Chapman v. Dunn

• Decision Date: 09 July 1969
• Docket Number: No. 18825.,18825.
• Citation: 414 F.2d 153
• Parties: Bernard A. CHAPMAN, Anna Chapman, Joseph C. Kalman, Thomas L. Lowery, Jr., Dale H. Burgess, Leonard G. Burgess, Johanna Adamson, and Ralph Isbrandt, Plaintiffs-Appellees, v. James B. DUNN, Receiver for Ohio East Producers, Defendant-Appellant.
• Court: U.S. Court of Appeals — Sixth Circuit

414 F.2d 153 (1969)

Bernard A. CHAPMAN, Anna Chapman, Joseph C. Kalman, Thomas L. Lowery, Jr., Dale H. Burgess, Leonard G. Burgess, Johanna Adamson, and Ralph Isbrandt, Plaintiffs-Appellees, v. James B. DUNN, Receiver for Ohio East Producers, Defendant-Appellant.

No. 18825.

United States Court of Appeals Sixth Circuit.

July 9, 1969.

William E. Speer, Detroit, Mich., for appellant.

C. Richard Abbott, Detroit, Mich., for appellees; Robert L. Heritier, John R. Nicholson, Detroit, Mich., on brief.

Philip A. Loomis, Jr., Gen. Counsel, Walter P. North, Associate Gen. Counsel, Jacob H. Stillman, Asst. Gen. Counsel, David J. Hensler, Atty., S. E. C., Washington, D. C., on brief as amicus curiae for Securities and Exchange Commission.

Before WEICK, Chief Judge, PHILLIPS, Circuit Judge, and McALLISTER, Senior Circuit Judge.

PHILLIPS, Circuit Judge.

This is an action under the Securities and Exchange Act of 1933 for the rescission of sales of unregistered securities. Plaintiffs-appellees (the investors) sued the issuer to recover the consideration paid for fractional undivided interests in oil and gas leases.

On cross-motions for summary judgment District Judge Fred W. Kaess concluded that there was no dispute as to any material fact and granted summary judgment in favor of the investors in the amount of $175,278.73, plus interest. The issuer appeals. We affirm.

The Securities and Exchange Commission (SEC) was granted leave to file a brief amicus curiae in this Court.

This action was filed under § 12(1) of the Act, 15 U.S.C. § 77l(1)¹ on the theory that the sale of these securities was in violation of § 5 of the Act, 15 U.S.C. § 77e, in that no registration statement was filed with the SEC. The issuer contends that the sale of the securities was exempt from the requirement of filing.

The issuer was a resident of Michigan. All the land covered by the oil and gas leases which are the subject of this litigation is located in Ohio. The issuer maintained an office and staff in Michigan for the management of his oil and gas business. Sales were made to at least 78 investors, including plaintiffs-appellees. The District Court found that all except two of the investors were residents of Michigan. On this appeal the issuer contends that at the time the securities were sold he believed that all the investors were Michigan residents.

The investors paid the issuer a specific amount for each fractional interest they purchased. No registration statement of any kind was filed with SEC nor was any type of registration statement or prospectus delivered or offered to the investors. The United States mail was used to issue and deliver the securities.

I.

The first question to be determined is whether, as contended by the issuer, these transactions are excluded under § 3(a) (11) of the Act, 15 U.S.C. § 77c(a) (11) which exempts:

"Any security which is a part of an issue offered and sold only to persons resident within a single State or Territory, where the issuer of such security is a person resident and doing business within or, if a corporation, incorporated by and doing business within, such State or Territory."

The District Judge held that the exception is not applicable under the facts of this case because:

(1) The issuer was not "doing business" in Michigan within the meaning of the statutory exemption, since the financial venture involved leases of oil and gas properties located in Ohio.

(2) At least two purchasers resided outside the State of Michigan. The securities therefore were not sold to "persons resident within a single State."

For the purposes of this opinion we pretermit decision of the question of whether all the sales were made to "persons resident within a single State" and proceed to determine whether the issuer was "doing business" in Michigan within the meaning of the above-quoted exemption.

The statute does not contain a definition of the term "doing business." Section 3(a) (11) originated as a part of § 5 of the 1933 Act, which was introduced as H.R. 5480. The Report of the House Committee on Interstate and Foreign Commerce contains this comment:

"SECTION 5. PROHIBITIONS RELATING TO INTERSTATE OR FOREIGN COMMERCE AND THE MAILS

"Subject to the exemptions allowed by sections 3 and 4, it is made unlawful for any person to make use of the mails or any means or instruments of interstate or foreign commerce (a) before the effective date of registration, or while the registration is suspended, to sell any security or to carry or cause to be carried any security for the purpose of sale or delivery after sale, and (b) after the effective date of registration to transmit any prospectus relating to the sale of any such security that does not meet the requirements set in section 10, or to carry or cause to be carried any such security for the purpose of sale or delivery after sale, unless accompanied or preceded by a prospectus meeting such requirements.

