author: EDWARD WEINFELD, District Judge.

text:
    TEACHERS INSURANCE & ANNUITY ASSOCIATION OF AMERICA, Plaintiff, v. David L. BUTLER, James L. Grauer, James E. Kassis, and One City Centre Associates, a California Limited Partnership, Defendants.
    No. 84 Civ. 3211 (EW).
    United States District Court, S.D. New York.
    Jan. 28, 1986.
    Fried, Frank, Harris, Shriver & Jacobson, New York City, for plaintiff; Robert E. Gerber, Mary Farrington, of counsel.
    Willkie Farr & Gallagher, New York City, for defendants; Francis J. Menton, J. Kelly Strader, of counsel.
   OPINION

EDWARD WEINFELD, District Judge.

Plaintiff, Teachers Insurance and Annuity Association of America (“Teachers”), is a New York nonprofit corporation which provides annuities and insurance programs to colleges, independent schools and other educational institutions, and derives income for such programs from various investments, including long-term loans on commercial real estate.

The defendant, One City Centre Associates (“OCCA”), is a California limited partnership which undertook the development and construction of a high rise office building, One City Centre, in Sacramento, California. It has three general partners, David L. Butler, James E. Kassis and James L. Grauer, also named as defendants (collectively “defendants” or “the Butler group”).

In connection with the development of the building, OCCA needed temporary or construction financing for the period during which the building was under construetion and upon completion “permanent financing,” which would be applied to the repayment of the construction financing. Bank of America made the construction loan.

Teachers, after extended negotiations with representatives of Sonnenblick-Gold- . man Corp., mortgage bankers and realtors who acted as the defendants’ agents, and with Butler and Kassis on behalf of OCCA, issued on September 9, 1982 a Commitment Letter which was accepted by the individual defendants on behalf of OCCA. Under the Commitment Letter, which the parties acknowledge constituted a binding agreement between them, Teachers agreed to lend and OCCA agreed to borrow $20,000,-000 for a thirty-five year term at a fixed interest rate of 14.25% per annum, to be secured by a first deed of trust on the building. The Commitment Letter, among other matters, granted Teachers a contingent interest in the rental returns over the life of the loan, referred to as a “kicker.” One provision precluded the defendants from prepayment of the mortgage during the first seventeen years (the “Lock-in Period”) and another permitted prepayment during the remainder of the loan upon payment of a premium (“Prepayment Premium”) at 6% in the eighteenth year and in reduced amounts thereafter until the expiration date of the loan. These provisions, to be discussed hereafter, are at the heart of this litigation.

In October 1982, Teachers, OCCA and Bank of America, the construction lender, executed a related agreement called a Take-Out Agreement. It provided that Teachers would “take out” (i.e., purchase) Bank of America’s construction loan or repay it the sums it advanced for construction of the building and succeed to its rights.

In July 1983, Teachers’ counsel sent to OCCA for review and comment the closing documents which Teachers proposed be executed by OCCA at the closing of the loan, including a California Deed of Trust and California Deed of Trust Notes, which in relevant part provided:

In the event Holder exercises its right to accelerate the maturity date following default by Maker, any tender of payment of the amount necessary to satisfy the entire indebtedness secured hereby made thereafter at any time prior to a foreclosure sale, either by Maker, its successors or assigns or by anyone in behalf of Maker, shall be deemed to constitute evasion of the prepayment privilege and shall be deemed to be voluntary prepayment herein and such prepayment, to the extent permitted by law, shall include the premium required to be paid under the prepayment privilege set forth herein. If such occurrence takes place prior to the eighteenth loan year then the agreed premium due and owing one [sic] the unpaid' indebtedness shall be the product of the premium otherwise due under the formula herein for prepayment during the eighteenth loan year multiplied by three.

The parties refer to this provision as the “Default Prepayment Fee Language” and to the second sentence thereof as the “Lock-In Period Default Prepayment Fee Language.”

Prior to th j time set for the closing on April 30, 1984, Teachers and OCCA, through their respective counsel, had resolved all disagreements with respect to the language of the closing documents except the Default Prepayment Fee Language. On April 30, 1984, Kassis and Grauer (with a power of attorney authorizing them to act for Butler) appeared at the office of the escrow agent the parties had mutually agreed upon and made certain changes in provisions unrelated to the Default Prepayment Fee Language which had been agreed upon by their respective attorneys. However, they also struck the Default Prepayment Fee Language in each Deed of Trust Note and the Deed of Trust before signing the documents. Later that day, OCCA’s attorney informed plaintiff’s attorney that OCCA was unwilling to accept the Teachers loan as long as the documents contained the Default Prepayment Fee Language. Teachers then drew the full amount of a $200,000 letter of credit which previously had been provided by OCCA under the Commitment Letter. Soon thereafter, Teachers commenced this diversity action.

Plaintiff seeks to recover damages upon a claim of breach of contract — that defendant failed to negotiate in good faith the dispute with respect to the Default Prepayment Fee Language and that OCCA’s claimed objection thereto was no more than a pretext for its unwillingness to proceed with the transaction as a result of a dramatic decline in interest rates from the date the Commitment Letter was signed to the date of the closing; that OCCA adamantly refused to negotiate the amount of the Default Prepayment Fee and insisted upon its deletion in its entirety — in sum that its position was wholly arbitrary and in bad faith. Plaintiff seeks to recover as damages the sum of $3,991,408, the difference between 14.25%, the rate of interest set forth in the Commitment Letter and 11.89%, the prevailing rate of interest on Teachers’ loans during the month after the closing, over the thirty-five year period of the loan, discounted to present value. Plaintiff also seeks to recover $170,000 covering interest over a six-month period following defendants’ refusal to close the deal, which period it claims was reasonably required before it could place a new loan, and $22,411 for the fees of its outside counsel retained for the closing.

The defendants reject plaintiff’s claim, essentially upon the ground that the Commitment Letter makes no provision for a Default Prepayment Fee payable after Teachers’ exercise of a right to accelerate for default during the first seventeen years of the loan. The essence of their position is that although the Commitment Letter contains a detailed provision entitled “prepayment,” that provision does not mention anything about Teachers’ right to an 18% default prepayment fee. Therefore, according to the defendants, it was plaintiff that breached the contract by insisting on the inclusion of a provision in the closing documents that was not in the Commitment Letter. Defendants counterclaim to recover the $400,000 commitment fee retained by plaintiff and the $25,000 appraisal and engineering inspection fee paid to plaintiff.

DISCUSSION

After a study of the entire record of the six-day nonjury trial at which plaintiff’s representatives and those of the Butler group testified, principally David Butler and James Kassis, who participated in the negotiations that led to the Commitment Letter and in events prior to the closing, and upon an evaluation of the credibility of the witnesses and consideration of the legal contentions advanced by the parties, the Court finds that the plaintiff has sustained its burden of proof upon its claim for breach of contract, and that the defendants have failed to sustain their burden of proof upon their counterclaim. Plaintiff is entitled to judgment in its favor.

Under New York law, a duty of fair dealing and good faith is implied in every contract. As this Court has said: “Where the parties are under a duty to perform that is definite and certain the courts will enforce a duty of good faith, including good faith negotiation, in order that a party not escape from the obligation he has contracted to perform.” Here, defendants signed the Commitment Letter, an agreement they concede was binding on both parties, obligating them to borrow and plaintiff to lend $20,000,000. Obviously the Commitment Letter did not contain, and the parties understood that it did not contain, all the final and definitive terms that were to be incorporated in the closing documents. Both parties were required to negotiate in good faith with respect to the closing documents needed to consummate the transaction. Defendants breached that duty to negotiate in good faith and therefore breached the contract with Teachers.

We start with an uncontested fact — that a prerequisite to the Butler group obtaining a construction or temporary loan to finance the construction of the contemplated office building was a permanent loan that would “take out” the construction loan. Defendants, through their agent Sonnenblick-Goldman, arranged for the permanent financing from Teachers. Even before signing the Commitment Letter they were aware that it was Teachers’ policy to adhere to the interest rate set forth in the agreement regardless of what happened to market interest rates and that Teachers expected its borrowers to do the same. The evidence supports a finding, however, that the Butler group, almost from the time the parties obligated themselves under the Commitment Letter, communicated with various lenders and brokers to avoid taking the Teachers loan. Beginning shortly after the Commitment Letter, with ■its interest rate of 14.25%, was signed, interest rates started to decline and as construction went forward, continued to decline so that when the loan was ready to be closed, financing was available at approximately 12% and without a kicker. Having obtained the permanent loan commitment necessary for construction to begin, defendants took advantage of the nineteen-month period before the scheduled closing to seek a more favorable loan package from other lenders.

Defendants do not deny communicating with other lenders in an attempt to arrange for permanent financing, but they contend that their purpose was to protect themselves against their inability to meet a requirement of the Commitment Letter that the building be 50% pre-leased at the time of closing. Defendants point to the financial difficulties of Attorneys Office Management Inc. (“AOMI”), a tenant to whom the defendants were required to lease a fixed percentage of building space. The evidence establishes that this claim was spurious. The pre-leasing requirement clearly was for the benefit of Teachers alone; a condition which Teachers could, and ultimately did, waive. Defendants began communicating with other lenders over two months before receiving evidence that AOMI had filed a chapter XI proceeding. Moreover, defendants’ communications to the other lenders and their testimony at trial belie their professed intention to protect themselves against a decision by Teachers not to proceed with the loan. The defendants’ principals, Kassis and Butler, were less than forthright with respect to this and other essential matters; bluntly, in some respects they were evasive and contrived answers to explain factual situations and documentary proof which were contradictory of, and adverse to, their contentions. Defendants’ claims must be viewed in the context of their subsequent dealings with Teachers, discussed hereafter, the decline in interest rates, and their acknowledged belief that the loan was not economically favorable to them.

Defendants’ actions during the last few months prior to the scheduled closing date conclusively establish that, as the closing drew near, the defendants deliberately intended not to proceed with this loan — at least not on the terms contained in the Commitment Letter. By contrast, Teachers not only took the steps necessary to close the loan, as it was obligated to do under the Commitment Letter, but it offered the defendants alternatives designed to reduce the likelihood of a default.

In July 1983, Teachers sent the draft closing documents to the Butler group for its comments. These documents included the same Default Prepayment Fee Language upon which defendants ultimately based their refusal to close the loan transaction. in April 1984. Defendants failed to acknowledge or respond to the request for comments. In January 1984, in connection with a checklist of matters that required attention before the closing, plaintiff’s representative, reminded the Butler group that Teachers was still waiting for any comments with respect to the draft documents. Again there was no response. In a letter dated February 1, 1984, Teachers’ in-house counsel wrote to Kassis that Teachers assumed, in light of defendants’ failure to respond with any comments, that the documents were satisfactory and would be deposited in escrow.

