author: WALTER E. BLACK, JR., District Judge.

text:
    MAYOR AND CITY COUNCIL OF BALTIMORE, a municipal corporation v. BALTIMORE FOOTBALL CLUB INC., a body corporate of the State of Delaware, and National Football League, an Unincorporated Association. INDIANAPOLIS COLTS, INC. v. MAYOR AND CITY COUNCIL OF BALTIMORE, a municipal corporation, William Donald Schaefer, Mayor of City of Baltimore, John Doe, Richard Roe, ABC, Inc., and XYZ, a partnership.
    Civ. A. Nos. B-84-1294, B-84-2560.
    United States District Court, D. Maryland.
    Dec. 9, 1985.
    As Amended Jan. 8, 1986.

      Benjamin L. Brown, Baltimore City Sol., Ambrose T. Hartman, Deputy City Sol., Richard K. Jacobsen, Chief Sol., L. William Gawlik, and J. Shawn Alcarese, Asst. City Solicitors; and Edwin C. Thomas, III, John R. Myers, Dennis P.W. Johnson, and Bell, Boyd & Lloyd, Chicago, 111., for Mayor and City Council of Baltimore, William Donald Schaefer, Mayor of the City of Baltimore, and members of the Baltimore City Council.
    Joshua R. Treem and Schulman & Treem, P.A., Baltimore, Md., and Max 0. Truitt, Jr., James Robertson, James E. Coleman, Jr., Carol E. Mattey and Gay Gellhorn, Wilmer, Cutler & Pickering, Washington, D.C., for Baltimore Football Club, Ine./Indianapolis Colts, Inc.
    George Beall, Mark D. Gately, and Miles & Stockbridge, Baltimore, Md., and Paul J. Tagliabue, Sonya D. Winner, and Covington & Burling, Washington, D.C., for Nat. Football League, an unincorporated ass’n, and Nat. Football League, a joint venture of its member teams.
   MEMORANDUM OPINION

Counsel will prepare an appropriate judgment incorporating by reference these Findings of Fact and Conclusions of Law for entry by the Court within twenty (20) days.

WALTER E. BLACK, JR., District Judge.

The original action (B-84-1294) in this consolidated litigation involves the attempt of the Mayor and City Council of Baltimore (“the City”) to condemn a professional football team — formerly the Baltimore Colts, and now doing business as the Indianapolis Colts (“the Colts”). Through its power of eminent domain, the City seeks to condemn the Colts’ franchise in the National Football League (“NFL”), arguing that it was within the City’s power of eminent domain on March 30, 1984, the date of the filing of the condemnation suit in state court. The Colts assert that “the Colts are gone” from Maryland, that the franchise was outside of the state of Maryland at whatever time is appropriate for determining its location. The matter is now pending before the court on the Colts’ motion to dismiss or in the alternative for summary judgment.

I. BACKGROUND

In late 1983 and early 1984, Robert Ir-say, the owner of the Colts, was considering relocation of the team. Extensive negotiations between Irsay and Mayor William Donald Schaefer of Baltimore and Governor Harry R. Hughes of Maryland had not produced agreement over the terms of a lease for Memorial Stadium or other matters which Irsay thought important to the Colts’ continuation in Baltimore.

On February 1, 1984, the City of Indianapolis solicited the Colts’ consideration of the Hoosier Dome in Indianapolis as a possible site for the playing of the Colts’ home games. Michael Chernoff, vice-president and general counsel of the Colts, responded by visiting Indianapolis and the Hoosier Dome and expressed an interest in the possibility of relocation. Accordingly, Indianapolis Mayor William H. Hudnut, III set up a “control group” of local politicians and businessmen to negotiate with the Colts’ organization in the hope of persuading them to relocate.

On February 24, 1984, a bill was introduced in the Maryland Senate authorizing Baltimore to condemn professional sports franchises. No vote was taken on the bill until over a month later. However, the Indianapolis control group was apparently aware of the legislation by late February. During mid-February, serious negotiations began between the Colts and the Capital Improvements Board of Managers of Marion County, Indiana (“CIB”), the owner of the Hoosier Dome, concerning the possibility of a lease of the Dome to the Colts.

On February 28, 1984, the United States Court of Appeals for the Ninth Circuit rendered its opinion in Los Angeles Memorial Coliseum Commission v. National Football League, 726 F.2d 1381 (9th Cir.), cert. denied, — U.S. -, 105 S.Ct. 397, 83 L.Ed.2d 331 (1984). In that case, the owner of the Raiders franchise had moved the club from its designated home territory in Oakland, California to Los Angeles without seeking approval of the NFL. When the NFL voted not to permit the move, the owner filed an antitrust suit, alleging that the League sought to prevent his club from entering and competing in the same home territory as another franchise. The Ninth Circuit affirmed a lower court ruling that the NFL’s vote had violated the antitrust laws.

Three days later, on March 2, 1984, the NFL held a special meeting in Chicago to review the Raiders antitrust decision and to discuss its possible impact on other issues before the League. In a privileged executive session, with Irsay and other Colt personnel absent, the League decided that it would take no action with respect to any possible move of the Colts. In light of the Ninth Circuit’s recent decision, the League decided that the consideration of a Colts’ move would not be a League matter. See Minutes of the Privileged Executive Session of the Special Meeting of the National Football League, March 2, 1984. Colts’ Motion to Dismiss or for Summary Judgment (“Colts’ Motion”), App. 10 at 2.

Later in the March 2 meeting, Irsay was allowed to return and stated that he was considering relocation of the team to Indianapolis, but was still negotiating with both Indianapolis and Baltimore officials. See Deposition of Alvin Ray Rozelle, Colts Motion, App. 9 at 43-44. The League expressed neither approval nor disapproval of the possible move. NFL Commissioner Pete Rozelle testified that, “the effect [of this League position] was that Bob Irsay could move the Colts ... to whatever city he chose,” without interference from the NFL. See Rozelle Deposition, supra, at 46.

During the remainder of March, 1984, the Colts continued to negotiate the lease with the CIB and a financing agreement with the Merchants National Bank & Trust Company of Indianapolis. At the same time, discussions continued between the City and the Colts concerning a financial package to be offered by the City in order to keep the Colts in Baltimore. On the morning of March 28, 1984, Irsay learned, from a Chicago newspaper account, that on March 27, the Maryland Senate had passed emergency legislation which authorized the City to condemn the Colts’ NFL franchise and related properties. Irsay immediately decided to move the Colts franchise to Indianapolis. He instructed Chernoff to conclude the Hoosier Dome lease and the loan transaction with Merchants National Bank. In addition, he instructed Chernoff'to move all the Colts’ property from Owings Mills, Maryland, to Indianapolis immediately.

Chernoff and the Indianapolis officials executed a twenty-year lease and the corresponding loan agreement the same day. That evening, Chernoff flew to Baltimore with an agent of Aero-Mayflower Transit Co. to coordinate the move. Mayflower personnel worked through the night of March 28-29 at the Colts’ Maryland training complex, loading most of the team’s physical possessions — including both office and athletic equipment — onto moving vans. By the morning of March 29, 1984, the Mayflower vans were on their way to Indianapolis.

On March 29, Irsay advised Commissioner Rozelle that he had relocated the Colts franchise to Indianapolis as of the close of business March 28, 1984. Later that day, the City served a letter upon the Colts at the team’s corporate headquarters in Skokie, Illinois, offering to purchase the team for $40 million. The offer, which terminated as of noon the next day, was not accepted.

On Friday, March 30, the Maryland legislature enacted Emergency Bill No. 1042, 1984 Md. Laws Ch. 6, the legislation which authorized Baltimore City to condemn sports franchises. Shortly thereafter, the Mayor and City Council of Baltimore enacted Emergency Ordinance No. 32, which also authorized such a condemnation. Under the authority of these two pieces of legislation, the City immediately filed a condemnation petition in the Circuit Court for Baltimore City, seeking to acquire the Colts by eminent domain and to enjoin the Colts from doing anything to further the transfer of the franchise. The Circuit Court issued an injunction, purporting to prohibit the Colts from relocating outside Maryland.

On March 31,1984, the CIB approved the Colts’ new 20-year lease of the Hoosier Dome. On April 5, 1984, the Colts obtained a license to do business in Indiana. On the same day, the Colts filed an interpleader action in the United States Federal District Court for the Southern District of Indiana, seeking to enjoin the condemnation proceedings in the Circuit Court for Baltimore City. Ultimately, the Indianapolis action was dismissed. See Indianapolis Colts v. Mayor and City Council of Baltimore, 741 F.2d 954 (7th Cir.1984), cert. denied, — U.S. -, 105 S.Ct. 1753, 84 L.Ed.2d 817 (1985). Since that time, the Colts have terminated all remaining ties they had with Maryland. For example, on May 11, 1984, the Colts notified the City that they were terminating the Memorial Stadium lease, and on September 17,1984, the Colts closed their checking accounts in Maryland.

On April 2, 1984, the Colts removed the original condemnation action to this Court on the basis of diversity jurisdiction. The City promptly filed a motion to remand, which was denied. In its opinion of June 22, 1984, this Court determined that for purposes of diversity jurisdiction, the Colts’ principal place of business as of March 30, 1984 was “not in Maryland.” Colts’ Motion, App. 4. The Court is now called upon to conduct a similar inquiry in determining whether the Colts were within the state of Maryland — and within the reach of the condemnation power of Baltimore City — at the appropriate time.

The Colts have moved to dismiss or, in the alternative, for summary judgment. The Court notes that the Colts raise only the threshold issue of the power of Baltimore City to condemn the franchise, expressly leaving open other defenses, such as the constitutionality of the enabling legislation. Memorandum of Indianapolis Colts (“Colts’ Brief”) at 4-5 & n.3. Since both parties have submitted significant documentation, affidavits and deposition testimony beyond the pleadings, the Court will treat the Colts’ motion as a motion for summary judgment. See Rule 12(c) of the Federal Rules of Civil Procedure.

