MEMORANDUM AND ORDER
REAL, District Judge.
The Small Business Administration as the receiver of defendant, NEWMAN CAPITAL CORPORATION, a Colorado corporation moves: (1) to dismiss the action as to defendant NEWMAN CAPITAL CORPORATION on the ground that this court is not the proper forum in that defendant NEWMAN CAPITAL CORPORATION is not properly found in this District; (2) to dismiss as to defendant NEWMAN CAPITAL CORPORATION on the ground that the complaint does not state a claim upon which relief can be granted against defendant NEWMAN CAPITAL CORPORATION; and (3) in the alternative, for Summary Judgment since the pleadings and affidavits show that there is no genuine issue as to any material fact; and (4) for release and delivery to the Small Business Administration of any and all sums which have been paid into court for the account of defendant NEWMAN CAPITAL CORPORATION.
Defendant JOSEPH E. NEWMAN moves: (1) to dismiss the Second and Third Counts of the Amended Complaint pursuant to Rule 12(b) (1) of the Federal Rules of Civil Procedure as to defendant JOSEPH E. NEWMAN on the ground that this court lacks jurisdiction over the subject matter under the provisions of §§ 17(a), 22 of the Securities Act of 1933, 15 U.S.C.A. §§ 77q, 77v; (2) to dismiss the Second and Third Counts of the Amended Complaint pursuant to Rule 12(b) (3) of the Federal Rules of Civil Procedure as to defendant JOSEPH E. NEWMAN on the ground that venue is improper under the provisions of § 22 of the Securities Exchange Act of 1933 and § 27 of the Securities Exchange Act of 1934, 15 U.S.C.A. §§ 77v, 78aa; (3) to Quash Service of Summons and dismiss the First, Fourth, and Fifth Counts of the Amended Complaint for Money Judgment pursuant to Rule 12(b) (2) and 12(b) (5) of the Federal Rules of Civil Procedure on the ground the court lacks jurisdiction over the person of defendant JOSEPH E. NEWMAN
Plaintiff OLYMPIC CAPITAL CORPORATION has filed separate memoranda of Points and Authorities and affidavits as to each of the motions of defendants. Since all present common questions, they will be considered as though presented in one pleading.
This is an action commenced by plaintiff OLYMPIC CAPITAL CORPORATION, a Texas Corporation, with its principal place of business in California against defendants JOSEPH E. NEWMAN, a citizen and resident of Colorado, and NEWMAN CAPITAL CORPORATION, a Colorado Corporation, with its principal place of business in Colorado.
The claim of plaintiff is in five counts, arising out of basically a single transaction, i. e., a debt evidenced by a Promissory Note executed by defendant JOSEPH E. NEWMAN, individually, on or about May 1, 1963. The First Count alleges a suit upon the promissory note executed by defendant JOSEPH E. NEWMAN May 1, 1963, and alleges that defendant JOSEPH E. NEWMAN and defendant NEWMAN CAPITAL CORPORATION have such a unity of interest that the "individuality and separateness of defendant NEWMAN and defendant CAPITAL has ceased" (alter ego).
Counts Two and Three purport to allege causes of action under the Securities Act of 1933 (15 U.S.C.A. § 77v) and the Securities Exchange Act of 1934 (15 U.S. C.A. § 78aa).
Count Four purports to allege a cause of action pursuant to Title 18 U.S.C.A. § 1014.
The Fifth Count purports to allege a common law suit for fraud.
Jurisdiction of Counts One, Four and Five is predicated upon diversity of citizenship. Counts Two and Three ground their jurisdiction in the respective Securities Acts of 1933 and 1934.
Defendant NEWMAN CAPITAL CORPORATION has been placed in receivership by the United States District Court for the District of Colorado and the Small Business Administration is the duly appointed receiver.
STATUS OF PLAINTIFF
Defendant NEWMAN CAPITAL CORPORATION questions the right of plaintiff to bring this suit because of alleged violations of the Small Business Investment Company Act of 1958. These alleged violations are that plaintiff changed its name and principal place of business without the prior approval of the Administrator.
