Watling, Lerchen & Co., Inc. v. Ormond

• Decision Date: 03 October 1978
• Docket Number: Docket No. 77-1017
• Citation: 86 Mich.App. 238,272 N.W.2d 614
• Parties: WATLING, LERCHEN & COMPANY, INC., a Delaware Corporation, Plaintiff-Counter Defendant-Appellee, v. Dennis C. ORMOND, an Individual, Defendant-Counter Plaintiff-Appellant.
• Court: Court of Appeal of Michigan — District of US

Page 614

272 N.W.2d 614

86 Mich.App. 238

WATLING, LERCHEN & COMPANY, INC., a Delaware Corporation Plaintiff-Counter Defendant-Appellee, v. Dennis C. ORMOND, an Individual, Defendant-Counter Plaintiff-Appellant.

Docket No. 77-1017.

Court of Appeals of Michigan.

Oct. 3, 1978.

Released for Publication Jan. 3, 1979.

Bodman, Longley, Bogle & Dahling by Paul L. B. McKenney and Richard D. Rohr, Detroit, for Dennis C. Ormond.

Dickinson, Wright, McKean, Cudlip & Moon by J. Bryan Williams and Shelley D. Roberts, Bloomfield Hills, for Watling, Lerchen & Co., Inc.

Before R. B. BURNS, P. J., and BRONSON and WALSH, JJ.

AFTER REMAND

R. B. BURNS, Presiding Judge.

Plaintiff filed a complaint in circuit court alleging that it had purchased 1000 shares of American Agronomics Corporation stock on account for defendant, and was owed $15,270 for the stock. Defendant answered, and counterclaimed, alleging he was injured through plaintiff's mishandling of the transaction. The trial court granted plaintiff's motion for accelerated judgment on the counterclaim, upon determining that it lacked subject matter jurisdiction over the claim.

Defendant moved for leave to file an amended counterclaim. In the amended counterclaim defendant alleges that he was without knowledge of the law and rules regarding purchase of securities, and that plaintiff's agents had alleged that they had expertise in the purchase of securities and related matters. Defendant further alleges that plaintiff was a member of the New York Stock Exchange and American Stock Exchange, and subject to exchange rules that it know the essential facts about each customer and order; that plaintiff knew or should have known that defendant's sister and brother-in-law were major stockholders in American Agronomics Corporation, and as a consequence defendant might be required to file a schedule 13-D with the Securities and Exchange Commission in connection with the purchase, and be restricted in reselling the stock. Defendant alleges that plaintiff had a duty to advise defendant of the legal ramifications of the purchase, to file a schedule 13-D, or to consult with an attorney; failed to so advise; and as a result, defendant has been sued by the Securities and Exchange Commission and various other parties, has been enjoined from selling his stock as it has declined in value, and has been subjected to adverse publicity.

Defendant's motion for leave to file an amended counterclaim was denied by the trial court. Defendant appealed, and this Court remanded to the trial court with instructions to set forth the reasons for the denial of defendant's motion. Ben P. Fyke & Sons v. Gunter Co., 390 Mich. 649, 656-657, 213 N.W.2d 134, 137 (1973). The trial court filed an opinion explaining that it had denied the motion because the amended counterclaim was legally insufficient on its face, and amendment would, therefore, be futile. Ben P. Fyke & Sons v. Gunter Co., supra. The trial court reasoned that the duty alleged to have been breached by plaintiff derives from exchange rules rather than common law, and therefore exclusive jurisdiction over the claim resides in Federal courts. 15 U.S.C. § 78aa. We reverse.

15 U.S.C. § 78aa provides in part that,

"(t)he district courts of the United States, and the United States courts of any Territory or other place subject to the jurisdiction of the United States shall have exclusive jurisdiction of violations of this chapter or the rules and regulations thereunder, and of all suits in equity and actions at law brought to enforce any liability or duty created by this chapter or the rules and regulations thereunder".

However,

"(t)he rights and remedies provided by this chapter shall be in addition to any and all other rights and remedies that may exist at law or in equity * * * ". 15 U.S.C. 78bb.

Thus, if the duty alleged to have been violated by plaintiff was created by the Securities Exchange Act of 1934 or "the rules and regulations thereunder", and does not exist "at law or in equity", the Federal courts have exclusive jurisdiction.

"This is not meant to suggest that it was the intent of Congress, in enacting the statute in question, to preempt common law rights which might have been fully adjudicated and enforced in a state court before the act was passed. A more likely construction of the statute is that it confers exclusive jurisdiction on federal courts to entertain only those actions which involve some right of recovery which goes beyond such common law rights. * * * Both state and federal courts recognize that a common law action giving rise to a private civil remedy enforcible in the state courts may arise out of violations of the provisions of the Act * * *." McCollum v. Billings, 53 Misc.2d 661, 664-665, 279 N.Y.S.2d 609, 614 (Sup.Ct., 1967). (Citation omitted.)

"[R]ules and regulations thereunder", 15 U.S.C. § 78aa, refers to Securities and Exchange Commission rules, not stock exchange rules. Starkman v. Seroussi, 377 F.Supp. 518, 523 (S.D.N.Y., 1974). However, stock exchange rules are promulgated as a condition of registration, 15 U.S.C. § 78f(d), and may amount to a substitute for regulation by the Securities and Exchange Commission. Colonial Realty Corp. v. Bache & Co., 358 F.2d 178, 182 (C.A.2, 1966), Cert. den., 385 U.S. 817, 87 S.Ct. 40, 17 L.Ed.2d 56 (1966), Starkman v. Seroussi, supra. Depending upon the rule and the circumstances, a violation of an exchange rule may be actionable as a violation of a "duty created by this chapter", 15 U.S.C. § 78aa. Starkman v. Seroussi, supra.

In determining whether violation of a stock exchange rule is actionable under Federal law,

"the court must look to the nature of the particular rule and its place in the regulatory scheme, with the party urging the implication of a federal liability carrying a considerably heavier burden of persuasion than when the violation is of the statute or an SEC regulation. The case for implication would be strongest when the rule imposes an explicit duty unknown to the common law." Colonial Realty Corp. v. Bache & Co., supra, 182.

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