Oxford First Corp. v. PNC Liquidating Corp.

• Decision Date: 06 March 1974
• Docket Number: Civ. A. No. 72-2364.
• Citation: 372 F. Supp. 191
• Parties: OXFORD FIRST CORPORATION and Lease/Auto Plan, Inc. v. PNC LIQUIDATING CORPORATION et al.
• Court: U.S. District Court — Eastern District of Pennsylvania

372 F. Supp. 191

OXFORD FIRST CORPORATION and Lease/Auto Plan, Inc. v. PNC LIQUIDATING CORPORATION et al.

Civ. A. No. 72-2364.

United States District Court, E. D. Pennsylvania.

March 6, 1974.

Blank, Rome, Klaus & Comisky, Goncer M. Krestal, William E. Taylor, III, Gilbert Stein, Philadelphia, Pa., for plaintiffs.

Ruffo, Ferrari & McNeil, Thomas P. O'Donnell, San Jose, Cal., John T. Clary, Philadelphia, Pa., for St. Claire defendants.

OPINION

EDWARD R. BECKER, District Judge.

I. Preliminary Statement

This is a securities fraud case in which the plaintiffs seek to recover damages because of alleged material misrepresentations made in a complex financial transaction which is detailed below.¹ Defendants William C. Duncan, Jr., Barbara Pabst Duncan, Donald G. Pabst and William D. Pabst (hereinafter referred to collectively as the St. Claire defendants) were served with process in California pursuant to section 27 of the 1934 Securities Act, 15 U.S.C. § 78aa. They have moved to dismiss the action for lack of in personam jurisdiction. Before addressing the motion, we must first set forth the transactions involved in detail. Since we are asked to rule here only on a motion to dismiss under 12(b) of the Federal Rules of Civil Procedure, we must consider the pleadings and affidavits in the light most favorable to the plaintiffs, who are the nonmoving party.² On January 17, 1974, we entered an Order denying the St. Claire defendants' motion with a notation that this opinion would follow.

II. The Transactions Involved in the Case

Based upon a reading of plaintiffs' complaint and affidavits, the transactions among the parties as respects this motion may be summarized as follows:

A. The Old Paragon—St. Claire Agreement

On March 31, 1970, Paragon National Corporation (Old Paragon) and St. Claire Leasing Corporation and St. Claire Finance Corporation (hereinafter referred to collectively as St. Claire) agreed that Old Paragon would acquire all of the capital stock of St. Claire from the St. Claire defendants in exchange for stock in Old Paragon. Both St. Claire and Old Paragon were engaged in the auto leasing business. The Old Paragon—St. Claire agreement included representations and warranties by the St. Claire defendants that St. Claire's financial statements were prepared in accordance with generally accepted accounting principles and presented a true and complete picture of the enterprise. The St. Claire defendants agreed to indemnify Old Paragon for any damage due to misrepresentations, breach of warranty or breach of contract.

B. The Oxford First—Old Paragon Agreement

In May of 1970 plaintiff Oxford First Corporation (Oxford First), a Philadelphia based concern which was engaged principally in the finance business, became interested in acquiring Old Paragon. On or about July 8, 1970, Oxford First entered into a tentative agreement with Old Paragon whereby substantially all of the assets of Old Paragon, including the St. Claire stock held by Old Paragon, were to be acquired by a new subsidiary of Oxford First called Paragon National Corporation (New Paragon)³ in exchange for shares of Oxford First common stock payable to Old Paragon at closing under the Oxford First—Old Paragon Agreement.⁴ It was understood that Old Paragon would liquidate and distribute the Oxford First shares to the Old Paragon shareholders. The Oxford First—Old Paragon Agreement provided that 10,000 of the 60,000 shares of Oxford First paid to Old Paragon would be held in escrow as collateral for any breach of warranty by Old Paragon, subject to a Collateral Security and Escrow Agreement.⁵ The Oxford First—Old Paragon Agreement further provided for another 115,000 shares of Oxford First common stock to be held in escrow and delivered to Old Paragon or returned to Oxford First, depending upon the performance of New Paragon over 24 months ending June 30, 1972.⁶ The Oxford First—Old Paragon Agreement included a number of representations and warranties by Old Paragon. Among them were the following: (1) that Old Paragon's financial statement fairly and accurately depicted Old Paragon's financial condition;⁷ (2) that the St. Claire financial statements fairly and accurately represented St. Claire's financial condition;⁸ (3) that the balances due on receivables, including the residual value of leased vehicles, were correctly reflected in the Old Paragon and St. Claire financial statements, and that adequate and proper allowance had been made for doubtful leases; and (4) that between June 30, 1970, and November 30, 1970, there were no adverse changes in Old Paragon's or St. Claire's financial conditions or operations, and that Old Paragon was not aware of any intention of any lending institution to terminate a significant relationship with Old Paragon.⁹