Plaintiff denies any violation on the ground that application was made for change of name and principal place of business and though no express approval of the Administrator has been forthcoming, approval can be found in the Regulations of the Small Business Administration by the failure of notification to the contrary within sixty (60) days after receipt of an application.
Title 15 U.S.C.A. § 681 provides in its pertinent part:
At the outset it appears that the statute contemplates licensing of a corporation which must first find its existence under State law. Clearly the provisions of Title 15 § 681 do not contemplate the creation and maintenance of the corporate entity but only the licensing of a corporate entity created under State law as a small business investment company. It is State law that governs its creation and existence as the corporate entity with the capacity to sue and be sued.
Provisions for forfeiture of the license to do business as a Small Business Investment Company, once granted by the Administration, are found in Title 15 § 687 not fully quoted by counsel for the Small Business Administration herein. From the quoted language however it can be seen that violation or failure of compliance of the Act or regulations promulgated thereunder may, but does not necessarily, cause the forfeiture of the license. What is important is: How is that done? It is not automatic!
Title 15 U.S.C.A. § 687 provides in its pertinent part:
The Administration has neither the power, nor the right to forfeit any license of a small business investment company licensed pursuant to the Small Business Investment Act of 1958, Title 15 U.S.C.A. §§ 661-696. That power is reserved specifically to "a court of the United States of competent jurisdiction." The Administration can, after hearing, suspend a license or issue a cease and desist order pursuant to Title 15 U.S.C.A. § 687a. None of the procedures which could in any manner affect plaintiff in the prosecution of its suit here have been instituted.
Further, the position of plaintiff appears well taken with reference to the regulations of the Small Business Administration itself. Under the circumstances the raising of an issue so clearly erroneous on behalf of defendant NEWMAN
MOTION TO DISMISS
1. AS TO DEFENDANT NEWMAN CAPITAL CORPORATION
Defendant, NEWMAN CAPITAL CORPORATION, (hereinafter referred to as CAPITAL) was incorporated as a Small Business Investment Company under the laws of the State of Colorado on May 2, 1963, and licensed by the Small Business Administration on June 28, 1963. CAPITAL has at all times maintained its principal place of business in the State of Colorado.
Plaintiff claims jurisdiction over the person of CAPITAL by reason of:
Jurisdiction must be distinguished from venue. In Neirbo Co. v. Bethlehem Shipbuilding Corp. (1939) 308 U.S. 165, at page 167, 60 S.Ct. 153 at page 154, 84 L.Ed. 167, the Supreme Court distinguishes in this manner:
Title 15 U.S.C.A. § 77v provides in its pertinent part:
Title 15 U.S.C.A. § 78aa provides in its pertinent part:
It is clear from a reading of both §§ 77v and 78aa (supra) that jurisdiction is vested in "[t]he district courts of the United States." Though broadly stated in terms of subject matter jurisdiction there are limitations upon the place where the action may be brought. It may be commenced in (1) the district wherein the defendant is found, (2) the
The pleadings, affidavits and papers filed herein concede that defendant CAPITAL is not found, reside or transact business within the Central District of California. Plaintiff offers this district as the district where the offer or sale took place and more particularly wherein "any act or transaction constituting the violation occurred." Since defendant CAPITAL did not in any direct capacity participate in the offer and sale of the promissory note executed by defendant JOSEPH E. NEWMAN, nor submit any allegedly false financial statements, the plaintiff relies upon a theory of aiding and abetting.
Plaintiff alleges in its Second Count that on or about May 1, 1963, defendant CAPITAL "sold to plaintiff out of the ordinary course of business a security" in violation of 15 U.S.C.A. § 77q,
In Count Three plaintiff alleges that defendant CAPITAL engaged in acts violative of 17 C.F.R. § 240, 10b-5,
Title 15 U.S.C.A. § 77b defines the relevant terms as follows:
That the giving of the promissory note in exchange for the personal loan made by plaintiff is a sale of a security within the meaning of the Securities Acts, Llanos v. United States (1953) 9 Cir., 206 F.2d 852 cert. denied 346 U.S. 923, 74 S.Ct. 310, 98 L.Ed. 417, is not questioned by any party herein. We are here concerned only with the scope of the "sale transaction." Here the evidence is without dispute that, except for the acts which might be attributable to both defendants (occurring at least a year after May 1, 1963), the transaction premising any cause of action for violation of the Securities Acts was completed before defendant CAPITAL had any actual or imputed capacity to perform any act, legal or illegal.
