Creswell-Keith, Inc. v. Willingham, 16022.

• Decision Date: 27 February 1959
• Docket Number: No. 16022.,16022.
• Citation: 264 F.2d 76
• Parties: CRESWELL-KEITH, INC., An Arkansas Corporation, Trustee for Creswell-Keith Mining Trust, Appellant, v. B. F. WILLINGHAM, W. S. Bradham (Also Known as W. S. (Pete) Bradham), Mildred Willingham, and Floy Bradham, Appellees.
• Court: U.S. Court of Appeals — Eighth Circuit

264 F.2d 76 (1959)

CRESWELL-KEITH, INC., An Arkansas Corporation, Trustee for Creswell-Keith Mining Trust, Appellant, v. B. F. WILLINGHAM, W. S. Bradham (Also Known as W. S. (Pete) Bradham), Mildred Willingham, and Floy Bradham, Appellees.

No. 16022.

United States Court of Appeals Eighth Circuit.

February 27, 1959.

N. L. Schoenfeld, Hot Springs, Ark., for appellant.

McMillan & McMillan, Arkadelphia, Ark., and Brown & Compton, El Dorado, Ark., for appellees.

Thomas G. Meeker, General Counsel, Joseph B. Levin, Asst. General Counsel, and Alger B. Chapman, Jr., Attorney, Washington, D. C., for Securities and Exchange Commission, amicus curiæ.

Before GARDNER, Chief Judge, and WOODROUGH and VAN OOSTERHOUT, Circuit Judges.

VAN OOSTERHOUT, Circuit Judge.

Plaintiff appeals from final judgment dismissing for lack of jurisdiction its complaint, invoking sections 12(2) and 17(a) of the Securities Act of 1933, as amended,¹ 15 U.S.C.A. §§ 77l(2) and 77q (a) (2), requesting rescission of allegedly fraudulent sales of securities. The complaint in substance alleged that plaintiff was induced to purchase undivided fractional interests in oil leases because of oral misrepresentations knowingly made by defendants to plaintiff's president, and asserted that plaintiff is entitled to rescind the purchases and recover the consideration paid. Defendants filed motions to dismiss for lack of jurisdiction.² If the action here involved falls within the provisions of section 12(2), jurisdiction is conferred upon the federal court by section 22, 15 U.S.C.A. § 77v.

The trial court dismissed the complaint for want of jurisdiction. The facts of this case and the reasoning upon which the trial court based the dismissal are fully set out in the trial court's opinion, D.C., 160 F.Supp. 735. The court held that it had no jurisdiction to grant the plaintiff the relief prayed for under section 12(2) since the complaint did not allege either (1) that the false representations were communicated by mail or interstate commerce, or (2) that the securities were delivered by mail or interstate commerce. It reasonably appears from the complaint that all alleged false representations were made orally face to face in Arkansas, and that the securities were delivered in Arkansas. Plaintiff pleaded that the mails were used to complete the payment of the consideration for the sales of the securities. The issue is whether such use of the mails brings the securities sales within the provisions of section 12(2).

Both plaintiff and defendants have filed briefs. The Securities and Exchange Commission has filed a brief amicus curiae, asserting its position that jurisdiction exists under the facts of this case. We regret that we were not given the benefit of oral argument to aid us in the solution of the difficult legal problems presented by this appeal.

The plaintiff and the Securities and Exchange Commission contend that section 12(2) does not require that the mails or an instrumentality of interstate commerce be used to transmit the misrepresentation or the securities involved. They contend that the mails and interstate commerce provision is inserted in the Act only for jurisdictional purposes, that Congress in the Securities Act intended to assert its full powers with reference to fraudulent sales of securities, and that any use of the mails or interstate commerce at any point in the transaction makes section 12(2) operative. The Securities and Exchange Commission in its brief thus states the interpretation problem and its solution thereof:

"1. The first question involved is the proper construction of the first three clauses or phrases of Section 12(2) which, for purposes of this discussion, are separated in the excerpt set forth below:

"Any person who * * * offers or sells a security * * *,

"by the use of any means or instruments of transportation or communication in interstate commerce or of the mails,

"by means of a prospectus or oral communication, which includes an untrue statement of a material fact or omits to state a material fact necessary in order to make the statements, in the light of the circumstances under which they were made, not misleading * * *

"shall be liable to the person purchasing such security from him * * *.