Under Rule 56 of the Federal Rules, a motion for summary judgment can only be granted if there is no genuine issue as to any material fact and the moving party is entitled to judgment as a matter of law. Poller v. Columbia Broadcasting System, Inc., 368 U.S. 464, 467, 82 S.Ct. 486, 488, 7 L.Ed.2d 458 (1962). The burden is on the moving party to demonstrate clearly that there is no genuine issue of fact and any doubt as to the existence of such an issue is resolved against him. Phoenix Savings & Loan, Inc. v. Aetna Casualty & Surety Co., 381 F.2d 245, 249 (4th Cir.1967). This burden can be a heavy one; the standard for passing on motions for summary judgment is strict. Clarke v. Montgomery Ward & Co., 298 F.2d 346, 348 (4th Cir. 1962). If interpretations of the facts of a case differ, summary judgment is improper. Morrison v. Nissan Motor Co., Ltd., 601 F.2d 139, 141 (4th Cir.1979). See also Ross v. Communications Satellite Corp., 759 F.2d 355, 364 (4th Cir.1985), where the court determined that summary judgment is proper only when “it is ‘perfectly clear that there are no [factual] issues in the case.’ ”

The heart of the Colts’ argument is that the team is “gone” from Maryland (Colts’ Brief at 2), and that the City lacks the power to assert its power of eminent domain over a franchise that is beyond the jurisdiction of the state of Maryland. The City counters by arguing that the Colts’ lingering contacts with Maryland are enough to give the City the power to condemn, that the Colts were still operating in Maryland on March 30, 1984, and that substantial disputes of fact exist that would preclude summary judgment. The issues have been fully briefed and the court has had the benefit of oral- argument. For the reasons set forth below, the Court has determined that the Colts’ motion for summary judgment should be granted.

II. SITUS

The Colts contend that condemnation may not proceed against property not located within the state of Maryland and that the Colts’ franchise was outside of Maryland at the appropriate time for determining its situs. The City argues in response that the team maintained sufficient contacts with Maryland at the time of the March 30 filing for the City to assert its power of eminent domain. In effect, the City argues that the franchise was still in Maryland for purposes of eminent domain.

There are three issues which the Court will address in this inquiry as to where the franchise was located. First, what is the relevant date to determine the location of the Club: the date of the filing of the condemnation proceedings (as the City proffers) or the date when compensation is paid (as the Colts proffer)? Second, what standard is the appropriate test for determining the situs of an intangible franchise in condemnation proceedings? Third, was the franchise in Maryland at the time when situs must be determined?

As a preliminary matter, the Court points out that it is now beyond dispute that intangible property is properly the subject of condemnation proceedings. 1 Nichols on Eminent Domain (3d ed. 1980), § 2.1[2], pp. 2-8 to 2-9; Kimball Laundry Co. v. United States, 338 U.S. 1, 11-13, 69 S.Ct. 1434, 1440-41, 93 L.Ed. 1765 (1949); City of Oakland v. Oakland Raiders, 32 Cal.3d 60, 183 Cal.Rptr. 673, 677-78, 646 P.2d 835, 839 (1982). Indeed, the parties do not disagree on this point. Nor is there any dispute over the location of the team’s tangible property at the times in question. The issue before us is where was the franchise — the intangible property — at the appropriate time for determining its location?

A. The Applicable Date

The Colts argue that Maryland law requires that property subject to condemnation proceedings must be located within the state of Maryland at the time of judgment. The Colts rely on Article III, § 40, of the Maryland Constitution which provides: “The General Assembly shall enact no Law authorizing private property, to be taken for public use, without just compensation, ... being first paid or tendered to the party entitled to such compensation.” Thus, the Colts argue, “property is not taken, and title does not vest, until plaintiff pays the judgment and costs.” Colts’ Brief at 25, citing Md. Real Prop.Code Ann. §§ 12-102(2), 12-108 (1981).

The City asserts that March 30,1984, the date of filing of the condemnation petition, is the appropriate date for determining the situs of the franchise. Relying on an Illinois case, City of Crystal Lake v. LaSalle National Bank, 121 Ill.App.3d 346, 76 Ill. Dec. 728, 731, 459 N.E.2d 643, 646 (1984), and a California case, San Bernardino Valley Municipal Water District v. Gage Canal Co., 226 Cal.App.2d 206, 37 Cal. Rptr. 856, 859 (1964), the City argues that its rights and interests date from the time of the filing of the condemnation petition, and not from the date of judgment. Memorandum of the Mayor and City Council of Baltimore (“City’s Brief”) at 44. The City urges the Court to adopt the “relation back” doctrine, even in light of its earlier concession that “the property sought ... cannot be taken, nor can rights over the property be exercised by [the City], until the case is adjudicated.”1 City’s Memorandum in Support of Motion to Dismiss and/or for Summary Judgment in B-84-2560 at 12.

The Colts respond by arguing that the Maryland case of Washington Suburban Sanitary Commission v. Nash, 284 Md. 376, 396 A.2d 538 (1979), makes clear that in Maryland, a condemning authority cannot interfere with an owner’s right to use and dispose of his property until it had paid for the property. Colts’ Brief at 26. In Nash, the Washington Suburban Sanitary Commission (WSSC) negotiated with the owner of a tract of land to acquire the land and standing timber. When they failed to agree upon terms, the owner contracted instead .to sell timber on the land to a lumber company. WSSC then filed a petition to condemn the land and shortly thereafter sought an ex parte restraining order to prevent removal of the timber. WSSC represented that it needed an injunction in order to preserve the property pending the outcome of the condemnation trial. The Court of Appeals of Maryland held that the injunction was unlawful. It noted that both the Constitution and the statutes of Maryland provide that property cannot be taken by condemnation until the plaintiff has paid for it, stating that WSSC’s “mere filing of the condemnation petition gave it no rights in the land. Nash was still free to use the land, enjoy it or dispose of it as before.” Id. at 381, 396 A.2d 538.

Recognizing fully that the precedents cited by both sides do not address the issue of intangible property, the Court is nonetheless persuaded that the Colts’ view must prevail on this issue. It seems untenable to the Court that the mere filing of a piece of paper in a court — with no compensation being paid — can restrict the owner’s use of the property. The statutory scheme provided by the Maryland legislature provides a clear framework of the procedures for acquiring property through eminent domain. The general rule is that until the condemning authority pays compensation, no right to possession is obtained. King v. State Roads Commission, 298 Md. 80, 84, 467 A.2d 1032, 1034 (1983). The logical corollary to this rule is that until such right of possession is obtained by the condemning authority, the owner is free to move and otherwise dispose of the property. See Nash, 284 Md. at 381, 396 A.2d 538.

There are, of course, certain procedures whereby the condemning authority need not wait until the end of litigation to assert control over the property. In “quick-take” procedures, for example, the state may take private property immediately “on making the required payment.” Md. Real Prop.Code Ann. § 12-101 (1981). See also King v. State Roads Commission, 298 Md. at 85-86, 467 A.2d 1032 (“In quick-take cases, the condemning authority takes possession of the property prior to trial upon payment into court of its estimate of the value of the property taken.”). In Nash, the condemning authority’s failure to use quick-take procedures enabled the owner to continue to sell off the timber on his property. Id., 284 Md. at 380-81, 396 A.2d 538. Indeed, the Court in Nash found unacceptable the notion that the mere filing of papers for injunctive relief without payment of compensation could restrict Nash’s use of the land.

In certain other circumstances, the Maryland legislature has allowed a state authority to assert control over property it seeks to condemn by means of an ex parte injunction. See, e.g., Md.Nat.Res.Code Ann. § 5-208 (1983) (permitting the Department of Natural Resources to prevent landowners from disposing of materials such as gravel and timber prior to finality of judgment). In the absence of some similar statutory provision, the City has no alternative but to rely on the normal rules of eminent domain as the statutory scheme provides. That framework makes it clear that there is no taking until compensation is paid to the owner or to a court. The City has at no time made any payment of the compensation that would be required, and, as a result, it had no power to stop Irsay from treating his property as he wished.

It is, of course, axiomatic that a sovereign state’s power to condemn property extends only as far as its borders and that the property to be taken must be within the state’s jurisdictional boundaries. 1 Nichols on Eminent Domain, supra, § 2.12. Now, of course, the Colts are no longer in Maryland, nor would they be here at the time of judgment were this case to go to trial. The inescapable conclusion is that the franchise is beyond the jurisdictional reach of Baltimore City.

Even if this were not the case and the Court were to adopt the March 30, 1984 date urged by the City, the Court finds that the City did not have the power to condemn the franchise on that date. Under any workable test for determining the situs of the franchise on that date, the Colts franchise had left Maryland by the time the City instituted the condemnation proceedings.

B. The Appropriate Standard for Determining the Situs of an Intangible

1. “Minimum Contacts" Analysis.

The City asserts that its power of eminent domain is coextensive with this Court’s personal jurisdiction over the Indianapolis Colts. City’s Brief at 2. Relying on International Shoe Co. v. Washington, 326 U.S. 310, 66 S.Ct. 154, 90 L.Ed. 95 (1945), and the doctrine of “minimum contacts” of personal jurisdiction, the City argues that since the Colts had sufficient contacts with the state of Maryland both before and after March 30, 1984 for this Court to assert jurisdiction over the team, the City therefore has power to condemn the club. City’s Brief at 30-31.

The Colts respond, and the Court agrees, that the minimum contacts required for personal jurisdiction are inadequate for jurisdictional purposes in eminent domain. A state’s power of eminent domain is, by its very nature, exclusive of another state’s power to condemn the same property. 1 Nichols, § 2.12. In order to avoid conflicting judgments with respect to the same property, only one state may condemn a particular piece of property, whether tangible or intangible. Cf. Western Union Telegraph Co. v. Pennsylvania, 368 U.S. 71, 82 S.Ct. 199, 7 L.Ed.2d 139 (1961) (only one state may escheat intangible property).

Personal jurisdiction, in contrast, involves an entirely different analysis. The courts of many different states could have the power to assert jurisdiction over a party if that party has sufficient contacts with those states to satisfy the dictates of due process. International Shoe, 326 U.S. at 316, 66 S.Ct. at 158, World-wide Volkswagon Corp. v. Woodson, 444 U.S. 286, 291-92, 100 S.Ct. 559, 564-65, 62 L.Ed.2d 490 (1980). The exercise of personal jurisdiction is a non-exclusive power; that is, it does not conflict with another court’s exercise of jurisdiction if minimum contacts also exist in another forum.

