author: HOLSCHUH, District Judge.

text:
    JOHN Q. SHUNK ASSOCIATION, INC., Plaintiff, v. UNITED STATES of America, Defendant.
    No. C-2-80-623.
    United States District Court, S.D. Ohio, E.D.
    Sept. 20, 1985.
    Michael Becker, Glander, Brant, Ledman & Newman, Columbus, Ohio, for plaintiff.
    Albert Ritcher, Asst. U.S. Atty., Columbus, Ohio, for defendant.
   MEMORANDUM AND ORDER

HOLSCHUH, District Judge.

Plaintiff brings this action seeking recovery of federal income taxes which it alleges defendant illegally assessed and collected from it for the taxable years 1974, 1975 and 1976. Jurisdiction is invoked under 28 U.S.C. § 1346 and 26 U.S.C. § 7422. This matter is before the Court for resolution on the stipulated facts and briefs of the parties.

The facts are stipulated as follows. Plaintiff, the John Q. Shunk Association, Inc., is a not-for-profit corporation incorporated under the laws of Ohio on February 9, 1960. On August 3, 1960 the Internal Revenue Service, determined that plaintiff qualified as a tax exempt organization under section 501(c)(3) of the Internal Revenue Code. 26 U.S.C. § 501(c)(3). Plaintiffs exemption from federal income tax has been continuously in effect since August, 1960 and was in effect during the tax years at issue here.

Plaintiff Association, during the years 1974, 1975 and 1976 met the definition of a private foundation as defined in'26 U.S.C. § 509. Its primary purpose was to assist young men and women residing in Crawford County, Ohio to obtain a college education by providing financial assistance in the form of annual scholarships.

As a private foundation, plaintiff is subject to the provisions of 26 U.S.C. § 4945, which provides for taxes of ten percent on certain taxable expenditures. A taxable expenditure is defined, in part, as any amount paid by a private foundation as a grant to an individual for the purpose of study. Section 4945(d)(3). However, the statute also provides that a grant which is awarded on an objective and non-discriminatory basis pursuant to a pre-approved selection procedure is exempt from taxation if it constitutes a scholarship and is used for study at a regular educational institution. 26 U.S.C. § 4945(g).

During the taxable years at issue, plaintiff made scholarship grants to the educational institution of its grant recipients in the following amounts: 1974 — $32,500; 1975 — $50,500; 1976 — $68,250. On plaintiff’s annual report to the Internal Revenue Service, Form 990-AR, the following payments were indicated: 1974 — $57,465.75; 1975 — $60,500; 1976 — $65,189.60. In 1977, during an audit of plaintiff’s tax returns, the IRS determined that the scholarship grants awarded during 1974, 1975, and 1976 constituted taxable expenditures because they had not been awarded pursuant to a selection procedure approved in advance by a delegate of the Secretary of the Treasury. Plaintiff conceded that it had not filed such an application prior to the selection of the recipients of the awards, as required by 26 U.S.C. § 4945(g), and promptly filed such an application. The Commissioner assessed taxes pursuant to section 4945(a) as follows: 1974 — $4,101.09; 1975 — $5,950.58; 1976 — $7,555.62. Plaintiff paid the tax and interest in full and timely filed a claim for refund, which was disallowed.

The parties agree that the scholarship grants awarded by plaintiff in 1974-1976 were made pursuant to an objective and non-discriminatory procedure, that the scholarship amounts were properly excludable from the recipient’s gross income under 26 U.S.C. § 117(a), and that the amounts were used solely for study at an educational institution described in 26 U.S.C. § 170(b)(l)(A)(ii). The IRS also admits that had plaintiffs grant application procedures for 1974-1976 been filed prior to making the grants, they would have met the requirements of 26 U.S.C. § 4945(g).

This action involves the narrow issue of whether section 4945 was properly invoked by the Service to deny plaintiff an exemption for its scholarship grants awarded during the taxable years 1974-1976. The relevant portions of the statute are as follows:

(a) Initial taxes.—
(1) On the foundation.— There is hereby imposed on each taxable expenditure (as defined in subsection (d)) a tax equal to 10 percent of the amount thereof. The tax imposed by this paragraph shall be paid by the private foundation....
(b) Additional taxes.—
(1) On the foundation.— In any case in which an initial tax is imposed by subsection (a)(1) on a taxable expenditure and such expenditure is not corrected within the taxable period, there is hereby imposed a tax equal to 100 percent of the amount of the expenditure. The tax imposed by this paragraph shall be paid by the private foundation____
(d) Taxable expenditure.— For purposes of this section, the term “taxable expenditure” means any amount paid or incurred by a private foundation—
(1) to carry on propaganda, or otherwise to attempt, to influence legislation, within the meaning of subsection (e),
(2) except as provided in subsection (f), to influence the outcome of any specific public election, or to carry on, directly or indirectly, any voter registration drive,
(3) as a grant to an individual for travel, study, or other similar purposes by such individual, unless such grant satisfies the requirements of subsection (g).
(4) as a grant to an organization (other than an organization described in paragraph (1), (2), or (3) of section 509(a)), unless the private foundation exercises expenditure responsibility with respect to such grant in accordance with subsection (h), or
(5) for any purpose other than one specified in section 170(c)(2)(B).
(g) Individual grants.— Subsection (d)(3) shall not apply to an individual grant awarded on an objective and nondiscriminatory basis pursuant to a procedure approved in advance by the Secretary, if it is demonstrated to the satisfaction of the Secretary that—
(1) the grant constitutes a scholarship or fellowship grant which is subject to the provisions of section 117(a) and is to be used for study at an educational organization described in section 170(b)(l)(A)(ii),
(2) the grant constitutes a prize or award which is subject to the provisions of section 74(b), if the recipient of such prize or award is selected from the general public, or
(3) the purpose of the grant is to achieve a specific objective, produce a report or other similar product, or improve or enhance a literary, artistic, musical, scientific, teaching, or other similar capacity, skill, or talent of the grantee.

Thus, the statute provides that an individual grant will not be calculated as a taxable expenditure if it satisfies the following criteria:

1. It is awarded on an objective and non-discriminatory basis.
2. It is made pursuant to a procedure approved in advance by the Secretary and
3. It is a scholarship grant used for study at an approved educational organization or is a prize or award from which the recipient is selected from the general public or is to enhance a literary, musical, scientific or teaching skill of the grantee.

The parties agree that the scholarship grants at issue here were awarded on an objective and non-discriminatory basis and that they were used for study at an appropriate educational institution. The only criterion which the grants did not meet was that they were not awarded pursuant to a pre-approved procedure, although that same selection procedure has since been filed and approved.

Plaintiffs argument is that the filing procedure is merely ministerial or directory and that the filing requirement is neither necessary to effect the purpose of the statute nor does it relate to the essence of the statute:

The Association contends that its objective and non-discriminatory grant procedure, its efforts to rely upon competent professional assistance and its prompt compliance with the statutory requirement for the grant procedure application following its discovery of that requirement constitutes substantial compliance with the provisions of I.R.C. § 4945(g). The Association did everything necessary to comply with the requirements of the law except the procedural act of filing the grant procedure application.

Plaintiffs brief at 10.

Defendant, on the other hand, argues that the fact that plaintiffs award granting procedures were proper did not relieve it of the burden of seeking advance approval as is mandated by the statute. It submits that the legislative history of the statute establishes that the requirement was specifically designed by Congress to curb past abuses of private foundations as a group, and therefore the filing requirement is the essence of the statutory provision. Defendant alleges that using a substantial compliance test would render the 10% and 100% penalties imposed by section 4945 a nullity.

Both plaintiff and defendant point to other provisions of the Internal Revenue Code where substantial compliance was held to apply or not apply, respectively, in support of their positions. The ultimate question, therefore, is whether the doctrine of substantial compliance may fairly be applied to the statute at issue. The question facing the Court is one of first impression.

On its face, section 4945 would appear to mandate that unless the objective and nondiscriminatory selection procedures of a private foundation are approved by the Secretary in advance, any grants awarded to individuals will be subject to a 10% tax as an improper expenditure. In determining whether plaintiff has “substantially complied” with this law, the crucial inquiry is whether the pre-approval of selection procedures is a substantive measure in the statute or whether it is a mere ministerial filing requirement purely for administrative convenience, as plaintiff contends. The Court’s focus, then, must be on Congressional intent in enacting this provision as demonstrated by its legislative history.

Section 4945 is a small part of a larger, major tax reformation in the area of private foundations, enacted as part of the Tax Reform Act of 1969. The purpose of this overall reformation of the private foundation taxation and reporting structure was to curb widespread abuses by private foundations of their tax exempt status:

The permissible activities of private foundations desiring to preserve the benefits of tax exemption, as well as the benefits to their contributors, are substantially tightened to prevent self-dealing between the foundations and their substantial contributors, to require the distribution of income for charitable purposes, to limit their holdings of private businesses, to give assurance that their activities are restricted as provided by the exemption provisions of the tax laws, and to be sure that investments of these organizations are not jeopardized by financial speculation.

H.R.Rep. No. 91-413, 91st Cong. 1st Sess., reprinted in 1969 U.S.Code Cong. & Ad. News 1645, 1648; S.Rep. No. 91-552, 91st Cong. 1st Sess., reprinted in 1969 U.S. Code Cong. & Ad.News 2027, 2032 (hereinafter House or Senate Report at__). Moreover, Congress believed that a tax should be imposed when private foundations made expenditures for “activities that should not be carried on by exempt organizations,” such as lobbying, electioneering, or grass roots campaigning. Senate Report at 2076. Of particular concern in the area of grant-making by private foundations was that existing law had failed to effectively limit the extent to which private foundations could award “educational grants to enable people to take vacations abroad, to have paid interludes between jobs, and to subsidize the preparation of materials furthering specific political viewpoints.” House Report at 1677.