On February 7, 1984, ten weeks before the closing, in a telephone conversation with a Teachers representative, Butler expressed his view that in light of OOCA’s difficulties in meeting the 50% pre-leasing requirement, defendants did not have to close the loan. The Teachers’ representative said that the Commitment Letter was binding and suggested that Butler should, seek a legal opinion with respect to the position he was taking. Kassis, a lawyer, testified that when Butler informed him of this conversation with Teachers, Kassis felt the defendants should “screw the two points” (the $400,000 commitment fee) and not proceed with the loan.

A few weeks later, on February .22,3984, Butler told Sullivan, Teachers representative who had negotiated the Commitment Letter with OCCA, that he assumed Teachers was not interested in closing the deal since AOMI was no longer a tenant. To Butler’s surprise and dismay, Sullivan responded that the pre-leasing condition was for Teachers’ benefit and could be waived by plaintiff. Defendants subsequently were informed by their own attorneys and by Teachers’ counsel specially retained for the purpose of closing the transaction, that under the contract Teachers could waive the pre-leasing condition and insist that the loan be closed despite the absence of AOMI.

After reviewing the leasing information for the One City Centre building sent by Kassis on February 24, 1984, Teachers decided the project was basically sound and informed defendants of its decision to close notwithstanding that the leasing percentage had not been met. In a good faith effort to meet the Butler group’s concerns about the rental situation, Teachers offered the defendants a six-month extension of the commitment to October 31, 1984 to allow them more time to secure additional leases for space in the building. On April 12, 1984, less than three weeks before the closing, Butler requested a reduction of the interest rate from 14.25% to 12% and of the contingent interest (the “kicker”) from 40% to 33.3%. Teachers representative refused to reduce the interest rates, but reiterated the offer of a six-month extension, told Butler that OCCA could obtain a second mortgage, and offered the defendants an accrual type loan in which interest payments would be tied directly to the building’s operating income, thereby reducing the likelihood of a default on the loan. Throughout its dealings with OCCA, Teachers adhered to its position that its policy was “to live up to the terms and spirit of its agreements and it expects those with whom it deals to do likewise.”

Defendants said nothing about any of the provisions of the closing documents until it became apparent that their attempts to convince Teachers not to go forward with the loan or alternatively, to lower the interest rate, would not succeed. Although Butler admitted knowing sometime in February that the closing documents contained the Default Prepayment Fee Language, neither he nor Kassis ever mentioned defendants’ objections to the inclusion of this provision in the closing documents in any of their conversations or communications with Teachers. In fact, the Butler group’s objections to the Default Prepayment Fee Language were not raised until April 26, 1984 — only four days before the closing — in a letter sent to Teachers’ counsel.

Defendants insisted that the Default Prepayment Fee Language be deleted in its entirety. They made no counteroffers with respect to the amount of any default prepayment fee nor were they willing to negotiate its terms.

The defendants take the position that since the Default Prepayment Fee Language was not contained in the Commitment Letter, Teachers was seeking to change the economic terms of the transaction; that the Butler group’s refusal to accede to the provision was consistent with their duty to negotiate in good faith. The evidence supports the conclusion, however, that the defendants seized on the absence of the Default Prepayment Fee Language from the Commitment Letter as a pretext for not going forward with the loan. Aware that Teachers considered the Default Prepayment Fee Language necessary to protect its interests, and having failed to convince Teachers not to close the loan, defendants struck the provision and refused to negotiate despite Teachers’ willingness to do so.

It is undisputed that the Commitment Letter signed by Teachers and the Butler group contained a seventeen-year Lock-in and a Prepayment Premium, but did not contain Default Prepayment Fee Language. The evidence at trial establishes that closing documents for commercial real estate loans historically contain provisions necessary to implement the express terms of the commitment letters, but which are not contained in the commitment letters. The parties, pursuant to their duty to negotiate in good faith to close the loan transaction, are expected to negotiate the terms of provisions such as acceleration clauses, default interest rates, lender’s remedies and default prepayment fees.

Here, defendants not only had an implied duty of good faith negotiation, but they expressly agreed in the Commitment Letter to abide by all matters pertaining to the due execution of documents that Teachers’ attorneys found “reasonably necessary for the transaction.” The Default Prepayment Fee Language included by Teachers in the closing documents was not only “reasonably necessary,” it was essential to protect Teachers from a voluntary default by OCCA.

The purpose of such language is to protect a lender against a drop in market interest rates which induces the borrower to default in the early years of the loan, forcing the lender to accelerate the balance, and enabling the borrower to prepay the loan with a second loan obtained at the lower interest rate. There can be no doubt that the loan, if consummated, would have been a highly desirable one to plaintiff, with its prospect of a stream of income over a thirty-five year period at a high interest rate and additional income by way of a kicker. The Default Prepayment Fee Language was intended to implement the Lock-in provision of the loan; without it, the borrowers could circumvent the Lock-in without consequence, depriving Teachers of the benefit of its bargain. Financial lenders in the California market, to protect themselves against such practices, included in their closing documents Default Prepayment Fee clauses at fixed amounts which were not immutable but subject to negotiation. The evidence fully establishes that the inclusion of such clauses was the custom and practice in the California real estate financing market. Indeed, defendants’ own expert acknowledged this was so, although he testified some loans were closed without its inclusion. Here, the evidence is that over-a period of more than twenty years, Teachers included substantially the same Default Prepayment Fee Language in all of its closing documents to protect itself against a default intended to deprive it of the benefits of the loan. Teachers’ inclusion of such language in the closing documents for the OCCA loan is consistent with both Teachers’ practice and industry practice.

Even Teachers probably would agree that it would have been more prudent for it to have included the Default Prepayment Fee Language in the September 1982 Commitment Letter. Some lenders include it in their commitment letters and the industry trend during the past few years appears to be towards greater specificity in commitment letters, in part due to a desire to avoid litigation such as this over provisions not contained in commitment letters. But this does not undermine the Court’s conclusion that the Butler group breached its duty to negotiate in good faith to close the loan. As discussed above, defendants had the closing documents in their possession for nine months and, despite repeated reminders from Teachers to review the documents, they waited until four days before the closing to object to the Default Prepayment Fee Language. Then, instead of making a counteroffer or engaging in good faith negotiations with respect to the amount of the fee or its terms, defendants arbitrarily refused to negotiate and insisted that it be deleted in its entirety. Nine months after insisting that Teachers delete the Default Prepayment Fee Language from the closing documents, defendants signed closing documents from Aetna Life Insurance Company which provided defendants with more money at a lower interest rate and without a kicker, but which contained a Default Prepayment Fee based on a formula which potentially could result in the imposition of a fee much greater than the 18% fee in Teachers’ documents.

In sum, the inescapable conclusion the Court draws from the totality of the evidence is that defendants’ refusal to negotiate with respect to the Default Prepayment Fee Language was simply a last-ditch attempt to scuttle the loan agreement they had entered into nineteen months earlier. The defendants signed the permanent financing agreement with Teachers to enable themselves to obtain construction financing from Bank of America. Almost immediately thereafter, as interest rates declined, defendants sought alternative financing from other lenders. When they were unable to persuade Teachers to lower the interest rate agreed to in September 1982 and when they realized that Teachers was serious about living up to its commitments, defendants engaged in an eleventh hour comparison of the closing documents to the Commitment Letter to come up with an ostensible reason for not going forward with the loan. Defendants breached the Commitment Letter and are obligated to Teachers for its damages.

PLAINTIFF’S DAMAGES

The basic principle of recovery for breach of contract is that the injured party should be placed in the same position it would have been in had the contract been performed. On the issue of damages, the Commitment Letter expressly provided:

In the event [defendants] fail to comply with any of the other covenants and conditions herein ... then [Teachers] shall have the right (i) to retain so much of the amount paid hereunder and not previously returned, to receive payment on the Letter of Credit also delivered hereunder, and, in addition, to claim and receive all provable damages, including loss of bargain, sustained by us as a result of such default in excess of such amount retained or received.

Plaintiff is entitled to the difference between the contracted for rate of interest— 14.25% — and the rate of interest at the time of the breach, over the thirty-five-year term of the loan, discounted to present value. At the Court’s request, plaintiff calculated its damages based on the interest rates at the time of the breach, 12.25%, rather than 11.89%, the average interest rate on Teachers loans during the month of May 1984. This sum discounted to present value amounted to $3,382,979.

In addition, under the terms of the Commitment Letter, plaintiff is entitled to attorney’s fees in the amount of $22,411 for counsel it retained for the closing. The $400,000 commitment fee retained by Teachers when the loan failed to close must be deducted from this amount, to avoid giving Teachers more than the benefit of its bargain. The Court declines to award Teachers $170,000 for the difference between the contracted for rate of 14.25% and the short-term interest rate for a six-month period. Teachers offered no evidence that it took six months to close a replacement loan or that Teachers would not have made the later loan had the OCCA loan closed. Teachers is therefore entitled to judgment in the sum of $3,005,390.

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

So ordered.

      . Under California law, the deed of trust evidences a security interest in the real property and serves the same purpose as a mortgage on the property under New York law.

      . See Teachers Ins. & Annuity Ass’n of America v. Butler, 592 F.Supp. 1097 (S.D.N.Y.1984) (denying defendants’ motion to dismiss for lack of in personam jurisdiction; denying defendants’ motion to transfer pursuant to 28 U.S.C. § 1404(a); and directing expungement of a lis pendens filed by plaintiff upon condition that defendants post a bond in the sum of $600,000, which together with $400,000 previously received by plaintiff the Court deemed adequate to protect plaintiffs interests).

      . The record includes the deposition testimony of witnesses and numerous documents introduced into evidence by the parties.

      . The Court finds that plaintiff failed to sustain its burden of proof with respect to its claim of fraudulent inducement, raised for the first time in the joint pretrial order and apparently abandoned by plaintiff at trial.

      . See Filner v. Shapiro, 633 F.2d 139, 143 (2d Cir.1980); Contemporary Mission, Inc. v. Famous Music Corp., 557 F.2d 918, 923 n. 8 (2d Cir.1977); Van Gemert v. Boeing Co., 553 F.2d 812, 815 (2d Cir.1977); Lowell v. Twin Disc, Inc., 527 F.2d 767, 770 (2d Cir.1975); Rowe v. Great Atlantic & Pacific Tea Co., 46 N.Y.2d 62, 412 N.Y.S.2d 827, 385 N.E.2d 566 (1978); Kirke La Shelle Co. v. Paul Armstrong Co., 263 N.Y. 79, 188 N.E. 163 (1933); Wood v. Lucy, Lady-Duff Gordon, 222 N.Y. 88, 118 N.E. 1082 (1917).