The adoption of the City’s “minimum contacts” analysis would lead to an untenable precedent. Any state whose courts could assert jurisdiction over the parties could condemn the property in question. Sports franchises, which have minimum contacts with many jurisdictions in this country, could be condemned by any state in which the teams play. At oral argument, counsel for the City conceded that the “minimum contacts” standard would permit the condemnation of the Colts franchise by Delaware as the state of incorporation, by Illinois as the state in which the corporate offices are located, and even by Florida, since the Colts play a football game in Miami each year. Under the same theory, Maryland, as the state of incorporation of the Washington Redskins, would have the requisite minimum contacts to condemn the Redskins in order to replace the lost Colts franchise. Counsel asserted that the resulting chaos could be alleviated by the award of the franchise by the Courts to the jurisdiction which filed its condemnation proceeding first.

The Court finds the City’s legal theory totally unacceptable and inapplicable. Such a rule would eviscerate the established rule that only one sovereign may properly condemn property, and would lead to the exercise by a foreign state of extraordinary powers over property located in another state.

2. Situs of a sports franchise under City of Oakland v. Oakland Raiders.

The only judicial authority of which the Court is aware that addresses the question of the situs of a sports franchise for condemnation purposes is the California decision involving the efforts of the City of Oakland to condemn the NFL franchise and related properties of the Oakland Raiders. City of Oakland v. Oakland Raiders, 32 Cal.3d 60, 183 Cal.Rptr. 673, 646 P.2d 835 (1982). In that case, unlike the case before this Court, the City of Oakland had commenced the condemnation proceedings while the team was still located in Oakland, before relocation to Los Angeles.

Among the issues in that case was whether or not the Raiders’ franchise and related intangible property rights had their situs within the Oakland city limits and accordingly, whether Oakland’s suit was barred by a state statute preventing municipalities from condemning property outside their territorial limits. The trial court granted summary judgment dismissing Oakland’s eminent domain action, and the City appealed. In its opinion reversing the trial court, the California Supreme Court noted that in fairness, the power of condemnation must have reasonable limitations. Id. at 682, 646 P.2d at 844. Turning, then, to the factors it thought relevant in determining the situs of the Raiders’ franchise and other intangible property, the court observed: “Oakland is the principal place of business of the partnership [the owner of the team]. It is the designated NFL-authorized site for the team’s ‘home games.’ It is the primary locale of the team’s tangible personalty.” Id. The court concluded that the territorial restrictions of the state statute had been satisfied and remanded the case for a trial. Id.

An application of those factors to this case provides useful guidance and supports the Court’s conclusion that the franchise was not in Maryland on March 30, 1984. First, the Court engaged in extensive inquiry at an earlier date into the team’s principal place of business on March 30. There is no dispute that on that date the team’s corporate books and records, financial records and files, office furniture and supplies, airplane, coaching materials, and film files were in Indianapolis. As this Court has already determined in consideration of an earlier motion, “no further day-to-day business was conducted in Maryland [after March 28]. Whatever business the team conducted on March 30, such as negotiating leases, issuing press releases, planning for the upcoming season and coordinating this litigation, those activities took place in a state other than Maryland. ... Once the Colts abandoned Maryland, activity in Maryland ended.” Opinion of June 22, 1984, Colts’ Motion, App. 4.

Second, there is no dispute that the majority of the team’s physical possessions were not in Maryland on March 30, 1984. The Mayflower vans which transported the team’s property to Indianapolis on March 28-29 removed most of the tangibles “necessary” and “valuable” to the operation of the team. See Deposition of Michael Chernoff at 237, Colts’ Motion, App. 2. The Court finds this act of physical relocation, however unpopular in Baltimore at the time, to be of great significance to our inquiry here. Indeed, if the move to Indianapolis had not taken place until after March 30, the location of the team’s tangible personal property, although of small value, would have been a potent factor in the city’s position on situs of the franchise.

Concerning the question of the NFL designated site for the team’s home games, the Court does not find this factor to be particularly significant on the facts of this case. Certainly as of March 30 (still in the off-season), Baltimore was the designated site of the Colts’ home games, at least as far as the NFL’s records indicate. However, the NFL was aware of a possible Colts’ move, and had decided to take no action in that regard (see III.A. infra). In a situation where the NFL decided not to act, it is hardly probative to determine the NFL designated home site on a date in the off-season when the team had just completed its attempt to relocate the franchise.

3. Situs of Intangibles in the Law of Escheat

Both the City and the Colts rely heavily on the law of escheat in their argument as to the determination of situs. In escheat proceedings, the state takes title to property abandoned by its owner; they are in some senses highly analogous to condemnation proceedings. Moreover, the Supreme Court has addressed squarely the issue of the determination of situs of intangible property in the law of escheat.

The City urges, in support of its “minimum contacts” argument, that under Connecticut Mutual Life Insurance Co. v. Moore, 333 U.S. 541, 68 S.Ct. 682, 92 L.Ed. 863 (1948) and Standard Oil v. New Jersey, 341 U.S. 428, 71 S.Ct. 822, 95 L.Ed. 1078 (1951), “a state may assert title to intangible property as long as minimum contacts exist between the holder of the res and the state consistent with the dictates of due process.” City’s Brief at 31-32. In Connecticut Mutual, nine insurance companies incorporated in states other than New York sued to enjoin the state of New York from taking custody of unclaimed proceeds of insurance contracts issued on the lives of New York residents. The Supreme Court held that New York had the constitutional power to seize the property based on its contacts with the intangible property. “The question is whether the State of New York has sufficient contacts with the transactions here in question to justify the exertion of the power.” Id. at 548, 68 S.Ct. at 687; City’s Brief at 32.

Similarly in Standard Oil, 341 U.S. 428, 71 S.Ct. 822, New Jersey escheated unpaid dividends of the stock of Standard Oil Company, a New Jersey corporation, which held the stock of unlocated or deceased and intestate shareholders. Standard Oil challenged this action on the basis that New Jersey lacked the power to escheat the property in question. The Supreme Court ruled in favor of New Jersey, stating that “where the debtor and creditor are within the jurisdiction of a court, that court has constitutional power to deal with the debt.” Id. at 439, 71 S.Ct. at 829.

The City relies on these two cases to argue that under the law of escheat, situs of intangible property is determined by the same jurisdictional analysis of minimum contacts mentioned in I.B.l, supra. “Because personal jurisdiction exists here, the Club’s NFL franchise is ‘within’ this jurisdiction and subject to the City’s power of eminent domain.” City’s Brief at 34.

Beyond the deficiencies of the “minimum contacts” analysis as applied to condemnation proceedings (see I.B.l, supra), the Court doubts that the cases upon which the City relies are still viable in light of more recent Supreme Court cases. As the Colts correctly point out, Connecticut Mutual and Standard Oil are part of a series of Supreme Court cases over a 40-year period. Reply Memorandum of Indianapolis Colts (“Colts’ Reply”) at 4. Two cases decided after Connecticut Mutual and Standard Oil make it clear that the Supreme Court has abandoned the minimum contacts/due process analysis the City urges the Court to adopt.

In the first, Western Union Telegraph, 368 U.S. 71, 82 S.Ct. 199, Pennsylvania sought to escheat monies representing uncashed refunds arising from transactions that originated in Pennsylvania. The Court held that Pennsylvania could not escheat the funds in question because they might be subject to escheat under the laws of some other state. Id. at 74, 82 S.Ct. at 200. In short, the Court was recognizing the exclusive nature of escheat — and by analogy, condemnation — proceedings.

Finally, in Texas v. New Jersey, 379 U.S. 674, 85 S.Ct. 626, 13 L.Ed.2d 596 (1965), the Supreme Court opted for a bright-line rule that would put the question to rest. It adopted a variation of the concept of mobilia sequuntur personam (“moveables follow the person”), according to which intangible personal property is found at the domicile of its owner, and held that the power to escheat intangible property could be exercised only by the state of the owner’s last known address. The question was which state, Texas or New Jersey, could escheat small debts owed by the Sun Oil Company. The Court, for purposes of “ease of administration,” adopted the last-known address rule. Id. at 683, 85 S.Ct. at 631. In so doing, it implicitly abandoned the precedents upon which the City’s “minimum contacts” argument rests. See Dissenting Opinion of Justice Stewart, 379 U.S. at 683, 85 S.Ct. at 631.

Thus, if this Court were to adopt the analysis of determining the situs of intangible property applied in the law of escheat, the last known address of the owner of the property would determine which state had the power to condemn. The application of this mechanical rule could lead to different results. The last address of the Colts on March 30, 1984 might be Indianapolis, if in fact they were conducting business from that location at that time. It might be Skokie, Illinois, the site of the Colts’ headquarters, if they were “gone” from Maryland but not yet in Indiana. Or, indeed, the last known address might be Maryland, if no permanent address had been established in Indiana.

In the Court’s opinion, however, the mechanical rule of last-known address is not controlling in the determination of the situs of the franchise. Unlike escheat proceedings, where the location of the owner of property is usually unknown, condemnation proceedings simply require the court to determine where, among two or more possible choices, the property was located on a given date. In this proceeding, for example, the owner is known, and the movement of the property over time can be traced. The helpfulness of the escheat analogy is primarily in its explication of the exclusivity of the proceedings, i.e., that only one state can take the property. Beyond that, the analogy begins to lose its force. It would seem anomalous indeed for this Court to determine, for example, that under the last-known address rule, the franchise was neither in Maryland nor Indiana but Illinois.

After careful analysis of the authority cited by both parties, the Court is persuaded that, under any workable test for determining the situs of a sports franchise, the Colts were out of Maryland on March 30, 1984. Three factors strongly support this conclusion. First, as noted above, the principal place of business of the team was “not in Maryland” at that time. Second, the location of the team’s essential tangible property — as well as its certificate of membership in the NFL — were in Indianapolis by March 30. Third, there can be no question that Irsay’s intention was that the Colts be outside the jurisdiction of Maryland by the time any eminent domain action was filed. To the extent that intent helps determine the situs of the franchise under the concepts of corporate domicile and mobilia sequuntur personam, it strongly supports the conclusion that the Colts were not in Maryland. In light of these factors, the Court cannot find that the Colts were somehow still in Maryland as of March 30, 1984.

