Delta Coal Program v. Libman

• Decision Date: 03 October 1984
• Docket Number: No. 83-8414,83-8414
• Citation: 743 F.2d 852
• Parties: , Fed. Sec. L. Rep. P 91,683 DELTA COAL PROGRAM, et al., Plaintiffs-Cross Claim Plaintiffs-Appellees, W. Paul Crum, Jr., and Mark W. Leonard, Plaintiffs-Cross-Claim Defendants- Appellants, v. Robert H. LIBMAN, et al., Defendants, Universal Heritage Investments Corporation, Defendant-Appellant.
• Court: U.S. Court of Appeals — Eleventh Circuit

Page 852

743 F.2d 852

40 Fed.R.Serv.2d 209, Fed. Sec. L. Rep. P 91,683

DELTA COAL PROGRAM, et al., Plaintiffs-Cross Claim Plaintiffs-Appellees W. Paul Crum, Jr., and Mark W. Leonard Plaintiffs-Cross-Claim Defendants- Appellants, v. Robert H. LIBMAN, et al., Defendants Universal Heritage Investments Corporation, Defendant-Appellant.

No. 83-8414.

United States Court of Appeals Eleventh Circuit.

Oct. 3, 1984.

John A. Christy, Lawrence S. Burnat, David H. Flint, Atlanta, Ga., for Crum & Leonard.

Phillip A. Bradley, Atlanta, Ga., Jeffrey L. Parker, Keith K. Hilbig, Torrence, Cal., for Universal.

Joseph Manning, David A. Rabin, Atlanta, Ga., for plaintiff-appellee.

Charles T. Huddleston, (as an interested party only) Atlanta, Ga., for Fieldstone.

Appeals from the United States District Court for the Northern District of Georgia.

Before RONEY and VANCE, Circuit Judges, and SIMPSON, Senior Circuit Judge.

VANCE, Circuit Judge:

Appellants Paul Crum, Mark Leonard, and Universal Heritage Investments Corporation (UHIC) bring this interlocutory appeal to challenge the district court's, order allowing thirty-five individual plaintiffs to be substituted for a limited partnership under Fed.R.Civ.P. 17(a). 554 F.Supp. 684. We affirm.

To facilitate our consideration, we recount only those aspects of the rather involved procedural maneuvering below that are germane to the questions presented by appellants. In 1977 Crum and Leonard entered into an agreement with UHIC in which they promised to promote the sale of a mining claim owned by defendant Kentucky Eastern Coal Company (Kentucky). Their efforts resulted in the sale of the mining claim on December 30 of that year to thirty-seven individuals, including Crum and Leonard, each of whom purchased an undivided working interest in the claim. On the same date Crum and Leonard formed Delta Coal Program (Delta), a limited partnership composed of the thirty-seven investors, to exploit the claim and to provide a tax shelter. Crum and Leonard served as co-managers of Delta.

The deal turned sour when some of the co-owners discovered that the mining claim was not as extensive as they had believed. In October 1979 Crum and Leonard filed suit in district court against several defendants, including Kentucky. They brought the suit as individuals and as co-managers of the third named plaintiff, Delta. The complaint alleged violations of sections 12(2) and 17(a) of the Securities Act of 1933 (15 U.S.C. Secs. 77l (2), 77q(a)), section 10(b) of the Securities Exchange Act of 1934 (id. Sec. 78j(b)) and Rule 10b-5 (17 C.F.R. Sec. 240.10b-5) promulgated thereunder, as well as state law securities and fraud claims. The complaint invoked the court's jurisdiction under the special jurisdictional provisions found in each of the two federal statutes, section 22(a) of the Securities Act, 15 U.S.C. Sec. 77v(a), and section 27 of the Securities Exchange Act, 15 U.S.C. Sec. 78aa. After it became apparent that Crum and Leonard might be liable to the co-owners for their part in the transaction, Delta retained separate counsel on May 29, 1980. In late October Delta added UHIC as a defendant, asserted RICO (18 U.S.C. Secs. 1961-1968) and state blue sky claims against the defendants, and filed a crossclaim against Crum and Leonard asserting all the federal claims then pending against the defendants. At this point, Delta invoked the court's jurisdiction under yet another statute, RICO's jurisdictional provision, 18 U.S.C. Sec. 1964(c).

