City of Harrisburg v. Bradford Trust Co.

• Decision Date: 05 November 1985
• Docket Number: Civ. A. No. 85-0429.
• Citation: 621 F. Supp. 463
• Parties: CITY OF HARRISBURG, Plaintiff, v. BRADFORD TRUST COMPANY, Defendant.
• Court: U.S. District Court — Middle District of Pennsylvania

621 F. Supp. 463

CITY OF HARRISBURG, Plaintiff, v. BRADFORD TRUST COMPANY, Defendant.

Civ. A. No. 85-0429.

United States District Court, M.D. Pennsylvania.

November 5, 1985.

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

R. Stephen Shibla, Rhoads & Sinon, Nathan H. Waters, Jr., City Sol., Harrisburg, Pa., for plaintiff.

Lewis Kunkel, Pepper, Hamilton & Scheetz, Harrisburg, Pa., for defendant.

MEMORANDUM

RAMBO, District Judge.

Background and Procedural History

This case is brought by the City of Harrisburg (hereinafter referred to as Harrisburg or the City) against Bradford Trust Company (Bradford), a New York financial and banking institution. The Complaint, filed on April 1, 1985, alleges violation of the federal securities laws, Section 10(b) of the Securities and Exchange Act, 15 U.S.C. § 78j(b), and Rule 10(b)-5, 17 C.F.R. 240.10b-5, as well as common-law fraud and misrepresentation.

For purposes of the present motion to dismiss, the allegations of the complaint will be taken as true. The substance of Harrisburg's claim is that it suffered serious financial losses due to Bradford's fraudulent acts in connection with certain "repurchase transactions," also known as "repo agreements." Under these agreements, Harrisburg purchased securities from one E.S.M. Government Securities, Inc. (E.S.M.), a Florida corporation.¹ E.S.M. agreed to repurchase the securities on a certain date and at a certain price, which would yield a profit to the City on the funds invested. E.S.M. allegedly represented to the City that these securities were being deposited with Bradford in a segregated account for the City. Bradford also allegedly represented to the City "that the government securities being purchased by the City from E.S.M. were in the custody of Bradford and were being held by Bradford in a segregated account for the City of Harrisburg." Complaint, ¶ 10. Harrisburg claims that these representations were false. Further, the City alleges that Bradford failed to disclose "that it was or would become a substantial creditor of E.S.M. thereby creating a conflict of interest with its duties as a fiduciary," and also "failed to disclose that it would sell collateral for its own benefit and to the detriment of the City of Harrisburg, which it did." Complaint, ¶ 11.

As a result of Bradford's allegedly fraudulent and tortious conduct, Harrisburg claims that it suffered losses in excess of three million, six hundred thousand dollars, for which it seeks to be compensated. The City further requests punitive and exemplary damages as well as incidental and consequential damages, interest, and costs.

Presently before the court is the defendants' Motion to Dismiss filed on May 22, 1985. By order dated July 25, 1985, this court ruled that the motion would be converted to a Motion for Summary Judgment in view of the factual material which had been submitted by the parties. Upon defendant's request for clarification, submitted via letter dated July 29, the court subsequently modified that order and ruled that only the 12(b)(2) and 12(b)(3) prongs of the motion were to be converted; the 12(b)(6) and 9(b) motions, raising no factual issues, would remain as such.

Thus, the instant motion consists of three parts:

(1) a motion to dismiss for lack of in personam jurisdiction over the defendant, Fed.R.Civ.P. 12(b)(2), and for improper venue, Fed.R.Civ.P. 12(b)(3), which have been converted into a motion for summary judgment on those grounds under Federal Rule of Civil Procedure 56;

(2) a motion to dismiss for failure to state a claim upon which relief can be granted, Fed.R.Civ.P. 12(b)(6); and

(3) a motion to dismiss for failure to plead the allegations of fraud with sufficient particularity, as required by Federal Rule of Civil Procedure 9(b).

The court will proceed to address the merits of these motions seriatim.

1. Personal Jurisdiction and Venue

The defendant has moved to dismiss, inter alia, on the ground that this court lacks in personam jurisdiction, and that venue is improper in this district. Fed.R.Civ.P. 12(b)(2) and (3). Bradford contends that the court lacks jurisdiction both under the federal securities laws and under the Pennsylvania statutes which provide the basis for federal diversity jurisdiction. Because this court finds that it has jurisdiction pursuant to the federal statute, we need not address the state law argument.²

Section 27 of the Securities and Exchange Act of 1934 provides in pertinent part that

any suit or action to enforce any liability or duty created by this title or rules and regulations thereunder ... may be brought in any ... district ... wherein any act or transaction constituting the violation occurred ... or in the district where the defendant is found or is an inhabitant or transacts business, and process in such cases may be served in any other district of which the defendant is an inhabitant or wherever the defendant may be found.