      . Candid Productions, Inc. v. International Skating Union, 530 F.Supp. 1330, 1334-35 (S.D.N.Y. 1982); see also Nuvest, S.A. v. Gulf & Western Indus., Inc., 649 F.2d 943 (2d Cir. 1981); Sommer v. Hilton Hotels Corp., 376 F.Supp. 297 (S.D.N.Y.1974).

      . For example, in a letter dated November 29, 1982, Kassis responded to another lender’s loan offer: ”[T]he rate and term of the loan you are offering is not attractive enough to induce us to change." See Plaintiffs Exhibit 12. Kassis admitted on direct examination that at the time he signed the Commitment Letter, he believed OCCA would be able to meet the pre-leasing requirements. See Testimony of James Kassis, Tr. at 632-33, 692.

      . See Plaintiffs Exhibit 35.

      . See Plaintiffs Exhibit 56.

      . See Plaintiffs Exhibit 6. Defendants do not acknowledge having received this letter.

      . See Deposition Testimony of David Butler, at 209; Testimony of David Butler, Tr. at 938.

      . See Plaintiffs Exhibit 32; Testimony of James Kassis, Tr. at 819-20.

      . See Testimony of David Butler, Tr. at 947; Testimony of Daniel Sullivan, Tr. at 71.

      . See Plaintiff's Exhibit 42.

      . See Testimony of Ronald Bernhard, Tr. at 107-11; Testimony of David Butler, Tr. at 950-58.

      . See Plaintiffs Exhibit 30.

      . See Testimony of David Butler, Tr. at 957, 966.

      . See Plaintiffs Exhibit 44.

      . Plaintiff’s Exhibit 1, ¶ 11(c).

      . See Testimony of Bruce Hyman, Tr. at 231-35; Testimony of Michael McAndrews, Tr. at 568-69; Testimony of Alan Wayte, Tr. at 302; Deposition Testimony of Kevin Starr, at 10-11.

      . Defendants’ expert also agreed with plaintiff s witnesses that default prepayment fees are often negotiated by the parties. Testimony of Michael McAndrews, Tr. at 570.

      . See, e.g., Wallace Steel, Inc. v. Ingersoll-Rand Co., 739 F.2d 112, 115 (2d Cir.1984); Adams v. Lindblad Travel, Inc., 730 F.2d 89, 92 (2d Cir. 1984); Brown v. Lockwood, 76 A.D.2d 721, 742-43, 432 N.Y.S.2d 186, 201 (2d Dept.1980); New York Water Serv. Corp. v. City of New York, 4 A.D.2d 209, 213, 163 N.Y.S.2d 538, 542 (1st Dept. 1957).

      . Contract damages are measured at the time of the breach. See J.M. Rodriguez & Co. v. Moore-McCormack Lines, Inc., 32 N.Y.2d 425, 429, 345 N.Y.S.2d 993, 995, 299 N.E.2d 243, 245 (1973); Simon v. Electrospace Corp., 28 N.Y.2d 136, 145, 320 N.Y.S.2d 225, 232, 269 N.E.2d 21, 28 (1971); Orange & Rockland Utilities, Inc. v. New England Petroleum Corp., 60 A.D.2d 233, 235, 400 M.Y.S.2d 79, 81 (1st Dept.1977).

      . Neither figure was challenged by defendants nor was any contrary evidence introduced.

      . The Commitment Letter provided: "[Defendants] agree to pay all expenses in connection with this transaction including but not limited to those for ... attorney’s fees (if outside counsel is engaged by us)." Plaintiffs Exhibit 1, ¶ 3.


source: Caselaw Access Project

author: BARBOUR, District Judge.

license: Public Domain

text:
    J.C. MENG, et al., Plaintiffs, v. BITUMINOUS CASUALTY CORPORATION, Defendant.
    Civ. A. No. W85-0023(B).
    United States District Court, S.D. Mississippi, W.D.
    Jan. 28, 1986.
    Phillip A. Letard, Vidalia, La., Mark F. McIntosh and Kenneth A. Rutherford, Jackson, Miss., for plaintiffs.
    Donald Y. Burch, Frank C. Horton, Joy Lambert Phillips, Jackson, Miss., for defendant.
   MEMORANDUM OPINION AND ORDER

BARBOUR, District Judge.

The Court has before it the Motion of Defendant, Bituminous Casualty Corporation (“Bituminous”), for Summary Judgment and the Motion of Plaintiffs, J.C. Meng and J.C. Meng, Jr., d/b/a Meng Plumbing & Air Conditioning Company (“Meng”), for Partial Summary Judgment. The issues presented by both Motions are: (1) whether Bituminous is liable for a judgment rendered against Meng in prior litigation under a comprehensive general liability insurance policy issued by Bituminous to Meng; and (2) whether Bituminous, as insurer, had a duty to defend Meng, as insured, in prior litigation.

FACTS■

Meng purchased a comprehensive general liability insurance policy from Bituminous. While that policy was in effect, Meng, as subcontractor, entered into a subcontract with Richard H. Thompson and Thompson Tree and Spraying Service, Inc. (“Thompson”), as general contractor, whereby Meng agreed to install a lawn sprinkler system for a subcontract price of $4500.00. When Thompson refused to pay Meng for the work performed under the subcontract, Meng sued Thompson in state court to recover the balance owed for the work performed and the material supplied. Thompson answered and counterclaimed against Meng, alleging that the sprinkler system installed by Meng was defective as a result of faulty installation, workmanship and design. Thompson claimed that as a result of the allegedly defective sprinkler system, he suffered damages in the amount of $11,225.32.

Upon receipt of the counterclaim, Meng notified Bituminous and requested it to defend him against the counterclaim. Bituminous declined to provide a defense, contending that no coverage existed under Meng’s policy. Thereafter, a judgment was rendered against Meng on Thompson’s counterclaim on the basis that Meng breached his subcontract with Thompson by negligently installing the sprinkler system. Accordingly, judgment was rendered against Meng for $11,067.82, plus interest at 8% and all costs relating to the counterclaim. Bituminous refused to pay the judgment. Meng then instituted this action against Bituminous to recover the amount of the judgment rendered against him and the costs incurred to defend the suit.

Bituminous denies liability on the basis of the exclusions contained in its policy which provide as follows:

This insurance does not apply:
(a) To liability assumed by the insured under any contract or agreement except an incidental contract; but this exclusion does not apply to a warranty of fitness or quality of the named insured’s products or a warranty that work performed by or on behalf of the named insured will be done in a workmanlike manner; ... (i) To property damage to premises alienated by the named insured arising out of such premises or any part thereof;
(m) To loss of use of tangible property which has not been physically injured or destroyed resulting from
(1) a delay in or lack of performance by or on behalf of the named insured of any contract or agreement, or
(2) the failure of the named insured’s products or work performed by or on behalf of the named insured to meet the level of performance, quality,, fitness or durability warranted or expressed by the named insured;
but this exclusion does not apply to loss of use of other tangible property resulting from the sudden and accidental physical injury to or destruction of the named insured’s products or work performed by or on behalf of the named insured after such products or work have been put to use by any person or organization other than an insured;
(n) To property damage to the insured’s products arising out of such products or any part of such products;
(o) To property damage to work performed by or on behalf of the named insured arising out of the work or any portion thereof, or out of materials, parts or equipment furnished in connection therewith;____

LAW

(1) Coverage.

Exclusion (a) of the Bituminous policy excludes “liability assumed by the insured under any contract or agreement____” According to Meng, he undertook no such assumption of liability in connection with the subcontract and, Bituminous has not refuted this. Accordingly, exclusion (a) is inapplicable to the facts sub judice.

Exclusion (1) of the Bituminous policy excludes “property damage to premises alienated by the named insured____” The facts do not establish that Thompson seeks damages arising out of premises “alienated” by Meng. Indeed, there is no evidence that Meng ever owned or “alienated” the property. Accordingly, exclusion (1) is likewise inapplicable.

Exclusion (m), commonly referred to as the “business-risk” exclusion, see, e.g., 2 R. Long, The Law of Liability Insurance, § 11.10, excludes “loss of use of tangible property which has not been physically injured or destroyed resulting from (1) a delay in or lack of performance by ... the named insured of any contract or agreement, or (2) the failure of the named insured’s products or work performed by ... the named insured to meet the level of performance ... the named insured to meet the level of the performance ... warranted or expressed by the named insured____” [Emphasis added]. Thus, exclusion (m) excludes coverage for loss of use claims caused by the insured’s delay in or lack of performance or by defects in the insured’s products or performance. As such, subsection (1) of exclusion (m) excludes coverage for an owner’s delayed occupancy of a building caused by the insured’s delayed performance. See 2 R. Long, supra, at § 11.10, p. 11-58. Likewise, Subsection (2) of exclusion (m) excludes an owner’s delayed occupancy of a building caused by a defective product used by the insured in performing his work or by the insured’s defective performance of the work. Id.

In this case, Thompson sought and recovered a judgment against Meng for $11,-067.82. According to Thompson’s deposition taken in the litigation between him and Meng, his damages included: (1) the costs to replace plants and trees planted by Thompson which died as a result of Meng’s defective sprinkler system; (2) the cost to retain an expert to inspect Meng’s defective sprinkler system; and (3) the cost to correct the defects in Meng’s sprinkler system and to complete the sprinkler system. None of Thompson’s claim against Meng sought damages for “loss of use” of property. Accordingly, exclusion (m) is inapplicable.

Exclusion (n), the “injury to product” exclusion, excludes “property damage to the insured’s products arising out of such products____” This exclusion excludes the cost to repair or replace defective products used by the insured in performing his work. See 2 R. Long, supra. at § 11.12, p. 11-65. Although this exclusion excludes liability for the repair or replacement of the defective product itself, it does not exclude damage to other property caused by the defective product. Id. Accordingly, exclusion (n) does not apply to the damage to other property and Bituminous is liable, unless protected by exclusion (o), for the cost of replacing trees and plants planted by Thompson which died as a result of the defective sprinkler system. Bituminous is not liable for the cost of repairing or replacing the defective parts in the sprinkler system or for the cost of completing the sprinkler system. Moreover, the costs of retaining an expert to inspect the system for defective parts are excluded by exclusion (n) since this cost was related to the defects in the sprinkler system.