With Delta now acting as the sole representative of the co-owners' interests, the district court attempted in June of 1982 to resolve an issue that had plagued the suit almost since Crum and Leonard's filing of the initial complaint--the status of Delta as a proper party plaintiff. In its opinion of June 7, the court agreed with the defendants that Delta was not entitled to assert any of its federal claims on its own behalf. The court concluded that Delta could not assert the securities claims under section 12(2), section 10(b) and rule 10b-5 because Delta, as opposed to the investors comprising Delta, was not a "purchaser" of securities. See 15 U.S.C. Sec. 77l (2); Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 95 S.Ct. 1917, 44 L.Ed.2d 539 (1975). Similarly, the court concluded that Delta could not pursue its RICO claim because the only entities possibly "injured in [their] business or property," 18 U.S.C. Sec. 1964(c), were the investors themselves. As to the section 17(a) claim, the court concluded that no private cause of action exists under that provision. ¹ Having disposed of all of Delta's federal claims, the court allowed Delta a week to decide whether to move for substitution of parties under Fed.R.Civ.P. 17(a) in case the individual investors wished to assert the viable federal claims themselves. On June 18 Delta and the investors filed a motion for substitution, which the court granted on September 20. The new plaintiffs filed an amended complaint reasserting against Crum, Leonard and each defendant the claims previously asserted by Delta.

Now on the defensive, Crum and Leonard join UHIC in appealing the district court's authorization of a rule 17(a) substitution. ² All three argue that the district court lacked subject matter jurisdiction over the federal claims at issue. UHIC further asserts that the requisites for a rule 17(a) substitution had not been established.

In addressing appellants' jurisdictional challenge, we acknowledge at the outset that federal courts are courts of limited jurisdiction. Where, as here, they exercise their decisionmaking power by virtue of special jurisdictional statutes, they must take care to exercise that power only within the limits established by Congress. At the same time, such statutes represent Congress' affirmative decision to assign to the federal courts a prominent role in shaping the substantive law in question. When the courts are called upon to determine what factors constitute essential elements to their jurisdiction under these special statutes, they should not infer requirements that would needlessly shut the courthouse door to the very kinds of controversies to which Congress particularly intended to afford a federal forum.

Appellants claim that each of the jurisdictional statutes in question confers jurisdiction on the district court only when the plaintiff properly alleges not only that the defendant has violated the substantive statute, but also that the plaintiff possesses the right being violated. They argue that because the federal claims here belonged to the investors, not Delta, Delta failed to meet the second jurisdictional requirement, and the court never had the power to entertain those claims. Given this fatal flaw in the court's jurisdiction over the federal claims, it also lacked the power to decide Delta's state law claims, as pendent jurisdiction can only be exercised where there first exists a federal claim that itself has "substance sufficient to confer subject matter jurisdiction on the court." United Mine Workers v. Gibbs, 383 U.S. 715, 725, 86 S.Ct. 1130, 1138, 16 L.Ed.2d 218 (1966). In short, appellants contend that because Delta had no claims that the district court had the power to hear, it should have been dropped from the litigation, leaving no entity for which the individual investors could have been substituted under rule 17(a). Appellants add that it would be improper for the district court to attempt to remedy its initial lack of jurisdiction by the substitution of the co-owners, because a lack of subject matter jurisdiction cannot be remedied retroactively by resort to procedural rules. See Pressroom Unions-Printers League Income Sec. Fund v. Continental Assurance Co., 700 F.2d 889, 893 (2d Cir.), cert. denied, --- U.S. ----, 104 S.Ct. 148, 78 L.Ed.2d 138 (1983); Fed.R.Civ.P. 82.

Our analysis need go no further than appellants' initial premise that the district court lacked subject matter jurisdiction over Delta's federal claims. The proper starting point is the wording of the three jurisdictional statutes invoked by appellees. See Aldinger v. Howard, 427 U.S. 1, 17, 96 S.Ct. 2413, 2421, 49 L.Ed.2d 276 (1976) (emphasizing importance of statutory language in case of special jurisdictional grant). Section 22(a) of the Securities Act of 1933, 15 U.S.C. Sec. 77v(a), grants the district courts jurisdiction over "offenses and violations under this subchapter and under the rules and regulations promulgated by the Commission in respect thereto." Similarly, section 27 of the Securities Exchange Act of 1934, 15 U.S.C. Sec. 78aa, grants the district courts "exclusive jurisdiction of violations of this chapter or the rules and regulations thereunder, and of all suits in equity and actions at law brought to enforce any liability or duty created by this chapter or the rules and regulations thereunder." Finally, appellees' jurisdictional grounding for their RICO claim lies in section 901(a) of the Organized Crime Control Act of 1970, 18 U.S.C. Sec. 1964(a)-(c), which accords the district courts jurisdiction over private actions challenging "violations of section 1962 of this chapter."

Common to each of these jurisdictional statutes is the requirement that there be a "violation" of the corresponding substantive statute. Though not construing the words of the statutes directly, courts in this circuit have given some contour to that requirement in the securities area. Our cases establish that because an element essential to a violation of section 10(b) or rule 10b-5 is a sale or purchase, plaintiffs who have been unable to characterize their key transactions with the defendants as such have failed to invoke subject matter jurisdiction for those claims. Reid v. Hughes, 578 F.2d 634 (5th Cir.1978); National Bank of Commerce v. All Am. Assurance Co., 583 F.2d 1295, 1298 (5th Cir.1978); Lutgert v. Vanderbilt Bank, 508 F.2d 1035, 1038 (5th Cir.1975). Here, the requirement of a...