Darwin v. Jess Hickey Oil Corporation

• Decision Date: 17 June 1957
• Docket Number: Civ. A. No. 3296.
• Citation: 153 F. Supp. 667
• Parties: A. J. DARWIN and Wife, Catherine Marie Darwin, Lewis R. Wilson, Lewis R. Wilson, Jr., and Wife, Maxine S. Wilson v. JESS HICKEY OIL CORPORATION, David H. Hickey and Jess Hickey.
• Court: U.S. District Court — Northern District of Texas

153 F. Supp. 667

A. J. DARWIN and Wife, Catherine Marie Darwin, Lewis R. Wilson, Lewis R. Wilson, Jr., and Wife, Maxine S. Wilson v. JESS HICKEY OIL CORPORATION, David H. Hickey and Jess Hickey.

Civ. A. No. 3296.

United States District Court N. D. Texas, Fort Worth Division.

June 17, 1957.

Hal M. Lattimore, Lattimore & Lattimore, Fort Worth, Tex., for plaintiffs.

C. O. McMillan, Stephenville, Tex., Mack Taylor, Fort Worth, Tex., for defendants.

ESTES, District Judge.

This is a suit brought by A. J. Darwin and wife, Catherine Marie Darwin, Lewis R. Wilson, and Lewis R. Wilson Jr. and wife, Maxine S. Wilson, against Jess Hickey Oil Corporation, a Delaaware corporation, David Hickey and Jess Hickey. The jurisdiction of the federal court is invoked upon the ground of alleged violations of the Federal Securities Act, Title 15 U.S.C.A. §§ 77a-77aa. The complaint also alleges violations of the Texas Securities Act, Arts. 579-580, Art. 600a, Vernon's Tex.Rev. Civ.Stat.^* By reason of such alleged violations plaintiffs contend that defendants are liable to Darwin and wife in the sum of $5,770, and to Lewis R. Wilson and Lewis R. Wilson, Jr. and wife in the sum of $2,700.

The complaint alleges that on or about May 12, 1955, defendants sold to plaintiffs Darwin and wife 25,000 shares of stock in the Jess Hickey Oil Corporation for $3,500; 10,000 shares of stock in the Mountain States Oil & Uranium Corporation for $1,000; and an oil and gas lease in Toole County, Utah, for $1,270. It is alleged that on or about June 1, 1955, defendants sold to Lewis R. Wilson and Lewis R. Wilson, Jr. and wife 14,500 shares of stock in the Jess Hickey Oil Corporation for $1,450; 5,000 shares of stock in the Mountain States Oil & Uranium Corporation for $500; and an oil and gas lease in Toole and Davis Counties, Utah, for $750. Plaintiffs demand judgment for the amounts paid for the stock and leases plus interest and costs.

The shares of stock purchased by the plaintiffs had previously been issued to David Hickey. The oil and gas lease assignments were from Jess Hickey and wife. All of the parties are residents of Fort Worth, Texas, and the transactions were consummated in the office of the Hickeys in Fort Worth, Texas. The checks received by David Hickey in the stock transaction were deposited, and subsequently were transmitted by mail from the depositing bank to the bank upon which they were drawn. The lease assignments were sent through the mails after being recorded in Toole County, Utah.

The defendants challenge the jurisdiction of the court on the ground that there was no use of the mails or other facilities of interstate commerce within the purview of the Federal Securities Act. Defendants further contend:

1. That the oil and gas lease assignments are not investment securities within the meaning of the Federal Securities Act.

2. That the federal court does not have jurisdiction of plaintiffs' alleged cause of action which might arise under the Texas Securities Act.

3. That the stock sales by David Hickey were secondary or private transactions, and are exempt under Title 15, § 77d of the Federal Securities Act as being transactions made by a person other than the issuer, or underwriter or dealer.

Jurisdiction of the Federal Court

The complaint, facts and evidence in the case do not show sufficient use of the mails or other instrumentalities of interstate commerce to invoke the jurisdiction of this court. The sale and purchase of the stocks was by an oral transaction which took place in the office of David Hickey in Fort Worth, Texas. Title to the stocks and complete control and dominion of the checks vested in purchaser and seller at the time of this arm-length transaction. The subsequent transmittal through the mails by the bank in which the checks were deposited to the bank upon which the checks were drawn does not bring the case within the prohibited area of Title 15, § 77e, relating to interstate commerce and the mails.

"It shall be unlawful for any person, directly or indirectly—(1) to make use of any means or instruments of transportation or communication in interstate commerce or of the mails * * *."

