Opinion ID: 385722
Heading Depth: 1
Heading Rank: 1

Heading: i. the piccirillo transaction

Text: 33 The majority concludes that the interest sold by Piccirillo falls within one of the categories of security set forth in § 3(a)(10), but I am unable to accept that proposition based upon the facts of this case. The agreement here provided that in consideration for agreeing to act as co-obligor on Piccirillo's loan from the bank, Weaver would have the right, as long as Piccirillo was operating and in possession of the Columbus Packing premises: 34 1. To use the barn and pasture on the packing house premises at the discretion of Piccirillo; 35 2. To receive 50% of the adjusted net profits of the Columbus Packing Company so long as Weaver remained a co-obligor; 36 3. To receive $100 per month until the bank loan was repaid. 37 Piccirillo also agreed not to borrow additional money without prior consultation and approval by Weaver. 38 Certain preliminary observations are in order. The agreement obviously is not in a standard form that could be issued to the public at large. It was tailored to the unique circumstances of the parties, i. e., use of the barn and pasture, as well as Weaver's personal approval of further borrowings. There was no public offering by Piccirillo, but rather a purely private arrangement among individuals Piccirillo, Weaver, and their spouses involving no public market or exchange. 39 Even if the written agreement between the parties could be characterized as a certificate of interest or a profit sharing arrangement, it does not follow that the Securities Exchange Act applies. In an analagous situation we held that the statutory definition of a security embracing every note cannot be read literally and in context, a note may be without the statute. Lino v. City Investing Co., 487 F.2d 689 (3d Cir. 1973). Similar reasoning requires that the Piccirillo agreement be examined in context to determine if the transaction, however labeled, is within the scope of the Act. 40 In construing the Securities Act of 1933, 15 U.S.C. §§ 77a-77aa (1976), the Supreme Court noted that courts will construe the details of an act in conformity with its dominating general purpose, will read text in the light of context and will interpret the text so far as the meaning of the words fairly permits so as to carry out in particular cases the generally expressed legislative policy. SEC v. C. M. Joiner Leasing Corp., 320 U.S. 344, 350-51, 64 S.Ct. 120, 123-124, 88 L.Ed. 88 (1943) (footnote omitted). 41 Some years later, the Court emphasized that the focus of the Act is on the sale of securities to raise money for profitmaking purposes, on the exchanges on which securities are traded, and on the need for regulation to prevent fraud and protect investors. United Housing Foundation, Inc. v. Forman, 421 U.S. 837, 849, 95 S.Ct. 2051, 2059, 44 L.Ed.2d 621 (1975). Thus, while the statutes are to be construed liberally, application is to turn on the economic realities underlying a particular transaction. Id. at 851-52, 95 S.Ct. at 2060. And as we cautioned in Lino not every plan generating allegations of fraud is a violation of federal securities law. 487 F.2d at 695. 42 The majority believes that the Piccirillo agreement comes within the Exchange Act designation of an investment contract. In United Housing Foundation, Inc. v. Forman, the Court reaffirmed the explanation of the type of security that it had discussed in SEC v. W. J. Howey Co., 328 U.S. 293, 301, 66 S.Ct. 1100, 1104, 90 L.Ed. 1244 (1946). Describing its formulation as a shorthand form ... (of) the essential attributes, the Court defined an investment contract as an investment of money in a common enterprise with profits to come solely from the efforts of others. 421 U.S. at 852, 95 S.Ct. at 2061. Application of that definition to the circumstances present here raises two issues: first, whether a common enterprise existed when only two parties were involved in the transaction; 1 and secondly, were the profits to come solely from the efforts of others when part of the consideration recited was Weaver's right to use Piccirillo's barn and pasture. 43 Although a security was found to exist in Howey, several significant facts in that case contrast starkly with the circumstances at hand. In Howey, there was a public offering, an advertising program, sales to persons who were not residents of the state, and, during a 28 month period, purchases by 42 persons. Similarly, in Tcherepnin v. Knight, 389 U.S. 332, 88 S.Ct. 548, 19 L.Ed.2d 564 (1967), where the Court found capital shares in a savings and loan association to be an investment contract within the Securities Exchange Act, the plaintiff class consisted of more than 5,000 investors. 