Jennings v. Boenning & Company

Citation482 F.2d 1128
Decision Date16 July 1973
Docket NumberNo. 72-1970.,72-1970.
PartiesJohn E. JENNINGS and Helen M. Jennings v. BOENNING & COMPANY and Boenning & Scattergood, Inc., Appellants.
CourtUnited States Courts of Appeals. United States Court of Appeals (3rd Circuit)

L. Carter Anderson, Rawle & Henderson, Philadelphia, Pa., for appellants.

Edward Fackenthal, Henderson, Wetherill, O'Hey & Horsey, Norristown, Pa., for appellees.

Before ALDISERT and ADAMS, Circuit Judges, and STAPLETON, District Judge.

Certiorari Denied November 12, 1973. See 94 S.Ct. 450.

OPINION OF THE COURT

ALDISERT, Circuit Judge.

In the midst of an action seeking damages for violation of the Securities Exchange Act of 1934, the district court, 352 F.Supp. 1000, issued a preliminary injunction restraining the appellant Boenning from executing on a state court judgment entered by confession six years prior to commencement of the federal action. This appeal requires an interpretation of the Securities Exchange Act of 1934 and the federal Anti-Injunction Act to determine the propriety of the district court's action.

John E. Jennings, a stockbroker in the employ of the Boenning Company, purchased for the account of his wife, Helen Jennings, certain Eastern Airlines debentures on February 9, 1966, and certain Rohr Aircraft debentures on January 18, 1966. The Jennings did not make full cash payment for the order within 7 days of purchase. Regulation T of the Federal Reserve Board, 12 C. F.R. § 2204(c) (2), promulgated pursuant to the Securities Exchange Act of 1934, 15 U.S.C. § 78g(a), requires that where "a customer purchases a security (other than an exempted security) in the special cash account and does not make full cash payment for the security within 7 days after the date on which the security is so purchased, the creditor shall, . . . with exceptions not pertinent here, promptly cancel or otherwise liquidate the transaction or the unsettled portion thereof."

Boenning sold the Eastern securities on March 1, 1966, and the Rohr securities on March 2 and 3, 1966. During the time the securities were held beyond the 7 day period permitted under Regulation T, the fair market value of the securities decreased by $32,175. This decrease in value when credited against Helen's account resulted in a deficit of $30,500.00 for which Boenning demanded and received from John and Helen Jennings a judgment note. On April 14, 1966, judgment by confession was entered against the Jennings in the Court of Common Pleas, Montgomery County, Pennsylvania. Three years later the Jennings attempted to open the judgment, but were rebuffed by the trial court and the Pennsylvania appellate court on the theory of laches. Boenning & Co. v. Jennings, 222 Pa.Super. 712, 294 A.2d 739 (1972).

Thereafter the Jennings filed a complaint in federal district court against Boenning seeking damages for "violation of the margin requirements of the Securities Exchange Act of 1934," 15 U.S.C. § 78g(c) ; 15 U.S.C. § 78cc.

During the course of the proceedings below the Jennings obtained a preliminary injunction restraining Boenning from executing on the judgment entered by the Montgomery County Court of Common Pleas. While the district court noted both the Federal Anti-Injunction Act, 28 U.S.C. § 2283, and the admonition of the Supreme Court of the United States in Atlantic Coast Line R. R. v. Brotherhood of Locomotive Engineers, 398 U.S. 281, 287, 90 S.Ct. 1739, 1743, 26 L.Ed.2d 234 (1970), that "any injunction against state court proceedings otherwise proper under general equitable principles must be based on one of the specific statutory exceptions to § 2283 if it is to be upheld . . . and the exceptions should not be enlarged by loose statutory construction," it found two such exceptions. The court concluded it was specifically authorized by § 21(e) of the Securities Exchange Act, 15 U.S.C. § 78u(e), to issue the injunction in this case. See Studebaker Corp. v. Gittlin, 360 F.2d 692, 696-698 (2d Cir. 1966). Furthermore, the court was also of the opinion that the second exception provided in the Federal Anti-Injunction Statute for injunctions "necessary in aid of" the jurisdiction of the district court likewise enabled the court to issue the relief requested. We hold that the district court erred in both conclusions and reverse.

I.

The district court's reliance on the Second Circuit's Studebaker case was misplaced. There, the enjoined state proceeding was one to inspect a corporation's stockholder list. The federal court's order enjoined the use of other stockholders' authorizations in the state action until there was compliance with the Proxy Rules of the Securities and Exchange Commission promulgated under § 14(a) of the Securities Exchange Act, 15 U.S.C. § 78n(a).

