ORDER
HEMPHILL, District Judge.
Defendants move to strike that portion of plaintiff’s complaint catalogued as Count Three on the grounds that the allegations thereof are immaterial and do not state sufficient facts to constitute a claim upon which relief can be granted against these defendants.
The background of the case is of import. Plaintiff owns and operates, in McBee, South Carolina a textile plant wherein raw yarn of various types is texturized to make it suitable for knitting into fabric for various uses such as ladies and men’s hosiery and men and women’s double knit garments. Basically, the texturizing process consists of twisting the yarn and setting the twist with heat.
The machines which textur
ize the yarn receive thread at separate positions from a large number of spools and each thread is individually heated, twisted, and wound onto another spool. The yarn is considered to be first quality if the thread from the individual spools can be knitted together in a fabric that has uniform bulk and uniform dyeability. In order to achieve this result, it is necessary that the conditions on the texturizing machine be within very close tolerances from thread to thread position. The control of the heat applied to the yarn on a position to position basis is important to the production of first quality uniformly texturized yarn. Allegedly, if there are significant heat variations between the different thread positions, the individual spools of thread when knitted together will not dye uniformly but will produce a streaked appearance referred to in the industry as barre, and have other defective possibilities.
The defendant Barmag Barmer Maschinenfabrik Aktiengesellschaft (hereinafter referred to as German Barmag) is engaged in the business of manufacturing machinery for texturizing yarn, and the machines are sold in this country through its subsidiary, the defendant American Barmag Corporation (hereinafter referred to as American Barmag.) During the year 1970, the plaintiff purchased twenty-six machines manufactured by the defendant German Barmag and sold by the defendant American Barmag. The present suit arises out of plaintiff’s claim that the Barmag machines were and are incapable of producing a first quality uniformly texturized yarn as represented.
The complaint contains several counts. The First Count alleges the circumstances leading up to the purchase of the machines and the various representations and guarantees that were made by the defendants with respect to the machines. Among other claims it is alleged that the defendants represented that the Barmag machines could control the critical process of uniformly heating the yarn at all thread positions during the texturizing process within a tolerance of plus or minus one-half degree Centigrade. The First Count seeks relief on the basis of breach of expressed and implied warranties.
The Third Count is based on fraud, common law and statutory. Count Three refers back to and incorporates the specific representations alleged in the First Count. It is then alleged that these various representations were false and known to the defendants to be false and were made for the purpose of inducing plaintiff to purchase the machines. The First Count as incorporated also alleged that the plaintiff relied upon the purported expertise of the defendants in purchasing the machines. These allegations in the Third Count make out a claim for common law fraud.
In addition to its right to recover on the basis of common law fraud, plaintiff also claims in Count Three the right to recover on the basis of a violation of certain sections of the Securities Act and Rule 10(b)(5) of the Securities and Exchange Commission. Thus, Count Three contains allegations for liability under several similar legal theories which for the sake of convenience are lumped together in one count.
Defendants’ motion did not detail the specifics of their attack on the Third Count, and, initially, it appeared that their position would be that fraud was not alleged. As will be seen from the allegations quoted (Note 2 supra) fraud is alleged.
The plaintiff alleges that numerous untrue representations were made to the plaintiff to induce it to purchase the machines, that the defendants knew the statements were untrue or made them with a reckless disregard as to their truth or falsity, that plaintiff relied upon the claimed expertise of the defendants with respect to said representations and that as a result of the falsity of the representations plaintiff has sustained damages in that the machines will not produce the product for which they were purchased. These allegations clearly state a claim for fraud. There have been numerous cases holding that a claim for fraud is stated where the plaintiff alleges a representation, its falsity, its materiality, the speaker’s knowledge of its falsity and his intent that it should be acted upon and the other party’s reliance upon the truth of the representation and his subsequent injury. E.g., Lawson v. Citizens & Southern National Bank of South Carolina, 255 S.C. 517, 180 S.E.2d 206 (1971)
; Gordon v. Fidelity and Casualty Company of New York, 238 S.C. 438, 120 S.E.2d 509 (1961)
; Warr v. Carolina Power & Light Company, 237 S.C. 121, 115 S.E.2d 799 (1960).
