Busch v. Buchman, Buchman & O'Brien, Law Firm

• Citation: 11 F.3d 1255
• Decision Date: 19 January 1994
• Docket Number: No. 92-2366,92-2366
• Parties: , Fed. Sec. L. Rep. P 98,026 Eldon A. BUSCH, Plaintiff-Appellant, v. BUCHMAN, BUCHMAN & O'BRIEN, LAW FIRM, et al., Defendants-Appellees.
• Court: United States Courts of Appeals. United States Court of Appeals (5th Circuit)

Page 1255

11 F.3d 1255

62 USLW 2462, Fed. Sec. L. Rep. P 98,026

Eldon A. BUSCH, Plaintiff-Appellant, v. BUCHMAN, BUCHMAN & O'BRIEN, LAW FIRM, et al., Defendants-Appellees.

No. 92-2366.

United States Court of Appeals, Fifth Circuit.

Jan. 19, 1994.

James E. Bachman, Bachman & Blunk, Omaha, NE, Robert Albright, Dallas, TX, for plaintiff-appellant.

Rachel J. Stroud, Guy M. Hohmann, Norton & Blair, Austin, TX, for defendants-appellees.

Appeal from the United States District Court for the Southern District of Texas.

Before POLITZ, Chief Judge, REAVLEY and EMILIO M. GARZA, Circuit Judges.

REAVLEY, Circuit Judge:

Personal jurisdiction over the defendants was predicated on 15 U.S.C. Sec. 78aa, which grants nationwide service of process to any federal court where "any act or transaction constituting the violation occurred." The district court, sitting in the Southern District of Texas, held that it lacked jurisdiction under Sec. 78aa because no act constituting a violation of the 1934 Securities Exchange Act occurred in Texas. Furthermore, the court concluded that, under the Due Process Clause of the Fifth Amendment, it could not exercise personal jurisdiction over the defendants because they lacked minimum contacts with Texas. We reverse.

I. Background

As part of a nationwide marketing strategy, Barrister Associates, a New York promoter, sent a prospectus to Eldon Busch, a Texas resident, in an effort to sell limited partnership interests as a tax-sheltered investment. ¹ Included within the prospectus was a tax opinion and a confidential offering memorandum, drafted by Buchman, Buchman, & O'Brien (a now-dissolved New York law firm), discussing the tax advantages offered by the securities.

Relying on the tax opinion and offering memorandum in the prospectus, Busch invested in the limited partnership interests. When the tax shelter did not pan out as expected, Busch filed suit in the Southern District of Texas against Buchman, Buchman & O'Brien ² (Buchman), Barrister Associates, and other defendants; Busch later dismissed Barrister Associates and the other defendants, leaving only Buchman. In Busch's complaint, he alleged that Buchman violated Rule 10b-5 because the opinion letter and the offering memorandum misrepresented information and failed to disclose material information about the limited partnership interests.

Buchman filed a Rule 12(b) Motion, arguing that the law firm was not subject to personal jurisdiction in Texas because (1) no act constituting a violation under the 1934 Securities Exchange Act occurred in Texas and (2) it did not have minimum contacts with Texas. The district court agreed. Busch appeals the dismissal of his complaint.

II. Analysis

A. Subject Matter Jurisdiction

Section 27 of the 1934 Securities Exchange Act, as amended, grants subject matter jurisdiction to a district court where "any act or transaction constituting the violation occurred." 15 U.S.C. Sec. 78aa (West Supp.1993). ³ In an effort to dodge the jurisdiction of the Southern District of Texas, Buchman tries to distance itself from Barrister's nationwide marketing of the limited partnership interests. Buchman argues that because it drafted the documents in New York for a promoter in New York, it is not responsible for Barrister's subsequent nationwide mailing of the prospectus. But this parochial view of the facts belies the realities of the business transaction.

Buchman drafted the tax opinion and the confidential memorandum, knowing that both would be included in the prospectus. And Buchman knew that Barrister intended to market the securities nationwide, which it did. Given that the only attractive feature of the limited partnership investment was its tax-sheltering effect, Buchman had to know that investors would rely on its tax opinion. While Buchman ostensibly made representations about the tax effects of the partnership interests to Barrister (both documents were addressed to Barrister), in reality, Buchman was representing the tax advantages of the investments to all potential investors. True, Barrister mailed the prospectus, but Buchman's tax opinion and offering memorandum were the crux of the sales pitch; the investors were actually relying on Buchman's representations about the tax-sheltering effects of the securities.

Buchman knew that the prospectus would be marketed nationwide, and Busch received the prospectus in Houston and relied upon Buchman's representations when he purchased the securities. Therefore, the Southern District of Texas has jurisdiction under Sec. 78aa.

B. Constitutionality

Once a case is filed in an appropriate district under Sec. 78aa, the statute gives the district court the authority to serve defendants nationwide. Congress' grant of this power under Sec. 78aa is limited only by the constraints of constitutional due process.

