Fed. Sec. L. Rep. P 95,494 Great Western Bank & Trust v. Sol Kotz
532 F.2d 1252
9th Cir.
1976
Check Treatment

*2 Before BARNES, ELY and WRIGHT, Circuit Judges.

PER CURIAM: This is another attempt to convert Sec- tion 10(b) of the Securities Exchange Act into a source general jurisdiction. federal Cf. Van Claxton, Arsdale v. 391 F.Supp. 538 (S.D.Cal.1975). Great Western Bank & (GWB) Trust failed to payment receive on an unsecured given by Artko Corpora- tion (Artko). GWB now seeks to recover some of its losses as against Kotz, arguing that he was a controlling person in Artko and hence is liable for alleged material mis- representations made in the course of the transaction. argues the note given by Artko is a security within the meaning of the 1933 and 1934 securities acts and seeks relief 17(a) under § Act, Securities 77q(a) U.S.C. (1970), § 10(b) § Act, Exchange 15 U.S.C. 78j(b) (1970) 10b-5, SEC Rule C.F.R. § 240.10b-5 court, The district in granting defend- dismiss, ant’s motion to held that the note of a corporation given to bank in exchange 10-month, for a renewable “line of credit” was not a “security” within the meaning of the federal securities laws. We affirm. I.

SUMMARY JUDGMENT The district court ruled: “The context of the present transaction requires this court to hold that the note in question is not a ‘security’ within the intent of the Security Acts.” It proceeded then to dismiss the cause “for jurisdiction.” lack of If the dis trict court ruled had on the basis of the federal complaint alone, its action should Brown, (argued), Vlassis & Paul Bonn properly more regarded be as a dismissal Ariz., plaintiff-appellant. Phoenix, for Bain, for failure to state claim. See Van Ars Streich, Lang, (argued), Claxton, dale v. Patton Jock 391 F.Supp. 538, (S.D. French, Phoenix, Ariz., Cal.1975); Weeks, Cardón Ingenito v. Bermec Corp., 376 F.Supp. 1154, defendant-appellee. 1179 (S.D.N.Y.1974). for Corp., 487 Chrysler Motors Stansifer to state failure However, dismissal (9th Cir. “if, any state improper claim would the com allegations Corp., 520 Equip. supporting v. Automated Radobenko facts claim.” 1975) (footnote a valid omit- stated have plaintiffs plaint, *3 41, 45-46, same in Gibson, is the standard ted). Our review Conley v. Cf. Id. Computer Marx v. litigation. See 2 L.Ed.2d 99, 101-102, (9th Cir. F.2d to Corp., is deemed ruling below Sciences Therefore, the if claim, a it state to for failure be a dismissal evidence, erroneous. together is following view the We therefrom, ain reasonable inferences with district the regard to choose We GWB, the non-mov- to favorable light most summary of grant the as action court’s banking corpora- is a Appellant GWB ant. ad Rather than defendant. judgment for to do busi- authorized and tion established com the federal basis of on the judicating of 1971 April law. In ness under Arizona considered alone, below the court plaint Kotz president then through its Artko the bearing on evidentiary material much $1,500,000 from of a line of credit obtained a issued was the note whether question transaction of the In the course GWB. documents: three It considered “security.” unsecured delivered an executed and Artko Agree Note,” the “Loan the “Demand amount. the bank in that note to promissory and Exten ment,” the “Modification and con- and relied sought, obtained GWB two considered It also Agreement.” sion by Artko prepared data financial siderable C. plaintiff. See submitted affidavits credit. The line of extending the before Miller, Practice Federal & A. Wright larg- part was of a transaction GWB-Artko at 558-59 Procedure to financ- of Kotz obtain part on the plan er GWB, unsecured cred- doc- as an complaint, the Artko. ing for considered the Having original affidavits, time issuance district itor uments, and earnings future note, upon the a relied was not “securi- Artko the note court held principal to recover plaintiff worth Artko holding precluded and net ty.” Since question on the and interest. full obtaining a trial from “security,” view we note was whether the instrument, a “demand while labeled The being equiva- court’s decision the lower maturity of 10 note,” actually had in judgment favor summary to a lent agreement months, mutual renewable Kotz. defendant “subject to” was It one-year periods. “loan accompanying by” grant “governed or denial and reviewing the The non-negotiable. motion, and was apply agreement,” we summary judgment “Viof 1% rate at the by the note bore “interest” initially employed that is same test quoted rate of