The opinion of the court was delivered by: STEWART
This action was brought by various tenants in an apartment building located at 345 East 57th Street, New York, New York, which has been converted to a cooperative housing corporation. Plaintiffs challenge the offering statement and plan pursuant to which shares in the apartment were sold. They allege that the defendant partnership, sponsor and promoter of the cooperative plan pursuant to which the corporation was organized and shares offered and sold, violated provisions of federal
securities laws and regulations by failing to register the shares sold with the Securities and Exchange Commission, by making false and misleading statements and material omissions in connection with and in the course of issuance of the shares, and by failing to obtain subscriptions by the necessary number of tenant participants by the offering's deadline.
Defendants Milton Spitz, Henry Spitz, and Jerome Spitz sued individually and as a partnership doing business as Three Forty Five Management Co., and defendant 34557 Corporation, the tenant corporation formed when the plan became effective, allege as affirmative defenses that the cooperative plan was exempt from the registration requirements of the Securities Act of 1933, and that therefore this court is without subject matter jurisdiction over the pendent state claims. Various tenants of the apartment building, who are also defendants, allege as affirmative defenses that this court is without subject matter jurisdiction over the entire action and that this action is further barred by the pendency of a prior action in the New York State Supreme Court based on the same set of facts.
Plaintiffs now move for partial summary judgment contending there are no genuine issues of fact to be decided as to the first, third and fourth causes of action. Essentially, plaintiffs argue that as a matter of law the shares offered by the sponsor constituted securities required to be registered under § 5 of the Securities Act of 1933 and did not constitute an exempt intrastate offering under § 3(a)(11) of the 1933 Act. With respect to the first and third causes of action, plaintiffs also argue that the purportedly misleading statements and omissions in the defendant sponsor's offering statement and amendments are so clearly material that summary judgment is warranted as a matter of federal and state securities law. The final contention, plaintiffs' fourth cause of action, is that the requisite level of tenant participation in the cooperative plan was not timely obtained, and hence the whole plan must fail.
This court finds that subject matter jurisdiction over this controversy is properly predicated upon § 22 of the Securities Act of 1933
and upon § 27 of the Securities Exchange Act of 1934
as construed by the recent Second Circuit decision in 1050 Tenants Corp. v. Jakobson, 503 F.2d 1375 (2d Cir. 1974). Since there is subject matter jurisdiction with regard to the federal cause of action, we may, in our discretion, retain jurisdiction over pendent state causes of action derived from "a common nucleus of operative fact." United Mine Workers v. Gibbs, 383 U.S. 715, 725, 16 L. Ed. 2d 218, 86 S. Ct. 1130 (1966). See also Almenares v. Wyman, 453 F.2d 1075, 1083-86 (2d Cir. 1971), cert. denied, 405 U.S. 944, 30 L. Ed. 2d 815, 92 S. Ct. 962 (1972); Drachman v. Harvey, 453 F.2d 722, 737-38 (2d Cir. 1972) (rehearing en banc).
We also find that the moving affidavits submitted in connection with this motion are sufficient to comply with the provisions of Rule 56(e) of the Federal Rules of Civil Procedure, despite defendants' assertions to the contrary. Rule 56(e) states in pertinent part that "[supporting] and opposing affidavits shall be made on personal knowledge, shall set forth such facts as would be admissible in evidence, and shall show affirmatively that the affiant is competent to testify to the matters stated therein." Defendants assert that plaintiffs failed to comply with this rule is submitting an affidavit by their attorney allegedly not based on personal knowledge and a second affidavit by plaintiff H. Victor Schwimmer, who declared that the attorney's affidavit is "true." Plaintiffs' attorney responds that his affidavit was based on personal knowledge of the documents, events, and admissions in question, although his moving affidavit did not so state. Furthermore, plaintiffs' attorney argues that, in any event, the corroborative affidavit by Schwimmer passes muster under Rule 56(e), since it was based on personal knowledge.
We accept plaintiffs' attorney's statement that his affidavit was based on personal knowledge, and thus distinguish Mercantile Nat. Bank at Dallas v. Franklin Life Ins. Co., 248 F.2d 57, 59 (5th Cir. 1957), cited by defendants, since in that case moving affidavits by attorneys were not based on personal knowledge. Rather, we agree with the court in Inglett & Co. v. Everglades Fertilizer Co., 255 F.2d 342, 349 (5th Cir. 1958) that it is permissible, though not advisable, for an attorney to present his own affidavit in support of a motion for summary judgment.
Plaintiffs' first cause of action alleges, inter alia, that the defendant sponsor was required to register its offering with the Securities and Exchange Commission pursuant to § 5 of the Securities Act of 1933 and failed to do so. Defendants Milton, Harry, and Jerome Spitz and defendant 34557 Corporation concede that their offering was not registered but argue as an affirmative defense that the offering falls within the § 3(a)(11) exemption from registration since it was made by a New York "issuer" and shares were sold only to New York residents. Section 3(a)(11) exempts from registration and prospectus requirements of the 1933 Act:
Any security which is part of an issue offered and sold only to persons resident within a single State or Territory, where the issuer of such security is a person resident and doing business within or, if a corporation, incorporated by and doing business within, such State or Territory.
Plaintiffs have moved to strike the defendant sponsor's affirmative defense based on Section 3(a)(11) of the 1933 Act, contending that the issuer partnership is not a "person" resident within New York, that the issuer does business outside of New York, and that some of the purchasers were nonresidents.
Plaintiffs' contention that this exemption does not apply is based initially on the conceded California residence of partner Jerome Spitz. His lack of New York residence is only dispositive if it is determined that each partner of the issuer must be a resident of the issuing state. If the rule is otherwise, however, a partnership issuer -- such as the one here -- will be entitled to the intrastate exemption so long as its principal place of business is in the issuing state.
No federal court has ruled on which theory of partnership residency should be applied for purposes of the § 3(a)(11) exemption and commentators considering the subject have disagreed. Professor Louis Loss has suggested that the residence of a general partnership should be that of its principal place of business.
A former Associate General Counsel of the Securities and Exchange Commission has suggested, however, that the residence of a general partnership should be the residences of all of its general partners.
While the 1933 Act does not define the term "resident," the SEC long construed the term to mean "domiciliary."
More recently, the SEC promulgated Rule 147, effective March 1, 1974, which sought to clarify the definition of "resident" under § 3(a)(11). Under Rule 147, when an issuer is a general partnership, its residence is that of its principal place of business.
According to two recent commentators, this definition is merely declarative of existing law.
We believe that on the basis of the above authorities, the better view is that the residence of a general partnership is that of its principal place of business. Applying that rule to the instant case, it is clear that the defendant sponsor partnership, Three Forty Five Management Co., falls within the residence requirement for a § ...