Carpenter v. Hall

• Citation: 352 F. Supp. 806
• Decision Date: 17 October 1972
• Docket Number: C.A. No. 68-H-738.
• Parties: Orville S. CARPENTER, Trustee, Plaintiff, v. E. M. HALL, Jr., et al., Defendants.
• Court: U.S. District Court — Southern District of Texas

352 F. Supp. 806

Orville S. CARPENTER, Trustee, Plaintiff, v. E. M. HALL, Jr., et al., Defendants.

C.A. No. 68-H-738.

United States District Court, S. D. Texas, Houston Division.

May 8, 1972.

On Motion for Reassignment October 17, 1972.

Andrews, Kurth, Campbell & Jones, James W. Dilworth, Houston, Tex., for plaintiff.

Coke & Coke, Houston, Tex., J. Edwin Fleming and Charles R. Haworth, Dallas, Tex., for defendants First National Bank in Dallas, Gene H. Bishop and William D. Breedlove.

MEMORANDUM OPINION

HANNAY, District Judge.

First National Bank in Dallas (the "Bank"), and two of its officers, Gene H. Bishop ("Bishop") and William D. Breedlove ("Breedlove"), all being named party defendants in the captioned action, have moved to dismiss the action as to them alleging that under 12 U.S.C. § 94¹ venue in the Southern District of Texas, Houston Division, is improper. Alternatively, Bishop and Breedlove have requested the Court to transfer the action as against them to the United States District Court for the Northern District of Texas, Dallas Division, under the authority of 28 U.S.C. § 1404(a).²

The Bank is a national banking association organized and existing under the laws of the United States, established and having its principal office and place of business in Dallas, Dallas County, Texas. Bishop and Breedlove were both officers of the Bank and residents of Dallas County at the time of the matters alleged against them by the Plaintiff in his First Amended Complaint. Dallas County lies within the territorial confines of the United States District Court for the Northern District of Texas, Dallas Division.³

The Plaintiff alleges that the Bank, Bishop and Breedlove violated Section 10(b) of the Securities and Exchange Act of 1934⁴ and Rule 10b-5⁵ promulgated thereunder. Jurisdiction is predicated on Section 2(a)(7) of the Bankruptcy Act,⁶ on Section 27 of the 1934 Act⁷ and on pendent jurisdiction.⁸

Venue is alleged to exist under Section 27 of the 1934 Act.⁹ The issue presented is whether venue in an action brought under the 1934 Act against a national bank is governed by the provisions of 12 U.S.C. § 94 or by Section 27 of the 1934 Act. It is undisputed that an "act or transaction constituting the violation occurred" within this division.

I. VENUE AS AGAINST THE BANK

The question presented is not new but has been decided by a number of courts. The numerical weight of the opinions is in favor of 12 U.S.C. § 94 and against the application of Section 27 venue. General Electric Credit Corp. v. James Talcott, Inc., 271 F.Supp. 699 (S.D.N.Y. 1966); Bruns, Nordeman & Co. v. Exchange Corp., 284 F.Supp. 387 (S.D.N. Y.1967), affirmed, 394 F.2d 300 (2d Cir. 1968), cert. denied, 393 U.S. 855, 89 S. Ct. 97, 21 L.Ed.2d 125 (1968); Berman v. Thomson, 284 F.Supp. 521 (N.D.Ill. 1968); Rome v. Eltra Corporation, 297 F.Supp. 314 (E.D.Pa.1969); United States National Bank v. Hill, 434 F.2d 1019 (9th Cir. 1970); and Klein v. Bower, 421 F.2d 338 (2d Cir. 1970). See Lemmon Pharmacal Co. v. Richardson, 319 F.Supp. 375 (E.D.Pa.1970) and Wyndham Associates v. Bintliff, 398 F. 2d 614, 618 (2d Cir. 1968), cert. denied, 393 U.S. 977, 89 S.Ct. 444, 21 L.Ed.2d 438 (1968). The contra case is Levin v. Great Western Sugar Company, 274 F. Supp. 974 (D.N.J.1967). The precise question presented is still open in the Fifth Circuit, but the Court is of the opinion that when the question is raised the Fifth Circuit Court of Appeals will adopt the reasoning in Levin, supra, and will hold that the 1934 Act controls.

The Court is presented with conflicting statements of the will of Congress. In 12 U.S.C. § 94 Congress has expressed its will of limiting the forums in which national banks are subject to suit while in Section 27 the Congressional mandate is to provide a flexible and multidistrict forum for enforcement of the remedial 1934 Act. It thus becomes important to determine the Congressional purpose behind both acts, since clearly one must yield to the other; and in this connection the Securities Act of 1933, which in Section 22(a)¹⁰ contains venue provisions as broad as in Section 27, must be considered.

