234 F.Supp. 59 (N.D.Ohio 1964), Civ. A. C 64-220, Lennerth v. Mendenhall

• Date: 05 August 1964
• Citation: 234 F.Supp. 59
• Docket Number: Civ. A. C 64-220
• Parties: Lennerth v. Mendenhall
• Court: U.S. District Court — Northern District of Ohio

Page 59

234 F.Supp. 59 (N.D.Ohio 1964)

Edward C. LENNERTH et al., Plaintiffs,

v.

Samuel T. MENDENHALL et al., Defendants.

Civ. A. No. C 64-220.

United States District Court, N.D. Ohio, Eastern Division.

Aug. 5, 1964

Page 60

Myron T. Krotinger, Cleveland, Ohio, for plaintiff.

Avery Cohen, Cleveland, Ohio, and F. J. Wettrick, Seattle, Wash., for defendants.

CONNELL, Chief Judge.

Plaintiffs instituted the within action charging the several defendants with fraud and deceit in the sale of securities, and seeking rescission of the sale. Thereafter they caused most of the named defendants to be served with process according to law. He complaint specifically states that the action arises under the Securities Exchange Act of 1934 (15 U.S.C.A. § 78(j)). After filing the complaint, during the investigation of the case by the plaintiff, it has supposedly come to their attention that the alleged securities which the plaintiffs bought were not the subject of an effective registration statement. If true, this would constitute a violation of the Securities Act of 1933. Consequently the plaintiffs have moved for a summary judgment in their favor, against those defendants properly before the Court, on the ground that there is no valid effective registration for this security. The defendants interpose two objections: First, they resist the attempt by the plaintiffs to secure judgment upon violation of the 1933 Act when the complaint is apparently

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grounded on the 1934 Act; Secondly, that the plaintiff has failed to show the absence of a genuine issue as to material facts.

In addressing the first objection of the defendants let us state preliminarily that the Federal Rules have inaugurated, and have forced Courts to adopt, a most liberal policy in the procedures which bring legal disputes to issue and disposition. As we stated recently in Wirtz v. W. G. Lockhart Construction Company, 230 F.Supp. 823 (N.D.Ohio 1964): 'It has always been this Court's impression that the Federal Rules of Civil Procedure were and are designed to introduce a sense of reality to the procedural aspects of lawsuits and to free litigants from the niceties of the common-law writs and the nuances of code pleading.'

Perhaps the cornerstone of this enlightened procedural structure is Rule 8, which requires only that the plaintiff make a short and plain statement of complaint setting out the relief sought and a legal basis for such relief. In such a 'notice' pleading jurisdiction, the plaintiff must only call to the defendant's attention that a transaction (using that term in its broadest sense) between the two is the subject of legal complaint. The defendant says here that, because the plaintiffs' complaint is bottomed upon an alleged violation of the Securities Exchange Act of 1934, they may not seek judgment upon proof of a violation of the Securities Act of 1933. We disagree. The complaint directed against this investment transaction has put the defendants on notice that that transaction is allegedly in violation of federal securities law, and this Court is empowered to grant relief if the plaintiffs have made out a prima facie violation of those laws and the defendants are unable to raise a genuine issue as to any material fact.

Professor Moore tells us that the Federal Rules have discarded the 'theory of the pleadings' doctrine which the defendants would have us apply to the plaintiffs. 2 Moore's Federal Practice 1713. Mr. Justice Harlan, while sitting in the Second Circuit, held in Siegelman v. Cunard White Star, 221 F.2d 189 (2d Cir. 1955), that it was not necessary to set out the precise legal theory upon which the claim was based. As Judge Clark stated in Gins v. Mauser Plumbing Supply Company, 148 F.2d 974 (2d Cir. 1945):

'A simple statement in sequence of the events which have transpired, coupled with a direct claim by way of demand for judgment of what the plaintiff expects and hopes to recover, is a measure of clarity and safety; and even the demand for judgment loses its restrictive nature when the parties are at issue, for particular legal theories of counsel yield to the court's duty to grant the relief to which the prevailing party is entitled, whether demanded or not.'

Thus, even without amending his pleadings, a complainant may be entitled to whatever relief that evidence indicates is proper. 2 Moore, supra, at 1718. In Dioguardi v. Durning, 139 F.2d 774, (2d Cir. 1944), in what has become known as a landmark case announcing the extent of liberality under the Rules, we again find Judge Clark sustaining an inartistically 'drawn pleading' and suggesting that the time for asserting the precise theory upon which relief is to be predicated is at trial or upon motion for summary judgment. This strikes us as the proper approach.

We find numerous examples where the interest of justice has prompted courts to permit recovery upon legal theories not within the limits of the pleadings. For example, in United States v. Missouri-Kansas-Texas Railroad Company, 273 F.2d 474 (10th Cir. 1959), the government sought to recover penalties for violation of the Safety Appliance Act (45 U.S.C.A. §§ 11, 12), alleging that the defendant's cars were not equipped with 'secure running boards' as required by the statute. No mention was made in the pleadings of certain regulations promulgated by the Interstate Commerce Commission; after submission of stipulated facts, the government asserted

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these regulations as a basis of recovery. The District Court refused to grant judgment for the plaintiff, but the appellate court corrected this error by entering judgment for the government:

'The trial court was apparently of the view, and it is so contended here, that the United States may not rely upon the specifications of a regulation which was not specifically pleaded. * * * We find no merit in this contention. * * * It is not necessary to plead under what particular law the recovery is sought.' 273 F.2d 474, 476.

Similarly, in Nord v. McIlroy, 296 F.2d 12 (9th Cir. 1961), a debtor applying for an arrangement under Chapter XI of the Bankruptcy Act alleged ownership of certain realty in opposition to the claim of title by certain claimants. The referee recognized the debtor's assertion of title; the District Court affirmed. Before the Court of Appeals, the appellant-claimants contended that the debtor should have been required to plead that his claim to the property was based on adverse possession. The contention was dismissed.

Turning to the particular statutes invoked by the plaintiff here, we are unable to find any case where the precise issue before us has been resolved. However, in two cases involving motions to dismiss alleged violations of securities laws, we find analogous authority which leads us to the inescapable conclusion that the defendants' contention here is without merit. In Buchholtz v. Renard, 188 F.Supp. 888 (S.D.N.Y.1960), several of the counts in a complaint alleged violations of both the Securities Act of 1933 and the Securities Exchange Act of 1934; the defendant moved to dismiss or strike, contending that alleged violations of the different statutes should be contained in separate averments. Thus spoke the Court:

'I do not think there is any merit in defendants' position nor have they cited any precedent for it. Many of the sections of these acts have little independent effect but depend on other sections for their full meaning.' 188 F.Supp. 888, 890.

It appears that that Court felt, and we agree, that the two statutes are so inextricably interwoven that they must be considered together as one body of law.

In Rosenberg v. Globe Aircraft Corporation, 80 F.Supp. 123 (E.D.Pa.1948), the complaint alleged that the defendants had filed a false registration statement, a violation of the 1933 Act, but referred to the Act of 1934 as the basis of the lawsuit. The Court overruled a motion to dismiss:

'It is obvious that the cause of action arises exclusively from conduct and acts which, whether or not they violate the Securities Exchange Act of 1934 * * * unquestionably constitute violations of the Securities Act of 1933 * * *. In this aspect the complaint states a claim upon which relief can be granted and the fact that the pleader referred to another statute * * * is immaterial.'

And we say here that it is immaterial that the pleader has specifically alleged violations of one Act when he predicates a motion for summary judgment upon proof of a violation of the...