Courts, facing the problem of the scope of a sale transaction have uniformally held that when a seller in State S delivers a security to a buyer in State B, who sends or delivers a check to the seller in State S, the sale takes place in State B. 3 Loss, Security Regulations 2008. There can be no violation of the Securities Act unless three acts co-exist in relation to the transaction: (1) use of the mail or other instrumentality of interstate commerce; (2) purchase or sale of a security; and (3) use of a manipulative or deceptive device.
In Boone v. Baugh (1962) 8 Cir., 308 F.2d 711 at 714, the court states the principle which must be applied to the transaction presented herein when it says:
See also Hooper v. Mountain State Securities (1960) 282 F.2d 195 cert. denied 265 U.S. 814, 81 S.Ct. 695, 5 L.Ed.2d 693.
Assuming, arguendo, that "the district courts of the United States" have jurisdiction in the sense of the "power to adjudicate." The venue provisions of either 15 U.S.C.A. § 77v or 15 U.S.C.A. § 78aa give no vitality to the position of plaintiff insofar as it regards the Central District of California as the proper district within which to commence its action
2. AS TO DEFENDANT JOSEPH E. NEWMAN
(a) Under Rule 12(b) (1)
Defendant JOSEPH E. NEWMAN (hereinafter referred to as NEWMAN) applied to plaintiff for a loan of $60,000 sometime early in 1963. In connection with that application, defendant NEWMAN submitted to plaintiff Application for Financing Established Business and a financial statement. After the loan was made defendant submitted financial statements and other reports in May, 1964, and April, 1965. Plaintiff in its Second Count maintains that all of these documents (the application and financial statements of 1963 and the financial statements and reports of 1964 and 1965) were false and misleading in violation of the Securities Act of 1933, § 17(a), 15 U.S.C.A. § 77q.
Title 15 U.S.C.A. § 77v establishes the jurisdiction of the offenses contemplated in § 77q in the district courts of the United States but providing that the action may be brought in the district (1) where the defendant is found, (2) where the defendant is an inhabitant or transacts business, or (3) where the offer or sale took place.
The facts as presented by affidavits filed herein clearly show that all of the acts complained of in the Second Count which can be related to the "offer or sale" occurred either in Colorado, Oklahoma or Texas. Defendant NEWMAN can neither be found nor does he transact business within the Central District of California.
The Third Count alleging violation of the Securities Exchange Act of 1934 § 10(b), 17 C.F.R. § 240.10b-5, Securities & Exchange Commission Rule 10b-5 and 15 U.S.C.A. § 78j(b) and jurisdiction pursuant to Securities and Exchange Act of 1934 § 27, 15 U.S.C.A. § 78aa.
Certainly § 78aa broadens the venue aspect of violations of 15 U.S.C.A. § 78j (b) to the district wherein "any act or transaction constituting the violation occurred." But the conduct made violative of the Securities Act by § 78j(b) is the use or employment, in connection with the purchase or sale. As set forth herein the sale of the promissory note of defendant NEWMAN was completed as the culmination of negotiations and acts in Colorado, Oklahoma and Texas.
(b) Under Rule 12(b) (3)
Since both §§ 78aa, 77v specifically provide for the venue of the Securities Act violations alleged by plaintiff it is clear that venue is most properly in the District of Colorado.
PENDENT JURISDICTION AS TO COUNTS ONE AND FIVE
Counts One and Five allege what, in the absence of diversity of citizenship jurisdiction, would be cognizable only under State law. There is no claim
As suggested by plaintiff there are uncontroverted facts supporting a true diversity of citizenship Title 28 U.S.C.A. § 1332 as between all defendants and the plaintiff herein. The controversy exceeds $10,000 and is between citizens of the State of Colorado and a citizen of the State of Texas. The applicability or inapplicability of the doctrine of pendent jurisdiction is therefore of no value to plaintiff and is not here considered as essential to a determination of the question of either jurisdiction or venue as between plaintiff and defendant CAPITAL.