Section 21(e) of the Securities Exchange Act provides:

Whenever it shall appear to the Commission that any person is engaged or about to engage in any acts or practices which constitute or will constitute a violation of the provisions of this chapter, or of any rule or regulation thereunder, it may . . . bring an action . . . to enjoin such acts or practices, and upon a proper showing a permanent or temporary injunction or restraining order shall be granted without bond. . . .

15 U.S.C. § 78u(e).

The very continuance of the state court action in Studebaker constituted a "violation of the provisions" of the Proxy Rules issued under a specific provision of the Securities Exchange Act, i. e., § 14(a), 15 U.S.C. § 78n(a). Drawing on the authority of J. I. Case Co. v. Borak, 377 U.S. 426, 432, 84 S.Ct. 1555, 1558, 12 L.Ed.2d 423 (1964), that a private suit was "a necessary supplement to Commission action," the Second Circuit held that section 21(e) was an exception to the Anti-Injunction Statute, 28 U.S.C. § 2283, "expressly authorized by Act of Congress." Thus, in Studebaker, the injunction was justified solely because it sought to terminate a state court action which by its very nature furthered "a violation of the provisions of" the Securities Exchange Act. Certainly, Studebaker qualified under the test subsequently set forth in Mitchum v. Foster, 407 U.S. 225, 238, 92 S.Ct. 2151, 2160, 32 L.Ed.2d 705 (1972) : "whether an Act of Congress, clearly creating a federal right or remedy enforceable in a federal court of equity, could be given its intended scope only by the stay of a state court proceeding."

By contrast, there is no impediment to the prosecution of the Jennings' claim for damages in federal district court by reason of the Montgomery County judgment. It was the Jennings' theory that violation of the margin requirements of Federal Reserve Regulation T was actionable under § 7(c) of the Securities Exchange Act. See Pearlstein v. Scudder & German, 429 F. 2d 1136 (2d Cir. 1970). Without reaching the question whether this court would adopt the view of the Pearlstein majority, see, e. g., the dissenting opinion of Chief Judge Friendly, 429 F.2d at 1145-1149, we are persuaded that even if the Jennings have a proper cause of action for damages, the presence of the state court judgment did not constitute an impediment to the assertion of "the federal right or remedy." The state judgment emanated from a contractual relationship between the parties cognizable by a state court. The continuance of a proceeding concerned solely with that relationship did not constitute a furtherance of an ongoing violation of the Securities Exchange Act so as to necessitate operation of § 21(e).

Our conclusion is buttressed by the Second Circuit's interpretation of its own Studebaker decision in a case on its facts closely resembling the case before us. In Vernitron Corp. v. Benjamin, 440 F.2d 105 (2d Cir. 1971), Benjamin had contracted with Vernitron to transfer all the stock of Benjamin's wholly-owned corporation to Vernitron in return for shares of Vernitron. After Benjamin had received a portion of the promised shares, Vernitron failed to deliver the balance, and Benjamin instituted a state court action alleging breach of contract. Vernitron counterclaimed alleging breaches of warranty and demanding rescission of the contract. Vernitron simultaneously commenced an action in federal court asserting essentially its state court counterclaim and also pleading violations of the Securities Exchange Act of 1934, 15 U.S.C. §§ 78j (b) and 78cc(b), as well as common law fraud. As the Jennings do here, Vernitron there relied on § 21(e) as an express statutory exception to the Anti-Injunction Act. In reversing the granting of the injunction by the district court, the Second Circuit reasoned that the prosecution of the state court action did not amount to conduct by persons

"engaged or about to be engaged" in acts in violation of the Securities Exchange Act. The plain wording of that statute would seem to foreclose Vernitron\'s contention. Moreover, Studebaker Corporation v. Gittlin, 360 F.2d 692 (2 Cir. 1966), relied upon by Vernitron is inapposite in that the prosecution of the state action there relevant would itself have furthered the violation of the Securities Exchange Act.

440 F.2d at 108.

We accept this reasoning and hold that § 21(e), 15 U.S.C. § 78u(e), is inapplicable to the facts of this case. Hence, the district court erred in applying it as an express statutory exception to the Anti-Injunction Act.

II.

Essential to any inquiry into the authorization for a federal court injunction of state court proceedings as "necessary in aid of the federal court's jurisdiction," is an understanding of the historical background of this statutory exception to the Anti-Injunction Act.

The starting point must be a recognition that federalism is a constitutional concept. "The constitution of the United States . . . recognizes and preserves the autonomy and independence of the states,—independence in their legislative and independence in their judicial departments. Supervision over either the legislative or the judicial action of...

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