Hill v. Der

• Decision Date: 17 September 1981
• Docket Number: Civ. A. No. 80-146.
• Citation: 521 F. Supp. 1370
• Parties: John T. HILL, Descomp, Inc., Data Controls North, Inc., Virgil and Marie Scott, Thomas L. and Patricia A. Ruger, and James R. Stritzinger, Plaintiffs, v. Lee P. DER, Lee P. Der, Inc., Lancaster Court Associates, Lancaster Associates, Inc., Stuart Bittelman, Marvin E. Greenfield, Wilmington House Associates, Eagle Associates, Orgas, Ltd., David E. Karr, Martin E. Mason, Der-Mas, Inc., Lee Mar, Inc., Roger W. Ball, Alma Coal Enterprises, Limited, and, D & S Financial, Inc., Defendants.
• Court: U.S. District Court — District of Delaware

521 F. Supp. 1370

John T. HILL, Descomp, Inc., Data Controls North, Inc., Virgil and Marie Scott, Thomas L. and Patricia A. Ruger, and James R. Stritzinger, Plaintiffs, v. Lee P. DER, Lee P. Der, Inc., Lancaster Court Associates, Lancaster Associates, Inc., Stuart Bittelman, Marvin E. Greenfield, Wilmington House Associates, Eagle Associates, Orgas, Ltd., David E. Karr, Martin E. Mason, Der-Mas, Inc., Lee Mar, Inc., Roger W. Ball, Alma Coal Enterprises, Limited, and, D & S Financial, Inc., Defendants.

Civ. A. No. 80-146.

United States District Court, D. Delaware.

September 17, 1981.

COPYRIGHT MATERIAL OMITTED

Harvey S. Kronfeld, Philadelphia, Pa., and Rawle & Henderson, Philadelphia, Pa., of counsel, for plaintiffs.

Robert C. Lefton, Wilmington, Del., Morton S. Taubman, Tom M. Schaumberg and

Leslie Glick of Plaia, Schaumberg & Taubman, Chartered, Washington, D.C., Lionel E. Pashkoff of Danzansky, Dickey, Tydings, Quint & Gordon, Washington, D.C., of counsel, for defendants Lee P. Der, Lee P. Der, Inc., Wilmington House Associates, Eagle Associates, Orgas, Ltd., David E. Karr, Martin Mason, Der-Mas, Inc., Lee Mar, Inc., Roger W. Ball, Alma Coal Enterprises, Ltd., and D & S Financial, Inc.

David A. Drexler, Wilmington, Del., for defendants Lancaster Court Associates, Lancaster Associates, Inc., Stuart Bittelman and Marvin Greenfield.

OPINION

LATCHUM, Chief Judge.

This complex action, involving multiple parties, alleges violations of the Securities Act of 1933 ("Securities Act"), the Securities Exchange Act of 1934 ("Exchange Act"), and regulations of the Securities and Exchange Commission promulgated thereunder. In addition, plaintiffs allege various state claims under the laws of Delaware and Maryland. The complaint contains twenty-four counts, each of which purports to state a separate claim against various combinations of the defendants. (Docket Item "D.I." 1.) Jurisdiction is predicated on section 22(a) of the Securities Act, 15 U.S.C. § 77v(a), section 27 of the Exchange Act, 15 U.S.C. § 78aa, and principles of pendent jurisdiction. (D.I. 1, ¶¶ 2, 3.)

Certain of the defendants¹ have moved to dismiss all but Count Seventeen of the complaint, under Rule 12(b), F.R.Civ.P., on the following grounds: (1) there is no implied private right of action under section 17(a) of the Securities Act; (2) the claims based on section 12(2) of the Securities Act and sections 10(b) and 15(c) of the Exchange Act, and Rule 10b-5 promulgated thereunder, contained in Count One, are barred by the applicable statutes of limitations for those provisions; (3) Counts Eight, Sixteen and Eighteen, which allege additional claims under sections 10(b) and 15 of the Exchange Act, and Rules 10b-5 and 15b10-3 promulgated thereunder, fail to state a cause of action; and (4) the punitive damages sought by plaintiffs, as a matter of law, are not recoverable under the federal securities laws. (D.I. 13.) Defendants contend that if the Court concurs in each of the foregoing arguments, the only federal count remaining in the complaint will be Count Seventeen, which alleges a single isolated violation of the registration provisions of the Securities Act as to one plaintiff. (D.I. 13 at 27.) Defendants argue that this Count does not arise from the same nucleus of operative facts as the pendant state law claims and, accordingly, those state claims should be dismissed. (D.I. 13 at 28.) Defendants' contentions will be addressed in turn.

I. Implied Right of Action Under Section 17(a)

Counts One, Eight and Eighteen of plaintiffs' complaint are based in part on § 17(a) of the Securities Act. This section provides:

(a) It shall be unlawful for any person in the offer or sale of any securities by the use of any means or instruments of transportation or communication in interstate commerce or by the use of the mails, directly or indirectly —

(1) to employ any device, scheme, or artifice to defraud, or

(2) to obtain money or property by means of any untrue statement of a material fact or any omission 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

(3) to engage in any transaction, practice, or course of business which operates or would operate as a fraud or deceit upon the purchaser.

15 U.S.C. § 77q(a).

Violations of § 17(a) may provide a basis for injunctive relief, 15 U.S.C. § 77t, or, may give rise to criminal liability if the violation is willful, 15 U.S.C. § 77x. The Securities Act by its terms, however, contains express civil damage remedies only in §§ 11 and 12 and does not provide an express private cause of action for damages under § 17(a). Accordingly, the issue before the Court is whether such a cause of action may be implied. The Supreme Court reserved ruling upon the propriety of implying a cause of action under § 17(a) in Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 734 n.6, 95 S.Ct. 1917, 1924 n.6, 44 L.Ed.2d 539 (1975), and the issue remains an open question both in the Third Circuit and in this District.

Those courts which have wrestled with this problem have reached conflicting conclusions. Four of the five courts of appeals considering the issue have, without extended discussion, found an implied right of action under § 17(a). Compare Stephenson v. Calpine Conifers II Ltd., 652 F.2d 808, 815 (C.A.9, 1981) (private right of action implied); Kirshner v. United States, 603 F.2d 234, 241 (C.A.2, 1978), cert. denied, 442 U.S. 909, 99 S.Ct. 2821, 61 L.Ed.2d 274 (1979); Daniel v. International Brotherhood of Teamsters, 561 F.2d 1223, 1244-45 (C.A.7, 1977), rev'd on other grounds, 439 U.S. 551, 99 S.Ct. 790, 58 L.Ed.2d 808 (1979); Newman v. Prior, 518 F.2d 97, 99 (C.A.4, 1975) with Shull v. Dain, Kalman & Quail, Inc., 561 F.2d 152, 155 (C.A.8, 1977), cert. denied, 434 U.S. 1086, 98 S.Ct. 1281, 55 L.Ed.2d 792 (1978) (private right of action not implied). The district courts, however, have generally been far less receptive to claims of implied remedies under this section of the Securities Act. Compare Campito v. McManus, Longe, Brockwehl, Inc., 470 F.Supp. 986, 993 (N.D.N.Y.1979) (private right of action implied); DeMarco v. Security Planning Service, Inc., 462 F.Supp. 1066, 1069 (D.Ariz.1978); Valles Salgado v. Piedmont Capital Corp., 452 F.Supp. 853, 857 (D.P.R. 1978); Osborne v. Mallory, 86 F.Supp. 869, 878-79 (S.D.N.Y.1949) with Ingram Industries v. Nowicki, 502 F.Supp. 1060, 1069 (E.D.Ky.1980) (private right of action not implied); McFarland v. Memorex Corp., 493 F.Supp. 631, 652 (N.D.Cal.1980); Mendelsohn v. Capital Underwriters, Inc., 490 F.Supp. 1069, 1080 (N.D.Cal.1979); Woods v. Homes & Structures, Inc., 489 F.Supp. 1270, 1288 (D.Kan.1980); Martin v. Howard, Weil, Labouisse, Friedricks, Inc., 487 F.Supp. 503, 507 (E.D.La.1980); Lingenfelter v. Title Ins. Co., 442 F.Supp. 981, 989 (D.Neb.1977); Gunter v. Hutcheson, 433 F.Supp. 42, 45 (N.D.Ga.1977); Architectual League of N.Y. v. Bartos, 404 F.Supp. 304, 313 (S.D.N.Y.1975); Reid v. Mann, 381 F.Supp. 525, 528 (N.D.Ill.1974); Ferland v. Orange Groves of Florida, Inc., 377 F.Supp. 690, 706-707 (M.D.Fla.1974); Dyer v. Eastern Trust & Banking Co., 336 F.Supp. 890, 903-905 (D.Me.1971); Emmi v. First-Manufacturers National Bank, 336 F.Supp. 629, 635 (D.Me.1971); Williams v. Nutritional Associates, 1980 Fed.Sec.L.Rep. (CCH) ¶ 97,678 at 98,563 (D.D.C.1980); Cowsar v. Regional Recreations, Inc., 65 F.R.D. 394, 398 (M.D.La.1974).

Nonetheless, despite the apparent controversy surrounding this issue, the Court believes that it would be blind to recent developments in the Supreme Court if it were to recognize an implied right of action under § 17(a). See United States v. City of Philadelphia, 644 F.2d 187, 192 (C.A.3, 1980). Although private damage actions were at one time readily inferred from statutory provisions which did not afford express civil remedies and were regarded as necessary supplements to enforcement of the underlying statutory schemes, in recent years the Supreme Court has sharply limited the availability of implied private remedies. An understanding of the metamorphosis which the implied remedies doctrine has undergone is necessary in order to appreciate fully the Court's reluctance to imply a cause of action under § 17(a).

The modern genesis of the Supreme Court's approach to implied remedies can be traced to a series of cases originating with J. I. Case v. Borak, 377 U.S. 426, 84 S.Ct. 1555, 12 L.Ed.2d 423 (1964), in which the Court found an implied right of action under the proxy provisions of the Exchange Act. In that and subsequent cases, the Court created implied rights of action, in the absence of any evidence of Congressional authorization or acquiescence, on the theory that such remedies were necessary to vindicate important federal interests. These decisions appeared to rest on the presumption that a civil damage remedy ordinarily would be inferred from a blanket statutory prohibition, unless there was some persuasive indication that Congress intended existing remedies and procedures to be exclusive. United States v. City of Philadelphia, supra, 644 F.2d at 192; see Wyandotte Transportation Co. v. United States, 389 U.S. 191, 200, 88 S.Ct. 379, 385, 19 L.Ed.2d 407 (1967).

In Cort v. Ash, 422 U.S. 66, 95 S.Ct. 2080, 45 L.Ed.2d 26 (1975), the Court took a first restrained step towards curbing the inexorable flow of private damage actions resulting from Borak and its progeny. In that case, the Court outlined four factors which must be considered in determining whether a private right of action should be implied from a federal statute:

First, is the plaintiff "one of the class for whose especial benefit the statute was enacted," — that is, does the statute create a federal right in favor of the plaintiff? Second, is there any indication of legislative intent, explicit or implicit, either to create such a remedy or to deny one? Third, is it consistent

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