Summer v. Land & Leisure, Inc.

• Decision Date: 14 September 1983
• Docket Number: No. 78-810-CIV-JAG.,78-810-CIV-JAG.
• Citation: 571 F. Supp. 380
• Parties: Roger L. SUMMER, Plaintiff, v. LAND & LEISURE, INC., et al., Defendants.
• Court: U.S. District Court — Southern District of Florida

571 F. Supp. 380

Roger L. SUMMER, Plaintiff, v. LAND & LEISURE, INC., et al., Defendants.

No. 78-810-CIV-JAG.

United States District Court, S.D. Florida, S.D.

September 14, 1983.

COPYRIGHT MATERIAL OMITTED

C. Robert Murray, Jr., Miami, Fla., for plaintiff.

Robert Fischer, Cooper City, Fla., Guy B. Burns, St. Petersburg, Fla., Burton Ginsberg, North Miami Beach, Fla., Jesse C. Jones, Bailey & Dawes, Michael Olin, Miami, Fla., Carl L. Liggio, Arthur Young & Co., New York City, for defendants.

ORDER

GONZALEZ, District Judge.

THIS CAUSE has come before the court upon several pending motions. The court has considered the record and heard extensive oral argument by counsel.

Between June 24, 1971 and January 3, 1973, plaintiff, Roger L. Summer, purchased a total of 9,500 shares of Land & Leisure common stock in eleven installments at a total cost of $54,000.00. On February 23, 1978, Mr. Summer filed a complaint in the United States District Court for the Southern District of Florida alleging violations of the federal securities laws under Sections 11, 12(2) and 17 of The Securities Act of 1933, and of Section 10(b) of The Securities Exchange Act of 1934. Mr. Summer also claimed that by reason of a conspiracy among the several defendants to defraud investors and to conceal the fraud, the defendants engaged in a fraud actionable at common law.

On May 2, 1979, this court dismissed Mr. Summer's federal claims as barred by the statute of limitations and his pendent state claims because of the dismissal of the federal claims.

On December 28, 1981, the Fifth Circuit Court of Appeals reversed this court's findings that Mr. Summer's Section 10(b) and Section 17 claims were barred by the statute of limitations. The Fifth Circuit upheld this court's dismissal of Plaintiff's § 11 and § 12(2) claims. Summer v. Land & Leisure, Inc., 664 F.2d 965 (5th Cir.1981).

As a result, there is no federal claim against the individual defendants, Guy B. Bailey, Sr., Guy B. Bailey, Jr., Areca Stone Bailey, and Charlotte Babcock, pending before this court.

The Pendent State Claims

In Stowell v. Ted S. Finkel Investment Service, Inc., 489 F.Supp. 1209 (S.D. Fla.1980), the court dismissed a pendent state claim for common law fraud which had been joined to a federal securities claim. The court there determined that a case coupling a Florida common law fraud claim with a federal 10(b)(5) claim, was not one in which the power of pendent jurisdiction should be exercised. The court noted that the likelihood of jury confusion was great, and that the state law fraud claim constituted the "real body" of the case. Id. at 1215.

The court encouraged other district courts to decline the exercise of pendent jurisdiction over Florida common law claims included in federal 10(b)(5) actions. Judge King noted that "the plaintiffs in these actions are not prejudiced by the court's refusal to hear such state claims either at the inception of the case or at any other time during the pendency of the case before the court." Id. at 1220. The expiration of the statute of limitations during the pendency of the action would not prevent plaintiffs subsequent filing in state court since the running of the statute is tolled upon filing in federal court. Nor would plaintiffs be barred by collateral estoppel or res judicata from asserting their claims in the appropriate state forum.

Admittedly the state fraud claims may arise from the same set of events that give rise to federal 10b-5 claims. Nevertheless, district courts should not decide state claims which interfere with the proper adjudication of federal claims in the federal forum. The district courts must dismiss these claims in order to preserve the proper functions of federal courts. 489 F.Supp. at 1216-18. Accord, Young v. Elgart, Case No. 81-8163-CIV-EBD (S.D.Fla. November 23, 1981).

As in Stowell, plaintiff here seeks to join common law fraud claims with his federal securities claims. The same potential for confusion and pervasiveness of the state law claims noted by Judge King in Stowell exists here. In fact, plaintiff claims only $54,000 in damages for his federal claims, but wants $594,000 for his state claims.

An even more compelling reason to dismiss the state claims against the individual defendants is that there is no pending federal claim against said defendants before this Court.

