Briskin v. Glickman, 66 Civ. 4301.
Decision Date | 12 April 1967 |
Docket Number | No. 66 Civ. 4301.,66 Civ. 4301. |
Citation | 267 F. Supp. 600 |
Parties | Sam BRISKIN et al., Plaintiffs, v. Louis J. GLICKMAN et al., Defendants. |
Court | U.S. District Court — Southern District of New York |
Schwartz & Frank, New York City, for plaintiffs; George H. Schwartz, Harvey M. Sklaver, Paul E. Gelbard, and Frederick Schwartzman, New York City, of counsel.
Simpson Thacher & Bartlett, New York City, for defendants Franchard Corp. and Glickman Servicing Corp.; Roy L. Reardon and Joseph J. Ackell, New York City, of counsel.
Strasser, Spiegelberg, Fried & Frank, New York City, for defendants Louis A. Siegel and Seymour Young; George A. Spiegelberg and Michael N. Pollet, New York City, of counsel.
Gordon, Brady, Keller & Ballen, New York City, for defendant Louis J. Glickman; Sol I. Sokolsky, New York City, of counsel.
This is an action brought by four limited partners on behalf of themselves and all other purchasers and holders of limited partnership interests in 21 West Associates against the general partners of Associates and two corporations said to be controlled by the general partners. The complaint contains four separate counts—two predicated on federal law and two on state law.
The federal claims alleged are based on a violation of section 17(a) of the Securities Act of 1933, 15 U.S.C. § 77q(a), and a violation of section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and rule 10b-5, 17 C.F.R. § 240.10b-5, of the Securities and Exchange Commission.
The state claims are based on alleged violations of sections 352-c and 352-e of the New York General Business Law, McKinney's Consol.Laws, c. 20. Defendants have moved pursuant to Fed.R.Civ.P. 12(b) (1) to dismiss the state law claims on the ground that this court lacks jurisdiction, or in the alternative pursuant to Fed.R.Civ.P. 12(b) (6) that the state law counts fail to state a representative claim upon which relief can be granted.
The court will first consider defendants' contention that the court lacks jurisdiction over the state claims, since if defendants are correct on this ground, the court is without power to decide whether a representative claim can be brought.
Both parties agree that jurisdiction over the state claims cannot be predicated on diversity of citizenship since the requisite diversity is lacking. If jurisdiction is to be found it must be based on the doctrine of pendent jurisdiction. As has been noted many times, the doctrine of pendent jurisdiction was first given prominent exposition in the Supreme Court case of Hurn v. Oursler, 289 U.S. 238, 53 S.Ct. 586, 77 L.Ed. 1148 (1933). See generally Note, 62 Colum. L.Rev. 1018 (1962). The Court there observed the distinction between a case where two distinct grounds for relief (one federal and one state) were urged to support a single cause of action and the situation in which two separate and distinct causes of action were alleged. 289 U.S. at 245-246, 53 S.Ct. 586. In the former situation pendent jurisdiction would be upheld; in the latter it would not. The policy of avoiding needless duplication of judicial time underlies the doctrine. Hazel Bishop, Inc. v. Perfemme, Inc., 314 F.2d 399, 5 A.L.R.3d 1031 (2d Cir. 1963); Telechron, Inc. v. Parissi, 197 F.2d 757, 761 (2d Cir. 1952).
The pendent jurisdiction doctrine has been applied to sustain a state claim of common law fraud when violations of the Federal Securities Acts as alleged herein have been claimed. Errion v. Connell, 236 F.2d 447 (9th Cir. 1956). A common law fraud claim has been deemed pendent even where the Securities Act involved did not require proof of reliance and scienter. See Jung v. K. & D. Mining Co., 260 F.2d 607 (7th Cir. 1958); Wood v. Precise Vac-U-Tronic, Inc., 192 F.Supp. 619 (E.D.Pa.1961). See also Ellis v. Carter, 291 F.2d 270 (9th Cir. 1961).