The Court stresses that the above analysis was not required since the Colts have prevailed on the threshold issue of the appropriate date for determining the situs of the franchise. Even assuming, however, that the City’s argument for March 30, 1984 is correct, the Court finds that the intangible NFL franchise was outside the jurisdiction and beyond the power of Baltimore City to condemn on that date. Whether one follows the Raiders test for determining the situs of a franchise, the escheat precedents, or the three factors articulated above, there is no avoiding the conclusion that “the Colts are gone.”

III. SUMMARY JUDGMENT

The City argues that summary judgment is inappropriate here because substantial disputed questions of material fact remain to be tried. City’s Brief at 50. Specifically, the City asserts that issues of fact exist as to the NFL’s March 2, 1984 meeting, the team’s continuing contacts with Maryland after March 30, 1984, and the team’s operations in Indianapolis before the March 30 filing. Citing Ross v. Communications Satellite Corp., 759 F.2d at 364, and Rule 56(c) of the Federal Rules of Civil Procedure, the City points out that all evidence must be viewed in the light most favorable to the non-moving party. City’s Brief at 52.

For the reasons discussed below, the Court rejects the City’s position that substantial issues of fact remain in this case. To the contrary, there is very little dispute as to what happened on the dates in question; rather, the dispute only relates to the legal conclusions that the parties draw from those facts. Accordingly, the Court views this case as particularly appropriate for summary judgment.

A. The March 2, 1984 Meeting of the NFL

In its privileged executive session of March 2, 1984, the NFL owners discussed the ramifications of the Raiders antitrust decision, particularly as it might apply to any attempt of the League to block a possible move of the Colts. Of particular importance here is the legal effect of Article 4.3 of the NFL Constitution and By-Laws, which provides in pertinent part as follows: “League Control of Games. ... No member club shall have the right to transfer its franchise or playing site to a different city, either within or outside its home territory, without prior approval by the affirmative vote of three-fourths of the existing member clubs of the League.” Colts’ Motion, App. 7 at 9.

The Colts assert that the League’s decision to express neither approval nor disapproval of Irsay’s possible move constituted a waiver or suspension of Article 4.3. After a careful review of the record, the Court agrees. The official minutes of that session indicate that “the suspension of Article 4.3 of the Constitution and By-Laws ... would continue, pending clarification of the anti-trust laws or other developments.” Colts’ Motion, App. 10, p. 2. The deposition testimony of Commissioner Rozelle further establishes the unambiguous decision of the meeting. “So what [the League] decided to do was to waive the provisions of 4.3 and to say that it was a Colt decision____ We suspended the provision in that case.” Rozelle Deposition, Colts’ Motion, App. 9 at 44.

The Court concludes that the League did exactly what the minutes indicate — waive the provision — particularly in light of the fact that only a few days before, the United States Court of Appeals for the Ninth Circuit had found the very same provision illegal. See Los Angeles Coliseum, 726 F.2d at 1398. Nor do any of the City’s arguments in this regard diminish the clarity of what transpired at the meeting. For example, the fact that several of the owners remember little from the meeting or can recall only that no actual vote was taken to suspend Article 4.3 (City’s Brief at 16-17) does not contradict the view of the official minutes or of the Commissioner. While some memories of the meeting might be poor, there is nothing in the record to indicate that something different happened at the March 2 meeting. Whether by actual vote or “just lack of dissent” (Rozelle Deposition at 44), it is beyond dispute that the NFL waived Article 4.3 insofar as it applied to the move of the Colts. See also NFL’s Answers to the City’s Interrogatories, Colts’ Motion, App. 12 and 13.

B. The Team’s Contacts with Maryland after March 30, 1984

The City also asserts that the Colts’ lingering contacts with the state of Maryland create an issue of fact as to whether the team “had left this jurisdiction as of March 30.” City’s Brief at 64. Of course, this argument depends heavily on the “minimum contacts” theory of eminent domain jurisdiction, which the Court has already discussed and rejected.

The Court sees no issue of fact in the question of the team’s lingering contacts with Maryland. Both parties agree that the Colts still had a stadium lease of Memorial Stadium as of March 30, 1984, a lease agreement of their Owings Mills training complex, a lease of certain facilities in Westminster, Maryland, broadcasting contracts in Maryland through April, 1984, as well as four commercial checking accounts. See e.g., Colts’ Reply at 28-31. None of those facts are in dispute.

The existence of the Colts’ contacts with Maryland through various winding-up activities does nothing to change the Court’s analysis that Maryland was not the team’s situs on March 30, 1984. Accepting all the facts of the winding-up activities as they have been presented by the City, there is no dispute as to what had left Maryland and what remained.

C. The Colts’ Business in Indianapolis on March 30, 1984

Finally, the City attempts to refute the Colts’ argument that the team was conducting football business in Indianapolis on March 30, 1984. Citing the uncontroverted facts that the team had “played no games, sold no tickets, conducted no advertising, entered no player, broadcast or supply contracts and employed no staff in Indiana,” the City argues that the fact that the team was not yet fully operative out of its Indianapolis offices also creates an issue of fact as to the franchise’s location. City’s Brief at 64-65. The City also notes that the Colts had no stadium lease agreement for the Hoosier Dome as of March 30 and were not licensed to do business in Indiana until April 5, 1984.

Accepting all of these facts as presented by the City, it is beyond dispute that whatever football business the team was conducting on March 30, 1984 was being conducted in Indianapolis. Indeed, the Court has, at an earlier date, recited many of the Colts’ activities in Indianapolis on March 29, 1984, including the arrival of key personnel and the installation of the team’s records and files. See Opinion of June 22, 1984, Colts’ Motion, App. at 10. The fact that the business was not completely in place at its new location does nothing to refute the reality that whatever business the Colts conducted on March 30, 1984 took place in Indianapolis — not in Maryland. Again, none of the relevant facts of this issue are in dispute. Both parties agree as to what remained in Maryland and what was happening in Indianapolis. Only the legal conclusions differ, and as a result, the case is ripe for a decision on summary judgment.

IV. CONCLUSION

For the foregoing reasons, the Court finds that Baltimore City lacks the power to condemn the Colts’ franchise. Until the City pays the owner compensation for the property taken, it has no right under Maryland law to restrict the owner from moving that property beyond the jurisdiction of the state.

Even if the applicable date for determining the situs of the franchise were the date of the filing of the condemnation petition rather than the date of payment of compensation, the Court reaches the same conclusion. The team’s principal place of business and its tangible property were both outside Maryland on that date, and it is clear that the owner’s intention was to relocate outside of Maryland. Under any of the workable tests for determining the situs of the franchise, the Court concludes that the Colts were “gone” on March 30, 1984.

There are no outstanding issues of material fact that would preclude the Court from deciding the matter on summary judgment. Accordingly, the Colts’ pending motion — being treated as a motion for summary judgment — will be granted, and the Court will enter a formal order consistent with this opinion.

      . Citing Charbonnages de France v. Smith, 597 F.2d 406 (4th Cir.1979), the City urges the Court to consider all the possible “inferences" from its version of the facts. Memorandum of the May- or and City Council of Baltimore ("City’s Brief") at 52. "Where ... the non-moving party would on trial carry the burden of proof, he is ... entitled ... to have ... the most favorable of possible alternative inferences from [the evidence] drawn in his behalf ...”. Charbonnages, 597 F.2d at 414. This passage restates the familiar rule that the Court at this stage of the proceedings should consider the facts in the light most favorable to the non-moving party. However, it does not require that the Court reach the same legal conclusions as the non-moving party. The word "inference” can hardly be read so broadly.

      . At oral argument, counsel for the City also proffered that the doctrine of lis pendens provides further support for the City’s argument that March 30, 1984 is the appropriate date for determining the situs of the franchise. Counsel cited no authority, nor is the Court aware of any, that compels us to apply that doctrine here. Lis pendens is a form of notice to the community that there is a dispute as to title to land and that those who deal with the property do so at their peril. It has little, if anything, to do with the location of the property at a given time. Indeed, since the doctrine applies uniquely to suits regarding land, one might question whether it has any bearing on the issue here, the situs of an intangible.

      . The City argues that the fact that the NFL attempted to enforce Article 4.3 against a contemplated move of the Philadelphia Eagles franchise demonstrates that Article 4.3 had not been waived or at least creates an issue of material fact. City's Brief at 61. The Court disagrees. The facts of the Philadelphia case are, of course, entirely separate from the facts here, and nothing in the Eagles case controverts the fact that, as applied to the Colts nine months earlier, the provision was waived. In fact, the League’s action against the Eagles transfer lends evidentiary support to the waiver in the Colts transfer.


source: Caselaw Access Project

author: SCOTT, District Judge.

license: Public Domain

text:
    UNITED STATES of America, Plaintiff, v. ONE 1977 36 FOOT CIGARETTE OCEAN RACER, FLORIDA REGISTRATION # FL9350CT; together with its electronics, apparel and equipment, Defendants.
    No. 84-1934-Civ.
    United States District Court, S.D. Florida, Civil Division.
    Dec. 10, 1985.

      Jonathan Goodman, Asst. U.S. Atty., Miami, Fla., for plaintiff.
    Marshall Ives, John Lipinski, Miami, Fla., for defendants.
   FINDINGS OF FACT AND CONCLUSIONS OF LAW

SCOTT, District Judge.

This in rem civil forfeiture action against the defendant Cigarette Ocean Racer was tried before the Court. The United States seeks forfeiture of this racing vessel for alleged violations of 19 U.S.C. § 1595a(a), 49 U.S.C. § 781 and 21 U.S.C. § 881. Federal jurisdiction is predicated upon 28 U.S.C. §§ 1345 and 1355.

After hearing the government’s case in chief, Claimant’s testimony and the government’s rebuttal witness, this Court, sitting as the trier of fact, entered ore tenus findings of fact and conclusions of law. These ore tenus findings and conclusions are also contained in this written order. See Anderson v. City of Bessemer City, North Carolina, — U.S. -, 105 S.Ct. 1504, 84 L.Ed.2d 518 (1985); Rule 52, Federal Rules of Civil Procedure.

FINDINGS OF FACT

The government’s affirmative case was offered through U.S. Customs Agents Thomas Arnold. Officer Arnold’s testimony consisted of two phases: (1) evidence to generate probable cause to forfeit the vessel, and (2) anticipated rebuttal evidence, designed to counter Claimant’s “innocent owner” defense.

