Friendly, Chief Judge, Oakes, Circuit Judge, and Davis, Judge.*fn*
Appellant Zeller, a stockholder of Belco Pollution Control Corporation (Belco), a Delaware corporation having its principal offices in New Jersey, brought this derivative action in the District Court for the Southern District of New York against Bogue Electric Manufacturing Corporation (Bogue), a New Jersey corporation, four individuals who were directors of both Belco and Bogue, and Belco's accountants. Federal jurisdiction was predicated on § 27 of the Securities Exchange Act of 1934, § 22 of the Securities Act of 1933, and pendent jurisdiction.
The principal allegations of the complaint were as follows: In 1968 Bogue caused Belco to be incorporated and later that year to make a public offering of 200,000 of its 810,000 common shares, with 600,000 unregistered shares being retained by Bogue, which exercised effective control over Belco. During 1969 Bogue suffered from accelerating operating losses and a deteriorating working capital position. In contrast, Belco, as a result of receiving approximately $1,000,000 from the public offering and operating earnings, was accumulating cash which was necessary for its growing business. During 1970 the four individual defendants caused Belco to make a series of open-account loans to Bogue for which "no interest was required to be paid." At the year end the loans totaled $202,130, and by June 30, 1971 they had increased to $315,310. On July 1, 1971, the open account indebtedness was replaced by a demand interest bearing promissory note,*fn1 collateralized by 150,000 shares of Belco stock owned by Bogue and to be held by a trustee. Subsequent disclosure of the loan by Belco to Bogue was claimed to have aborted a further public offering of Belco shares which would have yielded Belco at least $800,000.*fn2 The conduct of Bogue and the individual defendants was alleged to have violated § 10(b) and Rule 10b-5 of the Securities Exchange Act, § 17(a) of the Securities Act, and the securities laws of New York and New Jersey, where the improper acts were claimed to have been done. The complaint sought judgment for the amount of all loans by Belco to Bogue with interest at the legal rate of 7 1/4%*fn3 and the proceeds of the aborted underwriting, various forms of injunctive relief, and orders awarding attorneys' fees, costs and such other relief as would be just and proper.
After answer, plaintiff moved for summary judgment. Defendants countered with a motion and supporting papers which asked that the complaint be dismissed for want of subject matter jurisdiction, that they be granted summary judgment, or that, in any event, plaintiff's motion for summary judgment be denied.
Plaintiff's moving affidavit added several new matters of importance: Belco's own corporate resolutions recited that the advances had been made "for the corporate purposes of Bogue." Belco itself had suffered losses in 1969 and 1970, with a net decrease of working capital of $629,828 in the latter year, and thus was in no position to loan substantial sums to its parent. Plaintiff alleged that during 1970 "some of the most successful corporations in America were paying 10% to 12% per annum to borrow money from banks and other sources of financing because of 'tight money' conditions," were often required to give sweeteners in the form of options, warrants, or other securities, and were required to keep compensating balances of as much as 20% of the sums borrowed, thus making the effective rate for low risk borrowers as high as 15% per annum. For the first nine months of 1971 Belco had earned 40% on its invested capital. Also, after the action had been brought, Bogue had sold its interest in Belco to Foster-Wheeler Corporation.*fn4
Defendants' affidavits supplied more details: Bogue had sold its 600,000 Belco shares to Foster-Wheeler for $1,650,000. Upon the closing on May 1, 1972, the amount owing from Bogue to Belco with 8% interest from the date of each advance was paid,*fn5 and the 150,000 Belco shares that had collateralized Bogue's promissory notes were included in the transfer to Foster-Wheeler. It was alleged that the loans to Bogue were in Belco's best interest and that Belco had derived other benefits from its association with Bogue which must be taken into account in any determination whether Belco had been wronged and, if so, how much.
The district judge, 346 F. Supp. 651, granted defendants' motion for summary judgment and dismissed the complaint. He did this on the basis of the provision in § 28(a) of the Securities Exchange Act which entitles a plaintiff to recover only "actual damages on account of the act complained of" and his conclusion that, under the "federal" rule whereby a defrauded buyer is entitled only to the difference between the amount parted with and the amount received, see Smith v. Bolles, 132 U.S. 125, 10 S. Ct. 39, 33 L. Ed. 279 (1889); Levine v. Seilon, Inc., 439 F.2d 328, 334 (2 Cir. 1971), rather than the "benefit of the bargain" rule applied in such actions by many states, see Prosser, Torts § 110, at 734 (4th ed. 1971), repayment of the loan with interest had eliminated any compensable loss. From this ruling plaintiff appeals.
Defendants urge that, whether or not we agree with the court's holding that Belco could not establish any damages, the complaint should have been dismissed because it did not allege fraud in connection with the purchase or sale of a "security." In analyzing this argument it will be convenient to treat the case in the first instance as if Bogue had issued demand notes collateralized with Belco stock from the outset and then consider whether a different result is required because until July 1, 1971, Bogue's indebtedness was evidenced only on open account.
The Securities Act of 1933 and the Securities Exchange Act of 1934 differ in their method of handling short-term commercial paper. Under the 1933 Act, while § 2(1) provides that any note is a "security," § 3(a)(3) exempts from the registration and prospectus requirements "any note, draft, bill of exchange, or banker's acceptance which arises out of a current transaction or the proceeds of which have been or are to be used for current transactions, and 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." However, § 17, the general anti-fraud provision, provides in subsection (c) that the exemptions of § 3 shall be inapplicable. Instead of following this model in the Securities Exchange Act, Congress defined "security," § 3(a)(10), to include "any note" but inserted in the same clause that this would not include "any note, draft, bill of exchange, or banker's acceptance 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." If the letter of the 1934 Act is followed, paper falling within this proviso is thus excluded from all provisions of the 1934 Act, including those dealing with fraud.
A short answer to the question whether Bogue's demand note came within the exclusion of § 3(a)(10) could be that it makes no difference, since the only consequence of an affirmative answer would be predication of liability on § 17(a) of the 1933 Act, if that section created a private right of action. See SEC v. Texas Gulf Sulphur Co., 401 F.2d 833, 867-868 (2 Cir. 1968) (Friendly, J., concurring), cert. denied, 394 U.S. 976, 89 S. Ct. 1454, 22 L. Ed. 2d 756 (1969); 3 Loss, Securities Regulation 1785-86 (2d ed. 1961) and 6 Loss, Securities Regulation 3912-15 (Supp.1969). Be that as it may, we believe Bogue's note is not within the exclusion of § 3(a)(10) of the Securities Exchange Act.
Here again there is a short way to answer the question should we wish to take it. The SEC has made clear its view that the nine-month standard of § 3(a)(3) of the 1933 Act is not met by obligations payable on demand. Securities Act Rel. No. 4412 (1961), 26 Fed.Reg. 9158, 9159 (1961). Presumably it would take the same view with respect to the exclusion in § 3(a)(10) of the 1934 Act. Whatever the proper answer to this question in general, we would have little doubt of the validity of such a position in a case like this where the maker of the note could prevent any demand by the holder and the note was outstanding for ten months.
We think it preferable, however, to rest our decision on the basis that even if demand paper could ever qualify for the § 3(a)(10) exclusion -- which we do not decide, see ALI, Federal Securities Code, Tent. Draft No. 1 § 216A and comment on pp. 71-72 (April 1972) -- Bogue's note would not. The SEC has taken the position with respect to the exemptive provision of § ...