The opinion of the court was delivered by: BECKER
This is a securities fraud case in which the plaintiffs seek to recover damages because of alleged material misrepresentations made in a complex financial transaction which is detailed below.
Defendants William C. Duncan, Jr., Barbara Pabst Duncan, Donald G. Pabst and William D. Pabst (hereinafter referred to collectively as the St. Claire defendants) were served with process in California pursuant to section 27 of the 1934 Securities Act, 15 U.S.C. § 78aa. They have moved to dismiss the action for lack of in personam jurisdiction. Before addressing the motion, we must first set forth the transactions involved in detail. Since we are asked to rule here only on a motion to dismiss under 12(b) of the Federal Rules of Civil Procedure, we must consider the pleadings and affidavits in the light most favorable to the plaintiffs, who are the nonmoving party.
On January 17, 1974, we entered an Order denying the St. Claire defendants' motion with a notation that this opinion would follow.
II. The Transactions Involved in the Case
Based upon a reading of plaintiffs' complaint and affidavits, the transactions among the parties as respects this motion may be summarized as follows:
A. The Old Paragon -- St. Claire Agreement
On March 31, 1970, Paragon National Corporation (Old Paragon) and St. Claire Leasing Corporation and St. Claire Finance Corporation (hereinafter referred to collectively as St. Claire) agreed that Old Paragon would acquire all of the capital stock of St. Claire from the St. Claire defendants in exchange for stock in Old Paragon. Both St. Claire and Old Paragon were engaged in the auto leasing business. The Old Paragon -- St. Claire agreement included representations and warranties by the St. Claire defendants that St. Claire's financial statements were prepared in accordance with generally accepted accounting principles and presented a true and complete picture of the enterprise. The St. Claire defendants agreed to indemnify Old Paragon for any damage due to misrepresentations, breach of warranty or breach of contract.
B. The Oxford First -- Old Paragon Agreement
In May of 1970 plaintiff Oxford First Corporation (Oxford First), a Philadelphia based concern which was engaged principally in the finance business, became interested in acquiring Old Paragon. On or about July 8, 1970, Oxford First entered into a tentative agreement with Old Paragon whereby substantially all of the assets of Old Paragon, including the St. Claire stock held by Old Paragon, were to be acquired by a new subsidiary of Oxford First called Paragon National Corporation (New Paragon)
in exchange for shares of Oxford First common stock payable to Old Paragon at closing under the Oxford First -- Old Paragon Agreement.
It was understood that Old Paragon would liquidate and distribute the Oxford First shares to the Old Paragon shareholders. The Oxford First -- Old Paragon Agreement provided that 10,000 of the 60,000 shares of Oxford First paid to Old Paragon would be held in escrow as collateral for any breach of warranty by Old Paragon, subject to a Collateral Security and Escrow Agreement.
The Oxford First -- Old Paragon Agreement further provided for another 115,000 shares of Oxford First common stock to be held in escrow and delivered to Old Paragon or returned to Oxford First, depending upon the performance of New Paragon over 24 months ending June 30, 1972.
The Oxford First -- Old Paragon Agreement included a number of representations and warranties by Old Paragon. Among them were the following: (1) that Old Paragon's financial statement fairly and accurately depicted Old Paragon's financial condition;
(2) that the St. Claire financial statements fairly and accurately represented St. Claire's financial condition;
(3) that the balances due on receivables, including the residual value of leased vehicles, were correctly reflected in the Old Paragon and St. Claire financial statements, and that adequate and proper allowance had been made for doubtful leases; and (4) that between June 30, 1970, and November 30, 1970, there were no adverse changes in Old Paragon's or St. Claire's financial conditions or operations, and that Old Paragon was not aware of any intention of any lending institution to terminate a significant relationship with Old Paragon.
C. The Old Paragon -- St. Claire Settlement
D. The Oxford First -- Old Paragon Settlement
On November 30, 1970, closing and settlement of the Oxford First -- Old Paragon agreement was completed in Philadelphia. Sixty thousand shares of Oxford First stock were delivered to Old Paragon in exchange for the assets of Old Paragon, including all of the stock of St. Claire.
All the representations made by both St. Claire to Old Paragon,
and by Old Paragon to Oxford First survived the closing.
In their complaint, Oxford First and Lease/Auto Plan, Inc. (the successor by merger to New Paragon) charge Old Paragon
and its shareholders
and the St. Claire defendants with: (1) breaches of warranties; (2) 10b-5 material misrepresentations; (3) violation of § 17(a) of the 1933 Securities Act; and (4) common law fraud and deceit. Oxford First also charges that Leasco Computer, Inc. (LCI) and Leasco Corporation knew of the fraudulent misrepresentations in the financial statements of St. Claire and of Old Paragon and that Leasco aided and abetted Old Paragon in this fraud. Finally, Oxford ...