Defendant contends that the state statutes involved in the instant case are complex, and therefore the common law fraud cases are distinguishable. Section 352-c of the New York General Business Law is an intrastate regulation in many ways similar to the interstate federal securities regulations. Section 352-e requires certain real estate ventures that make public offerings of securities to register with the state department of law a detailed prospectus of that offering. Advisory literature and advertisements connected with such offerings are also regulated. The section and regulations issued pursuant to it are quite detailed; however, in essence they are directed to misstatements and omissions of material fact in the prospectus and literature issued to induce investment. The plaintiffs, in paragraphs 13 and 14 of their complaint, in support of their claim under section 17(a) of the Securities Act of 1933, have detailed facts that were misstated and omitted from the prospectus issued by defendants. These same facts and no more are relied on in support of their state claims. This distinguishes the instant case from Wolfson v. Blumberg, 229 F.Supp. 191 (S.D.N.Y.1964), appeal dismissed, 340 F.2d 89 (2d Cir. 1965), relied on by the defendants. In Darwin v. Jess Hickey Oil Co., 153 F. Supp. 667 (N.D.Tex.1957), also relied on by the defendants, the state claim included "securities" that were not recognized as securities by federal law involved therein. Further, many distinctions were noted as to burden of proof.
Defendants have not shown that if the alleged facts are proven, this would not be a violation of the New York laws. As was stated in Errion v. Connell, supra, 236 F.2d at 454, "The thought of requiring two law suits in this situation is untenable." See also Lupardo v. I. N. M. Indus. Corp., 36 F.R.D. 438 (S.D.N.Y. 1965) ( ).
Defendants contend that if the federal court has jurisdiction, the plaintiffs' local claims should nevertheless be dismissed because they fail to allege a representative claim under state law. They argue that since the state courts would not allow the representative form, Erie R. R. v. Tompkins, 304 U.S. 64, 58 S.Ct. 817, 82 L.Ed. 1188 (1938), and its progeny compel this court to dismiss the state claims.
The state claims in this action could not be brought as representative claims under New York state law.
The issue is therefore presented as to whether the federal court must follow the state court in this instance. The parties agree that Erie R. R. v. Tompkins, supra, applies to state claims in the federal court under the doctrine of pendent jurisdiction. See Mintz v. Allen, 254 F.Supp. 1012 (S.D.N.Y.1966); 1A Moore, Federal Practice ¶ 0.3053, at 3056 and n. 14 (2d ed. 1965).
When the state law involved in diversity or pendent jurisdiction of the federal courts is clearly substantive, no problem arises, for Erie and the constitution itself compel the court to follow state law. Difficulties arise when the rule involved is one normally thought of as regulating procedure. Such is the case here, as the focus is on Federal Rule 23. The mere label of procedure, of course, does not answer the Erie problem. Guaranty Trust Co. of N. Y. v. York, 326 U.S. 99, 109, 65 S.Ct. 1464, 89 L.Ed. 2079 (1945). For a time judicial focus looked mainly at whether application of the federal rule would change the outcome of the result. See Guaranty Trust Co. of N. Y. v. York, supra; Ragan v. Merchants Transfer Co., 337 U.S. 530, 69 S.Ct. 1233, 93 L.Ed. 1520 (1949); Cohen v. Beneficial Loan Corp., 337 U.S. 541, 69 S.Ct. 1221, 93 L.Ed. 1528 (1949); Palmer v. Hoffman, 318 U.S. 109, 63 S.Ct. 477, 87 L.Ed. 645 (1943); Clark, Federal Procedural Reform and States' Rights; To a More Perfect Union, 40 Tex.L.Rev. 211 (1961).
The shifting sands of Erie policy have recently swayed away from the oversimplified outcome-determinative test. In Hanna v. Plumer, 380 U.S. 460, 85 S. Ct. 1136, 14 L.Ed.2d 106 (1965), the question presented was whether Erie would be applied in a diversity case to invalidate a service made in compliance with Fed.R.Civ.P. 4(d) (1) which would be invalid under state law. At the time of institution of suit the statute of limitations had not run. At the time of decision the statute of limitations was a bar and if the state rule were applied, the litigation would be at an end; if the federal rule...
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