British-American Insurance Company Ltd. v. Lee

• Decision Date: 03 October 1975
• Docket Number: Civ. A. No. 74-241.
• Parties: BRITISH-AMERICAN INSURANCE COMPANY LIMITED, a Bahamian Corporation, and British-American Management Limited, a Bahamian Corporation, Plaintiffs, v. Laurence F. LEE, Jr. and Ruth W. Lee, his wife, Defendants.
• Court: U.S. District Court — District of Delaware

403 F. Supp. 31

BRITISH-AMERICAN INSURANCE COMPANY LIMITED, a Bahamian Corporation, and British-American Management Limited, a Bahamian Corporation, Plaintiffs, v. Laurence F. LEE, Jr. and Ruth W. Lee, his wife, Defendants.

Civ. A. No. 74-241.

United States District Court, D. Delaware.

October 3, 1975.

Rodman Ward, Jr., and John H. Small, Prickett, Ward, Burt & Sanders, Wilmington, Del., for plaintiffs.

Vincent A. Theisen and Steven D. Goldberg, Theisen, Lank & Mulford, Wilmington, Del., for defendants.

OPINION

LATCHUM, Chief Judge.

This case is before the Court on the defendants' motion to dismiss the action for improper venue.

The plaintiffs are British-American Insurance Company Limited ("B-A") and its wholly owned subsidiary British American Management Limited ("B-AM"), both of which are incorporated under the laws of the Bahamas and maintain their principal offices at Nassau, Bahamas. None of the plaintiffs' businesses is conducted in the United States. The defendants, Laurence F. Lee, Jr. ("Lee") and his wife Ruth W. Lee ("Ruth"), are citizens and residents of the State of Florida. The original complaint, filed on November 12, 1974, alleged in substance that the defendant Lee, who was B-A's chief executive officer and chairman of the board of directors at all times material hereto until February 18, 1974, used the McMillen Trust¹ to guarantee his complete domination of B-A's board, its officers and all of its affairs to achieve a continuous course of wrongful conduct which permitted the Lees to profit personally from B-A, to waste the corporate assets and to otherwise engage in conduct which was violative of Lee's fiduciary duties and obligations to B-A. Subject matter jurisdiction of the original complaint was based solely on diversity of citizenship under 28 U.S.C. § 1332(a)(2).² Property³ belonging to the defendants and having a situs in Delaware was sequestered and attached pursuant to 10 Del.C. § 365 and § 3506; Del.Ch. Rule 4(db); Del.Super.Ct. Civil Rule 4(b); and Rule 4(e), F.R.Civ.P.

After the motion to dismiss for improper venue was filed, the plaintiffs on January 27, 1975 filed a "first amended complaint" which repeated the allegations of wrongs of the original complaint and added a claim of an alleged violation of the Securities Exchange Act of 1934 (the "'34 Act"), 15 U.S.C. § 78a et seq.⁴ The added allegations charged that pursuant to a conspiracy with Ruth, Lee with the continuing approval and support of Wilmington Trust Comany, successor Trustee of the McMillen Trust, exercised dominion and control over B-A to prevent the registration of B-A's securities with the Securities and Exchange Commission in violation of Section 12(g) of the '34 Act, 15 U.S.C. § 78l, after such registration was required in 1967.⁵ The Lees were served with a summons and the first amended complaint on February 13, 1975 pursuant to § 27 of the '34 Act, 15 U.S.C. § 78aa, and § 22 of the Securities Act of 1933, 15 U.S.C. § 77v.⁶ Discovery initiated by the plaintiffs was, upon motion of the Lees, restricted to issues of jurisdiction and venue. On April 1, 1975, the plaintiffs filed a "second amended complaint" which substantially embodied all the allegations of the first amended complaint and added the further claim that the Lees, inter alia, by virtue of the control Lee exercised over B-A, engaged in a series of efforts to manipulate and inflate the over-the-counter market price of B-A unregistered shares by causing subsidiaries of Peninsular Life Insurance Company to buy B-A stock in order to maintain the market price of B-A's shares which the Lees had pledged as security for their personal loans.⁷ This, the plaintiffs allege, was in violation of § 10(b) of the '34 Act, 15 U.S.C. § 78j(b), and Rule 10b-5 promulgated thereunder.

The defendants contend that whether jurisdiction of the second amended complaint is based on diversity jurisdiction, 28 U.S.C. § 1332(a)(2), or on violations of the '34 Act, venue is improper in this district. The Court agrees.

First with respect to the claims involving the violation of the '34 Act as alleged in the second amended complaint, venue is determined under § 27 of the '34 Act, 15 U.S.C. § 78aa. This section provides that an action to enforce any liability or duty created by the '34 Act or rules or regulations thereunder may be brought in any district (1) wherein any act or transaction constituting the violation occurred or where the defendant (2) is found, (3) is an inhabitant, or (4) transacts business.

