* This order and judgment is not binding precedent, e xcept under the

doctrines of law of the case, res judicata, and col lateral estoppel. The court generally disfavors the citation of orders and judg ments; nevertheless, an order and judgment may be cited under the terms and condi tions of 10th Cir. R. 36.3. 

## F I L E D United States Court of Appeals Tenth Circuit 

### NOV 25 1998 

### PATRICK FISHER Clerk 

### UNITED STATES COURT OF APPEALS

TENTH CIRCUIT

IN RE: RUFF FINANCIAL SERVICES, INC., doing business as Ruffco, Inc., Debtor.

_________________________ ROGER G. SEGAL, Trustee, Plaintiff-Appellant,

v. MARYJANE B. LEDYARD, H.L. WIGGINS, SUE WIGGINS, ROBERT HALL, JIM GREESON, COLUMBIA PAINT CORPORATION, DULUTH ENTERPRISES, COLIN C. WONG, THE EAR, NOSE AND THROAT DEFINE BENEFIT TRUST, MICHAEL FANNON and SUSAN FANNON, Defendants-Appellees. No. 97-4094 (D.C. No. 96-CV-798-B) (D. Utah)



### ORDER AND JUDGMENT *

Before SEYMOUR , Chief Judge, EBEL and KELLY, Circuit Judges.

Roger G. Segal, the trustee of Ruff Financial Servi ces, Inc. (Ruffco), filed-2-

suit against noteholders of the corporation. He cl aimed defendants’ promissory notes actually constituted shares in the corporatio n which Ruffco had redeemed while it was insolvent, in violation of Utah law. On cross motions for summary judgment, the bankruptcy court found in favor of th e trustee. On appeal, the district court reversed, holding that the notes wer e loans, not shares, and that the trustee therefore was not entitled to recover payme nts made under the notes. We review the grant of summary judgment de novo. See Hollytex Carpet Mills, Inc. v. Oklahoma Employment Sec. Comm’n (In re Hollytex Carpet Mills) , 73 F.3d 1516, 1518 (10th Cir. 1996). Because we agree with the district court that the promissory notes constituted debt, we affirm. Ruff Financial Services, Inc. (Ruffco) was a Utah c orporation that engaged in business as a precious metals dealer from 1985 u ntil 1991. In 1986, Ruffco offered for sale sixty “units,” each of which consi sted of 50,000 shares of convertible preferred stock in Ruffco plus a $25,00 0 promissory note. The notes could not be bought separately from the shares. Th eir terms provided for 7.5% interest per annum, payable quarterly. The maturity date was June 1, 1989, but noteholders could demand immediate repayment after January 1, 1988, and prior to the maturity date at a 6% interest rate. Paymen t on the notes was subordinated to loans from financial institutions, but not to cl aims from general creditors. In May 1989, Ruffco sent a “roll over” letter to th e noteholders inviting-3-

them to defer payment on their notes for greater re turns later. No noteholder chose deferment, and by June 1989 Ruffco had paid the balance on all of the notes. In May 1991, Ruffco filed a Chapter 11 peti tion for relief in bankruptcy court, which was later converted into a Chapter 7 p etition. Mr. Segal was appointed as the Chapter 7 trustee. He filed suit against the noteholders, claiming that Ruffco’s redemption of the notes violated Utah law. Utah law provided at the time that “[n]o purchase o f or payment for its own shares may be made at a time when the corporation i s insolvent or when the purchase or payment would make it insolvent.” U TAH C ODE ANN . § 16-10-5 (5) (repealed 1992). It defined “shares” as “the units into which the proprietary interests in a corporation are divided.” U TAH C ODE ANN . § 16-10-2 (14) (repealed 1992 and re-enacted as U TAH C ODE ANN
. § 16-10a-102 (32) (1992)). The trustee claims Ruffco violated this statute whe n it redeemed the promissory notes. He argues that because the notes could onlybe purchased in a “unit” with stock shares, they are merely disguised shares whic h Ruffco redeemed while insolvent. The Utah statute requires a “proprietary interest” for the notes to be shares. While it is clear that the stock portion of the uni t conveyed such an interest, there is no evidence that the note portion did the same. Simply because defendants obtained both instruments through one transaction d oes not make the two-4-

instruments the same. On the contrary, the stock c ertificates and the promissory notes conveyed different types of interests carryin g different amounts of risk. Various tests exist to determine whether a note con stitutes a loan or equity. The bankruptcy court applied the “family resemblanc e test” articulated by the Supreme Court in Reves v. Ernst & Young , 494 U.S. 56 (1990), as the appropriate way to determine whether promissory notes are secur ities under the Securities Exchange Act of 1934. The district court declined to apply that test, instead analyzing the notes under a multi-factored test use d by circuit courts to decide whether an advance of money constitutes a loan for tax purposes. We agree with the district court that the tax cases are more relevant to this case. The purpose of the statute at issue is to pr otect creditors, see Owyhee, Inc. v. Robbins Marco Polo , 407 P.2d 565, 567-68 (Utah 1965), whereas the purpose of the Securities Exchange Act is to protect invest ors, see Reves , 494 U.S. at 60- 61. While the tax cases are not precisely on poin t, they deal with interests similar to those at issue here and, as such, guide our analysis. See Cenex, Inc. v. United States , 156 F.3d 1377, 1381-82 (Fed. Cir. 1998); Roth Steel Tube Co. v.
C.I.R. , 800 F.2d 625, 630 (6th Cir.1986); Bauer v. C.I.R. , 748 F.2d 1365, 1368 (9th Cir. 1984); Stinnett’s Pontiac Serv., Inc. v. C.I.R. , 730 F.2d 634 (11th Cir. 1984). While each tax case delineates a similar test, Stinnett’s Pontiac sets forth1 Because we conclude the notes are loans, not shares , it is not necessary to

address the other findings by the bankruptcy court. -5- the most comprehensive list of elements to considerin determining whether the notes constitute debt or equity: (1) the names given to the certificates evidencing the indebtedness; (2) the presence or absence of a fixed maturity dat e; (3) the source of payments; (4) the right to enforce payment of princ ipal and interest; (5) participation in management flowing as a result ; (6) the status of the contribution in relation to regular corporate c reditors; (7) the intent of the parties; (8) “thin” or adequate capit alization; (9) identity of interest between the creditor and stockholder; ( 10) source of interest payments; (11) the ability of the corporat ion to obtain loans from outside lending institutions; (12) the extent to which the advance was used to acquire capital assets; and (13 ) the failure of the debtor to repay on the due date or to seek a postpo nement. 730 F.2d at 638. Under this test, the promissory no tes appear to constitute debt. For example, the notes were entitled “subordinated promissory notes,” there was a fixed maturity date and fixed interest rate, the no teholders had a right to enforce payment, the notes were not subordinated to general creditors, the parties intended for the notes to be loans, Ruffco repaid the notes on time, and the notes conferred no voting rights. In sum, we agree with the district court’s characte rization of the notes as loans, and AFFIRM. 1
ENTERED FOR THE COURT Stephanie K. Seymour Chief Judge