The opinion of the court was delivered by: BONSAL
Plaintiffs, David and William Stirling, owners of some 40% of the common stock of Stirling Homex Corporation ("Homex"),
are suing nine banks and certain officers and employees of these banks, on behalf of themselves and "all persons who owned, purchased or sold securities of Stirling Homex between March 11th, 1972 and July 10th, 1972 . . . ." By Order of the Judicial Panel on Multidistrict Litigation, filed December 21, 1973, those related actions pending outside the Southern District of New York
were transferred to this Court "for coordinated or consolidated pretrial proceedings, pursuant to 28 U.S.C. § 1407," with a related action pending here.
Plaintiffs allege a conspiracy among the defendants to gain control of Homex and to perfect a preferred position as lienors upon the assets of Homex by means of fraudulent representations that the defendants would forbear from calling loans to Homex then outstanding and would advance additional sums of money.
Three causes of action are asserted. The first sounds in common law fraud. Plaintiffs allege that in return for Homex's execution of financial statements which would change the defendant banks from unsecured to secured creditors, the defendants represented that they would forbear from calling loans and would make new loans to Homex. These representations were allegedly false, and their breach, it is contended, resulted in the insolvency of Homex and the loss of value of Homex securities. Plaintiffs further allege that they resigned their positions as officers and directors of Homex in reliance on defendants' false representation that if they did so, outstanding loans would not be called and new loans would be made.
Plaintiffs' second cause of action alleges violations of section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act"), 15 U.S.C. § 78j(b), Securities and Exchange Commission Rule 10b-5, 17 C.F.R. § 240.10b-5, and section 17(a) of the Securities Act of 1933 ("Securities Act"), 15 U.S.C. § 77q(a). Plaintiffs contend that defendants were "control persons" and as such had a duty to disclose material information; that defendants falsely represented that they would not call outstanding loans and would make additional loans to Homex and failed to disclose their intention not to forbear from calling loans and not to make additional loans; that these misrepresentations and nondisclosures resulted in artificially inflated market prices; and that
"in ignorance of the omission by the defendant banks and other co-conspirators, to disclose their intentions not to refrain from calling their loans and not to advance additional sums up to $55,000,000 . . . the plaintiffs and other members of the Class, relying upon the integrity of the market prices during said period in retaining their shares or in purchasing or selling their shares, sustained substantial injury and damages as a result of the wrongs herein complained of."
For a third cause of action, plaintiffs allege that defendants were "corporate insiders and control persons" who were required to file reports under sections 13 and 16 of the Exchange Act, 15 U.S.C. §§ 78m and 78p, and that defendants failed to do so.
While Stirling v. First National Bank of Chicago, et al., 74 Civ. 65, was still pending before Judge McGarr of the Northern District of Illinois, defendant First National Bank of Chicago moved to dismiss the complaint. Prior to the filing of the Order of the Judicial Panel on Multidistrict Litigation transferring the case to this district, Judge McGarr, by "Memorandum Opinion and Order" dated December 4, 1973 granted the motion to dismiss, except insofar as plaintiffs' first cause of action stated individual claims for common law fraud.
The defendants in the other cases now move pursuant to F.R. Civ. P. 12(b) (1) and 12(b) (6) for an order dismissing the amended complaint in Stirling v. Chemical Bank, et al., 72 Civ. 4476, and the complaints in Stirling v. First National State Bank of New Jersey, et al., 74 Civ. 64, and Stirling v. Union Planters National Bank, et al., 74 Civ. 66, for lack of jurisdiction over the subject matter and for failure to state a claim upon which relief can be granted. Plaintiffs move for an order pursuant to F.R. Civ. P. 6(b), 59, and 60, granting them "leave to renew or reargue their opposition to" the motion of defendant First National Bank of Chicago to dismiss the complaint, which was granted by Judge McGarr, or "alternatively, for a certification pursuant to 28 U.S.C. § 1292(b)."