interest then prime over the 56(c), Federal under Rule trial court by the Chase City, New York in York l. v. New et a Soria Procedure. Civil Rules of successor).” Such (or Bank its Manhattan of Trus Board District School Oxnard the first monthly on payable interest was 1973); (9th Cir. tees, F.2d approved The note each was day of month. Corp., v. Bissett-Berman States United Loan Committee.” by GWB’s “Directors 1973). Apply (9th 764, 767 Cir. judgment is test, “[sjummary ing stringent placed agreement” “loan The genuine no where there only The bank’s ‘proper borrower. upon limitations for, where view “for, only fact any material money was to be used and issue which inferences not for ‘working capital’ and ing the evidence borrower’s light terms are as those ‘capital expenditures’ therefrom may be drawn ac- with party, to adverse accordance defined favorable most borrow- accounting principles.” as a prevail cepted to clearly entitled movant ” minimum Roberts, required maintain a 506 er was Caplan law.’ matter of balance with checking account 1974), quoting (9th $300,000during period borrowing management Artko’s skills. Under provide periodic bank with court, and was recent asking decisions of this wheth statements. financial er provided GWB has “risk capital” subject to the management skill of Artko is the borrow- inspect The bank was allowed same as asking whether GWB has made an upon er’s and records “reasonable property “investment” in return for Artko’s “securi required request.” borrower ty.” El Khadem v. Equity Securities working capital” “consolidated maintain Corp., Cir.), cert. $4,000,000, posi- a net current least 900, 95 denied 42 L.Ed.2d $500,000. (Under the tion at least loan S. E. v.C. Glenn W. Turner $4,000,000 figure excluded Inc., Enterprises, GWB.) amounts borrowed from 1973). In respect, this the issue raised is no engage The borrower could future *4 ultimately one of law. borrowing” “unsecured without the consent However, it is clear us that in appro organic and could effect no bank priate a properly circumstances instructed major with changes transactions its jury can determine whether as a matter of stockholders, exceptions. with certain Nu- disputed fact a instrument is isor not a merous acts of “default” were defined in “security.” S. E. Leasing C. v. Joiner Corp., agreement. the loan 344, 351, 320 355, 64 120, 123, 125, U.S. S.Ct. Following the disclosure of some adverse 88, 93, 88 L.Ed. 95 Tarvestad v. information, renegotiated GWB financial States, United 1048 to secure itself with Artko’s other personal property and assets. Addi- The district essentially determined, court stringent placed tional limitations were also after viewing all of facts, the other relevant dealings. on the business Artko sub- firm’s jury question that no presented with Chapter sequently bankruptcy entered a X respect to the nature of Artko note. It proceeding. is this which determination we review. above we In the recitation of facts have in favor resolved numerous factual issues of II. However, argues GWB. dis- court, motion, granting trict defendant’s INTERPRETATION OF THE remaining several overlooked issues ma- SECURITIES LAWS First, $1,500,000paid terial “was the fact. 77b(l) (1933Act) Title 15 U.S.C. defines § general financing for the Artko Art- security . including “any as note. . . genuine ko’s business?” There is no issue only exempting those which “out arise here, agree- the terms of the loan since current proceeds transaction ment, proceeds were to used for be which have been or are to used capital,” “capital expendi- not “working transactions, current and which [have] tures.” maturity time issuance of not Second, proceeds were the “[h]ow exceeding nine months . . . 15 fact Artko? This issue immateri used 77c(a)(3). U.S.C. § appeal, al to this since the nature of an The Exchange similarly Act defines se- instrument is to be determined at time curity “any note . . . but shall not issuance, subsequent not at some time. include . . . Co., C. v. Benefit Life Ins. Cf. S. E. United which has maturity the time of is- 202, 211, 1557, 1562, 87 S.Ct. U.S. exceeding suance of not nine months (1967), quoting L.Ed.2d S. E. C. v. . 78c(a)(10). . . 15 U.S.C. These § 344, 352-53, Leasing Corp., Joiner definitions of have security been held to be 120, 124, 88 L.Ed. 93-94 S.Ct. virtually identical, Tcherepnin Knight, v. Third, GWB asks whether and to U.S. L.Ed.2d 564 what extent its risk loss varied with 2060, 44 at 632. The L.Ed.2d Court rea- interpreting the acts soned: courts should