It has consistently been recognized that pendent jurisdiction is a doctrine of discretion, not of plaintiff's right. Its justification lies in considerations of judicial economy, convenience and fairness to litigants; if these are not present, the federal court should hesitate to exercise jurisdiction over state claims, even though bound to apply state law to them ... Needless decisions of state law should be avoided both as a matter of comity and to promote justice between the parties by procuring for them a surefooted reading of applicable law. Certainly, if the federal claims are dismissed before trial, even though not insubstantial in a jurisdictional sense, the state claims should be dismissed as well. Similarly, if it appears that the state issues substantially predominate, whether in terms of proof, of the scope of the issues raised, or of the comprehensiveness of the remedies sought, the state claims may be dismissed without prejudice and left for resolution to state tribunals ... Finally, there may be reasons independent of jurisdictional considerations, such as the likelihood of jury confusion in treating divergent legal theories of relief, that would justify separating state and federal claims for trial ... If so, jurisdiction should ordinarily be refused. United Mine Workers of America v. Gibbs, 383 U.S. 715, 726-727, 86 S.Ct. 1130, 1139, 16 L.Ed.2d 218 (1966).

Plaintiff has no federal claim against the individual defendants. A trial of these state claims against the individual defendants together with the plaintiff's federal claims against the other defendants would result in jury confusion and involve this court in the needless decision of state law.

Accordingly, this court finds that Plaintiff's state claims against Land & Leisure and the individual defendants should be dismissed.

Defendant Raymond James and Associates, Inc's Motion to Dismiss the Complaint and the Amendments thereto and Motion to Strike Plaintiff's Complaint and the Amendments Thereto

On the other hand, this court finds that Defendant, Raymond James and Associates, Inc.'s Motion to Dismiss the Complaint and the Amendments thereto and Motion to Strike Plaintiff's Complaint and the Amendments thereto should be denied since the complaint complies with Rule 9(b) and, therefore, states a claim upon which relief can be granted under Section 10(b) of the Exchange Act, and Rule 10(b)(5).

The particularity requirement of Rule 9(b) has been satisfied by the plaintiff by including with his allegations a statement of the facts upon which his belief is founded.

In determining what level of specificity is required, the background of the parties and the information available to them must be considered.

The defendant, Raymond James & Associates, Inc. is a large corporation whose principal business is to underwrite public offerings of securities. On the other hand, Roger L. Summer is a small stockholder without access to much of the information necessary to successfully plead securities fraud allegations as required by Rule 9(b), Federal Rules of Civil Procedure.

In Felton v. Waltson & Company Incorporated, 508 F.2d 577 (2d Cir.1974), an action alleging fraud in the sale of stock, the court held that while the allegations were not as specific as might be desired, they did specify the agreements and amounts involved in the alleged misrepresentation. The court in Felton stated that it may well be that plaintiffs have no claim against the defendant but the proper manner in which to determine whether a claim exists is to require an answer and, if necessary, a trial of those issues. Id. at p. 185.

While the purpose of Rule 9(b) is to discourage unnecessary litigation, strict application of Rule 9(b) in an action by a private individual for securities fraud could result in substantial unfairness to persons who are the victims of fraudulent conduct.

This court finds that the allegations of the complaint and the amendments thereto comply with Rule 9(b) and therefore state a claim upon which relief can be granted under Section 10(b) of the Exchange Act and Rule 10b-5.

In Ernst & Ernst v. Hochfelder, 425 U.S. 185, 96 S.Ct. 1375, 47 L.Ed.2d 668 (1976), the Supreme Court held that the Rule 10b-5 implied cause of action requires a showing of scienter. The Court defined scienter as "a mental state embracing intent to deceive, manipulate or defraud." Id. at 193, 96 S.Ct. at 1381.

In Huddleston v. Herman & Maclean, 640 F.2d 534 (5th Cir.1981), the Fifth Circuit concluded that recklessness can, under certain circumstances, be sufficient to establish scienter for purposes of a Rule 10b-5 cause of action. The Court held that reckless conduct sufficient to serve as scienter must involve more than simple, or even inexcusable negligence. It requires an extreme departure from the standards of ordinary care which presents the danger of misleading buyers or sellers. Id. at 545.

Plaintiff has alleged that the defendant, Raymond James, knew at all times that the representations made to the plaintiff were untrue, that each was made for the purpose of allaying any concern of plaintiff about the safety of his investment, and that each was designed to cause plaintiff not to begin any action to enforce his legal rights against the company, or any of the parties involved in the preparation and dissemination of the false prospectus, or the cover-up. The foregoing considered, plaintiff has alleged scienter sufficient to plead a cause of action under Rule 10b-5.

Defendant Arthur Young and Company's Motion to Dismiss

Arthur Young and Company, accountants, has moved to...