Opinion ID: 672857
Heading Depth: 3
Heading Rank: 1

Heading: The Motivations of Buyer and Seller

Text: 19 The first Reves factor requires a court to examine the transaction to assess the motivations that would prompt a reasonable seller and buyer to enter into it. 494 U.S. at 66, 110 S.Ct. at 951. The inquiry is whether the motivations are investment (suggesting a security) or commercial or consumer (suggesting a non-security). 20 The district court found that the buyers and seller of the mortgage participations were motivated by commercial rather than investment considerations. The court stated that the complaint indicates that the loan proceeds were to be used for cooperative conversions and renovation of commercial space. The court regarded Eagle as the seller of the mortgage interests, and characterized Eagle's motivations as commercial because it earned a fee for servicing the mortgages while obtaining funds to engage in additional loan transactions. The district court further found that appellants, as buyers, were commercially motivated because they received interest on their investment at a fixed rate and apparently had no prospect for profits in excess of the interest paid and personal guarantees by the principals of Eagle. 21 Appellants argue that this was error in several respects. First, the amended complaint alleged that Laidlaw and Twiste were sellers, as agents of Eagle. Second, the motivations ascribed to Eagle and to appellants by the district court are more properly characterized as investment than commercial. 22 We agree with appellants that the motivations of the parties to this transaction are more accurately characterized as investment rather than commercial. We acknowledge that this may be a close question with respect to the seller--or sellers. Cf. Resolution Trust Corp. v. Stone, 998 F.2d 1534, 1539 (10th Cir.1993). Nevertheless, we believe that the somewhat stronger position is that Eagle was raising funds for its general business activities of making and servicing mortgages. This would seem to be an investment motivation because the seller's purpose [was] to raise money for the general use of a business enterprise or to finance substantial investments. Reves, 494 U.S. at 66, 110 S.Ct. at 951. Moreover, with respect to the buyers, we regard motivation as not even a close question. The instruments were obtained for appellants by their investment adviser as part of their investment portfolios. Appellants sought to invest funds in secure, conservative instruments. Most of the instruments that such investors would take positions in, such as investment grade commercial bonds, would have a fixed rate of return in the form of interest. Such bonds are nonetheless regulated as securities. The Supreme Court has specifically recognized that profit means  'a valuable return on an investment,' which undoubtedly includes interest. Reves, 494 U.S. at 68 n. 4, 110 S.Ct. at 952 n. 4. We therefore believe that the district court erred in finding that the fixed rate of return cut against the presumption that the notes are securities. Since the buyers' motivation was so clearly to invest, we would adhere to this view even if we accepted the district court's characterization of Eagle's motivation. 23 With regard to the effect of the Eagle guarantees, there is a preliminary procedural question: Appellants argue that the district court erred in considering them at all on the basis of unauthenticated documentation submitted with the motion to dismiss, particularly since the documents apparently did not represent all or even most of the transactions at issue. Although this argument is substantial, we need not deal with it. 6 Even on the assumption that there were guarantees, appellants were not directly involved in the transactions, and they had no more opportunity to evaluate the value of the Eagle guarantees than they had to evaluate the underlying mortgages or the participations that they purchased. Moreover, the degree of safety of an investment does not call into doubt the applicability of the securities laws. See Exchange Nat'l Bank, 544 F.2d at 1136 (the securities laws cover debt, even supposedly gilt-edged debt, as well as equity).