Mount Clemens Industries, Inc. v. Bell

• Decision Date: 28 June 1972
• Docket Number: No. 71-1318.,71-1318.
• Citation: 464 F.2d 339
• Parties: MOUNT CLEMENS INDUSTRIES, INC., a corporation, Mt. Clemens Corporation (formerly Buckeye Corporation), a corporation, Petitioner-Appellants, v. O. M. BELL et al., Respondents-Appellees.
• Court: U.S. Court of Appeals — Ninth Circuit

464 F.2d 339 (1972)

MOUNT CLEMENS INDUSTRIES, INC., a corporation, Mt. Clemens Corporation (formerly Buckeye Corporation), a corporation, Petitioner-Appellants, v. O. M. BELL et al., Respondents-Appellees.

No. 71-1318.

United States Court of Appeals, Ninth Circuit.

June 28, 1972.

Lawrence Teplin (argued), of Leslie, Rubin & Teplin, Beverly Hills, Cal., for petitioners-appellants.

Thomas B. Moss (argued), of Voegelin & Barton, Los Angeles, Cal., for respondents-appellees.

Before CHAMBERS, KOELSCH and ELY, Circuit Judges.

ELY, Circuit Judge:

This appeal presents, for the first time in our court, the issue of whether there is a requirement in a private action for damages under Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b),¹ and Securities and Exchange Commission Rule 10b-5, 17 C.F.R. § 240.10b-5,² that the plaintiff be a purchaser or seller of the securities with respect to which he claims that actionable fraud has occurred.

The appellants, Mount Clemens Industries MCI and Mount Clemens Corporation, sought recovery of money damages in the District Court, claiming that they were precluded from bidding on and purchasing securities (one hundred percent of the outstanding shares of Missile Dynamics Corporation) at a sheriff's sale because of the misrepresentation to them by Bell that the securities were worthless. Bell, a former officer and director of MCI, was the President of Missile both when the alleged misrepresentation was made and at the time of the sheriff's auction sale. Other claims made by the appellants were grounded upon alleged violations of state law.

The District Court dismissed the action, insofar as it pertained to alleged violations of the federal securities laws in the auction sale transaction, because appellants were neither purchasers nor sellers of the Missile stock. Jurisdiction of the state law claims was retained, pursuant to 28 U.S.C. § 1332 and the diverse residence of the parties.

This interlocutory appeal is from the dismissal of the federal claim. Leave to take the appeal was granted pursuant to the District Court's certification under 28 U.S.C. § 1292(b).

I. THE PURCHASER-SELLER LIMITATION

The District Court's recognition of the "purchaser-seller" limitation is here attacked with a two-edged sword. The thrust of the appellants' argument is that the "purchaser-seller" requirement, first espoused in Birnbaum v. Newport Steel Corp., 193 F.2d 461 (2d Cir.), cert. denied, 343 U.S. 956, 72 S.Ct. 1051, 96 L.Ed. 1356 (1952), and recently reaffirmed in Iroquois Industries, Inc. v. Syracuse China Corp., 417 F.2d 963 (2d Cir. 1969), cert. denied, 399 U.S. 909, 90 S.Ct. 2199, 26 L.Ed.2d 561 (1970), has been so eroded by other decisions of the Second Circuit³ that it no longer truly represents the correct law, even in that Circuit.

Another line of attack is advanced by the Securities and Exchange Commission (SEC), in its brief as amicus curiae. Taking the position that Birnbaum was incorrectly decided in the first instance, the Commission contends that the District Court's application of the "purchaser-seller" doctrine to our present case "was an unduly narrow construction of Rule 10b-5, and that this Court should refuse to follow the Birnbaum and Iroquois cases."

In essence, we are urged to adopt a literal interpretation of the Act and the Rule so that "any person" who alleges that he was injured by reason of a "manipulative or deceptive device or contrivance," occurring "in connection with the purchase or sale of any security," has standing to maintain an action for damages under Section 10(b) and Rule 10b-5.

Upon careful examination, the edges of the sword appear quite dull, and we therefore reject both of the specified arguments. In our view, there has been no erosion of Birnbaum. Rather, the doctrine formulated therein has been interpreted and applied "flexibly, not technically and restrictively," Superintendent of Ins. v. Bankers Life & Cas. Co., 404 U.S. 6, 12, 92 S.Ct. 165, 30 L.Ed.2d 128 (1971), thus promoting the Congressional purpose in the enactment of this remedial legislation. See Tcherepnin v. Knight, 389 U.S. 332, 336, 88 S.Ct. 548, 19 L.Ed.2d 564 (1967); SEC v. Capital Gains Research Bureau, Inc., 375 U.S. 180, 195, 84 S.Ct. 275, 11 L.Ed.2d 237 (1963); Crane Co. v. Westinghouse Air Brake Co., 419 F.2d 787, 798 & n.14 (2d Cir. 1969), cert. denied, 400 U.S. 822, 91 S.Ct. 41, 27 L. Ed.2d 50 (1970). Moreover, while neither Section 10(b) nor Rule 10b-5 expressly requires engrafting a "purchaser-seller" limitation upon suits brought thereunder, there are substantial and compelling reasons why standing to sue for money damages under these provisions should be so limited.

