William H. Rehnquist: We'll have argument next in No. 88-681, Tyler v. David Ray Jenkins. No, I'm sorry, California Board of Education v. Sierra Summit. Mr. Tyler, you may proceed whenever you're ready.
Robert F. Tyler, Jr.: Thank you, Mr. Chief Justice and may it please the Court: At issue in this case is a proper interface between Federal bankruptcy power and the fundamental sovereign rights of the states to tax commerce and property within their borders. The case concerns the Ninth Circuit's holding that a state may not tax a private party's subsequent commercial rentals of property purchased at a bankruptcy liquidation sale by reason of the purported preemptive effect of 28 U.S.C. Section 960 and the purported unconstitutional interference such taxation is seen as imposing upon the bankruptcy processes. The state contends that this ruling is in error for three reasons. First, whatever it is, Section 960 is obviously not a clear expression of preemptive intent stated to be necessary to preempt state taxation under this Court's ruling in Swarts v. Hammer. Second, whatever the limits of intergovernmental immunity, the imposition of a nondiscriminatory tax on a liquidation sale or the purchaser therefrom certainly does not cross them. Third, whatever the limits of bankruptcy jurisdiction, a bankruptcy court clearly has no jurisdiction to adjudicate a controversy between a state and a nonbankruptcy party concerning the taxability of transactions occurring long after the bankruptcy is closed.
William H. Rehnquist: Mr. Tyler, there is kind of a procedural wrinkle in this case, isn't there, in that... it comes up because your client in effect was held in contempt for disobeying an injunction?
Robert F. Tyler, Jr.: That's correct.
William H. Rehnquist: Do you think the Ninth Circuit in this case, or the bankruptcy courts, did more than just interpret the terms of the injunction?
Robert F. Tyler, Jr.: Yes, I do, for the simple reason that the injunction is circumscribed by the judgment underlying it and that judgment in turn is circumscribed by the pleadings brought by the parties underlying the adversary complaint. That pleading, in turn, was brought by the debtor... if one will... or the trustee, state receiver's, under Bankruptcy Code Section 505. In turn, Bankruptcy Code Section 505 only allows adjudication of the debtor and the estate's rights... tax rights and obligations... on property in the bankruptcy estate. That's all that the trustee--
Antonin Scalia: I don't understand that answer. Your answer is that the judgment could not possibly go beyond the jurisdiction permitted? Surely, it could.
Robert F. Tyler, Jr.: --No. The jurisdiction permitted is circumscribed in the Bankruptcy Code.
Antonin Scalia: You mean no court has ever issued a judgment which went beyond what the court could do, legally?
Robert F. Tyler, Jr.: That was not the case presented in this situation. The Bankruptcy Court clearly did not mean to exceed the jurisdictional grant in 505.
Antonin Scalia: Well, nobody ever means to do that, but the question is whether it did so. Whether the text of the judgment was clear enough that it meant to cover even subsequent... subsequent taxation such as was involved here. Isn't that simply a question of construing the judgment?
Robert F. Tyler, Jr.: Yes. The Bankruptcy Court construed the judgment to the contrary. It found that this was not a contemptuous action because its prior order was not meant to have the ambit urged upon it by Respondent herein.
William H. Rehnquist: But then the bankruptcy appellate panel reversed that, didn't it?
Robert F. Tyler, Jr.: Yes, but the Bankruptcy Court itself obviously knew what it had in mind in framing its original order and I think that that construction is one which should be paid deference on appeal.
Antonin Scalia: Well, we ought to get out of the business of interpreting statutes, then. Just let Congress interpret them. I thought... you know, once you utter a judgment, it exists out there and it's not up to you to say in the future what it is. It's up to the appellate courts to say.
Robert F. Tyler, Jr.: But the Bankruptcy Court... what you have here is a nebulous phrase. It's included by some draftsmen in the judgment ultimately entered by the court, the "or other persons".
Anthony M. Kennedy: Could you have stipulated to an injunction which would forbid you from collecting tax from an ultimate user?
Robert F. Tyler, Jr.: I'm sorry, I don't understand what you mean by the ultimate user.
Anthony M. Kennedy: Well, suppose... suppose the judge said I'm going to enter an injunction and you can't tax this transaction, and you can't tax ultimate use based on the exempt nature of this transaction. Could you say, we stipulate to that, Your Honor?
Robert F. Tyler, Jr.: I believe so. I think you can assent to that.
Anthony M. Kennedy: All right. Well, hasn't that in effect happened, because the judge... at least arguably... issued a very broad injunction and you didn't appeal it. If... if you can stipulate to it, you can't come up here and say well, it's beyond their jurisdiction.
Robert F. Tyler, Jr.: No. The judge had no intent to affect the relationship between Respondent and its--
Anthony M. Kennedy: Well, that's the second question. Let's assume that the injunction can be prohibited... can be interpreted to prohibit the tax in this transaction. Let's assume that for the moment. If that's the case and you didn't appeal the injunction, aren't you barred by res judicata?
Robert F. Tyler, Jr.: --If in fact that was the intent of the court, the Bankruptcy Court, to enter such a judgment, yes. Well--
Anthony M. Kennedy: All right. And if not... if not, then we don't have the issue before us anyway, because the injunction doesn't even apply. So I don't see how in either case we reach the constitutional issue. Either you're bound by the injunction and the injunction covers you, or the injunction doesn't cover you, but in either event I don't see how we ever reached the Goggin case.
Robert F. Tyler, Jr.: --It was clear that the intent of the parties and the understanding of the parties and the Bankruptcy Court in 1983, when the original adversary judgment was entered, was simply that it only related... that judgment only related to the taxability of the debtor and the estate through the trustee and that... it begs reason--
Anthony M. Kennedy: Well, if that's true then that's the end of the case and we never reach the Goggin principle.
Robert F. Tyler, Jr.: --No. That's not... I would beg to differ. Under res judicata principles what the Court essentially would be holding us to there is to adjudicate hypothetical controversies with the trustee concerning taxability of transactions of third parties and clearly the trustee has no desire to do that and clearly the Board has no desire to do that, considering that in 1983 all of this exists as a mere hypothetical.
William H. Rehnquist: Is this all part of one proceeding? Was... is the proceeding we have here before us now basically just a continuation of the proceeding in which the injunction was entered?
Robert F. Tyler, Jr.: I... it's hard to answer that question. What happened was that the bankruptcy was opened, dismissed, reopened again for the purpose of the original adversary proceeding by the trustee, dismissed again, two and a half years later it's reopened again by Sierra Summit for the purpose of ostensibly bringing the instant contempt citation. In one sense it is a continuation, but in another sense it is very attenuated.
William H. Rehnquist: Okay. I know you intend to argue the merits of the case and please feel free to do so.
Robert F. Tyler, Jr.: Thank you, Your Honor. The main fault with the Ninth Circuit's ruling in this case exists and the cases upon which it rests... Goggins I and Goggins II... rests upon their interpretation that 28 U.S.C. Section 960 bars the taxation of a liquidation sale or property rights that a purchaser acquires therein. Whatever it is, Section 960 is not the clear expression of Congressional preemptive intent to preclude state taxation in this area. If anything, Section 960 is an affirmation of tax liability, establishing the liability of the bankruptcy estate for all state and local taxes otherwise applicable to its operations. Congress meant, by enactment of this statute, to advance two specific purposes. First, to create a level playing field by equalizing tax burdens between bankruptcy estates and commercial competitors outside the bankruptcy protection. Second, it meant to ensure the continued flow of tax revenues to the states to fund the services and protections that those states afford.
Byron R. White: Suppose there was no Section 960.
Robert F. Tyler, Jr.: Excuse me?
Byron R. White: Suppose there was no 960? Or to put it another way, why did Congress think it was necessary to pass 960?
Robert F. Tyler, Jr.: Because the courts, previous to the enactment of 960, had been engaging in essentially Socratic dialogue, splitting hairs over whether or not a bankruptcy trustee was doing business or not doing business.
Byron R. White: Well, what if he was?
Robert F. Tyler, Jr.: They were finding states' tax statutes inapplicable on the--
Byron R. White: Is the problem that the bankruptcy trustee is a Federal Instrumentality and there's some argument that you can't tax a Federal Instrumentality?
Robert F. Tyler, Jr.: --Conceivably that would be the situation.
Byron R. White: Well, did any court ever hold that?
Robert F. Tyler, Jr.: Goggin II did.
Byron R. White: Uh-huh. So we really needed 960 to really make sure that the states could tax, if the business was being operated?
Robert F. Tyler, Jr.: No. Because this court had previously held in Swarts v. Hammer that the general rule, the presumption is taxability of bankruptcy estates, and absent a clear expression by Congress--
Byron R. White: So they didn't need 960?