Section 10(b), Rule 10b-5, and Section 17(a)
To fall within the scope of section 10(b) of the Exchange Act and Rule 10b-5, the fraud alleged by plaintiffs must be "in connection with the purchase or sale of any security." 15 U.S.C. § 78j(b); SEC v. National Securities, Inc., 393 U.S. 453, 466, 21 L. Ed. 2d 668, 89 S. Ct. 564 (1969). For section 17(a) of the Securities Act to apply, fraud must be alleged "in the offer or sale of any securities." 15 U.S.C. § 77q. Generally, the courts of the Second, Third and Sixth Circuits
have held that only a purchaser or seller of a security may maintain an action for damages under section 10(b) of the Exchange Act and Rule 10b-5. See Haberman v. Murchison, 468 F.2d 1305 (2d Cir. 1972); Greenstein v. Paul, 400 F.2d 580 (2d Cir. 1968); Birnbaum v. Newport Steel Corp., 193 F.2d 461 (2d Cir.), cert. denied, 343 U.S. 956, 96 L. Ed. 1356, 72 S. Ct. 1051 (1952); Landy v. Federal Deposit Insurance Corp., 486 F.2d 139 (3d Cir. 1973), cert. denied, 416 U.S. 960, 94 S. Ct. 1979, 40 L. Ed. 2d 312, 42 U.S.L.W. 3595 (U.S. 1974); Simmons v. Wolfson, 428 F.2d 455 (6th Cir. 1970), cert. denied, 400 U.S. 999, 27 L. Ed. 2d 450, 91 S. Ct. 459 (1971); James v. Gerber Products Co., 483 F.2d 944 (6th Cir. 1973). Similarly, it has been held that only a purchaser of securities may invoke the provisions of section 17(a) of the Securities Act. See Birnbaum v. Newport Steel Corp., supra ; Slavin v. Germantown Fire Insurance Co., 174 F.2d 799, 807 n. 17 (3d Cir. 1949); Berne Street Enterprises, Inc. v. American Export Isbrandtsen Co., CCH FED. SEC. L. REP. para. 92,711 (S.D.N.Y. 1970). These cases which have relaxed the requirement that plaintiff be a purchaser or seller have involved a fraud in connection with an actual purchase or sale of securities which resulted in injury to the plaintiff. See e.g. Eason v. General Motors Acceptance Corp., 490 F.2d 654 (7th Cir. 1973), cert. denied, 416 U.S. 960, 94 S. Ct. 1979, 40 L. Ed. 2d 312, 42 U.S.L.W. 3595 (U.S. 1974); James v. Gerber Products Co., supra ; Crane Co. v. Westinghouse Air Brake Co., 419 F.2d 787 (2d Cir. 1969), cert. denied, 400 U.S. 822, 27 L. Ed. 2d 50, 91 S. Ct. 41 (1970); Mutual Shares Corp. v. Genesco, Inc., 384 F.2d 540 (2d Cir. 1967); Vine v. Beneficial Finance Co., 374 F.2d 627 (2d Cir.), cert. denied, 389 U.S. 970, 19 L. Ed. 2d 460, 88 S. Ct. 463 (1967); Heyman v. Heyman, 356 F. Supp. 958 (S.D.N.Y. 1973).
In the present case, plaintiffs in essence allege only that the defendants falsely represented that they would not call outstanding loans and would advance additional monies to Homex; that plaintiffs relied on these representations and retained their Homex stock; and that the value of their Homex stock declined when the defendants' representations proved false, the loans to Homex were called, and no further monies were advanced. Not only have plaintiffs failed to allege that they are purchasers or sellers of securities, but they have also failed to allege that there was any purchase or sale of securities.
Plaintiffs argue that by letter of April 15, 1972, they expressed willingness to pledge their unencumbered Homex stock to the defendant banks in order to induce the banks to forbear from calling outstanding loans. The letter of April 15 provides:
"5. David Stirling and William G. Stirling will pledge to the Agent, as agent for the Banks, all unencumbered shares of capital stock of the Company owned by them (and all encumbered shares now owned by them which may hereafter cease to be encumbered); such pledge to be terminated when all defaults by the Company have been cured."
Plaintiffs contend that this letter operated as a sale of securities. However, no pledge of plaintiffs' stock was ever actually made, and a mere expression of willingness to pledge ...