In addition to being a U.S. Customs officer, stationed in Key Largo, Florida, Thomas Arnold specializes in the location, detection and appearance of “false compartments” on vessels used to smuggle contraband. Agent Arnold is a “false compartment” instructor for the U.S. Coast Guard. In addition, he has previously been accepted as an expert in the location, detention and appearance of false compartments.

Agent Arnold testified to the following:

On March 3, 1983, U.S. Customs Patrol officers received information that two air drops of marijuana had taken place near “Dog Docks” and that several “Cigarette” racing vessels transporting the marijuana were heading toward Key Largo and Marathon.

The next day, the defendant vessel, a Cigarette racing boat, was found aground on Key Largo. Agent Arnold boarded and searched the vessel at approximately 3 p.m. He found approximately one (1) pound of marijuana residue. Agent Arnold conducted a field test on the residue. The test results were positive, indicating that the residue was marijuana. The marijuana residue was found in every compartment of the vessel — on the deck, inside the cabin, etc.

In addition to finding the marijuana residue, Agent Arnold also found that the interior of the forward cabin had been removed. Although the “stripped” cabin is not technically a false compartment under the meaning of 19 U.S.C. § 1703, Agent Arnold testified that drug smugglers frequently remove everything in the cabin because the smooth surface makes it easier to clean out the marijuana. In addition, removing everything in the cabin interior facilitates the placement and removal of contraband.

As indicated, the second part of Agent Arnold’s testimony was, in effect, anticipated rebuttal. Specifically, Agent Arnold’s testimony was designed to challenge claimant’s contention that the vessel was stolen and that she met the requisite elements of the “innocent owner” defense. At the same time, Agent Arnold’s testimony also bolstered the government’s threshold argument that Rebecca Martinez lacked “standing” to challenge the forfeiture, despite the fact that the boat’s title is in her name.

Agent Arnold testified that he has stopped and seized hundreds of vessels for violation of drug smuggling laws. Moreover, Agent Arnold has investigated countless incidents of illegal marijuana importation. He is familiar with the tactics frequently used by marijuana importers.

Initially, Agent Arnold testified that “Cigarette” racing boats are favored by drug smugglers because, among other things, they are quick. Agent Arnold has previously seized Cigarette vessels with marijuana aboard. In Agent Arnold’s opinion, the defendant Cigarette vessel was worth approximately $40,000.00 to $60,-000.00 when it was seized on March 4, 1983.

Besides favoring “Cigarette” vessels, drug smugglers are also inclined to use “Mirage” racing vessels, primarily for the same reasons.

As to the mechanics of how drug smugglers tend to acquire these racing vessels, marijuana importers frequently purchase the necessary vessels with cash. Using cash assets helps drug smugglers in avoiding tax liability, according to Agent Arnold. Furthermore, it makes it more difficult for law enforcement officers to trace actual ownership.

Agent Arnold also testified that the use of a “strawman” — listing the ownership of property in someone else’s name — is another common tactic used by drug smugglers. Again, the “strawman” strategy helps mask the actual ownership. In addition, it makes it easier for the nominal owner to assert the “innocent owner” defense in a forfeiture proceeding.

Once a vessel is actually seized, drug smugglers often arrange to file a “stolen boat” report with the police, hoping to generate factual support for an “innocent owner” defense. Agent Arnold described this tactic — the “stolen boat report” — as one of the most common used by drug smugglers. He testified that he participated in or knew about several cases where a “stolen boat” report was filed even though no theft had occurred. One of the most important factors in determing the validity of a “stolen boat” report, according to Agent Arnold, is whether the report is filed before or after the seizure. If the report is filed after the seizure, then Agent Arnold has cause to doubt its validity, especially if it is filed a few hours after the seizure.

Confronted with the “stolen boat” report scenario in this case, Agent Arnold testified that he checked with security personnel at the marina where the vessel was moored. No one there saw anything suspicious or heard anything unusual the day before the seizure.

Finally, Agent Arnold testified that the defendant “Cigarette” had two new inboard/outboard engines. He testified that they appeared to be “souped up”, did not seem to be original factory issue and made a substantial amount of noise. Anyone attempting to “hotwire” the vessel without keys would have to know what they were doing. Otherwise, Agent Arnold testified, the boat thief would risk causing an explosion.

In addition to calling Agent Arnold, the Assistant United States Attorney also introduced the deposition transcript of Emilio Gonzalez, Claimant’s husband. The transcript was not objected to by Claimant, who also sought to present her husband’s deposition testimony.

Among other things, Mr. Martinez testified that he also owns a Mirage speedboat, which he purchased for approximately $6,000.00. He made a down payment of $2,500.00 — which came from his bedroom closet — and borrowed the remainder from the seller, “Carlos.” Mr. Martinez did not sign a promissory note because “Carlos” told him he could pay whenever he wanted. Mr. Martinez does not know “Carlos’ ” last name, nor does he know where “Carlos” lives.

Mr. Martinez also testified that his wife, the claimant, does not know much about repairing boats. She never worked on a boat. She did not intend to fix the boat, which was intended solely for Mr. Martinez’s use.

In regard to the defendant “Cigarette” racing vessel, Mr. Martinez conceded that it was previously seized by police. He was not on the vessel, but testified that he never asked his friends, who were on the “Cigarette,” why it was seized.

Mrs. Martinez testified on her own behalf. She testified that she owned the defendant “Cigarette.” She introduced into evidence the formal title evidencing her ownership. Mrs. Martinez testified that she purchased the vessel with money from her savings. She testified that the vessel had been stolen and that she and her husband found out about it on March 4, 1983, when they went to the Marina. She also testified, albeit in summary, conclusory fashion, that (1) she did not know the vessel would be used to smuggle marijuana; (2) she believed that it was safe to keep the vessel at the marina; and (3) she did every-

thing possible to prevent the vessel from being used illegally.

Upon cross-examination, however, Mrs. Martinez conceded the following:

a. She never owned a boat before she bought the high-speed “Cigarette”.
b. She did not know much about boats before purchasing the “Cigarette,” nor did she know how to repair them.
c. She was earning approximately $290 per week, gross, when she purchased the vessel.
d. She purchased the vessel for approximately $8,200.00 in cash.
e. The cash she used to buy the vessel came from her bedroom closet. She had a checking account at the time, however.
f. She allowed her husband and his associates to work on the vessel.
g. There was no insurance on the vessel.
h. Her husband was responsible for paying the storage costs; she does not know how much he paid for the storage costs, nor to whom he paid it.
i. Her husband’s boat, the Mirage, had previously been seized by police.
J. The engine of the defendant “Cigarette” cannot be started without keys and only she and her husband had keys.
k. She never drove the “Cigarette” herself and had been on it only two or three times.

In response to Mrs. Martinez’s testimony, the United States called North Miami Police officer Dwight Melvin as a rebuttal witness. Officer Melvin is assigned to the marine patrol division and took the “stolen boat” report on March 4, 1983. Officer Melvin spoke only to Mr. Martinez. Significantly, Mr. Martinez told him that he owned the vessel. The “stolen boat” report was telephoned in to police headquarters at 5:05 p.m. and Officer Melvin arrived at the marina approximately five minutes later.

Officer Melvin testified that police were already keeping a watch on the vessel because it had been previously seized in 1982. Furthermore, police had heard that the vessel was active on the Miami River.

In any event, Mr. Martinez told him that the vessel had been stolen between 4 and 7 p.m. the previous day. Officer Melvin spoke to employees who worked on the docks. None of them heard anything unusual the day before. The defendant “Cigarette” vessel did not have any mufflers on its engines. In addition to producing noise, the engines also created a “canyon effect,” thus amplifying the already loud noise from the engines. Officer Melvin did not believe the vessel would actually been stolen.

CONCLUSIONS OF LAW

A forfeiture proceedings is an in rem action brought against seized property pursuant to the fiction that the property itself is guilty of facilitating crime. See Calero-Toledo v. Pearson Yacht Leasing Co., 416 U.S. 663, 680-84, 94 S.Ct. 2080, 2090-92, 40 L.Ed.2d 452 (1974). To contest a forfeiture action, an individual must first demonstrate an interest in the seized property sufficient to satisfy the court of his standing as a claimant. United States v. Three Hundred Sixty Four Thousand Nine Hundred Sixty Dollars in U.S. Currency, 661 F.2d 319, 326 (5th Cir.1981).

Standing is a threshold issue. If the claimant lacks standing, there can be no challenge to the forfeiture action. The burden of establishing standing is on the claimant. United States v. Five Hundred Thousand Dollars, 730 F.2d 1437 (11th Cir. 1984).

The possession of bare legal title may be insufficient to establish ownership. See United States v. One 1945 Douglas C-54 (DC-4) Aircraft, etc., 604 F.2d 27 (8th Cir.1979). The rationale for the rule that bare legal title may be insufficient is based on a candid determination that things are often not what they appear to be, especially in the world of drug trafficking any other illegal operations. In brief, people engaged in illegal activities often attempt to disguise their interests in property by placing title in someone else’s name. The criminal’s need to hide his ownership of property is especially acute when the property itself is used in the illegal activity, such as when a high-speed boat is used to ferry contraband.

In short, courts look behind the formal title to determine whether the record title owner is a “strawman” set up to conceal the financial affairs or illegal dealings of someone else. For instance, in One 1945 Douglas C-54, the “claimant” delivered the purchase money and listed himself as the purchaser on the bill of sale for the defendant aircraft. Nevertheless, another man actually put up the purchase money — a fact that the Court viewed as an overriding consideration in determining the true ownership of the aircraft.

In the instant case, Rebecca Martinez alleges that she has standing because her name appears on various documents relating to the vessel. The United States however, disputes her claim of standing, contending that she is nothing more than a “strawman” who holds title in name only.

The Court need not address the standing issue because it finds, as set forth below, that the government established probable cause to forfeit the vessel and that Claimant failed to prove the “innocent ownership” defense by a preponderance of the evidence. Nevertheless, had it been necessary to resolve the standing issue, the Court believes that it would have ruled in favor of the government.

