Simms Inv. Co. v. EF Hutton & Co. Inc., Civ. A. No. C-87-643-WS.

• Decision Date: 09 June 1988
• Docket Number: Civ. A. No. C-87-643-WS.
• Citation: 688 F. Supp. 193
• Court: U.S. District Court — Middle District of North Carolina
• Parties: SIMMS INVESTMENT COMPANY, a North Carolina Corporation, Plaintiff, v. E.F. HUTTON & COMPANY INC., A Delaware Corporation, and A.L. & E. Operating Company, an Oklahoma Corporation, Defendants.

688 F. Supp. 193

SIMMS INVESTMENT COMPANY, a North Carolina Corporation, Plaintiff, v. E.F. HUTTON & COMPANY INC., A Delaware Corporation, and A.L. & E. Operating Company, an Oklahoma Corporation, Defendants.

Civ. A. No. C-87-643-WS.

United States District Court, M.D. North Carolina, Winston-Salem Division.

June 9, 1988.

Wesley Bailey, Winston-Salem, N.C., and Martin T. Fletcher, Sr., Fort Wayne, Ind., for plaintiff.

William K. Davis and D. Anderson Carmen, Winston-Salem, N.C., and Daniel T. Flaherty, Washington, D.C., for defendant E.F. Hutton & Co.

Daniel R. Taylor, Jr., Winston-Salem, N.C., and Jennifer A. Ostrom, Denver, Colo., for defendant A.L. & E. Operating Co.

MEMORANDUM OPINION

GORDON, Senior District Judge:

This matter comes before the court pursuant to defendant E.F. Hutton & Company Incorporated's ("Hutton") and defendant A.L. & E. Operating Company's ("AL & E") motions to dismiss plaintiff Simms Investment Company's ("Simms") claim under Colorado securities law. Inasmuch as the applicable choice of law rules indicate that the court should apply North Carolina law, the court dismisses plaintiff's claim under Colorado law. The court will, however, allow plaintiff the option of amending the complaint to include any relevant causes of action under North Carolina securities laws.

I.

In April of 1983, Simms and AL & E agreed to enter into a joint venture. Pursuant to this agreement, AL & E/Simms 1983 Joint Venture ("AL & E/Simms 1983") was formed. Hutton acted as the sales agent between AL & E and Simms in the formation of AL & E/Simms 1983. AL & E/Simms 1983 is a Colorado partnership formed for the ostensible purposes of hunting, producing, and marketing oil and gas.

Plaintiff filed suit in September of 1987, alleging that defendants made misrepresentations and omissions of fact in order to induce plaintiff to participate in AL & E/Simms 1983. These misrepresentations and omissions, plaintiff contends, amount to a violation of (1) Section 10(b) of the Securities Exchange Act of 1934, (2) the Colorado Securities Act of 1981, and (3) the North Carolina common law prohibition of fraud. In particular, plaintiff alleges that defendants' conduct violated sections 11-51-123 and 11-51-125 of the Colorado Securities Act of 1981.

II.

Defendants first argue that dismissal of plaintiff's claims under Colorado law is proper, under Rule 12(b)(6) of the Federal Rules of Civil Procedure, because the questioned transaction did not amount to the offer and sale of a security within the Colorado Securities Act. Section 11-51-127 of the Colorado Securities Act of 1981 provides:

Scope of article and service of process.

(1) Sections ... XX-XX-XXX and XX-XX-XXX apply to persons who sell or offer to sell when an offer to sell is made in this state, or when an offer to buy is made and accepted in this state.

Stated differently, sections 11-51-123 and 11-51-125 only apply to persons who (1) sell or offer to sell where the offer to sell is made in Colorado or (2) sell where the offer to buy is both made and accepted in Colorado. Defendants argue that plaintiff's allegations clearly indicate that any offers to buy or sell occurred in North Carolina, and, therefore, plaintiff's claims fail to satisfy the tests stated in section 11-51-127.

In evaluating defendants' motion to dismiss, the court must presume that all factual allegations in the complaint are true. The complaint must be liberally construed in favor of the claimant, and all reasonable inferences resolved in support of the complaint. Hughes v. Rowe, 449 U.S. 5, 10, 101 S.Ct. 173, 176, 66 L.Ed.2d 163 (1980); Gilbert v. Bagley, 492 F.Supp. 714, 727 (M.D.N.C.1980); 2A J. Moore & J. Lucas, Moore's Federal Practice ¶ 12.072.-5 (1986). The court should not dismiss plaintiff's claims unless it appears beyond doubt that "no relief could be granted under any set of facts that could be proved consistent with the allegations." Hishon v. King & Spalding, 467 U.S. 69, 73, 104 S.Ct. 2229, 2232, 81 L.Ed.2d 59 (1984) (citing Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 101-102, 2 L.Ed.2d 80 (1957)). Accord Battlefield Builders, Inc. v. Swango, 743 F.2d 1060 (4th Cir. 1984); Wolman v. Tose, 467 F.2d 29, 35 (4th Cir.1972); Thompson v. Brotherhood of Sleeping Car Porters, 316 F.2d 191 (4th Cir.1963).