The “injury to work” exclusion, exclusion (o), excludes “property damage to work performed by ... the named insured arising out of the work ..., or out of materials, parts or equipment furnished in connection therewith____” This exclusion excludes liability for repair or replacement of work performed by the insured where the damage to the work performed is caused by the work itself or by the materials, parts or equipment furnished in connection with the work. See 2 R. Long, supra, at § 11.3, p. 11-70. For instance, if Meng installed a faulty part in the sprinkler system which damaged other parts of the sprinkler system, then Bituminous would not be liable for the cost of repairing Or'replacing the system. Thus, any damages Thompson incurred to repair or replace the sprinkler system caused by Meng’s installation of a defective part are not recoverable against Bituminous. However, exclusion (o) does not exclude liability for damage to other property caused by Meng’s defective sprinkler system such as the plants which died as a result of the defective system. See Todd Shipyard Corporation v. Turbine Service, Inc., 674 F.2d 401, 421 (5th Cir.1982); Western Casualty & Surety v. Polar Panel Company, 457 F.2d 957, 960 (8th Cir.1972); Oliver B. Cannon & Sons, Inc. v. Fidelity & Casualty Company, 484 F.Supp. 1375, 1383 (D.Del.1980); Vobill Homes, Inc. v. Hartford Accident and Indemnity Company, 179 So.2d 496, 497 (1965), writ refused, 248 La. 698,181 So.2d 398 (1966). Accordingly, Bituminous is liable under its comprehensive general liability insurance for the damage to any other property, including damage to the plants and possibly other property, caused by Meng’s defective sprinkler system. As such, Meng’s Motion for Partial Summary Judgment on this point is hereby granted such that Bituminous is liable for damage to other property caused by the defective sprinkler system. This liability does not include the cost to retain an expert or the cost to correct and complete the sprinkler, and in this regard the Motion for Summary Judgment of Defendant, Bituminous is granted in part.

(2) Duty to Defend.

In determining an insurer’s duty to defend its insured, Mississippi has adopted the “allegations of the complaint” rule. Universal Underwriters Insurance Company v. American Motorist Insurance Company, 541 F.Supp. 755, 762 (N.D.Miss. 1982). Under this rule, an insurer’s obligation to defend an action against its insured is determined by the allegations of the complaint. Id. Accordingly, the ultimate liability of the insurer is not the criterion for determining the insurer’s duty to defend. Thus, if the factual allegations of the complaint bring the action within coverage of the policy, “irrespective of what the actual facts may later prove to be,” the insurer is contractually bound to defend its insured. Preferred Risk Mutual Insurance Company v. Poole, 411 F.Supp. 429 (N.D.Miss.1976). In other words, if the factual allegations of the complaint allege coverage under the policy, then the insured is obligated to defend regardless of the ultimate outcome of the action.

On the other hand,
[w]here [the] complaint fails to state [a] cause of action covered by the policy, but [the] insured informs [the] insurer that true facts are inconsistent with [the] complaint, or insurer learns from independent investigation that the true facts, if established, present potential liability of [the] insured, insurer must defend until it appears that facts upon which liability is predicated exclude insurance coverage.

Mavar Shrimp and Oyster Company v. United States Fidelity & Guaranty Company, 187 So.2d 871, 875 (Miss.1966) (quoting Crum v. Anchor Casualty Company, 119 N.W.2d 703, 703 (Minn.1963)). In Ma- var, the Mississippi Supreme Court held that where the allegations of the complaint do not allege coverage but the insurer knows of facts that indicate coverage then the insurer has a duty to defend its insured. See also State Farm Mutual Automobile Insurance Co. v. Taylor, 233 So.2d 805, 808 (Miss.1970). As such, two rules emerge from the Mississippi cases. Where the complaint alleges factual allegations which fall within the terms of the policy, the insurer is obligated to defend regardless of its ultimate liability and regardless of the fact that the suit may be groundless, false or fraudulent. Conversely, where the complaint alleges facts which fall within a policy exclusion, the insurer is not obligated to defend unless it later learns or is apprised of facts which indicate coverage. Accordingly, although

... a divergence may exist between the facts as alleged in the petition and the actual facts as they are known to or reasonably ascertainable by the insurer, in which later ease the insurer has a duty to defend, notwithstanding a policy exclusion ____

State Farm Mutual Automobile Insurance Co. v. Taylor, 233 So.2d at 808. Under these circumstances, the insurer is obligated to defend until it appears that coverage is excluded.

In this case, the allegations of Thompson’s counterclaim fell within a policy exclusion. Accordingly, Bituminous was justified in refusing to defend Meng against Thompson’s counterclaim based upon the allegations of Thompson’s counterclaim. However, Thompson was subsequently deposed and revealed that the majority of damage he sustained as a result of Meng’s defective sprinkler system was the cost to replace plants and trees which died as a result of Meng’s defective sprinkler system. According to the uncontradicted affidavit of Phillip A. LeTard, Meng’s counsel in the prior litigation, Meng’s demand upon Bituminous to defend, made upon receipt of Thompson’s counterclaim, was renewed upon discovery of Thompson’s damages. At that point, Bituminous had an obligation to defend since the facts indicated coverage. Having failed to do so, Bituminous is liable for attorney’s fees, expenses, costs and any other damages which Meng incurred after Thompson’s deposition as a result of Bituminous’ breach of its contract with Meng. Brickell v. United States Fire Insurance Company, 436 So.2d 797, 801-02 (Miss.1983). Accordingly, Meng’s Motion for Partial Summary Judgment is likewise granted on this point.

Since the issues of liability have been determined and since only the issue of damages remains, the Court requests the parties to confer and notify the Court concerning whether this issue can be disposed of, by agreement, affidavit or otherwise, without the necessity of a full trial.

      . Meng sued Thompson for $7,729.97 plus attorneys fees, costs and interest. According to the material submitted by the parties in support of their Motions, Meng performed additional work for Thompson which apparently formed the basis for Meng’s claim against Thompson.

      . Bituminous also alleges that Endorsement No. 3 to its policy, entitled “Partial Schedule of Classifications of Operations Subject to One or More of the Explosion Hazard, Collapse Hazard and Underground Property Damage hazard exclusions”, excludes coverage of property damage to landscape gardening when construed with coverage part L6394XA, entitled "Additional Declarations." We agree with Meng that the classification of operations included on the partial schedule, including landscape gardening, are excluded from coverage only insofar as the property damage in question is included within the explosion, collapse or underground property damage hazard. The property damage in this case was not connected with any of these three hazards.


author: DeANDA, District Judge.

text:
    Hernan Benavides VILLEGAS v. Paul B. O'NEILL, District Director, Immigration and Naturalization Service.
    Civ. A. No. H-85-6719.
    United States District Court, S.D. Texas, Houston Division.
    Jan. 28, 1986.

      Joseph Vail, Margaret D. Burkhart, Houston, Tex., for petitioner.
    Nancy K. Pecht, Asst. U.S. Atty., Houston, Tex., for respondent.
   MEMORANDUM AND ORDER

DeANDA, District Judge.

Pending before the Court is Petitioner’s petition for a writ of habeas corpus and motion for a preliminary injunction. Having reviewed the record and the law, the Court is of the opinion that said petition and motion should be denied in all respects for the reasons set forth below, and renders judgment for the Respondent. The following discussion is designated as the findings of fact and conclusions of law in support of this decision.

Petitioner is a citizen of El Salvador who entered this country illegally in Spring, 1984. Petitioner was arrested by officials of the Immigration and Naturalization Service (INS) in Houston, Texas in June, 1984. On June 5, 1984, Petitioner was served an Order to show cause why he should not be deported. On June 13,1984, Petitioner was brought before an Immigration Judge for a show cause hearing on the issue of deport-ability, but the hearing was adjourned to afford Petitioner the opportunity to secure counsel. Petitioner, however, did not secure legal representation, and on June 27, 1984, was again brought before the Immigration Judge. Petitioner, appearing pro se, admitted that he was not a citizen or national of the United States and that he had entered the United States illegally. Petitioner thus conceded deportability, but requested political asylum from the Immigration Judge. The Immigration Judge provided Petitioner with the necessary forms to apply for political asylum and told him that if he remained in custody he would have to complete his application by July 11, 1984. Petitioner was released from custody, however, on a surety bond prior to July 11, 1984. Upon his release, Petitioner’s next hearing date was canceled and subsequently reset to July 8, 1985. Notice of the July 8, 1985 hearing was mailed by the Immigration Court to Petitioner at his last known address. Petitioner, however, had moved without notifying INS, the Immigration Court or the post office of his forwarding address, and thus never received notice of the July 8, 1985 hearing. When Petitioner failed to appear at this hearing, the Immigration Judge deemed his application for political asylum waived and ordered him deported. Subsequently, INS sent a notice to Petitioner’s bonding company that Petitioner was to surrender to INS. The bonding company contacted Petitioner and he surrendered to INS, unaware that he had been ordered deported. Petitioner secured legal representation and on November 29, and December 9, 1985 filed motions to reopen his case and stay deportation, alleging he received no notice of the July 8, 1985 hearing and that he was eligible for political asylum. The Immigration Judge denied these motions finding that notice of the hearing had been properly posted by the Immigration Court to Petitioner’s last known address and that Petitioner had not made a prima facie showing of eligibility for political asylum. Petitioner subsequently appealed the Immigration Judge’s rulings to the Board of Immigration Appeals, and his case is currently pending before the Board. Petitioner requested the District Director of the INS, Respondent herein, to grant him a stay of deportation pending a review of his case by the Board of Immigration Appeals. The District Director denied Petitioner’s request on December 11, 1985. On December 13,1985, Petitioner filed his petition for a writ of habeas corpus under 8 U.S.C. § 1105a(a)(9) and motion for temporary restraining order to stay his imminent deportation. On that same day, the Court stayed Petitioner’s deportation to maintain the status quo pending a hearing and ruling on Petitioner’s motion for a preliminary injunction to stay his deportation.

The scope of the Court’s review in this ease is very limited. The Court has no jurisdiction to review final orders of the Immigration Judge or the Board of Immigration Appeals in a habeas corpus proceeding under 8 U.S.C.. § 1105a(a)(9), as exclusive jurisdiction over such matters is vested in the Courts of Appeals. Johns v. Department of Justice, 653 F.2d 884, 892 (5th Cir.1981); Salehi v. District Director, Immigration & Naturalization Service, 575 F.Supp. 1237 (D.Colo.1983); Emmanuel v. United States Immigration and Naturalization Service, 579 F.Supp. 1541 (D.V.I.1984). The Court, however, does have jurisdiction in a habeas corpus proceeding to review the District Director’s denial of Petitioner’s stay of deportation. Bothyo v. Moyer, 772 F.2d 353, 355 (7th Cir.1985); Emmanuel, 579 F.Supp. at 1544. See also Bonilla v. Immigration & Naturalization Service, 711 F.2d 43 (5th Cir.1983). The District Director’s denial of a stay of deportation, however, is subject to review only to determine whether there has been an abuse of discretion. Bothyo, 772 F.2d at 355, Emmanuel, 579 F.Supp. at 1544. The Court thus cannot substitute its judgment for that of the District Director, but rather must affirm the District Director’s decision unless Petitioner can show it was either arbitrary, capricious or violative of due process. Emmanuel, 579 F.Supp. at 1544. See also Bothyo, 772 F.2d at 355.

