Petition for A Writ of Certiorari — McDaniel v. Dudley

SUBJECT INDEX

| OPINION BELOW (See Appendix B)..

JURISDICTION........... pen ik s2be errr ¢

QUESTION PRESENTED......... arr ee es

‘STATUTES INVOLVED..............0.00-5: ae

STATEMENT OF CASE...............0.54. are

SUMMARY OF REASONS FOR

ALLOWANCE OF WRIT....... EER ower Ay 6

ARGUMENT AND CITATIONS OF. .

- AUTHORITY IN SUPPORT OF WRIT.........7 .

COMCEIIIIOOE feo 5s 555s ccipeteeeee a ae

APPENDIX | oe eee orererrr rr . Title, i-ili, - 1a-60a

APPENDIX:B............ +1 cpieeeep ae ae ;

JUDGMENT |... sca yeescwseavens renee ee /

CERTIFICATE OF SERVICE. . sPrinnbaaeien ere ay fee

‘TABLE OF CASES - |

‘A. T. Brod & Co. y. Perlow, - | .

37S F.2d M3 (CAG, IW soc ianciesesataaes aoe

Bard. y. Dasho, 389 U.S. 977, 88 S.Ct. 480,

19 L.Ed. 2d 470 (1967)... 2... cece cece cence .9

Birmbaum y. Newport Steel Corporation,

193, F.2nd 461 (C.A. 2) cert. denied 343 U.S.

956, 72 S.Ct. 1051, 96 L.Ed. 1356 (1952)......... ‘8.

Coffee v. Permaian Corporation,

A P28 HS OO 555s iden acs 10

"Crane Company v. Westinghouse Air Brake an

Company; 419 F.2d 787 (C.A. 2, 1969).......... 9

| _ |

INDEX—continued _

ats Page

Dasho v. Susquehanna Corporation,. ©

. 380 F.2d 262 (C.A. 7)........ ire eae Cer ery 9

Greenstein v. Paul, 400 F.2d 480, ay eat *

— Fe ee errr rrr ee ews Se yer a

Herpich v. Wallace, 430 F.2d 792, Wy lg )

oe ae ee pceveseeee 8

‘Holmberg v. Williamson, | Sts tee

135 F. Supp. 493 (D.C. N.Y.,, 1955). << cscuavnn 8

Hooper v. Mountain States Securities Corporation, i

282 F.2d 195 (1960)...2...... eee eee es ere re 7

Iroquois Industries, Inc. v. Syracuse China’ :

Corporation, 417 F.2d 963 (C.A. 2, 1969)........ 8

Marley v..Schoenbaum, 395 U.S. 406,

ie 89 S.Ct. 1747, 23 L.Ed. 219 (1969)........ccceee 9

_ Rekant v.-Desser,-425 F.2d 872, oer

' $877(C.A. 5, 1970). .... Rens eet ee eeees 8

Ruckle y. Roto American Corporation, __ i |

339 F.2d 24 (C.A. 2, i. rae eee re jawenk 2.

Schoenbaum y. Firstbrook, 405 F. ad 215, es

219 (C.A. 2 1968) Sine din Kcbivue tas tanewanes Serer 9

Vine v. Beneficial Finance Corporation;

374 F.2d 627 (CA. 2) cert. denied 389 U.S. 970,

88 S.Ct. 463, 19 L.Ed. 2d 460 (1967).......... 9,10

il

IN THE

- Supreme Court of. the United States.

October ¥erm, 1971

4 Case Stenshae .

GEORGE E. DUDLEY, Receiver For Insurance

Investors Trust Company,

. seit Respondent,

-VS- ‘

SOUTHEASTERN FACTOR AND FINANCE

CORPORATION, JAMES M: McDANIEL,

ERNESTINE H. McDANIEL, et al.,

Defendants-Petitioners.

PETITION FOR WRIT OF CERTIORARI TO |

THE UNITED STATES COURT OF APPEALS

FOR THE FIFTH re i

JAMES M. McDANIEL and ERNESTINE H. Mc-

~ DANIEL, Defendants-Petitioners, Petition this Court

‘for Writ Of Certiorari to review the judgment and

opinion of -the United States Court of Appeals For

The Fifth Circuit entered in the ‘case of GEORGE E..