44 When the number of participants was much smaller, a different result has been reached. The Court of Appeals for the Seventh Circuit in Hirk v. Agri-Research Council, Inc., 561 F.2d 96, 100 (7th Cir. 1977), concluded that the requirement of a common enterprise includes both multiple investors and a pooling of their funds. In that case, an arrangement through which individual investors deposited funds with a commodity broker in separate discretionary accounts for investment in a profit sharing arrangement was held to be neither an investment contract nor a profit sharing plan within the Securities Act. Wasnowic v. Chicago Board of Trade, 352 F.Supp. 1066 (M.D.Pa.1972), aff'd mem., 491 F.2d 752 (3d Cir.), cert. denied, 416 U.S. 994, 94 S.Ct. 2407, 40 L.Ed.2d 773 (1974). Cf. SEC v. Continental Commodities Corp., 497 F.2d 516 (5th Cir. 1974) (multiple investors but no pooling). 45 The rationale employed by the Seventh Circuit in requiring multiple investors to satisfy the commonality requirement is persuasive, and I would follow Hirk for that reason alone. But even more compelling is that the result is in keeping with the general purpose of the Securities Exchange Act to regulate the securities markets where the public trades, and to scrutinize the various arrangements which are offered to the public as investments. United Housing Foundation, Inc. v. Forman, supra 421 U.S. at 837, 95 S.Ct. at 2053. In the case at bar, no widespread public interest is affected. 2 The transaction was a face to face encounter involving two parties who made a loan agreement. See Great Western Bank and Trust Co. v. Kotz, 532 F.2d 1252, 1262 (9th Cir. 1976) (Wright, J., concurring). Here there is no distribution of a widely offered instrument commercially known as a security, as is the case with the various schemes involving transactions regulated by the Act. See, e. g., SEC v. C. M. Joiner Leasing Corp., supra 320 U.S. at 352-53, 64 S.Ct. at 124; Hirk v. Agri-Research Council, Inc., supra at 103; SEC v. Koscot Interplanetary, Inc., 497 F.2d 473 (5th Cir. 1974). In addition, there is no suggestion that the laws of Pennsylvania do not provide for an appropriate resolution of the dispute in this case. Indeed, as the majority notes, the plaintiff included pendent state claims in his complaint. 3 46 The second issue, whether the profits were to come from the sole or essentially management efforts of others, see SEC v. Glenn W. Turner Enterprises, 474 F.2d 476 (9th Cir. 1973), is not per se as important a factor in this case. Were that issue standing alone, I would be inclined to follow the philosophy of the court in Safeway Portland Employees Federal Credit Union v. C. H. Wagner & Co., 501 F.2d 1120 (9th Cir. 1974), and apply the package concept to the various benefits that Weaver was to receive. There, the court held that the sale of interest bearing certificates of deposit, combined with a bonus agreement to pay additional interest on the transaction, was an investment package that qualified as a security. Id. at 1122. 47 If the other circumstances of the case at hand were not involved, the 50% share of the profits would carry the day on a similar basis. But more weight being given to Weaver's right to Piccirillo's barn and pasture is warranted when the arrangement is viewed in toto. Obviously, that benefit was of more value to Weaver than it would be to an out of state resident or to a person who had no connection with cattle raising. It is more in the nature of a personal use accomodation, shaped to fit the particular needs of the private parties involved. Thus, the arrangement between Weaver and Piccirillo does not have an equivalent money value to all persons, another characteristic generally attributable to true securities. See United Housing Foundation, Inc. v. Forman, supra 421 U.S. at 851, 95 S.Ct. at 2060. Moreover, when this factor is added to the lack of such features as common enterprise, use of a public market, public offering, and need for federal regulation, the conclusion is inescapable that the transaction between Weaver and Piccirillo does not qualify as a security within the meaning of the Securities and Exchange Act.