we are reminded an in conformi- the details of act construe Because securities transactions eco- dominating general purpose Congress its ty with nomic in character intended the light of context . read text in application these statutes to turn on so far interpret . the text and . . underlying economic realities a trans- fairly per- meaning of words as the action, appended name not carry particular out in cases so as mits thereto. policy. expressed legislative 95 S.Ct. L.Ed.2d U.S. Leasing Corp., 320 E. M. Joiner C. v. C. S. at 630. 344, 350-351, U.S. of appeals The courts have followed this Supreme (1943). As the L.Ed. 92-93 approach holding “economic realities” “ thing may be recently, noted Court ‘[A] not statutory these definitions should yet the statute and the letter of within be taken and that not all “notes” literally statute, its not within within the because are securities: its the intention of mak- spirit, nor within follow, however, It does not that every v. United Holy Trinity ers.’ Church transaction within interlocutory 511, 512, States, promissory clause of which involves Housing (1892).” United 36 L.Ed. 226 ... *5 protection investors, The Act is for 2059, 621, (1975). 2051, 630 44 L.Ed.2d S.Ct. provisions according- and its must read Congressional purpose underlying The ly- recently inter- has been the securities laws Bogue v. Electric Manufacturing Zeller preted by Court: 795, (2d Cir.), Corp., 476 F.2d 800 cert. de of the Securities primary purpose 908, 217, nied 414 U.S. 94 S.Ct. 38 L.Ed.2d to eliminate 1933 1934 was Acts of Enterprises, 146 See also C. N. S. unregulated largely abuses in a serious Enterprises, Inc., Inc. v. G & G 508 F.2d of the Acts market. The focus securities Cir.), (7th 825, ] 1354 cert. denied 423 U.S. 96 market[1 capital of the enter is on 38, 40, S.Ct. 46 L.Ed.2d 44 U.S.L.W. 3201 to sale of securities prise system: (Oct. 6, 1975); McClure v. First National purposes, profit-making capital raise Lubbock, (5th Bank of 497 490 F.2d Cir. exchanges on which securities 930, 1974), cert. 420 95 denied U.S. regulation to traded, need for and the 1132, v. City 43 L.Ed.2d 402 Lino the interest protect to prevent fraud and Co., Investing (3rd 1973). 487 F.2d 689 Cir. of investors. 849, 95 at at Forman, U.S. supra, 421 III. at 630. L.Ed.2d RISK AND ANALYSIS THE COMMER- that “stock” held in Forman Court CIAL-INVESTMENT DICHOTOMY housing cooperative purchasers issued To determine were whether the purchasers its transac since security, was not tion under a common review involves an obtaining “investment “investment” an not expecta- return for “securities” within a reasonable mean premised venture ing laws, the entre- from analyze to be derived we profits tion of of others” degree efforts nature and managerial of risk preneurial accompanying the by a desire “motivated party were transaction providing but rather purchased use or consume item El funds. See Khadem v. Equity Securities 852-53, . . . .” 421 at 95 S.Ct. at Corp., (9th U.S. 494 F.2d Cir.), cert. denied by “capital 1. The market” referred to the Court 91 S.Ct. equity (1971), quoted L.Ed.2d debt includes as well instruments. infra note 2 of Company Camp, concurring v. opinion. Investment Institute 42 L.Ed.2d 146 trade in securities. See 12 24; U.S.C. § (1974). The is inquiry whether funding Ariz.Rev.Stat. (1974 6-322 § Supp.). Thus party capital.” invested “risk Id. at 1229.2 we must determine whether in the instant case the promissory note held GWB was inquiry This “risk” is not a simple one. in economic reality a “security,” received in As the Circuit recently recognized: Seventh exchange for the bank’s “investment.” every one sense lender of money is an Our places investor he ultimate money inquiry since his at risk is whether GWB has in anticipation profit contributed “risk capital” the form of subject to the “entrepreneurial interest. Also in a broad every managerial sense efforts” of Artko. Forman, money investor lends his to a borrower U.S. at 95 S.Ct. at uses it price who for a L.Ed.2d is expected to 632. Khadem, El F.2d at return it 1229. day. one See also Parvin v. Davis Oil Co., 112, 116 1975). Cir. Scru S., supra, C. N. F.2d tiny of a number of factors aids us in In the context this case we must dis- properly framing the ultimate question. tinguish between the “risky loan” and “risk See generally S., C. N. 508 F.2d at 1361. capital.” Comm’r, Motel Co. v. (2d This distinction has The most important factor is time. been framed of appeals courts as the Cf. Nye