Court Opinion

ID: 9681850
Source: CourtListenerOpinion
Date Created: 2023-08-24 07:59:43.629095+00
Date Added: 2024-06-11T18:17:36.222118
License: Public Domain

WELLIVER, Judge,
dissenting.
I respectfully dissent. The Court’s majority opinion removes an attractive business device from those businessmen who choose to do business in Missouri.
The reason for the loss of this attractive investment device is the uncertainty surrounding the nature of a repurchase agreement. (Repo). As the majority’s opinion points out, the cases are all over the place on the question of whether the Repo is a sale, or merely a loan. Granted, the Repo agreement contains elements of both secured loans and outright sales. For the following reasons, I would hold that the Repo agreement constitutes a sale, and subsequent agreement to resell, the underlying Federal obligation, thereby exempting the interest income from state taxation.
First, the U.S. Supreme Court has noted the broad exemption contained in 31 U.S.C. § 3124. American Bank & Trust Co. v. Dallas County, 463 U.S. 855, 103 S.Ct. 3369, 77 L.Ed.2d 1072, reh’g denied, 463 U.S. 1250, 104 S.Ct. 39, 77 L.Ed.2d 1457 (1983), Memphis Bank & Trust Co. v. Garner, 459 U.S. 392, 103 S.Ct. 692, 693-94, 74 L.Ed.2d 562 (1983) (emphasis added). Section 3124, effective Sept. 13, 1982, Pub.L. 97-258, § 1, 96 Stat. 945. Earlier versions of this statute had been amended in 1959 to read: “This exemption extends to every form of taxation that would require that *596either the obligations or the interest thereon, or both, be considered, directly or indirectly, in the computation of the tax, with certain exceptions not relevant here.” Pub.L. 86-346, § 105(a), 73 Stat. 622, 31 U.S.C. § 742 (1976 ed.). This section, as amended, provided a “sweeping” exemption for federal obligations. First Nat. Bank of Atlanta v. Bartow County Bd., 470 U.S. 583,105 S.Ct. 1516, 1519, 84 L.Ed. 2d 535 (1985) citing American Bank, supra.
Second, the U.S. Supreme Court has held that a pledge of stock to a bank for a loan is an “offer or sale” for purposes of the Securities Act of 1933. Rubin v. United States, 449 U.S. 424, 101 S.Ct. 698, 701, 66 L.Ed.2d 633 (1981). In Rubin, the petitioner was convicted of making false representations to a bank concerning shares of stock pledged as collateral for loans. The stock was worthless, and petitioner subsequently defaulted on the loan. The bank sued on the note. Petitioner was convicted of fraud in the “offer or sale” of securities. Petitioner argued the pledges of stock to the bank did not constitute an “offer or sale” under the Securities Act of 1933. He further argued “the implied power to dispose of the stocks could ripen into title and thereby constitute a ‘sale’ only by effecting foreclosure of the various pledges, an event that could not occur without a default on the loans”. Id. The Court held the pledge of the securities did constitute a disposition of an interest in a security, for value. Rubin could be read to suggest the bank’s use of the underlying federal obligation as a form of collateral was also a transfer of an interest in a security. Given the broad exemption of federal obligations from state taxation, I would question whether income derived from this collat-eralized interest in the security could be taxed by the states.
Third, many cases cited by the majority differ from the present case. While the majority professes to use our “own” standards, it nevertheless adopts the reasoning contained in those cases. I believe this reasoning to be flawed. American Nat’l Bank of Austin v. United States, 421 F.2d 442 (5th Cir.) cert. denied, 400 U.S. 819, 91 S.Ct. 36, 27 L.Ed.2d 46 (1970), Union Planters Nat’l Bank of Memphis v. United States, 426 F.2d 115 (6th Cir.), cert. denied 400 U.S. 827, 91 S.Ct. 53, 27 L.Ed.2d 56 (1970), and First American Nat’l Bank of Nashville v. United States, 467 F.2d 1098 (6th Cir.1972) all involved municipal bond financing. While there were repurchase agreements present in those cases, the actual workings of the agreements were very different from the present case. Another distinguishing characteristic of those cases was the tax to be avoided was federal, not state, indicating a different standard of review at work.