The House Committee concluded that more effective limitations needed to be placed on tax exempt funds and that more effective sanctions were in order. Prior penalties, the loss of tax exempt status and denial of charitable contribution deductions, were considered inequitable and seldom enforced. To remedy these abuses of the tax exempt status, Congress enacted a series of provisions designed to establish a comprehensive system of taxation and administration over tax exempt organizations. One of these provisions was section 4945, which provided for a 10% tax on all “taxable expenditures,” including scholarship expenditures which were not excepted under section 4945(g). A second level tax of 100% was also to be imposed if the foundation failed to take action to “correct,” to the extent possible, the earlier improper expenditure.

Grants in the form of educational scholarships to individuals could be made without incurring the 10% excise tax only if such awards were made on an objective and nondiscriminatory basis under a procedure approved in advance by the Secretary of the Treasury. The objective was that “expertise and fairness replace whim and personal relationships” in the scholarship selection procedures. House Report at 1679. As the Senate Committee stated,

The House bill also imposes sanctions upon the making of grants to individuals by private foundations unless the grantees are chosen in open competition or on some other objective and nondiscriminatory basis, in accordance with procedures approved in advance by the Internal Revenue Service. This approval procedure does not contemplate specific approval of particular grant programs but instead one-time approval of a system of standards, procedures, and follow-up designed to achieve the intended degree of objectivity. Where the grants take the form of scholarships there will normally be available the relatively independent supervision of schools and colleges.

Senate Report at 2077. A strong indication that the pre-approval procedure was intended as a substantive measure of the law appears in the paragraph following the above quoted excerpt from the Senate Report: “[t]he scholarships, prizes, and other individual grants that a private foundation may make must meet the standards described at the beginning of the preceding paragraph. ” Senate Report at 2077-78 (emphasis added).

The abuses which prompted the tax reform measures and the preceding excerpt from the Senate Report indicate that the approval procedure was intended to provide a means of enforcing the Congressional mandate that private foundations distribute grants only in accordance with nondiscriminatory standards. The legislative history from various other tax reform provisions concerning private foundations is also helpful in viewing Congressional insight into the need for stricter regulation of those organizations. Along with section 4945, Congress enacted provisions governing the disclosure and publicity of the income and disbursements of private foundations. The purpose of these requirements was to provide the Internal Revenue Service with information sufficient to enforce the strengthened tax laws. House Report at 1681; Senate Report at 2080. Moreover, Congress intended that the disclosure of such information would aid state officials in regulating exempt organizations. Other changes in the law, such as notification of tax exempt status, were also designed to remove the Service’s disadvantage in evaluating and administering the law due to lack of information. In the words of the House Committee, “[y]our committee believes that it is not appropriate to continue to provide substantial tax benefits to organizations unless the organizations have provided the Internal Revenue Service with information as to their nature, purposes and activities.” House Report at 1682-83.

While there is no authority on this issue directly on point, a few cases have confirmed the Court’s perception of the Congressional approach to this matter. In Jackson v. Statler Foundation, 496 F.2d 623, 632 (2d Cir.1974), the Second Circuit, discussing the “sustained and detailed administrative relationship for enforcement of statutory standards” governing tax exempt foundations, found the provisions of section 4945 to be substantive limitations. After considering the purposes and history of the legislation in the context of racial discrimination, the court stated:

Properly construed, these provisions are only further evidence of the instrusiveness of the regulatory scheme.
Such an intrusive and detailed scheme was deemed necessary to prevent the use of foundations’ assets for a wide range of private purposes, such as profit-taking, control of businesses, and nepotism, and to ensure that the fruits of exemption benefit the public.
As one commentator concludes, the “... Act’s basic approach is to locate and maintain contact with the foundations____” Private Foundations under the Tax Reform Act of 1969, 7 Colum. J.Law & Soc.Prob. 240, 254 (1971).

Id. at 633.

In Gladney v. Commissioner of Internal Revenue, 745 F.2d 955 (5th Cir.1984), the statute at issue was 26 U.S.C. § 507(a), which imposes a tax upon an organization which files a notice that it intends to terminate its status as a private foundation. The statute, on its face, required notice before the termination could take effect. In reversing the tax court’s holding that the sole legislative policy for the notice requirement was to permit the IRS to determine the tax owed, the court found the requirement part of a larger statutory scheme intended to provide the Service with more information with which to administer the tax laws and to enhance the regulation of private foundations by the states. To serve those objectives, the Court found strict compliance with the notice requirement to be necessary. Addressing a “substantial compliance” argument, the Court held that the doctrine did not apply in the presence of clear legislative rationale for applying the notice requirement, and that “after the fact notification is not substantial compliance.” Gladney, at 962-63.

Defendant relies heavily on the case of German Society of Maryland, Inc. v. Commissioner of Internal Revenue, 80 T.C. 741 (Tax Ct.1983), the facts of which are nearly identical to those in the case sub judice. German Society was a long recognized tax exempt private foundation engaged in the activity of awarding scholarship grants. Through the Society’s inadvertence, the grant making procedures for the tax years 1974-1976 were not submitted to the IRS for approval until late 1976, and the section 4945 10% tax was assessed for those expenditures.

The Society argued that since it had corrected its failure to receive advance approval in accordance with section 4945, it should be relieved of liability for the 10% excise tax. Reviewing the legislative history and wording of the statute, the court observed that the statute contained no language indicating that the liability is conditional, and that the “clear implication is that the tax will be imposed regardless of subsequent actions by the foundation.” German Society, at 744.

Plaintiff strenuously argues that German Society is not controlling in this action because the issue in that case was whether correction could avoid the tax and that the foundation did not argue, nor did the court address, the doctrine of prior substantial compliance. However, it would appear that although phrased in different terminology, the arguments made by the foundation in German Society were substantially similar to those made by plaintiff:

Petitioner’s arguments that its procedures were identical in all of the years at issue, that it did not engage in any improper activity, and that the penalty is therefore undeserved and unwarranted does not fall on deaf ears. We understand the problems faced by foundations run by volunteers with little expertise in Federal taxation, and we realize that they often lead to inadvertent errors such as that involved here. Nonetheless, Congress enacted a statutory scheme which imposes an excise tax on those foundations that fail to obtain the approval required by section 4945(g). We are not free to disregard that mandate.

Id. at 746 (emphasis added). The Court finds the reasoning of German Society to be persuasive, and despite plaintiff’s arguments to the contrary determines its holding to be dispositive in this matter. ' Even assuming that plaintiff is correct in its contention that German Society does not control the instant case, the Court’s independent analysis of the legislative history of the statute provides ample basis for reaching the same result.

Aside from the legislative history of the statute, the tax regulations are also inconsistent with plaintiff’s assertion that compliance with every requirement except seeking prior approval is sufficient to avoid imposition of the first level tax and that the Service itself considers this requirement to be merely directory. Regulation 4945-1, 26 C.F.R. § 53.4945-l(d)(3), provides:

Correction for failure to obtain advance approval. Where an expenditure is taxable under section 4945(d)(3) only because of a failure to obtain advance approval of procedures with respect to grants as required by section 4945(g), correction may be accomplished by obtaining approval of the grant making procedures and establishing to the satisfaction of the Commissioner that:
(i) no grant funds have been diverted to any use not in furtherance of a purpose specified in the grant;
(ii) the grant making procedures instituted would have been approved if advance approval of such procedures had been properly requested; and
(iii) where advance approval of grant making procedures is subsequently required, such approval will be properly requested.

This provision defining “correction” is precisely what plaintiff asks this Court to find to be “prior substantial compliance.” Moreover, 26 C.F.R. § 53.4945-4 unequivocally states that “[s]ection 4945(g) requires that grants to individuals must be made pursuant to a procedure approved in advance.” It goes on to establish the procedures required to obtain approval. These regulatory provisions belie plaintiff’s assertions that the regulations demonstrate that the IRS does not believe the statute to be mandatory, simply because it provides for constructive approval of the grant making procedures after forty-five days of the filing. 26 C.F.R. § 53.4945-4(d)(3).

Plaintiff’s arguments concerning the inequities of forcing it to pay a tax for an inadvertent error while needy students are deprived of scholarship funds might be more appealing were it not for plaintiff’s mischaracterization of the statutory requirement. Plaintiff continually refers to the section 4945(g) requirement as a simple “filing” requirement. However, examination of the statute and its legislative history unequivocally demonstrates that the requirement is not a mere ministerial filing requirement made simply for the convenience of some administrator. Rather, it is a substantive requirement that the Secretary of the Treasury approve scholarship selection procedures in advance of making awards to ensure objectivity in the grant selection process. Plaintiff's inadvertent error was not in failing to file some superfluous administrative document; it was in failing to secure the required advance approval of its procedures.

Moreover, the major reforms in the laws governing the taxation of private foundations was enacted effective January 1, 1970. The regulations implementing the procedures for obtaining approval of the selection process were adopted on October 30, 1972. This is not a case where plaintiff sought approval only a short time after the change in the law; plaintiffs inadvertent error was not discovered until five years after the regulations were promulgated and seven years after the legislation was passed. Plaintiff admits that it operated with the assistance of counsel and a certified public accountant. While plaintiffs omission was indisputably inadvertent, it is axiomatic that organizations are charged with cognizance of the changing laws which govern them, and at some point they must accept the penalty for their failure to abide by those laws. Plaintiffs uncontested assurances that it was not one of those tax exempt foundations at which the tax reforms were directed is irrelevant. The provisions of the law apply to every private foundation receiving tax benefits from the United States government.

Accordingly, the Court finds that plaintiff did not substantially comply with the law and that it made improper expenditures as clearly defined by statute and that it is liable for the first level tax imposed. The Clerk shall enter JUDGMENT for defendant.

IT IS SO ORDERED.

