*1 INC., INDUSTRIES, am Illinois EMISCO Grossman, Inc.,
Corporation, I. L. Corporation, Plaintiffs-Appel
Illinois
lants, al., Defendants-Appellees. et INC.
PRO’S 75-1799.
No. Appeals, Court of Circuit.
Seventh
Argued 9, 1976. Feb. Oct. Berwanger,
John Chicago, 111., plaintiffs-appellants. Mancini, Roy Palmer,
Dominic J. C. Chi- 111., cago, for defendants-appellees. CASTLE, Before Judge, Senior Circuit and SWYGERT and Circuit Judges.
SWYGERT,
Judge.
Industries,
Inc. and I. L. Gross-
from the district court’s
complaint brought
dismissal of their
under
27 of the
Securities
78aa,
15 U.S.C.
an alleged
§
10(b)
act,
violation of section
10b-5,
78j,
and Rule
§
C.F.R.
240.10b5, promulgated
thereunder. The
*2
39
note,”
interpretation
involves an
of the fed-
not
appeal
all notes are securities within the
laws in
whether meaning
securities
the act.
eral
of
jurisdiction
subject
exists
matter
Our views have been
by
buttressed
complaint.
entertain
recent opinion
more
of
Supreme
Court
February
1973 Grossman
in United Housing
Inc. v. For
of the Parade Division of defend-
consideration,
Inc.1
(1975).
ant-appellee
There alleged misrepresenta-
$36,000
cash, gave
a
paid
five-
tions occurred in apartment
leasing ar-
$114,000,
note for
promissory
rangements
as-
year
housing
massive
coopera-
Parade’s liabilities. Emis-
certain of
sumed
tive. The fact
that
the evidence of the
co,
parent corporation, guaran-
advance
necessary
sum
to entitle
prospec-
teed the note. Grossman and Emisco assert
tive tenant
to a lease was called “stock”
misrepresentations
material
were
that
Supreme
held
Court to be insuf-
by the defendants in the transaction.2
bring
ficient to
the transaction within the
dismiss,
defendants’ motion to
On
dis-
purview of the Securities Exchange Act of
subject
trict court found that it lacked
mat-
1934. Because the
question
“stock” in
did
jurisdiction
ter
because the transaction did
possess
not
characteristics generally associ-
security
involve a
within the
not
ated with investments
stock,
in the form of
3(a)(10)
of the Securities Ex-
of
right
such as the
to receive dividends which
78c(a)(10).3
of
change Act
U.S.C.
would indicate their investment
held that
Court
federal securities laws
issue in this
is whether the
could not be invoked.
Grossman,
given by
partial
consider-
Parade,
ation for
of the assets of
recognized
Foundation
security
within the definition of the
act.
that
distinction must be made between an
recently expressed some views on this
We
transaction on the one hand and
question
G & a commercial or consumer transaction on
Inc.,
G
the other when construing the term “securi-
1975), cert.
ty.” The
say that,
Court went on to
After considering
focus of the
Acts is
capi-
on the
[Securities]
the definitional section of the 1934
that
tal market of the enterprise system:
begins
phrase,
with the
“unless the context
sale of
capital
securities
raise
profit-
requires,” we
making
otherwise
indicated
purposes,
exchanges
light
of the statute must be read in
traded,
text
of
securities are
and the need
regu-
“context,”
is, the surrounding
factual
lation
although
circumstances. We
held
interest
investors.” The Court also said
defining
“any
statute
includes
the basic test for a
security, found in
parent
agreement
and its
oil,
1. Both Grossman
Emisco have
any
gas,
or in
or other mineral
principal places
their
brook,
of business in North-
lease,
royalty
any
or
collateral-trust certifi-
principal
Illinois. Pro’s Inc. has its
cate, preorganization
subscrip-
certificate or
Chicago,
place of business in
Illinois. The
tion,
share,
contract,
transferable
main business Pro’s
Division was the
voting-trust certificate,
deposit,
certificate of
breading
prod-
chicken
sale of fried
and related
security,
general, any
or in
instrument
ucts.
commonly
“security”;
any
known as a
or
in,
participation
certificate of interest or
tem-
2. Besides Pro’s
the named defendants are
porary
for, receipt for,
or interim certificate
Mize,
Parade,
general manager
Harold C.
right
or warrant or
to subscribe to or
Tivener,
Parade,
purchasing agent for
Willaim
and William P.
chase, any
foregoing;
but shall not
Nicholas,
owner of Frozen Food
currency
note,
any
draft,
include
or
bill of
Products.
exchange,
acceptance
or banker’s
which has
maturity at
78c(a)(10)
a
exceeding
the time of issuance of not
reads:
months,
days
nine
exclusive of
“security”
any
stock,
means
The term
grace,
maturity
or
bond,
renewal thereof the
treasury stock,
debenture,
certificate of
participation
any profit-sharing
which is likewise limited.
or
interest
case
purchaser
of certain
Howey
franchise
con-
v. W.