The main thrust of defendants’ motion is that the provisions of the Securities Act
and the Rules and
Regulations
of the Securities and Exchange Commission are inapplicable to a controversy of this nature and are insufficient to set forth a claim against defendants. Basically, defendants contend that the bills of exchange which plaintiff sent to German Barmag (representing the balance of the purchase price on the 26 machines) are not “securities” within the meaning of the Securities Act (15 U.S.C. § 77a et seq.).
Paragraphs 20 and 21 (supra), of the complaint, along with the other matters alleged in the Third Count, form the additional basis for a claim for fraud under the Securities Act. It is alleged that the defendants, as a part of the fraudulent scheme to induce plaintiff to purchase the machines, agreed to allow plaintiff to pay for part of the purchase price through the use of ten bills of exchange. Further, it is alleged that the defendants represented to plaintiff that for the convenience of the defendant German Barmag the bills of exchange should be payable in deutschemarks and that plaintiff would not be harmed by making payments in deutschemarks rather than United States currency and that at the time the defendants knew but failed to inform plaintiff that the deutsehemark would soon be substantially revalued, thereby increasing the cost of the payments to the plaintiff.
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ORDER
HEMPHILL, District Judge.
Defendants move to strike that portion of plaintiff’s complaint catalogued as Count Three on the grounds that the allegations thereof are immaterial and do not state sufficient facts to constitute a claim upon which relief can be granted against these defendants.
The background of the case is of import. Plaintiff owns and operates, in McBee, South Carolina a textile plant wherein raw yarn of various types is texturized to make it suitable for knitting into fabric for various uses such as ladies and men’s hosiery and men and women’s double knit garments. Basically, the texturizing process consists of twisting the yarn and setting the twist with heat.
The machines which textur
ize the yarn receive thread at separate positions from a large number of spools and each thread is individually heated, twisted, and wound onto another spool. The yarn is considered to be first quality if the thread from the individual spools can be knitted together in a fabric that has uniform bulk and uniform dyeability. In order to achieve this result, it is necessary that the conditions on the texturizing machine be within very close tolerances from thread to thread position. The control of the heat applied to the yarn on a position to position basis is important to the production of first quality uniformly texturized yarn. Allegedly, if there are significant heat variations between the different thread positions, the individual spools of thread when knitted together will not dye uniformly but will produce a streaked appearance referred to in the industry as barre, and have other defective possibilities.
The defendant Barmag Barmer Maschinenfabrik Aktiengesellschaft (hereinafter referred to as German Barmag) is engaged in the business of manufacturing machinery for texturizing yarn, and the machines are sold in this country through its subsidiary, the defendant American Barmag Corporation (hereinafter referred to as American Barmag.) During the year 1970, the plaintiff purchased twenty-six machines manufactured by the defendant German Barmag and sold by the defendant American Barmag. The present suit arises out of plaintiff’s claim that the Barmag machines were and are incapable of producing a first quality uniformly texturized yarn as represented.
The complaint contains several counts. The First Count alleges the circumstances leading up to the purchase of the machines and the various representations and guarantees that were made by the defendants with respect to the machines. Among other claims it is alleged that the defendants represented that the Barmag machines could control the critical process of uniformly heating the yarn at all thread positions during the texturizing process within a tolerance of plus or minus one-half degree Centigrade. The First Count seeks relief on the basis of breach of expressed and implied warranties.
