Opinion ID: 329946
Heading Depth: 1
Heading Rank: 2

Heading: Resort to the Courts

Text: 8 Promptly reacting to Metro's demand for payment, Mrs. Woodward filed suit in the United States District Court on August 27, 1973, alleging federal jurisdiction under section 27 of the Securities Exchange Act of 1934, 15 U.S.C. § 78aa (1970) for violations of section 10(b) of that Act, 15 U.S.C. § 78j(b) (1970) and Rule 10b-5, 17 C.F.R. § 240.10b-5 (1975). She named Metro Bank, Starnes, and Turnbull as defendants. The complaint charges Starnes with devising a scheme to defraud her; it alleges that all defendants knew material facts about CIC's financial status and the use of the loan proceeds, but failed to disclose these facts, and it seeks to hold Metro and Turnbull as aiders and abettors. The promissory notes are alleged to be securities within the meaning of the Securities Exchange Act. The relief demanded in the complaint includes an injunction against foreclosure and sale of the stock, an order requiring Metro to return the shares to Mrs. Woodward, and cancellation of the note (or in the alternative, $200,000 plus interest). 12 Metro Bank and Turnbull answered, claiming lack of federal jurisdiction and failure to state a claim upon which relief could be granted, and specifically denying their connection to any fraud. Metro filed a state law counterclaim against Mrs. Woodward and a cross-claim against Starnes for judgment on the debt and foreclosure and sale of the stock. 9 Before this case came to trial, Metro and Turnbull twice filed motions to dismiss for want of federal jurisdiction, taking the position that the notes were not securities under section 3(a)(10) of the Securities Exchange Act, 15 U.S.C. § 78c(a)(10) (1970), because the Act exempts notes with maturity not exceeding nine months. A fortiori, they argued that since no security was involved, there was no fraud in connection with the purchase or sale of a security, as required by Rule 10b-5. See note 1, Supra. The district court denied the first motion in an order dated December 3, 1973, to allow plaintiff time to develop facts supporting jurisdiction through discovery. The court again denied defendants' Suggestion of Lack of Federal Court Jurisdiction on June 11, 1974, on grounds that sufficient jurisdiction existed to go to trial. Consequently, on June 13, 1974, the entire case came to trial. After a full trial on the merits, the district court announced it would dismiss the case against Metro, Turnbull, and Starnes based on the promissory notes for lack of jurisdiction, 13 without prejudice to state claims. The findings of fact and conclusions of law filed on June 18, 1975, cited as grounds for the court's decision the section 3(a)(10) exemption for notes payable in less than nine months and the commercial character of the transaction. 10 In this appeal, plaintiff argues that the scheme in which she placed her personal credit at risk and pledged $185,000 of her Texaco and Timkin stock I. e. the promissory note she signed as an accommodation maker was an investment contract, and therefore a security for purposes of federal jurisdiction. The statutory exclusion for paper with a maturity of less than nine months, she argues, does not automatically divest the court's jurisdiction where the transaction is in fact for investment. Finally, she asserts that the pledge of stock was tantamount to a sale, and therefore she was defrauded in connection with the purchase or sale of a security. Defendant-appellees' arguments stress the separability of the agreement between Starnes and Mrs. Woodward from the loan transaction between Metro and Starnes and Woodward. A commercial loan by a bank, they say, does not fall within the ambit of Rule 10b-5.