Robert F. Tyler, Jr.: --No, they did not need it, but the courts had been mired in a construction... essentially, a fruitless construction... splitting hairs over what was the conduct of business, what wasn't the conduct of business. The focus, prior to 960, as always, has been a focus on whether or not the transaction or property in question is taxable under state law.
Byron R. White: So absent 960, your submission is that the sales tax could surely have been imposed on the sale of this estate.
Robert F. Tyler, Jr.: The only question remaining then would be one of intergovernmental tax immunity and that is the only question that actually is in this case, according to our view and we believe that that's a well-founded view.
Byron R. White: I thought you said that we had already decided that there wasn't any such thing.
Robert F. Tyler, Jr.: As intergovernmental tax immunity?
Byron R. White: No, in this bankruptcy situation. That you could tax trustees and transactions just normally, even absent 960.
Robert F. Tyler, Jr.: Yes, that's true. But one still ends up with the question of whether or not there is a conflict between the fundamental purposes of the Bankruptcy Code and the efforts of the state to tax. It's essentially a Tenth Amendment analysis at that point. Going back, the immediate reason for enactment of 960 by Congress was simple: to clarify previously confused law in an area by providing a rule of construction whereby the taxability of an activity conducted under the jurisdiction of the Bankruptcy Court would be determined by reference to state law rather than by distinguishing whether or not it was conducted by a trustee or receiver. My opponents assert that 960 was meant to have preemptive intent with regard to state taxation of liquidating activities by Congress' inclusion of language, "conduct of business" within the terminology of that statute. They argue that that terminology was meant to resurrect and maintain a pre-act distinction in the act between liquidating and nonliquidating activities and by innuendo to retain a purported bar to state and Federal taxation on liquidation activities. The argument's invalid for three reasons. First, It's factually incorrect, for even assuming that such a distinction was made under the act, there was no bar on taxation of liquidation activities. The Hendersonville case cited in my brief amply demonstrates that a taxation on property held in the liquidating state was taxable. Similarly, the Mason/Tire case, although ultimately holding that no tax was due, found that there was no immunity to such taxation but found that as a matter of construction of Ohio law that a personal property tax on the monetary proceeds from a liquidation sale was not due and owing under Ohio law, as a matter of Ohio construction. The argument ultimately rests on a totally improper preemption analysis posited by negative innuendo from what is otherwise an affirmative statement of tax liability. As before, Swarts demands a clear expression of Congressional preemptive intent. Swarts is in line with the recent cases by this Court, most recently exemplified by the Puerto Rico decision cited in my brief, holding essentially that the states' exercise of their sovereign rights may be abridged only by the clear and direct statement of congressional intent to do so. Here we are talking, of course, the most fundamental of those rights essentially, the state's very existence... the right to tax to create the lifeblood by which the services and protections demanded by bankruptcy estates are provided. The clear expression here is asserted to lie in hidden subtlety of meaning, a purported term of arts, but it Congress meant a preemptive effect to take place here, it should have said so in direct language, such as doing business, except that the estate shall not be liable for any state, local or Federal tax on liquidation activities. Congress intended to create a level playing field, and at worst it left one ambiguity as to the extent of that field. That the ambiguity exists is demonstrated by the fact that I stand in front of the Court today, for the conflict of the circuits essentially created the jurisdiction of this Court and the fact that you have a myriad of cases cited on both sides, by both myself and my opponents, as to whether or not Section 960 includes liquidating activities. In practical terms, the Ninth Circuit's construction differentiating liquidating activities from the definition of business leads to absurd results and creates a rule which is both impossible to consistently and rationally apply. The inconsistent application of this rule is most amply demonstrated within the Ninth Circuit itself, for in United States v. Sampsell, considering Federal taxation of liquidating activities, the Ninth Circuit held that liquidating activities are included within the ambit of 960. Now, there's no rational differentiation one can make between Federal and state taxation for the purposes of the instant analysis. The Code at least, and the act since 1850, certainly made no distinction between Federal and state taxation. And the fact that one is undertaken under a supremacy clause analysis, whereas the other one is under statutory construction, is really of no regard, for the analysis is the same: harmonization to avoid conflict. If in fact... I would note that the contrary construction to the Ninth Circuit's analysis is one of common commercial usage and is one given terms in other statutes such as the Internal Revenue Code. This Court noted in Magruder, cited in my brief, that the term "doing business" is one of broad import, fairly limitless, and specifically stated that liquidation activities were included within that phrase. Obviously Sampsell stands for the same proposition. But perhaps the greatest fault of the Goggins rules is the fact that there's no rational test for differentiate... by which one can differentiate liquidating from nonliquidating activities. In this case, China Peak is a debtor in possession operated by a state receiver. It filed a bankruptcy proceeding to essentially gain protection from the state receivership and then dismissed it shortly after the liquidation sale... or what was termed a liquidation sale... took place. It was filed under Chapter 11, but no plan was ever filed. No trustee was ever appointed. It was never adjudicated. It was not brought under Chapter 7. It was not even what would now be termed as a liquidating 11. The sale was not for the benefit of the creditors of the estate but, by order of the Bankruptcy Court, was passed directly through to the state receivership to be distributed by the state receivership to whatever creditors or persons were deemed worthy of receipt therein. The sale here, because it was done in bankruptcy, was felt to be a liquidation sale and because of that was exempt from the same taxation given for the benefit of the state receivership, which would have borne it in the first place, had it been conducted by it directly. The Goggin cases are also good examples of the problem with the Goggin rules, for there, Mr. Goggin as trustee took a debtor's inventory, consisting of partly finished goods, utilized the debtor's work force and plant to continue finishing those goods and then sold them. Obviously, that is the normal course of business operations for the debtor, or under any common construction of the term and phrase, yet it was held to be a liquidation and thus immune from state taxation. The Oklahoma trustee amicus here, by analogy, argues that, as long as he is not operating under an order under Section 721, that he should be regarded as a liquidator. But consider the amicus banks, who argue that receivership should be taken as liquidating entitles also. This Court has previously refused to draw such a distinction in Michigan v. Michigan Trust, where a liquidating receivership, if one will, was still held to be a receivership and properly subject to state taxation on receivers. But perhaps the most pernicious hypothetical that one can draw is in fact a Chapter 11 11> ["] by a retail grocery chain or hotel chain consisting of a... of a multiple series of outlets. The hypothetical in particular is one of 16, possibly 17, of say 18 or 19 outlets where they are sold at sales deemed to be a liquidation sale, because they are virtually all of the assets, not within the ordinary course of business, but providing the debtor with a sufficient amount of cash to successfully reorganize and come out of Chapter 11. You've now come full circle, for the debtor obviously falls directly within the language of Section 960 but yet has been held to be immune from taxation because it's liquidating as opposed to operating a business. Two cited cases, cited by both of us for contrary rules, also demonstrate the perniciousness of the rule. In Glick v. Missouri you have a bankruptcy trustee who is held liable for unemployment taxes by reason of Section 960, or actually who was allowed to... who was stated to be subject, 960 notwithstanding. Under Goggin this is arguably an Incorrect statement of the law, but it's an... an absurd application, because there is absolutely no reason advanced why a... a liquidation trustee should be exempt from paying unemployment taxes on the debtor's employees. There is absolutely no reason to deny those employees unemployment insurance benefits because they were operating under a liquidating trustee rather than an operating trustee. Similarly, in Cusado the Eleventh Circuit's wholesaler liquor case, liquor taxes were imposed at the wholesale level on the debtor and because of this, under the Goggin analysis, were held to be improperly applied and barred, yet there's no practical purpose inuring to the benefit of the bankruptcy estate from this. Under Goggin, the only... under this analysis, only the estate is benefited by receiving more dollars by avoiding taxes that a regular business would otherwise have to pay. This is done so that a retailer receives a better price from the estate and arguably makes a better profit at the retail level. But they are not going to provide the services and protection, that the state has to provide those. The ultimate effect... the ultimate effect of the entire analysis is that, essentially, an unevil... an uneven playing field, the uneven playing field decried by Congress has been created and you have liquor entering the commercial transactions of the State of Florida, which surfers absolutely no tax burden whatsoever. All of these results are produced by, in essence, resurrecting... quibbling over much the same terms of art that Section 960 was designed to obviate by essentially reading them back into the statute. All of this creates a rule whereby tax-advantaged goods are created where to do so directly violates the concept of a level playing field, the concept underlying the promulgation of Section 960 in the first place and all without advancing any discernible Federal purpose. The last point underscores the next. It in fact there is no preemption under 960, the only bar is intergovernmental immunity. Yet whatever, these concepts mean, they are clearly not reached here. At issue in this case is a nondiscriminatory tax, broadly based, applicable to all retail sales in the State of California. It neither falls on a Federal Instrumentality nor imposes a cognizable burden on the processes of the Federal court. One need only look at who is paying the tax. There are no Federal dollars involved in this. The taxes come out of the estate. The trustee doesn't even pay the taxes, he passes them through to the estate. Who is complaining in this case? Not the Federal Government. We have private parties before us. Private parties who, simply put, want a better deal than they can get in the normal course of commercial discourse. Simply put, they want a bar to the efforts of the state to equalize the tax burdens on the property they own. They don't stand in the shoes of the government, to use the terms of this Court, and there's simply no Federal interest in barring the state's efforts to equalize that tax burden. This Court has recently declared its solicitousness of the efforts of states to raise revenues in this manner in the United States v. Washington case. Conversely, there is absolutely no tax on a government instrumentality, in that a government instrumentality is not involved in a liquidation sale. Goggin II speaks of the trustee. Under United States v. New Mexico, the test is whether or not a trustee is incorporated into the government structure. The trustee is paid by the estate, not by the government. The trustee is a private individual, operating his own business interests rather than being an employee of the Federal Government and he's acting to advance the private purposes of the creditors of the estate, rather than those of the Federal Government. Goggin II speaks of the liquidation sale as the process. Yet, since the promulgation of the Code, Section 363 in specific, the sale is... the sale is by the trustee, not the court and obviously one can speak of Levy and those... those cases as holding that there is a Federal instrumentality involved, but since the promulgation of the Code that analysis is no longer correct. There are two purposes of bankruptcy, only one of which is arguably affected by the instant taxation efforts and that is the efficient administration and distribution of the bankrupt property. Yet the efficiency of the administration and distribution is not what's impaired. The impairment raised by Respondents rises solely from the equalization of the tax burden to support the services and protection that that property receives. That equalization effort is felt to be a permissible abridgment on the exercise of enumerated powers as held... as stated, generally, in Massachusetts v. United States and Swarts v. Hammer.
