Stern v. National City Co.

• Citation: 25 F. Supp. 948
• Parties: STERN v. NATIONAL CITY CO.
• Decision Date: 04 November 1938
• Court: U.S. District Court — District of Minnesota

25 F. Supp. 948

STERN v. NATIONAL CITY CO.

District Court, D. Minnesota, Fourth Division.

November 4, 1938.

Leonard, Street & Deinard, of Minneapolis, Minn., for plaintiff.

Doherty, Rumble, Butler, Sullivan & Mitchell, of St. Paul, Minn., and Walter K. Earle, of Shearman & Sterling, of New York City, for defendant.

JOYCE, District Judge.

Plaintiff's complaint sets forth four causes of action involving certain sales made by defendant to plaintiff of shares of The National City Bank of New York, in the amounts and on the dates as follows:

Feb. 4, 1929, 5 shares, total purchase price $1,640.

Apr. 4, 1929, 5 shares, total purchase price $1,960.

July 12, 1929, 5 shares, total purchase price $2,035.

Oct. 16, 1929, 5 shares, total purchase price $2,875.

The stock of the National City Bank so purchased carried with it a certain beneficial interest in the stock of the defendant, and the stock which was the subject of the last two purchases also carried with it a beneficial interest in the stock of City Bank Farmers Trust Company. The beneficial interest in the stock of the defendant was the result of an agreement made under date of June 1, 1911, pursuant to which all of the stock of the defendant was issued and delivered to three trustees for the benefit of the stockholders of The National City Bank, and the beneficial interest in the stock of City Bank Farmers Trust Company was the result of an agreement made under date of June 29, 1929, pursuant to which all of the stock of City Bank Farmers Trust Company was transferred to three trustees likewise for the benefit of the stockholders of the National City Bank. From the time of acquisition of legal ownership of the stock of each of the corporations by the trustees mentioned a ratable beneficial interest therein was an incident to ownership of stock of the Bank and passed with sale and transfer of the Bank's stock, but was not otherwise subject to ownership, transfer or sale. These beneficial interests were evidenced by certificates of the trustees endorsed and signed on the reverse side of the certificates evidencing the Bank shares.

The defendant company was licensed as a foreign corporation in Minnesota on March 31, 1917, and so continued until August 23, 1934, when it formally withdrew from the state. In August, 1917, the defendant sought and obtained a dealer's license under the Minnesota Securities law, which was renewed annually until June, 1934, when defendant obtained a cancellation of its dealer's license as well as all licenses issued to agents which were then outstanding. After the defendant had obtained the requisite authority to carry on business in Minnesota in connection with the sale of securities, it opened an office in the Builders Exchange Building in Minneapolis, started a bank account, had a cashier, installed a private wire connection with its main office in New York through Chicago, acquired the usual office furniture and equipment for the conduct of a securities business, upon which equipment it paid a personal property tax in Minnesota.

The plaintiff is a clothing merchant of fifty-two years of age, residing in North-field, Minnesota, who had made various stock investments for himself and his mother, his first experience in making such purchases from the defendant occurring in 1922 or 1923.

There is little dispute in the facts, and it is for the recovery of the total purchase price that the plaintiff brings this action.

It appears from the testimony that the usual method of business was as follows: The defendant's agent would solicit a prospect, urging and recommending the purchase of stock of the National City Bank. Such prospective buyer, contingent upon a purchase, would then make a cash payment, or in lieu thereof turn in other securities to be applied on a certain number of shares at a certain price, or at the then market price. The telegraph operator in the office would then transmit the details to Chicago and so-called confirmation of the sale would later be received. The customer would be communicated with again and advised as to his purchase, and upon contract payments then being made, usually in the Minneapolis office, the stock would be "ordered out", registered if desired by the customer and delivered to him, sometimes directly by mail or at the Minneapolis office, or by manual delivery outside the office—all in Minnesota.

The plaintiff rests his right of recovery on "three separate and independent theories of action":

First, that the sales were void because of a failure to comply with the requirement of registration under the Minnesota Blue Sky Law as applied to the beneficial interest or units the subject of sale in the National City Company. In connection with this theory it is plaintiff's contention that the defendant, having on August 23, 1934, prior to the expiration of six years from the dates of sales by defendant to plaintiff, departed from the state and since that time having resided outside the state, the statute of limitations has been tolled, and the plaintiff's cause of action under what he terms the Blue Sky Law theory has never become barred.

