Nucorp Energy Securities Litigation, In re

• Decision Date: 03 October 1985
• Docket Number: No. 83-6468,No. 514,83-6468,514
• Citation: 772 F.2d 1486
• Parties: , Fed. Sec. L. Rep. P 92,306 In re NUCORP ENERGY SECURITIES LITIGATION, Stanford PHELPS and Robert Gulick, in behalf of themselves and in behalf of the 19 3/4%-10% Delayed Convertible Debentures of Nucorp Energy, Inc., (an Ohio Corporation), Graphics Club, Inc., (a New York Corporation), Private Water Supply, Inc., (an Illinois Corporation), and Herbert Lust, individually, Plaintiffs-Appellants, v. CONTINENTAL ILLINOIS NATIONAL BANK AND TRUST COMPANY OF CHICAGO, a National Banking Association, Defendant-Appellee. MDL
• Court: U.S. Court of Appeals — Ninth Circuit

Page 1486

772 F.2d 1486

54 USLW 2232, Fed. Sec. L. Rep. P 92,306

In re NUCORP ENERGY SECURITIES LITIGATION,

Stanford PHELPS and Robert Gulick, in behalf of themselves

and in behalf of the 19 3/4%-10% Delayed Convertible

Debentures of Nucorp Energy, Inc., (an Ohio Corporation),

Graphics Club, Inc., (a New York Corporation), Private Water

Supply, Inc., (an Illinois Corporation), and Herbert Lust, individually, Plaintiffs-Appellants, v. CONTINENTAL ILLINOIS NATIONAL BANK AND TRUST COMPANY OF

CHICAGO, a National Banking Association, Defendant-Appellee.

No. 83-6468.

MDL No. 514.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted Feb. 8, 1985.

Decided Oct. 3, 1985.

Bader & Bader, I. Walton Bader, White Plains, N.Y., for plaintiffs-appellants.

J. Anthony Sinclitico, III, Gibson, Dunn & Crutcher, San Diego, Cal., Theodore A. Livingston, Jeffrey M. Strauss, Doreen A Appeal from the United States District Court for the Southern District of California.

Gagnon, Mayer, Brown & Platt, Chicago, Ill., Leonard B. Simon, Milberg Weiss, Bershad Specthrie & Lerach, San Diego, Cal., for defendant-appellees.

Before GOODWIN, WALLACE and REINHARDT, Circuit Judges.

GOODWIN, Circuit Judge.

Plaintiffs (the Phelps Committee) appeal the judgments dismissing their claims of violation of federal securities laws and their pendent state law claims. We affirm the district court in all respects.

This action is related to a class action brought against Continental Illinois National Bank and Trust Company of Chicago, et al. Continental served as an indenture trustee for convertible debentures issued on October 1, 1981, by Nucorp Energy, Inc. Members of the class bought debentures between October 1, 1981, and January 20, 1982, on which date Nucorp made a public announcement of its financial difficulties. The class has alleged that Continental knew or had reason to know that the disclosure documents accompanying the debenture issue were materially misleading.

The Phelps Committee represents purchasers who bought Nucorp debentures from class members after January 20, 1982. The Committee filed an action against Continental in October 1982 in federal district court for the Northern District of Illinois. The case was transferred by the Judicial Panel on Multidistrict Litigation to the Southern District of California where there were pending the class action and another action filed by different plaintiffs, involving the same transactions. The Committee's complaint, as amended after the transfer, pleaded a federal cause of action for breach of trust under the Trust Indenture Act, 15 U.S.C. Secs. 77aaa-77bbbb, and pendent jurisdiction of state law claims for breach of fiduciary duty, willful misconduct, fraud and deceit and negligence. Having been excluded from the class of direct purchasers, the Phelps Committee does not claim to have been injured by virtue of its own reliance on misleading disclosures. Rather, it argues that when it purchased the debentures from members of the class it automatically acquired the sellers' causes of action for violation of federal securities laws and related state law claims.

In August 1983 Continental moved for dismissal of the amended complaint for failure to state a claim for which relief could be granted, Fed.R.Civ.P. 12(b)(6), and lack of subject matter jurisdiction over the state law issues. Fed.R.Civ.P. 12(b)(1). The substance of the 12(b)(6) motion was twofold. Continental argued that the Phelps Committee had not demonstrated that Continental had violated the Trust Indenture Act, or committed state law transgressions. The bank also argued that because the Committee could not have relied on Continental's role in the issuance of the debentures, the Committee could have suffered no injury and thus had no cause of action. At a hearing on the motion, Continental took the modified position that the court should retain jurisdiction to decide the pendent state law claims. The district court granted the motion as modified. It first dismissed the federal cause of action on the merits and then, after separate consideration, dismissed the state claims on the merits.

The question before us is not whether Continental committed the alleged violations of state and federal law. Our inquiry here is whether, under federal or state law, the direct purchasers' rights were automatically transferred to the subsequent purchasers. In the present procedural context we must decide whether the district court correctly retained jurisdiction over the state law claims and, if so, whether it correctly disposed of the state law claims. We must also consider the effect of federal law on the alleged federal claims.