John Paul Stevens: Mr. Tyler, can I interrupt you to go back to the problem that some of us... some of my colleagues raised at the outset? Exactly what... supposing we agree with you that Goggin is incorrectly decided and all of the legal points you're making. Precisely what relief do we grant in the... in this case? What is the order you're seeking here?
Robert F. Tyler, Jr.: The order I'm seeking is a dissolution of the contempt citation.
John Paul Stevens: Would that require a vacation of the injunction, too? I mean, it is the law of the case that you violated the injunction, according to the Court of Appeals. And... and... I... I'm still not quite clear on what happens if we agree with all of your legal analysis, but nevertheless feel that as the court of appeals held, you did not comply with the terms of an injunction which may have been erroneously entered. How... how... I'm just not quite clear on what happens.
Robert F. Tyler, Jr.: Well, obviously our contention is that the injunction entered had nothing to do with the taxation activities at issue in this case. The injunction entered--
John Paul Stevens: But if that's true, we don't reach all the Goggin issues, if that's true.
Robert F. Tyler, Jr.: --Well, under the Goggin analysis you do have to reach them, because Goggin provides this... Goggin utilizes this elaborate hypothetical, or elaborate rather arcane structure of in lieu of taxes and creates these bootstraps, consecutive bootstraps. Now, one can... I argued to the Ninth Circuit that those consecutive bootstraps were nonavailing in this particular circumstance, but they have held that those are the logical end result of the Goggin analysis and that the but for test, if one will, rising from one tax to the other, to the other, is one which they feel compelled to indicate in these cases.
John Paul Stevens: I must confess, I'm still puzzled about how reversing Goggin helps you in this case. Maybe I'm dense, but I just don't--
Robert F. Tyler, Jr.: Well, on the first line, we felt that we should have won in the Ninth Circuit under the debtor's reorganizer's rationale.
John Paul Stevens: --And of course you might have won if you'd objected to the entry of the injunction, or appealed from that.
Robert F. Tyler, Jr.: But there was no reason to appeal from that injunction. Simply put--
Anthony M. Kennedy: Did... did that injunction bar you from collecting a use tax on the purchaser at the time of the sale?
Robert F. Tyler, Jr.: --No. No, that injunction... if you read the injunction, the injunction said you may not take from the debtor, from the trustee or a person who is liable to reimburse them, for a sales tax--
Anthony M. Kennedy: No. It says you may not enforce a sales or other tax against the receiver or its principals or other parties by reason of the sale.
Robert F. Tyler, Jr.: --But the other parties... in turn it has to be limited by the pleadings underlying the judgment itself and that is all that the trustee asked for. If one reads the conclusions of law and the findings of fact entered by the Court at that time, that is the conclusion that the Court came to. It was seeking to reach only the tax obligations of the debtor and the trustee and that is totally consistent with Bankruptcy Section 505, because that is... those are the only tax obligations raised under 505 and the only tax obligations that are litigable under Section 505. And the Court obviously meant to adjudicate that which was brought before it and nothing else.
Antonin Scalia: Well, you litigated that and lost it and didn't appeal, though didn't you?
Robert F. Tyler, Jr.: That's correct.
Antonin Scalia: So it's too late.
Robert F. Tyler, Jr.: No.
Antonin Scalia: No, you want to raise it again?
Robert F. Tyler, Jr.: Why... why... why... and, I'm sorry, I don't mean to argue with you. But why does an adjudication of rights between two parties... how does that affect... or, why should a party have to adjudicate with a disinterested party, essentially, the rights of subsequent persons, persons who subsequently come in possession of that property for subsequent retail transactions? There is simply no rational purpose and no rational reason why those parties should litigate that question at that time, and that's why res judicata should not be applied in this case. And simply put, none of the parties to that prior proceeding foresaw the application of this particular rule to these transactions on behalf of Respondent herein.
John Paul Stevens: That goes to the question whether the use tax can be imposed by the leases by the purchaser of the equipment.
Robert F. Tyler, Jr.: Yes.
John Paul Stevens: But if you're right on Goggin, your fundamental position, you really could have objected to the injunction against the collection of the sales tax, couldn't you?
Robert F. Tyler, Jr.: That is correct. We've always felt that Goggin... I mean, we have... this Court knows we have attempted to bring the Goggin issue before this Court by certiorari in numerous instances.
Sandra Day O'Connor: But we don't have to reach that question here and indeed, probably can't. All we can decide in view of your failure to appeal on the Goggin question below in the first litigation, all we have before us is whether you can be held in contempt for the present application of the tax to the subsequent purchaser. Isn't that all we can do?
Robert F. Tyler, Jr.: No, this Court can also state that the previous injunction was improperly entered. I have the ability to be here because of the fact that I can collaterally attack that order by reason of the jurisdictional differences and the fact that res judicata will not apply to our case. I think that the Court brought up... and I deign to say why the Court brought the issue up before it at this time... but the reason and the patent conflict between the circuits is there. The question is one of law and there are no facts to be adjudicated further than what's in the record before you now. You will never have a record that says anything different from this record, because the only things in issue are the legal rights, obligations and constructions of Section 960 intergovernmental tax immunity and the ability of the states to exercise such a tax, and I would like to reserve the rest of my time.
William H. Rehnquist: Very well, Mr. Tyler. Mr. Jenkins?
David Ray Jenkins: Mr. Chief Justice, may it please the Court: I agree with Ms. Justice O'Connor. I don't think you can reach the substantive Goggin issues in this case, and I don't think you can allow a collateral attack of this judgment without doing great violence to your own precedent.
William H. Rehnquist: The court of appeals seemed to me in its opinion to have reached the merits. Do you disagree with that?
David Ray Jenkins: I think the Court of Appeals discussed the merits.
William H. Rehnquist: At great length... not much else.
David Ray Jenkins: Basically, what was admitted before the court of appeal was that the injunction was intended to enjoin whatever Goggin II proscribed and that's why they discussed the merits of what Goggin II proscribes compared to what was going on in this case. Let's look at the record very briefly, because some, in my view, misrepresentations have been made to you about the status of the record. In the joint appendix at page 3 is the prayer of the complaint by which this injunction was sought. Paragraph 2 of the prayer requests a judgment determining that the debtor, the plaintiff... who was the estate... and any and all other parties which may have any obligation in connection therewith, have no liability or obligation to the defendant. If you then look at the--
John Paul Stevens: But you didn't read the whole sentence... have liability in connection with the particular transaction before the Court.
David Ray Jenkins: --That's correct.
John Paul Stevens: And this transaction that the tax was imposed on occurred quite a while later, didn't it?
David Ray Jenkins: No, Your Honor. This tax is in effect a tax on the sale, because--
John Paul Stevens: Well, I understand that, but they didn't actually try to collect it until sometime later.
David Ray Jenkins: --They came back and tried to collect it later.
John Paul Stevens: After there had been leases of the equipment.
David Ray Jenkins: That's correct, Your Honor, but the tax that they're trying to collect is only due because no sales tax--
John Paul Stevens: Well, I understand that legal argument and the party from whom they're trying to collect it was not a party to the case that you read from the pleading.
David Ray Jenkins: --No, Your Honor. My client was not a party to that proceeding, but my client was intended to be a beneficiary of the injunction even at the time the complaint was filed.
John Paul Stevens: Well, the district... the judge who entered the injunction didn't think so, but apparently the Court of Appeals did.
David Ray Jenkins: I would agree with counsel for the Petitioner that as an ordinary rule of construction, if you're looking at an order or a judgment that's entered by a court, that you ought to give some deference to what that judge thinks it means. This case is different for two reasons, in my opinion. One reason is that I think this judge took a view of his own order that simply isn't supported by the literal language of the order. The second reason is that if you look at the findings and the opinion that the judge issued in that case, the order was clearly intended to proscribe whatever Goggin II proscribed. So it basically incorporated by reference a Ninth Circuit Court of Appeals case, and the Petitioner has admitted that. They have admitted that this injunction was intended to cover whatever Goggin II covered and I think that in that regard, deference should be given to the court which authored the Goggin II case and that's the Ninth Circuit Court of Appeals.
John Paul Stevens: But then is it not correct that either the meaning or the accuracy of the Goggin doctrine is before us because that's what illuminates the meaning of the underlying order. And is it also not true that in your brief in opposition to the petition for certiorari, you did not suggest that we would not be able to reach the Goggin issue? You suggested it wouldn't affect the outcome, but you did seem to agree at that time that the Goggin rule was before the Court under the questions presented.
David Ray Jenkins: I think that what the Court needs to determine is what the Goggin case means. I think that the Goggin case defines the parameters of this injunction, and I don't think this Court can reverse the Goggin cases. I think all it can do is construe what they mean for the purpose of determining what the injunction meant.
William H. Rehnquist: Well certainly, we aren't going to ordinarily take a case in order to construe something that the Ninth Circuit said 40 years ago.
David Ray Jenkins: I would think not.
William H. Rehnquist: But as Justice Stevens pointed out, under our Tuttle case it's your obligation, it it's nonjurisdictional point you want to raise, in your response to the petition for certiorari to point out that we can't reach the issue that the Petitioner seeks to reach.
David Ray Jenkins: I did not do that. In any event, they are bound by the doctrines of res judicata and collateral estoppel.
William H. Rehnquist: xxx.
David Ray Jenkins: No, Your Honor. But they cannot collaterally attack this injunction. This court has a long line of precedent that says that they can't, including a specific precedent that says--
Byron R. White: Well, that's sort of like a defense and if you don't ever raise it, you can't just raise it any time you want to.
David Ray Jenkins: --Your Honor, I did raise that in my brief.
Byron R. White: No, you didn't. Well, you didn't raise it when... before we granted certiorari.
David Ray Jenkins: No, Your Honor, I did not. I raised it in my brief that the doctrine... the doctrines of collateral estoppel and res judicata prevent a collateral attack on an injunction in contempt proceedings and the state had every opportunity in this case for a complete trial. As it happens in this case, the facts were all not subject to dispute and there was a stipulated statement of facts, but they had the opportunity to present each and every fact that they wanted to present in connection with their case and they had the opportunity to file a brief. And they did file a brief in connection with the injunction, in which they had the opportunity to raise all of the arguments that they're raising here and further, they in fact raised almost all of those arguments in their brief on the injunction action.
John Paul Stevens: Let me just make one other... ask you one other question about the Court of Appeals opinion. The Court of Appeals, as I read judge Noonan's opinion, seemed to think that the question whether Goggin was wrongly decided was open, but they... but as I read him he says, but we're not going to... we, as a panel, unlike a court sitting en banc, we don't have the power to reexamine and we're not inclined to change a rule that's been in force for over 30 years anyway. But as I read that opinion, I thought that the Court of Appeals considered the issue of whether Goggin correctly stated the rule was something that, had it been sitting en banc, they could have passed upon.
David Ray Jenkins: That was not my impression when I argued before them and it's not the way I read that opinion.
John Paul Stevens: It is not?
David Ray Jenkins: Because they specifically say that they're bound by Goggin I and Goggin II.
John Paul Stevens: Right, they're bound by it in a precedential sense and as a panel they don't have the power to overrule a Ninth Circuit precedent that's been on the books for 30 years. But if they didn't feel bound by stare decisis, it would seem to me they would have said that was an issue they could have confronted. At least, that's the way I had thought the opinion read.
David Ray Jenkins: Again, my understanding from having been there was that they felt that Goggin II not only bound them but absolutely and very clearly controlled this issue. Are there any other questions about this particular issue? Because if there aren't. I'll get into the substantive issues.
William H. Rehnquist: Let me just refer you to one part of the Ninth Circuit's opinion, at page A4 of the petition where Judge Noonan says the Board suggests that Goggin II was wrongly decided. The Second and Fifth Circuits are in the Board's corner, but this circuit was aware of the Second Circuit's reasoning and refused to follow it and the Supreme Court, denying certiorari, accepted a certain regionalism in the administration of Federal bankruptcy law. Then it goes on to say, it's not within the power of this panel and not within its heart to change a rule of this circuit that has been in force for over 30 years. It seems to me if they were saying that the merits of this question of whether the state can tax, levy a use tax or a sales tax, were simply not before it at all they wouldn't have used that language.
David Ray Jenkins: I must be reading that differently from you, Your Honor. When they talk about what this circuit was aware of, I believe they're talking about at the time the Goggin cases were decided. And when they're talking about it not within their heart to change the rule, I think they're telling you that they wouldn't if they could.
William H. Rehnquist: Yes, I believe that, but it seems to me the reason they say they're not going to change it is because the panel can't overrule an earlier decision and doesn't want to overrule it, not that the parties before them have no... have no right to have a decision on the merits.
David Ray Jenkins: In another part of the decision, the court also makes reference to the fact that they could have litigated this issue on an appeal from the injunction and that it's now too late. I think in that particular portion of the opinion, what they're doing is they're dealing with the petitioner's argument that the other circuits are right and Goggin is wrong.
William H. Rehnquist: Well, I didn't mean to prevent you from going on to your argument on the merits.
David Ray Jenkins: Thank you, Mr. Chief Justice. We have never taken the position, as far as I can recall, that 28 U.S.C. Section 960 in and of itself directly limits states from imposing this tax. Our position is that it impliedly creates such a limitation, and we are well aware that as a rule of construction this Court disfavors implied preemption. But the argument that we're making in this case is not substantially different from the line of reasoning that this Court used in the First Agricultural National Bank case in construing 12 U.S.C. Section 548. In that case, looking at the legislative history, the Court determined that Congress must have intended that this Section pro... prescribe those areas in which taxation was permitted to the exclusion of taxation in other areas, and the Court so held. I do want to point out, Swarts v. Hammer was decided 30 years before Section 960 was enacted. Presumably Congress was aware of Swarts v. Hammer at the time it enacted 960. The Swarts v. Hammer case doesn't deal with taxes of this type. What Swarts v. Hammer says is that there's no magic that occurs to property of the estate when a bankruptcy is filed such, that that property changes its nature so that the property shouldn't any longer be subject to property taxation, and we don't deny that property in bankruptcy estates is subject to ad valorem taxes. We have no issue with that. Section 960 when it was enacted was enacted at a time when intergovernmental immunity was at its high water mark and basically there were decisions which tended to limit the ability of state governments to tax almost anything having to do with the Federal instrumentality. And the courts on some occasions had found bankruptcy estates, or Federal receivers, to be instrumentalities of the Federal Government. If the Supreme Court... I'm sorry. If Congress hadn't felt that taxation was generally proscribed, it wouldn't have enacted 960 because it's superfluous otherwise, and I can see a reasonable and logical argument that 960 is over 50 years old and it's basically now a historic anomaly. The problem with that argument is that Congress undertook an exhaustive review of bankruptcy law in 1978 and at that time it reviewed, among other things, the provisions of the chapter in which Section 960 is and Congress in fact made some conforming changes to Section 959. If Congress had felt that Section 960 were no longer necessary or that it required some change to conform with the present status of the law, Congress could easily have made those changes.
William H. Rehnquist: Was 960 enacted as part of the Chandler Act?
David Ray Jenkins: No, Your Honor, I believe it was separate statute.
William H. Rehnquist: When... when was it enacted?
David Ray Jenkins: 1934. I believe it was specifically designed to deal with a discrete problem and the problem that was presented... bearing in mind that that was a time of great economic hardship in the country... the basic problem that was presented was, you have two businesses, substantially identical to one another, one of which happens to be in a Federal receivership, the other of which happens not to be. The receivership business at that time was allowed to operate at a great advantage over the one who wasn't and I think the feeling was that everybody in the world was going to wind up in receivership if we didn't solve that problem. The second reason we think that the tax is not permitted on a bankruptcy estate has to do with McCulloch v. Maryland. Basically, this tax is an assertion by the state... or a tax on the liquidation process itself is an assertion by the state of control in some form over the liquidation process, and the liquidation process is what bankruptcy is all about. It's the absolute essence of bankruptcy. Even in those cases where liquidation is not ordinarily contemplated, such as Chapters 11, 12 and 13--
Sandra Day O'Connor: Well, at this stage the liquidation is over. The assets have been sold and someone else has acquired them and is in business. It's just very hare for me to see why, under any interpretation of the statute, it shouldn't be taxable.
David Ray Jenkins: --Because, in essence, this is still a tax on the liquidation sale itself. It doesn't make any difference whether the state collects the tax at my cash register out of my customer's pocket, or mugs him on the street, they're still doing the same thing.
Sandra Day O'Connor: The sale is over.
David Ray Jenkins: The sale is over, but--
Sandra Day O'Connor: Your client acquired the assets and now wants to rent the skis.
David Ray Jenkins: --Yes, Your Honor and we... if they impose a tax generally that said, if you rent skis you have to pay a tax, we'd pay it. The only reason we owe this tax is because no sales tax was paid, so it's still a tax on the liquidation sale itself and in operation the way this tax works, it's basically designed to terrorize you into paying the sales tax. Because if you don't pay the sales tax you pay a tax measured by the same percentage of your rental income and as a general proposition, if you don't think you're going to generate at least as much rental income as you paid for the property, you wouldn't buy it. So as a general proposition you would ordinarily expect to, you know, wind up paying a higher use tax than the sales tax would have been. So basically what this is, Your Honor, is it's an effort on the part of the state to go far enough down the stream that they think they can safely do it, but still tax a transaction that is a Federal transaction and is not taxable. It's an effort on their part--
Sandra Day O'Connor: I guess other courts have held that the liquidation sale itself is doing business and can be taxed under 960.
David Ray Jenkins: --I'm aware of those holdings and I disagree with them. It's not unusual for there to be different constructions of different words in different parts of the Code. For example, the term willful, as used in the Internal Revenue Code dealing with the 100 percent penalty for failure to withhold and turn over, at least as construed in the Ninth Circuit, it means that you were alive at the time. Willful in the context of the Bankruptcy Code means something much more limited than that. I think that you don't have to apply doing business from the IRC to the bankruptcy context and I think in the bankruptcy context you have a long line of established case authority dealing with what is doing business and what isn't; and you're certainly going to have factual questions, but I don't think that the fact that a court is going to have to determine some factual issues justifies coming up with a rule that goes too far. The concept that I would like to discuss with you for why this tax isn't allowable is one that I think the Court... and now I'm talking about the specific tax on my client... is a concept that the court has alluded to in the United States v. New Mexico case and also in the Red Cross case dealing with employment taxes, and the concept is this: There are some transactions irrespective of who the incidence of the tax falls on, there are some transactions which are Federal transactions and the states are not entitled to exercise control or authority over them, and they can't do that by simply choosing to place the incidence of the tax on somebody other than the Federal entity itself, and that's exactly what you have here. No matter how far downstream you go, as long as they're still collecting a tax that's only due because no sales tax was paid, it's still basically a tax on the sale itself and that transaction is a Federal transaction conducted by a Federal bankruptcy estate, conducted with the requirement that it be approved by the Federal Bankruptcy Court and it's subject to a whole system of Federal regulation. The states have no business asserting control over that transaction and to allow them to is to basically concede to them control over the bankruptcy process.
William H. Rehnquist: Your argument would make a lot more sense if McCulloch against Maryland still stood as law in all its language, rather than having been toned down much later. You know, the idea that the power to tax is the power to destroy is no longer accepted by the Court. It's treated on a more pragmatic basis, don't you think?
David Ray Jenkins: I agree with that, but I think even under the more pragmatic basis that the Court now uses, that this transaction should not be taxable and it's part of the bankruptcy process. The states have no more business asserting control over the bankruptcy liquidation process than they do asserting control over national banks, and that's exactly what they're trying to do. Now, I do want to discuss with you the case of Washington v. The United States, because it appears to be contrary to me. In that case, there was a sales tax system where ordinarily in a contractor setting if I'm a contractor and I'm building a house for you and I go down to the hardware store, the incidence of the sales tax... the liability for the sales tax in the State of Washington is placed on you as the owner of the property that I'm going to improve. But the statute provides for a specific exception which says, if the owner of the property is a Federal entity then the tax falls on the contractor and in response to the argument that that was just an evasion of intergovernmental immunity, this Court said, look, the transaction is taxable. The fact that by an accident of state law the incidence of that tax would ordinarily fall on an exempt entity does not prevent the state from shifting the incidence of the tax to somebody else. But the key in that case is that the transaction was itself taxable, and the transaction was me, a contractor, not a Federal entity, going down to the hardware store, which is also not a Federal entity and buying stuff to use to improve your home. That's a taxable transaction. The difference in the bankruptcy case is that it's a Federal transaction governed by Federal law and the state has no right to attempt to control it. You also need to look at the impact that your ruling is going to have on the Bankruptcy Code as a whole. For example, if you hold that states can tax the liquidation process because what happens in the reorganization chapters is measured by what would happen in a liquidation, if I were to have to pay a 6.5 percent sales tax if I liquidated, that's 6.5 percent of the estate that I get to pocket as the debtor, because it's something that wouldn't have to go to the creditors and in Chapter 11, the floor on what you have to pay the creditors is what they would get in a reorganization and there are similar provisions in both Chapters 12 and 13. That... the net result of that would be that if you find that states can tax bankruptcy liquidation sales you're going to be allowing debtors to achieve a great windfall and I don't think that Congress had that in mind at all. Unless there are further questions, I will remit the rest of my time.
William H. Rehnquist: Thank you, Mr. Jenkins. The case is submitted.


Warren E. Burger: We will hear arguments now in Marine Bank against Samuel Weaver et ux. Mr. Miller, you may proceed whenever you are ready.
Daniel L. R. Miller: Mr. Chief Justice, and may it please the Court: This case involves two separate and distinct instruments: one, an FDIC-insured certificate of deposit in the amount of $50,000 bearing interest at 7 1/2 percent and maturing in six years; secondly, an agreement between a loan customer of the bank and a guarantor of the customer's loan to the bank about which the bank had no knowledge at the time the loan was made. Petitioner Marine Bank requests that the Court reverse the judgment of the Circuit Court which found that both instruments were securities within the meaning of the definitions of the '33 and '34 Acts. The FDIC-insured certificate of deposit is not specifically mentioned as an enumerated item in the '33 and '34 Act definitions. However, the Circuit Court of Appeals applied several tests: one, the "any note" test: and secondly, whether it was an investment contract. In the investment contract issue, the Howey case decided by this Court clearly establishes what the test is and has been since 1946, and that test was further elaborated upon by this Court in the Tcherepnin case cited a few years later; and that test being a document is a security if it's a contract, transaction or scheme whereby a person invests money in a common enterprise with the profits to come solely from the efforts of others. We believe that that test has been misapplied by the Circuit Court, and there are three Circuit Court decisions, in the Fourth, Fifth and Seven Circuits: the Burrus case in the Fourth, the Bellah case in the Fifth, and the Fingland case in the Seventh, which hold that certificates of deposit are not securities within the meaning of those cases of this Court. Is it any note? The statutes say unless the context otherwise requires any note and so forth. Is the CD any note? In this event we'd like you to address the matter the way you did in the Daniel case which looked at the substance of the transaction and not what it is called. If you look at the substance in Daniel, as you did, you found that a pension plan document did not establish a security. Now, the Third Circuit here said that this was functionally the equivalent of a corporate note. We don't believe that that's correct. A corporate note contains an earnings risk and a risk of repayment. This FDIC-secured certificate of deposit does not have a payment or repayment risk being an insured deposit, and it has a fixed rate of interest.
Speaker: Mr. Miller, you haven't mentioned the facts. You don't have to because we know what they are. But you represent the bank here.
Daniel L. R. Miller: Yes, I do.
Speaker: These old people are out their $50,000, aren't they?
Daniel L. R. Miller: Well, there was recovery, Your Honor, Mr. Justice, against other collateral, but there would be a substantial portion of that lost, yes, sir.
Speaker: Is the officer of the bank who handled this transaction still employed by the bank?
Daniel L. R. Miller: Yes, he is.
Speaker: Without reprimand?
Daniel L. R. Miller: He has not been reprimanded, to my knowledge. I believe the Third Circuit erred in its analogy calling this an investment contract. The Tcherepnin case held there was no voting... the fact of whether there is or is not a voting right connected with the instrument is important. In Tcherepnin that was a savings and loan certificate which contained the element of voting. The CD contains no element of voting.
Speaker: Well, are you saying that in Tcherepnin the thing was more like a share of capital stock?
Daniel L. R. Miller: Yes. It was more like an investment in a savings and loan. The savings and loan had no other investment vehicle other than selling shares or investment certificates as they were called in Tcherepnin. But in this case the bank has, of course, capital stock issued pursuant to the Pennsylvania banking laws, which is where the investment would be in this case.
Speaker: And you don't question that would be a security.
Daniel L. R. Miller: That certainly is a security. The legislative history of the enactment of the '33, I believe, and '34 Acts, in the congressional hearings one of the representatives of the banking industry clearly said that the stock of a national bank would be an investment. In looking at this you might think of it as to whether it's a commercial instrument or an investment instrument. We believe that commercial instruments are not covered by the securities definitions and investment instruments are. Legislatively, the '33 and '34 Acts were part of a package of acts that were enacted in those years and which regulated banking in several respects. One was the Glass-Steagall Act and another was the FDIC Act. Now, those acts provided a parallel system of regulation of banking in this country, that is to say, federally regulated banking institutions, through the FDIC or the comptroller of the currency. The legislative history of the Glass-Steagall Act shows that there was an attempt when it was passed to separate banking from investment activities. And the Third Circuit, we believe, erred in blurring that distinction and putting it back together again. The Respondent Weaver does have a remedy. The Pennsylvania Securities Act, as referenced in the complaint of the Respondent filed in the District Court, does claim account under the Pennsylvania Securities Act where there is essentially the same language as rule 10b-5. Also, there is a Pennsylvania common law fraud count alleged. Both of those are pendant claims, and so there is a state court remedy in this case.
Speaker: Has a state action been instituted?
Daniel L. R. Miller: Yes, it has, Your Honor.
Speaker: And what is it's status?
Daniel L. R. Miller: We understand it's been filed. I don't know whether it's been served.
Speaker: I didn't get the latter.
Daniel L. R. Miller: I understand it has been filed. I do not believe it has been served.
Speaker: No question of the statute of limitations or anything?
Daniel L. R. Miller: I wouldn't express an opinion on that. There probably is a question on that. Is the Piccirillo agreement an investment contract? I think there are four elements of investment contract that need to be looked at. One, is there a multiple investor situation? There is none here. Is there a pooling of funds? Was there a public offering? None here. Was it solely from the efforts of the promoter Piccirillo? No, for two reasons. This agreement provided that Mr. Weaver could pasture his cows and use the barn of Mr. Piccirillo. And secondly, and very most importantly, he could veto any future loans in Mr. Piccirillo's business. So it was not solely from the efforts of the promoter Piccirillo. Even if... and don't admit that it is... but even if this Piccirillo agreement is a security, the bank had no knowledge of it. The depositions of both Mr. Weaver and Mrs. Weaver, reproduced in the Joint Appendix and quoted in most of the briefs, clearly established that they did not tell Marine Bank of the existence of this side agreement between them: and Marine Bank therefore cannot be held under the Ernst and Ernst case decided in this Court as an aider and abettor in the securities fraud which has been alleged. We can't predicate 10b-5 liability on the alleged negligence of failure to inquire about something we didn't know was there. The closest case in the Circuit Court is in the Fifth Circuit, a case of Woodward v. Metro Bank cited about five years ago. Whether a CD or the Piccirillo agreement is or is not a security is a matter of law and not of fact. The Circuit Court erred in reversing the judgment of the District Court in remanding for trial. A motion for summary judgment was and is the proper method to resolve the issue of jurisdiction. The broad security definition cited by Judge Gibbons at the conclusion of the Third Circuit opinion is clearly in error. The SEC agrees, as do the other regulatory authorities, as to the result in this case. Under the analysis of Howey, Tcherepnin and Daniel cases in this Court, these two instruments are not securities and cannot be the basis of 10b-5 liability or a 10b-5 claim. Thank you.
Warren E. Burger: Mr. Conner.
Andrew J. Conner: Good morning. To understand this case, the posture of this case, is to understand some of the factual background. I think simply stated, Sam and Alice Weaver go to the bank at the bank's request in early March of 1978. They have acquired a $50,000 certificate of deposit a couple weeks ago prior to them going into the bank. They've already been solicited to make an investment in the Columbus business by the bank, and in early March of 1978 they in effect traded the certificate of deposit, the $50,000 certificate of deposit they had, which was of a maturity of six years, which you undoubtedly understand is critical because it gets it outside the exception within the '34 or the '33 Act that has the nine month exclusion, and they traded that for this particular agreement, that is, an investment position in the Columbus business. All of these events occurred within a couple days of each other or a couple weeks of each other, and one was the consideration for the other; in other words, they trade their certificate of deposit for the right to obtain the profits from Columbus. A critical thing here in the bank's involvement is that the bank induced this transaction for their own benefit, and the reason why it was to their own benefit is that they in effect were a risk lender to Columbus and unprotected at the time. And the reason why they were unprotected is they forgot to file their equipment liens properly in the right county; so in effect they had a $30,000 or $40,000 loan outstanding that they couldn't collect. Columbus is insolvent at the time. Columbus is overdrawn at this bank in the checking account; in other words, there is a checking account and they're overdrawn. I think the record indicates way back in '77 that they had been overdrawn; they had been overdrawn continuously. The bank kept on honoring their checks to keep them afloat, if you will, to keep Columbus afloat so that they could stay in business, so that they could figure out a remedy to this problem, because the bank couldn't collect on their loans because they hadn't perfected their equipment. So as a consequence of that, they had told Columbus, Mr. Piccirillo, to go get an investor, and they introduced... that is, Mr. Piccirillo introduced Mr. Weaver to the bank because the bank in effect was approving whoever was going to get in business with Mr. Piccirillo, and Mr. Weaver in February of 1978 refused to get involved in the business. He refused. He said it was too risky; he didn't know Columbus financial status. So what happened was then the bank, realizing that Mr. Weaver was going to be the way that they could enhance their position, that is, that they could get their overdrawn checking account solved and get the loans taken care of, went out and actively went after Mr. Weaver to get involved in Columbus. And they solicited him out at his farm, and they finally persuaded him to come in with his certificate of deposit and pledge it; and they told his that if he pledged the certificate of deposit, they would loan Columbus $65,000, and all or substantially all the $65,000 would go for working capital. This was perceived by Mr. Weaver to be a safe investment. It was perceived by Mr. Weaver to be safe for many reasons, one of which was the fact that the bank told Mr. Weaver that in fact the bank had filed proper liens against Columbus' equipment, and they were protected, and they had sufficient collateral to protect Mr. Weaver. Those three statements, affirmative statements by the bank were false. They weren't going to lend Columbus $65,000. They were going to take the $65,000, just as they did in this case, and pay themselves off, leaving little or no money for Columbus. And the second and third statements were false, that is, that they had perfected liens, Because they filed them in the wrong county. It's a quirk here. Columbus is right on the county line between Erie County and Warren County, and the bank's main office is in Erie County; and in any case they filed the equipment liens in the wrong county so they were unprotected. That was false, and the third statement was false, the third representation, that there was sufficient assets there that if anything went wrong with the loan that Weaver would collect. Now, perceiving that to be a safe investment and a safe transaction, that's what Mr. Weaver in effect did. He came in, he pledged it, and a couple days prior to that he had agreed to take this profit-sharing agreement with Columbus. Now, you've got to understand the fact that there is absolutely no question we're here under a rule 56 action for summary judgment, and the facts are to be construed favorably to the Weavers. The Weavers are elderly people. Sam is over 80 now. And to reasonably expect that he was going to actively participate in this business, a slaughterhouse business, which is hard physical labor, for generating profits is just unrealistic. And those facts are to be construed in our favor. Now--
Speaker: Mr. Conner.
Andrew J. Conner: --Yes, sir.
Speaker: Supposing the Weavers had simply come in and purchased a $50,000 certificate of deposit and then later been dissatisfied or thought there were fraudulent misrepresentations in connection with it, would you contend that was a security?
Andrew J. Conner: I would say that it was literally within the Act, but in the context of that transaction may not be a security. The distinguishing factor in this case is it is a secondary transaction that we're complaining about. We are not complaining about the original issuance of the certificate of deposit, and this distinguishes many of the cases that have been decided in this particular field. We're complaining about the second transaction, that is, the transaction which was the transaction in which he trades that position for an investment position. And I think there's a distinction between the primary issuance situation and the secondary transaction. I think in the primary issuance transaction it may literally fall within the note or bond, or if you're within the '33 Act within the term "evidence of indebtedness". But within the context of that particular issuance, it may not be a security transaction. But in the secondary transaction... and we've cited the case with Meason v. Bank of Miami draw as that distinction, which is a Fifth Circuit case. There is no Fed Second citation because it's so recent. It's an August or September of 1981 decision. I don't think there's a Fed Second citation.
Speaker: Mr. Conner, I asked your opposition whether a state claim had been filed.
Andrew J. Conner: A state claim has been filed, but there is a statute of limitations problems there specifically because there is a one-year statute for security violations in Pennsylvania. And in this particular case we have a pendant state court claim attached to the federal claim, and the motion for summary judgment in this case was not filed until the eve of trial, which was a couple years after the events here; and hence, we would be late with regard to any securities violation in the state court even though it's been filed. We have a procedure in Pennsylvania where we file by a summons. So there is a substantial statute of limitations defense.
Speaker: Well, are you conceding that that defense is a good one?
Andrew J. Conner: I'm not conceding that.
Speaker: But you haven't pursued the state claim.
Andrew J. Conner: We have not pursued the state claim, that's correct. As you undoubtedly know, in this particular case the Third Circuit had directed the District Court to hear the pendant state court claims in this particular case. That was Dart of the order, the reversal in this particular case was to hear the pendant state court claims. And under the authority of Rosado v. Wyman, which was decided by this Court, the pendant claim considering all of the equities and the circumstances can be heard by the District Court no matter what this Court would do with regards to either of the securities contentions in this particular case.
Speaker: Mr. Conner, is there a state common law fraud claim as well as the security-type claim?
Andrew J. Conner: Yes, sir.
Speaker: And is there a one-year statute as to that claim?
Andrew J. Conner: I believe there's a two-year statute with regard--
Speaker: So you have the same problem of limitation.
Andrew J. Conner: --Yes, sir. Going back, there was--
Speaker: I'm sorry, Mr. Conner. I didn't understand. Both these state claims you say are pendant claims in any event?
Andrew J. Conner: --Yes, sir.
Speaker: Are they, too, subject to a statute of limitations?
Andrew J. Conner: Well, not in this particular case they wouldn't be if they were resolved by the District Court because they were timely pled with the original federal securities claim.
Speaker: In other words, if they were decided as pendant claims, even though state claims, there would be no statute of limitation.
Andrew J. Conner: That's correct. But if we were--
Speaker: Well, that's because they were filed in time.
Andrew J. Conner: --The pendant state court claims in this case were filed timely.
Speaker: Yes.
Andrew J. Conner: The problem was that after the statute had expired in the state court proceedings and just on the eve of the trial of this particular case, the court Granted summary judgment on the entire case. And the District Court in this particular case dismissed not only the federal securities claim and also dismissed the pendant state court claim. Now, going to the question of the certificate of deposit made reference to by the bank in this particular case, I think that a change, that is, if the Court were to hold that a certificate of deposit is not a security, that that would be a change in the law as opposed to the contrary. And the reason why I said that is this. The national bank administrator had specifically told the presidents of the national banks back in 1967 that time deposits, according to the SEC, were considered securities within the antifraud sections of the 1933 an 1934 Act. And that reference was identified specifically in the Federal Register and made reference to in the amicus briefs. So the national banks at least since 1967 up and through the present time have been on notice that certificate of deposits were in fact held to be securities within the antifraud sections of the 1933 and 1934 Act.
Speaker: Did the administrator express approval of that construction by the SEC or simply note it?
Andrew J. Conner: Your Honor, I think it was just noted. It didn't say one way or the other. It just said in so many words that the SEC at that point in time had taken the position that the deposits and share accounts are subject to the antifraud provisions of the Securities Act of 1933 and 1934. And this was also made reference to in the... you might have a question as to whether or not the time deposit would be a certificate of deposit within that context. And in the Superintendent of Insurance v. Bankers Life the District Court so indicated. It did not express an opinion as to whether or not a certificate of deposit was a security, but so indicated that that's what they were alluding to. So if the Court would... it's our submission in this case that if you would hold to the contrary, that it's not a certificate of deposit or that it's not a security, that that would be a change in the law, because considering this has been out, we would submit that the banks have been on notice at least since that time period that certificate of deposits would be considered securities within the antifraud sections of the '33 and '34 Act. One other point--
Speaker: Counsel, has the SEC ever changed its position on that?
Andrew J. Conner: --To my knowledge they have not, and to my knowledge the best answer that I can Give to you with regard to that is that the SEC in various cases have appeared amicus taking various positions on whether or not a CD in the context of a transaction is a security. For example, in the Meason case v. Bank of Miami they appeared amicus, and in that case it was a secondary transaction. They contended it was a security within these acts. And think that in the Burrus case that after... there was a Burrus case that came down that originally held that a certificate of deposit was not a security. They filed amicus, and subsequently that decision by the court was withdrawn. So at various times they have appeared amicus and contended that a certificate of deposit is a security.
Speaker: How do you account for the Solicitor General's brief then in this case?
Andrew J. Conner: I account for it in the following. I think they filed a joint brief--
Speaker: A what?
Andrew J. Conner: --A joint brief between the FDIC, the SEC, and the Comptroller of the currency, and I think they take the position that it's in the context of this transaction as opposed to the literal question about whether or not it's a security for all purposes. And I would say that it sounds like... it's just a guess... that they voted between the other people that vote there in the government.
Speaker: Well, the Chief Counsel of the Commission is on the brief.
Andrew J. Conner: I understand that. But they say specifically in the brief, they say specifically that it's only in the context of this transaction and not a question whether or not in other cases, because they're very careful to say that in other cases they may take a different position.
Speaker: I thought I said that about the contract.
Andrew J. Conner: No, sir. They said that with regard to the CD. One other thing that I think the Court should be aware of is the fact that the opposition has indicated that the fact that the certificate of deposit is not mentioned specifically in the definition, that that would indicate that because it's not mentioned specifically and/or because they mention the word "certificate of deposit" for a security, which we acknowledge is a different instrument, that that would be some indication that a certificate of deposit was not meant to be literally within the act. This Court in Joiner in a very similar issue specifically held that that type of analysis was incorrect. There is a reference to oil leases, for example, in Joiner, and the question was whether or not a divided interest in oil leases as opposed to an undivided interest in oil leases was a security. And the Court held that just because they were making reference in the statute to an undivided interest and that they did not mention a divided interest, that that did not mean that the divided interest was held to be or would be held to be a security. In fact, the Court so held. Now--
Speaker: Mr. Conner, let me call your attention to page 6 of the Government's brief here where they say at the end of the first full paragraph, the conclusion that the certificate of deposit involved here is not a security subject to the antifraud provisions of the federal securities law harmonizes the federal securities and banking laws and avoids overlapping jurisdiction that would "serve no general purpose", citing our Daniel case. Now, I had taken that as a fairly explicit statement of their position.
Andrew J. Conner: --Your Honor, my understanding is on page 6, if you'll see that the... right down at the bottom of paragraph 2 it says, "examination"... excuse me. I'm sorry. My understanding is that in the brief here... and I have lost the particular point where they have said this... that in this particular brief they so indicate that they did not want it held for all purposes.
Speaker: Well, on page 22 I thought the Government's position was that where you have a regulated bank you just don't treat CDs as securities. They didn't want any general rule about certificates generally in unregulated areas. But with respect to a bank that's regulated, I thought they just said put it aside; the other laws will take care of this, not the securities laws. Is that right or not?
Andrew J. Conner: I don't think that's right. I don't think that that's their position. I think that... because that would be inconsistent with the SEC's position in other cases, and specifically the Bank of Miami case that's so recent, because they are--
Speaker: Well, that may be, that may be, but what about on page 20 beginning at paragraph 4? That just repeats what Justice Rehnquist said. Then it says, "The foregoing analysis, however, may not necessarily apply in other contexts. "
Andrew J. Conner: --And they say, "The better reasoned decisions of the lower court did not view the question of whether a certificate of deposit is a security in the abstract. "
Speaker: I know, but I thought their position was if you're dealing with a regulated bank, the answer is clear.
Andrew J. Conner: Well, I'm sorry, Your Honor.
Speaker: Okay.
Andrew J. Conner: My understanding is that they are not taking that firm a position, because obviously certificates of deposit can be traded in all sorts of secondary transactions. And I think that they recognize that, and I think that if they came out hard and fast that there would be all sorts of secondary transactions; and we just differ on the facts in this particular secondary transaction as to whether or not it formed a consideration for an investment position.
Speaker: What are the practical advantages of proceeding under the Act as opposed to in the state causes of action?
Andrew J. Conner: Well, one primary practical advantage is the fact that in the securities law, that is, in the 10b case or the 17 case, it includes omissions, as opposed to commissions; that is, situations where a party fails to disclose, as would apply to this particular case, Your Honor. It would apply to a situation where the misrepresentation was purely misrepresentation by silence, where they failed to tell people something. In this case there is that element in that. They failed to tell the Weavers, for example, in this case that Columbus was insolvent and was going to be insolvent even though they went through this loan transaction.
Speaker: And under state law?
Andrew J. Conner: They may not be a cause of action under the common law of Pennsylvania, because the common law draws a narrower line with regard to what is an actionable fraud. I think the distinguishing factor with regard to this secondary transaction, we differ from the Government because I don't think the Government analyzes the facts in this particular case to identify that the bank specifically identified Weaver as an investor. They in their testimony in this case specifically identified Weaver as an investor as opposed to a guarantor or proposed guarantor. They said he was an investor, one. Two, they said that he was making an investment transaction. They testified to that in their pretrial depositions... and we're entitled to the benefit or favorable construction of that... and said that. They never said that he was just acting as a guarantor. And thirdly, they specifically identified the amount of his investment as being $50,000, and they so stated in the record in this particular case. Now, separate and apart from the certificate of deposit issue is the related issue of the Piccirillo agreement, as to whether or not that constitutes a security within the securities law. And we would submit that it fits within any one of the one, two, or three definitions within the subspecies of security such as profit-sharing agreement, certificate of interest, or in fact an investment contract. And the Court has laid down three basic guidelines as to whether or not a particular agreement constitutes an investment contract: whether or not you have an investment of money, whether or not it's a common enterprise, and whether or not there's a reasonable expectation of profits from the efforts of others. And I think clearly in this case that we meet all of the elements. There is no question about it that there's a $50,000 investment. The bank in fact so stated that that was a channel which the money was being channeled into Columbus. And there's little question that on the facts of this case that the profits could be expected from the efforts of Piccirillo and not Weaver. There's absolutely no evidence that he was going to do anything that was going to contribute to the profits in this case. The bank argues that it's not a common enterprise, but the $50,000 investment of Mr. Weaver gets pooled. They say there is no pooling. It's in fact pooled with the assets of Columbus. It's no separated. It's co-mingled. There's also another question about whether or not in this particular case, considering the bank is in an unsecured position, their assets are pooled there, too. And there were other people who were loaning money, the original seller of the business. So if there is a question about just multiplicity of investors on a vertical standpoint as opposed to... horizontal, excuse me, as opposed to a vertical standpoint--
Speaker: Mr. Conner, may I ask you a question? If one owned farmlands and leased the lands to a farmer, the compensation to be a division of profits or a share of the profits under the lease arrangement, would that be analogous to the contract you are discussing here this morning?
Andrew J. Conner: --That is, the landowner leases it to the farmer?
Speaker: Yes. And the compensation to the landowner is a share in the profits, a very common arrangement.
Andrew J. Conner: That may be. I think there's a distinction, and the distinction is--
Speaker: What is the distinction?
Andrew J. Conner: --The distinction is that in our case we are contributing... we are making a... providing capital at risk--
Speaker: What about the land in the example I put?
Andrew J. Conner: --The owner gets the land back, and we don't get the certificate of deposit back if the business fails. We lose it, where the owner of the land gets the land back. He has not made an investment at risk like Mr. Weaver does in this particular case.
Speaker: Suppose the lease is for ten years?
Andrew J. Conner: There would be certain leasehold rights, that he would have the right, assuming that there is a written lease, he would have certain rights to take the land back. Eventually he gets... Your Honor, I would submit that he would get his land back, and he does not sake the commitment that an investor makes when he provides capital at risk that Mr. Weaver does in this particular case. This particular case, the only chance he's going to get his deposit back is if in fact Columbus has sufficient working capital to make it.
Speaker: In the example I put, the owner of the land might receive no profits whatever for years.
Andrew J. Conner: That's a possibility, yes, sir.
Speaker: Well, supposing... to modify Justice Powell's example a little bit... supposing in addition to the arrangement with the tenant who would work the land and provide a profit, they then pledged or mortgaged the land to the bank and borrowed the working capital to buy the farm equipment. Then I suppose you'd have the same case, wouldn't you?
Andrew J. Conner: You're getting closer to that particular case, and I'm sure that you can draw arrangements that get closer to this particular situation. And I think that we meet all of the elements. The Court said they were not dealing with a full record in this particular case, and the question before the Third Circuit was not whether or not after a full trial whether or not we had met the full definitions of an investment contract or a profit-sharing agreement or a certificate of interest, if you will, but whether or not there was a genuine issue of fact as to whether or not we met those requirements. And we would submit that on the record before that court and on the record before this Court there's certainly an issue of fact.
Speaker: Well, are you saying that to make the investment contract aspect of this case a security you must have as a part of the overall transaction a pledge of the certificate of deposit?
Andrew J. Conner: That's correct, Your Honor. See, the original idea of this whole transaction was Mr. Weaver was just going to give Piccirillo $50,000, and then he backed off because of the risk involved, and the bank became concerned and went back and told, well, listen, there is a less riskier way of doing this; you give us the $50,000 CD, we will loan the business $65,000. And the bank was doing that, you see, because that was the only way at that point that they could solve their own problems. And from Weaver's standpoint it seemed like a relatively safe investment, because he sees somebody who he trusts, the bank, and they're telling him that they have the equipment protected, that they're going to give him $65,000, and the bank themselves said that Piccirillo needed $10,000 to make it, and the bank knew that he wasn't going to get $10,000. He got $3,800 out of a $65,000 loan. Now, there was just no possible way that Columbus was going to make it; that they were headed for insolvency or bankruptcy irrespective of this loan transaction.
Speaker: Well, if the bank had made misrepresentations about this company and convinced the people to make a loan directly to the company, same result? Say you took back a note from the company.
Andrew J. Conner: Certainly the courts have held that risky loans, a long-term loan at risk is a security. The Second Circuit specifically, I believe in the Zeller case that's made reference to in the briefs, has indicated that long-term loans like that are securities.
Speaker: So any note issued by a borrower may be a security?
Andrew J. Conner: No, no. I didn't say that. I'm sorry. It's a loan that's at risk where the only chance of paying it back is a profit situation, and that was the only chance in this case. The only chance that Weaver was going to get his certificate of deposit back is in fact if Columbus somehow was going to make it. And so we would submit that whether you call it an investment contract or whether you call it a profit-sharing agreement or a certificate of interest, that there is at least under rule 56 a factual issue that would allow a court or jury to make a conclusion that investment contracts or one of these other subspecies in fact exist. And I think that the arguments about their not being a common enterprise are not correct. There was in fact a pooling of assets, a true pooling of assets. There was no specific segregation of Weaver's investment from Mr. Piccirillo's investment. And certainly the third element is made, would be satisfied in a full trial. We would submit that the Third Circuit is correct, that there are factual support for our position that the Piccirillo agreement is a profit-sharing agreement or a certificate of interest or investment contract; that in this particular case the Third Circuit is also correct that the certificate of deposit in this secondary transaction was made by an investor for investment purposes, that it was in fact a sale. This particular court held in the Rubin case that even though it was a loan transaction, the person got convicted under section 17 when they made a pledge, and that was just as much a commercial loan as this particular case. And if it applies in a criminal case, then it certainly would apply in a civil case. And we would submit that the Third Circuit was correct in directing the District Court to remand the case to hear the pendant state court claims. And we would submit that under Rosado v. Wyman that that would be the outcome no matter what this particular Court would decide on the federal securities questions. Thank you very much.
Warren E. Burger: Do you have anything further, Mr. Miller?
Daniel L. R. Miller: I didn't ask for any time for rebuttal, but I will accept your invitation to make one comment.
Warren E. Burger: There's no compulsion about it.
Daniel L. R. Miller: I'll say that there are a series of cases, the note and mortgage cases, and all of them in the circuit courts have decided generally that a note and mortgage situation referenced by Justice Powell and Justice Stevens were not securities. In response to one of the questions concerning the existence of the state court action, it is my clear understanding that the cases were filed in the state court on a timely basis but were not served on Marine Bank on a timely basis, and therefore, they are out of time as far as state court action goes. Thank you.
Warren E. Burger: Thank you, gentlemen. The case is submitted.