C. The Old Paragon—St. Claire Settlement

The Old Paragon—St. Claire settlement and closing took place on July 13, 1970. The Old Paragon—St. Claire Agreement was amended on that day to reflect the fact that Oxford First had loaned Old Paragon in excess of $500,000 to enable Old Paragon to indemnify the St. Claire defendants for money they had advanced to keep St. Claire in a position so that it could be sold to Old Paragon. Oxford First advanced this money to Old Paragon to preserve Oxford First's own transaction with Old Paragon, since Oxford First's interest in Old Paragon was contingent on St. Claire's financial statements and St Claire's stock being included in Old Paragon's assets. It can reasonably be inferred from the facts averred in the affidavits¹⁰ that at the time of settlement, the St. Claire defendants knew: (1) that Oxford First was repaying them; (2) that they were ultimately to receive Oxford First's stock instead of Old Paragon's stock in exchange for their St. Claire stock; and (3) that the St. Claire financial statements were given to and relied upon by Oxford First in its principal office in Philadelphia, Pennsylvania. Indeed, it is plain that Oxford First would not have made such arrangements to lend the St. Claire defendants money and accept St. Claire stock without reading and relying upon the St. Claire financial statements.

D. The Oxford First—Old Paragon Settlement

On November 30, 1970, closing and settlement of the Oxford First—Old Paragon agreement was completed in Philadelphia. Sixty thousand shares of Oxford First stock were delivered to Old Paragon in exchange for the assets of Old Paragon, including all of the stock of St. Claire.¹¹ All the representations made by both St. Claire to Old Paragon,¹² and by Old Paragon to Oxford First survived the closing.

III. Plaintiffs' Claims

In their complaint, Oxford First and Lease/Auto Plan, Inc. (the successor by merger to New Paragon) charge Old Paragon¹³ and its shareholders¹⁴ and the St. Claire defendants with: (1) breaches of warranties; (2) 10b-5 material misrepresentations; (3) violation of § 17(a) of the 1933 Securities Act; and (4) common law fraud and deceit. Oxford First also charges that Leasco Computer, Inc. (LCI) and Leasco Corporation knew of the fraudulent misrepresentations in the financial statements of St. Claire and of Old Paragon and that Leasco aided and abetted Old Paragon in this fraud. Finally, Oxford First charges that Ernst & Ernst (see notes 7 and 8, supra) knew or should have known about the fraudulent misrepresentations in the financial statements of St. Claire and Old Paragon.

IV. Discussion

A. Introduction

The St. Claire defendants challenge the in personam jurisdiction of this Court.¹⁵ In support of their contention that personal jurisdiction does not lie, the St. Claire defendants have asserted two alternative claims. Their first argument is in counterpoint to plaintiffs' interpretation of the 1934 Exchange Act,¹⁶ which provides that a combination of proper venue with extraterritorial service of process can fulfill the statutory requirements for in personam jurisdiction. The St. Claire defendants claim that there is no proper venue here and that the absence thereof defeats in personam jurisdiction in this case, since there is no other basis here for personal jurisdiction. In the alternative, the St. Claire defendants argue that, even if venue is proper, this Court still does not have in personam jurisdiction over them because they have not had the minimum contacts with this district necessary to meet the constitutional requirements of due process as embodied in International Shoe Company v. State of Washington, 326 U.S. 310, 66 S.Ct. 154, 90 L.Ed. 95 (1945), which they contend to be applicable here. To support their contentions, these defendants assert by way of affidavit that their transactions with Old Paragon (i. e., the St. Claire—Old Paragon Agreement and Settlement) were entirely separate and unrelated to Oxford First's transactions with Old Paragon.¹⁷

B. Venue

Under the 1934 Act, venue is conferred "in the district wherein any act or transaction constituting the violation occurred." 15 U.S.C. § 78aa.¹⁸ Venue will be sustained in a securities case where a defendant causes false or misleading information to be transmitted into a judicial district, even if the defendant never has been physically present in that district. Mitchell v. Texas Gulf Sulphur Co., 446 F.2d 90, 106 (10th Cir.), cert. denied, 404 U.S. 1004, 92 S.Ct. 564, 30 L.Ed.2d 558 (1971), 405 U.S. 918, 92 S.Ct. 943, 30 L.Ed.2d 788 (1972); Texas Gulf Sulphur Co. v. Ritter, 371 F.2d 145, 148-149 (10th Cir. 1967). In the Texas Gulf Sulphur cases, defendant Fogarty released a false and fraudulent press statement that was printed in the Wall St. Journal and read and relied upon by plaintiff. In making the release, defendant intended that it be read and relied upon by people even outside the judicial district where it was issued, since the nature and function of a press release is to diffuse information. Although defendant Fogarty did not necessarily intend or even know that the press release would in fact be read...