      . Section 501 provides in part:
      Exemption from taxation.— An organization described in subsection (c) or (d) or section 401(a) shall be exempt from taxation under this subtitle unless such exemption is denied under section 502 or 503.
      (c) List of exempt organizations. — The following organizations are referred to in subsection (a):
      (3) Corporations, and any community chest, fund, or foundation, organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary, or educational purposes, or to foster national or international amateur sports competition (but only if no part of its activities involve the provision of athletic facilities or equipment), or for the prevention of cruelty to children or animals, no part of the net earnings of which inures to the benefit of any private shareholder or individual, no substantial part of the activities of which is carrying on propaganda, or otherwise attempting, to influence legislation (except as otherwise provided in subsection (h)), and which does not participate in, or intervene in (including the publishing or distributing of statements, any political campaign on behalf of any candidate for public office.


source: Caselaw Access Project

author: MAZZONE, District Judge.

license: Public Domain

text:
    Larry WILLIAMS, Plaintiff, v. George ARNDT and Harvard Investment Service, Inc., Defendants.
    Civ. A. No. 83-3397-MA.
    United States District Court, D. Massachusetts.
    Sept. 23, 1985.

      Michael Arthur Walsh, Esq., Choate, Hall & Stewart, Boston, Mass., for plaintiff.
    Irving M. Kriegsman, Framingham, Mass., Alvin S. Nathanson, Nathanson & Goldberg, P.C., Boston, Mass., for defendants.
   OPINION

MAZZONE, District Judge.

This is an action for copyright infringement under the Copyright Act of 1976, 17 U.S.C. § 101, et seq. The plaintiff is Larry Williams of Kalispell, Montana, an investment adviser and commodities trader. The defendants are George Arndt of Harvard, Massachusetts, a commodities trader and adviser, and Harvard Investment Service, Inc., a Massachusetts corporation. Arndt is the president and sole stockholder of Harvard Investment Service, Inc. Prior to forming Harvard Investment Service, Inc., Arndt did business under the name of Investors Micro Messenger. The complaint consists of 5 counts: Counts I and II charge copyright infringement by Arndt and Harvard Investment of a booklet called “Floor Trader’s Manual.” Counts III and IV charge copyright infringement by Arndt and Harvard Investment of a second booklet called “Floor Trader’s Commodity Method.” Count V charges unfair acts and practices and unfair competition in violation of M.G.L. c. 93A. The plaintiff seeks injunctive relief and money damages, including attorneys’ fees and costs. '

The defendants deny infringement and have filed a counterclaim. They allege the copyrights of both works are invalid and unenforceable and that the applications for certificates of registration were accomplished by fraud and misrepresentation. Further, the defendant, Arndt, alleges he was libelled when the plaintiff publicly accused him of copying the Floor Trader’s system in the October, 1983 issue of Futures, a commodities trading magazine.

This Court has jurisdiction pursuant to 28 U.S.C. §§ 1332(a) and 1338(a). Venue is proper pursuant to 28 U.S.C. § 1400(a). The case was tried to the Court without jury. Pursuant to Fed.R.Civ.P. 52(a), I make the following findings and rulings.

I.

The plaintiff, Larry Williams, has been an active commodities trader for 15 years. He is the author of various books, articles and pamphlets on commodities trading. He has conducted various seminars at which his authored works have been distributed. These seminars have been given usually at four locations in the United States. The cost to attendees was $3,000 and they were required to sign a non-disclosure agreement. Similarly, Williams’ written material on trading methods sold for about $1,000 and was also subject to a non-disclosure agreement.

In January or February, 1980, Williams began working on a specific, step-by-step method for trading in various commodities. By December, 1980, after spending an average of 6 hours a day on this project, Williams had completed his research and compilation of data and began to rough draft his results and conclusions in a manual form. He sent his rough draft to a printer, Crum’s Instant Print, in Kalispell, Montana. Shortly thereafter, he received 10-15 copies from the printer. He kept one for his own file and sent a copy to about 10 of his more preferred customers who had ordered the booklet in response to a promotional flier Williams had limited to certain customers. The price was $2,000.

Williams, in reviewing this first printing, had noted that this first booklet, entitled the “Floor Trader’s Method” (FTM) did not have a copyright mark or his name on it. It did not have a title on the cover, and it contained some errors, some typographical and some textual. Making some corrections, and telling the printer to place his name, a copyright mark, and title on the manual, Williams returned one copy to the printer.

An additional copy was sent to a past customer, Jerry L. Snider, a market trader who lived in Oklahoma. Snider had attended a seminar given by Williams in 1980, but had not been successful in trading commodities. He had received the promotional flier from Williams alerting previous customers to the imminent publication of the new method. Snider called Williams and told him he wanted either a refund of the seminar fee or a free copy of the new method. After confirming that Snider had been unsuccessful, although he felt Snider had not followed his method correctly, Williams agreed to send him a free copy on the condition that there would be no refund and Snider would not disclose the method. Accordingly, in late 1981, Williams sent Snider one of the unedited copies that had been received from the printer. As stated above, that copy did not contain any copyright mark. At this point in time, copies of the FTM were in the hands of 10 identified purchasers and Snider had a copy. In all, then, 11 copies were distributed. One copy had been sent to the printers for corrections, and Williams retained a copy.

After making the required corrections and editing, the printer delivered about 75 copies of the revised edition of the method to Williams. This edition was called “Floor Trader’s Commodity Method” (FTCM) and contained the copyright mark on the front cover with Williams’ name. Williams sent out a second advance notice of this method to his entire mailing list in June, 1981. It was generally the same notice that Snider and the other 10 customers had received. The distribution of these copies was limited to about 75 customers and these copies were distributed in November or December, 1981. The price for this edition was $3,000.

About this time, and after he had completed the floor trading manual, Williams began to develop a computer program for commodities trading which he called “Striker.” He hired an experienced programmer to help him, James Stack, of Kalispell, Montana. Stack owned and operated his own investment research firm, Invest-Tech, and also had considerable experience in the commodities market.

Sometime in December, 1981, Snider, the trader from Oklahoma, called Williams. Snider told Williams he had made money using the FTM, but that he was losing his eyesight and would not be able to use the method much longer. Snider asked Williams for permission to computer program the method. Williams gave him permission on the condition he not disclose the method.

After receiving Williams’ permission, Snider contacted the defendant, George Arndt, in December, 1981. He asked Arndt if he could write a program for Williams' method for an Apple II computer. Arndt told Snider he had heard of Williams but was not aware of his method. Snider assured Arndt the system worked. He sent a copy of FTM and some notes to Arndt with a check for $250. Arndt reviewed the manual and called Snider, telling him it looked like a good system and should be done right. He needed more time and more money for the task. Snider sent Arndt another $500. A few weeks later, Arndt again called Snider and said he was still having trouble finishing the program. He told Snider he had spent many hours on the program and requested another $750. Sometime before March 22, 1982 Snider received a floppy disk from Arndt. Snider then sent another $750 to Arndt on March 22, 1982.

Snider tried the program he received from Arndt, but it did not generate the same results as the FTM. He complained to Arndt that the program did not function properly. Arndt asked for more money to complete the job, but Snider refused, asking for his money back. Arndt declined to refund any money.

Sometime after he sent Arndt his last • check on March 22, 1982, Snider learned that Arndt was selling the FTM computer program. Snider, annoyed because he had not received a usable program, called Arndt. He demanded to know what right Arndt had to sell the program which did not belong to him. Arndt told him he had cheeked with his attorney who had researched it and had advised him that Williams had failed to copyright the FTM.

Snider then called Williams and asked if the FTM was copyrighted. He told Williams that Arndt had told him that it was not copyrighted. This was not the only notice Williams received that the FTM was available in a computer program. At this time, Williams was working on the “Striker” program with James Stack. Stack had also taken on the task of responding to phone calls from customers who would call Williams on the “hot line” service Williams offered together with the FTM. Stack received a call from an irate purchaser of the FTM who complained that the floor traders method was being offered on a computer disk without any restriction on its distribution. Williams was engaged in a political campaign at this time and was away from the office a great deal of time during this period.

Stack called Arndt directly about the sale of the program. Arndt said he did not realize he was doing anything wrong because he believed the method was not copyrighted. Arndt asked Stack to talk to Williams about some arrangement which would allow Arndt to sell the program. Stack told Arndt he doubted Williams would do that. Arndt told Stack he would not sell the program without permission.

A short time later, with Stack present, Williams called Arndt. Using a speaker phone, and without identifying himself, Williams asked if he could buy the Larry Williams floor traders method. Arndt answered that it was not the Larry Williams floor traders method, but produced the same results. He offered to send further information.

In May, 1982, Arndt sent out a notice of his computer program. This notice was entitled “Floor Trader’s System” and was underscored with “SOLD RECENTLY FOR $2,500 ON PAPER.” The notice went on to state that Arndt had “PROGRAMMED the FLOOR TRADER’S System” and while it only took 8 hours to get the system running, it took over 150 hours to get it to “today’s point.” The notice said further “I offer the system to help you make $. The FLOOR TRADER WAS NOT COPYRIGHTED. No AUTHOR’S name on the original. We do have something HOT here.” On the reverse side of the notice were examples of the program’s actual results. The program was offered at $1,000. Williams and Stack both received copies of this notice. Arndt also inserted an advertisement for “FLOOR TRADER” in Commodities, a magazine of futures trading, in June, 1982. That advertisement stated “Profits over $100,000 last 6 months of 1981. Plus over $30,000 first 2 months.” It went on to say “Many paid $2,500 for this System written down, (but it was never copyrighted) now you can trade it perfectly for only $1,000.”

