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WILLIAMSPORT FIREMEN PENSION BDS. I & II v. E. F.

June 13, 1983

WILLIAMSPORT FIREMEN PENSION BOARDS I AND II, Plaintiffs
v.
E. F. HUTTON & COMPANY, INC. and PEYTON McDONALD, Defendants



The opinion of the court was delivered by: MUIR

MUIR, District Judge.

 I. Introduction.

 Plaintiffs Williamsport Firemen Pension Boards I and II (Pension Boards) filed this action against Defendants E.F. Hutton & Company, Inc. (E.F. Hutton) and Peyton McDonald on April 15, 1983. Jurisdiction of this Court is alleged to be conferred by federal securities law and by the diversity of citizenship of the parties. See Complaint para. 9. However, there is no diversity of citizenship jurisdiction in this case since both the Plaintiff Pension Boards and Defendant McDonald are Pennsylvania "citizens". E.g. American Fire & Casualty Co. v. Finn, 341 U.S. 6, 95 L. Ed. 702, 71 S. Ct. 534 (1951); 28 U.S.C. § 1332.

 According to the complaint, the Plaintiffs are pension boards organized under the laws of the Commonwealth of Pennsylvania and the ordinances of the City of Williamsport. E.F. Hutton is a corporation organized under the laws of the State of Delaware with a local office in Williamsport. McDonald is the vice-president and manager of E.F. Hutton's Williamsport office.

 The Pension Boards allege both federal causes of action and pendent state law claims. Count I of the complaint alleges that the Defendants violated Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j and Rule 10(b)(5) promulgated thereunder, 17 C.F.R. § 240.10(b)(5). In particular, Count I charges that Defendants McDonald made certain misrepresentations to the Plaintiff Pension Boards concerning the amount of and method of calculating E.F. Hutton's commissions on stock transactions. The Defendants are alleged to have defrauded the Plaintiff Pension Boards out of approximately $28,000 in excess commission charges.

 In Count II of the complaint, Plaintiff Pension Boards allege that the Defendants engaged in purposeful excessive trading known as "churning", also in violation of Section 10(b) and Rule 10(b)(5). E.g. Powers v. Francis I. DuPont and Company, 344 F. Supp. 429, 431 (E.D. Pa. 1972). In particular, the Pension Boards allege that between January of 1977 and August of 1982 the Defendants acted as broker for 166 transactions in the Pension Boards' stock portfolio and earned approximately $38,000 in commissions therefor.

 Counts III through VIII allege Pennsylvania state law causes of action. In Count III, the Pension Boards allege that as a result of the Defendants' gross and reckless conduct, they are liable to the Pension Boards for punitive damages. While Plaintiffs do not state with specificity whether Count III is brought under state or federal law, no punitive damages can be recovered under the Securities Exchange Act of 1934. Byrnes v. Faulkner, Dawkins, and Sullivan, 550 F.2d 1303 (2d Cir. 1977). Count IV alleges that the conduct of the Defendants is in violation of the Pennsylvania Securities Act of 1972, 70 Pa. Con.Stat. § 1-401 et seq. (1972). Count V alleges causes of action for fraud and deceit under the common law. Count VI alleges a cause of action for negligence. E.F. Hutton is alleged both to be directly negligent and to be vicariously liable for the negligence of McDonald. Count VII alleges a cause of action for the Defendants' breach of fiduciary duties owed to the Plaintiff Pension Boards. Count VIII alleges a cause of action for breach of the contractual agreement between the Pension Boards and the Defendants respecting the management of the Plaintiffs' accounts. The Pension Boards seek compensatory and punitive damages as well as attorney's fees and costs.

 By order of April 15, 1983, this case was placed on the Court's Williamsport June 1984 trial list.

 II. Defendants' Motion to Dismiss.

 On May 4, 1983, Defendants McDonald and E.F. Hutton filed a motion to dismiss the complaint and a supporting brief. The motion was opposed by the Pension Boards on May 20, 1983 and a reply brief was filed on June 2, 1983. Annexed to the reply brief is the affidavit of Peyton McDonald. The matter is now ripe for decision.

 In their motion to dismiss, Defendants McDonald and E.F. Hutton make the following arguments: first, that the Plaintiff Pension Boards lack the capacity to sue; second, that Counts I and II fail to state a claim; and third, that in the event that Counts I and II are dismissed, this Court lacks jurisdiction over the state law claims contained in Counts III through VIII. These arguments will be addressed seriatim.

 A. Capacity of Pension Board to Bring Suit.

 Plaintiffs are identified in the complaint as Pension Boards organized and existing under the laws of the Commonwealth of Pennsylvania and the ordinances of the City of Williamsport. With respect to entities other than individuals and corporations, the capacity of such entities to sue or be sued is determined by the law of the state in which the district court involved is sitting. F.R.Civ.P. 17(b). Thus, Pennsylvania law controls the question. Defendants contend that Firemen Pension Boards such as the Plaintiff Pension Boards do not under Pennsylvania law have the capacity to maintain an action.

 Under Pennsylvania law, in order to maintain a suit, a Plaintiff must have an actual or legal existence. "The Plaintiff . . . must be an entity which the law recognizes." Philadelphia Facilities Management Corp. v. Biester, 60 Pa. Commw. Ct. 366, 431 A.2d 1123, 1127 (1981), citing Thompson v. Peck, 320 Pa. 27, 181 A. 597 (1935); McConnell v. Apollo Savings Bank, 146 Pa. 79, 23 A. 347 (1892). The pension funds at issue in this lawsuit over which the Plaintiff Pension Boards have control are clearly entities "which the law recognizes." 53 Pa.Con.Stat. § 39320 directs that cities shall "establish, by ordinance, a firemen's pension fund, to be maintained in part by an equal and proportionate monthly charge against each member of the fire department . . ." Section 39320 further provides that "All pension funds established under the provisions of this ...


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