DeMarco v. Security Planning Service, Inc.

• Decision Date: 13 December 1978
• Docket Number: No. Civ. 72-393 Phx. WPC.,Civ. 72-393 Phx. WPC.
• Citation: 462 F. Supp. 1066
• Parties: Erma DeMARCO (formerly Erma DeMarco Hall) et al., Plaintiffs, v. SECURITY PLANNING SERVICE, INC., et al., Defendants.
• Court: U.S. District Court — District of Arizona

462 F. Supp. 1066

Erma DeMARCO (formerly Erma DeMarco Hall) et al., Plaintiffs, v. SECURITY PLANNING SERVICE, INC., et al., Defendants.

No. Civ. 72-393 Phx. WPC.

United States District Court, D. Arizona.

December 13, 1978.

Charles M. Duecy of Duecy, Moore, Petsch, Robinson & Bennett, Scottsdale, Ariz., for plaintiffs.

A. Jerry Busby, of Debus, Busby & Green, Phoenix, Ariz., for defendant.

Dell Miller, in pro per.

JUDGMENT

COPPLE, District Judge.

Plaintiffs filed their original complaint on July 19, 1972. Shortly thereafter plaintiffs moved for leave to amend their complaint and to maintain the action as a class action. On August 17, 1972, plaintiffs' motion was granted and notice as prescribed by the Court was made pursuant to Rule 23, Fed. R.Civ.P.

The litigation has been actively prosecuted by the parties and several partial, but final judgments have been granted by this Court. See Hall v. Security Planning Corp., No. Civ. 72-393 (D.Ariz. Sept. 26, 1978)¹; Hall v. Security Planning Service, Inc., 419 F.Supp. 405 (D.Ariz.1976); Hall v. Security Planning Service, Inc., 371 F.Supp. 7 (D.Ariz.1974).

Following the partial judgment of January 1974, Hall, supra, 371 F.Supp. 7, plaintiffs filed their motion for leave to amend their complaint, join additional parties as defendants, and dismiss the bankruptcy trustee as a defendant. On May 6, 1974, the motion for leave to amend was granted in accordance with the proposed Second Amended Complaint.

The defendants Dell Miller, Delores Miller and Dell Investment Company hereinafter Dell defendants or defendants, against whom this judgment is granted, were served with the Second Amended Complaint on June 7, 1974. Their Answer was filed on August 9, 1974. On January 9, 1975, this Court ordered plaintiffs to file a motion directed toward maintaining this action as a class action under the Second Amended Complaint. The Court on August 22, 1975 denied plaintiffs' motion to proceed with the Second Amended Complaint as a class action as proposed by plaintiffs and granted additional time within which to present to the Court an alternative proposal for proceeding in the form of a Third Amended Complaint or to proceed with the action based on the Second Amended Complaint. The plaintiffs subsequently filed their alternative proposal for proceeding with respect to any claims of the Second Amended Complaint and their proposal for proceeding in the form of a Third Amended Complaint with supporting motions. Notice was given to all parties and no objections were made to plaintiffs' proposals.

On February 19, 1976, this Court ordered the plaintiffs to file and serve notice if they desired to proceed on the Third Amended Complaint, otherwise to proceed on behalf of the nominal plaintiffs under the Second Amended Complaint. Following this order, the plaintiffs sought to proceed against defendants Dell Miller, Delores Miller and Dell Investment under the Second Amended Complaint and moved to maintain the action as a class action on behalf of an identified sub-class under Rule 23(c)(4), Fed.R.Civ.P. Coupled with this motion was a motion for partial summary judgment against the named defendants.

On March 8, 1978, the Court denied plaintiffs' motion for summary judgment against the Dell defendants under the Second Amended Complaint. The Court further directed that the action could proceed as a class action against the Dell defendants with respect to the federal anti-fraud claims and that the class consist of a sub-class of plaintiffs who purchased Cochise College Park notes from the sales chain established by the Dell defendants, and received written sales material prepared by the Dell defendants.

On April 4, 1978, plaintiffs filed a motion for leave to amend their complaint against the Dell defendants in accordance with a proposed Third Amended Complaint that was submitted. The motion also asked that the parties be permitted to proceed with the second wave of discovery to determine the truth of matters alleged or controverted and to determine the genuineness, correctness and accuracy of documents.² Notice was given to the Dell defendants, and no objection was made to the plaintiffs' motion. On April 24, 1978, this Court granted plaintiffs' motion. The plaintiffs then filed their Third Amended Complaint, and on May 3, 1978, the Third Amended Complaint was served on counsel for defendants Dell Miller, Delores Miller and Dell Investment Company.