The gravaman of Petitioner’s complaint is that his deportation should be stayed because it is likely he will prevail on his appeal before the Board, as the notice sent to him by the Immigration Court of the July 8, 1985 hearing did not meet the requirements of the applicable regulations or due process. Because the Court finds that the notice sent to Petitioner was not violative of either federal regulations or due process, the Court finds that the District Director did not abuse his discretion in denying a stay of deportation, and that Petitioner’s detention is neither illegal nor unconstitutional.

Petitioner argues that reasonable notice under the circumstances required by applicable regulations and due process put the burden on the INS to serve him personally with notice of the hearing or, at the very least, to notify him through his bonding,company of the hearing. The INS has shown, however, that Petitioner had already conceded deportability at a prior deportation hearing and thus the subsequent proceeding on Petitioner’s application for political asylum was not a new proceeding initiated by the Service with proposed adverse effect. Petitioner thus was not entitled to personal service by INS of notice of subsequent hearings on his application for political asylum. See 8 C.F.R. §§ 103.5a(c), 103.5a(d). Petitioner, however, maintains that the regulations and due process require that “reasonable notice” be given of all hearings, and under the circumstances of his case, “reasonable notice” requires that he be notified of all hearings through his bonding company.

Petitioner has shown that he has only an elementary education, does not speak English, and is unfamiliar with INS and Immigration Court procedures and policies. Petitioner asserts it is common practice for INS to notify bonding companies of hearing dates, and that INS officers instruct released aliens to contact their bonding companies to keep abreast of their appearance dates. Petitioner claims that both INS and his bonding company represented to him that he would be informed of his appearance dates by his bonding company. Petitioner’s bonding company instructed him to check in every fifteen days to keep apprised of his court dates, and Petitioner did so.

INS, however, has shown that while it endeavors to send notice of appearance dates to released aliens’ bonding companies, it does not always have the manpower to do so. INS has also shown that neither its local operating procedures nor the regulations require that it send such notices to bonding companies. Furthermore, INS has shown that it is the Immigration Court, not INS, that is responsible for notifying released aliens of appearance dates, and that the Immigration Court notifies released aliens of appearance dates by regular mail. See generally and compare, 8 C.F.R. §§ 103.5a(a)(l), 103.5a(d). INS has shown that upon release, all illegal aliens are told to keep INS informed of their current addresses. INS notifies the Immigration Court of any changes of address.

The Court finds Petitioner’s argument that “reasonable notice” requires notice to the bonding company to be without merit. Although Petitioner is unsophisticated, when he was released he knew that he was subject to deportation unless his application for political asylum was successful. Petitioner spent some twenty-two days in custody and had two appearances before the Immigration Judge. The Immigration Judge informed him of the seriousness of his situation and that his chances for political asylum were not good. The INS has shown that all released aliens are told to keep INS informed of their current addresses, and, moreover, the law requires them to do so. See 8 U.S.C.A. §§ 1302(a), 1305(a); 8 C.F.R. §§ 264.1, 265.1. INS reports all changes of address to the Immigration Court. Petitioner should have known that his situation was grave and should have appreciated the necessity of doing as he was told by INS. Petitioner was not entitled to default upon his obligation to keep INS informed of his current address just because he was told his bonding company would also notify him of his appearances.

Petitioner testified, however, that INS never told him that he had an obligation to keep INS apprised of his current address. INS is unable to specifically show that Petitioner was informed of this obligation, but has shown its operating procedures require released aliens be informed of this obligation, and that INS officers do so inform each released alien. Petitioner’s testimony is suspect. At the preliminary injunction hearing Petitioner stated he had never been before an Immigration Judge or had a hearing at any time on the issue of his deportability. Yet, Petitioner introduced into evidence the transcript of his June 27, 1984 hearing, which shows that Petitioner indeed had two hearings before an Immigration Judge while in custody. Moreover, Mr. Goldman, the INS attorney in charge of Petitioner’s case, also testified as to the two hearings. Furthermore, Petitioner testified that he left El Salvador because both the government and the rebels sought to put him into military service. Petitioner’s testimony contradicts his affidavit in support of his petition for a writ of habeas corpus and a temporary restraining order, wherein he statés he left El Salvador because he deserted from the government’s military forces as he opposed the civil war and no longer wished to be a part of it. While the Court is not unsympathetic to Petitioner’s plight, it is clear that Petitioner will say anything to stay in this country, and thus his testimony is weighed in that light. The Court finds that Petitioner was told at the time of his release from custody that he had a duty to keep INS informed of his current address. The Court further finds that had Petitioner informed INS of his change of address, INS would have so notified the Immigration Court.

Petitioner, however, further argues that even if he was told to keep INS apprised of his address, he was not told the address of INS or otherwise told the procedure for notifying INS of his change of address. Petitioner further asserts that the INS’s instructions to released aliens that they must keep INS informed of their current addresses, as well as instructions on how to inform INS of address changes and the address of INS, should be given to released aliens in writing in their native language at the time of release. The Court finds, however, that while distribution of detailed, written instructions is a better way, this is not required by the regulations or due process. Petitioner was told the seriousness of his situation at the June 27, 1984 hearing by the Immigration Judge, and upon his release from custody was given instructions on his legal responsibilities. It was incumbent upon Petitioner to comply with these instructions, and, given the circumstances, he should have realized the importance of doing so.

The Court thus finds that INS and the Immigration Court took all the steps required by the regulations and due process to give Petitioner notice of the July 8, 1985 hearing. Petitioner did not receive notice of his hearing due to his own inexcusable neglect. Furthermore, the Court would note that the Immigration Judge found that Petitioner did not have a prima facie case for political asylum. The record submitted to this Court makes clear that Petitioner fears returning to El Salvador because of possible prosecution for desertion from military service. As the Immigration Judge stated in his order denying Petitioner’s second motion to reopen, “any action brought by the authorities for [Petitioner’s] ... actions would be in the form of prosecution not persecution which does not qualify the [Petitioner] ... for asylum/withholding of deportation.”

The Court thus finds that Petitioner’s arguments to reopen his case are without merit. The Court finds that the District Director had ample reason to deny Petitioner a stay of deportation pending his appeal, and, thus, the District Director did not abuse his discretion in denying Petitioner a stay of deportation. The Court further finds that Petitioner has had a full and fair opportunity to present his case to the INS, and thus has not been denied his constitutional right to due process. Bothyo, 772 F.2d at 358.

The Court thus ORDERS that the temporary restraining order staying Petitioner’s deportation be DISSOLVED. Furthermore, the Court finds that Petitioner is not being illegally or unconstitutionally detained and therefore ORDERS that Petitioner’s application for writ of habeas corpus be DENIED, and that judgment be rendered in behalf of the Respondent.

This is a Final Judgment.

      . Petitioner does not seek review of the Immigration Judge's Order denying his stay of deportation, and it appears that an appeal of this Order is also pending before the Board of Immigration Appeals.

      . In his brief, Petitioner cites Matter of Smith, 17 I & N Dec. 146 (B.I.A.1977), for the proposition that reasonable notice requires notice to the released alien’s bonding company. This decision, however, only states on the facts before the Court, “reasonable notice" was satisfied by notice to the bonding company, not that “reasonable notice” requires notice to the bonding company.


author: CROW, District Judge.

text:
    Richard H. COFFEY, Plaintiff, v. UNITED STATES of America on Behalf of COMMODITY CREDIT CORPORATION, Defendant.
    No. 84-1169.
    United States District Court, D. Kansas.
    Jan. 29, 1986.

      Kathleen M. Boelte, Boelte & Boelte, Sublette, Kan., for plaintiff.
    Benjamin L. Burgess, Jr., U.S. Atty., Sharon A. Werner, Asst. U.S. Atty., Wichita, Kan., for defendant.
   MEMORANDUM AND ORDER

CROW, District Judge.

The case is before the court on defendant’s motion to dismiss for lack of subject matter jurisdiction and for failure to state a claim for which relief can be granted. The cause of action arises from a grain sale in which plaintiff transferred milo to defendant in exchange for the discharge of a farm loan held by defendant.

Plaintiff alleges that defendant offered a Payment-in-Kind (PIK) program “to encourage the redemption of outstanding corn, sorghum, and wheat loans.” (Amended Complaint, Exh. 1). As to the procedures, plaintiff alleges defendant calculated and inserted the total bushels (23,360) on the bid sheet, and then plaintiff inserted his bid of 12%, the amount he would retain for personal use or marketing. (Amended Complaint, Exh. 2). By letter dated May 2, 1983, defendant informed plaintiff that his bid of 12% had been accepted. (Amended Complaint, Exh. 3). On May 10, 1983, defendant mailed a Commodity Delivery Notice to plaintiff requiring delivery of 25,256 bushels of milo, which exceeds the bushels he had bid. (Amended Complaint, ¶ 7). The Grant County ASCS office explained in a letter dated May 18, 1983, that it had “corrected” plaintiff’s bid to 28,700 bushel from 23,360 bushel to reflect the entire quantity of grain not required for plaintiff’s participation in other PIK programs. (Amended Complaint, Exh. 4).

Plaintiff further alleges his full performance of the contract by the delivery of the milo under the terms of his bid. Plaintiff has demanded defendant to “release all remaining milo which was not required to be retained under loan and ... [to] retire his loan.” (Amended Complaint, 118).

Plaintiff filed his original complaint March 28, 1984, asserting jurisdiction of this court under 15 U.S.C. § 714b and seeking relief through a declaratory judgment on the contractual rights of the parties, a judgment of specific performance against defendant, and a finding of conversion with actual damages of $16,447.20, consequential damages of $14,690, and punitive damages.

After defendant filed a motion to dismiss, plaintiff amended his complaint to reflect this court’s jurisdiction under 28 U.S.C. § 1346(b), alternatively under 28 U.S.C. § 1346(a)(2). Plaintiff now seeks relief for conversion in the amount of $16,-447.20 actual damages and $14,690 consequential damages, and for breach of contract in the amount of $9,999 damages.

While defendant advances numerous arguments, the court will restrict its attention to whether plaintiff’s conversion claim sounds in contract and whether the Contract Disputes Act of 1978 is applicable.

