Townsend Corporation of America v. Davidson

• Decision Date: 16 September 1963
• Docket Number: Civ. A. No. 72-62.
• Citation: 222 F. Supp. 1
• Parties: TOWNSEND CORPORATION OF AMERICA, Plaintiff, v. Clinton DAVIDSON et al., Defendants.
• Court: U.S. District Court — District of New Jersey

222 F. Supp. 1

TOWNSEND CORPORATION OF AMERICA, Plaintiff, v. Clinton DAVIDSON et al., Defendants.

Civ. A. No. 72-62.

United States District Court D. New Jersey.

September 16, 1963.

Joseph Schildkret, New York City, for plaintiff; Martin Horwitz and Edmund H. Kerr, New York City, of counsel.

O'Mara, Schumann, Davis & Lynch, by James A. Hession, Jersey City, N. J., for defendants A. C. Wedemeyer and W. F. Rockwell; Cahill, Gordon, Reindel & Ohl, by Robert G. Zeller, Thomas E. Weesner and Robert L. Fonner, New York City, of counsel.

Riker, Danzig, Marsh & Scherer, by Charles Danzig, Newark, N. J., for defendant C. F. Smith; Sullivan & Cromwell, by Alfred Jaretzki, Jr., Marvin Schwartz, Edward W. Keane and E. Roger Frisch, New York City, of counsel.

AUGELLI, District Judge.

In this action against a number of its former directors and others, plaintiff Townsend Corporation of America (TCA) seeks, inter alia, an accounting for all damages claimed to have been sustained by it as a result of the several transactions alleged in the 11 counts of the complaint. The director-defendants are charged with violations of the Investment Company Act of 1940 (Act), 15 U.S.C.A. § 80a-1, et seq., and breaches of common law fiduciary duties.

The management of TCA is presently vested in an interim board of directors appointed by this Court in a separate proceeding brought by the Securities and Exchange Commission.

The jurisdiction of this Court is invoked solely under section 44 of the Act, 15 U.S.C.A. § 80a-43¹. Said section, in pertinent part, provides that:

"* * * any suit or action to enforce any liability or duty created by, or to enjoin any violation of, this subchapter * * * may be brought in any * * * district wherein any act or transaction constituting the violation occurred or in the district wherein the defendant is an inhabitant or transacts business, and process in such cases may be served in any district of which the defendant is an inhabitant or transacts business or wherever the defendant may be found. * * *"

Three of the defendants, Smith, Wedemeyer and Rockwell (former directors of TCA), now move, pursuant to Rule 12(b) (3) and (5) of the Federal Rules of Civil Procedure, for a dismissal of the complaint on the ground that venue is improperly laid in this District, and to quash service of process made upon them on the ground that service outside the District was ineffectual to obtain personal jurisdiction over them².

It is conceded that defendants Smith, Wedemeyer and Rockwell are neither inhabitants of this District, nor do they transact business here; also, that all were served with process outside the territorial limits of the District. Therefore, venue and service of process would be valid under section 44 of the Act if the Court determines that this is an "action to enforce any liability of duty created by" the Act and that, in addition as to venue, "any act or transaction" alleged to be a violation of the Act occurred in this District.

The complaint in this case charges the defendants with the commission of a number of acts, as well as omissions to act, which TCA claims are violative of both the Act and the common law. There is a general allegation that "each of said acts constituted a violation of one or more provisions of the Act * * *". In addition, it is specifically alleged that TCA was an "investment company" within the meaning of section 3(a) of the Act, 15 U.S.C.A. § 80a-3(a), and that the defendants failed to cause TCA to register as such with the Securities and Exchange Commission under section 8 of the Act, 15 U.S.C.A. § 80a-8. It is further alleged that the defendants caused TCA to engage in various activities in interstate commerce prohibited to an unregistered investment company by section 7(a) of the Act, 15 U.S.C.A. § 80a-7(a).

Notwithstanding that the complaint in this case alleges violations of the Act, the defendants argue that the Act does not, either expressly or by implication, create in TCA a private right of action against its directors for such violations. Concededly, the Act does not expressly grant a private remedy or create a private liability for a violation thereof. But there is respectable authority that a private right of action may be implied. For conflicting views on this question compare Brown v. Bullock, 294 F.2d 415 (2 Cir., 1961) with Brouk v. Managed Funds, Inc., 286 F.2d 901 (8 Cir., 1961), vacated as moot, 369 U.S. 424, 82 S.Ct. 878, 8 L.Ed.2d 6 (1962). However, in a recent case in this Circuit, Taussig v. Wellington Fund, Inc., 313 F.2d 472 (1963), the Court of Appeals has indicated that in a situation similar to the one here under consideration on this point, the contention that there exists an implied private right to relief is not frivolous. At this stage of the proceedings, this Court need go no further in determining the merits of the plaintiff's claims.

The defendants also question whether they, as directors, can be held individually liable for violations of section 7 of the Act, 15 U.S.C.A. § 80a-7, dealing with transactions by unregistered investment companies, and whether they can be held responsible for causing TCA, while an unregistered investment company, to violate certain sections of the Act which appear on their face to apply only to registered investment companies. Suffice it to say that for the purpose of the present motions, this Court has subject matter jurisdiction under the Act. This does not mean, however, that appropriate motions addressed to the legal sufficiency of the separate counts of the complaint may not be made at some future time.

The next question to be decided is whether any act or transaction constituting a violation of the Act occurred in this District. The moving defendants stress their lack of participation in the activities that took place in this State. The defendants Smith and Rockwell appear not to have attended any meetings of the TCA board of directors held in this District. The defendant Wedemeyer attended one or two meetings in New Jersey. Among the contentions made by these defendants is that if their failure to cause TCA to register as an investment company is a violation of the Act, such violation could occur only at the place where...