the attorney’s fees and costs incurred in this court amount to a total of $1,884.74, it is hereby

ORDERED that the Memorandum Opinion and Order of March 30, 1984 are vacated, and the plaintiff is awarded reasonable litigation costs as defined in 26 U.S.C. § 7430(c)(1) in the amount of $1,884.75.

      . The government’s position is evidenced by its Memorandum in Support of its Motion for Summary Judgment. This brief was filed with the court as an exhibit to the opposition to plaintiffs motion for attorney’s fees and costs.

      . Nor could Howard participate in any decision to pledge assets of the trust in support of his own credit [Will, Item VII(l) ].

       The basis of.the Government’s argument is, of course, that the broad powers of the independent trustees are imputed to him.” (Govt. memo, at 15, 16.)

      . I.R.C.Reg. § 20.2041-3(d)(l).

      . These cases are cited in Govt.Memo. at 10.

      . No suggestion was made that the other trustees dealt with the decedent at less than arm's length.

      . The decedent was not a co-trustee in this case.

      . The government concedes that the plaintiff has substantially prevailed with respect to the estate tax issue. (Govt.Opp. at 4.)

      . 28 U.S.C. § 2412(d)(3) provides:
      "(3) In awarding fees and other expenses under this subsection to a prevailing party in any action for judicial review of an adversary adjudication, as defined in subsection (b)(1)(C) of section 504 of title 5, United States Code, or an adversary adjudication subject to the Contract Disputes Act of 1978, the court shall include in that award fees and other expenses to the same extent authorized in subsection (a) of such section, unless the court finds that during such adversary adjudication the position of the United States was substantially justified, or that special circumstances make an award unjust.”


author: OWEN, District Judge.

text:
    Carmel CORDERO, Raul Rodriguez, Wilfred Woolridge, Plaintiffs, v. Thomas COUGHLIN, III, Commissioner of N.Y. State Department of Correctional Services, Stephen Dalsheim, Superintendent Downstate Correctional Facility, Defendants.
    No. 84 Civ. 728 (RO).
    United States District Court, S.D. New York.
    Aug. 3, 1984.
    Prisoners’ Legal Services of New York, Poughkeepsie, N.Y. (Pamela Goldberg, Robert Selcov, Poughkeepsie, N.Y., of counsel), for plaintiffs.
    Robert Abrams, Atty. Gen. of State of New York, New York City (Frederic Lieberman, New York City, of counsel), for defendants.
   MEMORANDUM AND ORDER

OWEN, District Judge.

Plaintiffs are inmates in various New York State prisons who suffer from Acquired Immune Deficiency Syndrome (“AIDS”). Proceeding under 42 U.S.C. § 1983, they allege that the policies and practices of the prison officials in segregating them from the general inmate population, and the consequent lack of social, recreational and rehabilitative opportunities, violate their rights under the First, Eighth and Fourteenth Amendments to the Constitution, and under the New York law governing the administration of a correctional facility.

Before me are plaintiffs’ motion to preliminary enjoin this segregation and defendants’ motion to dismiss, for failure to state a claim. As both parties have submitted affidavits concerning matters outside the pleadings, notably the effects and treatment of AIDS, I treat defendants’ motion as one for summary judgment. Keating v. BBDO International Inc., 438 F.Supp. 676 (S.D.N.Y.1977). There being no dispute as to any of the material facts concerning plaintiffs’ conditions of confinement, and the law in this area being clear, defendants’ motion is granted. Obviously, in light of this, plaintiffs’ motion for an injunction is denied.

The undisputed facts as set forward in the pleadings and affidavits before me reveal that plaintiffs’ situations are indeed grim. They suffer from an incurable, fatal disease, both the genesis and transmission of which is poorly understood. They are therefore greatly feared by fellow inmates and, apparently, ostracized. The papers before me, however, reveal no breach of any duty by defendants. On the contrary, they give the clear impression that defendants are doing their best to cope with an extraordinarily difficult problem involving issues of correctional management, security and health care provision. Each of the constitutional bases asserted for plaintiffs’ claims fails as a clear matter of law.