Since securities transactions are conducted on a nationwide scale, often without regard for geographical boundaries,⁴ we attach significant importance to the fact that every other Court of Appeals that has considered this issue has adopted the "purchaser-seller" requirement.⁵ Yet the desirability of national consistency in the interpretation of the federal securities laws is not the principal motivating force behind our adoption of the Birnbaum principle. Rather, it is the compelling logic of the opinions in Iroquois Industries, Inc. v. Syracuse China Corp., 417 F.2d 963 (2d Cir. 1969), cert. denied, 399 U.S. 909, 90 S.Ct. 2199, 26 L.Ed.2d 561 (1970), and Herpich v. Wallace, 430 F.2d 792 (5th Cir. 1970), that impels us to the same conclusion as that reached by our Brothers in the other Circuits.

In Iroquois, the Second Circuit reexamined its holding in Birnbaum and reaffirmed, on three grounds, the continuing vitality of the purchaser-seller limitation. First, the court directed its attention to one basis for the Birnbaum decision—the expressed purpose of the SEC in enacting Rule 10b-5—and concluded that the Birnbaum court was correct in assessing that purpose as affording to sellers the same remedies as were then available only to defrauded purchasers of securities.⁶ Next, the Iroquois court undertook to illustrate that decisions subsequent to Birnbaum had not relaxed the purchaser-seller rule, but had all adhered to the doctrine.⁷ The final basis for retaining the limitation on standing was the court's recognition of the unquestionably sound principle espoused in Blau v. Lehman, 368 U.S. 403, 413, 82 S.Ct. 451, 457, 7 L.Ed.2d 403 (1962):

"Congress can and might amend the Act if the Commission would present to it the policy arguments it has presented to us, but we think that Congress is the proper agency to change an interpretation of the Act unbroken since its passage, if the change is to be made."

Although this language was directed to Section 16(b) of the Exchange Act, 15 U.S.C. § 78p(b), we agree with our colleagues of the Second Circuit that it applies with equal force to Section 10(b).

Subsequent to Iroquois, the highly persuasive opinion of the Fifth Circuit in Herpich v. Wallace was issued. Judge Ainsworth's thorough examination of the issue of standing under Section 10(b) and Rule 10b-5 "within the framework of Article III of the United States Constitution, which restricts federal judicial power to `cases' and `controversies'," 430 F.2d at 805, resulted in the holding "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." 430 F.2d at 806. The rationale of Herpich therefore adds another dimension to the Birnbaum doctrine—the purchaser-seller limitation is not only deemed a desirable manner for effectuating the Congressional and administrative purposes to be furthered by the anti-fraud provisions, but it also becomes required as a matter of constitutional necessity.

Neither the appellants nor the Commission offer sufficient rebuttal to the carefully reasoned opinions discussed above. In fact, the only judicial support relied upon by appellants is found in isolated, conclusory statements phrased in the statutory language. Typical examples are the following quotations from the most recent Supreme Court opinion dealing with Section 10(b) and Rule 10b-5:

"Section 10(b) outlaws the use `in connection with the purchase or sale\' of any security of `any manipulative or deceptive device or contrivance.\'

* * * * * *

". . . . Since there was a `sale\' of a security and since fraud was used `in connection with\' it, there is redress under § 10(b), whatever might be available as a remedy under state law."

Superintendent of Ins. v. Bankers Life & Cas. Co., 404 U.S. 6, 10, 12, 92 S.Ct. 165, 168, 30 L.Ed.2d 128 (1971). These statements, standing alone, might seem to support a literalistic approach to the statute. Yet when they are read in context, it becomes apparent that the Supreme Court's opinion lends more credence to our view than to that of the appellants. Throughout the Bankers Life opinion, Mr. Justice Douglas repeatedly emphasized that Manhattan, the claimant there, was to be afforded standing under the Act because of its status as a defrauded "seller" of securities.⁸ Of more significance is the fact that the Court explicitly declined to rule on the purchaser-seller question. See id. at 13 n. 10, 92 S.Ct. at 165 n. 10. This express reservation, taken in conjunction with the principle set forth in the above quotation from Blau v. Lehman, supra, provides very solid additional support for our adoption of the Birnbaum doctrine.

Having decided that the District Court correctly concluded that the purchaser-seller limitation applies in our Circuit, we now examine that court's determination that the appellants did not fall within the protected class.

II. PLAINTIFFS AS PURCHASERS OR SELLERS

The question here is whether the appellants, under their pleading, could have proved any set of facts which would have entitled them to relief by reason of federal law. Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 2 L.Ed. 2d 80 (1957)...