Comm’r, 50 T.C. 212 & n. 9 “commercial-investment dichotomy.” C. N. (1968). While courts now consider the Ex S., 1361; 508 F.2d at Lewis, Zabriskie v. 507 change Act’s nine-month exemption [15 1974); F.2d McClure, 78c(a) U.S.C. (10)] as nondispositive of the 495; Lino, 694-95; 487 F.2d at issue,3 commercial-investment it is true that Zeller, 476 800. See also SEC Re- the longer one’s funds are to be used by 33-4412, lease No. Fed.Reg. another, greater the risk of loss. enough It ipse conclude dixit: A demand or short-term note is almost “A bank’s commercial business is lending ipso facto not a security unless payment *6 money trading not McClure, securities.” dependent upon the of success a risky en- fact, at 495. F.2d In may banks and do terprise, or parties the contemplate indefi- 2. judgment The Forman Court reserved on the the voiding decisions the exemp- short-term appropriateness approach, finding of this it un- tion paper, as to virtually investment writes necessary engage capital” analysis to in “risk exemption out of the law. On the one dispose particular to of the case before it. 421 hand, the Act notes, all covers investment no 24, 2063, U.S. at 857 n. 95 S.Ct. at 44 L.Ed.2d at matter how maturity, short their because However, Supreme 635. the Court has used they encompassed are not ‘any the note’ analysis past risk appropriate in the where to language exemption. of the On the other resolution of the issue confronted. See SEC v. hand, the Act any does not cover commercial Co., United Benefit Life Ins. 387 U.S. 210- notes, no long maturity, matter how their 1557, 1562, 87 S.Ct. 18 L.Ed.2d they ‘any because fall outside the defi- note’ Annuity SEC v. Variable Life Ins. Co. security. Thus, nition the investment or (VALIC), 65, 71-72, of America 359 U.S. entirely commercial nature of a note controls 618, 622, (1959). 3 L.Ed.2d See applicability Act, the depriving of the of all generally Thomas, Importance Hannan & The utility exemption the maturity- based on Reality of Economic Defining and Risk in Fed- length. original scrivener of the defini- Securities, eral (1974). 25 Hast.L.J. 226-28 may tional section hap- well wonder what Life, While United Benefit VALIC and El pened carefully to his exemption drawn contracts,” Khadem each involved “investment way courthouse, the to the judicial but if the Supreme questioned the Court has now the properly decisions do not reflect the intent of necessity distinguishing between the “invest- Congress coverage Act, to the only of the commonly ment contract” and an “instrument body properly rectify can ” the situation ‘security.’ Forman, known as a 421 U.S. at point, at this if stare apply decisis is to and at 44 L.Ed.2d at 629. Supreme the Court does not make some de- Judge Roney: In the words of contrary finitive decision presently to the de- holding today “We realize that our cided that the cases.” apply Act does not to commercial Bank, notes of a McClure v. First National 497 F.2d longer months, duration than (5th nine taken with 494-95 ingredient of enter essential stituting an con perhaps note of the nite extension pot (“participation prise formation Zeller, F.2d See, g., e. to stock. version Camp Wolters En enterprise,” luck demand prevent note could (maker of at Comm’r, F.2d terprises, Inc. general *7 amount, the 1361; relative larger the the a check- GWB to maintain required Artko risk, of stake, the therefore and the greater $300,000. least balance of ing account lender. the is tantamount readily attachable asset This Moreover, loan the security. partial contem- is factor the important Another to declare GWB default allowed agreement con- Proceeds proceeds. use plated always process. No. 33- “inves But SEC Release An see so. fication 4412, this is not 4. Of course collateralized, example, may with Fed.Reg. for is tor” who de be as of borrower stock the common impetus. the When Second transaction is management the bor upon skill of pendent purchase, a loan to finance for a consumer asks Plumb, lender. Cf. as is an unsecured rower clearly “security.” given But not a is the note Corpo Significance of Tax Income The Federal surplus may private funds party have a also Proposal, Analysis a and A Critical Debt: rate 26 Tax investment, may a fi- and initiate which need 369, 571-72 L.Rev. resulting acquisition in the nancial transaction commonly factors funds corporate for the mentioned in return two are of provided. 