Dudley v. Southeastern Factor and Finance Corp., 30641.

Decision Date12 October 1971
Docket NumberNo. 30641.,30641.
Citation446 F.2d 303
PartiesGeorge E. DUDLEY, Receiver for Insurance Investors Trust Company, Plaintiff-Appellant, v. SOUTHEASTERN FACTOR AND FINANCE CORPORATION et al., Defendants-Appellees.
CourtU.S. Court of Appeals — Fifth Circuit

Richard L. Parker, Charles D. Read, Jr., Atlanta, Ga., John E. Boyce, Stuart A. Handmaker, Louisville, Ky., for plaintiff-appellant; Handmaker, Weber & Meyer, Louisville, Ky., Grizzard, Jones, Parker & Simons, Atlanta, Ga., of counsel.

E. Lewis Hansen, Martin H. Rubin, Gerald A. Friedlander, Frank B. Hester, Joseph R. Manning, Richard M. Hester, Hester & Hester, Atlanta, Ga., Daniel P. Matthews, Atlanta, Ga., Ivan A. Ezrine, New York City, Richard T. Bridges, Thomaston, Ga., for defendants-appellees.

Bruce W. Skinner, pro se.

Before WISDOM, Circuit Judge, DAVIS*, Judge, and GOLDBERG, Circuit Judge.

Certiorari Denied October 12, 1971. See 92 S.Ct. 109.

DAVIS, Judge:

This is another case staking out a piece of the already crowded field of "sellers" and "purchasers" of securities under § 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b) (1964) and its enabling rule, Rule 10b-5, 17 C.F.R. § 240.10b-5 (1971). We are called upon to determine whether appellant George Dudley, acting as representative of Insurance Investors Trust Company (IITC), has such standing on the basis of the assertions in his complaint. He was appointed receiver of IITC (a Kentucky corporation) in 1967 and discovered among its assets a certificate of ownership of shares of the preferred stock of Southeastern Factor and Finance Corporation (SEFAF), incorporated in Georgia. Authorized by the court which appointed him to assert and enforce all of IITC's claims, appellant brought this action in the Northern District of Georgia against SEFAF, certain of its principals, its shareholders as a class, and other corporations, alleging that through a liquidation of SEFAF in which IITC was not allowed to participate, IITC was defrauded of its investment in SEFAF, contrary to § 10(b) and Rule 10b-5 (and also of § 17(a) of the Securities Act of 1933, 15 U.S.C. § 77q (1964)). The suit sought damages from the wrongdoers, or in the alternative equitable relief to allow IITC to recover the value of stock distributions from the persons to whom they were made since, in IITC's view, those distributions should have gone to it. The District Court, 315 F.Supp. 1019, dismissed the action on the ground that the complaint did not show that IITC was a "seller" or "purchaser" of securities within the coverage of the statute and the rule, and the appeal is from that judgment.

Since the case is before us on a motion to dismiss, we must, of course, take as true all the factual allegations of the complaint, supplemented by its exhibits. Coffee v. Permian Corp., 434 F.2d 383, 384 (C.A.5, 1970); Kahan v. Rosenstiel, 424 F.2d 161, 164 (C.A.3), cert. denied sub nom. Glen Alden Corp. v. Kahan, 398 U.S. 950, 90 S.Ct. 1870, 26 L.Ed.2d 290 (1970); Iroquois Industries, Inc. v. Syracuse China Corp., 417 F.2d 963, 965 (C.A.2, 1969), cert. denied, 399 U.S. 909, 90 S.Ct. 2199, 26 L.Ed.2d 561 (1970). These show that in July 1966 IITC transferred to SEFAF 690,996 shares of the stock of Acme, Inc., in return for which SEFAF issued 167,624 shares of its own preferred stock to IITC. Some 39,000 of these SEFAF shares were later disposed of by IITC, leaving it with at least 128,158 shares.1 In June 1967 SEFAF entered into an agreement with Atlantic Services, Inc. (Atlantic) under which SEFAF conveyed virtually all its assets to Atlantic in return for some 32,500 shares of preferred stock, and some 175,000 common shares, of Atlantic. It is then asserted that these Atlantic shares were distributed, under a plan to liquidate SEFAF, to SEFAF's creditors and to its shareholders, except for IITC which did not receive any distribution. These transactions between SEFAF and Atlantic are said to have occurred without IITC's knowledge or consent, in fraud of its rights, and through use of the mails and instrumentalities of interstate commerce. The result, in appellant's view, was to leave IITC with stock in a corporation which lacks operative existence.2

The two texts which frame our answer to the query whether these allegations are enough to invoke federal jurisdiction (under the securities legislation) provide:

Section 10(b) of the Securities Exchange Act of 1934:

"It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce or of the mails, or of any facility of any national securities exchange —
* * * * * *
(b) To use or employ, in connection with the purchase or sale of any security registered on a national securities exchange or any security not so registered, any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors." 15 U.S.C. § 78j(b) (1964) (emphasis added).