The plaintiffs do not rely on venue over the defendants on the basis they were "found" or were "inhabitants" of the District of Delaware because the record shows that both defendants are non-residents of Delaware who actually reside in Orange Park, Florida.⁸ Rather plaintiffs contend that venue properly exists here because § 27 allows suit to be brought "in the district wherein any act or transaction constituting the violation occurred." Citing Puma v. Marriott, 294 F.Supp. 1116, 1120 (D.Del.1969); Jacobs v. Tenney, 316 F.Supp. 151, 157-160 (D.Del.1970); Prettner v. Aston, 339 F.Supp. 273, 280 (D.Del.1972) and Mayer v. Development Corporation of America, 396 F.Supp. 917 (D.Del.1975), they argue that this provision of § 27 allows venue to be established in either of two ways: first, by showing that an act was committed in this district constituting a violation of the '34 Act, or alternatively, by showing that the act upon which venue is predicated was "an integral part of" or "of material importance to" the commission of the '34 Act violations. The plaintiffs also concede that "since none of the Lees' actions in this District are alleged to be, in themselves, illegal, venue here lies under the alternate theory. . . ."⁹ The plaintiffs assert that the basis on which venue should be predicated is the "control" that the Lees exercised over B-A and its subsidiaries through the McMillen Trust, which has a Delaware situs and which was and is administered in Wilmington. The argument runs that Lee, both through his personal contact with the Trustee and the personal influence he had with the Trust beneficiaries, was able to control the Trustee, the voting of the 66% of B-A's stock and in turn B-A, and that had not Lee been able to direct the voting of the B-A stock, held in Delaware, he would not have been able effectively to violate the '34 Act to prevent B-A from registering its stock with the Securities and Exchange Commission in violation of § 12 (g) or to manipulate the over-the-counter market of B-A's shares in violation of § 10(b). Such control and direction of B-A through the McMillen Trust in Delaware, plaintiffs say, is sufficient to support venue in Delaware because the control exercised here was "an integral part of" or "of material importance to" the commission of the two alleged violations of the '34 Act.

The difficulty, however, with this argument is the absence of sufficient factual support in the record. The evidence before the Court does not show that the McMillen Trustee was ever "controlled" or "dominated" by either of the Lees or by both of them. The record clearly shows (1) that Wilmington Trust, as successor Trustee of the McMillen Trust, holds legal title to approximately 66% of B-A's outstanding capital stock,¹⁰ (2) that the Trust Agreement provides that the B-A stock shall be voted by the Trustee as a unit and in such manner as the majority in interest of the beneficiaries shall determine,¹¹ (3) that a Vice President of the Trustee voted B-A's shares held in trust at stockholders' meetings in Nassau, Bahamas in strict conformity with the written or oral instructions given by the majority in interest of the Trust beneficiaries at the time in being,¹² (4) that during the period of time covered by the complaint, the beneficiaries of the Trust who instructed the Trustee as to the manner of voting the B-A stock were (a) Eileen McMillen Lee, one-third interest, mother of the defendant Lee, (b) Katherine McMillen Woodson, one-third interest, aunt of the defendant Lee, (c) Sheila Rodey Witte, until her death in June 1972, one-third interest, a first cousin of Lee, (d) Lonnie McMillen Sanchez, beginning in June 1972, one-sixth interest and (3) Katherine Morrison Faust, beginning in June 1972, one-sixth interest,¹³ and (5) that defendant Lee never gave the Trustee instructions as to how to vote the stock and if such had been given which were contrary to the instructions of the beneficiaries they would not have been accepted.¹⁴ The record is also clear that the Trust beneficiaries were and are all non-residents of the State of Delaware.¹⁵ Even if Lee influenced the beneficiaries as to the voting instructions that they gave the Trustee by accepting his advice, these acts of influence did not take place in Delaware, but in those districts where the beneficiaries resided.¹⁶ The Court is unable to conclude on this record that the Lees committed any acts of "control" in Delaware over the Trustee of the McMillen Trust that could be considered "an integral part of" or "of material importance to" the two alleged violations of the '34 Act.

Furthermore, while plaintiffs point out that Lee was in Wilmington on several different occasions from 1968 until May 30, 1973, most of these visits apparently related to either possible litigation or to litigation instituted by Wilmington Trust Company as Trustee of the McMillen Trust to obtain instructions from the Delaware Court of Chancery concerning (1) authority of the Trustee to hold shares in a holding company rather than shares in the insurance companies themselves, and (2) the right of the two minor daughters of Mrs. Witte to give the Trustee instructions for voting B-A shares after Mrs. Witte's death.¹⁷ The Delaware Chancery suits were instituted by the Trustee of the McMillen Trust to obtain court instructions on how to vote B-A's stock as a unit since it had obtained conflicting instructions from the beneficiaries and...