5. There significance. impetus First Analysis of we deem little transaction which cash, like a negotiability. drawing it makes note helpful While particularly thus not security, stocks presumably like a S., less N. But see C. line. commercial-investment Therefore, negotiable. generally bonds 508 F.2d help classi- negotiability does not fact of sign any tbe renegotiate By loan at faintest one time. these requirements GWB insecurity.6 limiting succeeded in the risk assumed. form, We incorporated note” now consider all factors, In the “demand of the above together agreement,” which with their facts, the “loan by underlying reference in the context of the consistently parties to the as “bor- entire referred GWB-Artko transac- tion to determine The transaction was whether GWB rower” and “lender.” has con- “risk capital” subject tributed to the being of the “line of credit” “entre- referred as preneurial managerial efforts” of variety. variously re- Artko. Plaintiff’s affiants credit,” loan and line of ferred “the Turner, As we said in F.2d at an decisions,” lending the “loan “plaintiff’s instrument is a security if antici transaction,” agreement.” and the “loan pated return on provided the funds depends largely upon “the undeniably significant only GWB was the lender involved essential managerial efforts” of risk inter transaction. Its was not this those other than parties. the funding In Accepting with that of others. as woven the instant case the district court cor was its GWB’s assertion that loan but true rect as a matter law in holding that sought scarcely many sup Artko one dependent. was not so ports making the conclusionthat Artko was GWB restricted Artko’s use of pro- equivalent “public offering” result required ceeds. It Artko to maintain a risk-pooling. in investor An individual ing certain minimum working cap- consolidated may as often solicit business such Artko ital position. and current It restricted Art- from financial institutions funds numerous ko’s future borrowing. unsecured Artko where, here, at the same time. Yet organic could change not effect without individually negoti disputed transaction is GWB’s consent. Artko’s records and prop- contracting to suit needs of both ated erty subject were inspection GWB’s upon seriously argued it cannot be parties, request. reasonable Should Artko amiss pooled with the lender has its “investment” payment, GWB was entitled to immediate Indeed, the ne those other institutions. acceleration. agreement specifically prohib gotiated loan assuming short, “current Artko from very ited GWB left little to chance. apart borrowing” from loans Artko do unsecured could little without answering to GWB and one named commercial from bank. Under these circumstances no person bank. reasonable could find that the return of GWB’sfunds depended largely upon requiring The effect of Artko to maintain managerial Artko, “essential efforts” of capital” working a “consolidated least within meaning of our holding in Turn- $4,000,000,together requirement with the er. $1,500,000 only that GWB’s used for “working capital,” “capital and not for ex- some While “risk” was created penditures,” lending meant the full line of money, only it amounted to that ex- normally credit could not under risk associated the lending with working capital at money period ceed 37.5% of Artko’s of time.7 There was no *8 enforceability was 6. of this clause made enterprise.”’ or failure success of the Id. when, years after clear some two and one-half at-(slip 5). Thus, op. uncertainty original agreement, loan consummation question impossible the “control” made it to renegotiate did to secure conclude a matter of law that return on with certain Artko assets. itself depend largely upon investment did not entrepreneurial managerial parties or efforts compel court 7. Earlier decisions this do not a case, other than the investor. In the instant Wiens, contrary 533 F.2d v. result. In Hector beyond the record demonstrates doubt 23, 1976), (9th we determined 429 Cir. Feb. depend largely summary judgment return of GWB’s funds did not for defendant im- “genuine proper upon entrepreneurial managerial because the existence of a efforts to issue of material fact as who had control of management. of Artko managerial ‘those essential efforts affect which 1260 banks in commercial loan transactions are relationship between dependent substantial City not securities. National Bank v. Van enterprise efforts. and Artko’s risk GWB’s 592, derboom, (W.D.Ark. F.Supp. 290 608 to elected not if, appears, GWB as it Even (8th Cir.), 1968), aff’d 422 F.2d 221 cert. agree- loan terms of the

