*This order and judgment is not binding precedent, except under the

doctrines of law of the case, res judicata, and collateral estoppel. The court

generally disfavors the citation of orders and judgments; nevertheless, an order

and judgment may be cited under the terms and conditions 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 Services, Inc. (Ruffco), filed
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suit against noteholders of the corporation. He claimed defendants’ promissory

notes actually constituted shares in the corporation 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 the trustee. On appeal, the

district court reversed, holding that the notes were loans, not shares, and that the

trustee therefore was not entitled to recover payments 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 corporation that engaged

in business as a precious metals dealer from 1985 until 1991. In 1986, Ruffco

offered for sale sixty “units,” each of which consisted of 50,000 shares of

convertible preferred stock in Ruffco plus a $25,000 promissory note. The notes

could not be bought separately from the shares. Their 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. Payment on the notes was subordinated

to loans from financial institutions, but not to claims from general creditors. 

In May 1989, Ruffco sent a “roll over” letter to the noteholders inviting
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them to defer payment on their notes for greater returns 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 petition for relief in bankruptcy

court, which was later converted into a Chapter 7 petition. 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 of or payment for its own

shares may be made at a time when the corporation is insolvent or when the

purchase or payment would make it insolvent.” UTAH CODE ANN. § 16-10-5 (5)

(repealed 1992). It defined “shares” as “the units into which the proprietary

interests in a corporation are divided.” UTAH CODE ANN. § 16-10-2 (14)

(repealed 1992 and re-enacted as UTAH CODE ANN. § 16-10a-102 (32) (1992)). 

The trustee claims Ruffco violated this statute when it redeemed the promissory

notes. He argues that because the notes could only be purchased in a “unit” with

stock shares, they are merely disguised shares which 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 unit conveyed such an interest, there

is no evidence that the note portion did the same. Simply because defendants

obtained both instruments through one transaction does not make the two
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instruments the same. On the contrary, the stock certificates and the promissory

notes conveyed different types of interests carrying different amounts of risk. 

Various tests exist to determine whether a note constitutes a loan or equity. 

The bankruptcy court applied the “family resemblance 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 securities under the Securities

Exchange Act of 1934. The district court declined to apply that test, instead

analyzing the notes under a multi-factored test used 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 protect 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 investors, see Reves, 494 U.S. at 60-

61. While the tax cases are not precisely on point, 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 forth
1Because we conclude the notes are loans, not shares, it is not necessary to

address the other findings by the bankruptcy court.

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the most comprehensive list of elements to consider in 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 date; (3) the source of

payments; (4) the right to enforce payment of principal and interest;

(5) participation in management flowing as a result; (6) the status of

the contribution in relation to regular corporate creditors; (7) the

intent of the parties; (8) “thin” or adequate capitalization; (9) identity

of interest between the creditor and stockholder; (10) source of

interest payments; (11) the ability of the corporation 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 postponement.

730 F.2d at 638. Under this test, the promissory notes appear to constitute debt. 

For example, the notes were entitled “subordinated promissory notes,” there was a

fixed maturity date and fixed interest rate, the noteholders 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 characterization of the notes as

loans, and AFFIRM.1

ENTERED FOR THE COURT

Stephanie K. Seymour

Chief Judge