Plaintiff alleges, in paragraph 58 of the complaint, that "the transaction which is the subject of this action constituted the offer and sale of a security in Colorado by defendants ... to the Plaintiff." Plaintiff further alleges, in paragraph 56 of the complaint, that the Joint Venture Agreement between Simms and A.L. & E. was executed and delivered in Colorado. If the court presumes these allegations are true and makes all reasonable inferences in favor of plaintiff, dismissal of plaintiff's claim under Colorado law would be improper. Plaintiff clearly alleges that the offer and the sale of the security occurred in Colorado, and the allegation that Simms and A.L. & E. "executed" the Joint Venture Agreement in Colorado suggests that the offer, acceptance, or both offer and acceptance occurred in Colorado. It does not appear "beyond doubt," from the face of the complaint, that plaintiff will be unable to prove the elements of section 11-51-127.

III.

Pursuant to the court's request, the parties briefed the issue of whether the court may apply Colorado law under traditional choice of law principles. In response to this request, plaintiff submitted a brief suggesting that this case does not present a choice of law problem. Instead, plaintiff suggests that the only issue is whether a sufficient nexus exists between the transaction and Colorado so that the transaction falls within the reach of the Colorado Securities Act. Plaintiff further argues that if a sufficient nexus exists between the transaction and the laws of more than one state, then the court can apply the laws of more than one state.

Plaintiff's position appears to confuse constitutional considerations under the due process clause with choice of law considerations. Under basic notions of due process, the Supreme Court has long recognized "that a set of facts giving rise to a lawsuit, or a particular issue within a lawsuit, may justify, in constitutional terms, application of the law of more than one jurisdiction." Allstate Insurance Co. v. Hague, 449 U.S. 302, 307, 101 S.Ct. 633, 637, 66 L.Ed.2d 521 (1981). A court may apply a state's substantive law to a cause of action if that state has "a significant contact or significant aggregation of contacts, creating state interests, such that choice of its law is neither arbitrary nor fundamentally unfair." Phillips Petroleum Co. v. Shutts, 472 U.S. 797, 818, 105 S.Ct. 2965, 2978, 86 L.Ed.2d 628 (1985) (citing Hague, 449 U.S. at 312-13, 101 S.Ct. at 639-40). Plaintiff argues that there are sufficient contacts with Colorado in this case, and, therefore, the court should apply Colorado law.

Plaintiff's argument fails to recognize that a court does not apply the law of any or every state that has a sufficient constitutional "nexus" between the questioned transaction, the parties, and the state; nor does a court apply every state statute that, according to its statutory language, might govern a particular transaction. Fundamental choice of law notions, long recognized by every court, dictate that if a court can apply state laws that substantively conflict, the court selects "one law from among the laws of several jurisdictions having some contact with the controversy." Hague, 449 U.S. at 308, 101 S.Ct. at 637.

Plaintiff cites Lintz v. Carey Manor Ltd., 613 F.Supp. 543 (W.D.Va.1985), for the proposition that when two or more state blue sky statutes might apply to a transaction, no conflict of laws problem exists, and the court should simultaneously apply all of the potentially applicable statutes. For the reasons articulated above, the court rejects this proposition. Additionally, the court notes that the only supporting authority cited in Lintz fails to support the conclusion reached in the case. The court, in Lintz, noted that "the only discussion I have located on the question of whether two or more state statutes can simultaneously provide civil liability for securities fraud ... is by Professor Joseph C. Long." 613 F.Supp. at 548. Later, in summarizing Long's views, the court states that Long never confronts the question of "whether conflicts of law principles should be applied" to a situation where a securities transaction is legal under one state's law and illegal under a second state's law. 613 F.Supp. at 550. The footnote to this statement, however, quotes Long, and Long writes that "when a transaction is determined to involve two or more states, it is possible that the transaction may be legal under one statute, but illegal under the statute of the second state. In such case a conflicts question arises as to which law should control." 613 F.Supp. at 550 n. 9 (emphasis supplied).

Accordingly, the court will apply a conflict of laws analysis to the facts of this case to determine what law applies to plaintiff's state law claim under Count II of the complaint.

IV.

The Rules of Decision Act, 28 U.S.C. § 1652 (1966), and the rule of Erie R. Co. v. Tompkins, 304 U.S. 64, 58 S.Ct. 817, 82 L.Ed. 1188 (1938), require a federal court sitting in a diversity case to apply the forum state's substantive law and federal procedural law. An adjunct of this rule mandates that a federal court apply the choice of law rules of the state where the federal court sits. Klaxon Co. v. Stentor Electric Mfg. Co., 313 U.S. 487, 496, 61 S.Ct. 1020, 1021, 85 L.Ed. 1477 (1941). These same principles apply "where a federal court addresses state law claims under its pendent jurisdiction." Compliance Marine, Inc. v. Campbell, 839 F.2d 203, 205 (4th Cir.1988). See United Mine Workers of America v. Gibbs, 383 U.S. 715, 726, 86 S.Ct. 1130, 1139, 16 L.Ed.2d 218 (1966); Bi-Rite...