timely enforce denied 399 U.S. 90 26 .S.Ct. “throwing good found itself and then ment Enterprises, N. L.Ed.2d 560 C. S. bad,” subsequent conduct such money after Bank, supra; Bellah v. First National 495 affect the nature retroactively cannot (5th 1974); McClure, supra; F.2d 1109 Cir. by received GWB. first the instrument Koenig, F.Supp. v. 388 670 United States (S.D.N.Y.1974); Avenue Bank v. State IV. Tourtelot, F.Supp. (N.D.Ill.E.D. 250 379 1974). CONCLUSION McClure, As the trial court noted in light in a most

Viewing all the evidence reality lending of commercial bank is “to GWB, we conclude that to favorable tally involving unrelated to the abuses no given by Artko bears note promissory investment,’ ‘trading speculation for the “securities” to economic resemblance Congress sought which abuses in 1934 and 1934 acts. Counsel by the 1933 defined Joiner, [citing supra, eliminate.” any disputed not identified GWB has 88 L.Ed. at which, 93]. in its fa- if resolved facts material F.Supp. (N.D.Tex.1973), aff’d 497 contrary conclusion. vor, support a would (5th 1974), F.2d 490 cert. Cir. denied 420 perceive any. do we Nor U.S. L.Ed.2d in the course given to a bank A note (1975). Compare Company Investment In financing transaction is not of a commercial v. Camp, stitute meaning of security within the generally a (1971), 28 L.Ed.2d 367 infra. expand To securities acts. the federal Congress There is no indication that ordinary acts to commercial of those reach sought financing to include commercial congression would distort loan transactions protection within the securities acts. interpret it. purpose as we al might Professor Loss comments that “[I]t prevail as a clearly entitled Kotz argued Congress would have been The decision of the district of law. matter explicit more it had provide if intended to is affirmed. court remedy federal civil in the context Loss, ordinary promissory note.” 1 Securi- WRIGHT, Judge A. Circuit EUGENE Regulation ties also Lino v. (concurring): Co., City Investing (3d 487 F.2d But, opinion. per 1973); Bank, in the curiam I concur Cir. Bellah First National it, I not discussed in reason for another “security” holder. is not a that GWB

