Court Opinion

ID: 9430700
Source: CourtListenerOpinion
Date Created: 2023-08-02 23:30:22.228617+00
Date Added: 2024-06-11T17:23:25.859619
License: Public Domain

Justice Brennan,
dissenting.
Section 12(2) of the Securities Act of 1933 provides that an investor may sue a seller of securities for misrepresentation of material facts in the prospectus or offering memorandum “to recover the consideration paid for such security with interest thereon, less the amount of any income received thereon, upon the tender of such security, or for damages if he no longer owns the security.” 15 U. S. C. §77Z(2). I agree with the Court that § 12(2) prescribes the remedy of rescission and restitution for investors who still own the securities. Unlike the Court, however, I believe that § 12(2) requires that restitution to the plaintiff be reduced by any tax benefits that a purchaser has bargained for and received from a tax shelter investment.
*671I too begin with the language of the statute. We know that Congress intended to establish rescission and restitution as the remedy for prospectus misrepresentation, not because it said so directly, but because that is the relief Congress describes in § 12(2). Given this intent, I would look for guidance in interpreting the word “income” in the theory and goals of common-law and equitable restitution, rather than in the Internal Revenue Code, as the Court does. L. Loss, Fundamentals of Securities Regulation 1022 (1983) (“Section 12(2) can perhaps best be analyzed and evaluated by comparing it with common law (or equitable) rescission, from which it was adapted”).
At common law and equity, rescission entails the undoing of the original transaction and restitution involves the restoration of each party to his precontract position. E. g., 3 H. Black, Rescission of Contracts and Cancellation of Written Instruments § 616, p. 1482 (2d ed., 1929); D. Dobbs, Remedies §9.4, p. 618 (1973); C. McCormick, Law of Damages § 121, p. 448 (1935). In order to reestablish the status quo ante, the plaintiff must return to the defendant the subject of the transaction, plus whatever else he may have bargained for and received under the contract by way of money, property, other consideration, or benefit, and the defendant must return to the plaintiff the consideration furnished by the plaintiff, plus the value of any other direct benefit the defendant received from the bargain, such as interest. E. g., 2 Black, supra, § 617, at 1485, 1487; 5 A. Corbin, Contracts § 1114, p. 607 (1964); 1 G. Palmer, Law of Restitution § 3.9, p. 275, § 3.11, p. 294, § 3.12, pp. 303-305 (1978); Thompson, The Measure of Recovery under Rule 10b-5: A Restitution Alternative to Tort Damages, 37 Vand. L. Rev. 349, 366, 369 (1984). In practice, where the defendant has sold something to the plaintiff for money, the steps leading to return to the status quo are streamlined: generally the plaintiff must tender the subject of the sale to the defendant and the defendant must tender to the_plaintiff the sale price plus inter*672est, minus whatever direct value the plaintiff has received from the transaction. If the plaintiff were not required to restore the value he has received from the bargain to the defendant, and were allowed to recover the full consideration he gave for the transaction, the plaintiff would be placed in a better position than he occupied before the contract was made — a result contrary to the theory of restitution. E. g. Corbin, supra; 3 Black, supra, § 617, at 1488 (“[A] party will not be permitted to rescind a contract so as to reclaim what he has parted with, and at the same time retain what he has received in the transaction”).
Application of these common-law principles to the rescission of a misrepresentation-induced sale of interests in a real estate limited partnership marketed as a tax shelter requires that the investor-plaintiff’s award be offset by tax benefits that the plaintiff bargained for and received as a result of the investment. This is so because a major portion of what the investor bargains for and purchases in a tax shelter is the tax benefit. See Salcer v. Envicon Equities Corp., 744 F. 2d 935, 940 (CA2 1984) (“One of the prime motivations for investment in limited real estate partnerships is the unique tax advantage made available to high tax bracket individuals”), vacated and remanded, post, p. 1015. Banoff, To What Extent Will Benefits from Tax Shelters Be Permitted to Offset Rescission Damages?, 57 J. Taxation 154, 157 (1982) (“[T]he plaintiff invests in a tax shelter largely for tax savings motives”); Note, Austin v. Loftsgaarden: Securities Fraud in Real Estate Limited Partnership Investments — Offsetting Plaintiffs’ Relief to the Extent of Tax Benefits Received, 16 Creighton L. Rev. 1140, 1143 (1983). Indeed, the facts that an investment is marketed as a tax shelter and that the investor generally pays a higher price for a tax sheltering investment than he would for one simply producing future growth or income, Salcer, supra, at 940, indicates that the tax shelter aspect of the investment is a *673bargained-for part of the agreement, rather than an incidental benefit. It would be ignoring reality to maintain that the economic benefit that flows to an investor from a tax shelter investment is not as direct a benefit of his bargain as are dividends that flow from a securities investment. Cf. United Housing Foundation, Inc. v. Forman, 421 U. S. 837, 863-864 (1975) (Brennan, J., dissenting) (footnote omitted) (“[I]n a practical world there is no difference between [money earned and money saved through tax advantages]. The investor finds no reason to distinguish . . . between tax savings and after-tax income”). To a rational investor, a security that yields $101 of tax benefits differs from a security that yields $100 in dividends in only one way — by $1.
In my view, Congress’ use of the word “income” in § 12(2) does not require us to ignore this reality. The term “income” may fairly be construed to embrace the tax benefits that respondents purchased. Income is commonly defined as “a gain or recurrent benefit usually measured in money that derives from capital or labor.” Webster’s Ninth New Collegiate Dictionary 610 (1983). Under that ordinary meaning, a bargained-for tax benefit is income: it is a gain or benefit measured in money that the investor purchases, that is, that he derives from capital. Petitioners bargained for and received a monetary benefit, in the form of tax savings, from their investments in respondents’ tax shelter. The fact that this monetary benefit was realized through tax savings rather than in the form of a check delivered from the partnership to petitioners has no bearing on whether petitioners have received a direct monetary benefit from their investments. There is nothing in the language or history of the Securities Act of 1933 suggesting that Congress, in using the word “income,” intended to reject this common meaning of the word. I think that a fair reading of Congress’ intent was simply to provide for rescission and restitution, and not to carve out, to the exclusion of all other forms of value that flow directly *674from a securities transaction, only income as defined by the tax code, for offset against the plaintiff’s award.*
Assuming, as does the Court, that rescission and restitution constitute proper relief for a violation of § 10(b) of the Securities Exchange Act of 1934, I would for the same reasons conclude that tax benefits should be offset against petitioners’ award under that provision.
I would affirm the judgment of the Court of Appeals and therefore respectfully dissent.

1 also disagree with the Court’s assertion that because the tax benefits “accrue only if the tax deductions or credits the investment throws off are combined with income generated by the investor or taxes owed on such income,” they “would in all likelihood not have been deemed a ‘direct product’ of the security at common law.” Ante, at 658. The deductions or credits received in a transaction such as the one at issue in this ease are valued in a manner that is entirely independent of anything that the investor may or may not do. In other words, in valuing a tax shelter for marketing purposes, the seller assumes that a buyer has need for the tax deductions the investment will generate, just as the seller of a rebuilt automobile engine assumes that the buyer has a ear in which to put that engine. We do not— at least I would not — describe the value that an engine has when placed in a car as “indirect” simply because the buyer had to acquire a car in order to exploit that value.