"As a matter of grammar, both clause two (`by the use of\', etc.) and clause three (`by means of a prospectus\', etc.) independently modify `offers or sells a security.\' Thus, the third clause modifies solely `offers or sells a security\' and is not merely an extension of the second clause. This is warranted by the comma between clauses two and three, by the absence of qualifying language, and by the commencement of both clauses two and three with the preposition `by\' which indicates that each was intended independently to modify the initial verbs.

"Thus viewed on the basis of the plain language of the section, in a sale of securities in which the mails or facilities of interstate commerce are used, the purchaser has a right of recovery against the seller for a misrepresentation however made, including one made orally `face to face.\' Furthermore, the statute does not prescribe how the mails or facilities of interstate commerce have to be used in the sale. Consequently, any use of the mails or interstate commerce in the offer or in the sale transaction suffices."

The substance of section 12(2) is set out in the foregoing quotation. The construction of the statute contended for is a permissible one.

It is quite true, as stated by the trial court, that there are no cases passing on the precise problem here confronting us. Various courts, however, have had occasion to interpret section 12(2), and have rejected the contention that section 12(2) is available only in the event the misrepresentation was made by mail or by interstate commerce, the courts holding that the mailing of the securities or the transporting of them in interstate commerce is sufficient to make the sale subject to the provisions of section 12(2). See Blackwell v. Bentsen, 5 Cir., 203 F.2d 690; Schillner v. H. Vaughan Clarke & Co., 2 Cir., 134 F.2d 875; Moore v. Gorman, D.C.S.D.N.Y., 75 F.Supp. 453; Athas v. Day, D.C.Colo., 161 F.Supp. 916; Annotation, 50 A.L.R.2d 1228, 1235.

In the Schillner case, supra, the false representations were made face to face, but the security was mailed to the purchaser. This circumstance was held sufficient to give the court jurisdiction to rescind the sale pursuant to section 12 (2). The court, in rejecting the argument that the statute requires the false representation to be made by the use of the mails or an instrumentality of interstate commerce states (at page 877 of 134 F.2d):

"* * * The argument assumes that this section requires the false or misleading statement which gives rise to the liability to be transmitted by mail or by use of an interstate instrumentality of transportation or communication. We do not think that this is the inevitable, or even the most natural, meaning of the statutory language. Liability to repay the consideration received is imposed upon any person who `sells a security * * * by the use of any means or instruments of transportation or communication in interstate commerce or of the mails, by means of a prospectus or oral communication\' of the untrue or misleading character described in the section. To accept appellant\'s construction would render the phrase `oral communication\' of most limited application because the section would then reach only interstate telephone calls or conversations where the parties might be talking across a state line. It would seem much more likely that Congress intended to make the statute applicable if one sells a security by use of the mails, even though the seller\'s untrue or misleading statement is communicated orally and intrastate. In the case at bar the contract of sale was concluded orally and the stock was paid for by the buyers without any use of the mails, but the mails were used for delivery of the stock certificate to the buyers. In our opinion such a transaction falls within both the letter and the purpose of the statute. Section 2(3) of the Act, 15 U.S.C.A. § 77b(3) provides that `unless the context otherwise requires\' the term `sale\' or `sell\' `shall include every contract of sale or disposition of * * * a security or interest in a security, for value.\' Delivery of the stock certificate pursuant to a contract of sale would seem to be a `disposition of * * * a security\' within this definition; consequently the seller who mails the certificate to the buyer `sells a security * * * by the use * * * of the mails.\'"

In Blackwell v. Bentsen, supra, the court, although finding that the sale-inducing representations were made orally face to face, found that it had jurisdiction under section 12(2) because the deeds and contracts consummating the transaction were transmitted by mail. The court considers and rejects contrary holdings, stating (at page 693 of 203 F.2d):

"* * * This is a remedial statute. It should be liberally construed to accomplish the dominant legislative purpose in adopting it, which is to prevent the use of the mails, and other instrumentalities of interstate commerce, in the perpetration of investment frauds. * * * Here the sales were apparently by oral communication, but the transactions were consummated by the use of the mails, which in our opinion brings the transaction within the statute. Delivery of the deeds and contracts is an integral part of the sale. * * *"

It is readily apparent that the courts deciding the Schillner and Blackwell cases have rejected the construction of the statute urged here by the defendants, the courts holding that the use of the mails in consummation of the sale by the delivery of the security brings the transaction within section 12(2), even though no mail or instrumentality of commerce was used to convey the false representation.

The defendants rely largely upon Kemper v. Lohnes, 7 Cir., ...