DUDLEY, Receiver For. Insurance Investors -Trust

Company V. SOUTHEASTERN FACTOR AND

FINANCE CORPORATION, JAMES M. McDAN-

' TEL, ERNESTINE H. -McDANIEL, et al., on July

9, 1971. :

1 | :

2

OPINION BELOW |

The opinion.and judgment of the.United States

Court of Appeals For The Fifth Circuit is as yet un-

reported but is appended hereto, (Appendix) the opin-

ion and judgment being dated July 9, 1971.

| JURISDICTION |

- The opinion and judgment of the United Kates Court

of Appeals For The Fifth Circuit was entered and dated

July 9, 1971. The jurisdiction of this Court is invoked

as provided under the provisions of 28 U. S.C.A. Sec-

| _ tion 1254.

~ QUESTION PRESENTED

The question presented is whether the United States

- Court of Appeals For’ The Fifth Circuit properly re-

versed and remanded the opinion and judgment of-the

United States District Court For The Northern District

of Georgia, Atlanta Division, wherein Motion To Dis-

' miss in behalf of JAMES M. McDANIEL and ER- —

NESTINE H. McDANIEL was sustained and granted, ©

the District Court holding that the Complaint filed in

behalf of GEORGE E. DUDLEY, Receiver for Insur-

ance Investors Trust Company, Plaintiff-Respondent,

did not set forth therein a federal claim under the Se-

curities Act of 1933 or the Securities Exchange Act of *

1934 or an independent ground of federal Court juris-

- diction with regard to the common law. |

STATUTES INVOLVED

(1) Section 17, Securities Act of 1933, 15 US.C. Sec- :

tion 77q (1964)

(2) Section 3, Securities Exchange Act of 1934, 15°

U. S.C. Section 78c (1964) N |

-

J

7

3

(3) Section 10, Secutities Exchange Act ct 15

U.S.C. Section 78) (1964)

'(4) SEC. Rule. 10b-5, 17 C.F.R. ‘Section 240. 10b-5

(1968) :

(5) 28 US: Cc. ‘Siction 1653 (1964) -

- (6) Federal Rules of Civil Procedure (9b)

- The two Texts which frame the answer by the United

States Court of Appeals For The Fifth Circuit to the

query whether the Complaint allegations were enough

_ _ to invoke federal jurisdiction under the securities legis-

lation provide:

Section 10(b) of the Securities nisin Act of 1934: |

“It shall be unlawful for any person directly or in- -

directly, by the use of any means or instrumental-

ity of interstate commerce or of the mails, or of

7 facility of any ‘national securities exchange . .

**eX KKK K *

(b) To use or employ, in connection with the purchase

or sale of any security registered on a national

‘securities exchange or any Security not so regis-

tered, any manipulative or deceptive device or

contrivance in contravention of such rules and

regulations as the Commission may prescribe as.

necessary or appropriate in the public interest or

for the: protection of investors.” 15 U.S.C. Sec- |

tion 78j{b) (1964)

Rule 10b- 5 of the Securities and Exchange Commis

sion: ... - |

“Tt shall be unlawful for any person, directly or

indjrectly, by the use of any means or instrumen-

tality of interstate 9 national or of the mails or

of any facility of any national securities exchange,

‘

(a) to employ any devits, scheme or artifice to. de-

fraud, :

(b) to make any untiue statement of a ihn fact

- or to omit to state a material fact necessary in

order to make the statements made, in the light

of the circumstances under which they were yceis :

not misleading, or :

(¢) to engage. in any act, or actice, or course of busi-

ness which operates or would operate as a fraud

or deceit upon any person,. :

in connection with the purchase or sale of any

security.” 17 C.F.R. Section 240. 10b-5: (1971)

Federal Rules of Civil Procedure 9(b)

“Fraud, Mistake, Condition of the Mind. In all

averments of fraud or mistake, the circumstances

. constituting fraud or mistake shall be stated with

particularity. Malice, intent, knowledge, and other

condition of mind of a _— may be averred

——,

STATEMENT OF CASE

Civil Action Complaint was brought by GEORGE E.