On May 30, 1978, defendants Delores Miller and Dell Miller filed their respective answers to the Third Amended Complaint of the Miller sub-class. Defendant Dell Investment Company did not file an answer. On July 28, 1978, plaintiffs moved for entry of partial judgment by default against defendant Dell Investment Company; for sanctions pursuant to Rule 37, Fed.R.Civ.P., against defendants Dell Investment Company and Delores Miller; and for partial judgment on the pleadings or alternatively for summary judgment against all Dell defendants under the Third Amended Complaint.

On October 6, 1978, this Court granted the plaintiffs' motion that all of plaintiffs' requests for admission of defendants Delores Miller and Dell Investment be deemed admitted, and that all of the matters that are the subject of plaintiffs' interrogatories shall be taken to be established as facts for the purpose of this action in accordance with plaintiffs' claims as set forth in their complaint. The plaintiffs' motion that defendants Delores Miller and Dell Investment be prohibited from introducing any evidence concerning the matters deemed admitted by failure to respond to plaintiffs' requests for admission under Rule 36, Fed. R.Civ.P., or deemed established for failure to answer plaintiffs' interrogatories under Rule 37(b)(2)(A), Fed.R.Civ.P., was granted. The plaintiffs' motion for summary judgment against the Dell defendants and for the plaintiffs on Count One of the Third Amended Complaint and on Count Three of the Third Amended Complaint for liability only as controlling persons under 15 U.S.C. § 78t and not on the principle of respondeat superior was also granted. The plaintiffs' motion in all other respects, including the motion for partial summary judgment on Count Two, was denied.

JURISDICTION AND VENUE

This Court has the sole jurisdiction of claims under § 10 of the Securities and Exchange Act of 1934 (15 U.S.C. § 78j(b)) and Rule 10b-5 (17 C.F.R. § 240.10b-5) promulgated thereunder pursuant to § 27 of the Securities and Exchange Act of 1934 (15 U.S.C. § 78aa). See Clark v. Watchie, 513 F.2d 994 (9th Cir. 1975); Hall v. Security Planning Service, Inc., 419 F.Supp. 405 (D.Ariz.1976).

This Court has pendent and ancillary jurisdiction of plaintiffs' common law claims inasmuch as the federal claim under Rule 10b-5 is the major substantive claim, and it and all of the pendent claims derive from a common nucleus of operative facts and are such that any party would ordinarily be expected to try them in one judicial proceeding. See United Mine Workers of America v. Gibbs, 383 U.S. 715, 86 S.Ct. 1130, 16 L.Ed.2d 218 (1966); 13 C. Wright, A. Miller & E. Cooper, Federal Practice and Procedure § 3567 at 442-45 (1975).

Venue of this action in the District of Arizona is proper inasmuch as every transaction alleged had a common and direct nexus with Cochise College Park in this district. Each of the transactions involved mailings by the Dell defendants to other defendants in this district and mailings by other defendants directly associated with the Dell defendants to the plaintiff subclass subject of this judgment. The individual transactions were not trivial and all related to the creation of the fraudulent securities by Cochise. See Hilgeman v. National Ins. Co., 547 F.2d 298 (5th Cir. 1977); Warren v. Bokum Resources Corp., 433 F.Supp. 1360 (D.N.M.1977).

BACKGROUND

The undisputed facts established by the evidence and record disclose the following pattern of fraud and deceit of the Dell defendants in participation with third parties including many other defendants. William Steuer, a defendant, now dead, in the late sixties incorporated Cochise College Park, Inc. hereinafter Cochise under Arizona law. Cochise acquired an equity interest in several thousand acres of barren desert land in southwestern Arizona. Cochise platted real estate subdivisions in the area known as Cochise College Park. Cochise made only minimal off-site improvements such as roads, streets, water, electricity and provided for none of the services or amenities common to residential property. Cochise conducted a nationwide sales campaign to induce individuals from throughout the world to purchase lots in the Cochise subdivisions. The sales were almost all on the installment basis with small downpayments and five to eight-year terms to pay the balance in monthly payments.

Concomitant to the sale of the lots, Cochise marketed by itself and through others, including Dell defendants, the notes purportedly executed by lot purchasers for balances due on lots. These notes were purportedly secured by mortgages and constituted the paper sold to the public.

The Dell defendants in October of 1970, following a visit by defendant Dell Miller to the Cochise operations in Arizona, began selling the notes produced by Cochise. Dell defendants advertised and represented the notes and mortgages emanating from Cochise as "Title Insured First Mortgages," and their sales people as "Bonded Representatives of Dell Investment Company." The notes and mortgages sold by the Dell defendants are non-exempt securities and were not registered as required by law either under the federal or Arizona securities laws. See Hall v. Security Planning Service, Inc., supra, 419 F.Supp. 405; Hall v. Security Planning Service, Inc., supra, 371 F.Supp. 7.

The Dell defendants continued their sale of the Cochise securities until June of 1972 when Cochise went into reorganization under Chapter X of the Bankruptcy Act. During the...