*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 282 F.2d 195 purchase mon loan to Grossman of the of a cert. From investment note. ey than an 695, 5 L.Ed.2d 693. S.Ct. See Eason v. vis-á-vis Pro’s aspect, this the transaction Motors Acceptance Corp., to clearly a commercial one and similar 1973). proposition, This Enterprises. The G.N.S. however, rests on the given underlying assump in that case were to bank *4 noted, reliance on the efforts As has been profit is the most others investment, which, aspect of an turn, an essential characteristic of protected by intended to be securities laws. Here there was no

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.