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April 28, 1977

Altman, Plaintiff
Knight, et al., Defendants

Cannella, District Judge.

The opinion of the court was delivered by: CANNELLA

CANNELLA, District Judge:

Motion by defendants *fn1" to dismiss the complaint herein for failure to state a claim upon which relief can be granted, is hereby granted. Fed. R. Civ. P. 12(b)(6). Motions to dismiss the complaint for failure to make a demand upon the board of directors before bringing suit, Fed. R. Civ. P. 23.1, and for failure to state separate claims in separate counts of the complaint, Fed. R. Civ. P. 10(b), are hereby dismissed as moot.

 Plaintiff's derivative claims stem from the purchase by Anaconda Company ("Anaconda"), the corporation on whose behalf the action is brought, of Walworth Company ("Walworth"), a subsidiary of defendant IU International Corp. ("IU"). It is alleged that the individual defendants caused this acquisition solely to defeat a tender offer by Crane Co. and not for any valid business purpose. If successful, the tender offer allegedly would have threatened their positions as directors and/or officers of Anaconda. Plaintiff claims that, in connection with the Walworth purchase, the individual defendants stated that the acquisition would serve a valid business purpose whereas in actuality it was entered into solely to block the Crane tender offer, a material misstatement in violation of § 14(e) of the Securities Exchange Act of 1934 (the "Act"), 15 U.S.C. § 78n(e).

 Plaintiff also alleges that the agreed purchase price for Walworth, $25 million cash and a five-year promissory note in the amount of approximately $15 million, was grossly excessive and amounted to corporate waste. It is contended that such acts further harmed Anaconda by exposing it to potential claims by Anaconda shareholders who were deprived of the opportunity to participate in the Crane tender offer at its original terms.

 Based upon these allegations, plaintiff sues under § 10(b) of the Act, 15 U.S.C. § 78j(b), and Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5, § 14(e) of the Act, 15 U.S.C. § 78n(e), and the common law. Plaintiff's § 10(b) claim is predicated on Anaconda's "sale" to IU of the $15 million note, which the complaint characterizes as a "security." Because the Court finds that, despite the five-year maturity date of the note, the context requires that it not be considered a security, see § 3(a)(10) of the Act, 15 U.S.C. § 78c(a)(10), the allegations fail to state a claim under § 10(b) of the Act. Plaintiff's § 14(e) claim also failed because the Walworth acquisition itself did not constitute "manipulation or deception" within the meaning of the antifraud provisions of the Act, see Santa Fe Indus. v. Green, 430 U.S. 462, 473, 97 S. Ct. 1292, 51 L. Ed. 2d 480 (1977), and any damages Anaconda suffered (or will suffer) result from the purchase, not any statements made in connection therewith. The federal claim being deficient, the pendent claim is also dismissed. United Mine Workers v. Gibbs, 383 U.S. 715, 726, 16 L. Ed. 2d 218, 86 S. Ct. 1130 (1966).

 The Section 10(b) Claim

 Section 10(b) of the Act makes it unlawful for a person "[to] use or employ, in connection with the purchase or sale of any security . . . any manipulative or deceptive device . . . ." Consequently, a sine qua non of any claim brought pursuant to this section is the presence of a "security" in the challenged scheme. Realizing this, plaintiff claims that the note given *fn2" in partial payment for Walworth qualifies as a security.