The intent and purpose of Congress in enacting the 1933 and 1934 Acts has been stated many times by the scholars and courts. Thus in 1 Loss, Securities Regulation (2d ed. 1961) at 130-131, the statement is made,

Whereas the 1933 Act is concerned primarily with the distribution process, the 1934 Act has to do with post-distribution trading. It has four basic purposes: to afford a measure of disclosure to people who buy and sell securities; to prevent and afford remedies for fraud in securities trading and manipulation of the markets; to regulate the securities markets; and to control the amount of the Nation's credit which goes into those markets. Emphasis added

See also Reader v. Hirsch & Co., 197 F. Supp. 111, 114 (S.D.N.Y.1961).

In Pettit v. American Stock Exchange, 217 F.Supp. 21, 28 (S.D.N.Y.1963), the court stated that the goal Congress had in mind in enacting Section 10(b) was ". . . the protection of the integrity of stock transactions." Likewise, in Hooper v. Mountain States Securities Corporation, 282 F.2d 195, 202 (5 Cir. 1960), cert. denied, 365 U.S. 814, 81 S. Ct. 695, 5 L.Ed.2d 693 (1961), the Fifth Circuit stated:

. . . Quite obviously the broad purpose of this legislation the 1934 Act was to keep the channels of interstate commerce, the mail, and national security exchanges free from fraudulent schemes, tricks, devices, and all forms of manipulation.

In Peoples Securities Co. v. Securities and Exchange Commission, 289 F.2d 268, 271 (5th Cir. 1961), the Fifth Circuit again commented on the factors behind the 1933 and 1934 Act and in so doing stated:

The Exchange Act has three basic purposes: to require dealers to disclose certain basic information to the investing public; to regulate the securities markets; and to control the amount of the nation's credit that goes into those markets. (Emphasis added)

More recently, in Lehigh Va. Trust Co. v. Central Nat. Bank of Jacksonville, 409 F.2d 989, 993 (5th Cir. 1969) the Fifth Circuit confirmed the policy of Congress in enacting Section 10(b) and Rule 10b-5,

"`. . . to protect interstate commerce, the national credit, . . . to protect and make more effective the national banking system and the Federal Reserve System, and to insure the maintenance of fair and honest markets in such transactions.'" 15 U.S.C.A. § 78b. (Emphasis added)

In order to implement and enforce the policies of the 1933 and 1934 Acts, Congress has also seen fit to provide, in Section 22(a) and Section 27, respectively, for nationwide service of process and for venue "in the district wherein the defendant is found or is an inhabitant or transacts business, or in the district where the offer or sale took place, if the defendant participated" Section 22(a) and "in any such district "in the district wherein any act or transaction constituting the violation occurred" or in the district wherein the defendant is found or is an inhabitant or transacts business" (Section 27). The announced policy of Congress in the 1933 and 1934 Acts is, therefore, to provide a convenient forum for suits involving multi-state frauds, no matter how many states the defendants are citizens of or conduct business in. Clapp v. Stearns & Co., 229 F.Supp. 305, 307 (S.D.N.Y. 1964). See Hooper, supra, 282 F.2d at 201. The jurisdictional and venue provisions of the federal securities laws are the teeth for the enforcement of this important legislation.

That 12 U.S.C. § 94 does not prevail over the venue provisions of the 1933 and 1934 Acts is also supported by an analysis of the intent of Congress in enacting the former. In First National Bank of Charlotte, North Carolina v. Morgan, 132 U.S. 141, 10 S.Ct. 37, 33 L. Ed. 282 (1889), Justice Harlan, speaking for the Court, commented on the Congressional intent in enacting the forerunner of 12 U.S.C. § 94, as follows:

. . . This exemption of national banking associations from suits in state courts, established elsewhere than in the county or city in which such associations were located, was, we do not doubt, prescribed for the convenience of those institutions, and to prevent interruption in their business that might result from their books being sent to distant counties in obedience to process from state courts. First Nat. Bank of Bethel v. Pahquioque Nat. Bank, 81 U.S. 14 Wall. 383, 384 20 L.Ed. 840, 842; Crocker v. Marine Nat. Bank, 101 Mass. 240.

In 1889, the date of the decision in First National Bank of Charlotte, North Carolina, the modern facilities for reproduction and transportation could not have been imagined. Today Xerox-type copy machines are as readily available as typewriters, and no two cities are as much as a half a day apart. Moreover the national impact of securities frauds, a by-product of modern communication technology, was already a major threat when Congress passed the 1933 and 1934 Acts.

At the time of enacting the 1933 and 1934 Acts Congress was also aware of the special status of national banks. This is fully evident by resort to the Acts themselves. Congress specifically created exemptions for national banks in Section 3(a)(2) 15 U.S.C. § 77c(a)(2) —exemption of securities issued or guaranteed by national banks and in Section 12(2) of the 1933 Act 15 U.S.C. § 77l(2)—exemption of securities so issued or guaranteed from civil liabilities. Regulation "U" (12 C.F.R. 221.1), promulgated by the Board of Governors of the Federal Reserve System under the express statutory authority contained in Section 7 of the 1934 Act (15 U.S.C. 78g), contains specific and detailed provisions relating to banks, and providing in substance that for the purpose of preventing the excessive use of the nation's credit in the securities market it is unlawful for a bank to make any loan secured by any stock for the purpose of purchasing or carrying any stock listed on a national...