It is a long-standing rule that the United States may not be sued without its consent. United States v. Mitchell, 463 U.S. 206, 212, 103 S.Ct. 2961, 2965, 77 L.Ed.2d 580 (1983); Amalgamated Sugar Co. v. Bergland, 664 F.2d 818, 823 (10th Cir.1981). The consent of the United States is a prerequisite to this court’s jurisdiction. Mitchell, 463 U.S. at 212,103 S.Ct. at 2965; Hefley v. Textron, 713 F.2d 1487, 1494 (10th Cir.1983). Because the jurisdiction of federal courts is limited to that provided by the Constitution or statute, there is a presumption against federal jurisdiction which must be affirmatively overcome by the party invoking jurisdiction. Karlin v. Clayton, 506 F.Supp. 642, 644 (D.Kan.1981).

The federal statute permitting suits against the Commodity Credit Corporation (CCC) is 15 U.S.C. § 714b which places exclusive jurisdiction in United States district courts. 15 U.S.C. § 714b also provides:

Any suit by or against the United States as the real party in interest based upon any claim by or against the Corporation shall be subject to the provisions of subsection (c) of this section to the same extent as though such suit were by or against the Corporation, except that (1) any such suit against the United States based upon any claim of the type enumerated in section 1491 of Title 28, may be brought in the United States Claims Court, and (2) no such suit against the United States may be brought in a district court unless such suit might, without regard to the provisions of sections 714 to 714p of this title, be brought in such court.

If plaintiffs suit is against the United States as the real party in interest, then other significant jurisdiction provisions will come into play.

The United States is the real party in interest in actions where recovery would come from the federal treasury. Anderson v. Occidental Life Ins. Co. of California, 727 F.2d 855, 856 (9th Cir. 1984); see Dugan v. Rank, 372 U.S. 609, 620, 83 S.Ct. 999, 1006, 10 L.Ed.2d 15 (1963). Plaintiff Coffey seeks monetary damages from the CCC, an agency and instrumentality of the United States within the Department of Agriculture. 15 U.S.C. § 714. The financial operation of the CCC is dependent upon the federal treasury. See 15 U.S.C. §§ 713a-4, 713a-12. The court concludes plaintiffs claim is against the United States, the real party in interest. See Raines v. Block, 599 F.Supp. 196, 198 (D.Colo.1984).

It is now a question of whether plaintiff’s suit could be brought in district court without regard to 15 U.S.C. §§ 714 to 714p. Plaintiff alleges jurisdiction pursuant to 28 U.S.C. § 1346(b), alternatively 28 U.S.C. § 1346(a)(2). Plaintiff seeks under § 1346(b) money damages for the alleged wrongful conduct of CCC’s agents in altering his bid and thereby converting his milo. The court finds merit in the defendant’s argument that plaintiff’s action sounds in contract and not tort.

Plaintiff’s allegations of wrongful conduct are limited to: “Defendant CCC altered his bid in violation of the terms and conditions of the program,” and “Defendant refused to comply with the contract, and refused to release that portion of the collateral in dispute, thereby converting Plaintiff’s grain.” (Amended Complaint, ¶¶ 7, 8).

Plaintiff concedes an “act or omission” of a government employee or agent “in the execution of a statute or regulation” is not actionable under the Federal Tort Claims Act (FTCA). 28 U.S.C. 2680(a). Nevertheless, plaintiff insists the government has converted 4,699.2 bushels of his grain by retaining it after he delivered, under protest, 25,256 bushels pursuant to the delivery notice which exceeded his bid of 20,-556.80 bushels. (Memorandum in Opposition, p. 4). The strained nature of this argument suggests plaintiff’s action rests in contract law.

Even though, as plaintiff notes, a breach of contract action and tort action can co-exist, it is settled that claims essentially based upon an alleged failure to carry out contractual duties are not tort claims which confer jurisdiction under the FTCA. Tannenbaum v. Envirodyne Engineers, Inc., 609 F.Supp. 931, 933 (D.Ill.1985), see Blanchard v. St. Paul Fire and Marine Insurance Co., 341 F.2d 351, 357 (5th Cir.) cert. denied 382 U.S. 829, 86 S.Ct. 66, 15 L.Ed.2d 73 (1965). Jurisdiction of this court cannot be invoked by framing the complaint as other than contractual, when in fact “the genesis of any wrongdoing by the United States was breach of contract.” Raines v. Block, 599 F.Supp. at 199; see Management Science America, Inc. v. Pierce, 598 F.Supp. 223, 225 (N.D.Ga.1984). The court in Megapulse, Inc. v. Lems, 672 F.2d 959, 968 (D.C.Cir.1982), stated: “The classification of a particular action as one which is or is not ‘of its essence’ a contract action depends both on the source of the rights upon which plaintiff bases its claims, and upon the type of relief sought (or appropriate).”

Plaintiff brought this action to obtain the CCC’s performance under the contract, as he understands the terms, and to receive consequential damages arising from CCC’s alleged breach of the same contract. Plaintiff’s rights spring from the contract. In such an action, the crucial question is whether the United States had the authority unilaterally to change the terms of the agreement. Because plaintiff’s claim of conversion is essentially a claim for breach of contract, the court finds it lacks jurisdiction under 28 U.S.C. § 1346(b) and the FTCA. See Raines v. Block, 599 F.Supp. at 199.

Plaintiff alternatively alleges this court has jurisdiction under the Tucker Act, 28 U.S.C. § 1346(a)(2), which provides in relevant part:

(a) The district courts shall have original jurisdiction, concurrent with the United States Claims Court, of:
(2) Any other civil action or claim against the United States, not exceeding $10,000 in amount, founded either ... or upon any express or implied contract with the United States, ... except that the district courts shall not have jurisdiction of any civil action or claim against the United States founded upon any express or implied contract with the United States ... which are subject to sections 8(b)(1) and 10(a)(1) of the Contract Disputes Act of 1978.

Acknowledging this court’s jurisdiction under the Tucker Act is limited to claims not exceeding $10,000, plaintiff has limited his alternative contract claim to $9,999. The waiver of damages in excess of $10,000 is sufficient to permit a district court to exercise its concurrent jurisdiction under the Tucker Act. Professional Managers’ Ass’n v. U.S., 761 F.2d 740, 742 (D.C.Cir. 1985). The only remaining hurdle to this court’s jurisdiction of plaintiff’s claim is whether the contract in question is subject to sections 8(g)(1) and 10(a)(1) of the Contract Disputes Act of 1978 (CDA), 41 U.S.C. § 601 et. seq.

The scope of the CDA is set forth at 41 U.S.C. § 602(a) as “any express or implied contract (including those of the nonappropriated fund activities described in sections 1346 and 1491 of Title 28) entered into by an executive agency for—

(1) the procurement of property, other than real property in being;
(2) the procurement of services;
(3) the procurement of construction, alteration, repair or maintenance of real property; or,
(4) the disposal of personal property.”

The government contends its contract for acquisition of plaintiff’s milo is a contract for the procurement of property covered by the express terms of the CDA. Plaintiff has not directly addressed this contention.

The CDA does not cover all government contracts. Coastal Corp. v. United States, 713 F.2d 728, 730 (Fed.Cir.1983). (An implied contract to give bids fair consideration is not within CDA). On the other hand, the CCC is an executive agency which entered into an express contract with plaintiff. See 15 U.S.C. § 714; 31 U.S.C. § 9101(3)(A). Under the terms of the contract, the CCC acquired grain from plaintiff. Procurement is usually defined as to get possession of, obtain, or acquire. Webster’s Third New International Dictionary (Unabridged) p. 1809 (1981). From this overview, the contract at issue appears to be within the CDA, but further analysis is necessary.

The CDA was intended to create a comprehensive statutory scheme of legal and administrative remedies to resolve government contract claims. Formerly, the government contract remedies system was a hodgepodge of rules and requirements varying with the whims of the agencies. Pursuing alternative forums — agency boards and courts — also generated restrictive and uncoordinated provisions and procedures. S.Rep. No. 1118, 95th Cong., 2d Sess. 1, reprinted in 1978 U.S.Code Cong. & Ad.News 5235. In order to achieve the unification of diverse and inconsistent procedures, the CDA was given broad application. S.Rep. No. 1118, 95th Cong., 2d Sess. 17-18, reprinted in U.S.Code Cong. & Ad. News 5251-5252.

Under the CDA, contract disputes are reviewed in either of two methods: (1) appeal of a contracting officer’s decision to the Board of Contract Appeals (41 U.S.C. §§ 606 and 607) or (2) direct relief from the Claims Court. (41 U.S.C. § 609). Sealtite Corp. v. General Services Admin., 614 F.Supp. 352, 354 (D.Colo.1985).

The CDA has been interpreted as eliminating a district court’s concurrent jurisdiction over government contract claims. North Side Lumber Co. v. Block, 753 F.2d 1482, 1486 (9th Cir.1985) appeal pending — U.S. -, 106 S.Ct. 265, 88 L.Ed.2d 271. [The court treated the CDA proviso in 28 U.S.C. § 1346(a)(2) as restricting the jurisdiction granted in the first part of 1346(a)(2).] See also North Side Lumber, 753 F.2d at 1487 (Boochever, J., dissenting). In S.J. Groves & Sons Co. v. United States, 495 F.Supp. 201, 207 n. 7 (D.Colo. 1980), the court noted that Congress intended the CDA to eliminate district court jurisdiction of government contract claims because the Claims Court has the greater expertise on these matters.

Research has not revealed precedent on whether a contract similar to the one at issue is within the scope of the CDA. In Hester v. Farmer’s Home Admin., 49 B.R. 593 (E.D.Mo.1985), the FmHA entered subordination agreements in consideration for the bank’s agreement to make additional loans to meet debtor’s annual operating expenses. Defendant Government argued the subordination agreements were for the procurement of services benefitting the FmHA and, therefore, were within the CDA. The district court did not accept this argument, stating:

To place this transaction within the confines of 41 U.S.C. § 602 would strain the language of the statute. The statute clearly relates to a contract by an executive agency for the procurement of services. The loans herein were between plaintiffs and defendant to implement a national policy related to farming. The fact that defendant later subordinated the agreement to certain private financial institutions does not transform the contract into ones for which the government is procuring services. Therefore, the Court finds that 41 U.S.C. § 602 does not work to divest it of jurisdiction.

Id. at 598. The court believes the Hester decision is distinguishable and not convincing authority.

• By the express wording of 41 U.S.C. § 602(a), the question of scope of the CDA is judged from the standpoint of the executive agency both as to the purpose or purposes for entering into the contract, as well as the results obtained in its performance. While the plaintiff’s agreement to deliver the grain was in consideration of the government’s retirement of a farm loan, the government’s expressed purpose for entering into this transaction was to acquire a sufficient supply of grain to meet expected PIK demands. (Amended Complaint, Exh. 1). The government’s manner of payment, whether by cash or by the discounting of a note, does not change the primary purpose of the contract — the procurement of grain. To transcend the actual transaction in favor of some national policy would force this court to ignore the broad wording of the CDA and to assume the inappropriate role of policymaker.

For the CDA to achieve the goal of unification, it must be consistently applied. Where the accepted definition of key operative terms are satisfied, the CDA should be applicable. The court finds the contract involved is subject to the CDA, with exclusive jurisdiction in the Claims Court.

The court is empowered to transfer a civil action where there is a want of jurisdiction and it is in the interest of justice. 28 U.S.C. § 1631.

IT IS THEREFORE ORDERED that this court lacking subject matter jurisdiction transfers the case to the United States Claims Court.


author: FEIKENS, Chief Judge.

text:
    Deryl BEASLEY, Plaintiff, v. CITY OF EAST DETROIT POLICE DEPARTMENT, a municipal corporation, Michael P. Lyczkowski, T.M. Duggan, and Leo Borowsky, jointly and severally, Defendants.
    No. 85-CV-73024-DT.
    United States District Court, E.D. Michigan, S.D.
    Jan. 29, 1986.
    Gary E. Levitt, Birmingham, Mich., for plaintiff.
    Bernard P. McClorey, Cummings, McClorey, Davis & Acho, Livonia, Mich., for defendants.
   MEMORANDUM OPINION AND ORDER

FEIKENS, Chief Judge.

Plaintiff, Deryl Beasley, alleges that defendant police officers used excessive force during an investigatory stop, and charges them with violation of 42 U.S.C. § 1983, assault, and intentional infliction of emotional distress. Beasley also charges their employer, City of East Detroit, with vicarious liability. Defendants move for summary judgment. I have already ruled that material issues of fact preclude summary judgment for the officers, and that Monell v. Department of Social Services, 436 U.S. 658, 98 S.Ct. 2018, 56 L.Ed.2d 611 (1978), and Oklahoma City v. Tuttle, — U.S. -, 105 S.Ct. 2427, 85 L.Ed.2d 791 (1985), mandate summary judgment for the City on the § 1983 claim. I now address the City’s motion on Beasley’s state claims.

The City argues it is entitled to summary judgment because its operation of a police department is a governmental function, and because Ross v. Consumers Power Co., 420 Mich. 567, 363 N.W.2d 641 (1984), immunizes a city from liability for torts committed by employees performing governmental functions. Beasley argues that no immunity applies because of the intentional tort exception created prior to Ross by Lockaby v. Wayne County, 406 Mich. 65, 276 N.W.2d 1 (1979), and McCann v. Michigan, 398 Mich. 65, 247 N.W.2d 521 (1976).

In Ross, the Court “reexamine[d] the extent of immunity from tort liability which the governmental tort immunity act ... and the common law provide to the state and its agencies.” Ross, 420 Mich, at 591, 363 N.W.2d 641. Using more than one-hundred pages, the Court traced the history of immunity doctrine, articulated new principles, and applied them to nine cases. The Court intended that Ross provide a new fountainhead of immunity doctrine, superceding prior law.

Under Ross, a city is immune from liability for torts committed by employees performing a governmental function, Ross, 420 Mich, at 625, 363 N.W.2d 641, which is any activity “expressly or impliedly mandated or authorized by constitution, statute, or other law.” Ross, 420 Mich, at 620, 363 N.W.2d 641. Immunity does not depend on whether the tort alleged is intentional. On the contrary:

[The statute] extends immunity to all governmental agencies for all tort liability whenever they are engaged in the exercise or discharge of a governmental function. This broad grant of immunity, when coupled with the four narrowly drawn statutory exceptions [inapplicable here], suggests that the Legislature intended that the term “governmental function” be interpreted in a broad manner.

Ross, 420 Mich, at 618, 363 N.W.2d 641 (emphasis original).

Beasley argues that Ross preserves the intentional tort exception. He relies upon the Court’s disposition of Willis v. Department of Social Services, one of the Ross cases:

We also conclude that plaintiff failed to state a claim of intentional tort against any of the defendants for the reasons stated by the Court of Appeals.

Ross, 420 Mich, at 641, 363 N.W.2d 641. Beasley reads too much into this comment. The statement indicates that the Court had no reason to consider immunity because plaintiff failed to plead a claim requiring any defense.

The Court of Appeals decisions Beasley cites misconstrue the scope of Ross. Cf. Smith v. Yono, 613 F.Supp. 50, 53-54 (E.D. Mich.1985) (municipalities immune under Ross from liability for police officers’ intentional torts). I am not bound by them. See Commissioner v. Estate of Bosch, 387 U.S. 456, 465, 87 S.Ct. 1776, 1782-83, 18 L.Ed.2d 886 (1967).

I hold that defendant police officers were performing a governmental function at the time of the alleged torts, and consequently, that the City of East Detroit is immune. The City’s Motion for Summary Judgment on Beasley’s state claims is GRANTED.

IT IS SO ORDERED.


author: CURTIN, Chief Judge.

text:
    Bernadine BOYD, Plaintiff, v. SECRETARY OF HEALTH AND HUMAN SERVICES, Defendant.
    No. Civ.-84-328C.
    United States District Court, W.D. New York.
    Jan. 29, 1986.

      Sharon Anscombe Osgood, Kenmore, N.Y., for plaintiff.
    Salvatore R. Martoche, U.S. Atty. (Joseph B. Mistrett, Asst. U.S. Atty., of Counsel), Buffalo, N.Y., for defendant.
   CURTIN, Chief Judge.

This is an action brought under section 205(g) of the Social Security Act, as amended, to review a final determination of the Secretary of Health and Human Services, which denied plaintiff’s application for a period of disability and widow’s disability insurance benefits. Plaintiff filed her application for widow’s disability insurance benefits on March 2, 1983. After plaintiff was initially denied these benefits by the Secretary, she requested and was granted a hearing before an Administrative Law Judge [ALJ], where she proceeded without legal representation. After the ALJ affirmed the earlier decision of the agency and the Appeals Counsel did not overturn this decision, plaintiff filed this appeal. Thereafter, plaintiff was granted in forma pauperis status, and the court assigned counsel. Both sides move for judgment on the pleadings.

In summary, the ALJ found at the time of her hearing, plaintiff was a widowed 50-year-old woman suffering from chronic undifferentiated schizophrenia or schizoaffective disorder. The ALJ concluded, however, that plaintiff’s impairment did not satisfy any of the listings in Appendix I and was, therefore, not under a “disability,” as defined in the Social Security Act during the pertinent time.

Plaintiff’s attorney argues that plaintiff meets both the old and new Appendix I listings, that plaintiff qualifies for widow’s benefits because she is unable to perform any gainful activity even if plaintiff did not meet the listings, and that the ALJ failed to apply the correct eligibility standard. Shaw v. Schweiker, 730 F.2d 462 (6th Cir. 1984).

My review of the record is as follows. At the time of her hearing, plaintiff was a 50-year-old woman who has suffered from chronic undifferentiated schizophrenia for about 20 years (Tr., p. 26). She has no relevant work experience and has very limited ability to read and write (Tr., pp. 53, 115), and she attended school only through the eighth grade (Tr., p. 99).

Plaintiff’s testimony at the hearing clearly evidences her psychological problems. • At that time, she could not recall her place of birth (Tr., p. 32), her date of marriage (Tr., p. 33), the year of her daughter’s birth (Tr., p. 35), her years of treatment at Buffalo General Hospital (Tr., p. 39), her years of in-patient hospitalization at the State Hospital or Buffalo General Hospital (Tr., p. 40), the name of the psychiatric clinic she was presently attending (Tr., p. 41), the name of her doctor (Tr., p. 41)) the type of operation she had in 1974, and who did this surgery (Tr., pp. 54-55).

Plaintiff was hospitalized at the State Hospital on three or four occasions, at Buffalo General Hospital twice, attended day treatment at Buffalo General Hospital, and had been in treatment since she first got sick in the 1960s (Tr., pp. 39-41). Plaintiff underwent brain surgery for an aneurysm in 1974 and in 1983 sought care for recurring and severe headaches (Tr., p. 132). At the time of the hearing, plaintiff was in treatment at a local clinic and takes 200 mg. of Thorazine three times a day, which was prescribed by her present psychiatrist, Dr. Schim (Tr., pp. 44-45). Prior to seeing Dr. Schim, plaintiff was treated for a long period of time by a Dr. Lampa (Tr., pp. 22, 47) and was also seen by Dr. Park about four times in late 1982 and early 1983 (Tr., pp. 22, 111).

Plaintiff testified that, for the last 20 years or so, she has spells of depression and is easily confused (Tr., pp. 55-58). She describes her only activities as occasionally going to church, shopping at a local thrift shop, watching television, and socializing with her daughters, who help her with her daily needs (Tr., pp. 51, 61-62, 64). Although plaintiff has a driver’s license, she walks wherever she goes and does not use the bus except with her daughter (Tr., pp. 36-38). When plaintiff is very depressed, she avoids being seen by others (Tr., p. 109).

The above evidence is essentially supported by all other evidence in the record. Plaintiff’s daughter testified that her mother's symptoms are, in fact, more intense than depression and confusion, comparing her mother to the patient in Three Faces of Eve, the movie about a woman with multiple personalities (Tr., pp. 60-62).

The Social Security staff noted plaintiff’s problems. On March 2, 1983, a staff person indicated that plaintiff’s general appearance was that of an ill person, slow physically and mentally, with no animation (Tr., p. 102). Again on May 1, 1983, plaintiff was noticed not to look well and was tense and argumentative (Tr., p, 106).

With respect to the opinion of plaintiff’s various psychiatrists, I note that Dr. Park, who examined plaintiff four times in late 1982/early 1983, said that plaintiff had a longstanding psychotic illness dating back to 1967 and characterized her condition by “psychotic disorganization, auditory hallucinations, paranoid ideations, etc.” (Tr., p. 111). Although Dr. Park believed that plaintiff’s condition had been in partial remission for a number of years, he did believe that she had “marked residual problems” and prescribed Thorazine and Elavil (Tr., p. 111). Dr. Park also noted plaintiff’s lack of spontaneity, unproductive speech, “blunted” mood, inadequate energy level, and inadequate cognitive functioning (Tr., p. 114).

Dr. Park also signed a functional assessment form indicating that plaintiff’s nutrition and diet need further work, that her clothing was not always appropriate for the weather and was frequently mismatched. He noted, as did other evidence, that plaintiff sometimes had drastic mood swings, often resulting in her losing control of her temper, and had limited trust in others (Tr., pp. 115-16).

