The opinion of the court was delivered by: METZNER
This is an action brought by four limited partners on behalf of themselves and all other purchasers and holders of limited partnership interests in 21 West Associates against the general partners of Associates and two corporations said to be controlled by the general partners. The complaint contains four separate counts - two predicated on federal law and two on state law.
The federal claims alleged are based on a violation of section 17(a) of the Securities Act of 1933, 15 U.S.C. § 77q(a), and a violation of section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and rule 10b-5, 17 C.F.R. § 240.10b-5, of the Securities and Exchange Commission.
The state claims are based on alleged violations of sections 352-c and 352-e of the New York General Business Law. Defendants have moved pursuant to Fed. R. Civ. P. 12(b) (1) to dismiss the state law claims on the ground that this court lacks jurisdiction, or in the alternative pursuant to Fed. R. Civ. P. 12(b) (6) that the state law counts fail to state a representative claim upon which relief can be granted.
The court will first consider defendants' contention that the court lacks jurisdiction over the state claims, since if defendants are correct on this ground, the court is without power to decide whether a representative claim can be brought.
Both parties agree that jurisdiction over the state claims cannot be predicated on diversity of citizenship since the requisite diversity is lacking. If jurisdiction is to be found it must be based on the doctrine of pendent jurisdiction. As has been noted many times, the doctrine of pendent jurisdiction was first given prominent exposition in the Supreme Court case of Hurn v. Oursler, 289 U.S. 238, 77 L. Ed. 1148, 53 S. Ct. 586 (1933). See generally Note, 62 Colum. L. Rev. 1018 (1962). The Court there observed the distinction between a case where two distinct grounds for relief (one federal and one state) were urged to support a single cause of action and the situation in which two separate and distinct causes of action were alleged. 289 U.S. at 245-46. In the former situation pendent jurisdiction would be upheld; in the latter it would not. The policy of avoiding needless duplication of judicial time underlies the doctrine. Hazel Bishop, Inc. v. Perfemme, Inc., 314 F.2d 399 (2d Cir. 1963); Telechron, Inc. v. Parissi, 197 F.2d 757, 761 (2d Cir. 1952).
The pendent jurisdiction doctrine has been applied to sustain a state claim of common law fraud when violations of the Federal Securities Acts as alleged herein have been claimed. Errion v. Connell, 236 F.2d 447 (9th Cir. 1956). A common law fraud claim has been deemed pendent even where the Securities Act involved did not require proof of reliance and scienter. See Jung v. K. & D. Mining Co., 260 F.2d 607 (7th Cir. 1958); Wood v. Precise Vac-U-Tronic, Inc., 192 F. Supp. 619 (E.D. Pa. 1961). See also Ellis v. Carter, 291 F.2d 270 (9th Cir. 1961).
Defendant contends that the state statutes involved in the instant case are complex, and therefore the common law fraud cases are distinguishable. Section 352-c of the New York General Business Law is an intrastate regulation in many ways similar to the interstate federal securities regulations. Section 352-e requires certain real estate ventures that make public offerings of securities to register with the state department of law a detailed prospectus of that offering. Advisory literature and advertisements connected with such offerings are also regulated. The section and regulations issued pursuant to it are quite detailed; however, in essence they are directed to misstatements and omissions of material fact in the prospectus and literature issued to induce investment. The plaintiffs, in paragraphs 13 and 14 of their complaint, in support of their claim under section 17(a) of the Securities Act of 1933, have detailed facts that were misstated and omitted from the prospectus issued by defendants. These same facts and no more are relied on in support of their state claims. This distinguishes the instant case from Wolfson v. Blumberg, 229 F. Supp. 191 (S.D.N.Y. 1964), appeal dismissed, 340 F.2d 89 (2d Cir. 1965), relied on by the defendants. In Darwin v. Jess Hickey Oil Co., 153 F. Supp. 667 (N.D. Tex. 1957), also relied on by the defendants, the state claim included "securities" that were not recognized as securities by federal law involved therein. Further, many distinctions were noted as to burden of proof.
Defendants have not shown that if the alleged facts are proven, this would not be a violation of the New York laws. As was stated in Errion v. Connell, supra, 236 F.2d at 454, "The thought of requiring two law suits in this situation is untenable." See also Lupardo v. I.N.M. Indus. Corp., 36 F.R.D. 438 (S.D.N.Y. 1965) (while the issue was not extensively argued, the court found it had jurisdiction of a 352-c claim under the pendent doctrine).
Defendants contend that if the federal court has jurisdiction, the plaintiffs' local claims should nevertheless be dismissed because they fail to allege a representative claim under state law. They argue that since the state courts would not allow the representative form, Erie R.R. v. Tompkins, 304 U.S. 64, 82 L. Ed. 1188, 58 S. Ct. 817 (1938), and its progeny compel this court to dismiss the state claims.
The parties are at issue as to whether New York state law would allow representative actions under sections 352-c and 352-e of the General Business Law to be brought. In Brenner v. Title Guar. & Trust Co., 276 N.Y. 230, 11 N.E. 2d 890 (1937), the court held that when fraud is alleged as to a group of purchasers, and the purchases have been made separately, a representative claim will not lie. This rule has been consistently followed down to Coolidge v. Kaskel, 16 N.Y. 2d 559, 208 N.E. 2d 780, 260 N.Y.S. 2d 835 (1965), which dealt with a representative action under section 352-e. Plaintiffs rely on two recent New York Court of Appeals cases, Riviera Congress Assoc. v. Yassky, 18 N.Y. 2d 540, 223 N.E. 2d 876, 277 N.Y.S. 2d 386 (1966), and Lichtyger v. Franchard Corp., 18 N.Y. 2d 528, 223 N.E. 2d 869, 277 N.Y.S. 2d 377 (1966), to support their contention that New York would allow their state claims to be brought representatively. While the cases do allow class actions to be brought by limited partners, problems of individualized proof and relief (cf. Society Milion Athena v. National Bank of Greece, 281 N.Y. 282, 22 N.E. 2d 374 (1939)), that troubled the Court of Appeals in Brenner, did not exist in those recent cases. They sought damages for injury to the entity of which the individual plaintiffs were members, and not to the individuals themselves. The court clearly states in Lichtyger that its
"conclusion is not at odds with any of our decisions holding that a class action was unauthorized because 'separate wrongs' had been done to each member of the putative class." (Citing Brenner and Coolidge). 277 N.Y.S. 2d at 382.
The state claims in this action could not be brought as representative claims under New York state law.
The issue is therefore presented as to whether the federal court must follow the state court in this instance. The parties agree that Erie R.R. v. Tompkins, supra, applies to state claims in the federal court under the doctrine of pendent jurisdiction. See Mintz v. Allen, 254 F. Supp. 1012 (S.D.N.Y. ...