In any event, with the standing issue set aside, the government bears the initial burden of proof as it must show probable cause for the institution of the suit. 21 U.S.C. § 881(d) (1981); 49 U.S.C. § 784 (1963); United States v. One 1971 Chevrolet Corvette Automobile, 496 F.2d 210, 212 (5th Cir.1974). Although the facts relate to violations of criminal law, the government is not subject to the burdens traditionally associated with criminal trials. To the contrary, the government’s burden is comparatively easy, even for a civil case. It only need establish probable cause, which is defined as a reasonable ground for belief of guilt supported by less than prima facie proof but more than mere suspicion. United States v. One 1978 Chevrolet Impala, 614 F.2d 983, 984 (5th Cir.1980); United States v. One 1975 Ford F-100 Pick-up Truck, 558 F.2d 755, 756 (5th Cir. 1977); United States v. One 1971 Chevrolet Corvette Automobile, 496 F.2d 210, 212 (5th Cir.1974).

In proving its case, the government is permitted to use certain types of evidence that is normally excluded in criminal proceedings. Specifically, hearsay evidence is admissible to prove probable cause in a civil forfeiture proceeding. See, e.g., Bush v. United States, 389 F.2d 485 (5th Cir. 1968); United States v. 1964 Beechcraft Baron Aircraft, 691 F.2d 725, 728 (5th Cir.1982); United States v. One 1974 Porsche 911-S Vehicle, 682 F.2d 283 (1st Cir.1982).

Marijuana is a “controlled substance” for the purposes of 21 U.S.C. 801, et seq. and is an “article” whose attempted introduction into the United States is “contrary to law” for the purpose of 19 U.S.C. § 1595a(a).

The Court concludes that the government, through officer Arnold’s testimony, has shown sufficient probable cause to forfeit the defendant “Cigarette.”

Once the government establishes probable cause, the burden of proof shifts to the claimant to prove a defense to the forfeiture. 19 U.S.C. § 1615 (1980), United States v. One 1975 Ford F-100 Pick-up Truck, 558 F.2d 755, 756 (5th Cir.1977), United States v. One 1971 Chevrolet Corvette Automobile, 496 F.2d 210, 212 (5th Cir.1974). The claimant must prove a defense by a preponderance of the evidence. Ford F-100 Pick-up Truck, 558 F.2d at 756.

“Innocence [of the claimant], in and of itself, is an insufficient defense to forfeiture,” United States v. One 1957 Rockwell Aero Commander 680 Aircraft, 671 F.2d 414, 417 (10th Cir.1982). See also Calero-Toledo v. Pearson Yacht Leasing Co., 416 U.S. 663, 683, 690, 94 S.Ct. 2080, 2091-92, 2095, 40 L.Ed.2d 452 (1974). To prevail on the defense of innocence, a claimant must establish that 1) he was not involved in the wrongful activity, 2) he was not aware of the wrongful activity, and 3) he had done all that reasonably could be expected to prevent the proscribed use of his property. Pearson Yacht Company, 416 U.S. at 689, 94 S.Ct. at 2094.

“To the extent that ... forfeiture provisions are applied to lessors, bailors, or secured creditors who are innocent of any wrongdoings, confiscation may have the desirable effect of inducing them to exercise greater care in transferring possession of their property.” Calero-Toledo v. Pearson Yacht Leasing, 416 U.S. at 687-88, 94 S.Ct. at 2094.

As applied to this case, the “innocent-owner” defense can only be successful if:

1. the vessel was, in fact, stolen; and
2. Mrs. Martinez was not involved in the wrongful activity (i.e. the marijuana found on the vessel); and
3. Mrs. Martinez was not aware of the wrongful activity; and
4. Mrs. Martinez took all reasonable precautions to ensure that her vessel would not be stolen.

The mere fact that the boat was stolen (assuming arguendo that it was stolen) is unsufficient to prevent forfeiture. The “defense” raised by Mrs. Martinez is almost identical to one made (unsuccessfully) by the claimant in United States v. (1) One 30 Foot 1982 Morgan, 597 F.Supp. 589 (M.D.Fla.1984). As in the instant case, the vessel in One 30 Foot 1982 Morgan was found abandoned with large amounts of marijuana residue on her decks. Similarly, the claimant there asserted that the boat had been stolen from its rented berth. The Court in One 30-Foot 1982 Morgan rejected the “stolen boat” defense and forfeited the vessel to the United States. In doing so, the Court found that the claimant did not even meet the initial burden of establishing the alleged theft, explaining “that purported fact was in fact reported the day after the seizure, which strongly undermines its probative value.” 597 F.Supp. at 591 (emphasis in original) In any event, the Court in One 30 Foot 1982 Morgan held that the claimant did not do all that reasonably could be done to prevent the theft and subsequent illegal use.

Based upon both the direct and circumstantial evidence, the Court finds that Rebecca Martinez has failed to prove the innocent ownership defense by a preponderance of the evidence. In particular, the circumstances surrounding (a) the purchase, (b) the alleged theft and (c) modifications to the boat, indicate to the Court that there is insufficient evidence to sustain the innocent owner defense. See. e.g. United States v. One 1957 Rockwell Aero Commander 680 Aircraft, 671 F.2d 414, 417 (10th Cir.1982) (innocence, by itself, is insufficient to preclude forfeiture); United States v. (1) One 30 Foot 1982 Morgan, 597 F.Supp. 589 (M.D.Fla.1984) (“stolen boat” defense rejected).

Specifically, at least two prongs of the “innocent owner” defense were not proved. First, Mrs. Martinez did not prove that she was unaware of the wrongful activity. Second, Mrs. Martinez did not prove that she had done all that was reasonably to be expected to prevent the possible illegal use of the “Cigarette.”

Accordingly, it is hereby ordered and adjudged:

1. The Court finds for the United States.
2. The Court finds against the Claimant, Mrs. Martinez.
3. The defendant “Cigarette” is hereby forfeited to the United States of America.

      . Claimant, Rebecca Martinez, contended that the vessel was "stolen” and that she was protected by the “innocent owner” defense.

      . Pursuant to 19 U.S.C. § 1703, vessels fitted out to smuggle merchandise into the United States through false compartments are forfeitable to the government.

      . "Dog Docks” is a landmark approximately 60 miles South of Key Largo.

      . In this case, the stolen boat report was telephoned in to North Miami Police approximately two hours after Agent Arnold found the marijuana.

      . Agent Arnold was interested in what happened on March 3, 1983 because Emilio Martinez, Claimant’s husband, told police that the vessel had been stolen between 4 and 7 p.m. on March 3, 1983 — the day before the seizure.

      . Mr. Martinez was incarcerated at the time of trial. Accordingly, his deposition transcript was admissible pursuant to Rule 32(a)(3)(C), Federal Rules of Civil Procedure.

      . In the instant case, the alleged theft was also reported the day after the seizure.

      . Pursuant to Rule 58, Federal Rules of Civil Procedure, the Court will formally enter a separate final judgment of forfeiture in favor of the United States.


author: ROBERT L. CARTER, District Judge.

text:
    Josephine LEONE and Josephine Leone as Executrix of the Estate of Andrew Leone, Plaintiffs, v. ADVEST, INC., Thomson-McKinnon Securities, Inc., Prudential-Bache Securities, Inc., and Jerome Messana, Defendants.
    No. 85 Civ. 1283 (RLC).
    United States District Court, S.D. New York.
    Dec. 10, 1985.

      Demov, Morris & Hammerling, New York City, for plaintiffs; Felice F. Mischel, of counsel.
    Shanley & Fisher, P.C., New York City, for defendant Advest, Inc.; Matthew Farley, Robert Brehme, of counsel.
    Sage Gray Todd & Sims, New York City, for defendant Thomson-McKinnon Securities, Inc.; John F.X. Peloso, Dorothy E. Hughes, of counsel.
    Joel E. Davidson, New York City, for Prudential-Bache Securities, Inc.
    Hertzog, Calamari & Gleason, New York City, for Jerome Messana; Loretta A. Preska, of counsel.
   OPINION

ROBERT L. CARTER, District Judge.

The four defendants in this securities fraud action present an omnibus of motions to the court in light of the recent Supreme Court decision in Dean Witter Reynolds, Inc. v. Byrd, — U.S. -, 105 S.Ct. 1238, 84 L.Ed.2d 158 (1985). In response, plaintiffs have moved to amend their complaint and seek sanctions pursuant to Rule 11, F.R.Civ.P.

Facts

The facts are taken from the amended complaint. In 1982, Josephine Leone was a 58 year-old teletype operator living alone in Queens. She supported her elderly and infirm father, Andrew Leone, who lived in a senior citizens home. In May of that year, she went to Advest, Inc. (“Advest”), seeking to place their savings of $413,000 in secure, income-producing investments. At Advest, she was introduced to Jerome Messana, who promised her that she would become a millionaire within five years and would receive $30,000 per year, tax-free, from one investment alone. She signed a “Customer’s Agreement” and opened two accounts at Advest, one in her name, and one jointly with her father. This “Customer’s Agreement” contained a provision that “any controversy between [Advest and the Leones] arising out of or relating to this agreement or the breach thereof shall be submitted to arbitration in accordance with the rules then prevailing of the Arbitration Committee of the National Association of Securities Dealers, Inc., the American Arbitration Association, Board of Arbitration of the New York Stock Exchange or the Board of Arbitration of the American Stock Exchange, as I may elect.” Over the next six months, Messana traded securities in these accounts, conducting $2 million worth of transactions. He also convinced Ms. Leone to invest funds in a commodities futures trading account and in three tax shelter programs. The Leones allege that by October, 1982, when Messana left Advest, his excessive and unsuitable trading had reduced their $400,000 investment to less than $240,000.

In October or November of 1982, Messana began to work for Thomson-McKinnon Securities, Inc. (“Thomson”). Messana visited Ms. Leone at her home and convinced her to transfer the Leones’ accounts to Thomson. Messana continued to conduct their trading. Ms. Leone signed an “Agreement for Option Trading” on November 15, 1982. That agreement contained a provision that any dispute “arising out of the purchase, sale, endorsement, execution or other handling of puts and/or calls for our account shall be settled by arbitration before the Arbitration Committee of the New York Stock Exchange, Inc., in accordance with the rules of that Committee.” In February, 1983, both Leones signed an identical agreement for their joint account. Ms. Leone opened a third “Bond and Dividend” account and made further tax shelter investments, all on Messana’s suggestion.

In addition to these accounts, Messana accepted $27,000 from the Leones for purchase of 25,000 shares of Keystone Medical Corp. (“Keystone”). He gave them a “Convertible Promissory Note” pledging repayment of the $27,000 or 25,000 shares of Keystone. The Leones received neither.