Arndt had no basis of his own for representing profits of $100,000 in late 1981, and $30,000 for January and February, 1982. He had received that information from Edwin Walter, a commodity broker from Chicago. Walter had ordered the FTM from Williams when it first came out in 1981. He studied the method, practiced it, and used it to trade for a few clients. He found it had performed extremely well and published the results for January and February, 1982. Later, he received a copy of the same results from Arndt on which Arndt had written “These are published results. The Floor Trader sold for $2,500 on paper. Now computer accuracy.” He also received a document from George Arndt called “Floor Trader” Results for January & February, 1982. That document contained a handwritten addition that “the Floor Trader sold for $2,500 on paper. Now computer accuracy.” Customers had called Walter to ask his advice on whether to buy the Williams FTM or the Arndt Floor Trader program. He called Williams, believing that Williams had made some marketing arrangement with Arndt. Williams told Walter he would look into it.

On May 14, 1982, James Vidal, attorney for Williams, wrote to Arndt to demand he discontinue selling the Floor Trader computer program. A similar letter was sent on June 10, 1982. Thereafter, there were letters on August 23, 1982 and March 24, 1983 from Vidal to Arndt’s attorney, Irving Kriegsman, warning of legal action if Arndt persisted in his sale of the program.

In June, 1982, Williams called Arndt and wrote to Arndt directly and told him to stop selling the program because it was his property. Williams refused to enter into any arrangements under which Arndt could sell the method. Stack also called after receiving the promotion and warned Arndt that Williams would bring suit unless Arndt stopped selling the program. Arndt continued to sell the program, which he called “Floor Trader” from April to November, 1982. He sold 46 copies at a price of $1,000 each. After November, 1982, Arndt offered the same program under the name “Trend Counter Trend.” He sold 98 copies of this disk at $2,500 for a total of $245,-000.

By this time, both Williams and Arndt had attracted the attention of other commodities traders. One publication, Club 3000 News by B.A. Thunman, described Arndt as being “of Floor Trader fame” in its publication of November 20, 1983. The Commodities issue of August, 1983 (Exhibit # 12) contained praise for the Larry Williams Floor Trader system and went on to say specifically:

“____but Floor Trader is no longer for sale. However, Thunman says he hears the Trend Counter Trend system offered by George Arndt of Investor’s Micro Software generates exactly the same result.”

On August 10, 1983, Williams responded to the Commodities article, thanking them for their kind words, but pointing out that Arndt’s program was an exact duplicate and Arndt was selling it on an unauthorized basis. Williams advised that legal proceedings had begun and readers should be cautious. This letter, which forms the basis of the libel counterclaim, was published by Futures in its October, 1983 issue. Futures was the successor to the Commodities magazine.

On October 20, 1983, Williams applied for a Certificate of Registration of Copyright for the FTCM, # TX-1-197-066. This lawsuit was filed on November 1, 1983, charging copyright infringement of the FTCM only. In the course of pre-trial discovery, Williams was shown some documents as a result of which he recalled that he had sent out the unedited, 11 copies of the first FTM which did not contain any copyright mark to Snider and other preferred customers. He immediately prepared a letter to all those customers and enclosed a copyright sticker to be attached to the manual. Those letters were sent to all those customers, including Walter, in March, 1984. On September 17, 1984, Williams filed two applications for Certificates of Registration of Copyright, one for the first, unrevised FTM sent to 11 customers, #TX-1-413-121, and a second, # TX-1-462-942, supplementing the earlier certificate for the FTCM. This latter supplementary registration corrected the text errors, explained that existence of this material (the 11 FTM copies) was unknown when the October, 1983, application was filed and described the work as a derivative work. The complaint was then amended to conform to these factual developments.

Finally many of the trading systems that are available to market traders focus on market trends. The FTM was a unique system because, while it also attempted to predict market trends from historical data, it alone contained 7 separate and unique features. No other system contained these features except the programs sold by Arndt, Floor Trader and Trend Counter Trend. When the results of the FTM calculated by hand, and the results of Arndt’s computer programs were compared, the vast majority of signals were identical. While there were some inconsistencies in the original FTM manual and the edited FTCM manual, those errors would become obvious to an experienced investor who would then take the corrective action necessary to resolve the conflict and understand the result. The output of Williams’ manuals and Arndt’s programs was substantially the same, even though one was written in English and one was written in a computer language or source code. The program, Trend Counter Trend, contained an additional feature called prioritization. This prioritizing resolves conflicts in the program. It does not alter the result in any way, but simply makes the choices for the user that the user would have to make when presented with the alternatives. While some of the steps of both programs may come at different times in the program, both programs contain essentially the same steps. They call for the entry of historical data to generate signals. These signals are filtered through certain checks into a sorting process, resulting in a signal to be used by the investor to make his trading decisions and entered with the broker the following morning. It is the presence of the 7 special features in both which is significant. Both systems have 4 distinct entry signals and both systems have qualifiers and variations which provide a signal at which a trade can be made or when it should be made. Both systems generate a signal for a possible entry during the day and a second possible entry at the close. In overall structure, the two competing systems are substantially similar.

II.

While the dispositive issues posed by the plaintiff’s action involve the validity of the copyright and whether it was infringed, the defendants raised at the beginning a preliminary and novel issue as well. They claim the source code devised by the defendant, Arndt, for the computer program was a new and different expression of the idea of a market trading system. O’Neill v. Dell Publishing Co., Inc., 630 F.2d 685 (1st Cir.1980) (copyright protection extends only to expression of idea and does not protect the idea itself).

I address these issues seriatim.

III.

(1) The Source Code As a New Expression

To understand this issue, some elementary background is needed. A computer program is a set of detailed instructions by which the computer performs certain functions or delivers a desired result. While the program usually involves very complicated problems and procedures, these same problems and procedures could be solved with a pencil and paper. The difference, of course, is the very long time it would require to perform the same functions manually that the computer, properly programmed, would perform in a matter of seconds.

Also, unlike the human mind, the computer can only perform one function at a time. It performs in sequence according to the step-by-step pattern that has been determined by the programmer. The computer can follow the same set of instructions over and over again or the program can be enlarged or modified to accomplish other objectives or reach other results. The programmer must know, then, what information must be put into the computer, what information is desired from the computer, and the steps the computer must follow to solve the problem at hand. Not only can the computer do simple arithmetic, it is also capable of making decisions if the programmer tells the computer what decision is desired. The computer “decides” by making comparisons, such as the lowest price, or the largest amount, or the best odds. The computer can also “decide” by printing an order once the programmed conditions have been met.

The system at issue here is designed to make predictions in the commodities market by analyzing prices and trends over a period of time. The question is not whether it is a sensible or accurate system of predicting market trends. Obviously, there is no fool-proof system of market trading. But it is possible to store an enormous amount of information in the computer, recall it at the touch of a button, analyze it in terms of trends and cycles, and make the calculations and comparisons to be used by the trader in arriving at his trading decision.

Those steps must be written in language the computer understands and can follow. The programmer writes a program in the selected computer language, using what is called a source code. A program written in a source code is a source program that the computer will translate into machine language using its compiling and assembling facilities. While there may be creativity and ingenuity in devising this source code, a source code is not an entirely new, unique expression of ideas. It is simply a translation from one language to another.

The computer programmer writes in computer language the commands necessary to implement the direction provided in the narrative. The computer language can be compared to any foreign language. Pezzillo, et al. v. General Telephone and Electronics Information System, Inc., 414 F.Supp. 1257 (M.D.Tenn.1976).

Writing the program may be a task requiring a great deal of inventiveness, or it may be merely a clerical function. To a skilled programmer, the conversion of known input, known output, the mathematical expressions needed and the methods of transferring those expressions into computer language is necessarily a mere clerical function. In the Matter of the Application of John W.C. Sherwood, 613 F.2d 809 (USCCPA 1980).

I conclude the source code in this case is not a different and unique expression of a well known idea. It made it possible for an experienced trader to reach a decision in a matter of minutes, rather than an hour. While the skilled programmer can provide flexibility, neatness, and clarity in arranging the order of the system, the programmer, no matter how talented, does not express creativity, imagination, independent thought and uniqueness. While the quality of the program is determined by the quality of the programmer:, it still amounts to a translation. If it were otherwise, every expression would be open to copying in source code form.

(2) Was the Plaintiffs Copyright Valid

I conclude that both manuals, the original “Floor Trader’s Manual” and the revised “Floor Trader’s Commodity Method” were copyrightable works. The manuals were the original creative effort of Williams alone, an arrangement of words he used to express his ideas. O’Neill v. Dell Publishing Co., 630 F.2d 685 (1st Cir. 1980). They were a detailed, step-by-step procedure or process to accomplish a specific desired result. Apple Computer, Inc. v. Franklin Computer Corp., 714 F.2d 1240, 1250-1252 (3rd Cir. 1983), cert. dismissed, 464 U.S. 1033, 104 S.Ct. 690, 79 L.Ed.2d 158 (1984); 1 Nimmer on Copyright, § 2:03[D] (1984). The FTCM was the corrected and edited final draft of the FTM. Since the FTCM was derived from the FTM, as a derivative work it also fell within the protection of the copyright laws. 17 U.S.C. § 106(2).

I further conclude that notice of copyright on the original FTM was not required because those 11 copies were not publicly distributed. 17 U.S.C. § 405(a). These works were not made available to the public generally. They were limited to a definite, very selective group for a limited purpose on the condition that the contents not be disclosed or further disseminated. Schuchart & Assoc, v. Cold Serve Corp., 220 U.S.P.Q. 170, 181 (W.D.Texas, 1983); 1 Nimmer on Copyright, § 4:13[A]. Further, only 11 copies were distributed, “a relatively small number of copies.” 17 U.S.C. § 405(a)(1). In my judgment Williams’ action did not amount to publication. E. Harold Munn, Jr. & Assoc., Inc. v. Minority Broadcasting Co. of Midwest, Inc., No. 82-0759 (N.D.Ill. Dee. 14, 1982).

