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Stuart v. Utility Investing Corp.

April 3, 1935

STUART ET AL.
v.
UTILITY INVESTING CORPORATION



Appeal from the District Court of the United States for the Eastern District of Pennsylvania.

Author: Buffington

Before BUFFINGTON, WOOLLEY, and THOMPSON, Circuit Judges.

BUFFINGTON, Circuit Judge.

In the court below the plaintiff, a corporation of Delaware, filed a bill against the defendants, citizens of Pennsylvania, who constituted the Securities Commission of that state. The bill prayed an injunction to prevent the defendants from bringing criminal prosecutions against the plaintiff, its officers and agents, for not taking out broker's license while carrying into effect a certain financial readjustment of the Associated Gas & Electric Company, its affiliate. With a view to determining whether the plaintiff was bound to take out such broker's licenses and register the same, and with the consent of all parties, the course was followed of plaintiff filing the present bill. On final hearing the court below held with the plaintiff and enjoined the defendant from entering criminal prosecution, whereupon the members of the Securities Commission took this appeal.

In the final analysis the case narrows to the question of whether the plaintiff's plan falls under the exceptions provided by the Pennsylvania Securities Act of April 13, 1927, P.L. 273 § 2(c), 70 PS Pa. § 2(c) which act provides:

"None of the following transactions shall constitute the person or company engaging therein a "dealer" within the meaning of this act, that is to say, a sale, offer for sale, solicitation, subscription, invitation, dealing in, or delivery. * * *

"(11) Stock dividends, etc.; reorganizations -- The distribution by a corporation of capital stock, bonds, or other security, to its stockholders as stock dividend or other distribution out of earnings or surplus, or the issue of securities to the security holders or other creditors of a corporation, in the process of a bona fide reorganization of such corporation, made in good faith, either in exchange for the securities of such security holders or claims of such creditors or the issue of increased capital stock of a corporation sold or distributed by it entirely among its own stockholders."

The court found as a fact that the proposed plan was one wholly between the Associated Gas & Electric Company and its security holders, that none of its exchange securities was to be offered to the public for sale, and the purpose of the plan was, as found by the court, "to relieve itself of the burden of having to meet fixed interest charges at definite periods, by inviting the holders of fixed interest debentures (the senior obligation of the company) to exchange them for new obligations at a higher rate of interest, cumulative, but payable only as earned and coupled with a sinking fund provision." (D.C.) 11 F. Supp. 391, 393. In its opinion and findings the court held the plan was a reorganization made in good faith and was excepted by the statute, and that the plaintiff was therefore not required to take out and register broker's licenses.

All the questions involved were discussed in the thorough opinion of the court. Finding ourselves in accord therewith, and feeling that an additional opinion by this court would simply be an effort to clothe in different language what has been already satisfactorily said in the judge's opinion, we limit ourselves to affirming the case thereon.

THOMPSON, Circuit Judge (dissenting).

I am constrained to dissent from the majority opinion. The appellee undertook to rearrange the capital structure of the Associated Gas & Electric Company by obtaining the consent of the holders of the debenture bonds of the company to to an exchange for other bonds of the company carrying a lower rate of interest.The appellants, who are members and counsel of the Pennsylvania Securities Commission, threaten to prosecute the appellee if it should present the proposed plan in Pennsylvania without registering. The appellants purport to act by authority of section 22 of the Pennsylvania Securities Act of April 13, 1927, P.L. 273 (70 PS Pa. § 22) which provides: "Any dealer, agent, salesman, principal, officer, or employee, who shall, within this State, sell, offer for sale or delivery, solicit subscriptions to or orders for, dispose of, invite offers for or inquiries about, or who shall deal in any manner in, any security or securities, without being registered as in this act provided, * * * shall be guilty of a misdemeanor, and, upon conviction thereof, shall be sentenced to pay a fine of not more than five thousand dollars ($5,000.00), or imprisonment for not more than two years, or both. Any dealer, officer, agent, salesman, principal, officer, or employee who shall commit, in whole or in part, any other act declared unlawful by this statute, shall be guilty of a misdemeanor, and, upon conviction thereof, shall be sentenced to pay a fine of not more than one thousand dollars ($1,000.00), or imprisonment for not more than one year, or both."

The appellee contends that it is exempt from being required to register, because it is not a "dealer" as defined by section 2(c)(11) of the Securities Act (70 PS Pa. § 2(c)(11), the pertinent portions of which are set out in the majority opinion.

The District Court found that the plan proposed by the appellee was for the issuance of securities to the security holders of a corporation in the process of a bona fide reorganization of such corporation, made in good faith in exchange for the securities of such security holders. I am willing to accept the fact findings of the District Court. I am also willing to accept the conclusion of the District Court that the appellee is within the exemption of the statute and is not a "dealer" as therein defined, and that the jurisdiction of a federal court is established since the bill alleges diversity of citizenship and the requisite jurisdictional amount.

So far I agree with the reasoning and conclusions of the majority. I cannot, however, agree that a federal court has jurisdiction to enjoin the appellants and direct that they be restrained from instituting proceedings under the penal clauses of the state act. In my opinion, the real issue is whether the bill alleges sufficient grounds for the granting of injunctive relief by a federal court. In Commonwealth of Pennsylvania v. Williams, 294 U.S. 176, 55 S. Ct. 380, 385, 79 L. Ed. 841, 96 A.L.R. 1166, opinion filed February 4, 1935, the Supreme Court said: "It is in the public interest that federal courts of equity should exercise their discretionary power with proper regard for the rightful independence of state governments in carrying out their domestic ...


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