The Third Count is based on fraud, common law and statutory. Count Three refers back to and incorporates the specific representations alleged in the First Count. It is then alleged that these various representations were false and known to the defendants to be false and were made for the purpose of inducing plaintiff to purchase the machines. The First Count as incorporated also alleged that the plaintiff relied upon the purported expertise of the defendants in purchasing the machines. These allegations in the Third Count make out a claim for common law fraud.
In addition to its right to recover on the basis of common law fraud, plaintiff also claims in Count Three the right to recover on the basis of a violation of certain sections of the Securities Act and Rule 10(b)(5) of the Securities and Exchange Commission. Thus, Count Three contains allegations for liability under several similar legal theories which for the sake of convenience are lumped together in one count.
Defendants’ motion did not detail the specifics of their attack on the Third Count, and, initially, it appeared that their position would be that fraud was not alleged. As will be seen from the allegations quoted (Note 2 supra) fraud is alleged.
The plaintiff alleges that numerous untrue representations were made to the plaintiff to induce it to purchase the machines, that the defendants knew the statements were untrue or made them with a reckless disregard as to their truth or falsity, that plaintiff relied upon the claimed expertise of the defendants with respect to said representations and that as a result of the falsity of the representations plaintiff has sustained damages in that the machines will not produce the product for which they were purchased. These allegations clearly state a claim for fraud. There have been numerous cases holding that a claim for fraud is stated where the plaintiff alleges a representation, its falsity, its materiality, the speaker’s knowledge of its falsity and his intent that it should be acted upon and the other party’s reliance upon the truth of the representation and his subsequent injury. E.g., Lawson v. Citizens & Southern National Bank of South Carolina, 255 S.C. 517, 180 S.E.2d 206 (1971)
; Gordon v. Fidelity and Casualty Company of New York, 238 S.C. 438, 120 S.E.2d 509 (1961)
; Warr v. Carolina Power & Light Company, 237 S.C. 121, 115 S.E.2d 799 (1960).
The main thrust of defendants’ motion is that the provisions of the Securities Act
and the Rules and
Regulations
of the Securities and Exchange Commission are inapplicable to a controversy of this nature and are insufficient to set forth a claim against defendants. Basically, defendants contend that the bills of exchange which plaintiff sent to German Barmag (representing the balance of the purchase price on the 26 machines) are not “securities” within the meaning of the Securities Act (15 U.S.C. § 77a et seq.).
Paragraphs 20 and 21 (supra), of the complaint, along with the other matters alleged in the Third Count, form the additional basis for a claim for fraud under the Securities Act. It is alleged that the defendants, as a part of the fraudulent scheme to induce plaintiff to purchase the machines, agreed to allow plaintiff to pay for part of the purchase price through the use of ten bills of exchange. Further, it is alleged that the defendants represented to plaintiff that for the convenience of the defendant German Barmag the bills of exchange should be payable in deutschemarks and that plaintiff would not be harmed by making payments in deutschemarks rather than United States currency and that at the time the defendants knew but failed to inform plaintiff that the deutsehemark would soon be substantially revalued, thereby increasing the cost of the payments to the plaintiff. It should be here noted that plaintiff’s claim under the Securities Act is not dependent upon the alleged representation with respect to the payments to be made in deutschemarks. The bills of exchange would have been given in any event, and it is plaintiff’s contention that the execution of the bills of exchange was induced by the many fraudulent representations made to induce the plaintiff to purchase the machines. The transfer and acceptance of the bills of exchange allegedly took place in interstate commerce through the United States mails and is the basis for jurisdiction under the relevant statutes of the Securities Act.