This is not the first time we have dealt with a federal court's ability to get personal jurisdiction over a defendant when the suit is based upon a federal statute providing nationwide service of process. In Federal Trade Comm'n v. Jim Walters Corp., we held that "due process requires only that a defendant in a federal suit have minimum contacts with the United States." 651 F.2d 251, 256 (5th Cir.1981). We grounded our holding on the understanding that "[t]he doctrine [of personal jurisdiction] arises out of the limitations inherent in concepts of sovereignty." Id.

The Supreme Court, however, rejected this sovereignty analysis in Insurance Corp. of Ireland, Ltd. v. Compagnie des Bauxites, 456 U.S. 694, 701, 102 S.Ct. 2099, 2104, 72 L.Ed.2d 492 (1982) (stating that the requirement of personal jurisdiction protects an individual liberty interest grounded in the Due Process Clause, and not on notions of sovereignty). But, even under the due process rationale of Bauxites, the holding of Jim Walters remains.

A court can exercise personal jurisdiction over a defendant if the defendant has had minimum contacts with the forum and the maintenance of the suit in the forum will not offend traditional notions of fair play and substantial justice. Asahi Metal Indus. v. Superior Court of Calif., 480 U.S. 102, 113, 107 S.Ct. 1026, 1033, 94 L.Ed.2d 92 (1987). From Bauxites, we know that this jurisdictional limitation flows not from notions of sovereignty, but from the Due Process Clause. Bauxites, 456 U.S. at 701, 102 S.Ct. at 2104. Sovereignty, however, may remain germane because it defines the scope of the due process analysis.

In cases where a state is attempting to get extraterritorial jurisdiction over a defendant, the inquiry is whether the defendant has had minimum contacts with the state. International Shoe Co. v. Washington, 326 U.S. 310, 315, 66 S.Ct. 154, 158, 90 L.Ed. 95 (1945). And, when a federal court is attempting to exercise personal jurisdiction over a defendant in a suit based upon a federal statute providing for nationwide service of process, the relevant inquiry is whether the defendant has had minimum contacts with the United States. United Liberty Life Ins. Co. v. Ryan, 985 F.2d 1320, 1330 (6th Cir.1993); United Electrical, Radio & Machine Workers of Am. v. 163 Pleasant St. Corp., 960 F.2d 1080, 1085 (1st Cir.1992); Go-Video Inc. v. Akai Elec. Co., Ltd., 885 F.2d 1406, 1414-16 (9th Cir.1989) (rejecting argument that Bauxites prohibits national contacts approach); Lisak v. Mercantile Bancorp, Inc., 834 F.2d 668, 671-72 (7th Cir.1987), cert. denied, 485 U.S. 1007, 108 S.Ct. 1472, 99 L.Ed.2d 700 (1988); Securities Investor Protection Corp. v. Vigman, 764 F.2d 1309, 1315-16 (9th Cir.1985), rev'd on other grounds sub nom., --- U.S. ----, 112 S.Ct. 1311, 117 L.Ed.2d 532 (1992); Texas Trading & Milling Corp. v. Federal Republic of Nigeria, 647 F.2d 300, 314-15 (2d Cir.1981), cert. denied, 454 U.S. 1148, 102 S.Ct. 1012, 71 L.Ed.2d 301 (1982). ⁴ Thus, while the Due Process Clause must be satisfied if a forum is to acquire personal jurisdiction over a defendant, sovereignty defines the scope of the due process test.

Here, the due process concerns of the Fifth Amendment are satisfied. Given that the relevant sovereign is the United States, it does not offend traditional notions of fair play and substantial justice to exercise personal jurisdiction over a defendant residing within the United States. Cf. Burnham v. Superior Court of Calif., 495 U.S. 604, 620, 110 S.Ct. 2105, 2116, 109 L.Ed.2d 631 (1990).

III. Conclusion

The district court in the Southern District of Texas has subject matter jurisdiction under Sec. 78aa, because Busch purchased the securities after receiving and relying upon Buchman's tax opinion and offering memorandum in Houston. Further, the court has personal jurisdiction over Buchman because Buchman has minimum contacts with the United States and resides herein.

The judgment, only for the claims of Eldon A. Busch, is REVERSED. To that extent the case is REMANDED. The appeal of the unnamed plaintiffs is DISMISSED.

EMILIO M. GARZA, Circuit Judge, dissenting:

The majority holds (1) that "[t]he Southern District of Texas has [subject matter] jurisdiction under Sec. 78aa" and (2) that "[g]iven that the relevant sovereign is the United States, it does not offend traditional notions of fair play and substantial justice to exercise personal jurisdiction over a defendant residing within the United States." Because the majority confuses the rationales underlying the requirements of subject matter and personal jurisdiction, I respectfully dissent.

I agree that "the Southern District of Texas has [subject matter] jurisdiction under Sec. 78aa." ¹ See 15 U.S.C. Sec. 78aa. However as the Supreme Court made clear in Insurance Corp. of Ireland, Ltd. v. Compagnie des Bauxites, 456 U.S. 694, 102 S.Ct. 2099, 72 L.Ed.2d 492 (1982), the rationale supporting subject matter, as opposed to personal jurisdiction, is different. In Bauxites, the Supreme Court stated the following:

Subject-matter jurisdiction ... is an Art. III as well as a statutory...