believe designed the securities acts are While “investors,” protect given the courts have commercial loans exception,1 one With given by borrowers to banks are not “investments” that notes ruled pyramid Safeway Employees’ sales scheme were found to be Portland Federal In holders, security they Co., Inc., since invested their funds Wagner Union v. C. H. Credit dependent in a common scheme for success 1974), funding directly upon the collective sales efforts of the expect profit party as the result of led to “was organization. completing certain an- efforts” [borrower’s] ticipated transactions. Young Corp., F.Supp. v. Seaboard Khadem, the lender’s El (D.Utah 1973), given held that notes for bank year year, depending of loss varied from risk reasoning loans were securities. conducted “the skill with which [borrower] properly court is far from clear and criticized managed lend- ventures and [the its business the Fifth in Bellah v. Circuit First National *9 Bank, 1109, 1974), for er’s 1115 funds].” Inc., Enterprises, failing recognize W. Turner the distinction between In SEC v. Glenn 1973), participants commercial and investment transactions. 482

1261 engaged and banks in transactions such as between banks’ lending and investing func- this are not within meaning “investors” tions: of these acts. It should be that Con- noted A savings bank may invest its capital and

gress explicitly distinguished has the invest- deposits and the income derived there- ing from the lending activities of national from: banks, 12 U.S.C. 24 and §§ state

banks which are members of the Federal In other bonds, listed notes, and deben- Reserve, 12 335. U.S.C. also § 12 tures which have a standard rating above the first four grades if the investment is (1974). C.F.R. 7.1180 § The investment transactions of such approved in writing by at least two-thirds banks strictly to a limited set defined of the directors of the bank and the su- “investment securities” whose parameters perintendent of banks. would not given include a in a com A.R.S. (1974 6-322 § Supp.) (Emphasis lending transaction, mercial 12 U.S.C. 24. § added.) Comptroller The the Currency defines Such restrictions reinforce the distinction “investment as security” “a marketable ob between the commercial lending and invest ligation in the bond, note, form of a ment functions Sanders, banks. See su debenture which is commonly regarded as pra, 1080; 463 S., F.2d at C. N. supra, 508 an investment security.” 12 1.3(b) C.F.R. § 1362; Bellah, supra, 495 F.2d at (1974). (Emphasis added.)2 1113. Zabriskie, Cf. supra, 507 F.2d at 551 The question note in here certainly can- (individual investor distinguished from not be held to abe obligation “marketable bank which is in business of making loans). . commonly regarded as an invest- The distinction by made Congress be- ment security.” dichotomy in the tween commercial lending transactions and banking regulations between lending and those involving investment securities is a investing functions belies suggestion reasonable one. While banks are subjected that such notes are “investment securities.” to risks of misinformation, their ability to regulations governing sav- Arizona verify representations and take supervisory ings pose banks an even stricter dichotomy and places corrective actions them in sig- a Compare 2. (1974 Supp.). A.R.S. Supreme § 44-3002 Company Court. Investment Insti- Camp, tute v. complex 91 challenging a statutory action authority expressly L.Ed.2d Comptroller While not Currency ad- . dressing by the issue engage resolved allow banks to in the district investment bank- court, business, Supreme ing Court did comment: district court of the District of nothing phrasing “[T]here Columbia was Comptrol- confronted with of either argument “securities,” § 16 [12 ler’s U.S.C. § 24] § [12 U.S.C. as used in 12 378(a)] suggests reading § meaning § U.S.C. has a narrow different than “se- the word contrary, curities” used in ‘securities.’ the Securities To the Act of 77b(l). Rejecting implicit contention, U.S.C. breadth § term is this the fact that statutory language court stated: the antecedent encom- passes only equity “It would be inconsistent conclude securities but also Congress did equiva- representing not intend to obtain the debt.” meaning lent term 401 U.S. at ‘securities’ as used 28 L.Ed.2d at (This in the Securities parallels Act it when used broad definition those Glass-Steagall 77b(l) same term in the 78c(a)(10).) § Act U.S.C. and § [12 by Having determination, U.S.C. 24] which enacted this same made the Invest- Congress.” Company ment Institute then Court stated that Company Camp, Congress Investment Institute v. had intended to “divorce” commer- “ F.Supp. (D.D.C.1967) (footnote 642-43 banking ‘buying cial selling from securi- omitted). acquired purely ties specula- for investment or ” The decision of purposes.’ the district court was re- tive U.S. 91 S.Ct. at Appeals, versed the Court of National Ass’n quoting Hearings L.Ed.2d at Pur- Exchange Securities Dealers Securities & suant to S.Res. 71 before Subcommittee Comm’n, U.S.App.D.C. Banking the Senate Committee and Curren- (1969), subsequently but was cy, Cong., Sess., affirmed 71st 3d *10 nificantly posture different than the inves- sought protected through