15 U.S.C.S. § 78aa (Lawyers Edition 1983). It is well settled that this authorization of nationwide service of process is constitutionally valid.

Congress has the power to provide for the reach of service of process to the outer limits of the reach of its legislative power which, of course, is anywhere in the United States or its territories.... If suit under the Federal securities anti-fraud acts and rules thereunder is brought in a federal court, (the plaintiff) has the privilege of nationwide service of process.

Kramer v. Scientific Control Corp., 365 F.Supp. 780, 787 (E.D.Pa.1973) (citations omitted). See also, e.g., Fitzsimmons v. Barton, 589 F.2d 330 (7th Cir.1979); Mariash v. Morrill, 496 F.2d 1138 (2d Cir.1974) ("It is simply too late in the day to argue that Section 27 does not authorize nationwide service of process on any individual named in the complaint, provided, of course, the complaint states a claim under the 1934 Act"); Oxford First Corp. v. PNC Liquidating Corp., 372 F.Supp. 191 (E.D. Pa.1974).

Thus, if the defendant is served in the United States, the only objection to in personam jurisdiction that may be raised is "that the actual method of service employed was not reasonably calculated to inform the defendant of the pendency of the proceedings." Lehman Brothers Kuhn Loeb, Inc. v. Lawrence, 1981-1982 Transfer Binder Fed.Sec.L.Rep. (CCH) ¶ 98, 314 (S.D.N.Y.1981). Bradford has raised no such objection. Therefore, the focus of the motion to dismiss must be considered to be Bradford's objections to placing venue in the Middle District of Pennsylvania.

As cited above, Section 27 of the 1934 Act provides that venue is proper in a judicial district in which "any act or transaction constituting the violation occurred." 15 U.S.C.A. § 78aa. Defendant contends that its alleged misrepresentation and omissions did not "occur" in Pennsylvania, because its sole communication with the City consisted of two telephone calls, initiated by the plaintiff, to which Bradford merely responded. Such response was not sufficiently volitional, defendant argues, to constitute an "act or transaction" within the meaning of Section 27.

A party will be deemed to have effected an "act or transaction" within the meaning of the statute if there has been "any use of instrumentalities of the mails or other interstate facilities³ made within the forum district constituting an important step in ... the consummation" of the allegedly fraudulent scheme. State Teachers Retirement Board v. Fluor Corp., 500 F.Supp. 278, 289-90 (S.D.N.Y.1980) aff'd in part, rev'd in part on other grounds, 654 F.2d 843 (2d Cir.1981) (citations omitted) (emphasis supplied). See also, Sarratt v. Walker, 405 F.Supp. 132, 133-4 (D.S.C. 1975), citing, inter alia, Hooper v. Mountain States Securities Corp., 282 F.2d 195, 204-05 (5th Cir.1960), cert. denied, 365 U.S. 814, 81 S.Ct. 695, 5 L.Ed.2d 693 (1961). The venue provision "is intended to require some actual contact with the judicial district." Fluor, 500 F.Supp. at 290. This court must disagree with Bradford's underlying argument that as a matter of law the receipt of telephone calls, as opposed to the initiation of calls, does not qualify as "contact" with the forum and therefore is an improper basis for the establishment of venue. Several cases have held that venue "lies in both the district where the fraudulent communication was transmitted and the district where it was received." Black & Co. v. Nova-Tech, Inc., 333 F.Supp. 468, 473 (D.Ore.1971) (citations omitted) (emphasis added); Schneider v. H.A. Sears, 265 F.Supp. 257, 262 (S.D.N.Y.1967). In Wassel v. Eglowsky, 399 F.Supp. 1330 (D.Md. 1975), aff'd, 542 F.2d 1235 (4th Cir.1976), for example, venue was properly laid in the plaintiff's forum where the plaintiff contacted the defendants by telephone and left a message with the defendants' answering service. The defendants returned the call several days later. 399 F.Supp. at 1342. Parenthetically, it may be noted that in Wassel the plaintiff made his call in response to an advertisement placed by the defendants in the Wall Street Journal. There, the placing of such an advertisement constituted a volitional use of the forum in that the defendant could reasonably expect telephone inquiries from out of state. Here, Bradford's allegedly engaging in transactions in which it held the funds of out-of-state investors may similarly be said to establish that Bradford could reasonably expect inquiries from investors in other states.⁴

Thus, jurisdiction and venue are proper, under the Securities and Exchange Act, in the Middle District of Pennsylvania. This court further holds that it has pendent jurisdiction⁵ of the state law claim. Klein v. Tabatchnick, 610 F.2d 1043, 1051 (2d Cir.1979); International Controls Corp. v. Vesco, 593 F.2d 166 at 175, n. 5 (2d Cir. 1979), cert. denied, 442 U.S. 941, 99 S.Ct. 2884, 61 L.Ed.2d 311 (1979). Therefore, the court need not reach the question whether it may exercise diversity jurisdiction.

2. The Motion...