JURISDICTION

We are met by the threshold question, not addressed by the parties but a question of which we are always mindful, whether we have jurisdiction over the Phelps Committees' claims. To the extent that the Committee alleges that Continental Bank made misleading statements in

connection with Nucorp's debenture issue, the Trust Indenture Act expressly provides jurisdiction. 15 U.S.C. Sec. 77www. Thus, we do not need to decide whether other sections of the Trust Indenture Act provide implied causes of action and therefore permit the assertion of federal subject matter jurisdiction. The section 77www claim provides us with jurisdiction to proceed. Even if the Committee's other claims do not arise under the Trust Indenture Act, they could be heard as pendent state claims as we conclude below.

FEDERAL CLAIMS

A. The Applicable Law

The Phelps Committee urges us to apply state law in deciding whether there was automatic assignment of the class members' federal causes of action. We find no reason to apply state law to this question.

The Trust Indenture Act is part of the large and complicated body of federal law covering securities transactions. It constitutes Title III of the Securities Act of 1933, 15 U.S.C. Secs. 77aaa-77bbbb. See 53 Stat. 1149 (1939). As a securities statute, it is designed "to vindicate a federal policy of protecting investors." Lowry v. Baltimore & Ohio Railway Co., 707 F.2d 721, 727 (3rd Cir.) (en banc) (Garth, J., concurring) (citing Ernst & Ernst v. Hochfelder, 425 U.S. 185, 195, 96 S.Ct. 1375, 1382, 47 L.Ed.2d 668 (1976) ), cert. denied, --- U.S. ----, 104 S.Ct. 238, 78 L.Ed.2d 229 (1983). A claim which arises under a federal statute and implicates federal policy is appropriately decided under federal law. Accord Huddleston v. Herman & MacLean, 640 F.2d 534, 557 & n. 40 (5th Cir.1981) (federal law applies to claims under Rule 10b-5 because the action is implied in a federal statute), aff'd in part and rev'd in part on other grounds, 459 U.S. 375, 103 S.Ct. 683, 74 L.Ed.2d 548 (1983); In Re Fine Paper Litigation, 632 F.2d 1081, 1090 (3rd Cir.1980) (status of claims held under federal antitrust law is a question of federal law).

The possibility that federal law should apply in the exact context presented here--determining whether a federal cause of action runs with ownership of a security--was carefully considered and accepted by two members of the Lowry en banc panel. Lowry, 707 F.2d at 726-28 (Judges Garth and Sloviter concurring). Moreover, federal law has been relied upon by all of the federal district courts which have considered the possibility of an automatic transfer of a cause of action under securities law. See Rose v. Arkansas Valley Environmental & Utility Authority, 562 F.Supp. 1180, 1188-89 (W.D.Mo.1983); Independent Investor Protective League v. Saunders, 64 F.R.D. 564, 572 (E.D.Pa.1974); International Ladies' Garment Workers' Union v. Shields & Co., 209 F.Supp. 145, 149 (S.D.N.Y.1962); Mills v. Sarjem Corp., 133 F.Supp. 753, 761 (D.N.J.1955).

The Phelps Committee argues that under Sec. 16.04 of the trust indenture agreement the parties agreed to apply state law to problems arising under the indenture. Section 16.04 provides that "[t]his Indenture and each Debenture shall be deemed to be a contract made under the laws of the State of New York, and for all purposes shall be governed by and construed in accordance with the laws of said State." This choice-of-law clause is irrelevant with respect to the assignability of federal causes of action upon sales between the class members and the Committee. In order to determine whether an assignment by operation of law occurred, we must interpret and examine the contracts of sale, not the indenture. Only after it has been determined who possesses the cause of action need the indenture be construed. Because of the case law and the strong federal policies surrounding assignment of a federal securities law claim, we hold that federal law governs the assignment of claims under the Trust Indenture Act.

B. Transfer of Claims

The Trust Indenture Act provides a cause of action for persons who purchase securities issued under an indenture if the purchaser relies on misleading statements or omissions and suffers actual damages.

                15 U.S.C. Sec. 77www.  It may provide other private causes of action as well.  The statute provides nothing for subsequent purchasers to whom no misrepresentations were made directly or indirectly and to whom no statutorily provided cause of action was expressly assigned.  We find no more reason to provide a remedy to these subsequent purchasers than we could find to provide a remedy for individuals who had purchased stock directly from an issuer before a misleading disclosure was made.   See Williams v. Sinclair, 529 F.2d 1383, 1389 (9th Cir.1975), cert. denied, 426 U.S. 936, 96 S.Ct. 2651, 49 L.Ed.2d 388 (1976);  Raschio v. Sinclair, 486 F.2d 1029, 1030 (9th Cir.1973).   Accord Shivers v. Amerco, 670 F.2d 826, 831 (9th Cir.1982) (minority shareholders cannot claim injury under securities laws if they sell stock after deception has ceased)
                

A cause of action arising from reliance on misrepresentation is personal to those persons who relied; it does not follow the security to remote purchasers...