tors to be

securities acts. situation,

In an investment the issuer has

superior access to and control of informa-

tion material to the investment decision. relying solely semi-anony-

Rather than information,

mous and secondhand market investors,

as do most the commercial bank promissor.

deals “face-to-face” with the superior bargaining position

The bank has a can compel wide-ranging disclosures

and verification of issues material to its

decision on the loan application. The bank

here obtained a permit covenant to it to

inspect property Artko’s and records “at

such times may reason- [Great Western]

ably request.” purchasing Far from an in-

strument whose prior terms were fixed offering,

the time of its negotiat- the bank

ed terms of the note in question. When

it change discovered a in Artko’s financial

status, it was negotiate able to new terms dealings. restrictions on Artko’s America, Appellee,

UNITED STATES of BUNKER, Appellant.

Richard D.

No. 75-3401.

United Appeals, States Court of

Ninth Circuit.

March notes within Rule 10b-5. 837, 849, Forman, Foundation U.S.

Notes

notes long-term holder). While generally securities. 1956)), are (5th Cir. not “securities,” they may like more ly look hand, to maintain those used theOn other are callable example, they if, be are not. position generally current financial Comm’r, Bazley v. obligee. Cf. ofwill McClure, also SEC v. 497 F.2d at 494. See 1489, 1491-92, 742-43, 67 S.Ct. 497 F.2d Corp., Commodities Continental 1782, 1787-88 91 L.Ed. 1974). Generally 525-27 collateraliza extent of and The existence generate operations current spent on funds consideration. important is another tion capital funds used for return than do faster n. 14. Khadem, El expenditure.5 more de lender The unsecured application hold that We do not managerial skills upon pendent to compels us factor discussed above single who can party is a secured than' borrower the district court. judgment affirm inability case of collateral look in a different case we Nor do intimate repay.4 con be factors to not other there would be must also obligation The form S., 508 F.2d supra, N. sider. See C. the form controlling, While not considered. we have discussed 14. The factors & n. the circum- explain help may utilized facts, material to undisputed relate to the obligation. of issuance stances viewed in disputed facts those gether with partic are issuance GWB, which are The circumstances favorable to light most obligations important. Whether before us. ularly in the record present large or to a single party to a issued were together all factors When the nature light on investors sheds class of bear, clear that it is Artko’s brought 493; McClure, financing. dignity rise to the note does not promissory Co., Inc., 463 Nuveen v. John Sanders could “security.” 10-month Cir.), denied cert. 1075, 1079-80 GWB. absent consent of renewed 34 L.Ed.2d the 10-month event of default within pay accelerated period, GWB could demand relationship be- interest. important principal Also of both ment the size of amount borrowed tween the se- note was not initial Artko While the S., business, C. N. borrower’s loan cured, accompanying