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MOVIELAB, INC. v. BERKEY PHOTO

December 23, 1970

MOVIELAB, INC., Plaintiff,
v.
BERKEY PHOTO, INC., Berkey-Pathe, Inc., Berkey-Pathe 45th Street Lab, Inc., Berkey-Pathe Opticals, Inc. and Berkey Photo Service, San Francisco, Inc. (Berkey-Pathe Hollywood Division), Defendants


Mansfield, District Judge.


The opinion of the court was delivered by: MANSFIELD

MANSFIELD, District Judge.

In this suit by a maker of promissory notes ("Movielab") against the payees ("Berkey") alleging fraud in violation of § 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and SEC Rule 10b-5 thereunder, and seeking damages and rescission, defendants Berkey have moved pursuant to Rule 12, F.R. Civ. P., for dismissal of the complaint for lack of jurisdiction, or, in the alternative, for a stay of this action pending determination of another suit between the parties in the Supreme Court of the State of New York for New York County. For the reasons stated below, the motion is denied.

 The essential facts are that by agreement dated June 27, 1967, Movielab agreed to purchase from Berkey certain assets consisting of film processing and optical businesses, issuing in payment therefor two 8% installment promissory notes in the amount of $5,250,000 each, payable over a period of 20 years in 240 equal monthly installments, and one shorter term note in the sum of $4,178,312. On June 2, 1970, the parties modified the agreement in certain respects. Thereafter Movielab failed to make payments due on the notes and on August 25, 1970, Berkey gave notice of its election to accelerate payment of the full amount of the notes. When settlement negotiations failed, both sides simultaneously instituted suits against each other on September 1, 1970, Berkey bringing suit on the notes in the New York County Supreme Court, and Movielab instituting the present action here, the actions being commenced within an hour of each other. Movielab has moved to dismiss the state court suit, or, in the alternative, to stay that proceeding pending disposition of this case.

 The complaint here alleges that Berkey induced Movielab to make and deliver the notes in exchange for the assets by various false representations and concealment of certain material facts (e.g., the price Berkey had paid for the assets being sold to Movielab; the extent of losses that had been suffered; the status of the assets and equipment; and Berkey's relationships with customers), with the result that Movielab was unable efficiently to use the assets acquired from Berkey and suffered heavy losses.

 The Motion to Dismiss

 Berkey contends that we lack subject matter jurisdiction under § 10(b) of the Exchange Act, which prohibits fraud "in connection with the purchase or sale of any security " (emphasis added), for the reason that the notes issued by Movielab did not constitute a "security" but were merely an individual loan of the type not encompassed within the prohibitions of the federal securities laws.

 At first blush we were much attracted to Berkey's position. The primary purpose behind the adoption of the antifraud provisions of the 1933 and 1934 Acts was to protect public investors against fraud in the sale of securities of the type normally offered in the market place. See, e.g., SEC v. W.J. Howey Co., 328 U.S. 293, 301, 66 S. Ct. 1100, 90 L. Ed. 1244 (1946); SEC v. C. M. Joiner Leasing Corp., 320 U.S. 344, 351, 64 S. Ct. 120, 88 L. Ed. 88 (1943). If instruments used in every private loan transaction qualified as securities under the federal statutes, our jurisdiction could be invoked with respect to any claim of fraud in connection with the issuance of a check or note, no matter how small the transaction (e.g., the purchase of an automobile or refrigerator), provided the mails or some other instrumentality of interstate commerce were used. Furthermore, the maker of the note or check as well as the payee would be entitled to sue. We do not view this as the type of situation that prompted the enactment of the federal securities laws.

 Upon turning to § 3(a)(10) of the 1934 Act, however, we find that it provides, in unequivocal and all-embracive language, that "The term 'security' means any note * * * but shall not include * * * any note * * * which has a maturity at the time of issuance of not exceeding nine months, exclusive of days of grace, or any renewal thereof the maturity of which is likewise limited." (Emphasis added). This plain language, literally read, clearly includes promissory notes of the type that are the subject of the present suit. In interpreting the statute we are guided by well recognized basic principles.

 
"There is, of course, no more persuasive evidence of the purpose of a statute than the words by which the legislature undertook to give expression to its wishes. Often these words are sufficient in and of themselves to determine the purpose of the legislation. In such cases we have followed their plain meaning." [Footnotes omitted] (United States v. American Trucking Assns., Inc., 310 U.S. 534, 543, 60 S. Ct. 1059, 1063, 84 L. Ed. 1345 (1940))
 
"For the ultimate question is what has Congress commanded, when it has given no clue to its intentions except familiar English words and no hint by the draftsmen of the words that they meant to use them in any but an ordinary sense. * * * After all, legislation * * * is addressed to the common run of men and is therefore to be understood according to the sense of the thing, as the ordinary man has a right to rely on ordinary words addressed to him." (Addison v. Holly Hill Fruit Prods., Inc., 322 U.S. 607, 617-618, 64 S. Ct. 1215, 1221, 88 L. Ed. 1488 (1944))
 
"The plain meaning of the words of the act covers this use. No single argument has more weight in statutory interpretation than this." (Browder v. United States, 312 U.S. 335, 338, 61 S. Ct. 599, 601, 85 L. Ed. 862 (1941))

 There is no ambiguity in the language of § 10(b). Nor does a literal reading of the language defeat or hamper Congress' apparent purpose. We cannot therefore say that Congress did not intend to exercise its power to legislate with respect to fraud in the issuance of promissory notes of the type here involved.

 Try as we may, we fail to detect in the 1934 Act any grant of discretionary power to the court to construe the term "security" as including certain types of notes but not others. Congress apparently decided that it would pass a sweeping prohibition rather than attempt to draw such distinctions. We are bound by that decision.

 Other courts have reached the same conclusion, holding that the issuance of a promissory note as part of a private commercial transaction constitutes the "sale" of a security within the meaning of the anti-fraud provisions of both the 1933 and 1934 Acts. Llanos v. United States, 206 F.2d 852 (9th Cir. 1953), cert. denied, 346 U.S. 923, 74 S. Ct. 310, 98 L. Ed. 417 (1954); Lehigh Valley Trust Co. v. Central National Bank of Jacksonville, 409 F.2d 989, 991-992 (5th Cir. 1969); Prentice v. HSU, 280 F. Supp. 384 (S.D.N.Y. 1968); SEC v. Vanco, Inc., 166 F. Supp. 422, 433 (D.N.J. 1958); Olympic Capital Corp. v. Newman, 276 F. Supp. 646, 653 (C.D. Calif. 1967); Whitlow & Associates, Ltd. v. Intermountain Brokers, Inc., 252 F. Supp. 943, 947-948 (D. Hawaii 1966). In ...


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