Second, the plaintiff presents his implied representation theory, it being claimed that when the defendant sold the securities to the plaintiff, such act amounted to a representation in law that the sale was in all respects valid and made in compliance with law; that the act of sale implied representations which he says were false, and that therefore Section 9191, subd. 6, of Mason's 1927 Minnesota Statutes, dealing with limitation is applicable, which reads:

"The following actions shall be commenced within six years: * * *

"For relief on the ground of fraud, in which case the cause of action shall not be deemed to have accrued until the discovery by the aggrieved party of the facts constituting the fraud."

Third, plaintiff contends that defendant perpetrated a fraud on plaintiff in suppressing and concealing the fact that the securities it sold him were not registered, although the defendant well knew the requirement of registration; and that plaintiff bought in the belief that the transaction was a valid one. Such conduct, plaintiff urges, amounted to express fraud and he claims on this theory of the case that the cause of action did not accrue until his discovery of the facts constituting fraud.

It is conceded that there were no specific or actual representations made as to registration.

Defendant admits the sales but contends they were made in interstate commerce, outside of Minnesota; that the statute relied upon by plaintiff had no application to the facts here; that the plaintiff at all times acted with full knowledge of the circumstances. Defendant pleads ratification, laches and estoppel and that the action is barred by the statute of limitations.

Plaintiff's testimony was in substance that he never learned until the Fall of 1937 that the securities which he bought had not been registered.

A security is defined by Sec. 3996-1 of Mason's Minnesota 1927 Statutes as follows: "`Security' shall mean and include any stock, share, bond, note, debenture, commercial paper, evidence of indebtedness, investment contract. Interest in or under a profit sharing or participating agreement or scheme, or beneficial interest in a trust or pretended trust. Any interest in any security shall be deemed a security."

The first paragraph of Sec. 3996-4 of Mason's 1927 Minnesota Statutes provides: "No securities shall be sold within the State of Minnesota unless or until such securities have been registered as herein provided."

That the Security Act is a valid exercise of the police power of the State, see State v. Nordstrom, 169 Minn. 214, 210 N. W. 1001; State v. Swenson, 172 Minn. 277, 215 N.W. 177, 54 A.L.R. 490; Anderson v. Chase Securities Co., 193 Minn. 443, 258 N. W. 743.

That the contract was a Minnesota contract, in my opinion, admits of little dispute. Hardly can the defendant hold itself out to the public as a licensed broker in Minnesota conducting its business under the authority of a Minnesota license and then seek to escape liability from the Minnesota law, following the exercise of such license, on the theory that all its contracts were confirmed outside of Minnesota. The solicitation, the agreement to pay the money and accept the stock, the actual payment, the delivery of the certificates — all suggest the contract was consummated in Minnesota. If what was done in this case does not present a Minnesota contract, it is obvious that the Minnesota law is incapable of application and becomes impotent. Drees v. Minn. Petroleum Co., 189 Minn. 608, 250 N.W. 563. See also Bothwell v. Buckbee, Mears Co., 275 U.S. 274, 48 S.Ct. 124, 72 L.Ed. 277, wherein the Supreme Court of the United States affirmed a Minnesota Supreme Court judgment in an action on an insurance contract where the insurer without a license illegally solicited the same in Minnesota. Bartlett v. Doherty, 1 Cir., 81 F.2d 920, on rehearing 83 F.2d 259; Commissioner of Banks v. Chase Securities Corp., Mass., 10 N.E.2d 472.

That the security involved required registration under the Minnesota Blue Sky law, see State v. Ogden, 154 Minn. 425, 191 N.W. 916; State v. Nordstrom, supra. See also Commissioner of Banks v. Chase Sec. Corp., Mass., 10 N.E.2d 472, appeal to U. S. Supreme Court denied Chase Sec. Corp. v. Husband, 302 U.S. 660, 58 S.Ct. 476, 82 L.Ed. 510; McGray v. Hornblower, Mass., 10 N.E.2d 501; Castle v. Acme Ice Cream Co., 101 Cal.App. 94, 281 P. 396; National Bank v. Price, 65 Utah 57, 234 P. 231.

Defendant was engaged in the business of selling securities. Its right to do so in Minnesota could only be in accordance with Minnesota law. It is to be presumed that it knew of the registration requirement. The National City Company was not engaged in the banking business and there were not available to it the exemptions which attached to a national bank.

In its answer defendant...