The Equal Protection Clause requires that similarly situated people be treated equally. Because AIDS victims are not similarly situated to other prisoners the Equal Protection Clause simply does not apply here. Francis v. Immigration and Naturalization Service, 532 F.2d 268, 272-33 (2d Cir.1976). Even assuming that the Equal Protection Clause does apply, AIDS victims are not a “suspect class” and therefore as long as there is a legitimate government end and the means used are rationally related to that end, the Equal Protection Clause is not violated. Massachusetts Board of Retirement v. Murgia, 427 U.S. 307, 96 S.Ct. 2562, 49 L.Ed.2d 520 (1976). Here, the state sets forth its objective: to protect both the AIDS victims and other prisoners from the tensions and harm that could result from the fears of other inmates. The existence of such fears, whether realistic or not, has not been contradicted. Certainly the separation of these inmates therefore bears a rational relation to this objective, at least until some better system is developed, and it is undisputed that defendants are changing their programs as they work to improve their ability to cope with the needs of prisoners with AIDS. It is clear therefore that as a matter of law defendants must prevail on the equal protection claim.

Plaintiffs next claim that they have been denied such liberty as is guaranteed by the Fourteenth Amendment of the Constitution. The Supreme Court itself has stated, however, that “the transfer of an inmate to less amenable and more restrictive quarters for nonpunitive reasons is well within the terms of confinement ordinarily contemplated by a prison sentence.” Hewitt v. Helms, 459 U.S. 460, 103 S.Ct. 864 at 869-70, 74 L.Ed.2d 675. To argue otherwise would be to “draw from the due process’ clause more than it can provide.” Id. at 869. Prison officials have broad discretion and incarcerated individuals retain “only a narrow range of protected liberty interests.” Id.

Furthermore, under applicable New York law, there is no requirement of a hearing before prison officials may act. Id. at 871. 7 NYCRR, parts 250-300. A decision such as is involved here is clearly one of discretion, and as a matter of law plaintiffs’ due process rights have not been violated.

Plaintiffs also assert that their Eighth Amendment rights to be free of cruel and unusual punishment have been violated. However, the degree of Eighth Amendment scrutiny afforded an inmate is limited to ensuring that they receive “adequate food, clothing, shelter, sanitation, medical care and personal safety.” Wolfish v. Levi, 573 F.2d 118, 125 (2d Cir.1978). Here, plaintiffs make no assertion that they have been deprived of the above cited necessities. As Justice Rehnquist has stated: “I know of nothing in the Eighth Amendment which requires that [inmates] be housed in a manner most pleasing to them or considered even by most knowledgeable penal authorities to be likely to avoid psychological confrontations, psychological depression, and the like.” Atiyeh v. Capps, 449 U.S. 1312, 1315-16, 101 S.Ct. 829, 831, 66 L.Ed.2d 785. Plaintiffs here have alleged no facts which could entitle them to relief under the Eighth Amendment.

Plaintiffs last constitutional claim is that they have been denied their rights to privacy, free expression and free association in violation of the First Amendment. However, First Amendment rights are limited by “[t]he fact of [a prisoner’s] confinement and the needs of the penal institution_” Jones v. North Carolina Prisoners’ Labor Union, Inc., 433 U.S. 119, 125, 97 S.Ct. 2532, 2537, 53 L.Ed.2d 629 (1977). Obviously, in a case such as this, defendants cannot be compelled to provide plaintiffs with the identical privileges available to the other inmates. There is therefore no basis for relief under the First Amendment on the circumstances of this case.

Finally, plaintiffs have asserted claims under New York law. However, Pennhurst State School & Hospital v. Halderman, 465 U.S. 89, 104 S.Ct. 900, 907-11, 79 L.Ed.2d 67 (1984) precludes a federal court from awarding injunctive and declaratory relief solely on the basis that defendants violated requirements of state law. The state law claims are therefore dismissed.

Defendants’ motion for summary judgment is granted. Plaintiffs’ motion is denied.

Submit order and judgment accordingly.