Finally, Williams made a reasonable effort to add copyright notice to those 11 copies by mailing a letter with a sticker to be affixed to those copies. He did not become aware of, or did not recall, the distribution of those copies until more than 3 years later, but, once he recalled the circumstances, he made a reasonable effort to add the notice. 17 U.S.C. § 405(a)(2). E. Harold Munn, Jr. & Assoc., Inc. v. Minority Broadcasting Co. of Midwest, Inc., supra.

Both the FTM and the FTCM have been granted Certificates of Copyright Registration by the United States Copyright Office. Copies of those manuals have been deposited with the Register of Copyrights. 17 U.S.C. § 410(a). The defendants have alleged the affirmative defense of unclean hands because of certain omissions and concealment in the application for copyright registration. The defendants have failed to prove that any omission was an intentional, knowing or purposeful concealment or that the Copyright Office might have rejected the application had it known of the omission. Eckes v. Card Prices Update, 222 U.S.P.Q. 762, 764; 736 F.2d 859 (2nd Cir.1984). As stated herein, Williams did not recall that the FTM which lacked the copyright notice had been sent to Snider until after this litigation began. When he did recall that fact, he took immediate steps to rectify the situation. The defendants are not entitled to the defense of unclean hands under the facts of this case.

Accordingly, as to this issue, I conclude the plaintiff’s copyright was valid.

(3) Was the Plaintiffs Copyright Infringed

The burden of proof in a copyright infringement action is on the plaintiff. 3 Nimmer, The Law of Copyright, § 13.01 (1984). He must prove each of two elements of copyright infringement: (1) ownership of the copyright; and (2) copying by the defendants. Marcelo Ramos Motta, Inc., et al. v. Samuel Weiser, Inc., 768 F.2d 481 (1st Cir.1985). To prove copying, the plaintiff must show access and substantial similarity. O’Neill v. Dell Publishing Co., Inc., supra, at 686; Sid & Marty Krofft Television Productions, Inc. v. McDonald’s Corp., 562 F.2d 1157, 1164 (9th Cir.1977).

I conclude the plaintiff has satisfied his burden of showing both access and substantial similarity. There is no doubt that Arndt had access to FTM, not only from a copy he testified he received from an unknown sender, but also from Snider. As discussed above, the errors or inconsistencies in the text were not significant.

As to substantial similarity, the question is whether Arndt’s works can be recognized by a reasonable observer as having been copied from the Williams’ manual. Original Appalachian Artworks, Inc. v. Toy-Loft, Inc., 684 F.2d 821, 829 (11th Cir. 1982). As discussed above, it is not a defense that the Arndt program was expressed in a computer source code. That source code contained similarities which generated identical signals in the vast majority of comparisons. Here, Arndt merely translated Williams work from English into computer language (in this case, Basic) which produced substantially similar results.

The most graphic evidence of substantial similarity was the comparison of the FTM with both programs Arndt had offered, Floor Trader and Trend Counter Trend. Picking a commodity — live cattle — in February, 1983, James Stack went through a step-by-step process of both systems, illustrating his steps by graphs and a “chalk” which were received in evidence. The FTM result was essentially the same as the result reached by running the Trend Counter Trend system (Exhibit # 32).

Accordingly, I conclude the plaintiff’s copyrights of the Floor Trader’s Manual and the Floor Trader’s Commodity Method were infringed.

One further note is in order. The basic issue in this case, as in most cases, turns on the question of credibility. In this non-jury trial, that assessment is left to me. Generally, I have accepted the plaintiff’s version of the facts as more credible. Because the issues here were hotly contested and, at times, somewhat frustrating, I set out my reasons for accepting the plaintiff’s version.

As for the principals, Larry Williams showed an extensive, proven experience in the commodities market as a trader, author, teacher and adviser for 15 years. His testimony as to his background was supported by documents, corroborating testimony, and favorable notices in trade journals. His demeanor impressed me as one of candor, fairness and truthfulness. His work in this field was amply demonstrated, not only by the developing of the manuals at issue here, but by his seminars and publications dating back to 1974.

On the other hand, George Arndt told conflicting stories. When called as a witness by the plaintiff, he said he worked largely as a sales representative for Digital, Techtronics and Raytheon, interrupted by a short period of 14 months as an independent sales representative and antiques auctioneer. He had experience writing computer programs, but had no experience as a commodities trader and never earned a living by providing advice on the commodities market. He testified he received the Floor Trader Manual in the mail from an unknown source, but he used it in connection with his software program and incorporated many ideas from the manual into his software program. He later received the same manual from Snider, together with handwritten notes, and used them, his own experience and program he had written at Christmas, 1981, to write his Floor Trader program. Under this adverse questioning, he admitted his purpose was to generate the same returns as the Floor Trader Manual and he admitted he programmed the manual he received from Snider. After receiving complaints from Williams that he was copying the manual, he testified that he consulted an attorney and continued to distribute his computer program on the advice of counsel. Following this direct examination, he was not examined by his counsel. Because of the press of other court business, the case was adjourned on July 26, 1985, after the plaintiff rested its case. It was resumed on September 5, 1985.

On resumption of the trial some five weeks later, Arndt was called as the first witness in his defense. While his educational and work experience was essentially the same, he told a very different story about his commodities experience. He testified he had traded in the commodities market since he was 14 years old, and continued throughout high school, college and graduate school. He testified he “created” Floor Trader and Trend Counter Trend and before those, he had written 75 programs of trading strategy, with updates provided 4 times a year. Over a period of 10 years, he had written hundreds of programs telling people when to buy and when to sell. Many were offered to the public for sale. In mid-1981, he went into the business full-time, leaving his position as senior sales representative at Digital. He founded Harvard Investment Service, Inc.

Arndt then turned to the FTM. Because people knew he was writing his own software system, he assumed someone sent him the FTM. He skimmed it and found it impossible to understand and full of mistakes. When he received the Snider manual, he found similar inconsistencies and mistakes. The signals were conflicting, and contained no prioritization. Using Snider’s “ideas” and “concepts,” he continued to work on his own program to make it “unique.” He testified it took a tremendous amount of commodity market experience and a tremendous amount of “creativity.” Finally, after over 500 hours of work, and 38 hours of uninterrupted work at one stretch, the “expression of his ideas” came out on the computer screen. In his “creative frenzy” he had “created” his own program. He spent 500 more hours perfecting his system. Basically, he testified that he never read the Larry Williams system, and the Snider manual was of no use. He had started from scratch. This appeared to me to be a total abandonment of his earlier contention, namely, that the source code was such a different expression, there could never be substantial similarity.

I looked for some corroboration of Arndt’s version and found nothing of substance. Arndt did not produce one program to support his assertion that he created hundreds. He did not produce any supporting evidence of market experience, even losses. He produced no witnesses, no pamphlets, no charts, no notices to support his assertions of a lifetime of investment advice experience. In short, he asked me to take his testimony, unsupported and unadorned. I found his testimony not credible.

Turning to the expert testimony, I was presented with the same conflicts. The plaintiff’s single expert owns and operates an investment research firm. He met Larry Williams in 1979 and in 1981, Larry Williams asked him to program his commodities market program “Striker.” He became aware of the Floor Trader Manual when people called in on the “Hot Line” for information or with questions, a service that Williams made available to his purchasers. He explained the Williams system and its unique features. Of the thousands of trading systems with which he is familiar, only one has these same 7 features — Arndt’s Trend Counter Trend. He performed the calculations set out in the Floor Trader Manual by hand, then ran the Trend Counter Trend program on his computer and did the same with Arndt’s early Floor Trader, and, in his opinion, they were substantially the same. They contained at least 6 of the unique features and generated signals that were 75% the same. The inconsistencies, he testified, were errors which would be obvious to the experienced investors who read the system as a whole. This expert then demonstrated the step-by-step procedure, using data from the Wall Street Journal, achieving the same result. His calculations were demonstrated by exhibits received in evidence as well as “chalks” he used to perform his comparison.

He then ran the Arndt program, Trend Counter Trend, and the result was the same. The prioritization in the Arndt program was an additional feature which resolved conflicts. Whereas a person would resolve these conflicts by making a choice of alternatives, the computer did it for the user. It was a desirable feature, but not a significant one, he testified. In his opinion, the source code meant nothing since the program can be written in various ways. But when the output is the same, the program is the same. The expert supported his testimony by graphs and charts outlining his work.

The defendant produced two experts. Both had experience with computers. The first had no experience in the commodities market. He had compared the source code with the Floor Trader Manual and found them quite different. The FTM was not a complete document from which to make a complete program. He came to the opinion that the person who wrote the source program had read the manual, but had not followed it one hundred percent.

The second expert had minimal experience in writing programs although he traded in commodities on a full time basis. He examined the Floor Traders Manual and found it was not an effective system because it did not have prioritization, was confusing and contained ambiguities. He came to the opinion that the Floor Trader Manual and the source code were entirely dissimilar, organized and structured in a completely different way and the FTM did not contain prioritization. He ran the systems and found that 70% of the signals were the same. He kept no records, had no charts or graphs and had no results to support his testimony.

On the basis of preparation, corroboration, fairness, candor and experience, I accepted the plaintiffs expert as clearly more credible.