Even though the interpretation of the statute and of the phrase "directly or indirectly", be given a liberal construction it does not follow that the clearing of the checks between the banks, who were not parties to the transaction at all is sufficient to charge David Hickey with selling a security by use of any instrumentality of interstate commerce or of the mails. Neither does the mailing of a lease assignment for recording or after recording constitute sufficient use of the mails because the sales here involved were final, complete and irrevocable before the mails were used. Recording has nothing to do with the passing of title. The mails were not used for the purpose of executing the sales of the stocks or lease assignments. Kann v. U. S., 1944, 323 U.S. 88, 94, 65 S.Ct. 148, 150, 89 L.Ed. 88, is authority for the proposition that it does not suffice to show that the mails were used after the completion of a scheme.

"The banks which cashed or credited the checks, being holders in due course, were entitled to collect from the drawee bank in each case and the drawer had no defense to payment. The scheme in each case had reached fruition. The persons intended to receive the money had received it irrevocably. It was immaterial to them, or to any consummation of the scheme, how the bank which paid or credited the check would collect from the drawee bank. It cannot be said that the mailings in question were for the purpose of executing the scheme, as the statute requires."

The jurisdictional element of diversity of citizenship is also lacking. It is undisputed that all of the individual parties were residents of Texas. While the Jess Hickey Oil Corporation, a Delaware corporation, is named as a defendant, the evidence fails to establish that any of the alleged fraudulent sales were made by the corporation. The stocks were sold by David Hickey, and the lease assignments by Jess Hickey and wife, Etta M. Hickey. There were no sales by the corporation itself.

Even though there was no use of the mails or facilities of interstate commerce, and no diversity of citizenship, it does not follow that the court is without jurisdiction to decide the federal question presented. Plaintiffs have alleged that this action arises under the Securities Act, Title 15 U.S.C.A. §§ 77a-77aa. The Securities Act is one of those acts regulating commerce. By 28 U.S. C.A. § 1337, the United States District Courts have jurisdiction of "any civil action or proceeding arising under any Act of Congress regulating commerce". The theory was stated in Mulford v. Smith, 1939, 307 U.S. 38, 59 S.Ct. 648, 651, 83 L.Ed. 1092:

"Though no diversity of citizenship is alleged nor is any amount in controversy asserted so as to confer jurisdiction under subsection (1) of Section 24 of the Judicial Code, the case falls within subsection (8) which confers jurisdiction upon District Courts `of all suits and proceedings arising under any law regulating commerce'."

However, for the court to have jurisdiction under this section a federal question must be alleged. This theory is stated in Barron & Holtzoff, Federal Practice and Procedure, Vol. 1, Sec. 25 as follows:

"If a case involves a federal question, diversity of citizenship of the parties is not required for federal jurisdiction. District courts have original jurisdiction of all civil actions wherein the matter in controversy exceeds the sum or value of $3,000, exclusive of interest and costs, and arises under the Constitution laws or treaties of the United States."¹

"A federal question is presented in any case in which the correct decision depends upon the construction of the Constitution, treaties or laws of the United States or on the validity of a statute or treaty."

In the instant case substantial federal questions are alleged and the court has jurisdiction to adjudicate such issues. The federal questions are: (1) Were the lease assignments investment securities under the Federal Securities Act, Title 15 U.S.C.A., without proof that any of plaintiffs' money was obtained for, and went into, the drilling of oil wells by the defendants?

(2) Are the stock sales exempted transactions under this Act?

Oil Leases as Securities

The Act defines the term "security" to include, in addition to the well known corporate securities —

"* * * any * * * certificate of interest or participation in any profit-sharing agreement. * * * investment contract * * * fractional undivided interest in oil, gas, or other mineral rights." Title 15 U.S.C.A. § 77b(1).

It is to be noted that the definition as to oil and gas interest is confined to fractional undivided interests. In the instant case no fractional undivided interests were conveyed. The lease assignments in question do not come within the definition.

S. E. C. v. C. M. Joiner Leasing Corp., 1943, 320 U.S. 344, 64 S.Ct. 120, 88 L. Ed. 88 held that assignments of oil and gas leases in that case were "investment contracts". In that case widely circulated advertising matter was sent through the mails and referred to the leasehold as "securities". Prospective purchasers were urged to "invest"; they were invited to purchase leases on undescribed, unlocated acreage, which was to be selected in each case after the purchase by the promoters. The agreement to drill a well was an integral part of the entire transaction. The well had to be drilled or the entire original lease would have been forfeited. The court held the leases to be "investment contracts" or "investment securities" and seems to have used the terms synonymously.

The following language from S. E. C. v. W. J. Howey Co., 1946, 328 U.S. 293, 66 S.Ct. 1100, 1103, 90 L.Ed. 1244 may be a guide in determining whether the lease assignments in question should be considered to be "investment securities" under the Federal...