It is well established that a violation of the noted
statutes and rule gives rise to a private right of action and applies to private transactions between individuals or corporations. Superintendent of Insurance of State of New York v. Bankers Life & Casualty Company, 404 U.S. 6, 92 S.Ct. 165, 30 L.Ed.2d 128 (1971); Tcherepnin v. Knight, 389 U.S. 332, 88 S.Ct. 548, 19 L.Ed.2d 564 (1967); Llanos v. United States, 206 F.2d 852 (9th Cir. 1953); Whitlow & Associates, Ltd. v. Intermountain Brokers, Inc., 252 F.Supp. 943 (D.Haw.1966); Movielab, Inc. v. Berkey
Photo, Inc., 321 F.Supp. 806 (S.D.N.Y.1970). As indicated in the Superintendent of Insurance of State of New York case, supra, the statutes are to be read flexibly and broadly and are not to be construed as "limited to preserving the integrity of the securities markets.” If there is a “sale” of a “security” with fraud used in connection with the sale and a connection with interstate commerce through the mails or otherwise, the statutes apply.
This court finds the notes are sufficiently within the definition of a “security” and that the “sale” requirement is satisfied. Initially, it cannot be denied that the bills of exchange were “certain evidence of indebtedness.” Landay v. United States (CCA 6 1939) 108 F.2d 698, United States v. Monjar (CCA 3 1944), 147 F.2d 916, 920. The definition of security in the Act
is unequivocal and all-embracing (except as exempted by Section 77 c as applied here). Movielab, Inc. v. Berkey Photo, Inc. (S.D.N.Y.1970), 321 F.Supp. 806. The Act provides that “the term ‘security’ means any note .... or any certificate of interest or participation in . any of the foregoing.” Le-high Valley Trust Co. v. Central National Bank of Jacksonville (CCA 5 1969), 409 F.2d 989. Llanos v. United States (CCA 9 1953) 206 F.2d 852, cert. denied (1954) 346 U.S. 923, 74 S.Ct. 310, 98 L.Ed. 417. Congress did not intend for a strict construction of the term security. Llanos v. United States, supra, Whitlow & Associates, Ltd. v. Intermountain Brokers, Inc. (D.Haw.1966), 252 F.Supp. 943, S.E.C. v. Vaneo Inc. (D.N.J.1958), 166 F.Supp. 422, S.E.C. v. Addison (N.D.Tex.1961), 194 F.Supp. 709.
In addition to 15 U.S.C. § 77b(l), supra, 15 U.S.C. § 77q provides that the term security means “any note, . evidence of indebtedness, ... or, in general, any interest or instrument commonly known as a ‘security’ ”... and 15 U.S.C.A. Sec. 78e(a)(10)
, applicable to 15 U.S.C.A. Sec. 78j and Rule 10b-5, defines a security as “any note, . or in general, any instrument commonly known as a ‘security’ ”. The Supreme Court in Superintendent of Insurance of State of New York case, supra, and Tcherepnin v. Knight, supra, have indicated that these generic terms are to be given a very broad definition and that the ending phrase, i.e., any other instrument commonly known as a “security” is to be broadly defined and not to be limited by the previous terms outlined. A bill of exchange, of course, is merely a form of a note. Upon acceptance it is a promise to pay to the order of a certain person and it is negotiable. In fact, the defendants have entered ma
terial in the record showing that the bills of exchange have been negotiated to a third party.
Other decisions support a broad (coverage) definition of the word “security”, as defined or considered in the Securities Act. See In re Los Angeles Land and Investments, Ltd. (D.Haw.1968) 282 F.Supp. 448; United States v. Roselli (CCA 9, 1970), 432 F.2d 879; Rekant v. Desser (CCA 5, 1970) 425 F.2d 872, Lawrence v. Securities and Exchange Commission (CCA 1, 1968), 398 F.2d 276.
For the reasons stated above, this court adjudges that the bills of exchange constitute “securities” and their issuance and acceptance constituted a “sale”. The transfer of the bills of exchange through the United States mails satisfied the interstate commerce provisions of the statutes and the fraudulent representations and failure to reveal material information supplies the fraudulent elements. Clearly, plaintiff has alleged facts sufficient to constitute a claim under the Securities Act as well as a claim for common law fraud.
Defendants’ motion to strike is overruled and denied.
And it is so ordered.
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