Opinion ID: 2439704
Heading Depth: 1
Heading Rank: 2

Heading: Evidence of Indebtedness

Text: Evidence of indebtedness is another term taken from the Federal Securities Act of 1933, 15 U.S.C. § 77b(1) (1971). It has been defined to mean all contractual obligations to pay in the future for consideration presently received. United States v. Austin, 462 F.2d 724, 736 (10th Cir.), cert. denied, 409 U.S. 1048, 93 S.Ct. 518, 34 L.Ed.2d 501 (1972). The court of civil appeals found in this case that there was no evidence of indebtedness, but only contracts in which CTC agreed to obtain commodity futures for the customer if he exercised his options. We disagree with this finding. As pointed out above, the commodity options sold in this case were naked options. There was never a purchase or sale by defendants of any futures contract on behalf of a customer; only the net cash result of a hypothecated purchase or sale took place. A naked commodity option sold by CTC represented a contingent obligation on the part of CTC to pay the difference between the striking price of the option and the market price of the futures contract at the time the option was exercised. The Austin case involved promoters who sold letters of commitment to construction companies in need of funds. The letters of commitment were promises to secure funds from third parties or, if a third party lender could not be found, the promoters promised to advance the money themselves. The court held that the letters of commitment were evidence of indebtedness as a matter of law, and therefore, securities. It stated: It is true that the letter of commitment is not an indicium of debt in the same sense as is a promissory note, but as used in the Securities Act no such restriction is appropriate. In last analysis, this letter of commitment was sold for a substantial consideration, and the buyer received what appeared to be an enforceable obligation which contemplated the flow of funds. It indicated a binding and legally enforceable right. Therefore, we can find no fault with the ruling of the trial court insofar as it regarded the letter of commitment as plainly being a security. United States v. Austin, 462 F.2d 724, 736 (10th Cir.), cert. denied, 409 U.S. 1048, 93 S.Ct. 518, 34 L.Ed.2d 501 (1972). CTC represented in its literature that upon exercise of an option, the customers were assured of payment by sufficient margin on deposit with Kohlmeyer and Company to initially hedge over $1,000,000 in silver. According to the testimony of the former president of CTC, STC was to underwrite and guarantee the options to the customers. Although the market fluctuations determined the amount to be paid or whether an amount was due, the options were represented as an obligation of CTC to pay money on certain contingencies. The automatic repurchase feature converted CTC's obligation from one to buy or sell futures contracts to one to pay a monetary return at some future time. We hold that this brings the commodity options within the definition of an evidence of indebtedness. King Commodity Co. of Texas v. State, 508 S.W.2d 439, 445 (Tex.Civ.App. Dallas 1974, no writ); Long, The Naked Commodity Option Contract As A Security, 15 Wm. & Mary L.Rev. 211, 240-41 (1973). In conclusion, we hold that the commodity options sold by CTC in this case were both investment contracts and evidence of indebtedness. It therefore follows that defendants have sold unregistered securities, for which plaintiffs are entitled to rescission and a return of their consideration paid. The judgment of the court of civil appeals is reversed and that of the trial court affirmed. CHADICK, J., not sitting.