DUDLEY, Receiver for insurance Investors Trust Com-

- pany (hereinafter referre, to as IITC), Plaintiff-Respon-

dent, to recover damages allegedly sustained by IITC as

a result of Defendant’s-Petitioner’s allegedly wrongfully —

‘withholding from IITC (a shareholder of Defendant

Southeastern Factor and Finance Corporation) its pro- |

portionate “share of a liquidating distribution from

. Southeastern. Jurisdiction is alleged-under the Securities

Act of 1933 (15 U.S.C. Section 77a, et seq.), 28 U.S.C.

Section 1337, and 28 U.S.C. Section 1332. The com-

plaint alleges that in July, 1966 IITC and Southeastern

entered into a written contract pursuant to which IITC

5.

conveyed to Southeastern approximately 621,000 shares

of the common stock of another corporation (Acme,

Inc.) in exchange for approximately 68,000 shares of

the preferred stock of. Southeastern. HTC subsequently

transferred some of its Southeastern stock to First

American Life Insurance Company of Alabama, which

-company thereafter was also a preferred shareholder of

Southeastern. During the summer of 1967, Defendant

Atkantic Services, Inc., and Defendant Southeastern

entered into an agreement pursuant to which South-

eastern was to sell to Atlantic certain shares, and op-

tions to’ purchase additional shares of preferfed stock

in First American Life Insurance Company of Alabama,

and Atlantic was to issue to Southeastern 34,000 shares

of Atlantic’s convertible preferred stock. This latter

transdetion allegedly was pursuant to a plan of liquida-

tion adopted by Southeastern whereby all creditors and

sharcholders were to receive assets of Southeastern.

Defendant Atlantic allegedly distributed the shares

which it had agreed to transfer to Southeastern directly

to. the creditors and common shareholders of South-.

eastern, pursuant.to Southeastern’s instructions, but in.

so doing ignored the preferred position of IITC and

First American (of which latter corporation Atlantic

was itself a preferred shareholder). IITC claims that

the transaction between Atlantic and Southeastern was

intended to, and did, result in a fraud upon certain

shareholders of Southeastern in that: they were not

"given their liquidating’ shares as required by. South-

eastern’s liquidation plan, the allegation of fraud not

being made with particularity. (Appendix A)

Defendants Ernestine and James M. McDaniel and

Defendants Maurice E. Olen, C. A. Sclreuerman, and.

Crown Services Corporation moved to dismiss on grounds

.. : S

of (1) failure to state a claim, (2) \improper venue, (3)

failure to state a claim under the Securities Acts and

improperly joining with the claim arising under. the

Securities Acts a claim based on common law grounds _

of misfeasance, malfeasance, fraud, and unjust enrich-

ment, ahd (4) failure to show on the face of the com-

plaint that the action‘was brought within: the period

of the statute of limitations. In addition, the Olen de-

' fendants moved: to dismiss for insufliciency of process

and lack of personal jurisdiction. (Appendix A)

-The District Court held that the Complaint did not

‘state a claim under the Securities Act of 1933 or the

- Securities Exchange Act of 1934, the federal claims

_. being dismissed, and that since it did not appear from

the Complaint that an independent ground of federal

‘court jurisdiction existed with regard to the common |

- law claim, the state claim was dismissed without preju-

dice fo its being refiled if an independent: ground of

federal court jurisdiction could be demonstrated. (Ap-

pendix A) ;

-~GEORGE E. DUDLEY, Receiver for Insurance In-

vestors Trust Company, Plaintiff-Respondent appealed

‘the aforesaid District Court decision to the United

States Court: of Appeals Far The Fifth Circuit, that

court reversing and remanding, which is the subject

of this Petition For Writ Of Certiorari. (Appendix B)

SUMMARY OF REASONS FOR

ALLOWANCE OF WRIT

Through broad and liberal interpretation by the

Cotirts the intended federal coverage by the Securities

’ Acts and Rules thereunder has been stretched com-

pletely out of line with the intention of Congress when

|

7

said statutes were enacted. (See footnotes 2 and 6 of

Decision.) | :

