Head v. Head

• Decision Date: 24 April 1985
• Docket Number: No. 84-1116,84-1116
• Citation: 759 F.2d 1172
• Parties: Fed. Sec. L. Rep. P 92,022 Joan G. HEAD, Appellant, v. Howard HEAD, Appellee.
• Court: U.S. Court of Appeals — Fourth Circuit

Page 1172

759 F.2d 1172

Fed. Sec. L. Rep. P 92,022

Joan G. HEAD, Appellant, v. Howard HEAD, Appellee.

No. 84-1116.

United States Court of Appeals Fourth Circuit.

Argued Jan. 8, 1985.

Decided April 24, 1985.

Gary I. Strausberg and Kenneth D. Pack, Baltimore, Md. (Melnicove, Kaufman, Weiner & Smouse, P.A., Baltimore, Md., on brief), for appellant.

Melvin J. Sykes, Baltimore, Md. (Max R. Israelson, Baltimore, Md., on brief), for appellee.

Before WINTER, Chief Judge, and PHILLIPS and MURNAGHAN, Circuit Judges.

James Dukson PHILLIPS, Circuit Judge:

Joan Head appeals from an order of the United States District Court for the District of Maryland granting summary judgment in favor of her ex-husband, Howard Head, in her claims against him for alleged violation of anti-fraud provisions of the federal securities law in their property settlement agreement. We now affirm the judgment of the district court.

I

Joan and Howard Head were married on June 11, 1968. Howard had children by a previous marriage, so the couple entered into an antenuptial agreement that limited Joan's access to Howard's considerable wealth in the event of death or divorce. Howard's wealth increased substantially during the marriage due to his invention of the Prince tennis racket and his ownership of the company that manufactured and marketed the racket, Prince Manufacturing Incorporated (PMI).

On September 24, 1981, Joan filed for divorce a mensa et thoro in Maryland state court. After several months of negotiations the lawyers for the respective parties worked out a property settlement agreement that was signed by the parties on December 30, 1981. During the negotiations Howard relied on the 1968 antenuptial agreement and Joan disputed the validity of the agreement. Howard also produced for Joan's lawyers financial statements from his accountants that listed the book value of Howard's PMI stock as being $2,551,000. Both parties recognized that this reported figure was considerably lower than the stock's fair market value.

In the December 1981 property settlement Joan released any claim she might have had against Howard in exchange for $1,525,000, with $1,025,000 payable immediately, and $500,000 payable on or before February 16, 1982. The $500,000 obligation was evidenced by a promissory note from Howard to Joan and secured by 25,000 shares of PMI stock placed in escrow with Joan's lawyer. In due time Howard satisfied the obligation and the escrowed stock was returned to him.

In June of 1982, approximately four months after Howard satisfied his property settlement obligations, Howard sold all of his PMI stock to the Chesebrough-Ponds corporation for $45,000,000.

Shortly thereafter Joan brought this action in the United States District Court for the District of Maryland alleging that the December 1981 property settlement constituted a fraudulently induced "sale" of her alleged interest in the PMI shares in violation of section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. Sec. 78j; SEC Rule 10b-5, 17 C.F.R. Sec. 240.10b-5; and section 17(a) of the Securities Act of 1933, 15 U.S.C. Sec. 77q.

Howard moved for summary judgment on the grounds that Joan had no standing to assert her federal securities claims. The district court granted summary judgment, reasoning that Joan Head had no interest in the PMI stock itself under the Maryland Marital Property Act, Md.Cts. & Jud.Proc.Code Ann. Sec. 3-6A-01, et seq., and therefore failed to satisfy the federal standing requirements set forth in Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 95 S.Ct. 1917, 44 L.Ed.2d 539 (1975). The district court also rejected Joan's alternative claim that the stock escrow portion of the property settlement constituted a fraudulently-induced purchase of the pledged stock. This appeal followed.

II

In Blue Chip, the Supreme Court held that only actual purchasers and sellers of securities have standing to pursue private actions under the anti-fraud provisions of the federal Securities Exchange Act of 1934. See also Gurley v. Documation, Inc., 674 F.2d 253 (4th Cir.1982) (applying Blue Chip standing test). Under that test, we conclude with the district court that Joan was not, by virtue of the December 1981 property settlement, a seller of PMI shares, and that she therefore lacked standing to sue under Rule 10b-5. Under relevant state law she then had no recognizable property interest in that stock.

The Maryland Marital Property Act defined marital property as

[A]ll property, however titled, acquired by either or both spouses during their marriage. It does not include property acquired prior to the marriage, property acquired by inheritance or gift from a third party, or property excluded by valid agreement or property directly traceable to any of these sources.

Md.Cts. & Jud.Proc. Code Ann. Sec. 3-6A-01(e) (repealed in 1984 and recodified in substantially identical form as Md.Fam.Law Code Ann. Secs. 8-201-213). Under the Act a Maryland court granting a divorce or annulment was authorized to resolve any dispute between the spouses with respect to ownership of marital property. However, Maryland's statute was "unique among those of other states in that the chancellor is given no authority to transfer title to marital property under the Act." Deering v. Deering, 292 Md. 115, 437 A.2d 883, 891 n. 9 (1981). Instead, under Sec. 3-6A-05 the Maryland court was authorized to determine the total value of the marital property and then, in consideration of nine equitable factors, to grant a discretionary cash award to the less pecunious spouse.

The result was that the less pecunious spouse in Maryland did not have a property interest in property to which the wealthier spouse held title. At most the less pecunious spouse had but an intangible expectancy in a share of the marital property's total cash value. Grant v. Zich, 53 Md.App. 610, 456 A.2d 75 (1983).

Howard Head alone held title to the PMI stock. While Howard Head's PMI stock might therefore have become "marital property" for the purposes of the Maryland statute, the district court was correct in finding that under the controlling state statute Joan Head had no interest in those particular securities that was sufficiently identifiable to make the December 1981 property settlement a "sale" of securities and thereby to make Joan Head a "seller" of shares for the purposes of the federal securities laws. The district court was therefore correct in its conclusion that Joan Head lacked standing under Blue Chip to maintain this action as a seller of shares.

III

Joan Head asserts as an alternative, independent basis for standing the pledge of PMI stock by Howard Head to secure his $500,000 debt to Joan under the December 1981 property settlement. Joan argues that the pledge itself was a "sale" as to which she was a purchaser and as to which Howard's alleged fraud as to his net worth was "in connection" for the purposes of the federal securities laws. We also disagree with this contention.

In Rubin v. United States, 449 U.S. 424, 431, 101 S.Ct. 698, 702, 66 L.Ed.2d 633 (1981), the Court determined that a pledge of stock was a "sale" for the purposes of Sec. 17(a) of the Securities Act of 1933, and that the anti-fraud provision therefore applied to the pledge transaction. In Marine Bank v. Weaver, 455 U.S. 551, 554 n. 2, 102 S.Ct. 1220, 1222 n. 2, 71 L.Ed.2d 409 (1982), the Court construed Rubin to hold that a pledge of a security was likewise a "sale" for the anti-fraud purposes of Sec. 10(b) of the Securities Exchange Act of 1934, but reversed the lower court on the grounds that the certificate of deposit at issue was not a "security" under the Act.

While the pledge transaction part of the December 1981 property settlement here in issue might therefore be considered a "sale" of a security, Joan...