Reply Brief of Petitioner — Bentsen v. Blackwell

1

Supreme Court of The United States

OcToBEeR TERM, 1953

No. 423

LiLoyD M. BENTSEN;SR., et al.,

Petitioners,

EMERY C. BLACKWELL, et al.,

Respondents.

RESPONDENTS BRIEF IN OPPOSITION TO PETITION

FOR WRIT OF CERTIORARI

To THE HONORABLE, THE CHIEF JUSTICE OF THE

UNITED STATES, AND TO THE ASSOCIATE JUSTICES

OF THE SUPREME COURT OF THE UNITED STATES:

Come now the respondents, Emery C. Blackwell,

Boyd Construction Company, Claude E. Blackwell,

Clyde W. Weatherly, Arie K. Smith, Dudley Smith,

W. H. Ham, Herbert Clark and Frank L. Danner,

and respectfully present their brief in opposition to

the petition for writ of certiorari.

The trial court sustained petitioners motion to

dismiss for lack of jurisdiction on two points. First,

that respondents failed to plead the sale of an “in-

vestment contract” as defined by the Securities Act

of 1933; and Second, that no use of the mails was

made sufficient to constitute a violation of Sec.

12(2) of the Act, 15 U.S.C.A. 771(2).

On appeal, the Fifth Circuit reversed and remand-

ed on both points. No evidence has been received,

and both the appeal and the petition for certiorari

are based solely on the pleadings.

icant iy og gr thy or

SBOP S AOR Ug ea RRC eae

4

the United States Mails) and increasing the size of

their investments. All of these facts will be fully

developed on the trial of this case. We do not believe

that this Court should be required to decide a ques-

tion of the importance involved, without having a

full development of the facts.

It is true that some of these facts are alleged in a

general manner, but the petitioners are fully on no-

tice of what they will need to meet on the trial, and

we say that this manner of pleading is contemplated

by the Federal Rules of Civil Procedure. In any

event, a full presentation of the facts involved will

result in the point being decided fairly to all con-

cerned.

2. Petitioners stress in their argument that the

present case is local in nature. While it is true that

the respondents all reside within the State of Texas,

the local nature of this transaction does not involve

next door neighbors as petitioners would have this

Court believe. Four of the purchasers live approxi-

mately 900 miles from their investment, two of them

approximately 600 miles, one was an engineer from

Wisconsin who moved to Texas after the purchase,

with the nearest purchaser residing at least 400

miles from the scene of this operation.*

2 Judge Allred referred (R. 57) to five similar cases filed

against the same principal Defendants and stated that they

were grounded on practically the same allegations of con-

spiracy and fraud. In fact, the cases did not involve the

Securities Act of 1933, but were based on the common law

and statute of the State of Texas. It is worthy of note as

to the extensive nature of the operations of the principal

defendants that the 5 plaintiffs in the five consolidated

cases were from 5 different states, California, lowa, Ohio,

Indiana and Minnesota.

Alarm is expressed by petitioners, that if the de-

cision below is allowed to stand that the overworked

Federal District Courts will be flooded by local land

fraud suits. We agree that all of our District

Judges are greatly overworked and evidence of this

is the fact that the present suit was filed in June,

1951 and the memorandum opinion of the trial court

was not filed until April of 1952, some 10 months

later. However, there is no basis for the argument

that the Federal Courts will be flooded by local land

fraud suits. The decision of this Court in S.E.C. v.

W. J. Howey Company, 328 U. S. 293, has been on

the books seven years, and the decision in Schil!ner

v. H. Vaughan Clarke & Co., 134 F. 2d 875 (C. A. 2,

1943) for 10 years, and the predicted flood of suits

has not as yet developed. It is equally open to specu-

lation that the correct decision stopped the fraudu-

lent operators rather than started a flood of lita-

gation.

3. Petitioners point out that the purpose of the

Securities Act was to remedy the ineffective reliet

available to purchasers of securities who were being

fleeced by unscrupulous operators. Congress, in the

Securities Act of 1933. enacted a very comprehensive

statute providing for both civil and criminal liabili-

ty. The section involved here covers civil liability

and is section 12 (2). The comparable section in-

volving criminal liability is 17 (a). The court rul-

ings involving the jurisdictional language under 17

(a) have not required that the misrepresentations

or half-truths be transmitted through the mails.*

Therefore, if sec. 12 (2) is restricted to the narrow

view of Kemper v. Lohnes 173 F (2) 44, then it is

possible that a sale might be in violation of the

criminal section and yet the purchaser would have

no civil remedy under sec. 12 (2). Sec. 12 (2) is un-

questionably a remedial provision and, as such, is

entitled to liberal construction. This was recognized

by the Court in Schillner v. H. Vaughan Clarke &

Co., 134 F. (2) 875 at 877:

“We do not think that this is the inevitable, or

even the most natural, meaning of the statutory

language. Liability to repay the consideration re-

ceived is imposed upon any person who ‘sells a se-

curity ***** by the use of any means or instruments

of transportation or communication in interstate

commerce or of the mails, by means of a prospectus

or oral communication’ of the untrue or misleading

character described in the section. To accept ap-

pellant’s constructioi: would render the phrase ‘oral

communication’ of most limited application because

the section would then reach only interstate tele-

phone calls or conversations where the parties might

3 The following are examples of mailings which have

been held sufficient:

Mailings by wren ey to the Defendants con-

taining reports of the success of meetings held to obtain

from victims, ard remitting cash statements and

drafts, U. S. vs. Monjar, 47 Federal Supplement 421

Aff’d, 147 Federal 2nd, (C. A. 3, 1944) cert.

Delivery by Mail of a stock certificate after the contract

of Sale was concluded orally and the stock paid for. S.E.C.

vs. Wimer 75 Federal Supplement 955.

Mailings of Warranty between Defendants, and to

the County Clerk for recording and subsequent delivery

to the investors. Mansfield vs. U. S. 155 Federal 2nd 952

(C. A. 5, 1946) cert. denied, 329 U. S. 792, 1946.

7

be talking across a state line. It would seem much

more likely that Congress intended to make the

statute applicable if one sells a security by use of the

mails, even though the seller’s untrue or misleading

statement is communicated orally and intrastate.”

We have alleged, and will show on the trial that

the plan and scheme involved in the sale of the cit-

rus groves and management contracts, was depend-

ent on the use of the United States Mails, and that

without the facilities provided by the mails, none of

the sales could have been completed. The manage-

ment contracts were completed and delivered to the

purchasers through the mails after they returned

to their homes in distant parts of Texas. The Man-

agement Contracts are an integral part of the in-

vestment, and the sales were not completed in face

to face negotiations as stated by petitioners. The

instant transactions are the type transactions at

which Congress was aiming, and the opinion of the

Circuit Court below is in keeping with the intention

of Congress.

For the above reasons, the Petition should be

denied.

Respectfully submitted,

GARLAND F. SMITH

E. H. McILHERAN

516 Texas Blvd.

Weslaco, Texas

Attorneys for Petitioners.

4 Petitioners further argue that the Federal Court should

not take jurisdiction of this case because the local courts

are | able to grant relief, and that Sec. 22 (a) prohibits

removal of such actions to the Federal Courts. We respect-

fully submit that unless there has been a use of the mails

cient to constitute a violation of Sec. 12 (2), the local

courts would have no more jurisdiction than the Federal

FPR open ae ee ee FTL ANE MLE NAOT AM VEEN TEMES A LINES TP

IN THE

Hupreme Court of the United States

Ocroser Term, 1953

No. 423

Luovp M. Bentsen, Sa., er av., Petitioners,

v.

Emery C. Biackwe.t, et a., Respondents.

PETITIONERS REPLY BRIEF IN SUPPORT

OF PETITION

1. The SEC in its memorandum has clearly conceded

both the conflict between the Circuits in the present case

and the importance of this question.

2. Respondents likewise have conceded that ‘‘the point

involved in this suit is of great importance .. .’’ (Opposi-

tion Memo, zp. 3).

3. The only point made by respondents in opposition is

that the question presented is of such importance that it

should not be decided on the pleadings but only after trial.

But no trial is necessary, the issue of law being clearly

presented on the face of the complaint. That issue is

whether a civil action under the Securities Act of 1933 may

2

be brought where a sale is completed without use of the

mails or interstate commerce, but the securities are deliv-

ered by mail after the sale. The Securities and Exchange

Commission made no suggestion that additional evidence

would be necessary to clarify the question. Nor did the

Court of Appeals. The issue is the same admittedly decided

to the contrary by the Seventh Circuit in Kemper v. Lohnes,

173 F. 2d 44. (Opposition Memo, p. 6.)

4. The argument that certain facts developed on deposi-

tion might alter the Court’s conclusion is without founda-

tion. Those facts appear from the complaint itself.

5. The fact that the mails were used to collect subsequent

payments for care of the trees also appears in the complaint.

The court below apparently regarded it as too remote in

time to have any connection with the sale of the alleged

investment contract. But if these mailings have any rele-

vance they are fully alleged in the complaint and can be

availed of in this Court. No testimony is necessary to

determine the legal question. @

6. Since the legal issue is clear from the complaint and

no testimony whatsoever is necessary to clarify it, it is

an unconscionable suggestion that the District Court should

be required to go through an extensive trial. The trial

would be devoted primarily to the question of fact concern-

ing whether certain representations were made and whether

they were true or false. Such a trial would be unnecessary

1 For example, the fact that dates inserted in management con-

tracts were subsequent to the dates of the deeds to the property

appears clearly in the complaint. This, of course, resulted from

th» cireumstance that care for the trees was not needed until the

trees were planted. The facts are that all the arrangements for

the sale of the property, for the planting of the trees and for their

eare were made in face-‘o-face conversations in the State of Texas

and that mere mechanical and ministerial acts took place thereafter,

such as the recording of the deeds, the filing in of the blanks in

the management contracts, and the mailing of both documents to

the purchasers. This, both the District Court and the Court of

Appeals understood in arriving at their respective conclusions.