Finally, plaintiff’s treating physician, Dr. Schim, said that plaintiff’s condition is poor. She is a “schizophrenic” who is “fearful of people,” emotionally unstable, “paranoid with poor reality testing.” Dr. Schim found that plaintiff’s ability to make occupational adjustments” to be “very poor” because she “becomes agitated under stress” and “irrational” (Tr., pp. 141-46). The record is replete with such opinion.

It is clear that the AU both distorted and ignored evidence in the instant record in coming to his decision. Here, virtually all of the examining physicians agree that plaintiff is incapable of doing even low stress gainful activity. Therefore, the Secretary committed error in finding otherwise. See McLaughlin v. Secretary, 612 F.2d 701 (2d Cir.1980).

The AU also failed to fulfill his duty of developing the record, given plaintiff’s pro se status at the hearing as well as her serious mental problems. See e.g., Cruz v. Secretary, 593 F.Supp. 45 (S.D.N. Y.1984). Here, despite plaintiff’s testimo- • ny about depression and confusion, the AU failed to ask any questions about the frequency of these problems, their duration, etc. Furthermore, despite the fact that plaintiff said, on the record, that she had had operations on her back and head, the AU failed to ask any questions about these conditions or to subpoena records about either the operations or plaintiffs stays at various psychiatric facilities.

Finally, I find that the Secretary failed to apply the proper standard in inquiring whether, in accordance with 42 U.S.C. § 423(d), plaintiff was capable of doing “any gainful activity.” In making his inquiry, the AU merely examined whether plaintiff satisfied Appendix I. This constitutes reversible error here because there is no evidence in the record that plaintiff is capable of performing gainful activity of any kind. In Shaw v. Schweiker, supra at 464, the court said:

Under 42 U.S.C. § 423(d)(2)(A), a wage earner is considered disabled if his impairment precludes him from engaging in any substantial gainful activity. Under § 423(d)(2)(B), however, a widow applying for benefits on the basis of her spouse’s record as a wage earner must show that she suffers from an impairment deemed by the Secretary to preclude her from engaging in any gainful activity. Moreover, in assessing a wage earner’s ability to work, the Secretary must consider the claimant’s age, education, and work experience. By contrast, a widow’s claim of disability is judged solely by medical criteria.

As in so many of these Social Security cases, this ease represents yet another example of “sheer bureaucratic dishonesty” by the agency which this court cannot permit. Cf. McLean v. Heckler, 586 F.Supp. 1364, 1365 (E.D.Pa.1984). Therefore, and for all of the above reasons, the Secretary’s decision is reversed. I find the plaintiff disabled with an onset date of 1968. This matter is remanded to the Secretary for the calculation of benefits.

So ordered.


author: PER CURIAM.

text:
    UNITED CORPORATION, Plaintiff/Appellee, v. REED, WIBLE AND BROWN, INC., Defendant/Appellant.
    Civ. No. 1985/15.
    District Court, Virgin Islands, D. St. Croix, Appellate Division.
    Argued Dec. 17, 1985.
    Decided Jan. 29, 1986.

      Roland B. Scott, Jr., Christiansted, St. Croix, Virgin Islands, for plaintiff/appellee.
    Joel H. Holt, Christiansted, St. Croix, Virgin Islands, for defendant/appellant.
    Before CHRISTIAN, P.J., DAVID V. O’BRIEN, District Judge and FEUER-ZEIG, Territorial Court Judge.
   OPINION

PER CURIAM.

The issue presented in this appeal from the Territorial Court is whether the failure of a contracting party to comply with a condition precedent prevents application of the doctrine of anticipatory breach. We affirm the trial court’s decision and hold that performance of a condition is excused where the breaching party induced the noncompliance.

I. FACTS

This appeal involves the second lawsuit arising out of the parties’ contract for the sale and lease back of construction equipment. Executed in February, 1980, the agreement was to last through the completion of two building projects specified by the seller, United Corporation (“United”). It contained the following provision:

BUYER shall maintain, operate and deliver to SELLER within SEVENTY-TWO (72) HOURS from the time of request, the following listed equipment for the hourly rental rates as stated below, said accrued rental sums to be deducted from the total purchase price as above stated.

The buyer, Reed, Wible & Brown, Inc. (“RWB”), was unhappy with the deal from the onset due to repeated breakdowns in the machinery and, therefore, ignored United’s rental requests. United, in turn, rented equipment from other sources and brought its first action against RWB for the difference in the rental rates. The Territorial Court, rejecting RWB’s counterclaim which alleged that the sale of defective equipment breached the contract, found RWB in partial breach and awarded damages to United.

With its contract still in force, United made several requests to rent equipment. When these went unanswered, it again turned to other suppliers but never abandoned the contract. The record shows that 14 requests were made overall and RWB failed to deliver equipment — or even respond — on all but one occasion and on that day heavy rains made work impossible. On another occasion, a face-to-face demand yielded only smiles from RWB personnel. Finally, United turned exclusively to its other sources, renting equipment on 46 occasions. United again sued RWB and judgment of $33,822.97 was entered in its favor.

RWB now appeals the amount of this second award, arguing that it was excused from performance on each of the 32 occasions where United failed to request equipment. United maintains in justification of the trial court’s judgment that RWB repudiated the contract.

II. DISCUSSION

Repudiation occurs when a party to a contract makes clear his intent to breach the agreement before the time to perform has arrived. E.g., Bill’s Coal Co., Inc. v. Board of Public Utilities of Springfield, Mo., 682 F.2d 883, 886 (10th Cir.) cert. denied 459 U.S. 1171, 103 S.Ct. 816, 74 L.Ed.2d 1014 (1982); City of Fairfax, Va. v. Washington Metropolitan Area Transit Authority, 582 F.2d 1321, 1325 (4th Cir.) cert. denied 440 U.S. 914, 99 S.Ct. 1229, 59 L.Ed.2d 463 (1978); 4 Corbin, Contracts, § 959 (1951). The remedy for anticipatory breach, as repudiation is also known, is the right of the non-breaching party to immediately seek damages for a total breach of the contract. Fairfax, supra at 1325; Restatement (Second) of Contracts § 253 (1981); Corbin, supra; § 964.

Two elements must exist in order to support a finding of repudiation. First, the obligation repudiated must be so essential to the purpose of the contract that non-performance makes the agreement worthless. Fairfax, supra at 1327 [citing McCloskey & Co. v. Minweld Steel Co., 220 F.2d 101 (3d Cir.1955) ]; Restatement, supra § 250, comments b and c; Corbin, supra, § 973. Otherwise, only a partial breach may be found. Secondly, there must be an “absolute and unequivocal refusal to perform.” McCloskey, supra at 104. See also Dingley y. Oler, 117 U.S. 490, 502, 6 S.Ct. 850, 853, 29 L.Ed. 984 (1886); Restatement, supra § 250, comments b and c. Thus, courts have refused to find repudiation where a party has merely threatened nonperformance or has offered to rescind the contract. E.g., Harrell v. Sea Colony, Inc., 35 Md.App. 300, 370 A.2d 119, 123 (1977).

It is not required that the breaching party make a point blank declaration, because an act may also constitute repudiation. Restatement, supra § 250(2); Cor-bin, supra §§ 959, 973. It must, however, be “a voluntary affirmative act which renders the obligor unable or apparently unable to perform without such a breach.” Restatement, supra § 250(a). Nonfeasance, such as United was faced with, cannot support a finding of repudiation under the Restatement’s definition. Instead, where suspicion regarding future performance exists, a party may demand assurances of the other’s intent and ability to perform and the contract is repudiated if none are provided. Restatement, supra § 251. See Bitzes v. Sunset Oakes, Inc., 649 P.2d 66, 70 (Utah 1982); Garfield & Sons, Inc. v. Cowling, 616 P.2d 1008, 1010 (Colo.App.1980). This right is drawn from § 2-609 of the Uniform Commercial Code and recognizes that a sense of security is an implicit feature of every contract. Restatement, supra, § 251, comment a.

United’s right to demand assurances arose when RWB failed to respond to the rental requests made in the wake of the decision of the first lawsuit. From United’s point of view, these requests tested RWB’s intent to honor the contract. Not only did RWB fail to perform but its employees all but laughed at United’s in-person demand for assurances. Moreover, each written rental request also included a demand, all of which were, of course, ignored. It is clear, then, that this continued abstinance constituted repudiation under § 251 of the Restatement.

RWB contends, however, that its duty to rent out equipment was conditioned upon United’s giving notice of its needs. It concedes on appeal that a partial breach resulted from its failure to perform when notice was given but argues that it was discharged from performing in United’s other 32 rentals. Thus, RWB concludes, the trial court erred in awarding damages for a total breach of the contract.

A condition precedent is an event which must occur before there is a right to performance and a resulting breach of duty. E.g., M.K. Metals, Inc. v. Container Recovery Corp., 645 F.2d 583, 588 (8th Cir.1981). RWB correctly states the general rule that non-occurrence of a condition discharges the obligor’s duty. Restatement, supra, § 225.

Although the trial judge did not specifically rule on, whether the notice provision was a condition, this issue is not essential to affirming the judgment. If notice was intended as a mere time frame for performance, then RWB’s repeated failure to provide the assurances demanded by United supports a finding of repudiation. And even if performance was conditioned on notice, United was excused from this prerequisite because conditions are excused where a party’s conduct has caused the non-occurrence. Restatement, supra, § 255; Corbin, supra, § 977. See Irving Trust Co. v. Nationwide Leisure Corp., 95 F.R.D. 51, 74 (S.D.N.Y.1982); Jinright v. Russell, 123 Ga.App. 706, 182 S.E.2d 328, 330. (1971); Refrigeration Engineering Co. v. McKay, 4 Wash.App. 963, 486 P.2d 304, 308 (1971).

The same conduct that gave rise to United’s right to demand assurances, namely RWB’s failure to respond to the rental requests as well as to the demands themselves, supports a finding that notice, if it were a condition, was excused. After repeated attempts to secure performance, particularly in light of the earlier judgment, United was justified in concluding that further efforts would be futile and then seeking the equipment it needed elsewhere. Accordingly, the damages awarded by the trial judge properly encompassed all of the additional rental costs incurred over the contract’s term.

III. CONCLUSION

The record clearly supports the trial court’s finding that RWB breached the rental contract. Therefore, we affirm the award of cover damages.

      . Each rental request issued after the first trial bore the following warning:
      "If you do not confirm the availability to us of the above mentioned equipments, we have no choice but to rent from the open rental market and bill you for same.