A central theme of American Nat’l Bank was the lack of supposed market risk to the plaintiff. Id, at 452. The court discounted the possibility of a successful bidder-dealer being financially unable to take the bonds from the plaintiff. Id, at 453. In American Nat’l Bank of Austin v. United States, 573 F.2d 1201 (1978), the Court of Claims questioned the underlying “no risk” rationale of the earlier American Nat’l Bank after evidence showed six bond dealers in the latter case did, in fact, decline to exercise their options, causing the plaintiff to sustain a large financial loss. The chances of default are no smaller for Repo agreements involving underlying federal obligations, as the Mount Pleasant Bank and Trust Company, a small Iowa bank, Lombard Wall, Inc., a government securities dealer, and the Fidelity Savings and Loan Association of San Francisco all demonstrate. Each failed, each involved various amounts of Repo agreements, and each demonstrated that the risk of loss could ultimately rest on the purchaser of the Repo. I do not see the dispositive importance the risk of market fluctuation would play in a situation like the present case, especially when such short time periods, mostly overnight, are involved. The short time spans, and hence great liquidity, involved in these types of agreements are an element of their popularity.
Fourth, I see no relevance in whether physical delivery of the underlying security has occurred. Since 1965, the Federal Reserve Banks and the Department of the *597Treasury have tried to eliminate the paper evidencing Treasury obligations, favoring instead a computer entry system. See Hoey and Rassnick, “Automation of Government Securities Operations”, 17 Jur-imetrics Journal 176 (1976). Non-possesso-ry Repo transactions also involve less cost to the purchaser since he avoids the usual transfer fee for actual physical delivery. In re Bevill, 67 B.R. 557, 570 (D.N.J.1986).
Fifth, the Securities and Exchange Commission has issued policy statements treating Repurchase agreements as “short term contracts to sell and repurchase entire government securities in large denominations”. 46 Fed.Reg. 48,637 (1981) (reprinting SEC Exchange Release No. 34-18122 (1981)). The release also shows the differing types of Repo agreements, for instance “wholesale” or “retail”,1 which was not discussed in the record. The record does contain the testimony of Mr. Omar Whitesell, Treasurer of Massman Construction, who testified he had been entering Repo agreements on behalf of the company with the banks involved in this case since approximately 1977. The Governors of the Federal Reserve Board, the Federal Deposit Insurance Corporation and the Federal Home Loan Bank Board only allowed banks and depository institutions to begin offering their customers “retail” Repo transactions in late 1979. Note, at 405. While the transactions here were in 1981, their classification as “wholesale” or “retail” remains unknown to us.
Finally, the Bankruptcy Code was amended in 1984 to provide protection to a Repo participant, who, upon the insolvency of the debtor, would have faced uncertain treatment depending on the classification of his interest in the underlying security. 11 U.S.C. § 559, effective Oct. 8, 1984, permits the Repo participant to liquidate the repurchase agreement with the debtor. This decision to liquidate cannot be stayed, avoided, or otherwise limited by any provision of the Bankruptcy Code or by order of a court or administrative agency, unless where the debtor is a stockbroker or securities clearing agency, the order is authorized by either the Securities Investor Protection Act of 1970 or any statute administered by the SEC. This revision allowing liquidation of a Repo position would seem to suggest a desire to treat the repurchase transactions as actual sales, thereby removing the securities from both the estate of the debtor and the avoidance powers of the Trustee.
For the above reasons, I respectfully dissent.

. The differences between the two can be seen in Note, "Lifting the Cloud of Uncertainty Over the Repo Market: Characterization of Repos as Separate Purchases and Sales of Securities”, 37 Vand.L.Rev. 401, 403-05 (1984), [hereafter referred to as Note].