"The provisions of this section as to the use of the mails, however, do not apply to the sale of a security where the issue of which it is a part is sold only to persons resident within a single State, where the issuer is a resident and doing business within such State." H.R.Rep. No. 85, 73d Cong., 1st Sess. 14 (1933).

The report of the Committee of Conference made minor changes in the phraseology of the 1933 bill and the following was enacted as a part of § 5 of the original Act:

"(c) The provisions of this section relating to the use of the mails shall not apply to the sale of any security where the issue of which it is a part is sold only to persons resident within a single State or Territory, where the issuer of such securities is a person resident and doing business within, or, if a corporation, incorporated by and doing business within such State or Territory." H.R.Rep.No.152, 73d Cong., 1st Sess. 5 (1933).

The Securities Exchange Act of June 6, 1934, c. 404, § 202, 48 Stat. 906, amended the 1933 statute by transferring from § 5 to § 3(a) (11), under the heading "Exempted Securities," the language relating to intrastate transactions, as follows:

"(11) Any security which is a part of an issue sold only to persons resident within a single State or Territory, where the issuer of such security is a person resident and doing business within or, if a corporation, incorporated by and doing business within, such State or Territory."

The Committee of Conference explained the purpose of this amendment as follows:

"The new section 3(a) (11) incorporates the existing section 5(c) of the act and further makes clear that the exemption is not limited to the use of the mails, if sales in the course of the distribution of the issue are limited to residents within a single State or Territory." H.R.Rep.No.1838, 73d Cong., 2d Sess. 40 (1934).

The purposes of the 1934 amendments were explained in some detail on the floor of the House June 1, 1934, by Representative Sam Rayburn. The only reference to the intrastate amendment was made in response to an inquiry by Representative Dirksen, as follows:

"Mr. DIRKSEN: Mr. Speaker, will the gentleman yield for a question?

"Mr. RAYBURN: I yield.

"Mr. DIRKSEN: The gentleman will remember that in the discussion when the bill was under consideration in the House I voiced some apprehension about the small corporate entities whose securities were unregistered, that they might be placed under undue restrictions with respect to the over-the-counter markets. I understand the bill has been amended and an exception has been made in their favor.

"Mr. RAYBURN: An exception is made in unregistered securities of companies predominantly intrastate in character." 78 Cong.Rec. 10269 (1934).

In construing the private offering exemption clause in the Act, the Supreme Court said in SEC v. Ralston Purina Co., 346 U.S. 119, 124, 73 S.Ct. 981, 984, 97 L.Ed. 1494:

"The design of the statute is to protect investors by promoting full disclosure of information thought necessary to informed investment decisions. The natural way to interpret the private offering exemption is in light of the overall statutory purpose."

Applying this rule, we interpret the intrastate exemption in the light of the overall statutory purpose.

The caption to the 1933 Act contained the following language:

"To provide full and fair disclosure of the character of securities sold in interstate and foreign commerce and through the mails, and to prevent frauds in the sale thereof, and for other purposes." 48 Stat. 74 (1933).

In his message to Congress, dated March 29, 1933, recommending enactment of this legislation, President Franklin D. Roosevelt said:

"There is, however, an obligation upon us to insist that every issue of new securities to be sold in interstate commerce shall be accompanied by full publicity and information, and that no essentially important element attending the issue shall be concealed from the buying public.

"This proposal adds to the ancient rule of caveat emptor, the further doctrine `let the seller also beware.\' It puts the burden of telling the whole truth on the seller. It should give impetus to honest dealing in securities and thereby bring back public confidence." H.R.Rep.No.85, 73d Cong., 1st Sess. 2 (1933).

In the light of this legislative history, we address ourselves to the issue of whether sales of securities by a Michigan resident to other Michigan residents is exempt from the filing of a registration statement under § 3(a) (11) of the Act when all the income producing property to which the securities apply is located outside the State of Michigan. We answer the question in the negative.

When Congress enacted this legislation the country was in the middle of a great economic crisis. Prior to this time the sale of securities across the nation had been subject to considerable abuse by dishonest or zealous sellers and promoters. Supervision of these securities had been left to the individual States. Experience had demonstrated that State legi...