3

if this Court should rule that as a matter of law no juris-

diction exists in the federal court.

7. The issue is clear now. It is ripe for decision and the

decision is concededly important. Delay is unnecessary

and would result in lengthy and expensive litigation which

might otherwise be avoided.

8. As to the merits, we have set forth in our petition

the reasons why the Congress did not intend to exercise the

full limit of its constitutional power. Both respondent

and the SEC urge that it is inconceivable that the civil

remedy provisions should be placed on a more limited

jurisdictional base than the criminal provisions of the

Act. But there is good reason for such a difference.

Criminal provisions are applied only when government

officials, the SEC, and the Attorney General decide that

recourse to the federal courts is appropriate in the pvhlic

interest. In such cases broadening the area of such dis-

cretion cannot be expected to flood the federal courts with

purely local matters. On the other hand, a civil action

may be commenced by anybody who feels himself aggrieved.

For example, the ordinary bond and mortgage, like the

ordinary promissory note, is a security under the Securities

Act, Section 2(1), 15 USC § 77b(1). Bonds and mortgages

are normally recorded and thereafter delivered by mail.

Under the decision below, private individuals who might

prefer the federal courts could bring disputes involving

real estate mortgages into the federal courts under the

Securities Act. Surely no such intention should be attrib-

uted to the Congress when the language it used plainly

indicates the contrary.

4

CONCLUSION

On the basis of all the memoranda, it is clear that the

issue is important; that it involves conflict between two

circuits; that it is ripe for decision now; and that the

question presented is substantial. The petition should

be granted.

Respectfully submitted,

Pavut A. Porter,

Mizton V. Freeman,

1229 19th Street, N.W.,

Washington 6, D. C.

Jackson LITTLETON,

Swwvey L. Farr,

Woodroof Building,

Edinburg, Texas,

Attorneys for Petitioners.

ArnoLp, Fortas & Porter,

1229 19th Street, N. W.,

Washington 6, D. C.

Kewiey, Loonty, McLean & Littieton,

Woodroof Building,

Edinburg, Texas,

Of Counsel.

December, 1953.

2 ;

Fi ve iLaD

/ FEB 1 7@ 1954

ee , Clerk

Supreme Court of the Anited States

Octoser Term, 1953

No. 423

Lioyp M. Bentsen, Sr., et al., Petitioners,

Vv.

Emery C. BLackwe.L, et al., Respondents.

On Petition for a Writ of Certiorari to the United States Court

of Appeals for the Fifth Circuit

BRIEF FOR PETITIONER

Pau A. Porter

Mitton V. Freeman

1229 19th Street, N.W.

Washington 6, D. C.

Jackson LITTLETON

Siwvey L. Farr

Woodroof Building

Edinburg, Texas

Attorneys for Petitioners

ARNOLD, Fortras & Porter

1229 19th Street, N.W.

Washington 6, D. C.

Ketuey, Looney, McLean & Littteton

Woodroof Building

Edinburg, Texas

Of Counsel

February, 1954

Press or Byron S. Apams, Wasurincton, D.C.

INDEX

ND SUITE 6dr 5 0 cn a Hoan Sacveseqescesecgerawns

EP PEO, POETS EEE Pe ye tine bl

i COE danse bicevaresws ehewevenshe seus

a dee ieee thneenes

Or ee! i oe ele nnaedals

ee ED i GS dss do cneaaawsecasvauas

EY GE BOE no c.n.vccedisncbe ieevesdcece sa

OIE 5 ib 6 ne ee rn 0 ok 6065008800 ceenensees due

I. The Statutory Language Cannot Apply to the

io OR Re Pe ee

(1) The securities were not sold ‘‘by the use of

the matie’’ £6 FORWITOD .....ccccecccsesvens

(2) The securities were not sold ‘‘by the use of

the mails, by means of a prospectus or oral

communication’’ as required ...............

II. Investors Will Be Adequately Protected Under

the Petitioner’s Construction of the Statute .....

Ill. To Sustain the Ruling Below Will Extend Fed-

IV.

en ee eee eoatebatedavendrtents

eral Jurisdiction to a Hust of Cases Having No

Relation to the Objective of the Securities Act ..

The Congressional Purpose Is Not Served by the

Construction Adopted by the Court Below ......

