# Petition for A Writ of Certiorari — McDaniel v. Dudley

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## Record

- **Collection:** Supreme Court brief
- **Document type:** Petition for A Writ of Certiorari
- **Published:** January 1, 1971
- **Citation:** 404 U.S. 858

## Text

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:

---

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