author: ARONOVITZ, District Judge.

text:
    DEPARTMENT OF BANKING AND FINANCE, STATE OF FLORIDA, Plaintiff, v. U.S. TRUST CORPORATION and U.S. Trust Company of Florida, N.A., Defendants.
    No. 85-8066-Civ.
    United States District Court, S.D. Florida.
    June 5, 1985.

      Carl Mostadt, for plaintiff.
    Karen Curtis, Miami, Fla., for defendants.
   ARONOVITZ, District Judge.

THIS CAUSE was removed to this Court upon the Petition for Removal which was filed on January 25, 1985. The Court has carefully considered the Plaintiff’s “Opposition to Removal” [treated herein as a Motion to Remand], the parties’ memoranda of law submitted in support thereof and in opposition thereto, and has heard the argument of counsel at a hearing on Monday, June 3, 1985. Having reviewed the applicable law, and being otherwise fully advised in the premises, it is thereupon

ORDERED AND ADJUDGED that this cause be, and the same is hereby, REMANDED, and the Clerk is hereby directed to transfer this cause to the Circuit Court of the Fifteenth Judicial Circuit in and for Palm Beach County, Florida. 28 U.S.C. § 1447(c). This action was improvidently removed because the Complaint states a claim under Florida law, and does not allege a cause of action “arising under the Constitution, laws or treaties of the United States.” There is thus no federal subject matter jurisdiction under 28 U.S.C. § 1331, as alleged by the Defendants.

In the Petition for Removal, Defendants argue that Plaintiff’s claim arises under federal law for three reasons. First, Defendants argue that since the state law relied upon by the Plaintiff, Fla.Stat. § 658.296, incorporates the federal Bank Holding Company Act of 1956 for its definition of terms, this Court’s construction and interpretation of federal law will determine the outcome of this case. Second, Defendants argue that the Florida statutes cited by Plaintiff are in conflict with federal law. And third, Defendants contend that this action should be heard in federal court because of the pendency of related litigation before the Eleventh Circuit Court of Appeals.

With respect to the second ground for removal, it has been settled law since 1887 that a case may not be removed to federal court on the basis of a federal defense, including the defense of preemption. Franchise Tax Board of the State of California v. Construction Laborers Vacation Trust for Southern California, 463 U.S. 1, 103 S.Ct. 2841, 2848, 77 L.Ed.2d 420 (1983). With respect to the third ground asserted in support of removal, this Court notes that the decision in Florida Department of Banking and Finance v. Board of Gover nors, 760 F.2d 1135 (11th Cir.1985) is very much related to this case. Indeed, if the decision in that case remains binding precedent in this Circuit, the instant case would be rendered moot as the Trust Company of Florida would no longer be permitted to operate as a “nonbank bank,” i.e., accept deposits and issue consumer loans. Nevertheless, this is a Court of limited jurisdiction, and since the Complaint in the instant case arises under state law, this action cannot be removed under the well-pleaded complaint rule unless there is diversity of citizenship and an amount in controversy in excess of $10,000.00.

With respect to the first ground asserted in support of removal, the issue is somewhat more complex. In T.B. Harms v. Eliscu, 339 F.2d 823, 827 (2d Cir.1964), Judge Friendly wrote that a “case may arise under a law of the United States if the Complaint discloses a need for determining the meaning or application of such a law.” Since the Florida statutes cited by the Plaintiff in the Complaint incorporate certain federal statutes, it can be argued that the Complaint itself discloses that the Court would necessarily interpret and apply federal law in adjudicating Plaintiffs claim.

In this case, however, there are several factors which must be taken into account in determining the role of the federal statutes in Florida’s own statutory scheme, and whether the incorporation of federal law, merely for the purpose of defining certain terms, necessarily means that a claim which invokes the Florida law “arises under” federal law for the purposes of § 1331 jurisdiction. First, it is clear that the Complaint does not pass Justice Holmes’ oft-cited test from American Well Works Co. v. Layne & Bowler Co., 241 U.S. 257, 36 S.Ct. 585, 60 L.Ed. 987 (1916): “A suit arises under the law that creates the cause of action.” In the instant case, it is clearly Florida state law and not federal law which creates the authority to bring Plaintiff’s claim for injunction and/or divestiture. To use another phrase of Justice Holmes, in the instant case federal law has no “force proprio vigore,” and federal law has merely been adopted by Florida state law “as a criterion or test.” Smith v. Kansas City Title Co., 255 U.S. 180, 41 S.Ct. 243, 250, 65 L.Ed. 577 (1921, J. Holmes dissenting). See also Moore v. Chesapeake & Ohio Ry., 291 U.S. 205, 54 S.Ct. 402, 78 L.Ed. 755 (1934); United Air Lines v. Division of Industrial Safety, 633 F.2d 814 (9th Cir.1980).

Second, Fla.Stat. § 658.296 is a new law which became effective on December 12, 1984. While abstention is not in order, it must be noted that this Court thus has little guidance from the Florida courts regarding the interpretation of that statute. Moreover, it certainly cannot be inferred that the Florida legislature, in incorporating federal law merely for the purpose of defining certain terms, meant to leave to the federal courts the interpretation and application of its new statute forbidding out of state bank holding companies from controlling Florida banks.

Third, in the interest of comity and federalism, this case should be decided by the Florida courts. In its recent opinion in Florida Department of Banking, supra, the Eleventh Circuit highlighted the fact that Congress, in enacting the Douglas Amendment to the Bank Holding Company Act, expressed its desire to allow the states to choose for themselves whether to open their borders to out-of-state banks. In enacting Fla.Stat. § 658.296, the Florida legislature thus acted consistently with the intent of Congress to leave to the states substantial authority in the area of bank regulation. It is this Court’s belief that the initial stages of the interpretation and application of such an important new piece of state legislation should be left to the courts of the State of Florida.

Orders of remand under § 1447(c) are generally not appealable. However, because of the pendency of the aforementioned related litigation before the Eleventh Circuit Court of Appeals, this Court would seriously entertain a motion for certification of this order for appeal.


source: Caselaw Access Project

author: GONZALEZ, District Judge.

license: Public Domain

text:
    The GRANVILLE MARKET LETTER, INC., Plaintiff, v. OPPENHEIMER & CO., INC., Robert Novinski and John MacGregor, Defendants.
    No. 82-6640-Civ-GONZALEZ.
    United States District Court, S.D. Florida, N.D.
    June 5, 1985.
    Sidney Bernstein, Bernstein & Berk, Fort Lauderdale, Fla., for plaintiff.
    Richard Brodsky, Paul, Landy, Beiley, Harper & Metsch, P.A., Miami, Fla., George C. Kopp, Vasslich & Assoc., North Kansas City, Mo., for defendants.
   ORDER

GONZALEZ, District Judge.

THIS CAUSE has come before the Court upon the Motion for Partial Summary Judgment filed by the defendants. For the reasons set forth below, summary judgment will be granted as to Court VI of the Complaint. The Court, however, reserves ruling on summary judgment on the RICO counts, Counts VIII-XI.

Count VI alleges violations of Section 10(b) of the Exchange Act of 1934, 15 U.S.C., § 78j(b) and Rule 10b-16, 17 C.F.R. 240.10b-16. Rule 10b-16 requires that a securities broker establish procedures to assure that customers are given or sent required disclosure forms. The Affidavit of Phyllis Holtzelaw reveals that Oppenheimer did have established procedures for providing the requisite disclosures. Thus, as no issue of material fact exists, summary judgment is proper.

The Court notes that summary judgment is appropriate for a second reason. A plaintiff seeking to invoke protections afforded under section 10(b), supra, and rules promulgated thereunder must plead and prove scienter. See, Aaron v. SEC, 446 U.S. 680, 100 S.Ct. 1945, 64 L.Ed.2d 611 (1980); Ernst & Ernst v. Hochfelder, 425 U.S. 185, 96 S.Ct. 1375, 47 L.Ed.2d 668 (1976); Robertson v. Dean Witter Reynolds, Inc., 749 F.2d 530 (9th Cir.1984). As the plaintiff in the case sub judice has failed to plead and prove the element of scienter, Court VI cannot stand.

The defendants also argue that Counts IX-XII [sic] cannot withstand a motion for summary judgment. The defendants premise their argument, in part, on Sedima, S.P.R.L. v. Imrex Co., Inc., 741 F.2d 482 (2nd Cir.1984), cert. granted, — U.S.-, 105 S.Ct. 901, 83 L.Ed.2d 917 (1985).

The Court hereby informs the parties that the United States Supreme Court heard argument in Sedima on April 17, 1985. See, 53 U.S.L.W. 3751 (April 23, 1985). This Court finds that the interests of judicial economy and efficient litigation require this Court to await the ruling now imminent in the Sedima case.

Accordingly, it is hereby

ORDERED AND ADJUDGED as follows:

1. The Motion for Partial Summary Judgment, Count VI, be and the same is GRANTED. Within ten (10) days of the filing of this Order, the defendants shall submit a proposed final judgment dismissing Count VI;

2. The Court reserves ruling on the Motion for Partial Summary Judgment — RICO counts pending the United States Supreme Court’s decision in Sedima, S.P.R.L. v. Imrex Co., Inc., whereupon ruling will be forthcoming without further argument or supplemental memoranda of law;

3. This case is hereby removed from the trial calendar commencing on July 1, 1985 and will be reset by further Order of this Court.


author: ELFVIN, District Judge.

text:
    UNITED STATES of America v. Joseph E. TODARO, Sr.
    No. CR-83-29E.
    United States District Court, W.D. New York.
    June 6, 1985.

      Anthony M. Bruce, Dept, of Justice Atty., Buffalo, for plaintiff.
    Joseph M. Latona, Buffalo, for defendant.
   MEMORANDUM and ORDER

ELFVIN, District Judge.

In this prosecution charging three counts of willfully and knowingly attempting to evade federal income tax liabilities in violation of 26 U.S.C. § 7201 and four counts of willfully and knowingly making and subscribing false tax returns in violation of 26 U.S.C. § 7206(1), the abovenamed individual (“the defendant”) has moved to dismiss the Indictment and, alternatively, for a severance of the trial of Count Seven of the Indictment from the other six counts.

The government has indicated, with respect to the tax evasion counts, that it intends to demonstrate at trial the existence and extent of defendant’s unreported taxable income in each year by utilization of the “net worth plus non-deductible expenditures” method of proof. See Holland v. United States, 348 U.S. 121, 75 S.Ct. 127, 99 L.Ed. 150 (1954). Defendant’s dismissal motion is premised upon the government’s alleged failure to have investigated adequately certain “leads” that he had provided to it regarding three substantial loans which he has claimed had been made to him during the periods in question.