SEC
(1946), is:
tracts
with
1100, 1104,
paid
90 L.Ed.
cash and promissory notes.
invest
involves an
The Third Circuit found that the
the scheme
notes were
“whether
enterprise
purchased by
speculation
in a common
the seller for
money
ment of
investment;
rather,
from the efforts
solely
come
simply
a transac
others,”
in contrast to
paying
purchase price.
which is
the means of
to use
is motivated
purchaser
“a
The court concluded
where
that because the trans-
*3
purchased.”
the item
action was of a
or consume
commercial
the
did not
security.
notes
constitute a
Accord-
in
whether the stock
In
Foundation,
ing
Housing
to United
“securi
was a
Housing Foundation
security]
presence
is the
touchstone
[of
the characteristics
examined
the Court
ty,”
investment
common venture
and the nature
of the instruments
premised
expectation
on
reasonable
guided by the
It was
the transaction.
to be derived
entrepreneu-
from the
profits
Knight,
Tcherpnin
holding in
managerial
rial
efforts
others.”
548, 19
(1967), that
the case at bar there was no
reliance
for substance
disregarded
should be
“form
plaintiffs
Pro’s on the efforts of
produce
to
on economic
should be
emphasis
and
expected
It
profits.
Grossman to
off
pay
Housing Founda
the United
reality.” As
five-year term, and,
its
the note over
if it
Enter
decision in G.N.S.
own
and our
tion
failed,
Emisco,
expected
guarantor,
to
demonstrate,
key
interpreta
to
prises
pay it off. This was the
expecta-
natural
found in the commer
“security” is
tion
(as
any loan),
plain-
whether or not
dichotomy. Al
cial/consumer-investment
tiffs achieved
on any of their busi-
agree that
this is
though
parties
both
nesses.
applied,
disagree
in its
test to be
proper
facts of this case.
to the
application
appear
Plaintiffs
argue
to
in their
they,
Pro’s,
brief
rather than
are the
took the
argument Grossman
In oral
investors, having invested in the assets of
Pro’s was an investor
position that
they purchased
part
Parade which
in
for Parade’s
given
exchange
in
assets.
note
their note. There are decisions which hold
however, shows other
reality,
Economic
if an investment
transaction is in
economically the
analyzed
When
wise.
volved,
the Securities
Act of 1934
accepted as
that the note was
facts dictate
may
though
be violated even
the fraud re
in
Pro’s was interested
cash substitute.
value of
given
lates to the
selling
business assets of its
exchange
rather than to the
Acceptance of the
to Grossman.
Division
security. Hooper
value of the
v. Mountain
more in the nature
in lieu of cash was
Corp.,
States Securities
federal part of either party reliance on the
such thus investment. The transaction no America, UNITED Appellee, STATES of nothing more than a note used as a v. property. cash substitute the note did not constitute “a securi- Hence George HILYER, Appellant. William of the 1934 ty” within Securi- No. 76-1169. premised feder- ties jurisdiction. al Court Appeals, Eighth Circuit. plaintiffs’ com-
The dismissal of amended plaint affirmed. 19, July 1976. Submitted 17, Sept. Judge (concurring). should look at both sides the coin. One ongoing
If the seller of business was repayment
anticipating that the depend upon note would its conduct
chaser’s business, conceptualized this could be Similarly, purchas- an investment. if the gave its note in reliance how well
er had established the busi-
the seller
ness, the transaction could also be said flavor. These
have an investment defend- evidently depending upon
ants * Movielab, 1255, Photo, Inc., (4th Berkey 1974), 1262-1263 Cir. See certiorari 1971); denied, 499, (2d Cir. Eason v. 452 F.2d 663-664 419 U.S. 42 L.Ed.2d 297; Katz, Acceptance Corp., Lipton (Are Not?) Motors 490 F.2d “Notes" Are & Securities, (7th 1973), Always Lawyer 861, certiorari 29 Business 312; 40 L.Ed.2d Alberto v. G & G Scherck, 484 F.2d Culver contra, grounds, purely reversed on other is not for it involved a commer- 270; transaction, namely, promis- Occidental Life cial Associates, Ryan sory Pat & in return for a existing money necessary tion of an loaned the transaction. which a business. We found the If there is no investment and hence no investor, having be a commercial one can be no “security” to within transaction of the characteristics of an invest of the act. none Although a third that case involved ment. shown, we have Pro’s was not an sufficiently bank —it analo party —the Analysis in the note. investor demon- apposite to make it to the case at bar gous strates that Grossman was not an “inves- decision. to our argued It that Grossman tor.” relied on City Investing past up is Lino v. efforts to build Equally relevant Parade’s busi- (3d 1973). In that ness before its assets. future misfires. It is tantamount conduct of the argument This business sold because on Pro’s saying guaranteed that Grossman relied had the business had been argument at representations and oral es- only repeats plaintiffs’ alle- up. This built chewed contention that were in- upon misrepresentations of reliance vestors. gation While of a note for an during purchase. might business sometimes need for the transaction to constitute an “regulation element relied on is that Grossman investors” the interest of where the issuers efforts of another to present “by future of the note were attracted financial profits. planned As Grossman (United returns on their investments” Pa- operate Forman, over and the business of take rade, 837, 849, 853*, it is nonsensical to is de- say it S.Ct. Pro’s current or future ef- pending present L.Ed.2d setting persuades produce profit. forts me to concur.
Notes
Insurance Co. v. bank loan.