ALTER EGO THEORY
The Small Business Administration as the receiver of defendant CAPITAL contends in support of its motion to dismiss or alternatively for summary judgment that no liability can be imposed upon CAPITAL since CAPITAL was not a party to any transaction between plaintiff and defendant JOSEPH E. NEWMAN and has not otherwise assumed any personal obligations of defendant JOSEPH E. NEWMAN. Plaintiff contends that liability can and should be imposed upon defendant CAPITAL because "there is such a unity of interest and ownership between defendant NEWMAN and defendant CAPITAL that the individuality and separateness of defendant NEWMAN and defendant CAPITAL has ceased."
The proposed application of an alter ego theory or more accurately a disregard of the corporate entity theory in order to state a cause of action against defendant CAPITAL is entirely misplaced.
Plaintiff relies upon Hudson v. Wylie (1957 9th Cir.) 242 F.2d 435 cert. denied 355 U.S. 828, 78 S.Ct. 39, 2 L.Ed.2d 41 and interestingly enough the allegation of alter ego in plaintiff's complaint (supra) is similar to the consideration of the Conclusions of Law set forth at page 440 of the Hudson case (supra). But the Hudson case (supra) had under consideration a different situation than that presented here. The court in Hudson was concerned with disregarding the corporate entity to reach the individual by "declaring and decreeing that Palmdale was the alter ego of Hudson." Plaintiff here would have the court disregard the entity of defendant JOSEPH E. NEWMAN to impose liability upon defendant CAPITAL, i. e., that defendant JOSEPH E. NEWMAN was a hollow shell controlled and dominated by defendant CAPITAL. The statement of such a contention makes patent the fallacy of the reasoning.
None of the cases cited by either party has any analogy to the requested action of the court here. The court has been able to find no situation in which the doctrine of alter ego has been applied to a fact situation such as it presented to the court in this case. Alter ego would appear to be limited to the situation where there is reason to disregard a corporate entity to reach individuals, it has no applicability in disregarding the existence of an individual to reach corporate assets.
Agency in terms of what may be called the "sole actor doctrine," General American Life Ins. Co. v. Anderson, 46 F.Supp. 189 modified 141 F.2d 898 cert. denied 323 U.S. 798, 65 S.Ct. 554, 89 L.Ed. 637, is not pleaded herein and it is most doubtful that the facts could support such an allegation.
Plaintiff after filing suit herein caused a Writ of Attachment to issue from this court and attached property of defendant CAPITAL, viz., a promissory note owing to defendant CAPITAL.
Upon application made pursuant to California Code of Civil Procedure §§
Service was then made upon defendant CAPITAL both personally and by mail.
Plaintiff now claims that this procedure invests in this court quasi-in-rem jurisdiction over the defendant CAPITAL.
Rule 4(e) (2) Federal Rules of Civil Procedure provides in its pertinent part:
In interpreting Rule 4(e) as allowing quasi-in-rem jurisdiction to be exercised in federal courts the court in Great American Insurance Company v. Louis Lesser Enterprises, Inc. (1965) 8 Cir., 353 F.2d 997 says at page 1007:
Plaintiff herein has complied with all of the requirements of California Code of Civil Procedure §§ 412, 413, making effective the service prerequisite to quasi-in-rem jurisdiction of defendant CAPITAL. We have dealt with the problem of subject matter jurisdiction and the requirements of venue and repetition here is therefore unnecessary.
CAUSE OF ACTION PURSUANT TO 18 U.S.C.A. § 1014
Count Four of plaintiff's complaint attempts to ground a private cause of action upon 18 U.S.C.A. § 1014, a criminal statute. It provides in its pertinent part:
Plaintiff would have this court imply a private right from what appears to be a purely penal statute. Plaintiff's reliance upon the language in Reass v. United States (1938) 4 Cir., 99 F.2d 752 as to the purpose of the statute is entirely misplaced. The question before the court in the Reass case (supra) was simply one of venue of the offense. The language does not imply nor does it appear to have any reference to the creation of a private right in those organizations it is patently enacted to protect, Reass v. United States (supra).