ARGUMENT AND CITATIONS OF AUTHORITY

IN SUPPORT OF ~ oe

PETITION FOR WRIT OF CERTIORARI

It is respectfully submitted and strongly urged that °

the Complaint does not set forth a claim arising under

the Securities Acts. Those statutes give rise to causes

of action arising out of fraudulent or deceptive -acts

connected with the sale or purchase of securities. The

United States Court of Appeals. For The Fifth Circuit

recognized in Hooper v. Mountain States Securities ‘

Corp., 282 Fed. 2nd 195 (1960) that a significant pur-°

"pose of Section 10(h) of the Securities Exchange Act

of 1934 (15 U.S.C. Section 78j(b)) and the regulations

* authorized therein (SEC Regulation X-10B-5) was to

extend to sellers of securities the same protection against

fraudulent and other unlawful schemes which the Se-

curities Act of 1933 afforded to those defrauded in the

purchase of securities. Any injury Plaintiff-Respondent

received as a result of the acts set forth in the Com-

plaint did not result from the sale or purchase of se-

curities, but, rather, resulted ‘from the purchaser Cor-

poration’s failure properly to distribute among its share- —

holders certain securities which the Corporation itself .

had purchased. Stripped of adornment, the Complaint

alleges a complaint against Defendants-Petitioners for

failure in a duty to see to it that IITC received its pro-

- portionate share of a distribution in connection with a

partial liquidation by Southeastern. Neither of the Se-

curities Acts referred to covers the situation, and no

jurisdiction existed based upon a federal claim. In the

Complaint, all that is said is that “the distribution of

8

shares of Atlantic to common stockholdérs of South-

eastern was in fraud of this creditor,” creditor meaning

HTC. It is-respectfully submitted that -under the Se-

curities Act of 1933, the fraud contemplated is, some-

‘thing more than a mere failure ‘to give a stockholder

its claimed share of a dividend. In the. Complaint no

claim is inade that the contract between Atlantic and

Southeastern was fraudulent, and thts 80 attack has

been made. on the only “purchase” or “sale” which is-

involv oe the allegations in the case. There must be :

“sale” or “offer of sale which is being attacked in

order ne jurisdicfion to attach under the federal stat-

utes. Holmberg v. Williamson, 135 F? Supp. 493 (D.C.

N.Y., 1955). The leading case of Birnbaum vy. Newport

Steel Corporation, 193 F.2nd 461 (C.A. 2), cert. denied,

343 U.S. 956, 72 S.Ct. 1051, 96 L.Ed. 1356 (1952), in-

terpreted the phrase “in connection witht the purchase

or sale of any security” in both statute and rule as lim-

iting permissible Plaintiffs in a civil action under the

rule to. “purchasers” or “sellers”. of securities. See

Rekant vy. Desser, 425 F.2d 872, 877 (C.A. 5, 1970),

Iroquois Industries, Ine. v. Syracuse China Corporation,

417 F.2d 963 (C.A. 2, 1969), cert. denied 399 U.S. 909,

90 S.Ct. 2199, 26 L. Ed: 2nd 561 (1970); Greenstein y.

Paul, 400 F.2d 580, 581. (C.A. 2, 1968). In Herpich vy.

Wallace, 430 F.2d 792, 808 (C.A. 5, 1970) it was said:

“s. 2a plaintiff must frame his complaint so that

it appears with reasonable clarity therefrom either

that a purclfase or sale of securities by the plaintiff

is the subject of the fraudulent scheme or that the

inducement of such a purchase or sale is a’ purpose

of the scheme. That: the ‘conduct complained ot -

may be reprehensible does not require the conclu-

sion that a federal remedy must be furnished. .

