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ROBINSON v. DIFFORD

July 14, 1950

ROBINSON et al.
v.
DIFFORD et al.



The opinion of the court was delivered by: GRIM

This is an action by former owners of a minority of the stock of the Robinson Manufacturing Company (hereinafter referred to as the Company), a corporation engaged in the lumber business in the state of Washington. The action is against (1) the Company, (2) the owners of a majority of its stock, who were also its officers and directors, and (3) their alleged agents. The plaintiffs claim damages in the sum of $ 1,791,875 and other relief by reason of alleged misrepresentations by the defendants which, according to the complaint, caused the plaintiffs to sell their stock in the Company to the majority shareholders at substantially less than its 'true actual value'.

Plaintiffs have expressly and solely grounded their action on section 10(b) *fn1" of the Securities Exchange Act of 1934 and rule X-10B-5 *fn2" promulgated thereunder by the Securities Exchange Commission.

 The defendants have filed a motion to dismiss the complaint under rule 12(b) of the Federal Rules of Civil Procedure, 28 U.S.C.A. Their contentions can be summarized as follows:

 1. The court lacks jurisdiction of the subject matter because, contrary to the requirements of the Securities Exchange Act, the transactions complained of did not involve securities traded on a securities exchange or in the over-the-counter market.

 2. The court lacks jurisdiction of the subject matter because the Securities Exchange Act does not provide a civil right of action for the type of transaction described in the complaint.

 3. The court lacks jurisdiction of the persons of the defendants because they were not served with process in the state of Pennsylvania, they having been served in the state of Washington, where they all are residents.

 4. The venue in this court is not properly laid as to plaintiffs Isabella V. Zimmerman and Floyd S. Zimmerman, because there are no allegations that any of the fraudulent acts, which induced them to sell their stock, occurred within the state of Pennsylvania.

 A summary of the facts as they are set forth in the complaint is:

 The Robinson Manufacturing Company was incorporated under the laws of the state of Washington in 1901. By charter amendment, effective November 17, 1948, the name of the corporation was changed to Robinson Plywood and Timber Company. It is under this name that it is listed as a defendant.

 At the time of the transactions set forth in the complaint, the Company had an authorized capitalization of 7500 shares of common stock, all of which were then outstanding. The plaintiffs as a group owned 2500 shares. The other 5000 shares were owned by defendants John R. Robinson, Laura R. McLeod, Ted R. Robinson, A. W. V. Ford and J. S. Robinson. These defendants constituted a control group, actively managing the Company as officers, directors and majority shareholders. Because of the close family relationship and the long personal association between the plaintiffs and the members of the 'control group', plaintiffs placed their complete trust and confidence in the latter's management and judgment. Between March 14, 1948 and November 17, 1948, however, the control group betrayed that trust and confidence and, through agents and by their own acts, purchased the shares of the plaintiffs at grossly inadequate prices. The defendants used the mails and instrumentalities of interstate commerce in making their fraudulent misrepresentations. The shares were not registered on an exchange nor traded in the over-the-counter market, and no security dealer or broker was used in effecting the purchases.

 Rule X-10B-5 of the Commission, which was 'prescribed' by the Commission pursuant to the power given to it by this section of the Act is:

 '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 of any ...


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