The creation of a private right from a purely penal statute as opposed to a regulatory statute is clearly distinguishable. And that distinction is clear in the reading of the Note found in 77 Harvard Law Review 285, cited by counsel for plaintiff. It should be even clearer to counsel for plaintiff since he may well have been responsible for the comprehensive analysis of the subject matter therein.
The court finds nothing in the legislative history of this statute that suggests in any manner that Congress intended the creation of a private right of action. There is nothing in the language of the statute that suggests that the court should not apply the rule expressio unuis est exclusio alterius.
In any event the court can find little reason for implying a private right created by 18 U.S.C.A. § 1014 since "where effective state remedies for the conduct proscribed by the federal statute are available throughout the country, there is generally little reason to imply a federal cause of action." This court knows of no jurisdiction, federal or state, where an action upon a promissory note or for common law fraud (the theories of plaintiff herein) are not fully available to litigants.
MOTION TO QUASH SERVICE OF SUMMONS AND DISMISS FIRST, FOURTH AND FIFTH COUNTS
(a) Pursuant to Rule 12(b) (2)
The First Count, an action upon a promissory note, and the Fifth Count
Plaintiff claims jurisdiction over the person of defendant NEWMAN reasoning that since extraterritorial service of process is proper pursuant to the Securities Act violation alleged in the Second and Third Counts of its Complaint process on the First, Fourth and Fifth counts is valid by reason of the application of pendent jurisdiction to service of process. Plaintiff also claims quasi-in-rem jurisdiction over defendant NEWMAN on the First, Fourth and Fifth causes of action.
Quasi-in-rem jurisdiction of defendant NEWMAN can only be justified here if property of the defendant NEWMAN were attached within the State of California.
Writ of Attachment herein was issued January 11, 1967, to provide for the attachment of all property of the defendants JOSEPH E. NEWMAN and NEWMAN CAPITAL CORPORATION.
The return of service of the Writ of Attachment shows that on January 11, 1967, the writ was served personally on Louis Taubman in the United States Marshal's office. The return shows a receipt of $2,400 in partial satisfaction of the Writ of Attachment served.
An amended return of service of the Writ of Attachment was filed January 24, 1967, showing by letter from Mr. Taubman that he continued to have in his possession, (and subject to the Writ) a $60,000 debt on a promissory note, principal payable on July 11, 1968.
The letter of Mr. Taubman is interesting because it shows that the property held by him is as follows:
There is in the record no return upon any Writ of Attachment showing property of defendant JOSEPH E. NEWMAN under attachment. Consequently, plaintiff can find no comfort in pressing quasi-in-rem jurisdiction of the defendant NEWMAN.
Although not argued by plaintiff it can be assumed that by its position it would claim that the alter ego theory asserted in plaintiff's complaint makes the property of the defendant corporation the property of defendant NEWMAN. This would be a complete distortion of the alter ego doctrine. That doctrine has been invoked when fairness and justice require that the property of individual stockholders be made subject to the debts of the corporation. To apply such a doctrine here would be asking the court to apply the doctrine in one manner, i. e., make the property of the corporation the property of a stockholder, for the purposes of obtaining jurisdiction of the person of the stockholder and then to reverse the procedure, i. e., make the action of the individual stockholder the action of the corporation for purposes of creating liability in the name of the corporation. Neither reason nor law compel such a gymnastic.
Plaintiff cites United Mine Workers v. Gibbs, 383 U.S. 715, 86 S.Ct. 1130, 16 L.Ed.2d 218 as approval of the Supreme Court for a broad interpretation of pendent jurisdiction. But a reading of the Gibbs case (supra) makes it plainly evident that the Supreme Court did not extend the principle of pendent jurisdiction to bootstrap service of process not otherwise valid. The court in discussing Hurn v. Oursler, 289 U.S. 238, 53 S.Ct. 586, 77 L.Ed. 1148, as limiting pendent jurisdiction to state and federal claims which are "little more than the equivalent of different epithets to characterize
then follows the language important to our consideration here:
at page 725, 86 S.Ct. at page 1138, the broadened approach is described as:
Gibbs (supra) though broadening the cause of action approach to pendent jurisdiction does not stand for the proposition that service of process to obtain personal jurisdiction can be bootstrapped as the plaintiff suggests here.