Under Holland v. United States, supra, when income tax evasion is sought to be established by use of the net worth method, the government has an obligation to investigate all leads provided to it by the defendant when and to the extent that such leads are reasonably susceptible of being checked. “When the government fails to show an investigation into the validity of such leads, the trial judge may consider them as true and the Government’s case insufficient to go to the jury.” Id. at 136, 75 S.Ct. at 135.

Although the government has submitted affidavits and documentation with respect to the nature and scope of its investigation of the provided leads, consideration of such is not necessary to the determination of defendant’s dismissal motion inasmuch as this Court finds that such motion is premature. The government has correctly contended that the motion presupposes that the government will fail to prove at the trial of this case that it had discharged its obligation to investigate the leads. Should the government thus fail at trial, this Court could, with legal propriety, prevent the government’s case from going to the jury. See Holland v. United States, supra, at 135-136, 75 S.Ct. at 135; United States v. Scott, 660 F.2d 1145, 1167 fn. 42 (7th Cir.1981), cert. denied, 455 U.S. 907, 102 S.Ct. 1252, 71 L.Ed.2d 445 (1982). Defendant’s additional contentions that the government had failed to exhaust the leads during the Grand Jury’s investigation and should have presented informant evidence to that body regarding one of the claimed loans have been considered and have been found insufficient to warrant dismissal of the Indictment. Accordingly defendant’s request for dismissal shall be denied without prejudice.

Defendant’s motion to sever Count Seven from the other six counts, is bottomed on the assertion that such count had been improperly joined with the other six under Fed.R.Crim.P. rule 8(a). He has further contended that severance of said count from the others is appropriate under Fed. R.Crim.P. rule 14 due to the separate transaction upon which Count Seven is premised, the dissimilar theory of proof that will be utilized by the government regarding such count and the possible jury confusion and unfair prejudice to him of a trial of this count jointly with the others.

The parties are in basic agreement that: (a) Counts One through Six charge defendant with willfully evading income tax liability (Counts One, Three and Five) and willfully filing false tax returns (Counts Two, Four and Six) for fiscal years ending in 1976, 1977 and 1978 respectively; (b) the government’s evidence regarding these charges will be presented according to the net worth/non-deduetible expenditures method of proof; (c) Count Seven charges defendant with willfully filing a false income tax return for the fiscal year ending June 30, 1979 due to his alleged fraudulent deduction of the payment of a personal gambling debt as a business expense; and (d) the government will utilize a “specific item” method of proof regarding Count Seven. The government has also indicated the substantial correctness of defendant’s prediction that, with one or two possible exceptions, different witnesses will be called by the government in attempting to prove Counts One to Six than with respect to Count Seven.

Rule 8(a) of the Federal Rules of Criminal Procedure permits joinder of two or more offenses in the same indictment where the crimes charged “are of the same or similar character.” In the case at bar the offense charged in Count Seven— namely, the willful filing of a false income tax return with respect to the fiscal year ending June 30, 1979 in violation of 26 U.S.C. § 7206(1) — is sufficiently similar to the violations of 26 U.S.C. § 7206(1) charged in Counts Two, Four and Six — and even to Counts One, Three and Five — to warrant joinder under rule 8(a). Cf. United States v. Sciandra, 529 F.Supp. 316, 318 (S.D.N.Y.1981).

“Moreover, Rule 8(a) is not limited to crimes of the ‘same’ character but also covers those of ‘similar’ character, which means ‘[n]early corresponding; resembling in many respects; somewhat alike; having a general likeness.’ ” United States v. Werner, 620 F.2d 922, 926 (2d Cir.1980).

However, the propriety of the joinder of distinct offenses under rule 8(a) does not preclude the granting a severance under Fed.R.Crim.P. rule 14 “if it appears that the defendant is prejudiced by the joinder.” Id. at 928. In United States v. Halper, 590 F.2d 422, 430-431 (2d Cir. 1978), it was explained:

“When all that can be said of two separate offenses is that they are of the ‘same or similar character,’ the customary justifications for joinder (efficiency and economy) largely disappear. Whereas the joinder of offenses ‘based on the same act or transaction’ or of offenses based ‘on two or more acts or transactions connected together or constituting parts of a common scheme or plan’ is reasonable and desirable both from the government’s and the defendant’s perspective, the same cannot be said for joinder of offenses of the ‘same or similar character.’ ”

The Court in Halper (wherein two separate indictments had been joined for trial) noted the potential dangers to which a defendant is exposed by joinder of offenses of the “same or similar character” — e.g., the jury might view the government’s evidence cumulatively or improperly utilize the evidence regarding one offense to infer a criminal disposition on the part of defendant regarding another offense — and announced a rule requiring

“a severance of offenses that are purportedly of the ‘same or similar character’ unless evidence of the joined offenses would be mutually admissible in separate trials or, if not, unless the evidence is sufficiently ‘simple and distinct’ to mitigate the dangers otherwise created by such a joinder.” Id. at 431.

In the instant criminal action application of this rule justifies a separate trial of Count Seven. The government’s assertion that “evidence that the defendant committed any one of the first six counts might be admissible in a separate trial of Count Seven” is too speculative to deny the sought severance in view of the possible unfair prejudice to defendant and is not persuasive in view of the absence of any contention by the Government of a common scheme or plan by defendant to have evaded taxation regarding all of the charged offenses. Such assertion is, in all probability, not going to be fulfilled on trial. In view of the numerous documents and witnesses that the government is expected to utilize regarding Counts One through Six, as well as the complexity of the net worth theory of proof, the expected relative simplicity of the government’s case with respect to Count Seven does not warrant denial of defendant’s motion. While it might not be an abuse of this Court’s discretion to deny the severance, it most certainly can not be deemed improper to grant such relief. The latter course will not enable the government to adduce evidence of the defendant’s gambling activities, if any there be, with its unfair influence upon the jury to the substantial adverse interest of the defendant on the trial of Counts Qne through Six.

For these reasons it is hereby

ORDERED that defendant’s motion for dismissal of the Indictment is denied without prejudice; and it is hereby further

ORDERED that defendant’s motion for a severance and a separate trial of Count Seven of the Indictment is granted; and it is hereby further

ORDERED that the government shall, within fifteen (15) days of the entry of this Memorandum and Order elect in writing whether it will go to trial September 10, 1985 on Counts One through Six or on Count Seven.

On Motion to Require Written Objections

In this prosecution charging defendant with willfully attempting to evade federal income tax liabilities in violation of 26 U.S.C. § 7201 and willfully subscribing false tax returns in violation of 26 U.S.C. § 7206(1), the government has moved pursuant to Fed.R.Cr.P. rule 12(d)(1) to require defendant to file written objections to the authenticity of certain designated records and for a pretrial hearing for the purpose of ruling on any objections filed by defendant. Defendant has opposed such motion, asserting that the government is not entitled to the relief sought.

Fed.R.Cr.P. rule 12(d)(1) permits the government to provide a defendant with notice of “its intention to use specified evidence at trial in order to afford the defendant an opportunity to raise objections to such evidence prior to trial” in the form of a motion to suppress evidence under rule 12(b)(8). In the case at bar the government seeks to compel defendant to make his position known prior to trial with respect to the authenticity vel non of some 568 exhibits that the government intends to offer at trial. Although this Court recognizes that the granting of the instant motion would conserve its time, would reduce the length of what is expected to be a prolonged trial by eliminating certain witnesses and/or testimony and possibly would diminish confusion of the jury which can arise when attorneys argue about and witnesses testify as to the authenticity of records, rule 12(d)(1) does not authorize the procedure sought by such motion and the government has not cited any other rule or authority which would permit such procedure. In addition, although this Court certainly would favor a stipulation by the parties as to the authenticity of any exhibits the genuineness of which is not disputed, I shall not order defendant to file specific objections inasmuch as such procedure could serve to provide the government with notice of a problem as to a specific exhibit and an opportunity to rectify such prior to trial. Absent the requested order the government might find at trial that it is unable to introduce into evidence a certain exhibit or exhibits for lack of having established adequately its or their authenticity. Accordingly, I find that the government is not entitled to the advantage of pretrial rulings on the authenticity vel non of its exhibits.

For these reasons it is hereby ORDERED that the government’s motion is denied.

      . The government had indicated, tentatively, that it would opt to try the defendant on Count Seven initially and then on Counts One through Six. Inasmuch as the unfair prejudice works in but a single direction — viz., from Count Seven into the disposition of Counts One through Six— it would appear that, if the government were to try the latter first, the same jury could be utilized. In a sense, there would be a bifurcated trial with a single jury.


author: SWEET, District Judge.

text:
    VISION, INC., Plaintiff, v. Alexis PARKS, d/b/a Alexis Parks Communications and Alexis Parks Communications, Inc., Defendants.
    No. 85 Civ. 3022 (RWS).
    United States District Court, S.D. New York.
    June 6, 1985.

      Balogh, Osann, Kramer, Dvorak, Genova and Traub, New York City, for plaintiff; Harold Traub, Andrew D. Maslow, New York City, of counsel.
    Albert Robin, New York City, for defendants; Howard B. Barnaby, New York City, of counsel.
   OPINION

SWEET, District Judge.

Plaintiff Vision, Inc. (“Vision Inc”) brought this action charging defendants Alexis Parks (“Parks”) and Alexis Parks Communications, Inc. with trademark and trade name infringement, violation of § 43(a) of the Lanham Act, 15 U.S.C. § 1125(a), unfair competition, injury to business reputation under N.Y.Gen. Bus.Law § 368-a, and deceptive acts and practices under N.Y.Gen.Bus.Law § 349. Vision now seeks a preliminary injunction enjoining the defendants from using the designation VISION or VISION USA on and in connection with the sale and publishing of a magazine. For the following reasons, Vision’s motion is denied.

Facts

Vision Inc., a New York corporation with its principal place of business in New York, has been publishing a Spanish language magazine called VISION since November 1950. Since September 1952 Vision Inc. has also published a newsletter called THE VISION LETTER. Both publications deal with news and articles pertaining to Latin America. Although Vision Inc. registered both marks in the United States Patent and Trademark Office, the registration of VISION for a Spanish language magazine was not renewed on the due date, May 15, 1982, and has expired. A new application was filed on January 11, 1985. Vision Inc. is the registrant and owner of a valid trademark for “THE VISION LETTER.”