In November of 1983 the peripatetic Messana left Thomson and began to work for defendant Prudential-Bache Securities, Inc. (“Pru-Bache”). He again visited Ms. Leone and persuaded her to transfer the funds she had remaining at Thomson — now amounting to about $120,000 — to Pru-Bache. She did so. Both Leones signed a “Joint Account Agreement” that stated, in part: “Any controversy arising out of or relating to my account, to transactions with or for me or to this agreement or the breach thereof, shall be settled for arbitration in accordance with the American Arbitration Association or the Board of Governors of the New York Stock Exchange as I may elect.”

The Leones apparently closed their account with Pru-Bache in May, 1984. Under Messana’s stewardship, their investment had dwindled to approximately $60,000.

The Leones brought this suit in February of 1985. Their nine-count complaint alleges violations of § 12(2) of the Securities Act of 1933 (“the Securities Act”), 15 U.S.C. § 77i(2), § 10(b) of the Securities Exchange Act of 1934 (“the Exchange Act”), 15 U.S.C. § 78j(b), and Securities and Exchange Commission Rule 10b-5 (“Rule 10b-5”), 28 C.F.R. § 240.10b-5 by Advest and Messana in Count One, by Thomson and Messana in Count Two, and by Pru-Bache and Messana in Count Four. Count Three seeks performance of the promissory note for Keystone stock. Count Five seeks rescission of the various agreements signed by the Leones. Count Six charges common-law fraud and breach of fiduciary and other duties by all defendants. Count Seven charges negligent mismanagement of the plaintiffs’ accounts by all defendants. Count Eight charges violations of various provisions of New York law. Finally, Count Nine charges Advest, Thomson and Pru-Bache with controlling person liability for Messana’s actions under both federal securities and the common law.

This lengthy complaint has been met with a barrage of motions. Defendant Ad-vest seeks: (a) to sever the claims against it, pursuant to Rule 21, F.R.Civ.P.; (b) to dismiss all securities claims pursuant to either Rule 12(b)(6) or Rule 9(b), F.R.Civ.P.; or, alternatively (c) to compel arbitration of all claims; or (d) to dismiss Counts Five, Six and Eight pursuant to Rule 9(b), F.R. Civ.P.; and (e) to receive costs and attorney’s fees pursuant to Rule 11, F.R.Civ.P. Defendant Thomson asks the court to: (a) stay the action pending arbitration; (b) dismiss the complaint pursuant to either Rule 12(b)(6) or 9(b), F.R.Civ.P.; (c) grant summary judgment in Thomson’s favor; (d) dismiss the state law claims pursuant to Rule 12(b)(1), F.R.Civ.P. Defendants Pru-Bache and Messana together urge us to compel arbitration, stay the non-arbitrable claims, and award them costs pursuant to Rule 11, F.R.Civ.P. and 28 U.S.C. § 1927. Finally, plaintiffs seek both to amend their complaint pursuant to Rule 15(a), F.R. Civ.P. and to receive costs and attorney’s fees from all defendants.

Discussion

I. Arbitration

A. Motions to Compel

The Supreme Court’s recent decision in Dean Witter Reynolds, Inc. v. Byrd, supra, leaves the court with precious little discretion in ruling on the motions to compel arbitration. The Court interprets the Arbitration Act of 1925 (“the Arbitration Act”), 9 U.S.C. §§ 1 et seq., as a “mandate[ ] that district courts shall direct the parties to proceed to arbitration on issues as to which an arbitration agreement has been signed____absent a ground for revocation of the contractual agreement.” Id. at-, 105 S.Ct. at 1241 (emphasis in original). Two issues confront the court: first, the existence of an enforceable arbitration agreement; second, which issues those agreements permissibly cover.

Josephine and Andrew Leone signed four agreements that included arbitration clauses, one each with Advest and Pru-Bache, and two with Thomson. Although they fail to specify any of the circumstances surrounding the signing of these agreements, the Leones allege fraud in their inducement. Such fraud, if proven, of course provides grounds for the non-enforcement of the arbitration clause. 9 U.S.C. § 2. However, the validity of a contract that provides for arbitration is an issue for the arbitrators themselves. Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395, 87 S.Ct. 1801, 18 L.Ed.2d 1270 (1967). The language of the Arbitration Act “does not permit the federal court to consider claims of fraud in the inducement of the contract generally.” Id. at 404, 87 S.Ct. at 1806. The federal court may address allegations of fraud only if they are directed to the arbitration clause itself. H. W. Mosely v. Electronic & Missile Facilities, 374 U.S. 167, 83 S.Ct. 1815, 10 L.Ed.2d 818 (1963).

In Mosely, the Supreme Court dealt with an allegation that an arbitration clause was part and parcel of a fraudulent scheme. The contract between a prime contractor and a plumbing subcontractor was for work to be performed in the construction of two Air Force bases in Georgia. The arbitration clause, however, called for arbitration in New York, and was alleged to be part of “a fraudulent scheme to obtain a great amount of work and material from [the subcontractor] and other subcontractors without making payment therefor and to ‘browbeat’ [the subcontractor] and his fellow subcontractors into accepting much less than the value of their claims.” Id. at 171, 83 S.Ct. at 1817. Under those circumstances, linkage between the defendant’s fraud and the arbitration clause was apparent. Here, plaintiffs’ sole assertion of fraud relating to the arbitration clause itself is based upon the defendants’ purported duty, given the “unequal bargaining position between the defendants and the plaintiffs with regard to the agreements,” Amended Complaint 1137, to reveal that the agreements would waive the Leones’ rights to litigate certain of their claims. Plaintiffs do not reveal the source of this duty. The court finds that the plaintiffs have failed to allege actionable fraud as to the arbitration clause itself. Thus, any arguments regarding fraud in the inducement of the agreements signed must be addressed to the arbitrators. The court grants the motions to compel arbitration.

B. Non-arbitrable claims

We turn now to decide which issues are non-arbitrable and must remain with the court. In Wilko v. Swan, 346 U.S. 427, 74 S.Ct. 182, 98 L.Ed. 168 (1953), the Supreme Court held that claims under § 12(2) of the' Securities Act were non-arbitrable. It is undisputed that the court retains jurisdiction over plaintiffs’ § 12(2) claims. Plaintiffs’ other securities claims are another matter. In 1977, the Second Circuit extended the Wilko holding to federal securities claims arising under § 10(b) of the Exchange Act and Rule 10b-5. Allegaert v. Perot, 548 F.2d 432 (2d Cir.), cert. denied, 432 U.S. 910, 97 S.Ct. 2959, 53 L.Ed.2d 1084 (1977). However, defendants vehemently argue that the Supreme Court’s decision in Byrd, supra, nullifies Allegaert’s holding and forces us to compel arbitration of all federal securities claims, save those arising under § 12(2).

Byrd holds that where arbitrable and non-arbitrable claims are mingled in a complaint, the district court must still compel arbitration of arbitrable claims. Defendants emphasize Justice White’s concurrence to the unanimous decision. There, the Justice argued that:

Wilko’s reasoning cannot be mechanically transplanted to the 1934 Act. While § 29 of that Act, 15 U.S.C. § 78cc(a), is equivalent to § 14 of the 1933 Act, counterparts of the other two provisions are imperfect or absent altogether. Jurisdiction under the 1934 Act is narrower, being restricted to the federal courts. 15 U.S.C. § 78aa. More important, the cause of action under § 10(b) and Rule 10b-5, involved here, is implied rather than express. See Herman & MacLean v. Huddleston, 459 U.S. 375, 380, and nn. 9-10 [103 S.Ct. 683, 686, and nn. 9-10, 74 L.Ed.2d 548] (1983). The phrase “waive compliance with any provision of this chapter," 15 U.S.C. § 78ec(a) (emphasis added), is thus literally inapplicable. Moreover, Wilko’s solicitude for the federal cause of action — the “special right” established by Congress, 346 U.S., at 431 [74 S.Ct. at 184] — is not necessarily appropriate where the cause of action is judicially implied and not so different from the common law action.

— U.S. at-, 105 S.Ct. at 1244.

This concurrence does not alter the landscape of precedent that renders § 10(b) claims non-arbitrable in this circuit. First, as Justice White himself noted, the question of the arbitrability of Exchange Act claims was not before the Court in Byrd. Second, the arguments raised by Justice White had already been raised before the Second Circuit when it decided in Allegaert to extend Wilko to Exchange Act claims. Allegaert, 548 F.2d at 437. Justice White acknowledges that his arguments are derived from dicta in Scherk v. Alberto-Culver Co., 417 U.S. 506, 94 S.Ct. 2449, 41 L.Ed.2d 270 (1974) — decided three years before Allegaert — which held § 10(b) claims arising out of international transactions arbitrable. The court sees no reason to anticipate that the Second Circuit would accept in 1985 an argument that it apparently rejected in 1977. Justice White’s reiteration of Scherk’s dicta does not strengthen its precedential effect.

Moreover, the court is unable to distinguish Allegaert from the instant case. We perceive two possible means of doing so: by noting that the case in Allegaert was brought by a trustee in bankruptcy, or by noting that the securities fraud allegations there arose “in connection with one of the most celebrated brokerage house failures in the history of Wall Street.” Allegaert, 548 F.2d at 436. Both must be rejected: the first, because the Allegaert court did not rely on the special status of the bankruptcy trustee in reaching its decision on the arbitrability of the securities law claims; the second, because it is both repugnant as a rule of law and inconsistent with the purpose of the Exchange Act to distinguish among defrauded investors on the basis of the magnitude of defendants’ fraudulent activity. But see McMahon v. Shearson/American Express Inc., 618 F.Supp. 384 (S.D.N.Y.1985) (MacMahon, J.). Thus, the court must follow Allegaert and retain jurisdiction of all claims arising under Exchange Act § 10(b) and Rule 10b-5. The court also retains jurisdiction over all claims arising out of transactions not covered by any arbitration clauses, i.e. claims against Thomson arising out of transactions other than those in options.

