# Appendix — MacKethan v. Virginia > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385608_0815%3A3 ## Record - **Collection:** Supreme Court brief - **Document type:** Appendix - **Published:** January 1, 1975 - **Citation:** 422 U.S. 1045 ## Text EXHIBIT A In The UNITED STATES DISTRICT COURT For The Eastern District Of Virginia ; Richmond Division Civil Action No. 74-0013-R Edwin R. MacKethan, Receiver Norfolk Savings & Loan Corp. Vv. Commonwealth Of Virginia, et al MEMORANDUM Filed July 24 1974 This matter is before the Court on the motion of the defendant, the Commonwealth of Virginia [hereinafter re- ferred to as the State], to dismiss the complaint filed herein as to it. Similar motions by other of the defendants which are now pending, and some of which are still awaiting plaintiff's response, will not be considered herein. Plaintiff, Edwin R. MacKethan, is the Receiver of the Norfolk Savings and Loan Corporation, having been so appointed by the Law and Chancery Court of the City of Norfolk, Virginia, in a suit there pending between the Commonwealth of Virginia at the relation of the State Corporation Commission of that State and the Norfolk App. 2 Savings and Loan Corporation. As Receiver, plaintiff is the possessor of all claims of that corporation, its depositors, creditors and owners, and seeks here a judgment for damages against the various defendants in the amount of eleven million dollars. As relates to its claim against the State, the piaintiff alleges generally that the State, through agents of its State Corporation Commission, negligently and/oz fraudulently: one, breached its regulatory duties with respect to the activities of the now closed Norfolk Savings and Loan Corporation; and two, participated in the dissemination of false or misleading information to investors in said corpora- tion by failing to disclose relevant information in its posses- sion. Jurisdiction is sought to be invoked pursuant to 15 U.S.C. § 78aa. Prior to the filing of this action, the instant plaintiff had filed a related action in this Court naming the State as the sole defendant. MacK ethan v. Commonwealth of Virginia, Civil Action No. 73-547-R. Subsequent to the filing of the present action, wherein additional defendants were joined, the Court dismissed the previous action on jurisdictional grounds. The Court there held that jurisdiction was lacking by reason of the State’s sovereign immunity, inherent in the State and preserved to it by the Eleventh Amendment to the Constitution of the United States. See MacK ethan v. Com- monwealth of Virginia, C.A. No. 73-547-R, mem. decis. Jan. 16, 1974 (E.D.Va.) The defendant’s motion in this action likewise raises the bar of sovereign immunity as grounds for dismissal. As to the first count in plaintiff's present complaint, it is obvious to the Court that said count must be dismissed for the reasons stated in the memorandum accompanying the ee App. 3 order dismissing the plaintiff's previous related action against the State. MacKethan v. Commonwealth of Virginia, C.A. No. 73-547-R, mem. decis., Jan. 16, 1974 (E.D.Va.). That is because the first count in the present complaint simply incorporates by reference all of the allegations contained in the complaint filed in the previous action referred to. The additional allegations in Counts II and IV of the present complaint relate essentially to claims brought against defendants other than the State in this action, and are there- fore irrelevant to the motion presently before the Court. As to the third count in the present complaint, which does attempt to raise a claim against the State, the plaintiff con- tends that same is a “new claim” and that the reasoning behind the decision in the previous action does not apply with respect to this “new claim.” The plaintiff asserts that the “new claim” in Count III, unlike the claim previously asserted, fails within an exception to the bar of sovereign immunity. 1. : RES JUDICATA To be more specific, the plaintiff contends that the claim raised in the previous action and incorporated into Count I of this action, was premised on a theory that the State had breached its state statutory duty of supervising the afore- mentioned savings and loan corporation’s securities trans- actions and was therefore liable for the resultant damages to depositors, creditors and owners. The plaintiff argues, how- ever, that the claim raised in Count III of the instant com- plaint is based on the state’s alleged complicity in the dis- semination of false or misleading information to investors in the aforementioned savings and loan corporation, in clear violation of federal securities laws. ~ App. 4 The Court would begin by pointing out that it did not construe the plaintiff's previous action as having been so narrowly drawn as plaintiff now suggests.’ In its memoran- dum dismissing the complaint therein the Court stated at one point: ... Indeed plaintiff alleges that “the Commonwealth and the Board of Directors conspired to prevent the public from realizing the insolvent condition” of the corporation. It is these alleged acts of the defendant upon which plaintiff premises his claim under the Securities Act of 1933 and...the Securities Exchange Act of 1934... C.A. No. 73-547-R, mem. decis., jan. 16, 1974, at p. 2 (E.D. Va.). Indeed, had the Court viewed the previous claim as having been based solely on the defendant’s alleged breach of its state statutory duties, it would never have reached the issue of sovereign immunity. Absent the element of an alleged federal securities violation, the plaintiff's claim would simply have amounted to a state claim. Under that circumstance, regardless of the state’s alleged waiver of sovereign immunity, the Court would have been totally lacking subject matter jurisdiction, which is the first prere- 1 Courts, of course, decide cases on the basis of facts presented. While it is hoped that the litigants will aid the Court by drawing attention to the relevant principles of law, courts do not limit their inquiry, with BE ee dees adios cal ec the litigants coctaiellly accuse Wiens setueaitay ua cer uabeaee ok given in short, one does the best he can with what he has. ox i App. 5 quisite to maintaining an action in federal court. See Mans- field, Coldwater @ Lake Ry. v. Swan, 111 U.S. 379 (1884) ; Minnesota v. Northern Securities Co., 194 U.S. 48, 62-63 (1904). Beyond that, the Court would further note that the only apparent difference between the plaintiff's “old claim” and his “new claim” is in the theories on which they are premised. The factual allegations do not appear to differ materially. While a new hair-do may create a new woman, as certain advertisements suggest, a new legal theory does not make a new cause of action. Moreno v. Marbil Produc- tions, Inc., 296 F.2d 362 (5th Cir. 1961) ; Norman Tobacco & Candy Co. v. Gillette Safety Razor Co., 295 F. 2d 362 (5th Cir. 1961). The doctrine of res judicata applies to jurisdictional issues, as well as to substantive matters. See Stoll v. Gottlieb, 305 U.S. 165, 172 (1938); Baldwin v. Iowa State Traveling Men’s Ass’n., 283 U.S. 522 (1931). Therefore, even assuming the Court had not given the previous complaint the full breadth of consideration justi- fied by the allegations set forth therein, the present action would still be barred by the doctrine of res judicata. See, id. The plaintiffs only relief would be by way of appeal. Finally, there is no doubt that the present action arises out of the same series of occurrences that was subject to con- troversy in the previous action. Assuming further that the plaintiff had come forward in the present complaint with new factual allegations bearing on the sovereign immunity question, the new action wouid still be barred under the doctrine of res judicata. This is because a plaintiff may not litigate his claim piecemeal. See Heiser v. Woodruff, 327 U.S. 726, 735 (1946), and cases cited therein. Repetition, whether in presenting new theory or pleading additional facts, is not to be tolerated. See Lester v. National Broad- App. 6 casting Co., 217 F. 2d 399 (9th Cir. 1955), cert. denied, 348 U.S. 954 (1955), rehearing denied, 349 U.S. 917 (1955). See also, Kriesel v. Berkshire Associates, Inc., 452 F.2d 491 (4th Cir. 1971) (deciding the issue under Virginia law). Il. SOVEREIGN IMMUNITY The essence: of plaintiffs contention in this regard, throughout this: and the previous litigation, has been that the state had expressly or impliedly waived its sovereign im- munity. In the memorandum dismissing the previous complaint, the Court concluded that it could find no Congressional intent to pre-condition the State’s entry into the field of securities regulation on the State’s consent to be sued for claims arising out of that activity. MacKethan v. Common- wealth of Virginia, C.A. No. 73-547-R mem. decis. Jan. 16, 1974 (E.D. Va.). Cf., Parden v. Terminal R. Co. of Ala- bama, 377 U.S. 184, 187-191 (1964) with Employees v. Missouri Public Health Dept., 411 U.S. 279, 287 (1973). Accordingly, no implied waiver was found. The only theory not previously addressed is plaintiff's ap- parent contention that, by participating in the dissemination of false or mislleading information, incidental to its regula- tory action, the State agency involved left the sphere of legitimate governmental activities, and thereby became a mere “lawbreaker.” The plaintiff argues that the State thereby “waived” iis immunity for actions arising under the federal securities legislation. This contention, in the Court’s view, misconceives the doctrine of sowereign immunity. There is no issue but that action which violates superior federal law is outside the scope a ee a ae _ App. 7 of legitimate state activity, regardless of the state authority relied upon. Ex parte Young, 209 U.S. 123, 159-160, 163, 166-68 (1908). The state functionary involved is, in a sense, a law breaker. The theory is that although the state func- tionary may be acting under color of state law, his actions are not the official actions of the state. Id. It is basic that the simple act of violating superior federal law does not establish a waiver of sovereign immunity merely because the state, through its functionaries, has thereby left its legitimate sphere of activities.? See Hans v. Louisiana, 134 U.S. 1, 10 (1889) ; Smith v. Reeves, 178 U.S. 436, 446-49 (1900). Moreover, the plaintiff's argument fails to distinguish this case from Employees, supra, 411 U.S. 279. There was no question in Employees that the state employer was covered by the substantive provisions of the Act there in question. 