The view of Judge Weinfeld in Kane v. Central American Mining & Oil, Inc., D.C., 235 F.Supp. 559 at 568 is a most enlightened one. Personal jurisdiction over defendants in separately stated causes of action in one case should not depend upon a ritualistic method of service attendant to the nature of relief sought or the statute pursuant to which the particular count may be litigated in one court. How the defendant comes before the court to litigate all the disputes or theories of one lawsuit is unimportant. What is important is that a defendant is properly before a particular court under some valid service of process upon which the court has the power to proceed in some one of the disputes or theories alleged.
Assuming the court adopts this view of service of process, the doctrine of pendent jurisdiction lends little support to plaintiff in light of the determination made upon the Second and Third Counts herein.
(b) Pursuant to Rule 12(b) (5)
The motion to dismiss for insufficiency of service of process raises no new issues not a ready discussed in this opinion.
Rule 4(f) insofar as it provides for service of process beyond the territorial limits of a state "when authorized by a statute of the United States or by these rules" would validate the ritualistic service of process made upon defendant
TRANSFER OF ACTION
The subject matter jurisdiction of the claims set forth in plaintiff's Amended Complaint For Money Judgment is vested in "the district courts of the United States."
We are here concerned basically with the venue aspects of 15 U.S.C.A. §§ 77v, 78aa and the attendant problems of where this dispute should most properly be tried.
Title 28 § 1406(a) Provides:
In interpreting § 1406(a) in a factual situation closely analogous to our case the Supreme Court in Goldlawr, Inc. v. Heiman, 369 U.S. 463 at page 464, 82 S.Ct. 913 at page 915, 8 L.Ed.2d 39 says:
The motions of defendants to dismiss and for summary judgment are denied without prejudice to the defendants to raise them before the District Court to which this action is being transferred pursuant to Title 28 U.S.C.A. § 1404 (a).
In the interest of justice pursuant to Title 28 U.S.C.A. § 1404(a) the action is transferred to the District of Colorado for all further proceedings as to all parties.
It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce or of the mails, or any facility of any national securities exchange—
"§ 412. Summons; service by publication; pre-requisites; order
Where the person on whom service is to be made resides out of the State; or has departed from the State; or can not, after due diligence, be found within the State; or conceals himself to avoid the service of summons; or is a corporation having no officer or other person upon whom summons may be served, who, after due diligence, can be found within the State, and the fact appears by affidavit to the satisfaction of the court, or a judge thereof; and it also appears by such affidavit, or by the verified complaint on file, that a cause of action exists against the defendant in respect to whom the service is to be made, or that he is a necessary or proper party to the action; or when it appears by such affidavit, or by the complaint on file, that it is an action which relates to or the subject of which is real or personal property in this State, in which such person defendant or corporation defendant has or claims a lien or interest, actual or contingent, therein, or in which the relief demanded consists wholly or in part in excluding such person or corporation from any interest therein, such court, or judge, may make an order that the service be made by the publication of the summons."
"§ 413. Summons; service by publication; order; mailing; personal service out of state; post office defined
The order must direct the publication to be made in a newspaper, to be named and designated as most likely to give notice to the person to be served, and for such length of time as may be deemed reasonable, at least once each calendar week; but publication against a defendant residing out of the State, or absent therefrom, must be pursuant to Section 6065 of the Government Code, except in proceedings instituted pursuant to the provisions of Chapter 4, Title 3, Part 3, of this code. In case of publication, where the residence of a nonresident or absent defendant is known, the court, judge, or justice, must direct a copy of the summons and complaint to be forthwith deposited in the post office, directed to the person to be served, at his place of residence. When publication is ordered, personal service of a copy of the summons and complaint out of the State is equivalent to publication and deposit in the post office. Service is complete upon the making of such personal service or at the expiration of the time prescribed by the order for publication, whichever event shall first occur."
"§ 1404. Change of venue
(a) For the convenience of parties and witnesses, in the interest of justice, a district court may transfer any civil action to any other district or division where it might have been brought."