1. The Law Was Intended Primarily to Deal With

the Area of Interstate Commerce Beyond the

Power of the States to Control ..............

2. The Purpose and Effect of the Partial Reliance

Oe Tie POO FOG. veccnsevecinecesveseses

ii Index Continued

TaBLe oF AUTHORITIES

CasEs: Page

Deckert v. Independence Shares Corporation, 311 U.S.

DN. etnvensddd denn cecescnedebous es teeatocebas 17

Federal Trade Commission y. Bunte Bros., Inc., 312

WN SE sa doves dadedewdadedediccencéosuabates 19

Hall v. Geiger-J ones, 242 U.S. 539 .... 0... cee eee ees 21

Hollywood State Bank v. Wilde, 70 Cal. App. 2d 103,

Be os UIE evicnddvesexcesonsvecceeseee

Kann v. United States, 323 U.S. 88 ...........0..6-- 15

Kemper v. Lohnes, 173 F. 2d 44 (CA 7 1949) ...... 6, 12, 14

Kirschbaum v. Walling, 316 U.S. 517 ..........00005 i9

Llanos v. United States, 206 F. 2d 852 (CA 91953) .... 16

Murphy v. Cady, 30 F. Supp. 466 (D. Me. 1939) ...... 14

Paul v. Virginia, 8 Wall. 168 ............. cc eceeeees 23

Schillner v. H. Vaughan Clarke & Co., 134 F. 2d 875

25 lope Pr er re 12, 14, 19

Securities and Exchange Commission v. W. J. Howey

i TEE dS dé pence etes caveeesesescacidci 4, 6

Securities and Exchange Commission v. Payne, 35 F.

Bee CES SOOO co cverccevcevcesoncececes 16

Stevens v. Liberty Packing Corp., 111 N.J. Eq. 61, 161

EE ED 6x 6dver ves encesvabsdanrectesetds 16

MISCELLANEOUS:

Annual Report of Director of Administrative Office of

the Federal Courts to the Judicial Conference of

the United States, September 1953 .............. 17

Loss, Securities Regulation

PREM soneb sswsetedcdccconseusvéousdecdeens 21

Pi PE civades sacvensisrevetwneeveeneseper 15

i EG didn d dine txesubecess qeseesvernen 16

ET. 24 bene Junesesedesessovceganvneséntna 18

The Securities Act of 1933, 15 U.S.C. § 77 ...... 15, 16, 17,

20, 24

i nD ovcocctyeesdeesseaves 3, 10, 27

eS eer errr errr rs 11, 12

§ 3(10), 15 U.S.C. § T7B(10) .... 2... ce cceceecee 14, 15, 27

$ 3(a)(11), 15 U.S.C. § 77e(a)(11) ................ 23

Se Sco ite cenehds cvecdecous owes 3, 11, 26

§ 5(a)(2), 15 U.S.C. § 77e(a) (2) ....- 2. cece eee eees 11

Index Continued

Page

§ 5(b)(2), 15 U.S.C. § 77e(b) (2) .... cee eee eee ee ees 11

§ 12(2), 15 U.S.C. § 771(2) ........ 2, 6, 7, 8, 9, 11, 12, 14,

15, 16, 18, 24

616 15 UB.O. § TTp . cece ccvcccvcccccccccceccess 21

$17(a), 15 U.S.C. § Tiq(a) ....cccccccccccsevcees 14

OTR, BS OBS. OTEF 6 cc cccccctecconccccvsseneses 21

§20(b), 15 U.B.C. § T7t(b) .. 0. cc cccccccccccccess 18

§ 22(a), 15 U.S.C. § 77v(a) ..... cece eee reece eeeeee 3, 26

§ 26, 15 U.B.C. § 77S 2... ccc ccccccccccccerveceses

The Securities Act of 1934, 15 U.S.C. § 78 § 10(b), 15

UBC. § TBD) .. ccccccccccccccccccccvccceccees

2B U.L.C. § ISBT) . cc cccccccesccccccccveescececes 1

Texas Revised Statutes:

GERn GC UUR) . cccccccccesevescedevccescesencepes 15

DEES ccvccccvcccicsonesexcceseeteceesesns 15

Hearings Before the Committee on Interstate and

Foreign Commerce, House of Representatives,

73rd Cong., First Sess., on H. R. 4314, p.10......

Hearings Before Senate Committee on Banking and

Currency, 73rd Cong., First Sess., p. 214-215 .... 22

H. Rep. 85, 73d Cong., Ist Sess. ............- 19, 20, 23, 24

S. Rep. 47, 73d Cong., Ist Sess. ........--eeeeeeeeeee 23

77 Cong. Ree.

a a ee

Pe ee ee ee

ee ee

eee eee sree seers eeeseereseeereseeseees

eee eee eee eee eee eer eee eer eeeeeeeee

Pe ee ee

a a ee ee

Pe ee ee