Rule 10b-5 of the Securities and Exchange Commission:

"It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails or of any facility of any national securities exchange,
(a) to employ any device, scheme or artifice to defraud,
(b) to make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or
(c) to engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person,
in connection with the purchase or sale of any security." 17 C.F.R. § 240.10b-5 (1971) (emphasis added).

The leading case of Birnbaum v. Newport Steel Corporation, 193 F.2d 461 (C.A.2), cert. denied, 343 U.S. 956, 72 S.Ct. 1051, 96 L.Ed. 1356 (1952), interpreted the italicized phrase in both statute and rule as limiting permissible plaintiffs in a civil action under the rule to "purchasers" or "sellers" of securities. While this reading may not have been inherent in the literal language, cf. Mutual Shares Corporation v. Genesco, Inc., 384 F.2d 540, 543-544 (C.A.2, 1967), and despite some academic criticism, see, e. g. Leech, Transactions in Corporate Control, 104 U.Pa.L.Rev. 725, 832-35 (1956); Comment, 100 U.Pa.L.Rev. 1251 (1952), and even a judicial prediction of Birnbaum's demise, Entel v. Allen, 270 F.Supp. 60, 70 (S.D.N.Y.1970), that holding remains, as Judge Wisdom put it, "bloody but unbowed" within its circuit. Rekant v. Desser, 425 F.2d 872, 877 (C.A.5, 1970). See Iroquois Industries, Inc. v. Syracuse China Corporation, 417 F.2d 963 (C.A.2, 1969), cert. denied, 399 U.S. 909, 90 S.Ct. 2199, 26 L.Ed.2d 561 (1970); Greenstein v. Paul, 400 F. 2d 580, 581 (C.A.2, 1968). In a trilogy of recent cases,3 this court (through the pen of Judge Ainsworth) thoroughly considered the "purchaser"/"seller" requirement, and adopted the Birnbaum rule for this region, saying that "for a plaintiff to establish his standing to maintain a Rule 10b-5 action for damages, he must be a purchaser or seller of the securities involved in connection with the alleged rule violation." Herpich v. Wallace, supra, 430 F.2d 792, 806 (C.A.5, 1970).

But it has also been pointed out, many times, that the purchaser-seller requirement does not demand a sale in "the strict common law traditional sense," Hooper v. Mountain States Securities Corporation, 282 F.2d 195, 203 (C.A.5, 1960), cert. denied, 365 U.S. 814, 81 S.Ct. 695, 5 L.Ed.2d 693 (1961); Herpich v. Wallace, supra, 430 F.2d 792, 806 (1970); and Birnbaum's progeny have for the most part interpreted those terms very liberally.4 For example, in Ruckle v. Roto American Corporation, 339 F.2d 24 (C.A.2, 1964), a company caused by its control group to issue treasury shares at prices arbitrarily established was held to be a seller within the rule. See Schoenbaum v. Firstbrook, 405 F.2d 215, 219 (C.A.2, 1968) (en banc), cert. denied sub nom. Manley v. Schoenbaum, 395 U.S. 906, 89 S.Ct. 1747, 23 L.Ed.2d 219 (1969). In A. T. Brod & Co. v. Perlow, 375 F.2d 393 (C.A.2, 1967), a stockbroker whose customer ordered stock, but refused to pay for it if its market price had not increased by the payment date, was held to have standing as a purchaser; the court said that "novel or atypical methods should not provide immunity from the securities laws." 375 F.2d at 397. In Dasho v. Susquehanna Corporation, 380 F.2d 262 (C.A.7), cert. denied sub nom. Bard v. Dasho, 389 U.S. 977, 88 S.Ct. 480, 19 L.Ed.2d 470 (1967), Susquehanna Corporation agreed to merge the American Gypsum Company into it by issuing shares to Gypsum's stockholders pursuant to a prescribed exchange ratio. The Seventh Circuit held that Susquehanna's exchange of its shares for Gypsum's assets in order to merge the two companies was a sale of securities, and Susquehanna had standing to assert a violation of the rule. See also Herpich v. Wallace, supra, 430 F.2d 792, 809 (C.A.5, 1970); Erling v. Powell, 429 F.2d 795, 798 (C.A.8, 1970); Crane Company v. Westinghouse Air Brake Company, 419 F.2d 787, 797-798 (C.A.2, 1969); cert. denied, 400 U.S. 822, 91 S.Ct. 41, 27 L.Ed.2d 50 (1970); Mader v. Armel, 402 F.2d 158, 160-161 (C.A.6, 1968), cert. denied sub nom. Young v. Mader, 394 U.S. 930, 89 S.Ct. 1188, 22 L.Ed.2d 459 (1969); Hooper v. Mountain States Securities Corp., supra, 282 F.2d 195, 202-203 (C.A.5, 1960).

Applying this general canon of broad construction is a line of 10b-5 decisions which is particularly close, in facts and rationale, to our case. In Vine v. Beneficial Finance Company, 374 F.2d 627 (C.A.2), cert. denied, 389 U.S. 970, 88 S.Ct. 463, 19 L.Ed.2d 460 (1967), the plaintiff was a shareholder of a corporation, Crown Finance Company, most of whose stock had been acquired by ...

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