Having concluded that the plaintiffs copyrights were infringed, the next question is whether the defendants were innocent infringers and thus shielded from liability for actual or statutory damages under 17 U.S.C. § 405(b). I believe they are not so protected because they have failed to satisfy their burden of proof that they were innocent infringers. 17 U.S.C. § 405(b). Arndt did not prove that he acted in good faith or reasonably relied upon the absence of a copyright notice. 2 Nimmer on Copyright, § 7.14[B][i] and [ii]. Beginning in early 1982, from his conversations with Snider, and certainly by June, 1982 when Williams wrote directly to Arndt and Stack had called him, Arndt was on notice that he was copying the Williams system. He attempted to make some arrangement with Williams and, rebuffed in this attempt, he nevertheless continued to distribute his program. Despite the absence of the copyright notice on the FTM he received from Snider, Arndt had “... reason to think otherwise.” H.R.Rep. No. 1476, at 148, U.S.Code Cong. & Admin. News 1976, pp. 5659, 5764. ■

Finally, the defendants have moved to dismiss Count Y of the plaintiffs complaint asserting that this Court lacks subject matter jurisdiction over any claim under M.G.L. c. 93A. They based their motion on two grounds. First, they say c. 93A is pre-empted by federal law. 17 U.S.C. '§ 301. Secondly, they say the transaction in issue did not occur primarily and substantially in Massachusetts as required by M.G.L. c. 93A, § 3(l)(b). I believe they are wrong on both counts, but I do not need to engage in an extensive discussion of those issues because I conclude that the defendants’ actions did not amount to conduct which “Attain(s) a level of rascality that would raise an eyebrow of someone inured to the rough and tumble of the world of commerce.” Levings v. Forbes & Wallace, Inc., 396 N.E.2d 149, 153, 8 Mass. App. 498 (1979). I have in mind that, while Arndt was on notice of the copying claim in June, 1982, he had received the FTM from Snider which did not contain a copyright notice. And, when he heard from Stack and Williams, he sought the advice of an attorney and proceeded on the basis of counsel’s advice. While acting on counsel’s advice does not excuse him as an innocent infringer, it does negate, in my judgment, the type of unscrupulous, intolerable and unethical behavior proscribed by c. 93A. J.A. Westerbeke Corp. v. Onan Corp., 580 F.Supp. 1173 (D.Mass.1984).

As to the defendant Arndt’s counter-claim, I conclude Arndt has failed to prove by a preponderance of the evidence that he was defamed by the publication of the Williams letter in the October 1983 issue of Futures. The contents of the letter were not false. Further, there was no credible evidence that Arndt was injured or discredited in any way.

IV.

The final matter is the subject of damages for the infringement. The copyright owner is entitled to recover actual damages suffered and, in addition, any profits of the infringer. 17 U.S.C. § 504(b). I have found that the defendants sold 46 copies of the FTM program at $1,000 each for a total of $46,000 and 98 copies of the Trend Counter Trend program for a total of $245,000. The total gross profit realized by the infringing defendants was, then, $291,000. On the facts above, I cannot credit the defendants with any deductible expenses. Arndt kept no credible records. He claimed to have recalculated his expenses and income from the numerous checks he claimed were available to him and to his brother in Chicago, an accountant. The income statements for the years 1982, 1983 and 1984 (Exhibit #45) were completely unsupported, were prepared for use in this litigation and, in short, were completely unreliable. The defendants have not proven any deductible expenses and, therefore, I award the gross revenue from the sale of the infringing programs. Russell v. Price, 205 U.S.P.Q. 206, 213 (9th Cir.1979); Whelan Associates, Inc. v. Jaslow Dental Laboratory, Inc., 609 F.Supp. 1307, 1322 (D.C.PA 1985).

At the same time, I decline to award any damages for the plaintiff’s claim of lost revenues from reduced attendance at his seminars, or purchase of his written material. Given the dissemination of his own manuals, as well as other programs, I have no substantial basis for any such claim and any award would be uncertain and speculative.

In summary, I award compensatory damages in the amount of $291,000. I do not award attorneys’ fees. Again, I have in mind that the defendants acted pursuant to counsel’s advice and, in the exercise of my discretion, I believe this case presents sufficient unusual circumstances to avoid attorneys’ fees. I do, however, award costs to the plaintiff. 17 U.S.C. § 505.

The award of damages and costs will be against both defendants jointly and severally. The evidence is clear that Arndt is the founder, sole stockholder and only operating officer of Harvard Investment Service, Inc. and that the facilities of Harvard Investment Service, Inc. were used freely by Arndt in his infringing activity.

Conclusion

In accordance with the above, judgment will be entered as follows:

(1) Judgment on Counts I, II,. Ill and IV is entered in favor of the plaintiff, Larry Williams, and against the defendants, George Arndt and Harvard Investment Services, Inc., jointly and severally, in the sum of $291,000.
(2) The defendants, George Arndt and Harvard Investment Services, Inc., jointly and severally and individually, are enjoined and restrained from marketing, advertising, selling or licensing the corporate programs Floor Trader and Trend Counter Trend.
(3) The defendants, George Arndt and Harvard Investment Service, Inc., jointly and severally, shall pay plaintiff’s costs.
(4) On Count V, judgment will be entered for the defendants.
(5) On the defendant’s counterclaim for defamation, judgment will be entered for the plaintiff, defendant-in-counterclaim.
(6) The plaintiff, Larry Williams, is awarded prejudgment interest.

SO ORDERED.


author: VAN SICKLE, Senior District Judge.

text:
    FARMER'S UNION CENTRAL EXCHANGE, INC., Plaintiff, v. RELIANCE INSURANCE COMPANY, Defendant. and CONOCO, INC., Plaintiff, v. RELIANCE INSURANCE COMPANY, Defendant.
    Civ. Nos. A1-83-79, A1-83-96.
    United States District Court, D. North Dakota, Southwestern Division.
    Sept. 23, 1985.
    Sean O. Smith, Daniel L. Hovland, Bismarck, N.D., for Farmer’s Union Central Exchange, Inc.
    Jane Fleck Romanov, Bismarck, N.D., for Conoco, Inc.

      Zuger & Bucklin, James S. Hill, Bismarck, N.D., Patrick J. O’Connor, Jr., Hart & Bruner, Minneapolis, Minn., for Reliance Ins. Co.
   MEMORANDUM AND ORDER

VAN SICKLE, Senior District Judge.

This Memorandum and Order is addressed to the motions for summary judgment currently pending in the above captioned cases. In both cases, Plaintiffs seek to recover under payment and performance bonds which Defendant executed as surety, as well as on claims for bad faith failure to pay on the bonds. Defendant moves for summary judgment, alleging that the bond claims are barred by a statute of limitations and that Plaintiffs have not alleged sufficient facts to state either a tort claim or a claim under the North Dakota insurance practices statute. Plaintiffs oppose those motions. In addition, Plaintiff Conoco, Inc. moves for partial summary judgment in Civil No. Al-83-96, seeking a ruling that, in order to recover on its bond claim, it need not establish with specificity that the materials it supplied were incorporated into a particular bonded project. Defendant opposes that motion.

FACTS — Al-83-79

Farmer’s Union Central Exchange, Inc. (Cenex) contracted with Scherbenske Excavating, Inc. (Scherbenske) to supply asphalt oil for several road construction projects with which Scherbenske was involved during the summer of 1981. Three of the projects were state or city contracts for which Scherbenske provided payment and performance bonds for the protection of those parties who supplied labor or materials to Scherbenske. Reliance Insurance Company (Reliance) executed each of the three bonds as surety.

The contract between Cenex and Scherbenske provided that Cenex would sell Scherbenske a given amount of asphalt oil during the 1981 construction season at a fixed price per ton. (Buska Deposition at 7). The asphalt oil was transported periodically from Cenex’s Bismarck, North Dakota terminal to Scherbenske’s Beulah, North Dakota “hot plant.” (Buska Deposition at 13-14). Scherbenske had several construction contracts in the Beulah area during the 1981 construction season, and used asphalt oil purchased from Cenex on projects other than the three projects for which Reliance acted as bond surety. It also used asphalt oil purchased from suppliers other than Cenex on the three bonded projects. Under terms of their contract, Scherbenske was to pay Cenex within thirty days of the date of each invoice. (Buska Deposition at 32).

Cenex shipped oil to Scherbenske’s “hot plant” on various dates during 1981. The last shipment Cenex supplied to Scherbenske was delivered on October 9, 1981. Scherbenske defaulted on payments for asphalt oil shipped after September 8, 1981. (Buska Deposition at 32). After Scherbenske defaulted, Cenex attempted to secure payment by collecting on the surety bonds. By letters dated February 23, 1982, Cenex gave notice to each of the three governmental entities involved on the bonded projects (State of North Dakota, City of Dodge, and City of Beulah) that it was filing claims on the surety bonds. (Exhibits to Complaint). Cenex gave the same notice to Reliance, through its general agent Fargo Insurance Agency, on the same date. (Complaint if VIII).

On June 8, 1982, Cenex, through its attorney Morris A. Tschider (Tschider), contacted Reliance’s Midwest bond claims manager H.S. Hudson (Hudson) concerning Cenex’s claims on the three bonded projects. Hudson told Tschider that Reliance would take no action until Scherbenske declared default, that Reliance expected to be involved once default was declared, that Reliance would make payment on the bonded projects, but that he expected there would be problems in allocation of amounts supplied by Cenex for use on the bonded projects. (Tschider Deposition at 12). On July 2, 1982, Tschider again contacted Hudson and was informed that Scherbenske had declared default on June 28, 1982, and that Hudson would mail the necessary claim forms to Cenex for completion. (Tschider Deposition at 17). During the July 2, 1982 conversation, Hudson told Tschider that Reliance was working “super hyperactive” on the Cenex claims. Scherbenske filed a petition in bankruptcy on July 14, 1982. (Complaint ¶ XIII).