If Congres ss had intended. that the federal courts

*

9

inquire into every decision affecting the manage-

ment of corporations and then.fashion a new fed-

eral law on the fiduciary responsibilities of corpo-

rate directors, officers, and controlling persons,

presumably so revolutionary a federal intervention

into an area traditionally handled by the states.

would have been clearly expressed..." ye”

In trend through interpretation it has been held that

_ the purchaser-seller requirement does not demand a sale

in the strict common law traditional sense and as a result

it was held in Ruckle v. Roto American Corporation,

339 F.2d 24 (C.A. 2, 1964) a company caused by its

. control group to issue: treasury shares at prices arbi-

trarily established ‘was a seller within the -rule, (See

Schoenbaum vy. Firstbrook, 405. F.2d 215, 219 (C.A. 2,

1968) (en banc), cert..denied sub nom. Marley vy. Schoen-

baum, 395 U.S. 406, 89 S.Ct. 1747, 23. L.Ed. 219 (1 969) );

it was held in A. 7. Brod & Co. v. Perlow,-375 F.2d 393

(C.A. 2, 1967). that a,stockbroker whose customer or-

dered stock, but refused to pay for it if its market price

had not increased by the’ payment date, was and had ~

standing as a purchaser, it was held in Dasho v. Sus-

quehanna Corporation, 380 F.2d. 262 (C.A. 7), - cert.

denied sub-nom. .Bard v. Dasho, 389 U.S. 977, 88 S.Ct.

480, 19 L.Ed. 2d 470 (1967) that when Susquehanna

_ Corporation: agreed to merge the American Gypsum

_ Company into it by issuing shares to Gypsum’s stock-

holders pursuant to a prescribed exchange ratio, Sus-

-quehanna’s exchange of its shares for Gypsum’s assets

. in order to merge the two companies was a sale of se-

curities, and Susquehanna had standing to assert a vio-

lation -of the rule, the “forced sale” rationale being.

applied to a tender-offer situation in Crane Company v. °

Westinghouse Air Brake Company, 419 F.2d 787 (C.A.

. 2, 1969), a merger situation, in Vine v. Beneficial Finance

Fr ANT ON eet

Webeaie aie iQeaSines aod aes

MB tp hb APB nt > SF

Sa NS Bees SUT RE a it Berge alii Whe

‘

Company, 374 F.2d 627 (C.A. 2) cert. denied, 389 U.S.

~~ 970 88 S.Ct., 463, 19 L.Ed. 2d 460 (1967) and in a liqui-

dation case, Coffee v. Permaian Corporation, 434 F.2d

383 (1970).. The aforesaid rationale and broad interpre-

tation by the Courts has now stretched the intended

coverage by the Securities Acts and rules completely

out of line with the intention of Congress, and Defen-.

dants-Petitioners respectfully request Writ of Certiorari

to review the current status of Security Act cases and

clarify the coverages afforded thereunder. It is further ~

pointed out that under Rule 9(b) of the Federal Rules

of Civil Procedure that a claim of fraud and the cir-

cumstances in connection therewith shall be stated with

particularity. (See footnotes 2 and 6 of Decision.)

| a:

CONCLUSION

Defendants-Petitioners JAMES M. MCDANIEL and

ERNESTINEH. McDANIEL respectfully request Writ

_ GF Certiorari to the United States Court of Appeals —

_ For The Fifth Circuit and for reversal of the judgment

and opinion of July 9, 1971,. wherein it was held that

the Plaintiff-Respondent (IITC) had standing as a seller

to sue under Section 10(b) of the Securities Exchange

Act and Rule 10b-5, reversing and remandjng the judg-

ment and opinion of the District Court sustaining a

Motion To Dismiss for failing to set forth a claim in

the Plaintiff-Respondent Complaint under the Securi-

_ ties Acts or an independent ground of Federal Court

jurisdiction. -—

j

HESTER & HESTER

803 Fulton Federal Building

Atlanta, Georgia 30303

404-525-7616

Counsel for Defendants-Petitioners

- ie | 12

se A 7 |

/ : CERTIFICATE |

, This is to certify that the Appendix A contained here-

“in is a true and correct copy of the entire Appendix on

file in this Court. 3 :

This ; _ day of " , 1971.

Clerk, United States Court of

_ Appeals for the Fifth Circuit

By: