McGough v. First Arlington Nat. Bank, 75-1267
| Decision Date | 22 July 1975 |
| Docket Number | No. 75-1267,75-1267 |
| Parties | Fed. Sec. L. Rep. P 95,246 Richard J. McGOUGH, et al., Plaintiffs-Appellants, v. FIRST ARLINGTON NATIONAL BANK, a National Banking Association, et al., Defendants-Appellees. |
| Court | U.S. Court of Appeals — Seventh Circuit |
Maurice J. McCarthy, Chicago, Ill., for plaintiffs-appellants.
William J. Holloway, Lawrence R. Moelmann, David I. Herbst, Chicago, Ill., for defendants-appellees.
Before SWYGERT and BAUER, Circuit Judges, and EAST *, Senior District Judge.
On or about April 10, 1974, plaintiffs-appellants Richard J. McGough, William Ritchie and Robert Snell, individually and d/b/a Consolidated Investments Company, an Illinois General Partnership, (hereinafter referred to collectively as McGough) entered into a sales agreement with the Brite-O-Matic Corporation (Brite-O-Matic) for the purchase of a certain Brite-O-Matic car wash unit. As part of the transaction, McGough entered into a lease back agreement with Brite-O-Matic, with the view that the car wash unit would be subleased to other persons for operation. McGough's financial return from the transaction was to be monthly income by virtue of the profits earned by Brite-O-Matic through the subleasing procedure.
As a part of the entire transaction, McGough on or about April 26, 1974 borrowed the purchase money from the First Arlington National Bank, a national banking association, (Bank). The loan transaction was evidenced with a collateral installment promissory note and security agreement covering the unit in the amount of $7,847, representing principal in the amount of $6,000 and accruing interest for the difference. The note was payable in monthly payments of $130.79 for a period of five years.
The Brite-O-Matic venture financially collapsed. In the wake, McGough defaulted on the note payments to the Bank. On November 6, 1974, the Bank instituted confession of judgment proceedings
for the collection of the promissory note and its security in the Circuit Court for Cook County in the State of Illinois (State action).
McGough on December 2, 1974 demanded rescission of the transaction and made tender to the Bank as the alleged "underwriter and control person" of the transaction. The Bank ignored the demand so McGough on January 27, 1975 instituted these proceedings in the District Court alleging fraud in the inducement of the contract in violation of various sections of the Security Act of 1933, the Security Exchange Act of 1934, and the rules and regulations promulgated thereunder (hereinafter referred to collectively as Exchange Act).
McGough entered a special appearance in the State action but has not generally appeared in answer to or affirmatively in defense of the merits thereof. The presiding judge in the State action has continued its proceedings awaiting the disposition of motions pending in the federal court. Hence, neither of the causes have progressed to a point beyond return.
The District Court:
a. Denied McGough's motion for a preliminary restraint of the prosecution of the Bank's action in the State action for collection of the promissory note and its security, pending the prosecution of the proceedings in the District Court; and
b. Granted the Bank's motion for a stay of the proceedings in the District Court pending the prosecution of the State action or further order.
McGough appeals. The matter is before this court under expedited procedures. We affirm the denial of the motion for preliminary restraint of prosecution of the State action and reverse and vacate the stay order.
The Stay of the Proceedings in the District Court:
This court has held in Aetna State Bank v. Altheimer, 430 F.2d 750 (7th Cir. 1970), (hereinafter cited as Aetna ) that notwithstanding the provisions of 28 U.S.C. § 2105 which prohibits a reversal of a ruling upon matters in abatement not involving jurisdiction, it is appropriate to review the stay order. Aetna points out that the federal courts are recognizing motions for stay pending the outcome of related state actions as within the Doctrine of Abstention. Accordingly the District Court's opting to issue a stay in a federal proceeding is discretionary. At 755-56.
At the outset, we point out that the Bank made no attack upon the jurisdiction of the District Court nor the sufficiency of McGough's complaint for statutory relief under the Exchange Act. We assume without deciding that the interlocking sale-lease back of the Brite-O-Matic unit and promissory note and its security agreement transaction with the Bank was a "security investment" involving the sale and purchase of a "security" and McGough's complaint alleges a valid and subsisting federal cause of action for statutory relief from fraud within the meaning of and pursuant to the provisions of the Exchange Act.
The provisions of the Exchange Act impose duties upon underwriters and control persons in connection with the sale and purchase of securities and grant remedies in favor of purchasers of security which were unknown at common law. They are pure federal remedies of congressional creation. Congress has provided that the "district courts . . . shall have exclusive jurisdiction . . . of all suits . . . and actions . . . brought to enforce any liability or duty created by this chapter . . .." 15 U.S.C. § 78aa. Accordingly it is manifest to us that the exclusive federal remedy sought under the complaint in the District Court is not available to McGough in the State action. Therefore, we conclude that the District Court's stay order was an abuse of judicial discretion and reversible error, since it relegated McGough to a sterile state court for vindication of its federal remedies.
In Movielab, Inc. v. Berkey Photo, Inc., 321 F.Supp. 806 (S.D.N.Y.1970), aff'd, 452 F.2d 662 (2d Cir. 1971), the District Court was faced with the identical situation as presented here. That court teaches at 811:
"The pendency of the state court suit, therefore, does not offer a valid basis for precluding (McGough) from prosecution in (the District Court) of its affirmative claim for (Exchange Act relief) which (relief) it cannot obtain in the state court because of our exclusive jurisdiction over affirmative claims based on the Exchange Act."
We are not unmindful that ...
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