The opinion of the court was delivered by: NEALON
William J. Nealon, Jr., Chief Judge, Middle District of Pennsylvania
Plaintiffs filed this action pursuant to 28 U.S.C. § 1331 on September 24, 1985 asserting that defendants wrongfully terminated an agreement between the parties whereby Defendant Alco Standard was to purchase all of Metropolitan's stock. Plaintiffs allege violations of the federal securities laws, 15 U.S.C. §§ 78j, 77q(a), the Racketeer Influence and Corrupt Organizations Act [RICO] and various state law claims of breach of contract and fraud. Defendants filed a Motion to Dismiss and a brief in support thereof on November 15, 1985 and November 25, 1985, respectively. Plaintiffs opposed the motion by brief filed December 2, 1985 to which defendants replied December 31, 1985. Defendants also filed a Motion to Stay which has been fully briefed. See Documents 9, 10, 18 & 22 of the Record. The motions are now ripe for disposition. For the reasons set forth below, the Motion to Dismiss will be granted in part and denied in part. The Motion to Stay will be denied.
Plaintiffs, Metropolitan International, Inc., Intermetro Industries Corporation and their respective shareholders [Metropolitan], filed this action against Defendants Alco Standard Corporation, Alco Foodservice Equipment Company [Alco], Ray B. Bundt, President of Alco, and Thomas J. McCann, Jr., Vice-President of Acquisitions of Alco. Plaintiffs contend basically that Alco wrongfully "walked-away" from a merger agreement entered into by Metropolitan and Alco.
Plaintiffs allege that in March, 1985, Alco approached Metropolitan with the intent of acquiring Metropolitan. After two meetings, defendants made a substantial offer to purchase all of Metropolitan stock in exchange for Alco stock. After negotiations, the parties entered into an Agreement Plan [Agreement] on June 28, 1985, which included the purchase of 100 % of Metropolitan's stock in exchange for Alco stock. A specific date was not set for consummation of the exchange. Additionally, the Agreement called for a "due diligence" review of Metropolitan's operation. If the "due diligence" review revealed Metropolitan's financial condition was adversely different from that represented by Metropolitan management, then the Agreement provided that Alco could "walk-away" from the Agreement without liability. Specifically, the "walk-away" clause provided:
(f) Alco's right to terminate. Alco shall have the right to terminate this Agreement, without liability, prior to the Closing, upon written notice to the Company, that, as a result of the "due diligence" review of the Company and its subsidiaries, the business or financial condition of the Company taken as a whole materially adversely differs from the representations made to Messrs. McCann, Mundt, Shelley or Veale by Richard Maslow at or prior to the execution of this Agreement concerning the plant, equipment and business operations of the Company taken as a whole, but excluding matters relating to the industry or the trends in the industry in which the Company is engaged.
Plan and Agreement of Reorganization, Document 20 of the Record, Appendix C at para. 2(f) [hereinafter Agreement]. Plaintiffs allege that they objected to the "walk-away clause" but acquiesced after Alco assured them that its inclusion only reflected Alco's concerns with respect to the physical condition of the plants and equipment and compliance with environmental laws. In any event, Alco conducted its due diligence review and, on July 25, 1985, informed Metropolitan that it would not proceed with the transaction based upon financial reasons discovered during the review which adversely affected the price agreed upon. Alco suggested either a termination of the Agreement or a renegotiated price reflecting the fiscal information revealed during the review. Metropolitan refused and by formal letter dated August 14, 1985, Alco gave detailed written notice that it was terminating the Agreement due to Metropolitan's adverse misrepresentations. This action ensued.
Alco has moved to dismiss arguing that plaintiffs have failed to state a cause of action under Section 10(b) and Rule 10b-5 of the federal securities laws inasmuch as plaintiffs are not purchasers or sellers of securities or, alternatively, there is no causal relationship between the alleged fraud and the sale of securities. Defendants also contend that there is no implied cause of action pursuant to § 17(a) of the 1933 Securities Act. Additionally, defendants maintain that plaintiffs have failed to satisfy the "pattern of racketeering activity" requirement under plaintiffs' RICO claim. Finally, defendants argue that this court should not exercise pendent jurisdiction over the remaining state law claims. Each argument will be addressed seriatim.
1. Purchaser-Seller Requirement
Defendants contend that plaintiffs have failed to state a claim under section 10(b)
and Rule 10b-5 of the Securities Exchange Act of 1934
because they were not actual purchasers or sellers of securities within the meaning of the Act. As a result, defendants argue that plaintiffs have no standing. The court does not agree.
In Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 44 L. Ed. 2d 539, 95 S. Ct. 1917 (1975), the Supreme Court held that a private cause of action for money damages under section 10(b) can be maintained only by a purchaser or seller of the stock in question. Our Court of Appeals has held that the sale of all or part of a business effectuated by a transfer of stock is a sale of a security under the federal securities acts. Ruefenacht v. O'Halloran, 737 F.2d 320 (3d Cir. 1984) aff'd sub. nom. Gould v. Ruefenacht, 471 U.S. 701, 105 S. Ct. 2308, 85 L. Ed. 2d 708 (1985). Thus, the issue presented here is whether plaintiffs are purchasers or sellers of a security having executed a contract that is later terminated before consummation of the transfer.
Under the definitional section of the securities acts, "purchase" includes a contract to buy, and "sell" includes a contract to sell. 15 U.S.C. § 78c (a) (13) & (14). The Agreement, signed by the parties, provides a contractual right to purchase Alco stock and sell Metropolitan stock. While this contractual right is conditioned upon, inter alia, the "due diligence" review, it is sufficiently definite for plaintiffs to maintain that they are purchasers or sellers for the purposes of section 10(b). See Yoder v. Orthomolecular Nutrition Institute, Inc., 751 F.2d 555 (2d Cir. 1985) (contract for transfer of security may qualify as a sale under securities laws even if contract is never fully performed); See also Abrams v. Oppenheimer Government Securities, Inc., 737 F.2d 582 (7th Cir. 1984) (contract to purchase and sell constitutes purchase or sale of securities for purposes of securities laws).
Even if plaintiffs are purchasers or sellers, however, defendants contend that there is no causal connection between the purchase or sale of any security and the alleged fraud. According to defendants, plaintiffs have not alleged any fraud in connection with the sale of any security. Plaintiffs counter that a review of the complaint demonstrates that it is replete with allegations of fraud which satisfy the "in connection with" requirement.
Our Court of Appeals has stated that the "in connection" requirement must be read broadly, Angelastro v. Prudential-Bache Securities, Inc., 764 F.2d 939, 943 (3d Cir.), cert. denied, 474 U.S. 935, 106 S. Ct. 267, 88 L. Ed. 2d 274 (1985), although some causal connection must be established between the alleged fraud and the purchase or sale of stock. Defendants place great reliance upon Tully v. Mott Supermarkets, Inc., 540 F.2d 187, 194 (3d Cir. 1976).
In the instant case, however, the requisite causal connection is lacking. The fraud which plaintiffs have alleged lies not in the actual sale of stock to them, but rather in the refusal to sell . . . in accordance with the . . . Agreement. . . . The allegations are based, not on injuries suffered as a result of plaintiffs' actual stock purchase, but rather on injuries caused by [defendants'] refusal to sell to plaintiffs [and ...