By letters dated July 28, 1982 and July 29, 1982, Reliance requested information verifying the quantities of asphalt oil supplied by Cenex and used on the three bonded projects. Reliance supplied the claim forms at that same time, approximately one month after Hudson had promised to mail the forms. The letters stated that Reliance was unconditionally reserving all of its rights under the bonds and under applicable law. (Tschider Deposition Ex. 8 & 9). Because asphalt oil supplied by Cenex had apparently been commingled with that purchased from other suppliers, and because asphalt oil supplied by Cenex had apparently been used on Scherbenske’s unbonded projects as well as on its bonded projects, Reliance asserted that verification of Cenex’s bond claims was a complicated task. (Tschider Deposition at 22-23). On September 30, 1982, Cenex submitted the claim and affidavit forms required by Reliance. Cenex claimed it was owed $46,-419.21 on the State of North Dakota project, $85,417.49 on the City of Dodge project, and $42,188.80 on the City of Beulah project. Tschider was apparently confident that Reliance would make a settlement offer after these forms were submitted. (Tschider Deposition at 35-36). Tschider and Hudson discussed the Cenex claims again on November 23, 1982; Tschider asserts that Hudson stated during this conversation that he either had hired or would hire an asphaltic engineer to “reconstitute the jobs” and that Reliance would be making an offer on the Cenex claims within the first two weeks of December, 1982. (Tschider Deposition at 36-37). Tschider made further inquiry on the Cenex claims in January, 1983. On March 10, 1983, Hudson advised Tschider that Reliance would make no settlement offer. Reliance took the position that Cenex’s claims were barred by N.D.Cent.Code § 48-02-17 (1978) since Cenex did not file suit within one year of October 9, 1981, the date on which it last supplied materials to Scherbenske. Tschider was apparently not aware of this statute until Reliance asserted its application. (Tschider Deposition at 54). Cenex then initiated suit in state court by summons and complaint dated March 31, 1983. Reliance filed a petition for removal of the action to this court.

FACTS — Al-83-96

Conoco, Inc. (Conoco) supplied labor and materials to Scherbenske from August, 1980 through October, 1981. During this period, Conoco supplied asphaltic oil to Scherbenske’s “hot plants” in Jamestown, North Dakota and Zap, North Dakota. Scherbenske had contracted on three highway construction projects in that area and Reliance, acting as surety for Scherbenske, had executed payment and performance bonds for each of those three projects (Mercer County, North Dakota; Stutsman County, North Dakota; and Valley City, North Dakota). The dates on which Conoco last supplied materials to Scherbenske on each of the projects were: September 17, 1981 on the Mercer County project, October 16, 1981 on the Stutsman County project, and October 10, 1981 on the Valley City project. Scherbenske defaulted on its obligations to Conoco. On April 8, 1982, Conoco secured a promissory note from Scherbenske for the amount of the outstanding debt. Collection on that note is the subject of an action currently pending in another division of this district. Civil No. A3-82-127.

On or about July 14, 1982, David Nigh, Conoco’s in-house counsel, contacted Hudson, of Reliance, regarding collecting on the bonds for each of the three projects. On July 28, 1982, Hudson sent bond claim forms to Nigh, along with a letter similar in content to the July, 1982 letters from Reliance to Cenex; Reliance stated in that letter that it was unconditionally reserving all of its rights under the bonds and under applicable law. Reliance received the completed claim forms from Conoco on September 14, 1982. Conoco submitted claims in the amounts of $175,651.50 for the Mercer County project, $36,724.33 for the Stutsman County project, and $103,378.26 for the Valley City project.

In October, 1982, Conoco again contacted Reliance regarding the bond claims. This contact was made by Wesley Spears, who had replaced Nigh as in-house counsel, and William Ronne, an assistant treasury manager for Conoco. Hudson told Spears and Ronne that he was investigating Conoco’s claims and would contact Conoco when he had finished that investigation. (Spears Deposition at 16-17; Ronne Deposition at 64-66). Conoco asserts that Hudson in fact did little or no investigation of the claims. (Hudson Deposition at 136-40, 148). Spears contacted Hudson again in December, 1982. Hudson again told Spears that the claims were being investigated and that he would contact Spears after the investigation was concluded and Reliance had determined what portion of the amounts claimed would be paid. (Spears Deposition at 17; Ronne Deposition at 66-67). Spears again contacted Hudson in January, 1983 and during this conversation Hudson raised Reliance’s statute of limitations defense. Conoco initiated suit to collect on the bonds on April 28, 1983 in a state court. Reliance filed a petition for removal to this court on May 27, 1983.

RELIANCE’S MOTIONS

In support of its motion for summary judgment, Reliance argues that the Cenex and Conoco bond claims are barred by a one year statute of limitations, that the tort claims asserted by Cenex and Conoco are merely conclusory allegations insufficient to support the claims, and that Cenex and Conoco fail to state a claim under North Dakota’s insurance practices statute. Application of N.D.Cent.Code § 48-02-17

Reliance asserts that the claims of both Cenex and Conoco are barred by N.D. Cent.Code § 48-02-17 (1978), which provides:

All claims for any labor, material, or supplies furnished for improvements, upon which suit is not commenced within one year after completion of the claimant’s contribution of labor, material, or supplies, shall be barred as liens or claims against said contractor and his surety. No action upon any such claim so barred shall be maintained nor any right of setoff or counterclaim thereon enforced in any court in this state against the state or contractor or his surety. Nothing in this chapter in any manner shall bar the right of any person who has furnished labor, supplies, or materials to any subcontractor to enforce the same against the subcontractor.

Cenex and Conoco argue that this statute applies only to building construction projects and not to road construction projects and that, even if the statute applies to road construction projects, Reliance is estopped from asserting the statute because of Hudson’s conduct in handling the bond claims.

The application of section 48-02-17 to road construction projects has not been addressed by the North Dakota Supreme Court. State district courts which have addressed that question have reached conflicting conclusions. Cenex cites Williston Ready Mix, Inc. v. United States Fidelity and Guarantee Company, Civil No. 15,874 (N.W.D.N.D. Aug. 26, 1983), where the court denied the surety’s motion for summary judgment and concluded that the applicable statute of limitations on a highway construction bond claim was that of N.D. CentCode § 28-01-16 (Supp.1983) rather than that of N.D.Cent.Code § 48-02-17 (1978). Reliance cites Hanwell v. William Collins, Inc., Civil No. 33,277 (S.C.D.N.D. Mar. 22,1983), where the court granted the surety’s motion for summary judgment and concluded that N.D.Cent. Code § 48-02-17 applied to a claim on a bond on a road construction project. This court thus must predict how the North Dakota Supreme Court would resolve the question of whether section 48-02-17 applies to road construction projects. See Hazen v. Pasley, 768 F.2d 226, 228 (8th Cir.1985).

Title 48, N.D.Cent.Code, is captioned “Public Buildings.” Chapter 48-01 of that title is captioned “Contractors’ Bonds and Insurance,” and Chapter 48-02 of that title is captioned “Construction.” Section 48-01-01 provides in part:

Every public officer or board authorized to enter into a contract for the erection, repair, or alteration of any public building or any public improvement, ... shall take from the contractor a good and sufficient bond for an amount equal at least to the price stated in the contract, conditioned to be void if the contractor ... shall pay all bills or claims on account of labor and materials, ... performed, furnished, and used in and about the performance of said contract, including all demands of subcontractors. Such bond shall stand as security for all such bills, claims, and demands until the same are fully paid____

(Emphasis added). This court concludes that the statute’s language “any public improvement” encompasses road construction projects. Though Title 48 is entitled “Public Buildings,” the language of section 48-01-01 underscored above indicates that the legislature intended Title 48 to have a broader application than its title might imply. In reaching its conclusion, this court has also considered the opinion of the North Dakota Supreme Court in Nelson v. Hagen, 146 N.W.2d 873 (N.D.1966), where section 48-02-17 was not at issue, but where the court found that provisions of Title 48 other than section 48-02-17 applied to road construction projects.

Estoppel

There is no dispute that neither Cenex no Conoco commenced suit within one year after labor or materials were last supplied to Scherbenske. Therefore, unless Reliance is barred from asserting the statute of limitations against Cenex and/or Conoco, Reliance is entitled to summary judgment on the bond claims. Cenex and Conoco assert that Hudson’s conduct in handling the bond claims was such as to estop Reliance from asserting that defense. They argue that Hudson’s conduct was calculated to lull them into a false sense of security and so to cause them to forbear from filing suit and ultimately to cause their claims to be barred by the statute of limitations.

The North Dakota Supreme Court has apparently not interpreted the statutory provisions involved in this case. In support of their theory of estoppel, Cenex and Conoco cite several cases applying the federal Miller Act, 40 U.S.C. §§ 270a-f. While cases applying the Miller Act are useful, they are not governing law. The provisions of the Miller Act are similar to those of the North Dakota statute at issue. Federal courts interpreting the Miller Act have recognized the doctrine of equitable estoppel without requiring proof of fraud or deception and seem to have been more willing to find estoppel than has the North Dakota Supreme Court. See, e.g., U.S. ex rel. Nelson v. Reliance Insurance Company, 436 F.2d 1366 (10th Cir.1971); U.S. ex rel. Humble Oil & Refining Co. v. Fidelity and Casualty Company of New York, 402 F.2d 893 (4th Cir.1968). The North Dakota courts have analyzed equitable estoppel claims involving a statute of limitations in the same way they have analyzed equitable estoppel claims arising in other contexts. Krueger v. St. Joseph’s Hospital, 305 N.W.2d 18, 23 (N.D.1981); Gipson v. First National Bank of Bismarck, 97 N.W.2d 671, 675 (N.D.1959).

In order to prevail on a claim of equitable estoppel under North Dakota law, a party must show 1). conduct which constitutes a false representation, 2). the intention to cause another person to rely on that conduct, and 3). that the party having made the false representation had knowledge of the true facts. A party claiming estoppel must have lacked knowledge of the true facts and must have relied on the false representation to his or her injury. Farmers Cooperative Association of Churchs Ferry v. Cole, 239 N.W.2d 808, 813 (N.D. 1976). North Dakota has codified the doctrine of estoppel:

When a party, by his own declaration, act, or omission, intentionally and deliberately has led another to believe a particular thing true and to act upon such belief, he shall not be permitted to falsify it in any litigation arising out of such declaration, act, or omission.

N.D.Cent.Code § 31-11-06 (1978).

For purposes of Reliance’s motions for summary judgment, this court must determine whether, accepting the facts as stated by Plaintiffs, Reliance is entitled to judgment as a matter of law. This court must determine whether Hudson’s conduct constitutes a false representation for purposes of invoking the equitable estoppel doctrine. A false representation may be in the form of a positive false statement or in the form of suppression of facts which one party has a legal or equitable obligation to communicate to another. Krueger, 305 N.W.2d at 25. This court concludes that Reliance had no legal or equitable obligation to inform Plaintiffs of the existence of the one year statute of limitations. Knowledge of the existence of the statute was accessible to all parties. It is not unreasonable to expect that Plaintiffs (or legal counsel representing them at the time they initiated their attempts to collect on the bonds), having taken preliminary steps to collect on the surety bonds, would ascertain the applicable statute of limitations. Plaintiffs suggest that N.D.Cent.Code § 26.1-04-03(9) imposes on Reliance a duty to inform bond claimants of the period of the statute of limitations. This court concludes that affirmative duty is not imposed by that statute’s prohibition on “knowingly misrepresenting to claimants pertinent facts of policy provisions relating to coverages at issue.”

This court must next consider whether, accepting the facts as stated by Plaintiffs, Hudson’s conduct constituted a false positive statement. This court concludes that, for purposes of establishing an estoppel claim, only those statements Hudson made before the end of the one year statute of limitations period are relevant. Once that period ended, Hudson’s statements could have caused Plaintiffs’ claims to be barred by the statute of limitations. See U.S. ex reí. Bagual Builders v. United States Fidelity & Guarantee Co., 411 F.Supp. 1333 (D.S.C.1976). Thus, in Al-83-79, this court will consider only those statements Hudson made to Tschider prior to October 9, 1982: 1). Hudson’s June 8, 1982 statement that Reliance expected to be involved once Scherbenske declared default and that Reliance would make payment on the bonded projects though Hudson expected there would be allocation problems, 2). Hudson’s July 2, 1982 statement that Reliance was working “super hyperactive” on the Cenex claims, and 3). Reliance’s July, 1982 letters stating it was reserving its rights under the bonds. Of these statements, only the June 8, 1982 statement might be considered a false positive statement.

In Al-83-96, this court will consider only those statements Hudson made to Conoco’s representatives prior to September 17,1981 on the Mercer County project, October 10, 1982 on the Valley City project, and October 16, 1981 on the Stutsman County project. Those statements were: 1). Hudson’s July 14, 1982 statement to Nigh concerning the documentation which would be required to substantiate Conoco’s bond claims (Nigh Deposition at 47) and promise to mail the claim forms to Nigh, 2). Hudson’s statement to Nigh in late July, 1982 that he would send the claim forms (Nigh Deposition at 49), 3). Reliance’s July 28, 1982 letter stating it was reserving its rights under the bonds, and 4). Hudson’s statement to Ronne and Spears on October 13, 1982 acknowledging that Reliance had received the completed claim forms, was investigating them, and would contact Conoco again after the investigation was completed. (Ronne Deposition at 66; Spears Deposition at 16; Conoco’s Answer to Reliance’s Interrogatory # 10). Of Hudson’s statements, only the last might possibly be considered a false representation. That statement could be considered only on Conoco’s claim on the Stutsman County project, because it occurred after the one year period had expired on the Mercer County and Valley City projects. Insofar as the Mercer County and Valley- City projects are concerned, Conoco’s claim on the surety bond is barred by N.D.Cent. Code § 48-02-17 (1978).

This court’s analysis concerning Cenex’s claims and Conoeo’s claim on the Stutsman County project is guided by that of the North Dakota Supreme Court in Gipson, 97 N.W.2d at 671. In that case, a bank depositor sought to recover from a bank for allegedly forged checks negligently debited to his checking account. As a defense, the bank asserted that the depositor had not complied with a statutory requirement that the depositor give the bank written notice of the claim within ninety days after the end of the month in which the check was paid. Plaintiff argued the bank was estopped from asserting the defense. The facts on which Plaintiff’s estoppel theory was based were summarized as follows:

According to the testimony of the plaintiff, shortly after he discovered the forgeries for which settlement was made he had several conversations with the vice-president of the defendant bank who told him that the bank would not pay unless the checks were produced. The plaintiff further testified that in a later conversation had during the early part of May, 1954 the vice-president, in the presence of plaintiff’s attorney, said:
‘that if I could produce the checks the Bank would pay, otherwise it wouldn’t.’
The plaintiff predicates waiver or estoppel on these conversations and the promise of the vice-president that the bank would pay if the checks were produced. It is argued that because of these conversations and the promise to pay the checks if they were produced the plaintiff was induced to forego giving the notice required by the statute, that it was the duty of the bank officer to advise the plaintiff of the necessity of giving such notice and that the bank is estopped by reason of the silence of its officer in this respect. The checks were never produced. In their absence it is clear that there was no waiver of the statute. There is no indication from the conversations with the vice-president that he intended to relinquish or forbear the enforcement of any right which the bank had in the absence of the production of the checks. Clearly there was no waiver. Neither did the conduct of the vice-president amount to an estoppel. There is no evidence to indicate that the conversations in any way contributed to the failure of the plaintiff to give the notice prescribed by statute. According to the plaintiff’s own testimony he was told that the bank would not pay if he did not produce the checks that he claimed were forged. There was no concealment on the part of the bank officer of any fact pertinent to the controversy. Neither was there a failure of performance of any duty on his part.

97 N.W.2d at 676. Concluding the bank’s conduct was insufficient to establish an estoppel claim, the court reversed a judgment for the plaintiff, and ordered that judgment be entered for the defendant.

This court concludes that, as a matter of law, the evidence of Hudson’s conduct cannot establish Plaintiff’s claim of estoppel. At most, Reliance stated that it expected to be involved on the bond claims once Scherbenske declared default, and that it would make payment if the claims were proved to its satisfaction. Even if Reliance was, as Plaintiffs assert, demanding extraordinary documentation of the claims, the only promise it made was contingent on Plaintiffs supplying the documentation demanded. These statements cannot be considered a false representation. This court concludes that Reliance is entitled to judgment as a matter of law on Plaintiffs’ bond claims.

Tort Claim

In addition to their claims under the surety bonds, both Cenex and Conoco seek to recover under a tort theory. They assert Reliance acted in bad faith and with a lack of fair dealing in handling their bond claims, that Reliance has a general business practice of handling similar claims in a similar manner, and that Reliance’s conduct proximately caused damages to Plaintiffs. They assert that Reliance has a duty, arising under North Dakota’s statute on insurance claims settlement practices, to handle claims fairly. That statute provides in part:

A person may not engage in this state in any trade practice defined in this chapter as ... an unfair or deceptive act or practice in the business of insurance.

N.D.Cent.Code § 26.1-04-02 (Supp.1983).

The following are unfair methods of competition and unfair and deceptive acts or practices in the business of insurance:
Unfair claim settlement practices. Committing any of the following acts, if done without just cause and if performed with a frequency indicating a general business practice:
a. Knowingly misrepresenting to claimants pertinent facts or policy provisions relating to coverages at issue.
b. Failing to acknowledge with reasonable promptness pertinent communications with respect to claims arising under insurance policies.
c. Failing to adopt and implement reasonable standards for the prompt investigation of claims arising under insurance policies.
d. Not attempting in good faith to effectuate prompt, fair, and equitable settlements of claims submitted in which liability has become reasonably clear.

N.D.Cent.Code § 26.1-04-03(9) (Supp.1983).

Again, this court must deal with an issue of state law which has not yet been decided by the North Dakota Supreme Court. A review of the available legislative history has provided no useful information. Chapter 26.1-04 does not, by its express terms, recognize a duty giving rise to an action for damages to one who is injured by an insurer’s unfair claim settlement practices. Plaintiffs cite a single decision of a state district court which apparently recognized a private cause of action under that chapter. Weber v. Horace Mann Insurance Co., Civil No. 13684 (S.C.D.N.D. May 27, 1982) .

This court concludes that the duties imposed by Chapter 26.1-04 may be the basis for an action sounding in tort. It is apparent from the provisions of that chapter that the statute was enacted to protect persons filing claims against insurers. See R.B.J. Apartments, Inc. v. Gate City Savings & Loan Ass’n, 315 N.W.2d 284, 287 (N.D.1982); Hennenfent v. Flath, 66 N.W.2d 533, 536 (N.D.1954). As bond claimants, Cenex and Conoco come within that protected class, for the purpose of a surety bond is to protect those parties supplying materials or labor to a contractor. Cenex and Conoco are such parties. The statute prohibits all persons from engaging in unfair practices in the business of insurance. N.D.Cent.Code § 26.1-04-02 (Supp. 1983) . Reliance, being authorized by the North Dakota Commissioner of Insurance to transact insurance and bonding business within the state, surely comes within that broad definition.

Having recognized a duty not to engage in unfair insurance claim settlement practices as defined by the statute, this court concludes genuine issues of the fact of Reliance’s breach of that duty preclude summary judgment on the tort claims.

CONOCO’S MOTION

Having concluded that the bond claims are barred by the statute of limitations, it is not necessary that this court address Conoco’s motion for partial summary judgment.

CONCLUSION

For the foregoing reasons, IT IS ORDERED:

1). In Civil No. Al-83-79, Defendant Reliance Insurance Company is granted summary judgment dismissing Plaintiff’s claim for collection on surety bonds.
The motion for summary judgment is, in all other respects, denied.
2) . In Civil No. Al-83-96, Defendant Reliance Insurance Company is granted summary judgment dismissing Plaintiffs claim for collection on surety bonds. Defendant’s motion for summary judgment is, in all other respects, denied.
3) . In Civil No. Al-83-96, Plaintiff Conoco, Inc.’s motion for partial summary judgment is dismissed as moot.

      . A later amendment to that statute has no application to this case.