 The Second Circuit's most recent expression of whether a particular note is a security is found in Exchange Nat'l Bank of Chicago v. Touche Ross & Co., 544 F.2d 1126 (2d Cir. 1976) (Friendly, J.). There, the plaintiff bank had purchased notes from a brokerage house, allegedly in reliance upon the defendant's opinion as to the firm's financial condition. Judge Friendly declined to follow the "commercial/consumer-investment dichotomy" approach of other circuits, C. N. S. Enterprises, Inc. v. G. & G. Enterprises, Inc., 508 F.2d 1354 (7th Cir.), cert. denied, 423 U.S. 825, 46 L. Ed. 2d 40, 96 S. Ct. 38 (1975); McClure v. First Nat'l Bank of Lubbock, 497 F.2d 490 (5th Cir. 1974), cert. denied, 420 U.S. 930, 43 L. Ed. 2d 402, 95 S. Ct. 1132 (1975); Bellah v. First Nat'l Bank of Hereford, 495 F.2d 1109 (5th Cir. 1974); Lino v. City Investing Co., 487 F.2d 689 (3d Cir. 1973), viewing dimly the prospects of meaningful criteria for decision-making under this standard. The court chose instead to emphasize the statutory language itself. Observing that the 1934 Act includes within its definition of "security," "any note . . . [excepting one] which has a maturity at the time of issuance of not exceeding nine months," 544 F.2d at 1137, quoting 15 U.S.C. § 78c(a)(10), the court stated:

A party asserting that a note of more than nine months maturity is not within the 1934 Act . . . has the burden of showing that "the context otherwise requires." (Emphasis supplied.) One can readily think of many cases where it does -- the note delivered in consumer financing, the note secured by a mortgage on a home, the short-term note secured by a lien on a small business or some of its assets, the note evidencing a "character" loan to a bank customer, short-term notes secured by an assignment of accounts receivable, or a note which simply formalizes an open-account debt incurred in the ordinary course of business (particularly if, as in the case of the customer of a broker, it is collateralized). When a note does not bear a strong family resemblance to these examples and has a maturity date exceeding nine months, § 10(b) of the 1934 Act should generally be held to apply. . . . A more desirable solution would be for Congress to change the exclusions to encompass "a note or other evidence of indebtedness issued in a mercantile transaction," as is proposed in the ALI's Federal Securities Code, § 297(b)(3), . . . [so] long as the statutes remain as they have been for over forty years, courts had better not depart from their words without strong support . . . .

 Id. at 1137-38 (footnotes omitted).

 Like the ALI proposal, Judge Friendly's examples of cases in which a note would not constitute a security all occur in the "mercantile" setting. The court of appeals found that the notes in question in Touche Ross clearly did not. For example, their terms took up almost nine typewritten pages and "bore scant resemblance to the standard forms used in commercial lending," id. at 1138; both parties knew that the New York Stock Exchange would view the notes' proceeds as equity capital; rather than a one-shot deal, the notes formed part of a larger financing operation by the brokerage house. Moreover, the bank was motivated to purchase the notes in order to expand its business by cultivating a relationship with the brokerage firm.

 By contrast, the note issued in payment for Walworth is a one-page, ordinary promissory note. As a purchase money note, it is similar in many aspects to a "note delivered in consumer financing." IU was not interested in investing in Anaconda, but would have preferred a cash payment: the note was a cash substitute. The Court therefore finds that defendants have met their burden of showing that, notwithstanding the five-year maturity date of the note, it is not a security because "the context otherwise requires."

 Support for the Court's conclusion is found in Emisco Indus., Inc. v. Pro's Inc., 543 F.2d 38 (7th Cir. 1976), a case decided on strikingly similar facts. In Emisco, as here, a corporation purchased the assets of another corporation, tendering as part of the consideration a five-year promissory note. Claiming that defendants had made material misrepresentations regarding the transaction, the purchaser-corporation brought suit under § 10(b) of the Act. On defendant's motion to dismiss the complaint it was necessary to determine whether the note constituted a "security" as that term is defined in § 3(a)(10). The Seventh Circuit interpreted United Housing Foundation, Inc. v. Forman, 421 U.S. 837, 95 S. Ct. 2051, 44 L. Ed. 2d 621 (1975), as drawing "a distinction . . . between an investment transaction on the one hand and a commercial or consumer transaction on the other when construing the term 'security,'" 543 F.2d at 39, and as reaffirming the "commercial/consumer-investment dichotomy" standard. In deciding that the promissory note in Emisco was not a security, the court stated:

When analyzed economically the facts dictate that the note was accepted as a cash substitute. Pro's was interested in selling the business assets of its Parade Division to Grossman. Acceptance of the note in lieu of cash was more in the nature of a loan to Grossman of the purchase money than an investment in the note. From ...

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