411 U.S. 282. On a motion to dismiss, the state employer in Employees was presumed to have been in violation of the © standards set forth in that legislation. Employees, therefore, also involved a clear violation of superior federal law ; but no waiver of sovereign immunity was found. — As to the question of Congressional intent, upon which the issue of an implied waiver of sovereign immunity ultimately turns, the Court recognizes that Section 2 of the Securities Act of 1933, 15 U.S.C. § 77(b) (2), defines a “person” to include “a government or political subdivision thereof ;” and that Section 17 of the Act, 15 U.S.C. §77(q), makes it unlawful for any “person” to fraudulently participate in the dissemination of false or misleading information with regard to the sale of securities. Even assuming arguendo that this 2 Assuming, however, that the state functionaries involved had not been acting in good faith, it may be that they would be liable, in their individual capacities, for their participa the alleged federal tion in securities violation. Cf. Pierson v. Ray, 386 U.S. 547, at 555-557 (1967) ; Montoe v. Pape, 365 U.S. 167 (1961). App. 8 | statutory scheme might properly be interpreted as estab- lishing a Congressional intent to precondition direct parti- . cipation by the various states in the marketing of securities on a waiver of sovereign immunity as to any violations of the Act that might occur in the process, see Parden v. Terminal R. Co., supra, 377 U.S. 184, 187-191 ;* plaintiff must still fail, for he has not alleged facts sufficient to establish direct state involvement, either as principal or agent, in the marketing of securities. The relevant state legislation provides for the regulation of: savings and loan company activities, which may include supervision over the marketing of securities by such organizations. See Va. Code § 6.1-237, et seq., Code of Virginia 1950. That legislation does not, however, contem- plate active participation by the state in the process of marketing the securities. Any indirect involvement by the state in such activities would be merely incidental to the state’s performance of its regulatory function. Under any interpretation of the federal securities legislation in question, the Court cannot conceive that Congress intended to pre- condition the state’s engaging in a regulatory function, such as that here present, on a waiver of sovereign immunity as to any securities violations that might occur with regard to the activities of the regulated organizations: To reiterate, the state’s function here was regulatory, which is a purely governmental function. The implications of Congressional intent with regard to the coverage of the Securities Act of 1933 might be quite the opposite had the state here been a principal or participant in a proprietary ® The Court does not, however, here determine that such i Amendment to exclude private damages actions. See Employers v. Missouri Public Health Dept., supra, 411 U.S. 279, 285-86. a eee) eee RED EEE ae a App. 9 function which necessitated also its active participation in the public sale of securities to finance the venture.‘ Cf. Parden v. Terminal R. Co., supra, 2/7 U.S. 184, with Employees v. Public Health Dept., supra, 411 U.S. 279. It may be, as alleged, that certain state functionaries participated directly with others in the dissemination of information which ultimately proved to be false or mislead- ing. Were that participation in the public information activities of the savings and loan company officially sanc- tioned by the regulatory legislation under which the state functionaries had been acting, the argument for an implied waiver would unquestionably be stronger. In such a situation the official state involvement in the securities marketing activities would have to be viewed as more direct. However, the legislation here in question does not, on its face, contem- plate even good faith participation by state functionaries in the dissemination of corporate financial information to the investing public. See Va. Code, § 6.1-237, et seq. There- fore, any such participation which may in fact have occurred would have been ultra vires in its inception, and cannot be viewed as a waiver, by the state, of its sovereign immunity. Finally, the Court takes note of the plaintiff's objection that the issue of sovereign immunity is not ripe for deter- mination on a motion to dismiss. Suffice it to point out that, regardless of what the evidence may show as to the unofficial activities of the state functionaries involved in this matter, no proof of facts can change the purely regulatory nature of the legislation under which they were acting. In the absence of more, no implied waiver of sovereign immunity can be found ; and no express waiver is apparent. * It is not uncommon for municipal corporations and other govern- mental subdivisions to join with private enterprise in the marketing of securities to finance, for example, industrial parks. App. 10 For the reasons stated, the state’s motion to dismiss will be granted, and the action will be dismissed as to the state. An appropriate order shall issue. /s/ Rost. R. Meruice, Jr. United States District Judge Date: JUL 24 1974 --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385608_0815%3A3. Public record. Not legal advice.