Hill v. Equitable Trust Co.

• Decision Date: 03 May 1983
• Docket Number: Civ. A. No. 82-220.
• Citation: 562 F. Supp. 1324
• Parties: John T. HILL, et al., Plaintiffs, v. The EQUITABLE TRUST COMPANY, et al., Defendants.
• Court: U.S. District Court — District of Delaware

562 F. Supp. 1324

John T. HILL, et al., Plaintiffs, v. The EQUITABLE TRUST COMPANY, et al., Defendants.

Civ. A. No. 82-220.

United States District Court, D. Delaware.

May 3, 1983.

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

Martin I. Lubaroff of Richards, Layton & Finger, Wilmington, Del., for defendant, The Equitable Trust Co.; Michael D. Colglazier and Edward F. Shea, III of Miles & Stockbridge, Baltimore, Md., of counsel.

Martin I. Lubaroff of Richards, Layton & Finger, Wilmington, Del., for defendant, Mercantile-Safe Deposit & Trust Co.; Nell B. Strachan and Cynthia Meyers Hahn, Baltimore, Md., of counsel.

OPINION

CALEB M. WRIGHT, Senior District Judge.

This action, involving eight plaintiffs and two defendant banks, concerns various alleged violations of the Securities Act of 1933 (hereinafter "1933 Act"), the Securities Exchange Act of 1934 (hereinafter "1934 Act"), and regulations of the Securities and Exchange Commission promulgated thereunder. In addition, the plaintiffs further allege various state law claims pursuant to the laws of Delaware and Maryland. Although the Complaint purports to set forth only eight counts, the two counts based on the securities laws allege violations of numerous sections of the 1933 and 1934 Acts. Jurisdiction is predicated on Section 22(a) of the 1933 Act, 15 U.S.C. § 77v(a), Section 27 of the 1934 Act, 15 U.S.C. § 78aa, and pendent jurisdiction.

The case is currently before the Court on the defendant's, Equitable Bank, N.A.¹ (hereinafter "Equitable"), Motion to Dismiss and/or Quash Return of Service, and the defendant's, Mercantile-Safe Deposit & Trust Company (hereinafter "Mercantile"), Renewed Motion to Dismiss, pursuant to Fed.R.Civ.P. 12(b). Equitable has moved for dismissal on the following grounds: (1) personal jurisdiction in Delaware is lacking: (2) venue is improper under the securities laws and 12 U.S.C. § 94 (venue pertaining to national banks); (3) the plaintiffs' securities law claims are barred under the applicable statute of limitations; (4) the plaintiffs have failed to set forth securities law claims upon which relief can be granted; (5) the Court lacks subject matter jurisdiction over the pendent state law claims because there are no cognizable federal claims; and (6) the punitive damages sought by the plaintiffs, as a matter of law, are not recoverable under the federal securities laws. The defendant Mercantile asserts the same grounds for dismissal except that it does not contest the propriety of jurisdiction and venue in this district.² In connection with the portion of the defendants' motion that seeks dismissal for failure to state a claim upon which relief can be granted pursuant to Fed.R.Civ.P. 12(b)(6), the parties have filed affidavits and other extrinsic materials. Consequently, except to those issues which pertain to jurisdiction and venue, the defendants' motions must be treated as motions for summary judgment made pursuant to Fed.R.Civ.P. 56.³ Fed.R. Civ.P. 12(b); see Moreland v. Western Pennsylvania Interscholastic Athletic League, 572 F.2d 121, 126-27 (3d Cir.1978).

The Court is initially confronted with interpreting the lengthy yet rather nebulous Complaint filed in this case. In addition, the plaintiffs in their briefs and at oral argument have alleged various facts which do not appear in the current record. Nevertheless, because a presentation of the facts is essential to any discussion of the legal problems in this case, the Court has attempted to distill and set forth the operative facts as thus far developed in the record. The facts and legal analysis are first presented as they pertain to the Wilmington House Associates (hereinafter "Wilmington House") transaction and then as they relate to the Eagle Associates (hereinafter "Eagle") venture.⁴

WILMINGTON HOUSE

1. Factual Background

Wilmington House was a limited partnership organized and existing under the laws of the State of Maryland. Wilmington House was formed solely for the purpose of acquiring Lancaster Court, another limited partnership, which owned and operated a 324 unit garden apartment complex in Wilmington, Delaware. The general partners of Wilmington House were Lee P. Der, Inc., a Maryland corporation, and David E. Karr, a Maryland attorney. The sole shareholder of Lee P. Der, Inc., was Lee P Der (hereinafter "Der"), a natural person residing in Baltimore County, Maryland.

In early October, 1977, Der⁵ offered to sell to the plaintiffs John T. Hill, Descomp, Inc., Virgil Scott, Marie Scott, Thomas Ruger, and Patricia Ruger (collectively "Wilmington House plaintiffs"), limited partnership interests in Wilmington House. As a result of Der's solicitations, Descomp, Inc., Virgil and Marie Scott, and Thomas and Patricia Ruger purchased Wilmington House limited partnership shares in November, 1977. Similarly, John T. Hill purchased a share in December, 1977. The limited partnership agreement required each plaintiff to make a cash down payment towards the purchase price. The agreement further provided that additional installment payments were to be made.⁶ Each of these installment payments was to be secured by irrevocable letters of credit drawn for the benefit of Wilmington House.

Der suggested to the Wilmington House plaintiffs that they apply to the defendant Equitable for the required letters of credit. The Wilmington House plaintiffs did apply to Equitable and subsequently they received the desired letters of credit. On information and belief, the plaintiffs allege that certain officers of Equitable, most notably Stephen Meszaros, approved the plaintiffs' letter of credit application because Der bribed them to do so. When Equitable allegedly discovered the perfidy of its employees, it discharged them. Equitable, however, never informed the plaintiffs of the bribes, nor of the subsequent discharge of the bribed employees.

The Amended Complaint filed in Hill v. Der, 521 F.Supp. 1370, indicates that the Wilmington House venture encountered difficulties as early as December, 1977. The plaintiffs first learned of the acuity of these problems in early February, 1979, but Der allayed the plaintiffs' fears. In April, 1979, however, the plaintiffs received further information that led them to realize the severity of the financial problems of Wilmington House. Nevertheless, the plaintiffs continued to make the required installment payments, up to and including that of February 1, 1980.

Subsequently, the venture apparently failed completely and the Wilmington House plaintiffs sued Der and his alleged associates. In connection with that suit, John T. Hill wrote to Equitable on March 9, 1981, generally inquiring into the issuance of the letters of credit and specifically asking whether any Equitable employees were discharged as a result of the issuance of said letters. In an April 27, 1981 reply letter, Equitable Vice President and Counsel Martin B. Ellis informed Hill that there were no irregularities concerning the issuance of the letters of credit, and further that no employees were dismissed or asked to resign because of this matter.

On March 17, 1981, Virgil Scott wrote a letter to Equitable on behalf of Descomp, Inc., making further inquiries into the issuance of the letters of credit. In a letter of April 27, 1981, Martin B. Ellis similarly informed Mr. Scott that there were no irregularities or employee discharges in connection with the issuance of the letters of credit.

On March 20, 1982, Thomas Ruger received a telephone call from Martin E. Mason, a defendant in Hill v. Der, et al., 521 F.Supp. 1370, in which Mason allegedly informed Ruger that Der had provided kickbacks to employees of Equitable in connection with Wilmington House. Shortly thereafter Ruger, along with Virgil Scott, met with Mason who allegedly informed them of some of the specifics of the kickback scheme. Subsequently, this action was filed against Equitable on April 30, 1982.

2. Jurisdiction and Venue

A. Jurisdiction

A threshold issue is whether Equitable is amenable to suit in Delaware. Fed.R. Civ.P. 4(e) permits service of process upon a party not an inhabitant of or found within the state by any method permitted by state statute or court rule. Consequently, in this federal question case, the propriety of service and the exercise of jurisdiction is measured under 10 Del.C. § 3104(c)(4). Section 3104(c)(4) provides:

(c) As to a cause of action arising from any of the acts enumerated in this section, a court may exercise personal jurisdiction over any nonresident, or his personal representative, who in person or through an agent:

(4) Causes tortious injury in the State or outside of the State by an act or omission outside of the State if he regularly does or solicits business, engages in any other persistent course of conduct in the State, or derives substantial revenue from services, or things used or consumed in the State....

Equitable does not contest that the plaintiffs' statutory claims constitute allegations of tortious injury as that term is used in Section 3104(c)(4). See Magid v. Marcal Paper Mills, Inc., 517 F.Supp. 1125, 1130 (D.Del.1981) (and cases cited therein). Consequently, Equitable is amenable to suit in this case if it either (1) conducts a substantial volume of business in Delaware; or (2) persistently engages in conduct in Delaware. Id.⁷ It is beyond peradventure that Equitable's activities in Delaware satisfy both these requirements, and therefore the exercise of jurisdiction is proper.

There are many factors which indicate that Equitable has a substantial jurisdictional presence in Delaware. First, an Equitable affiliate that handles Equitable's credit card operations, Equitable Bank of Delaware, is located in Delaware. Equitable Bank of Delaware services the credit card customers of Equitable.⁸ Under Section 3104(c)(4), if Equitable Bank of Delaware is an agent of...