Paul S. Mullin & Associates, Inc. v. Bassett

• Decision Date: 08 April 1986
• Docket Number: Civ. A. No. 85-169 CMW.
• Court: U.S. District Court — District of Delaware
• Parties: PAUL S. MULLIN & ASSOCIATES, INC., Paul S. Mullin Advisors, Inc., and Mary E. Mullin as Executrix of the Estate of Paul S. Mullin, Plaintiffs, v. Joseph M. BASSETT; Arthur Brosius, II; Bassett, Brosius and Associates, Inc.; R.J. Financial Corporation; Investment Management and Research, Inc.; Eagle Asset Management, Inc.; M. Anthony Greene; Herbert Ehlers; et al., Defendants.

632 F. Supp. 532

PAUL S. MULLIN & ASSOCIATES, INC., Paul S. Mullin Advisors, Inc., and Mary E. Mullin as Executrix of the Estate of Paul S. Mullin, Plaintiffs, v. Joseph M. BASSETT; Arthur Brosius, II; Bassett, Brosius and Associates, Inc.; R.J. Financial Corporation; Investment Management and Research, Inc.; Eagle Asset Management, Inc.; M. Anthony Greene; Herbert Ehlers; et al., Defendants.

Civ. A. No. 85-169 CMW.

United States District Court, D. Delaware.

April 8, 1986.

William J. Wier, Jr. and Joseph G. Krauss of Herlihy & Wier, Wilmington, Del., for plaintiffs.

Allen M. Terrell, Jr. and Robert W. Whetzel of Richards, Layton & Finger, Wilmington, Del.; Thomas C. Harney of Kilpatrick & Cody, Atlanta, Ga., of counsel, for defendants.

OPINION

CALEB M. WRIGHT, Senior District Judge.

Several motions await decision in this case, which arose from the abortive sale of two financial planning corporations. All defendants have filed a motion to dismiss the suit, and defendant Herbert Ehlers additionally seeks dismissal because of allegedly improper service of process and lack of personal jurisdiction. To ward off the possibility of dismissal, plaintiffs also seek to amend their complaint to add a claim under the Investment Company Act, 15 U.S.C. §§ 80a-1-80a-64 (1982).

I. The Facts¹

Paul S. Mullin operated a financial planning business in Wilmington, Delaware, until his death on November 3, 1984. Mr. Mullin operated his business through several corporations, of which he was the founder, president, and sole stockholder.

Plaintiff Paul S. Mullin Advisors, Inc. ("Advisors"), performed financial planning services for its clients, including analysis and recommendations regarding investments, retirement programs, tax planning, insurance, etc. To qualify to provide general advice about investments, Advisors registered as an investment adviser with the SEC. Advisors entered into investment adviser contracts with clients and received fees for providing investment advice. Mr. Mullin and defendants Joseph M. Bassett and Arthur Brosius, II were registered agents of Advisors.

Plaintiff Paul S. Mullin & Associates, Inc. ("Associates"), was the vehicle through which Mr. Mullin administered those aspects of his business which required money management services and investment in securities and limited partnerships. Many of these services could be provided only through a broker/dealer registered with the SEC, and Mr. Mullin consequently became an authorized independent sales associate of defendant Investment Management & Research, Inc. ("IM & R"), a registered securities broker/dealer. IM & R operates through individual independent associates and sub-associates, pursuant to written contracts between IM & R and the individual. IM & R entered into a sales associate contract with Mr. Mullin personally. As a result of their affiliation with Mr. Mullin and Associates, defendants Bassett and Brosius entered into sub-associate contracts with IM & R. All commission checks for trades handled by IM & R on behalf of the three men were issued to Mr. Mullin. Mr. Mullin, however, deposited these checks into the Associates account, from which he paid Bassett, Brosius and himself their respective shares of the commissions.

Many customers of Mr. Mullin, upon his recommendation, placed funds for management with Eagle Asset Management, Inc. ("Eagle"), an investment adviser registered with the SEC. Eagle had investment adviser contracts with customers who placed funds with it through Mr. Mullin and IM & R. Such contracts specified, among other things, a securities salesperson (such as Messrs. Mullin, Bassett, or Brosius). IM & R, as broker/dealer, received a commission for trades conducted on behalf of Eagle's clients, and the specified securities salesperson generally received a portion of that commission.

Both Eagle and IM & R are subsidiaries of defendant R.J. Financial Corp. ("R.J. Financial"), parent company of the largest regional brokerage and investment firm in the southeastern part of the country. Another R.J. Financial subsidiary, Raymond, James & Associates, Inc. ("Raymond, James"), is a registered brokerage firm; it conducts securities transactions for accounts managed by Eagle and acts as clearing broker/dealer for IM & R. Defendant M. Anthony Greene is president of IM & R and a director of R.J. Financial. Defendant Herbert Ehlers is president of Eagle and an officer of Raymond, James.