Alexis Parks is an individual operating under the trade name Alexis Parks Communications and controlling Alexis Parks Communications, a New York corporation with its principal place of business in New York (collectively “Parks”). In 1983 Parks developed a free-standing newspaper insert which is intended to present new ideas emerging in health, the workplace and lifestyles. According to Parks, the mark VISION USA was selected for the publication, which is distributed exclusively as a supplement to newspapers, after a trademark search revealed that Vision Inc.’s registration of VISION had expired, that the registration of THE VISION LETTER covered a mark and goods different from Parks, and that there were a number of other registrations of marks containing the word “VISION” for various types of publications. Parks’ application to register the mark VISION USA was accepted by the United States Patent and Trademark Office and was published for opposition on May 14, 1985.

Parks published the premiere issue of VISION USA in November, 1984. Parks subsequently received a letter dated December 10, 1984 from Vision Inc.’s attorneys requesting that she discontinue use of the mark VISION. In response to the letter, Parks met with Richard Rapold (“Rapold”), publisher of VISION Magazine, on December 11, 1984. According to Parks, some manner of agreement was reached at the meeting, and Parks’ attorneys advised Vision Inc. of the alleged accommodation by letter dated December 17, 1984. By letter dated December 19, 1984, Rapold denied the existence of any agreement.

Apparently there was no further communication between the parties, and Parks continued to develop the VISION USA publication. Parks now has commitments from newspapers in ten geographic areas for inclusion of the magazine-type insert as a monthly Sunday supplement. The next issue is scheduled to be published in September 1985.

According to Vision Inc., at least one incident of confusion between VISION and VISION USA has occurred since the first publication of VISION USA. It asserts that the vice president of New York advertising agency suggested to a client that he call VISION INC., but apparently supplied the number of VISION USA instead, causing the client considerable confusion.

Vision Inc. subsequently filed suit charging Parks with trademark infringement, unfair competition and deceptive business practices. Contending that the use of the mark VISION USA has created and is likely to create confusion among the purchasing public and in particular the advertising community, Vision Inc. also moved to enjoin the continued use of the mark by Parks.

Discussion

Under the well-settled law of the Second Circuit, to succeed on a motion for a preliminary injunction in a trademark infringement action the moving party has the burden of establishing: (a) irreparable harm; and (b) either (1) probable success on the merits, or (2) sufficiently serious questions going to the merits to make them a fair ground for litigation and a balance of hardships tipping decidedly toward the party requesting the preliminary injunctive relief. See Kaplan v. Board of Education, 759 F.2d 256 (2d Cir.1985); Sperry Int. Trade, Inc. v. Gov’t of Israel, 670 F.2d 8, 11 (2d Cir.1982).

Once the threshold issue of a mark’s eligibility for protection is resolved, the central question in a trademark case is “whether there is any likelihood that an appreciable number of ordinarily prudent purchasers are likely to be misled, or indeed simply confused, as to the source of the goods in question.” Mushroom Makers, Inc. v. R. G. Barry Corp., 580 F.2d 44, 47 (2d Cir.1978); cert. denied, 439 U.S. 1116, 99 S.Ct. 1022, 59 L.Ed.2d 75 (1979). A showing of a likelihood of confusion establishes both the requisite likelihood of success on the merits and the risk of irreparable harm. Standard & Poor’s Corp., Inc. v. Commodity Exchange, Inc., 683 F.2d 704, 708 (2d Cir.1982), C-Cure Chemical Co., Inc. v. Secure Adhesives Corp., 571 F.Supp. 808, 814 (W.D.N.Y.1983).

The threshold determination that must be made in a trademark infringement ease is whether the mark in question is eligible for protection. Thompson Medical Co., Inc. v. Pfizer, Inc., 753 F.2d 208, 215 (2d Cir.1985). A mark can fall into one of four general categories, which, in order of ascending strength, are (1) generic; (2) descriptive; (3) suggestive; and (4) arbitrary or fanciful. McGregor-Doniger Inc. v. Drizzle, Inc., 599 F.2d 1126, 1130 (2d Cir.1979); Abercrombie & Fitch Co. v. Hunting World, Inc., 537 F.2d 4, 9 (2d Cir.1976). The Second Circuit recently set forth the relationship between a marks classification and its eligibility for protection:

Generic terms — “the common descriptive name of an article or substance” — are ineligible for any trademark protection. Descriptive marks, those “describing] the qualities, ingredients, effects or other features of the product naturally and in ordinary language” are protectible only where secondary meaning can be established. Suggestive terms require “imagination, thought and perception to reach a conclusion as to the nature of goods,” and are eligible for protection without proof of secondary meaning. Finally, arbitrary or fanciful marks “enjoy all the rights accorded to suggestive terms as marks — without the need of debating whether the term is ‘merely descriptive’ and with ease of establishing infringement.”

Thompson Medical Co., Inc. v. Pfizer, Inc., supra, 753 F.2d at 212-213 (citations omitted).

Applying the above analysis to the marks at issue in the present case, I conclude that the marks VISION and THE VISION LETTER are eligible for trademark protection. It is evident at the outset that the word “VISION” is not synonymous with a magazine or newsletter and is thus not used in its generic sense by either party. Nor is it a descriptive term, since it does not “convey ... an immediate idea of the ingredients, qualities, or characteristics of the goods,” Stix Products, Inc. v. United Merchants & Manufacturers, Inc., 295 F.Supp. 479, 488 (S.D.N.Y.1968). Since a consumer using “imagination, thought and perception” is unlikely to conclude that the publications involve Latin American issues, the marks as used by Vision Inc. best qualify as arbitrary, which refers to common words applied in an unfamiliar way. See Abercrombie & Fitch Co. v. Hunting World, Inc., supra, 537 F.2d at 11 n. 12. As such, the marks are entitled to trademark protection.

Once a mark is determined to be protectible, the next and central area of inquiry must be the degree to which any likelihood of confusion exists. Thompson Medical Co., Inc. v. Pfizer, Inc., supra, 753 F.2d at 211. In Polaroid Corp. v. Polarad Elects. Corp., 287 F.2d 492, 495 (2d Cir.), cert. denied, 368 U.S. 820, 82 S.Ct. 36, 7 L.Ed.2d 25 (1961), the Second Circuit noted the factors that must be examined in making such a determination:

[The] strength of the mark, the degree of similarity between the marks, the proximity of the products, the likelihood that the prior owner will bridge the gap, actual confusion and the reciprocal of defendant’s good faith in adopting its own mark, the quality of defendant’s product, and the sophistication of the buyers.

Id. at 495. An assessment must also take into account “the equities involved.” See Information Clearing House v. Find Magazine, 492 F.Supp. 147, 155 (S.D.N.Y.1980). No single factor is determinative. Instead, all the factors must be considered together according to the degree to which each is implicated. Lambda Electronics v. Lambda Tech. Inc., 515 F.Supp. 915, 925 (S.D.N.Y.1981).

1. Strength and Similarity of the Mark

The Second Circuit has held that: [t[he term “strength,” as applied to trademarks, refers to the distinctiveness of the mark, or more precisely, its tendency to identify the goods sold under the mark as enamating from a particular, although possibly anonymous, source.

McGregor-Doniger Inc. v. Drizzle, Inc., supra, 599 F.2d at 1131. Arbitrary marks and registered marks are by their very nature distinctive and strong trademarks, although a mark consisting of a common word is less strong than a fanciful mark. See Proctor & Gamble Co. v. Johnson & Johnson, Inc., 485 F.Supp. 1185, 1197 (S.D.N.Y.1979), affd, 636 F.2d 1203 (2d Cir.1980). However, this strength may be diminished by the existence of similar marks used in connection with similar products. See Lambda Electronics Corp. v. Lambda Technology, Inc., 515 F.Supp. 915, 925. Parks has submitted evidence of numerous other registered trademarks, both subsisting and expired, using the word “VISION” in some manner, including several instances in which “VISION” was a part of the publications title — Twin Vision, TV Vision, Vision Mound, Cable Vision, and Peripheral Visions. Parks Affidavit, Ex. A.

2. Similarity of Marks

Although the close similarity between the marks used by the parties is evident, there are distinguishing factors. On the Spanish-language magazine, VISION is pronounced in Spanish with three syllables and the accent on the third syllable. On certain magazine covers, and in business correspondence, an accent is placed over the word. The additional letters U.S.A. in Park’s mark, although small, serves to distinguish the marks in overall appearance. VISION appears in the upper left of the magazine on a dark background, THE VISION LETTER appears in square block letter across the very top, while VISION USA appears with a somewhat three dimensional aspect in thinner typeface across the top of the magazine.

In addition, the superficial visual similarity of the marks VISION, THE VISION LETTER, and VISION USA is not dispositive of the issue of likelihood of confusion. “Similarity in and of itself is not the acid test. Whether the similarity is likely to provoke confusion is the crucial question.” McGregor-Donizer, Inc. v. Drizzle, Inc., supra, 599 F.2d at 1133, quoting R. Callman, “The Law of Unfair Competition, Trademarks and Monopolies”, § 82.1(2) (1969) at 601-02 (footnote omitted); see also C-Cure Chem. Co. v. Secure Adhesives Corp., 571 F.Supp. 808, 815 (W.D.N.Y.1983). In making this analysis, the overall impression of the products on the consumer must be considered. C-Cure Chem. Co. v. Secure Adhesives Corp., supra, 571 F.Supp. at 815. In this case the overall impression which the allegedly infringing product makes upon the consumer or advertising client is not such “that he is likely to believe the product is from the same source as the one he knows under the trademark.” McGregor-Donizer, Inc. v. Drizzle, Inc., supra, 599 F.2d at 1134. In addition to the visual differences in the manner in which the word “VISION” is displayed, the fact that VISION USA is an English-language magazine is immediately apparent. VISION USA and THE VISION LETTER are sufficiently different in presentation and appearance as to render them dissimilar despite the use of the same word.

3. Proximity of the Products

The differences between the products in issue are substantial and readily apparent. The VISION mark is used in connection with a Spanish language magazine directed to articles on Latin America, and THE VISION LETTER mark is used in connection with a newsletter dealing with Latin American economic issues. VISION USA is directed to an entirely different group of consumers. More important, it is distributed to the public as an insert in Sunday newspapers, not sold at newstands. It is read for pleasure, not business and covers a very different set of issues. Because the topics covered the methods of distribution, and apparent readership are different, the products are not proximate, despite the fact that both are magazines published in New York.

4. Bridging the Gap

There is no evidence that Vision Inc. is likely to bridge the gap between the publications at issue. Vision Inc. has been using its marks in relation to Latin American issues for many years. It appears unlikely that it will expand its use to include an English language newspaper insert. For that reason, it seems unlikely that many of Vision Inc.’s readers would believe that it had expanded its operation to include the VISION USA newspaper insert.

5. Actual Confusion

A plaintiff usually faces a formidable task in obtaining proof of actual con-, fusion, especially where only a single issue of the allegedly infringing product has been distributed. Information Clearing House v. Find Magazine, 492 F.Supp. 147, 159 (S.D.N.Y.1980). In this case Vision Inc.’s efforts do not provide convincing evidence of actual confusion as to the source or origin. Vision Inc. presented evidence of an instance in which an individual allegedly received the telephone number of VISION USA in response to a request to directory assistance for the telephone number of Vision Inc. According to Vision Inc., this confusion is merely symptomatic of the possibilities for confusion that might result. However, while the individual who received the wrong information may have been confused as to the number, he was not confused as to the source or origin of the various publications. There is no evidence that the introduction of Vision Inc. caused any individual consumer or advertiser to be confused as to the origin of the newspaper insert.

6. Defendant’s Good Faith

Despite Vision Inc.’s claims that the adoption of VISION USA as a mark after hearing of the existence of Vision Inc.’s marks is evidence of bad faith, “[kjnowledge of the existence of plaintiff’s trademark does not establish that defendants acted in bad faith.” Information Clearing House v. Find Magazine, supra, 492 F.Supp. at 161. It is not contended that the mark VISION USA was chosen as a result of Vision Inc.’s success or that Parks has sought to trade on Vision Inc.’s success. Parks has presented a credible explanation of her reasons for choosing the mark, an explanation consistent with the possible suggestive relationship between the name and the subject of the publication. There is no evidence that Park’s decision was made in bad faith.

7. Quality of the Defendants’ Product

As Vision Inc. notes, the quality of Park’s publication is unknown since it has only just begun to be published. Although it asserts that the quality must be in doubt because on two occasions VISION USA did not answer its telephone during business hours, this is not convincing evidence of poor quality that might impinge on Vision Inc.’s reputation. The mere fact that Vision Inc. will have no control over the quality is not in itself sufficient to show that the infringing product is of a quality that might affect Vision Inc.’s business.

8. Sophistication of the Buyers

The sophistication of purchasers of VISION USA is difficult to assess. Since VISION USA is inserted free of charge into newspapers, there is no specific body of ordinary consumers as such. The general reading public for VISION USA must be considered unsophisticated since it potentially includes a complete cross-section of individuals. However, because individuals will not be purchasing VISION USA it is difficult to see how any lack of sophistication might cause confusion between the products that would lead someone to purchase the wrong product. The only danger that might exist would be if Vision Inc.’s readers, whose level of sophistication is unknown, were incapable of discerning the distinction between the products and thus might assume that the products came from the same source.

The focus of Vision Inc.’s concern is on its advertisers, who might be confused by the existence of a similarly named publication in the same city as Vision Inc. However, as the court noted in McGregor-Donizer, Inc. v. Drizzle, Inc., supra, 599 F.d at 1137, “the greater the value of an article the more careful the typical consumer can be expected to be.” An advertising executive purchasing advertising space is not an impulse buyer and is unlikely to be confused as to the publication in which he is placing an ad. The sophistication of VISION USA’s actual “buying public”, therefore, suggests that actual confusion would be unlikely.

9. Balancing the Equities

Although Vision Inc. argues that Parks will suffer little harm from the grant of an injunction against use of a name which it has just begun to use, VISION USA has been in existence for over a year and has apparently made considerable efforts with regard to its next issue. Furthermore, the fact that Vision Inc. waited four months after the initial publication of VISION USA to commence this suit also balances the equities against it.

An evaluation of the above factors leads to the conclusion that Vision Inc. has failed to meet its burden of proving likelihood of confusion. Although Vision Inc.’s marks are strong and there is close similarity between the relevant marks, the products themselves are dissimilar in content, approach, and method of distribution. There is no evidence of actual confusion as to source. Because of the manner in which VISION USA is distributed, consumers would not accidentally purchase the wrong magazine, nor is it likely that an advertiser would make a similar mistake. Although there is potential overlap between readers, a prior reader of VISION or THE VISION LETTER confronted with a copy of VISION USA is not likely to assume that it originated from the same source because of the dissimilarities between the publications. Vision Inc.’s most legitimate concern is that the existence of another publication in the same city with a similar name might prove to be confusing in the sense that it could be an annoyance in terms of such administrative matters as mail and telephone calls, but absent any evidence of a likelihood of confusion between the actual products this concern is not enough to justify the grant of a preliminary injunction.

The failure to establish any likelihood of confusion defeats Vision Inc.’s claim of probable success on the merits as to the trademark and trade name infringement claim, the Lanham Act claim and the common law claim of unfair competition. As to its claims for injury to business reputation, dilution, and deceptive practice under N.Y. Gen.B.Law §§ 349 and 349, which do not require a showing of likelihood of confusion, Vision Inc. has similarly failed to present enough evidence to meet its burden of establishing the probability of success on the merits or sufficiently serious questions going to the merits. It has failed to show any concrete evidence of bad faith or intentional trading on its reputation by Parks, nor has it demonstrated that its mark will be diluted, given the dissimilarities in market. See Information Clearing House v. Find Magazine, supra, 492 F.Supp. at 162 n. 44. In any event, given the lack of proof as to the likelihood of confusion or injury to Vision Inc.’s reputation, Vision Inc. has failed to demonstrate irreparable harm. See Bell & Howell: Mamiya Co. v. Masel Supply Co. Corp., 719 F.2d 42 (2d Cir.1983). Vision Inc. has, therefore, failed to make the showing necessary for the grant of a preliminary injunction.

For the reasons discussed above, Vision Inc.’s motion for a preliminary injunction is denied. Discovery will be completed by September 11, 1985 and a joint pretrial order submitted by September 18, 1985.

IT IS SO ORDERED.


author: H. FRANKLIN WATERS, Chief Judge.

text:
    The FIRST NATIONAL BANK OF FORT SMITH, and S.W. Jackson, Jr., Co-Executors of the Estate of Captilles A. Lick, Jr., Plaintiffs, v. UNITED STATES of America, Defendant.
    Civ. No. 84-2255.
    United States District Court, W.D. Arkansas, Fort Smith Division.
    June 6, 1985.

      Thomas A. Daily, Fort Smith, Ark., for plaintiffs.
    Jack D. Warren, Washington, D.C., W. Asa Hutchinson, U.S. Atty., Fort Smith, Ark., for defendant.
   MEMORANDUM OPINION

H. FRANKLIN WATERS, Chief Judge.

Plaintiffs, The First National Bank of Fort Smith and S.W. Jackson, Jr., brought this civil action against the defendant, United States of America, under 28 U.S.C. § 1346(a)(1) to recover estate taxes and interest which they allege were improperly assessed and collected by the Internal Revenue Service. On March 27, 1985, this matter was tried to the court without a jury. After full consideration of all evidence, testimony of witnesses, stipulations, and arguments of counsel, the court enters its memorandum opinion incorporating its findings of fact and conclusions of law.

I.

A. Captilles A. Lick, Jr., the decedent, died on September 14,1980. At the time of his death he owned 5,708 shares of the common stock of Weldon, Williams & Lick, Inc. (WWL), a privately-held commercial printing company specializing in the printing of admission tickets and other prenumbered products. The common stock of WWL was owned by 29 individuals including the decedent; his ownership amounted to 28.54% of the total of the then outstanding shares of common stock of WWL. On September 14, 1980, none of the common stock of the company was publicly traded and there was no readily available existing market for the sale of such common stock.

Plaintiffs, as duly appointed co-executors of the decedent’s estate, filed a timely federal estate tax return which reflected an estate tax liability of $1,189,216.00. On April 12, 1983, the District Director of the Internal Revenue Service assessed an estate tax deficiency against plaintiffs in the amount of $716,401.00. Plaintiffs paid this assessment plus interest and filed a claim with the Director for refund of the deficiency and interest. When more than six months elapsed from the date of the filing of the claim, plaintiffs filed this action for refund of estate tax and interest. The court finds that all jurisdictional prerequisites for filing and maintenance of this suit have been satisfied and the court has jurisdiction pursuant to 28 U.S.C. § 1346(a)(1).

B. As previously noted, WWL is a closely-held commercial printing company which specializes in prenumbered products such as admission tickets and stickers for vehicle control. At the date of decedent’s death, WWL made sales to over 10,000 accounts nationwide. The primary basis for assessment of the estate tax deficiency was the government’s determination that the fair market value of decedent’s WWL stock was $285 per share or $1,626,780.00 for the block of shares. Plaintiffs had claimed a value of $68.16 per share for an aggregate value of $389,057.00. Originally, the difference in the respective valuations stemmed in large part from the fact that the IRS chose to value decedent’s individual holdings as part of a 61.1% controlling interest held by Mr. Lick and family members. However, by a memorandum opinion entered on March 25, 1985, the court ruled that decedent’s interest in WWL should be valued independent of any consideration of other interests held by family members. The ultimate issue which still remains to be resolved concerns the fair market value of decedent’s WWL stock.

II.

A. Before we can consider the issue as to the value of decedent’s WWL stock, we must first take up the government’s objection to the testimony of certain of the plaintiffs’ witnesses.

During the trial, counsel for the government objected to the testimony of plaintiffs’ witnesses on the grounds that the facts about which the witnesses were questioned were not set out either in the administrative claim for refund or plaintiffs’ response to the government’s interrogatories. Specifically, defendant objected to the testimony of S.W. Jackson, Jr., a plaintiff and president of WWL, and Harvey Earp and Molly Wilson, financial analysts. Mr. Jackson testified about those factors which would have influenced a knowledgeable buyer of WWL stock on the date of Mr. Lick’s death. His testimony touched upon those conditions which threatened the printing industry generally and those conditions which affected WWL specifically. Mr. Earp testified as an expert about the method he used to value decedent’s interest in WWL; Ms. Wilson testified about a prior sale of WWL stock. Government’s counsel earnestly argued that plaintiffs’ failure to disclose the underlying facts of their claim deprived the government of its right to effective cross-examination and subjected defendant to “trial by ambush.”

B. As a general rule, a ground for a refund that is neither specifically raised by a timely claim for refund, nor included within the general language of the claim, cannot be considered by a court in a subsequent suit for a refund. Angelus Milling Co. v. Comm’r, 325 U.S. 293, 65 S.Ct. 1162, 89 L.Ed. 1619 (1945); First Nat. Bank of Fayetteville, Ark. v. United States, 727 F.2d 741, 744 (8th Cir.1984); Ottawa Silica Co. v. United States, 699 F.2d 1124, 1138 (Fed.Cir.1983). Under 26 U.S.C. § 7422(a), a taxpayer may not maintain an action for a refund until a claim for refund has been filed with the Secretary according to the Secretary’s regulations. Section 301.6402-2(b)(l) of the regulations of the Department of the Treasury requires that each claim for a refund must set forth in detail each ground upon which a refund is claimed as well as facts sufficient to apprise the Commissioner of the exact basis of the claim.

The reasons for the rule requiring a taxpayer to state the grounds for his claim are “to prevent surprise ... to give adequate notice to the Service of the nature of the claim and the specific facts upon which it is predicated, thereby permitting an administrative investigation and determination ...,” to provide the Commissioner with an opportunity “to correct any errors, and ... to limit the scope of any ensuing litigation to those issues which have been examined____”

First Nat. Bank of Fayetteville, Ark., supra, at 744, citing Union Pacific Railroad v. United States, 389 F.2d 437, 442 (Ct.Cl.1968). Where a claim for refund seeks relief on general grounds, an item arising in litigation will be permitted, even though not specifically mentioned in the claim, if the taxpayer has sufficiently alerted the Service to the fact that the item is a ground for refund. Ottawa Silica Co., supra, at 1139, n.6.

C. There are a number of reported cases where the IRS has successfully raised the variance issue at trial. Review of those decisions indicates the government most often prevailed for one of two reasons. One, courts have refused to consider a taxpayer’s grounds for refund where the taxpayer attempted to raise at trial any issue which was entirely separate and apart from any issue listed in the administrative claim. Clearly, a taxpayer may not raise a new ground for refund at trial when the Service had no opportunity to investigate the ground administratively. See, e.g., Real Estate Title Co. v. United States, 309 U.S. 13, 60 S.Ct. 371, 84 L.Ed. 542 (1940) (taxpayer claimed a deduction for obsolescence at the administrative level and a casualty loss deduction in court); Ottawa Silica Co., supra, (taxpayer disputed the appropriate depletion rate with the Service but added claims for errors in calculating depletion deduction and net operating loss at trial). See also Gindes v. United States, 661 F.2d 194, 202, 228 Ct.Cl. 632 (1981); Stride Corp. v. United States, 625 F.2d 1001, 1003, 223 Ct.Cl. 262 (1980); Salyersville Nat. Bank v. United States, 613 F.2d 650, 651 (6th Cir.1980); Forward Communications Corp. v. United States, 608 F.2d 485, 508, 221 Ct.Cl. 582 (1979); Cook v. United States, 599 F.2d 400, 406, 220 Ct.Cl. 76 (1979); Southwestern Life Ins. Co. v. United States, 560 F.2d 627, 631 (5th Cir.1977); and Twin City Const. Co. of Fargo v. United States, 515 F.Supp. 767, 770 n. 1 (D.C.N.D.1981).

Second, a taxpayer may not litigate a refund claim where the administrative claim was so vague or so general that the Commissioner could only guess at the precise nature of the taxpayer’s claim. A general objection and demand for refund would in fact encompass all conceivable grounds for a refund, but the Service is not required to ferret out on its own the specific claims advanced by the taxpayer. See, e.g., Stoller v. United States, 444 F.2d 1391, 1393 (5th Cir.1971); Union Pacific Railroad Company v. United States, 389 F.2d 437, 445, 182 Ct.Cl. 103 (1968); and Fearis v. C.I.R., 548 F.Supp. 408, 409 (N.D.Tex.1982).

Clearly, plaintiffs’ claim in this case does not fall within either of the foregoing categories. We find that the claim for refund brought before this court is based upon substantially the same grounds outlined in the claim filed with IRS; we also find that plaintiffs’ administrative claim adequately apprised the Service of the basic nature of their dispute over the valuation of decedent’s interest in WWL. The claim filed with the Service in pertinent part reads:

Therefore it is necessary to apply the evaluation procedures outlined in Revenue Ruling 59-60, 1959-1 Cum.Bull. 237 in determining the “fair market value” of the decedent’s stock____ Furthermore, the Internal Revenue Service’s evaluation of the decedent’s interest in Weldon, Williams and Lick was founded on erroneous conclusions as to economic and industry conditions on September 14, 1980; the dividend payout potential; the book value of the stock of Weldon, Williams and Lick and liquidation value; its financial condition on September 14, 1980, and further, the Internal Revenue Service, in its evaluation, attempted to compare Weldon, Williams and Lick with companies which are, in fact, not comparable. Also, industry and market conditions as of September 14, 1980, were ignored or misconstrued by the Internal Revenue Service. In addition, the Internal Revenue Service failed to consider prior sales of the subject stock and prior valuations of this stock by the Internal Revenue Service.

In judging the adequacy of plaintiffs’ administrative claim, we find it helpful to refer to the analysis of the Court of Claims in Burlington Northern, Inc. v. United States, 684 F.2d 866, 231 Ct.Cl. 222 (1982). In that case the Great Northern Railway Company sought an income tax refund on the ground that it was entitled to a reasonable allowance for the depreciation of its railroad grading and tunnel bores. Before trial the taxpayer submitted to the government schedules of its investments in and retirements of railroad grading and tunnels and informed the Service that it would offer expert testimony at trial as to the useful lives of such assets. The government objected to taxpayer’s proposed proof, arguing that such evidence would be at variance with the “factual grounds” stated in the refund claim. The trial court agreed with the variance claim and restricted proof at trial.

The Court of Claims held that “[T]he precision to which defendant urges that we now hold plaintiff goes wholly beyond that which is required by the Code or regulations. If a claim fairly apprises the Commissioner of the ground on which recovery is sought, then the claim is adequate for purposes of bringing suit under section 7422(a).” Burlington Northern, supra, at 869. The regulations, according to the court, distinguish between the ground of a claim — the legal theory upon which the refund is sought — and facts sufficient to inform the Commissioner of the exact basis of the claim. In Burlington Northern, the issue of law raised by the claim was the deduction under 26 U.S.C. § 167 for depreciation based on anticipated obsolescence of the assets; the factual basis of the claim was the asserted finite useful life of the assets. The proof objected to by the defendant, the court reasoned, constituted “a third, lower level of the claim, not addressed or required by the regulation: the supporting facts with which the claimant intends to prove the ultimate fact of anticipated obsolescence.”

We find the basic outline of Burlington Northern to be applicable under the present facts. Here, the issue of law to be decided is the correctness of the defendant’s determination of the fair market value of the decedent’s WWL stock. The factual bases of the claim are the economic and industry conditions, the dividend payout potential, the book value of WWL stock, WWL’s financial condition, the comparative valuation of WWL stock, and prior sales and valuations of WWL stock. The testimony objected to by the government was simply evidence probative of the factual bases clearly set out in the refund claim. Furthermore, the expert testimony was entirely consistent with the ground of recovery and factual bases stated in the refund.

Finally, we see no evidence that the Commissioner was not aware of the nature of plaintiffs’ claim for refund or the factual bases for such claim. As noted, the reason for setting forth all grounds for a refund at the administrative level is to allow the IRS an opportunity to fully investigate the substance of the claim. Again, we see no evidence that the Commissioner was denied such opportunity. For all the reasons discussed above, we find that the testimony objected to by the government was properly admissible at trial. If the government was not adequately prepared to cross-examine certain expert witnesses, it was not because the Service was denied fair notice of the basis of plaintiffs’ claim or full opportunity to investigate.

III.

A. Having disposed of preliminary matters, we may now turn our attention to the ultimate issue of the fair market value of Mr. Lick’s WWL stock. We undertake this task fully aware of the difficulty inherent in ascertaining the value of the stock of an unlisted closely-held corporation. Central Trust Company v. United States, 305 F.2d 393, 399, 158 Ct.Cl. 504 (1962).

Fair market value is the price at which property would change hands between a willing buyer and .a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of relevant facts. 26 C.F.R. § 20.2031-1(b). When valuing unlisted stocks, 26 U.S.C. § 2031 requires, in the absence of sales or bid and asked prices, that one take into consideration in addition to all other factors, the value of listed stock of other corporations engaged in the same or similar line of business. Rev.Rul. 59-60, CB 1959-1 237, provides a general review and outline of the approach, methods and factors to be considered in valuing such stock. “A sound valuation will be based upon all the relevant facts, but the elements of common sense, informed judgment and reasonableness must enter into the process of weighing those facts and determining their aggregate significance.” The factors listed in Rev.Rul. 59-60 include:

1) The nature of the business and the history of the enterprise from its inception.
2) The economic outlook in general and the condition and outlook of the specific industry in particular.
3) The book value of the stock and the financial condition of the business.
4) The earning capacity of the company.
5) The dividend-paying capacity.
■6) Whether or not the enterprise has goodwill or other intangible value.
7) Sales of the stock and the size of the block of stock to be valued.
8) The market price of stocks of corporations engaged in the same or a similar line of business having their stocks actively traded in a free and open market, either on an exchange or over-the-counter.

B. Plaintiffs presented three witnesses to assist the court in arriving at an informed judgment. The first was Mr. Jackson who testified about various internal and external factors which might have affected the value of WWL stock on September 14,1980. Mr. Jackson testified at some length about competitive threats to WWL’s prenumbered ticket business. New technology including in-house computerized ticket systems had substantially cut into WWL’s business. The vehicle control segment of WWL’s business was threatened by competition from prison industries, legislative repeal of automobile safety inspection programs, and the development of a new plastic-coated safety windshield which was not compatible with the control stickers currently used. Mr. Jackson believed that any informed potential buyer would have been aware of these problems on the date of decedent’s death.

Mr. Jackson also testified regarding the financial condition of WWL. The company maintained a conservative money management policy, preferring to keep cash reserves in short term investments rather than borrowing. On October 30, 1980, WWL had $2,149,353.00 in cash, but Mr. Jackson testified that this cash reserve was not actually sufficient to provide working capital and cover self-insured losses, pension plan liability (including a sizable unfunded liability for past service under a previous plan), anticipated capital expenditures, and emergency reserve funds. In his opinion, WWL would not have had the capacity to pay higher dividends than it had paid.

In addition to Mr. Jackson, plaintiffs relied on the testimony of two expert witnesses, each with experience in valuing small closely-held corporations. The first expert, president of a money management firm, considered a number of approaches to valuing the stock. First, the expert testified as to a prior sale of WWL stock. On May 10, 1979, Merchants National Bank as trustee for the Elizabeth Reynolds Trust, negotiated a sale of WWL stock held as a trust asset. The stock was sold to WWL for $93.00 a share; a total of 404 shares (approximately 2% of the shares outstanding) were sold. The sale was, in the expert’s opinion, an arm’s length transaction because Merchants National Bank negotiated the sale in its fiduciary capacity.

Second, this expert considered two approaches to valuation by capitalization of dividends. The value reported on the estate tax return reflected the 1980 dividend ($8.35) capitalized at the New York prime rate on the valuation date (12.25%). This approach yielded a value of $68.16 per share. The expert thought this approach was not unreasonable although she did offer her own capitalization method. Again, taking the 1980 dividend figure, and assuming that an investor would want to earn two points over Treasury rates, the expert capitalized the dividend at 13.50% for a value of $61.85 per share.

Third, the expert attempted to assign a value to the stock by using earnings capitalization. This approach placed the value of the stock at somewhere between $83.00 and $86.00 per share. When asked to give a final figure which would reflect her opinion of the value of WWL stock, the witness chose the $93.00 per share value based on the prior sale in May, 1979. She believed that the sale was at arm’s length and was the most objectively determined indication of value available.

Plaintiffs’ other expert witness was president of a firm which evaluates companies with sales up to $30 million annually. This witness testified that WWL was experiencing a severe obsolescence problem in the late 1970s; this problem had become serious in 1978 and remained so through the date of Mr. Lick’s death. Any increases in earnings following 1980 were potentially short-term benefits gained while competitors went to new technologies. The expert also believed that the printing industry at large was in trouble as systems using optical readers and computers took business away from traditional printing companies. Because of rapidly advancing technological developments, it would have been imprudent for WWL to have paid higher dividends. Even with the $2,000,000.00 in reserve at the date of death, WWL was still one to three million dollars short of having the capital necessary to get into new markets, according to the expert’s estimate. As far as placing a value on the stock, he chose the earnings capitalization approach. He believed that it was reasonable to multiply the 1979 earnings by five (DJIA stocks at that time were selling for 7.5 x earnings). Because decedent held an illiquid, nonmarketable minority interest, the witness then applied a 50% discount. Based upon this formula, he thought a reasonable fair market value was $98.82 per share.

The government’s sole witness was the expert who had prepared the valuation of WWL for the Internal Revenue Service. The majority of his testimony was an explanation of how he arrived at his estimate. Based upon the upward trend of the Dow Jones Industrial Average throughout 1980 and Standard & Poor Industry Surveys, the government’s expert concluded that the industry outlook for WWL was favorable on the valuation date.

Like the plaintiffs’ witnesses, the government expert examined more than one valuation method. He rejected capitalizing dividends because that method ignored factors such as the true earning capacity of the company. The expert believed that the dividends paid by WWL were not representative of the company’s capacity to pay dividends. He also minimized the import of the sale of stock from the Reynolds Trust because of the small size of the block of shares. In considering the financial condition of WWL, he looked at such indicators as book value, liquidation value, and net working capital. In his opinion the minimum value for the stock was the net working capital of $222.00 per share. The most significant approach taken was the comparison with publicly traded printing companies. The expert took the average price/earnings ratio of seven other companies, adjusted it downward, and applied that figure to WWL’s financial data. This approach yielded a value of $256.00 per share. Choosing from a range of six possible values from $394.00 (book value on December 31,1980) to $222.00 (net working capital per share), the expert recommended a value of $285.00 per share. At trial, he admitted that a lack of merchantability discount of 22% was reasonable, leaving a final value of $222.00 per share.

C. It is true that the majority of courts faced with deciding the value of closely-held stock have relied on a number of factors without singling one out as being especially significant. Many courts have, however, under particular circumstances, relied primarily on a single factor in valuing such stock. See 22 A.L.R.Fed. 31, 44 (1975).

“In determining the value of unlisted stocks, actual sales made in reasonable amounts at arm’s length, in the normal course of business, within a reasonable time before or after the basic date, are the best criterion of market value.” Fitts’ Estate v. Commissioner of Internal Revenue, 237 F.2d 729, 731 (8th Cir.1956). Of course, any sale of stock of a closely-held corporation should be looked at closely to determine whether it represents a transaction at arm’s length. Rev.Rul. 59-60, CB 1959-1. In addition, the burden is on the taxpayer to demonstrate that the sale relied upon was an arm’s length sale in the normal course of business. Fitts’ Estate, supra, at 731.

Often times, a sale of unlisted stock will be found not to have been made at arm’s length where a special relationship between the buyer and the seller suggests that the sale did not result from the usual type of bargaining or negotiation. In Righter v. United States, 439 F.2d 1204, 194 Ct.Cl. 400 (1971), a single sale of stock was held not to be controlling for valuation purposes where the sale was made by a trustee to a co-trustee. Furthermore, the sale price had not been bargained for but had been determined by a formula fixed in the decedent’s will. In Central Trust Company v. United States, 305 F.2d 393, 158 Ct.Cl. 504 (1962), sales made at prearranged prices to company employees and family friends were said to create an artificial value for unlisted stock for gift tax purposes.

In other cases prior sales have been thought to be inconsequential for valuation purposes where the sales were too remote in time from the valuation date. See, for example, Fitts’ Estate, supra, at 731, where the Court of Appeals for the Eighth Circuit held that prior sales occurring three or more years prior to the valuation date and five years after the critical date were too remote to be useful. Other circumstances which may undermine the probative value of prior sales are forced sales, sales in a restricted market, and sales of small lots.

We do not intend to rely upon the sale from the Elizabeth Reynolds Trust as the single determinative factor, but we do find that the circumstances of that sale are such that the transaction does provide a significant representative measure of fair market value.

We find it particularly significant that the May 10, 1979, sale was negotiated by Merchants National Bank acting as trustee on behalf of the Elizabeth Reynolds Trust. In Arkansas law

It is well settled that a trustee is held to a high standard of good faith and prudent dealing. He owes a duty of loyalty to the beneficiaries____A trustee must act in good faith in the administration of the trust, and this requirement means that he must act honestly and with finest and undivided loyalty to the trust, not merely with that standard of honor required of men dealing at arm’s length in the workaday world, but with a punctilio of honor the most sensitive.

Riegler, et al. v. Riegler, 262 Ark. 70, 76, 553 S.W.2d 37 (1977), citing Restatement (Second) of Trusts § 170 (1959) and Hardy v. Hardy, 222 Ark. 932, 263 S.W.2d 690 (1954). Plaintiffs’ expert witness, a former employee of Merchants National Bank, testified that in her opinion the trustee negotiated the sale of stock at arm’s length in a manner consistent with its fiduciary duty. The negotiated price was, to her knowledge, the highest price for which WWL stock had ever traded. The fact of Merchant National Bank’s fiduciary duty to the trust would support rather than undermine the notion that the sale was negotiated at arm’s length. Additionally, we find that the sale from the Reynolds Trust was within a reasonable time of the decedent’s date of death. While the sale was executed 16 months before Mr. Lick’s death, there is no indication that circumstances in either the printing industry or WWL were so volatile that the value of the company would have increased or decreased significantly during that period. Certainly, May, 1979, was well within the time frame considered by the experts on both sides in their valuation analyses.

As indicated, we think it wise not to rely upon the prior sale as a sole conclusive factor. This is primarily because of the relatively small size of the block of stock sold by the Reynolds Trust. We find that a 28% block of stock in a company such as WWL would necessarily be worth more on a share for share basis than a 2% block, although the difference should not be substantial. We do believe, however, that the value of $93.00 per share is an objectively determined figure against which the other evidence of fair market value should be measured.

This figure is consistent with the valuations given by plaintiffs’ experts. Using the earnings capitalization method, one expert proposed a value of approximately $98.00 per share. Section 5(a) of Rev.Rul. 59-60, CB 1959-1 237, states, “In general the appraiser will accord primary consideration to earnings when valuing stocks of companies which sell products or services to the public.” We think it significant that this valuation was made after full consideration of a broad range of factors influencing a potential investor.

Plaintiffs also submitted evidence of the value of WWL stock accepted administratively in two other estates. Walter T. Pfennig died on June 20, 1976. On his federal estate tax return, Mr. Hennig’s executor listed 378 shares of WWL common stock valued at $80.00 per share. Ethel K. Riddler owned 749 shares of WWL stock at her death on December 27, 1979. Her executor proposed a value of $75.00 per share, but the IRS adjusted the value administratively “to reflect a fair market value of $99.00 per share based upon sales and other factors.” “The valuations accepted by the Internal Revenue Service in the cases of other estates, involving the same stock and other death and valuation dates, are of probative value in the solution of the problem involved in this case and must be considered.” Righter v. United States, supra, at 1211. We agree with the court in Righter that the values accepted by the IRS are not determinative on the question of value but are evidence which should be considered.

We note one major shortcoming in the government’s substantially higher valuation. Although the valuation may have been a good faith effort to evaluate raw financial data, it was, in essence, prepared in a vacuum. By this, we mean that the government's expert arrived at his opinion of fair market value based almost solely upon financial data; he did little to incorporate those valuation factors which do not show up on a corporate balance sheet. We find it highly unlikely that any buyer would be willing to purchase WWL stock without careful analysis of industry-wide technological developments, threats to the company’s traditional business, obsolescence, and future uncertainties as well as the broad range of current financial data.

Based upon the foregoing discussion, the evidence before the court, and the entire record, we conclude that the fair market value of decedent’s 5,708 shares of WWL stock as of September 14, 1980, was $110.00.

SUMMARY

The deficiency paid by plaintiffs was based upon a valuation of decedent’s WWL stock at $285.00 per share on the date of death, but the court has determined that the value of the stock was $110.00 per share. Therefore, plaintiffs are entitled to recover to the extent of the difference between the valuations. In addition, section 2053(a)(2) of the Internal Revenue Code allows a deduction from the value of the gross estate for administrative expenses. Pursuant to this provision, plaintiffs also claim that certain amounts be allowed for accountant, executor, and attorney’s fees. The government concedes that plaintiffs are entitled to such deductions. We see no reason not to give effect to the parties’ agreement in this respect. Accordingly, the amount of the recovery should also reflect such a reduction.

A separate judgment in accordance with this memorandum opinion will be concurrently entered.

      . The total estate tax and interest paid by plaintiffs is as follows:
      Dates of Payment Amount
      June 15, 1981 (Tax) $ 394,984.00
      June 18, 1981 (Tax) 794,232.00
      January 14, 1983 (Tax) 716,401.00
      December 9, 1983 (Interest) 210,944.22
      TOTAL: $2,116,561.22

      . 26 U.S.C. § 7422(a) provides:
      (a) No suit prior to filing claim for refund.
      —No suit or proceeding shall be maintained in any court for the recovery of any internal revenue tax alleged to have been erroneously or illegally assessed or collected, or of any penalty claimed to have been collected without authority, or of any sum alleged to have been excessive or in any manner wrongfully collected, until a claim for refund or credit has been duly filed with the Secretary or his delegate, according to the provisions of law in that regard, and the regulations of the Secretary or his delegate established in pursuance thereof.

      . 26 C.F.R. § 301.6402-2(b)(l) provides:
      (b) Grounds set forth in claim. (1) No refund or credit will be allowed after the expiration of the statutory period of limitation applicable to the filing of a claim therefor except upon one or more of the grounds set forth in a claim filed before the expiration of such period. The claim must set forth in detail each ground upon which a credit or refund is claimed and facts sufficient to apprise the Commissioner of the exact basis thereof. The statement of the grounds and facts must be verified by a written declaration that it is made under the penalties of perjury. A claim which does not comply with this paragraph will not be considered for any purpose as a claim for refund or credit.

      . WWL had previously paid dividends of:
      Year Dividend Per Share Earnings Per Share 1976 $6.20 $23.31 1977 6.40 32.10 1978 7.00 36.53 1979 7.50 38.89 1980 8.35 41.54

      . The witness also considered the book value of the stock, the liquidation value, and the comparative value approach, but rejected them all as unrepresentative of the market value of the stock.


author: MAROVITZ, Senior District Judge.

text:
    David ELY, Plaintiff, v. DEPARTMENT OF JUSTICE, Office of U.S. Attorneys, Elizabeth Stein, and Norman Lerum, Defendants.
    No. 84 C 9041.
    United States District Court, N.D. Illinois, E.D.
    June 6, 1985.

      Robert K. Mayer, pro bono, Chicago, Ill., for plaintiff.
    Michael S. O’Connell, Asst. U.S. Atty., for Dept, of Justice and Elizabeth Stein.
    Paul E. Freehling, Chicago, Ill., for Norman Lerum.
   MEMORANDUM OPINION

MOTION TO DISMISS AND/OR FOR SUMMARY JUDGMENT

MAROVITZ, Senior District Judge.

Plaintiff David Ely brings this action for damages pursuant to the Privacy Act of 1974 (the Act), 5 U.S.C. § 552a against defendant The Department of Justice, The Office of the United States Attorney, Elizabeth Stein, and Norman Lerum, complaining that Stein disclosed certain records that the FBI had maintained on him to Lerum, Ely’s court appointed attorney in a separate civil rights action that Ely was then pursuing against various federal defendants. Presently pending before the Court are all of the defendants’ motions to dismiss and/or for summary judgment. After full review of the pleadings, memoranda, affidavits and other materials filed with the Court, the Court disposes of the motions as follows.

In order to fully understand the posture of the case, some background information about Ely and his past and current litigation is necessary. Ely is a federal prisoner currently incarcerated at the Federal Correctional Facility in Oxford, Wisconsin where he is serving two consecutive 15 year terms for conspiracy to distribute cocaine and distribution of cocaine. His sentence was imposed after he pled guilty to three counts of a seven count indictment for narcotics laws violations (Ely I).

Ely had previously been the subject of an investigation by the FBI regarding an attempted bank robbery for which he was arrested on August 20, 1982 near Peoria, Illinois. Pursuant to Ely’s plea agreement in Ely I, the government agreed to drop the charges of attempted bank robbery against him. U.S. v. Ely, 719 F.2d 902, 904 (7th Cir.1983). Ely then filed a pro se civil action in the Northern District of Illinois alleging numerous violations of his constitutional and civil rights by federal officers and private individuals in connection with the investigation and his arrest. That case, (Ely II) was assigned to Judge Leighton who appointed Norman Lerum to represent Ely. Assistant U.S. Attorney Elizabeth Stein was assigned to represent all of the federal defendants in Ely II.

During the course of the proceedings in Ely II, Lerum, upon Ely’s request, attempted to issue certain subpoenas directed to some of the federal defendants. Stein moved to quash the subpoenas for failure to comply with 28 C.F.R. § 1621, et seq., which sets forth the procedures to be followed with respect to the production or disclosure of any material contained in the Department of Justice files, and Judge Leighton granted the motion. Stein also moved to transfer the action to the Central District of Illinois. This motion was taken under advisement by Judge Leighton. Pri- or to the court’s decision on the motion to transfer, Stein gave Lerum certain documents that Ely had already obtained from the FBI through the Freedom of Information Act. It is undisputed that the materials that Stein gave to Lerum contained some of the documents Lerum had attempted to subpoena on behalf of Ely. Why Ely wanted to subpoena documents already in his possession is unclear. Subsequently, Ely requested that Lerum withdraw as his counsel and Lerum moved to do so. On July 27, 1984, Judge Leighton granted Le-rum’s motion to withdraw, refused to appoint a different attorney to represent Le-rum stating his reasons for the refusal, and granted Stein’s motion to transfer venue.

On September 18, 1984, Ely filed a pro se civil action in this Court, Ely v. Hegarty, No. 84 C 8070 (Ely III) charging that Stein, Lerum, and Edward Hegarty, Special Agent in Charge, Chicago Field Office, FBI, engaged in a conspiracy to violate his constitutional rights. He also charged Le-rum with legal malpractice. One month later, October 18, 1984, Ely filed this action (Ely IV) charging Lerum, Stein, and the Department of Justice with having violated certain provisions of the Privacy Act when Stein gave the documents to Lerum during the course of Ely II.

All of the defendants in this action originally filed a motion to dismiss and/or for summary judgment. The Court then appointed Robert K. Mayer to represent Ely. Affidavits and other evidentiary material were filed in support of the motions for summary judgment.

The gist of Ely’s complaint is that Stein violated 5 U.S.C. § 552a(b) by giving the documents concerning Ely to Lerum without first obtaining Ely’s written consent. According to the complaint, Ely alleges that Stein gave the documents to Lerum to “create, foster, and garner ill thoughts and dislikes between Plaintiff and Lerum for the purpose of prejudicing Lerum against Plaintiff.” Complaint jf 9. The complaint also alleges that the Department of Justice failed to comply with the provisions of 5 U.S.C. § 552a(b)(7) by disclosing information concerning him to another agency, i.e., the U.S. Attorney’s office without the head of the agency making a request in writing and stating what the disclosure was to be for, and that Stein, the Department of Justice, and the Office of the U.S. Attorney failed to comply with the provisions of 5 U.S.C. §§ 552a(c)(l)(A), (B) and (c)(2), (3) by not properly accounting for the disclosures as required by those sections of the Act. Finally, the complaint alleges that the Department of Justice and the Office of the U.S. Attorney failed to comply with 5 U.S.C. § 552a(e)(10) by not establishing the required safeguards to insure the confidentiality of plaintiff’s records, and that Stein, Lerum, and the Department of Justice and Office of the U.S. Attorney all conspired to violate the aforementioned provisions of the Privacy Act.

The Privacy Act of 1974 serves to safeguard the public interest in informational privacy by delineating the duties and responsibilities of federal agencies that collect, store, and disseminate personal information about many individuals. Doe v. United States Civil Service Commission, 483 F.Supp. 539 (S.D.N.Y.1980). The Act limits the kind of information that can be collected or disclosed and imposes a standard of quality and diligence on the maintenance of government records. Individuals can obtain access to agency records that pertain to them and can seek amendments to records thought to contain erroneous information. Id.

The Act itself sets forth remedies for violations of its provisions. A civil damage action may be brought solely against an “agency.” 5 U.S.C. § 552a(g)(l). As the Seventh Circuit recently held “[t]he Privacy Act authorizes private civil actions for violations of its provisions only against an agency, not against any individual. ” Brown-Bey v. United States, 720 F.2d 467, 469 (7th Cir.1983) (emphasis added); Windsor v. The Tennessean, 719 F.2d 155 (6th Cir.1983). Accordingly, all claims against Stein and Lerum must be dismissed.

The Department of Justice and the Office of the U.S. Attorney have moved for summary judgment upon the “routine use” exception contained in 5 U.S.C. § 552a(b)(3). Section (b) of the Act prohibits unconsented disclosures of information concerning an individual unless the circumstances attendant the disclosure place it within one of Section (b)’s exceptions. One such exception is the routine use exception. Routine use is defined as a “use of such record for a purpose which is compatible with the purpose for which it is collected.” 5 U.S.C. § 552a(a)(7). That exception allows an agency to make unconsented to disclosures provided the use to which the disclosed information is to be put is one which has previously published in the Federal Register. Zeller v. United States, 467 F.Supp. 487, 503 (E.D.N.Y.1979). 5 U.S.C. § 552a(e)(4)(D).

Since February 4, 1983, the Department of Justice has published guidelines outlining what it considered to be a “routine use.” E.g. 48 Fed.Reg. 5381 (Feb. 4, 1983). Pursuant to this publication, “a record relating to a case or matter may be disseminated to an actual or potential party or his attorney for the purpose of negotiation or discussion on such matters as settlement of the case or matter or informal discovery proceedings.” 48 Fed.Reg. 5382 (Feb. 4, 1983). In support of the motion, the defendants have provided the Court with Stein’s affidavit stating that as part of her representation of the defendants in Ely v. Hersley, (Ely II) she presented Lerum with a copy of the documents that the FBI had previously released to Ely pursuant to the FOIA. Also provided to the Court is a copy of the transcripts of certain hearings before Judge Leighton in Ely II in which Stein informs Judge Leighton that she had provided to Lerum “as a courtesy a copy of the FOIA,” the documents that were released under the Freedom of Information Act ... to Mr. Ely____ (Government Exhibit No. (e)). A review of the transcript clearly reveals that the documents were given to Lerum to help him oppose the motion to transfer venue.