C. Motions to Stay Court Proceedings

The court grants the defendants’ motions to stay the proceedings pending arbitration. Plaintiffs admit that the factual allegations underlying the federal and state law claims are identical. Plaintiffs’ Memorandum at 41. A stay of these proceedings is warranted by considerations of judicial economy and convenience. Home Life Insurance Co. v. Kaufman, 547 F.Supp. 833 (S.D.N.Y.1982) (Sprizzo, J.). Plaintiffs’ success at arbitration may render further proceedings on the federal claims unnecessary. Plaintiffs’ failure in arbitration will not necessarily bar them from seeking relief on their federal claims. Byrd, 105 S.Ct. at 1243; McDonald v. City of West Branch, 466 U.S. 284, 104 S.Ct. 1799, 80 L.Ed.2d 302 (1984). Byrd accepts “piecemeal” litigation of federal and state claims. Byrd, 105 S.Ct. at 1243. It does not, however, require unnecessary duplication of effort where, as here, the facts underlying the claims are identical. Weizman v. Adornato, No. CV 84-3603 (E.D. N.Y. April 24, 1985).

Before imposing the stay, however, the court will rule on the remaining motions in order to clarify which claims remain in the case.

II. Advest’s Motion to Sever

Advest seeks to sever the claims against it from the claims against the remaining defendants. It argues that the allegations against it are based on Messana’s activities solely while he was employed by Advest, and are factually distinct from any claims based on his employment at Thomson and Pru-Bache. The argument, long on analogy and short on precedent, is unconvincing. Key issues such as Messana’s knowledge and intent are clearly common to the charges against all defendants. Advest has not yet persuaded the court that any possible prejudice to it will outweigh the manifest convenience and economy of a joint trial. The motion is denied.

III. Advest and Thomson Motions to Dismiss

Advest and Thomson seek to dismiss the federal securities claims against them under either Rule 9(b) or 12(b)(6), F.R.Civ.P. For the reasons discussed below, these motions are granted in part and denied in part.

A. Section 12(2) claims

Both Advest and Thomson argue that § 13 of the Securities Act, 15 U.S.C. § 77m, requires dismissal of the § 12(2) claims. That section bars actions pursuant to § 12(2):

unless brought within one year after the discovery of the untrue statement or omission, or after such discovery should have been made by the exercise of reasonable diligence____ In no event shall any such action be brought ... more than three years after the sale.

This action was brought on February 15, 1985. The Advest account was closed in October, 1982; that at Thomson in November, 1983. Plaintiffs do not state in their complaint when they discovered the misleading nature of the unnamed statements made to them. They have failed to plead facts showing that they fall within the limitations period. The § 13 limitations period is a substantive requirement of § 12(2) claims. In re Caesar’s Palace Litigation, 360 F.Supp. 366, 377 (S.D.N.Y.1973) (Weiner, J.). A failure to plead the limitations period is fatal to a claim, even where the purchases fall within the maximum three-year limitation period. Homburger v. Venture Minerals, Inc., [1982 Decisions] Fed. Sec.L.Rep. (CCH) ¶ 98, 858 (S.D.N.Y.1982) (Haight, J.). The § 12(2) claims against Advest and Thomson are dismissed.

B. Unsuitability Claims

Defendants Advest and Thomson argue that “unsuitability” — a broker’s failure to recommend suitable securities for a client — does not state a cause of action under the federal securities laws. They correctly note that there is no implied private right of action for violations of the rules of the New York Stock Exchange (“NYSE”) or National Association of Securities Dealers (“NASD”). Jutter v. Rothschild, Unterberg, Towbin, 554 F.Supp. 331 (S.D.N.Y.1983) (Knapp, J.). However, although plaintiffs recite various NYSE and NASD rules in their complaint, they do not rely on those rules to establish a separate ground for liability. In this circuit, unsuitability states a cause of action under § 10(b) and Rule 10b-5 where the plaintiff alleges that a broker knowingly or intentionally chose unsuitable investments for the client. Clark v. John Lamula Investors, Inc., 583 F.2d 594 (2d Cir.1978). Despite the intellectual appeal of defendants’ arguments against the unsuitability cause of action, they misstate the law of this circuit. Plaintiffs have adequately pleaded an unsuitability cause of action. The motions to dismiss, as to these claims, are denied.

C. Churning

Advest and Thomson argue that the charges of “churning” made against them fail to meet the requirement of particularity imposed on fraud pleadings by Rule 9(b), F.R.Civ.P. Churning, or excessive trading in an account for the purpose of generating commissions, is a species of fraud subject to the special pleading requirements of Rule 9(b), F.R.Civ.P. The complaint sets forth the transactions made in the various accounts and the turnover rate. As the court recently found in a similar case, these averments adequately state a churning claim for the purposes of Rule 9(b), F.R.Civ.P. Levin v. Shearson/American Express Inc., [1984-85 Decisions] Fed.Sec.L.Rep. (CCH) ¶ 92,080 (S.D.N.Y.1985) (Carter, J.). In addition, the complaint also sets forth the commissions paid, an alternative means of satisfying Rule 9(b), F.R.Civ.P.

The two defendants further fault the churning claims for failure to allege Messana’s control over the plaintiffs’ accounts. This lapse, they argue, renders the churning claim deficient in stating a cause of action pursuant to Rule 12(b)(6), F.R. Civ.P. This argument flies in the face of the complaint itself, which is rife with charges of Messana’s insidious control over plaintiffs’ investments over a two-year period. See, e.g., Complaint, ¶¶ 13(f) & (g). The motions are denied as to the churning claims.

D. Miscellaneous Arguments

Advest and Thomson seek dismissal of various claims on the ground that they are not “in connection with” the sale of a security. Thomson argues that misrepresentations relating to the opening of an investment account are not actionable under Rule 10b-5. Absent a showing of “vertical commonality” between broker and client, Savino v. E.F. Hutton & Co., Inc., 507 F.Supp. 1225 (S.D.N.Y.1981) (Ward, J.), investment accounts are not securities. Darrell v. Goodson, [1979-80 Decisions] Fed.Sec.L.Rep. (CCH) ¶ 97,349 (McMahon, J.). Any claim of fraudulent misrepresentation relating to the opening of the investment accounts at Advest or Thomson must be dismissed, pursuant to Rule 12(b)(6), F.R.Civ.P.

Advest seeks dismissal of claims against it based on transactions in a commodities futures trading account. Claims of fraud relating to the sale of commodities are under the exclusive jurisdiction of the Commodity Exchange Act, 7 U.S.C. §§ 1 et seq. Gonzalez v. Paine, Webber, Jackson & Curtis, [1982-84 Decisions] Comm.Fut.L. Rep. (CCH) ¶ 21,615 (S.D.N.Y.1982) (Werker, J.); Reynolds v. Prudential-Bache Securities, Inc., [1984-85 Decisions] Fed.Sec. L.Rep. (CCH) ¶ 91,901 (S.D.N.Y.1985) (Pollack, J.). Any claim relating to the commodity account must therefore be dismissed, pursuant to Rule 12(b)(6), F.R. Civ.P.

Finally, Advest urges that claims relating to the purchase of tax shelters must be dismissed. This portion of the motion must be denied. Advest argues that it cannot be liable for any claim related to the tax shelters purchased by the Leones because they were purchased “elsewhere.” It reasons that any liability for unsuitable investment advice regarding such shelters is Messana’s alone. However, plaintiffs allege that Advest “controlled” Messana within the meaning of § 15 of the Securities Act and § 20 of the Exchange Act. Thus, this argument must be rejected.

IV. Thomson Motion for Summary Judgment

Thomson urges that we grant summary judgment in its favor for claims pursuant to § 11(d) of the Exchange Act. The court does not interpret the complaint to assert § 11(d) as an independent basis for liability. Reference to the statute is apparently for the purpose of setting forth a relevant standard of conduct for determining the existence of fraud. Thomson’s motion for summary judgment is denied.

V. Rule 11 Motions

Plaintiffs and defendants Advest, Messana and Pru-Bache move for the imposition of Rule 11, F.R.Civ.P. sanctions. Given the disposition of the motions made above, sanctions for any of these parties would be inappropriate. All motions for sanctions are denied.

IT IS SO ORDERED.

      . The court grants leave to amend the complaint. The amended complaint simply amplifies allegations — already suggested in the original complaint — of fraud in the inducement of the various written agreements signed by the Leones. Plaintiffs apparently viewed such averments as necessary to avoid arbitration in light of Byrd. Leave to amend pleadings should be "freely given where justice so requires." Rule 15(a), F.R.Civ.P. This is especially so where the significance of factual issues is altered by changes in law during the pendency of a litigation. In Re Beef Industry Antitrust Litigation, 600 F.2d 1148 (5th Cir.1979), cert. denied, 449 U.S. 905, 101 S.Ct. 280, 66 L.Ed.2d 137 (1980). As the discussion below makes clear, defendants have not been prejudiced by the amendment.

      . N.Y.Gen.Bus.L. §§ 339-a, 339-e and 352-c (McKinney 1968).

      . The agreements with Thomson cover only options trading, a relatively small portion of the trading done in the Leones' accounts.

      . Plaintiffs argue a second ground permitting judicial examination of the contract: where the "alleged fraud was part of a grand scheme that permeated the entire contract,” Weinrott v. Carp, 32 N.Y.2d 190, 344 N.Y.S.2d 848, 298 N.E.2d 42 (1973). None of the cases cited in the plaintiffs' brief, however, interprets the powers of the federal district court under the Federal Arbitration Act. Because that act creates a distinct body of federal substantive law on arbitrability, Moses H. Cone Memorial Hospital v. Mercury Construction Corp., 460 U.S. 1, 103 S.Ct. 927, 74 L.Ed.2d 765 (1983), the New York and California cases cited are inapposite.

      . Although plaintiffs urge the court in their papers to stay the arbitration pending resolution of non-arbitrable claims, they have not so moved. In any event, such a stay would be inappropriate in light of the holding in Byrd.

      . The court is not persuaded by McMahon’s reasoning that the public interest — assuming, as we must, that public interest remains a relevant factor in considering arbitrability — can vary within the class of federal securities fraud cases by the number of investors defrauded. We note here that the reams of unpublished slip opinions on this point that defendants have too gracious- • ly provided to the court are unpersuasive. Because of Allegaert, cases in other circuits are inapposite; unlike other courts, we do not write on a clean slate.

      . On April 26, this court instructed the parties to delay discovery in this case pending determination of the instant motions. On November 25, plaintiffs’ counsel addressed a letter to the court urging that discovery commence. In light of the rulings discussed herein, the court must reject this informal request.