Paul S. Mullin died on November 3, 1984. Ownership of all outstanding stock in both Associates and Advisors passed to his estate, of which his wife, plaintiff Mary E. Mullin, is executrix.

The sales associate agreement between Mr. Mullin and IM & R was to terminate upon the death of Mr. Mullin, unless IM & R approved a successor in writing. On December 11, 1984, Greene, acting on behalf of IM & R, appointed Bassett to assume all supervisory and administrative responsibilities previously fulfilled by Mr. Mullin. Bassett and Brosius continued to service all customer accounts they had previously serviced, as well as those accounts developed and managed exclusively by Mr. Mullin.

In the meantime, Mrs. Mullin, as executrix of her husband's estate, had been negotiating with Bassett and Brosius about purchasing the stock of Advisors and Associates from the estate. At some time prior to December 12, 1984, the parties reached an oral agreement on the sale. Mrs. Mullin wrote a letter on that date to the companies' clients² advising them that the business had been sold to Bassett and Brosius. The parties never consummated the proposed sale, evidently because of a failure to reduce the oral agreement to acceptable written form. This breakdown occurred sometime after release of the December 12, 1984, letter.

Using Associates stationery, Brosius wrote to the companies' clients on January 3, 1985, thanking them for their support and advising them to "keep confidence in the firm." He stated further that he would try to reach each client within the next few weeks. At about this time, Bassett and Brosius also engaged in telephone solicitations of the clients.

Mrs. Mullin gave Bassett and Brosius a final written declaration that negotiations for sale of the Mullin companies were terminated on January 8, 1985. She then started negotiations with other potential buyers. The letter terminating negotiations with Bassett and Brosius told them to return any proprietary or confidential client information and to cease all contact with clients.

Bassett and Brosius then organized Bassett, Brosius and Associates, Inc. ("BB & A"), which was registered as a Delaware corporation on January 10, 1985. Bassett and Brosius wrote to the clients on January 14, 1985, using BB & A letterhead, soliciting their business and informing them that BB & A's offices were at the same address and down the hall from the Mullin companies' offices. Bassett and Brosius also continued to telephone clients previously served by the Mullin companies to inform them that the two would continue to provide them with the same services, including the investment services handled through IM & R and Eagle.

At about this time, Mrs. Mullin had negotiated a sale of the Mullin companies to A. Duer Pierce, Jr., and Donald N. Pierce, who executed a purchase agreement for the companies. Shortly thereafter, IM & R and Eagle, through their attorney, directed the Pierces to surrender to Bassett all client investment files maintained by the Mullin companies. IM & R and Eagle claimed these files as their property, to which Bassett, as local agent and representative of IM & R, was entitled. Faced with the possibility of litigation, the Pierces turned over the files in their possession, and therefore did not fulfill their agreement with the Mullin estate to purchase the two Mullin companies. The Mullin estate still owns all stock of the two companies.

The plaintiffs — Advisors, Associates, and Mrs. Mullin, as executrix of the estate of Paul S. Mullin — filed suit here on March 13, 1985. Named as defendants were Bassett, Brosius, BB & A, R.J. Financial, IM & R, Eagle, Greene, Ehlers, and certain unknown individual defendants. All individual defendants were sued in both their official and personal capacities. Earlier the same day, Bassett, Brosius, and BB & A filed suit in the Delaware Court of Chancery against the parties plaintiff here. All claims asserted by plaintiffs in the federal action have been filed as compulsory counterclaims in the state court action. The state court action is stayed, however, pending this Court's resolution of defendants' motion to dismiss.

II. The Parties' Contentions

The underlying wrong for which plaintiffs seek redress through this lawsuit is that the defendants allegedly converted to their own use the business operated by Paul S. Mullin before his death, and usurped his clients, "without paying his estate or the businesses a dime." Plaintiffs' Brief in Opposition to Motion to Dismiss at 1, Docket No. 28. According to plaintiffs, the defendants accomplished this feat through a pattern of fraud and manipulation. Plaintiffs allege a myriad number of state and common law offenses, as well as three federal causes of action with which the Court currently is concerned. In particular, plaintiffs assert federal claims under the Investment Advisers Act, 15 U.S.C. §§ 80b-1-80b-21, and the Racketeer Influenced and Corrupt Organization Act ("RICO"), 18 U.S.C. §§ 1961-1968, and seek the Court's permission to add a new claim under the Investment Company Act, 15 U.S.C. §§ 80a-1-80a-64.

Defendants, on the other hand, take the position that plaintiffs have claims only under state law, if they have any claims at all. The defendants seek to have the RICO and Investment Advisers Act claims dismissed for failure to state a claim upon which relief can be granted, and ask that plaintiffs' proposed amendment to assert a claim under the Investment Company Act either not be allowed or be dismissed for...