In opposition to the motion for summary judgment, Ely has failed to present any evidentiary material either by way of deposition, affidavit or as otherwise provided in Rule 56 of the Federal Rules of Civil Procedure, choosing instead to merely restate his allegation that the disclosure was made to garner ill thoughts and dislikes between him and Lerum. Ely’s submissions are clearly inadequate under the Federal Rules. “When a motion for summary judgment is made and supported as provided in this Rule, an adverse party may not rest upon the mere allegations or denials of his pleadings, but his response, by affidavits or as otherwise provided in this rule, must set forth specific facts showing that there is a genuine issue for trial.” Fed.R.Civ.P. 56(e).. Having failed to bring forth a genuine issue, summary judgment must be granted to defendants on Ely’s claim that Stein’s disclosure of the documents to Le-rum violated the Privacy Act.

Having determined that the disclosure of the FOIA documents to Lerum did not violate Section (b) of the Act, all that remains are Ely’s allegations that the Department of Justice and Office of the U.S. Attorney violated Section (c) of the Act by not properly accounting for the disclosure and Section (e) by not establishing appropriate safeguards to insure the security of his records.

The Act provides that in order to avail oneself of the civil remedies afforded by it, the lack of compliance with the Act must result in some adversity to the claimant. 5 U.S.C. §§ 552a(g)(l)(C), (D); Fagot v. FDIC, 584 F.Supp. 1168 (D.C.P.R.1984). Additionally, there must be a causal relationship between the adversity and the agency’s violation of the Act. Id., Edison v. Department of the Army, 672 F.2d 840, 843 (11th Cir.1982).

The only adverse effect alleged by Ely is the fact that Lerum withdrew as his attorney. However, this, according to Ely, was a direct result of Stein’s disclosure to Lerum of the documents. This disclosure the Court has already determined to fall within the routine use exception and therefore did not violate the Act. Ely has made no allegation that any of the information contained in those documents was incorrect, thus it is impossible for the alleged failure to properly account for the disclosure or the alleged failure to properly safeguard his records to have caused the alleged adverse effect. It was the disclosure that Ely alleges to have caused Lerum to garner ill thoughts about him, not the Department’s failure to properly record or account for the disclosure. Thus, since Ely has not alleged to have suffered any adverse effect caused by the alleged improper safeguarding and accounting, his claims under Section (c) and (e) of the Act fail to state a cause of action and are hereby dismissed.

In summation, the Court concludes that: 1) Stein and Lerum are not amenable to suit under the Privacy Act and thus are dismissed from the action; 2) Stein’s disclosure of the documents to Lerum during the course of her representation of the federal defendants in Ely II falls within the “routine use” exception and thus did not violate the Act. Therefore, summary judgment is granted to the Department of Justice and the U.S. Attorney’s Office on Ely’s claim that the disclosures violated the Act; 3) Ely’s claim that the Department of Justice and U.S. Attorney’s Office violated Sections (c) and (e) of the Act by failing to properly account for the disclosure and properly maintain their records fails to state a claim since the adversity alleged could not possibly have been caused by the alleged violations. The claims are therefore dismissed. This entire action is hereby dismissed with prejudice.


author: HORACE T. WARD, District Judge.

text:
    TRACEY T., et al., Plaintiffs, v. Dr. Charles McDANIEL, et al., Defendants.
    Civ. A. No. C81-2292A.
    United States District Court, N.D. Georgia, Atlanta Division.
    June 6, 1985.

      Archer D. Smith, III, Patrick McKee, Atlanta, Ga., Charlie Weatherly, Decatur, Ga., for plaintiffs.
    Tom Cox, Atlanta, Ga., for defendants.
   ORDER OF COURT

HORACE T. WARD, District Judge.

The above-styled action is scheduled to come before the court on June 17, 1985 for trial on the merits. Plaintiffs seek relief pursuant to the Education for All Handicapped Children Act, 20 U.S.C. § 1401 et seq. (“EAHCA” or “Act” or “Public Law 94-142”). In advance of trial, plaintiffs request that the court issue a ruling regarding the matter of which party shall bear the burden of proof. Plaintiffs have brought the case of Burger v. Murray County School District, 612 F.Supp. 434 (N.D.Ga.1984) to the attention of the court. In the Burger case, as in this case, the child was in an educational placement (during the pendency of the litigation) which both parties had at one point agreed was appropriate. In Burger, Judge Murphy ruled:

when the suggestion is made that a child, who falls under the aegis of the EAHCA and is currently learning in what has been deemed to be an appropriate setting, be moved to a different facility, the party advocating the move should bear the burden of proving its propriety.

Burger, at 437.

The EAHCA contains no provision which specifically assigns the burden of proof in an action brought pursuant to the Act. Town of Burlington v. Dept. of Educ., 736 F.2d 773, 794 (1st Cir.1984), affd, — U.S. -, 105 S.Ct. 1996, 85 L.Ed.2d 385 (1985). Public Law 94-142 establishes elaborate procedural prerequisites to the commencement of a civil action. Among these requirements is review by the state educational agency of the jointly-developed IEP. A party aggrieved by “the findings and decision” of the state agency required by 20 U.S.C. § 1415(c) may institute a civil action pursuant to 20 U.S.C. § 1415(e)(2). In an action brought pursuant to § 1415(e)(2), the trial court is to review the final decision of the state educational agency. The trial court has “some latitude” in reviewing the state agency decision but a trial de novo “is not called for.” Lang v. Braintree School Comm., 545 F.Supp. 1221,1226 (D.Mass.1982). Given that the role of the court in a 94-142 case is to review state agency action, the First Circuit has concluded that, as a general matter, “the burden of proof is on the party who seeks to overturn the findings and decision of the (state educational) agency.” Town of Burlington, 736 F.2d at 794. Given the importance of the administrative review process in the statutory scheme established by the EAHCA, this approach “aceord[s] the administrative agency’s expertise the respect it is owed.” Id. Any other allocation of the burden of proof would make the administrative process essentially a meaningless exercise. Thus, in general, where an IEP has been upheld in the state administrative process, it is the party attacking that IEP who bears the burden of persuasion.

Some cases have come to a contrary result by looking to 20 U.S.C. § 1415(e)(3). However, it appears that this provision was not intended to affect the substantive rights of the parties (the burden of.proof).. Rather, it was intended to allow for the maintenance of the “status quo” (the “then current” educational placement) — in order to ensure consistency in a disabled child’s education — while the parties dispute the appropriateness of the challenged IEP. Doe v. Brookline School Comm., 722 F.2d 910, 915 (1st Cir.1983). If the parties at some point agreed to a particular placement but a more recent IEP (again, developed by both parties), proposed a different placement, the “former” (even if “current” for § 1415(d)(3) purposes) placement does not control the burden of proof issue, even though it may be probative as to the ultimate issue in dispute — the appropriateness of the challenged educational placement. This is so because an action brought pursuant to Public Law 94-142 challenges a decision of a state educational agency with respect to a jointly-developed IEP. Where a more recent IEP has replaced an earlier IEP and it is that more recent IEP which is the subject of litigation under § 1415(e)(2), the prior IEP cannot be relevant to the issue of the allocation of the burden of proof. The case of Tatro v. Texas, 703 F.2d 823 (5th Cir.1983), relied on by plaintiff, does not hold otherwise. In Tatro, the court noted that the school district would bear the burden of showing an IEP was inappropriate where it first raised this argument on appeal. 703 F.2d at 830. In accordance with the general rule, “the party attacking [the IEP] should bear the burden of showing why the educational setting established by the IEP is not appropriate.” Id. There, the school district was in the posture of attacking the IEP which had been approved by the state educational agency.

In the instant case, the plaintiffs challenge a 1981 IEP developed by Tracey’s parents and the staff of the DeKalb defendants. The parents unsuccessfully pursued relief at the state administrative level. The issue before the court in this action, then, is whether the 1981 IEP is in accordance with the EAHCA (i.e., whether it provided Tracey with a “free appropriate public education.”). In this case, the defendants are not attacking the earlier (1975-1981) placement; rather, it is the parents who are attacking the 1981 IEP. Since the plaintiffs bring this action to overturn the 1981 “findings and decisions” of the state agency made pursuant to 20 U.S.C. § 1415(c), they must bear the burden of proof on their claims against the DeKalb defendants (retrospective relief issues). Town of Burlington, supra.

The situation with respect to the Fulton defendants, at first glance, appears to be somewhat different. Plaintiffs challenge an IEP developed by the parents and the staff of the Fulton defendants. This IEP and the Fulton defendants were made a part of the instant action before the completion of state administrative review pursuant to the EAHCA. Because of these peculiar circumstances with regard to plaintiffs’ claims against the Fulton defendants, there are technically no § 1415(c) state educational agency “findings and decision” (administrative record) before the court with regard to the Fulton placement. Under analogous circumstances, the First Circuit has concluded that where the state agency has made no findings and decision regarding the appropriateness of an IEP, “neither party can be assigned the burden for [that IEP] on the basis of its posture on an appeal from a state agency decision.” Town of Burlington, 736 F.2d at 794. This rule makes sense because there is no § 1415(c) administrative record being appealed from.

However, the circumstances of this case differ from those discussed in Town of Burlington to a significant degree such that the First Circuit’s conclusion to look elsewhere for guidance in allocating the burden of proof is inapplicable. Pursuant to an understanding between the plaintiffs and the Fulton defendants, the IEP developed by those parties is to stand in the same position as the DeKalb IEP. Although the Fulton IEP is one which has not been reviewed through the state administrative process, it stands before this court in the same position as would the § 1415(c) “findings and decision” of the state educational agency. Since the parents are attacking this IEP, which was “upheld” in the administrative process (to the extent it occurred and/or by stipulation of parties), it is appropriate that they should bear the burden of proof. Town of Burlington, 736 F.2d at 794. No departure from the general rule is warranted under the circumstances of this case.

Accordingly, it is appropriate for the plaintiffs to bear the burden of proof with respect to their claims under Public Law 94-142 in this case.

      . In Lang, supra, the court placed the burden of proof on the school district despite the fact that it had prevailed in the administrative proceedings. It appears this was done because the administrative process was already rendered ineffective due to the school district's failure to include the child's parents in the development of the IEP at issue, as required by the EAHCA. 545 F.Supp. at 1228.

      . Judge Murphy's opinion in Burger did not consider which party was seeking to overturn the decision of the state agency. Burger, at 435 n. 3. Allocation of the burden of proof in an EAHCA case requires a full consideration of the administrative process in the statutory framework established by Public Law 94-142 and the role of judicial review pursuant to 20 U.S.C. § 1415(e)(2). See generally Board of Education v. Rowley, 458 U.S. 176, 102 S.Ct. 3034, 73 L.Ed.2d 690 (1982). For this reason, Burger is distinguishable.